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Triumph Group Inc. (TGI)

February 20, 2013 9:00 am ET


Sheila G. Spagnolo - Vice President and Director of Taxes Operations & Investor Relations

Jeffry D. Frisby - Chief Executive Officer, President and Chief Operating Officer

R. Cudd

Jeffrey L. McRae - President of Triumph Aerostructures-Vought Integrated Programs Division and Chief Financial Officer of Triumph Aerostructures-Vought Aircraft Division

M. David Kornblatt - Chief Financial Officer and Executive Vice President


Myles A. Walton - Deutsche Bank AG, Research Division

Sheila G. Spagnolo

Why don't we get started? Good morning, everyone, and welcome to Triumph Group's Investor Day. I am Sheila Spagnolo, I'm the Vice President of Investor Relations and Tax at Triumph Group. I'd like to start out by doing a quick introduction of our presenters today.

To my immediate right is Jeff Frisby. Jeff is the President and Chief Executive Officer of Triumph Group, and he will be providing an overview of Triumph this morning. To his right is Jim Cudd. Jim is our Vice President of Business Development, and will be speaking about Triumph's opportunities and growth strategy. Seated next to Jim is Jeff McRae. Jeff is our President of Triumph Aerostructures-Vought Integrated Programs Division, and he will be giving us an update on our Jefferson Street facility in Texas. And to his right is Dave Kornblatt, our Executive Vice President and Chief Financial Officer, who will be providing some financial highlights. We will close the program with a Q&A session that will be chaired by Jeff Frisby.

I do want to remind everyone that this event is being webcast. This slide is our normal forward-looking information disclosure statement. As always, we rely on the Safe Harbor Act of the Securities and Exchange Commission with respect to our remarks and responses to your questions today.

To begin the program, we like to share with you a video that we prepared that will give you an overview of Triumph, tell you who we are, what we do and why we believe we have the broadest product offering in the industry. James?


Jeffry D. Frisby

Well, good morning. This is the Academy Awards seasons, so I'm hoping that, that film will be nominated for some award.

I want to -- my name is Jeff Frisby, and hopefully I'll find a way to advance the screen. And I am the President and Chief Executive Officer of the Triumph Group. And I want to add my welcome to this Investor Day. We appreciate you all coming out, and we hope that you will learn more about the Triumph Group than you knew when you came in today. There are some of you here that have been with us a very long time and some of this will seem like kind of a repeat. There are some of you that are pretty new to Triumph. So I think it's important to get a pretty complete and accurate overview of what makes Triumph different. What impact? We say that we're designed to be different and build to perform. What does that mean? I will be going over that in some depth, hopefully get you to understand why it is that the operating philosophy of Triumph is so effective and why it is particularly beneficial in the turbulent times that our marketplace finds itself in today.

So this slide here, I have to say that Triumph leads with our values, and in fact, these are values that are posted on -- in each of our companies. They're posted in many places. These 5 items here are what we do in terms of attempting to live our lives every day. We attempt to run our companies in that way. Obviously, things like integrity are paramount. We, obviously, all have to operate with a high level of integrity. Flawless execution, while that's certainly a goal, we have not achieved that yet. But these are the values that we attempt to live to each and every day. Ending with certainly commitment, and that commitment extends to our stakeholders that listed across the -- around the perimeter of this circle, and those are our customers, our employees, our investors, our suppliers and our communities. And we're going to talk a little bit about how the Triumph Group values get integrated into our daily lives.

But I just, actually yesterday, heard an example that I thought I'd share with you. Each of our companies is -- has great deal of autonomy and has an ability to take these kind of corporate guidelines, objectives and deploy them into their own business however they see fit. We have one of our facilities over in the U.K., who, obviously, these guys are, I would say, they're soccer fans, but they would correct me and say that they're football fans. And what they have decided to do with consultation with their employees is to ensure that their management is living up to these values that are -- we have listed here. They have these values printed on red cards. And what happens now, each of the employees has a red card. And if any of the management is doing something in the business that is in violation of these values, they give them the card. And so this is how -- and that particular, at least, perceived offense is then dealt with a timely manner, and so they -- so folks know that we actually live our values. But they've actually taken that to a very personal level there. And we were thinking about maybe instituting that in our American companies with throwing flags, but that could, in fact, be a bit of a safety hazard. So we leave it up to the individual companies.

Our core philosophy is, one, that is largely unchanged since our inception in '93 and our public debut in '96, but this philosophy has been enhanced somewhat over the last year, and so it pays to go over it. Our philosophy is that we protect the integrity of the individual operating company while providing each with the benefits of being part of a large corporation. Now this is all -- this has been there in the past. What we've done is we have added a kind of a reciprocal side, which is, we used to just provide the benefits that an individual company would receive for being part of Triumph. But now, we've added what is the responsibility of that company as being part of the Triumph Group. And in return, each company is accountable for superior operating and financial results and contributing to the overall success of the enterprise.

That's important because, obviously, it's important to have the proper numbers, but it is also important to operate very well. We can provide really solid numbers for a period of time while alienating our customer base, and that is not what we're looking to do. We are looking to not only operate well financially, but also to be a very high-performing supplier at our customer so we become the supplier of choice at that important stakeholder.

And contributing to the overall success of the enterprise is a new add to a philosophy, which means that, okay, we do have a lot of independents at our individual companies, but we can't have that independence and success of an individual company come at the expense of the overall Triumph group. So we require each of our operating presidents to take 1/2 step back and look at what is in the best interest of Triumph. So many times, a company president will need now to review a decision and actually make -- take a step that might be detrimental to the individual company's financial results if, in fact, there's a greater benefit to all of Triumph, and that's something that is now part of what we do.

What this does is, this allows us to keep operating in a manner in which we have been operating for many, many years. When I was running a small company called Frisby Aerospace, part of our mission statement, but it was -- we operated with a philosophy that we were -- we had large company capabilities with small company responsiveness and innovation. That was an important feeling so that we could actually deliver its great value but still be very responsive. And part of the reason that I became part of Triumph back in 1998 was that Triumph had that same feel, it has that feel back then when it was a $200 million, $250 million business, and it has that same feel today as a $3.5 billion operation.

We think that's very important, and we think that's one of the byproducts of our philosophy. We think it's a bit of a danger to us if we start really viewing ourselves as a large company and start acting that way. We are going to continue to keep Triumph one of the largest small companies in the industry. And this unique philosophy is clearly entrepreneurial, it's customer-focused and it is value-driven at its very core, and that is -- that philosophy is what, in fact, impact will serve us well in the years to come.

The small company benefits that we talked about in the philosophy are pretty clear, but they're also very important at this particular time. The local decision-making that we allowed to take place and the entrepreneurial spirit which we attempt to encourage allows us to be flexible and responsive to changing market conditions. There are all kinds of pressures in our market today. There are pricing pressures that we haven't seen in -- I mean, they're always pricing pressures, but certainly, the gain has turned up in terms of that sequestration. And the pressures on a defense budget, it's not the first time the defense budget has gone down, but this is a pretty significant issue for us. And so these times require the utmost in flexibility, adaptability and the ability to turn on dime in order to continue to grow despite the fact that some of our markets are seeing pressure. And so our -- part of being the small company allows us to not only survive in such conditions, but actually, to succeed and to thrive in them.

The ability to adapt corporate strategies to individual customers and markets. One of the examples is the red card, right? I mean, we lay out these values and these guys can, in fact, adopt them in their own manner. We -- another analogy that we like to provide for this is that our corporate strategies, our corporate guidelines, which keep our companies going in the same direction but are not too intrusive are very much like those gutter bumpers that now they've put in, in bowling alleys, So that -- I mean, back in the old days, you could throw gutter balls all day long and have a pretty good habit of doing that. But when you bring your kid's bowling and they put these gutter bumpers in place, so they roll the ball down the alley and it bounces off one side, bounces off the other side, eventually hit some pins. And so our guidelines, our structure, corporate structure, is very much like that. We allow the companies a great deal of flexibility, but we keep them from rolling gutter balls.

The next bullet is key, which is a place to financial responsibility and accountability with each individual company. This sense of ownership obviously is something that is paramount to Triumph. We don't have a bunch of caretakers of companies that are just working to achieve their budgets. We have entrepreneurial owner operators that are very committed to growing their companies, and are doing so without the specific direction and guidance of corporate on a day-to-day basis.

And it is also very key to our integration of Vought Aircraft Industries. When we bought Vought, we bought one large company. But as I've mentioned in our last Investor Day, I've never viewed Vought as one company. I've always viewed them as 6 individual companies. And we have, in fact, broken them down into 6 individual sites and are working hard towards developing them into 6 individual P&Ls with site presidents that are -- that have the individual site responsibilities for growing their individual companies, and we've had some success with that. We have found that local management cares an awful lot more about things like cost control, things like growing their business than a large central corporate would necessarily care.

And certainly, the small company benefits, we can tailor our employment environment to whatever regional issues that we need in order to attract and retain the top talent. And we can identify and respond to local community needs better. We have -- this is an important initiative that we have started. It doesn't necessarily show up directly to our bottom line, but I think it certainly adds to it. And beyond that, it adds to our purpose of being a company and the responsibility that we have. We instituted what -- something called the "Wings" program. Our "Wings" program is a program that requires -- and I'll use that in quotes because all of our sites were very happy to participate in this, "requires" our sites to get out in the community and find a specific charitable organization that will improve the lives of people in our communities and get out there. And we're not mailing them a check, our people are getting out in the community and digging dirt and repairing homeless shelters and doing whatever it is that their community needs. Again, this thing driven by the corporate office would get nowhere. But driven by the local companies, it makes great headway.

In fact, we had a -- one of our Mexican facilities, in Zacatecas. This apparently is not a culturally understood thing in certain parts of Mexico, but we launched this "Wings" program in Zacatecas where we brought great deals of food into areas that were relatively impoverished, and we received a number of awards from the local cities and the states, which indicated that not only was this a great humanitarian gesture, but the fact that we took that step encouraged other companies to start their own programs in this, and actually became kind of a snowball effect for community involvement, which I think is very important. Certainly is. And it could be argued and I think it would be argued properly that this does, in fact, at some point, translate to the bottom line. But if it doesn't, it's still the right thing to do.

The large company benefits. We talked about why it's so good to be a small company, but the large company benefits are equally important. We can provide a common face and a single point of contact to all of our companies that desire it, not all of them do, but when they do, we can provide them one point of contact. We also provide each of the company's that we acquire with a worldwide network of business development specialists who have access to all of our industries' customers and who are very skilled in flushing out opportunities that would apply to each of our companies. Then it's up to the individual company's specific subject-matter experts to be able to close deals with these customers. But this is something that a small company would not have access to, so this is one of the benefits that Triumph provides.

We do, in fact, provide leverage on our supply chain and our quality management. In supply chain, it's pretty obvious that a small company has very little leverage when it comes to simple things like FedEx or freight contracts or raw material contracts. We have those all levered up at the $3.5 billion level. Beyond that, into more of the subtleties, an individual company in Indiana, for example, if they wanted to subcontract product, it's unlikely that they would be able to develop an effective supply chain into Korea or into Poland or wherever it is that the most competitive arena in the world is at that particular time for that product. We, in fact, have a central supply chain that has inroads into all those things so we can provide each company access to a worldwide low-cost source of supply.

The quality management is very useful because we have in place overall Triumph quality metrics, quality improvement plans, and that's something that our customers are certainly coming to expect of a company like Triumph. And we're happy to do that, which is kind of a thin veneer of quality control over all of our companies, which provides simple benefits, like if we have a Los Angeles company that has a supplier in the Detroit area, rather than sending a person from Los Angeles to Detroit to either survey that company or provide oversight, we have a company in Detroit. We'll send someone from there and save travel expense. So we've got a number of benefits that we can drive in terms of large company there.

Lean is certainly critical to us. When we acquired Vought Aircraft Industries, we had 2 different approaches to Lean. Vought had a -- the Vought operating system, which was based on the Lean Six Sigma approach. Triumph -- now Triumph production system, which was based on the Toyota Production System, which is the Shingijutsu-based philosophy. So when we put those 2 together, we came up with a hybrid system, which we think are the best of both worlds, and we called it Triumph Global Competitiveness, which is a continuous improvement plan and tools that is taught through an organization called Triumph University. And Triumph University is a corporate-run enterprise that actually has a site in Phoenix, but also has web-based training and also travels around from region to region to provide easy training for our companies.

Our strong balance sheet supports in investments and profitable growth. Once again, a small company going to a large customer will not be afforded the opportunities to participate in large programs because they don't have the resources. Well, being part of Triumph, they have the resources. And we have proven that we're willing to invest in those programs that make sense. And so we've opened up the opportunities for each of our companies just by being part of the Triumph Group.

Access to capital markets is something that we can provide and do so successfully. Dave will talk a bit later about our successful bond offering that we just completed recently. So this is another thing that is a substantial benefit for one of our companies to have access to. And the rest of the these are kind of the standard back-office corporate stuff that I don't want to minimize, but I don't want to read either.

So overall, to give you a summary, Triumph Group is a global leader in Aerostructures, Aerospace Systems and repair and overhaul, with -- and we've -- that are last guidance for FY '13 has been revenue of approximately $3.65 billion. Earnings per share from continuing operations, including the benefit of retroactive reinstatement of the R&D tax credit and excluding the integration costs and early retirement incentives, is equals -- approximately $6.05 a share, and EBITDA will be in excess of $650 million, and you've heard those numbers before.

So what I'd like you to do is think about those numbers for a minute and think about 1996 when we went public. We had about $60 million in aviation-related sales. I joined the company in 1998. We had about $200 million, $250 million in aviation sales. We're going to do $3.65 billion in aviation sales now. So while we keep looking at things on a quarter-to-quarter basis on a fiscal year to fiscal year basis, there's a bigger picture here, and it's a picture of growth and it's not one that is going to change anytime soon. Our -- I mean, we may and obviously, the percentage increase to go from $60 million do $3.6 billion is a pretty high percentage, so I'm not sure we're going to be keeping that rate up. But the fact is, we are committed to continued growth. And we have grown through headwinds, we have grown through tailwinds and we will continue to perform well over the long-term. And in a little bit, we'll talk about what we think our FY '16 will look like. And again, all this number, when we look at it 5 years from now, 10 years from now, we'll be looking at these kind of numbers in a nostalgic way, thinking and remember when we were this size.

And I want to reiterate that we operate across 3 segments, Aerostructures, Aerospace Systems and Aftermarket Services. I make that point for 2 reasons: number one, we have a tremendous capability in Aerostructures. But prior to the Vought acquisition, we already had a structures capability of significance, and we had somewhat of a balance of Aerostructures, Aerospace Systems and Aftermarket Services. And again, I'll also remind you that our Aftermarket Services business, as listed here, is our segment Aftermarket business, which is strictly third party repair and overhaul. We repair other people's stuff. We have an Aftermarket business within Aerospace Systems that is traditional OEM high-margin spares and repair and overhaul. So we differentiate those because of the different markets that they're in and that they actually are just the third party guys in Aftermarket Services.

But the reason I point that out is that we had a balance before you the acquisition of Vought. And once we acquired Vought Aircraft Industries, we actually became, well, I'll consider overweight, where our balance right now is really heavily weighted towards Aerostructures. So some folks have the misguided view, in my opinion, that we are an Aerostructures company. We are certainly capable of designing and making Aerostructures, but we have a very broad portfolio that time and our acquisitions -- you noticed we've made a couple of acquisitions that is starting to bring that balance back and we'll continue to do that to bring back the balance so that the balance that once was very, very evident, will become evident again.

And the other point I'll make is that we are very capable in Aerostructures. We can design and develop an entire wing, for example, and we're doing that on the Global 7000 and 8000. But as far as I can tell, there is no other wing manufacturer out there that can also design the landing gear system for it, can also design all the flight controls for it, all the little gizmos to make the flaps go back and forth. And at the same time, there are no companies that are capable of designing flight control systems, actuation products that can design a wing around it. So that's a unique capability.

And so the next obvious question is, why does that matter? It's, in fact, does that matter to your customer? Well, it matters in if, in fact, we can get to the customer in an early enough position in the development of the aircraft, it will matter a lot. And so we're working with our customers in doing that because when you actually have the design expertise to be able to design your wing and your landing gear, at the same time, you can maximize that interface, you can make a far better design. And some of our customers are getting that, and we're giving the opportunity to do just that.

So this is why we say that with our broad portfolio, we have the ability to integrate them in new and innovative ways to meet our customer's emerging needs. We are, in this case, having to lead our customers a bit, but we think that they are very receptive to that.

I will not get into this in great detail. Dave will go over this a bit more. But what this points out is that we have a diversified market mix. We are in commercial, we are in military, we're in business, we're in regional to some extent and we're in non-aviation, and we're happy we're in all of those. There are some folks that have recommended that, oh boy, you need to be out of military because military is going downhill. And it wasn't that many years ago when people were encouraging us to get into military because military is the place to be. The fact is, is that the military business is -- goes through cycles. There are certainly external factors that drive it down, there are external factors that drive it up. Military business is not going away. And so we certainly are happy to be in the military business. You note that we have made acquisitions recently that are focused in the military world, and we are happy to make those acquisitions as long as we paid the right price for them because military will, in fact, has a future, and the fact that we're diversified puts us in far better stead than if we are overfocused in any one area.

Okay, I'm going to go through this rather quickly. I promise you, I won't read these. These are for your reading pleasure. But our commercial aircraft market represented 57% of our sales through the first 3 quarters. The 747 program is, obviously, a very important one for us. It's an important one for Boeing as well. We are going to wait and see. We were at a rate of 2 per month and we'll get into a rate a little bit later. Boeing has committed for the short to medium term to keep that rate where it is, but we are certainly laying out our own strategies to deal with any reduction in rate that Boeing may have on their 747 line.

The 777 that is listed here is, obviously, a very important program for Boeing, it's a very important program for the Triumph Groups. It is -- it has got a lot of legs left in it and, in fact, we'll be one of those that will go well into the next decade. And certainly through its derivative, Boeing is still talking about launching the 777X. We are working with them extensively in a number of areas to help them deliver successful airplane.

787. Well, I guess you guys already know about the 787. It's going to be a very good program. Right now, it's not moving too fast. Obviously, we have a setback in terms of the issues with the batteries. And if there's one thing I'm confident about, it's that over some period of time that this problem will be resolved and the program will continue to run and will be a successful program. So certainly, we have not seen any reduction in rates and deliveries to Boeing at this point. We have been told that we will not see any. Certainly, we will react if and when that happens, but we do believe that there'll be a short-term solution, short term being couple of 3 months or so before they get their deliveries going again. And so we're confident in our -- in the airplane, we're confident in that customer.

737 is, obviously, a very high-production aircraft that we have considerable content on, and it's going into the Max version in a few years. We also have nice content on the Max and are continuing to get new opportunities on that, and we'll go into that later.

767 and A330, these are the 2 contenders for the Boeing or for the U.S. Air Force Tanker program, and the 767 prevailed that, in fact, extended the life of the 767 program, which would likely have ended fairly soon without that award. As it is, the 767 will now likely extend for decades at relatively low rates, but will, in fact, be a production aircraft for many, many decades to come.

The A330 is Airbus' answer to the 777, and it's a very popular, very high-selling aircraft that also will, in fact, extend past this decade until probably the A350 attempts to cannibalize it and starts to wind down in the early '20s some time.

And the A320 is you'll consider -- someone considered a weakness that's not in our Top 10 programs. It's a great program, but I would consider it our greatest area of opportunity that we are very focused on A320 content and have a tremendous number of opportunities. Certain things that are, I think, are developing that we can't announce at this particular time that make us very confident that we will be successful in attaining more A320 content.

Concerning rates, 737, there was obvious generally an upward story. 737 is increasing to 40 a month in the second half of our fiscal year. And 777 increasing to 8.3.

747, I already talked about, is currently at 2. We'll expect it to stay at 2, but are preparing for it to potentially go down from there.

787 is increasing to 10 a month once it gets started again, and there's been talk about actually going beyond 10. And I think I'd like to see them get to 10 for a while before I believe that they're going to go to 14 or whatever the number they were saying.

767, we're seeing a short-term decrease. The 767 is going to drop down to 1 a month later on in this calendar year as Boeing focuses on making several tankers. And then, after that slight dip, they will be ramping it back up again as the FedEx freighters start kicking in, and then the additional orders for the tankers. We really think that's going to be a 2-per-month scenario for as far as we can see.

A330 is increasing to 10.5 a month, and that is another high-production aircraft. And since it's such a large aircraft, it provides a lot of value for us.

A320 is going to 42 and Airbus is -- keeps talking about 50, keeps talking about 60. This is something that they have a lot of faith in.

A380 going to 3 a month. And the A350, I don't have listed on there, it's in development certainly, but it will see significant growth in the next few years as it is, in fact, certified and enters production.

So where are our opportunities in the commercial aircraft market? We have opportunities for strategic partnerships. We talked a little bit about that at the last Investor Day, and we talked about the relationship we have with DAHER, which is a company over in France that has allowed us inroads to Airbus, and we've secured nice content on all of Airbus' platforms through that relationship. These relationships go both ways. We are now helping them in North America and helping ourselves as well in helping them have inroads into North American markets.

It's not that you can go over to Europe or go down to Brazil and spend 6 weeks there, and suddenly have a working knowledge of how these companies in these different cultures operate. There are certain advantages to being local. And while we are not currently local in many of these areas, these partnerships allow us to learn the ropes far more quickly. And as a result, some of our partners are asking us -- because just as a lot of times we don't have a clue when we go to some of these other countries. Europeans don't have a clue when they come here to North America. They can't figure us out. So it does work both ways, and it's, I guess, the essence of a partnership.

We have a number of outsourcing opportunities that we have secured in support of engine manufacturers, insulation products and structures. The outsourcing is very key for us now, not only in commercial but also in military. We're seeing our customers looking to continually outsource more and more products. And there are significant additional opportunities being bid, particularly on the Airbus side. A lot of the Airbus -- I will talk about this in a little bit more specificity a little bit later, a lot of the Airbus opportunities are coming about from Tier 1 suppliers in Europe who are making room for the A350 business. They don't want to expand in Europe. So what do they have internally? They have A330 work, they have A320 work. And so they want to carve that out and bring that into more of a dollar-based situation. So there are great opportunities on A320 and A330 that we're currently reviewing, that there's enough runway on those programs to make those investments very, very positive for us. So we're looking at those, and we have quite a number of opportunities there.

And so we've secured new content on A320 Neo and Max. We have, in fact won specific contracts on those that we have not announced because they are not specific individually of significance in order to have a press release. We don't just send out press releases every 3 weeks. They -- we usually take some significance in order to do that. But we're continually adding content on these aircraft. I get monthly presidents' reports from all the companies. And just yesterday again, I was reading the monthly report from last month and noticed that one of our companies just secured significant content on A320 Neo. So it's just -- this is kind of how we increase our share and how we're able to increase our ship set value on a -- in kind of a Triumph way as opposed to necessarily going out and say, "Okay, we're now the wing maker for the A350." I mean, that would be an interesting concept. I'm not sure the risk would fit our profile.

But if you think about the 787, we've already reported that we have $2 million plus ship set content on that aircraft, and almost all of that was not won directly from Boeing. Almost all of that was won kind of under the radar with individual different tiers of supply, and we were able to win that content at significantly more favorable terms and conditions than we would have if we were one of the initial partners with the Boeing company. And remember, partnering with the Boeing company can sometimes be very expensive. So this is -- so you're going to see us grow in A320 Neo, 737 Max, but you'll probably see it without a tremendous number of press releases. What you will see is those aircraft start showing up on the top 10 backlog reports.

Our -- we believe that our opportunity exists in continued investment in R&D, which we're doing, both on our own. We have some independent research and development we're doing on advanced technologies, and we're also working in concert with our customers. And again, some of the new aircraft that we're working on, we've had a team working on the A30X with Airbus, which is certainly far out. It's probably late next decade before that aircraft enters service. We're working with Boeing on 777X. So we're just continuing to put ourselves in position to be able to be successful in the future while we are also competing successfully in the short-term.

And we also think we have an opportunity within our Aerospace Systems group to expand our proprietary Aftermarket business. Some of our companies have not been excellent at that, and we have allowed the -- we have allowed some of the third party guys to come in and eat our lunch, to coin a phrase, and we got to get our lunch back. So we're going out there and attempting to recapture some of that market share, which is a very lucrative market share with some nice margin in there.

And overall, in commercial, the market growth is still very strong in commercial aircraft. Jim will talk about some of that as well. And we just read yesterday that, for example, Lufthansa is -- canceled their dividend and has -- is looking to spend EUR 9 billion on aircraft, and will likely be a mix of narrow-body and widebody and probably a mix of Boeing and Airbus as they have done in the past. Swiss is looking at replacing their A340s. I mean -- so we've got an awful lot of U.S. and European carriers that are beginning to step up with some of these orders, and we think that they'll be coming to the plate fairly soon.

Specific opportunities, and I won't go over this in detail because we've talked about this. At Boeing, our strategy is to focus on integrated structures and adding value to the assemblies that we currently do to provide systems integration for the products that we now perform. And as I've mentioned already, we're supporting the plans for the next generation aircraft very actively.

In terms of Airbus, we want to expand our program participation on the 320 and the 350, and talked about a little bit about how we're doing that. First tier Aerostructures outsourcing is one of the ways. I mentioned that some of the guys are making room for their A350 by outsourcing some of the A320 work, and we're participating there.

Also, we have a number of opportunities in the components and systems world with some of the Airbus first tier suppliers of that, and an example I would give you there was via our expanding relationships with companies like Aircelle, which is a nacelle maker, tied together with Snecma, and so they have a significant content on Airbus platforms. And our relationship with them is expanding. We won a number of contracts and have additional opportunities there.

At Bombardier, C series ramp-up is one that has us kind of in -- we're not exactly thrilled about all the C series opportunities we have because it's our opportunity to compete with China, and we still are very sensitive about the margins that we need to make. But there are areas that fit us very well. And so in spots, we are going to bid and try to compete in some of the C series business.

Embraer has a new airplane coming out. It's very exciting. It's -- they call it the G2. It's the advanced aircraft replacing the 170, 190 series. And Embraer is very interested in the tremendous breadth of product that Triumph offers, so we're actually talking to them about things all the way from integrated structures to hydraulic systems, to -- you name it, and we're working with them on all of those.

And of course, on the new commercial helicopter programs, Bell has just announced that they're really going to focus on recapturing their identity as a commercial helicopter supplier. We have, in fact, won significant programs on their 429 and on their new 525 Relentless. We're also making inroads now with Eurocopter, which owns half of the world's helicopter fleet, but we don't have significant business with them yet, so we're focused on that as well.

In our rotorcraft market, we have a number of platforms, which we have, for example, the V-22, the example here is that is not only a helicopter, but it's also an aircraft, and Triumph provides the pylon conversion actuator that actually creates those 2 activities through our Park City facility. We also do quite a lot of other structure and systems work as well.

The Black Hawk, we used to make the cabin structures for 3 different models. We're now primarily doing their S model. But we also do a tremendous amount of work in our legacy or heritage Triumph companies on that program.

C-130. We make the empennage in Nashville. Lockheed is planning on moving that empennage to India sometime in 2014. I am not sure that there'll be successful in doing that. We are -- we're certainly preparing for that. But before the acquisition of Vought, Vought tried to move that empennage from Nashville to Dallas, and it didn't work. So I'm not sure how moving it to India is going to go. This is something that was designed in the '50s and it's -- there's so much, I call it, tribal knowledge or hidden factory in that, that it's going to be a big challenge for them to move. So we are planning for them to move it, but they may not succeed.

C-130 certainly is another example of a program that, while it's being reduced in the military budget, has a tremendous amount of foreign military sales, so we will see probably not a tremendous reduction in our orders there. Although as we pointed out in the last conference call, short-term, our orders have dried up on C-130, and we're really still trying to understand that. The production rates going on, it's either an issue of Lockheed has, in fact, analyzed their inventory and found out that they have enough of our stuff for a little while. So we may see a little bit of a gap, but it will, in fact, pick back up.

C-17 is a program that has more legs than you'd think, and we have just gotten the long-term authorization for lot 26 [ph], are discussing lot 127 [ph] with them. And no matter we know that, that aircraft is going to sunset at some point, but we also know that there's going to be a great deal of business in supporting all the products that we make for that aircraft in the future. And so we'll -- at some point, we'll go from production mode to support mode.

53K and KC-46A are 2 advanced programs that we are -- have significant content on, and that's still are in pretty good shape from the standpoint of the budget acts. We'll see how all of that goes. But both of those are long-term programs that we have significant content on.

And to wrap up the military world, the Global Hawk is one we make the single piece composite wet wing that you see on there, and it's something that certainly has considerable future as the world moves towards UAVs more and more. And the F-16, F-35, as well as the F-15 and 18, we have certainly a lot of content on those. And those programs, as we'll talk about, are not necessarily dead yet either because of the fact that sometimes, these budget constraints tend to work to our benefit, and I'll talk about that in a second.

So the market drivers for military. Obviously, the U.S. government budget realities are going to be a key driver for that, so we think there is going to a lot of downward pressure on the DoD budget. And most production rates are planned to decline, and even with this, pricing is very competitive and that we are seeing opportunities for market share increase. The Tanker and CH-53K, as I talked about, are certainly our best new product opportunities there.

Our growth opportunities, and this is what I was talking about before, is that the delays and things like JSF will extend the life of existing fleets, that's why we're going to need service life extension programs likely on F-15, potentially on F-18. All these programs are supposed to be retired by the Joint Strike Fighter. They're not going to enter service in the quantities that they were, so we're going to need to continue to support those and will, in fact, create new opportunities. Not only that, because of the reductions in the U.S. defense budget, all our defense customers are very active in the foreign military sales arena. Obviously, the large sale that -- of F-15s to Saudi was significant, and there's more and more of that. V-22, you're going to see a lot more foreign sales. There's a lot more focus in that.

We think that with -- there are outsourcing opportunities coming, and one of the examples will be Boeing helicopter, who is attempting to reduce their cost of doing business by shrinking their footprint in Ridley Park. And as such, their outsourcing, some of the things that they were doing internally and providing opportunities for companies like Triumph, that we have, in fact, won some of those. And obviously, pockets of opportunities still exist in special programs that are classified and we can't really talk about.

Business jets very quickly. G4 and G5, we have significant content on those aircraft. We think that they have far more life left in them than a lot of folks give credit for them. In fact, each time we get a forecast, it seems to extend out further and stay stronger than we had modeled.

The Bombardier 7000 and 8000, obviously, a very key program for our future. Its sales are going very well. We'd, in fact, design and developing the entire integrated wing for that program. And the reason CJ4 and the Mustang is on there is just to indicate that we participate in that lower end of the commercial -- of the business jet market as well, and we feel like that's can at least stay stable and has some potential upside in terms of where it is now.

So in the business jet market, we do continue to see the dichotomy in the market between the large cabin, long-range jets and the small-cabin aircraft, and our backlog remains relatively flat but our OEMs, like Cessna, are still confident that their rates are going to be going up. They don't, in any way, predict a return to pre-2008 rates, but they are, in fact, seeing growth. And the effect of the Hawker Beechcraft exit is really yet to be seen. There are number of moves to be played out there.

Our growth opportunities in biz jet is -- are the new aircraft programs that Gulfstream is launching, that Bombardier is launching and Embraer is launching. And those things we can, in fact, win not only on the integrated Tier 1 level, but also at the sub level. And the meaning of third bullet is that we didn't play at Tier 1 on the Gulfstream 650, yet we have significant content on the 650 at the lower tier. That's an important distinction if, in fact, you're thinking about us as an Aerostructures company because there are no other Aerostructures company that once they've lost the Tier 1 opportunity, they can go in and probably make as much margin at Tier 2 than they ever could have at Tier 1. So it's a nice differentiator there.

And when we talk about these new and restarted turbo-prop passenger and utility aircraft, so a number of those that are starting to back up. And while -- certainly, there are somewhat higher risks, and so as a result, we will not invest heavily into those. We will participate because some of these are going to succeed, and I think you'll see that we're going to be active in that area. There is a market there that's recovering.

Our Aftermarket business represents 8% of our business for fiscal year 2013, and I'll comment that the margins have come up. We always talk about an Aftermarket -- third party Aftermarket segment that will not be dilutive to our margins, and we're approaching that. And I do believe that, that is something that we still have an ability to move those Aftermarket margins even higher. And we do feel like in order to maintain our balance, we're going to need to add capabilities and volume in this part of our business. So rather than going through all of that, I'll spare you with that. We have extensive capability in the third party marketplace.

Some of the -- these are some of our growth drivers. The important things to remember here is that, again, being part of Triumph allows the companies to take advantage of the investments that we'll make in select rotables, thrust, reverser, halves, APUs, these types of things that allow for quicker turn times and allow us to compete against some of our smaller competitors that won't invest in those type of things. We added our structures capability in Bangkok because it doesn't pay for our Eastern Asian customers to ship structures all the way back to Hot Springs, Arkansas, so we've got a facility close to them. We are also establishing capabilities near where the aircraft are serviced. We bought a facility in Atlanta. It's doing very well. We're currently setting up shop in Indianapolis, and we're looking at Europe.

All right, so I want to take 1 minute or 2 and just talk about -- remember, I talked how Vought was not 1 company but was, in fact, 6 companies. And in fact, we heard over and over again, is why we do buy Vought? All they are is a bunch of sunsetting programs. Well, the fact is, when we look at each of those companies, we see growth potential. And if Triumph is known for anything, it's known to being a catalyst for growth. Well, I think I've already talked about the fact that we're set on growth. Our Marshall Street facility is focused on 47 and 67 currently. We're optimizing our use of low-cost sourcing to stay competitive, and we're getting additional product putting in going in to add our -- to increase our value-add in Marshall Street.

Hawthorne is probably the single factory that we have is pretty much focused on 747. And as a result, we've been looking at opportunities in sheet metal forming and processing, which is an important business for them. But also importantly, some of these Airbus-related outsourcings, these are -- some of these are headed to Hawthorne, which will allow us to have a balance and less sole reliance on individual program.

Stuart is a great story. We're in the middle of expanding Stuart. They have the -- they make the wing center section very large piece of structure on the 67, so that will be going on for decades. They make a lot of the flaps and ailerons for the 777 and 37, both very strong programs there, and they have a line of aircraft doors. These are mostly for Boeing, but in fact, we've had Airbus in there, very recently gotten high grades, and so we think we'd been able to add some Airbus work there as well.

Milledgeville is our composite -- advanced composite assembly place, and those guys are just bursting at the seams with the work that they're doing on 87, 777, and they're continually in growth mode.

Jefferson Street is one that Jeff McRae will talk about. This is our very large facility that we have, in fact, made a decision to exit, to make ourselves more competitive. So that, in fact, we can take this Jefferson Street facility, turn it into our Red Oak facility and actually create a growth opportunity out of a facility that was not destined for growth.

Nashville has proven to be one of the most interesting companies within Vought in that it always was the most independent, so it's not a surprise that they took to the Triumph model very, very quickly. Not only do they have extensive machining, processing assembly capability but they've also are the first ones to go out there and win a lot of new significant contracts that, regrettably, I can't go into at this point. But these guys have really gotten it in terms of being part of Triumph.

And Red Oak, we'll talk about when Jeff goes over that. We will be developing a very state-of-the-art facility that is very competitive and should be able to help us grow in Texas.

This slide is one you've seen before, and it's one I'll just use to accent again that we, I think, are unique, and in that we can succeed in each of these 3 categories. Tier 1, what we call Tier 1.5 or Super Tier 2; and then Tier 2 and Tier 3. And there are reasons for existing in all of those areas and because we have a relatively low-cost of corporate kind of oversight and because we don't burden our individual companies with that cost, they can, in fact, be very competitive and can go out and win those contracts that we need them to win to continue to grow.

And our acquisition strategy, this you've already seen in the last several months. We want to increase our product-offering capability. So we're looking at new capabilities and we're looking to rebalance our mix. So you've seen that in Embee, you've you seen that in Goodrich Pump and Engine Control Systems, which, hopefully, we'll close sometime this quarter. We're looking for an excellent strategic fit. We're looking to provide program and customer diversification. We know we have an awful lot of Boeing work, and while we love Boeing work, we would like to have other work as well. So we're looking to diversify our customer base and our program base.

Certainly, we're going to continue to operate under the guidelines that the transaction has to be immediately accretive. And certainly, that bar today is not that high, but we would also want to make sure that we continue being able to achieve or to reachieve the margins that we're used to seeing. And expand our international presence. You'll see us more and more acquire outside the U.S. Obviously, the aftermarket business where we have to have local presence for difficult-to-ship structures, for example. We need to be players in low-cost regions for those labor-intensive processes in order to be more competitive. And proximity to customers, where logistics, engineering or support activity is required, is also very important.

You guys have seen this, I won't go into it again. I did talk about how Embee was a company that was sitting in the right place in the supply chain. I mentioned that all roads lead to Rome or all parts go to Embee. Remember when I was in private service, even then, all -- it seemed like, sooner or later, all parts went to Embee. They are relatively program agnostic. They are supplier agnostic. So basically, whoever wins, whatever parts, they go there. And it's a well-run operation and is one that is a very, we're very happy to add it to the Triumph family.

And GPECS is certainly a very larger company, about $200 million. And then they're in the fuel systems business. And we're happy to have that because it's a market we haven't existed in before. Their margins are currently somewhat dilutive to our margins, but we have plans in place to, in fact, remedy that. And so we think we'll see not only sales growth, but significant margin enhancement as well.

Okay. Well, you might be interested in this slide. This -- what I want to start out by saying is that we're not, at this point, we're not talking about FY '14. FY '14, we're not through with our budget process yet. And in our May conference call, we will go over the FY '14 guidance. We're also not going to talk about an update of FY '15 guidance, we're just replacing it with FY 2016. And so, the way we're looking at this now, that we feel like we'll have revenue of $4.5 billion in fiscal year 2016, earnings per share of approximately $8.25 a share and EBITDA of approximately $875 million. It makes all these assumptions, which we need to go over.

Certainly, the current and then previously announced commercial build rates, we don't see any big risk there. Modest market share gains, which is what we do. Business jet-continued strength in large cabin; return of modest growth in small cabin. Aftermarket growth rate, mid-single digits. It does, in fact, include the impact of Embee and Goodrich. It understands that we're in a pricing environment that's in deflationary mode. It takes into consideration our view of existing DoD budget pressures. It assumes pension contributions for the next 3 years of $230 million. And it also talks about cumulative debt reduction in FY '14 to '16 of $700 million. So that, tied in with the included impact of the acquisition, makes you understand that, really, we don't have any new acquisitions in that model. So if there is anybody who's thinking that between now and the end of fiscal year '16, we won't make another acquisition, it would be a bad assumption. So we're going to, in fact, continue to acquire. So you'll see that what that will boil down to is that will be slightly less debt reduction, but slightly more sales and earnings and the like.

The implied organic revenue growth there is commercial up 14%. This is for the 3-year period. Military down 8%. Business Jets up 5%. And currently, we're treating all 767 revenue as commercial. At some point, when it goes to tanker, that'll flip over to military and starts skewing our models a bit. And it also includes a positive impact of the Jefferson Street facility move, which we will be going over in detail very soon.

So I think that's the end of my presentation, other than to say that Triumph leads with its values and we're going to close with our values. So at that -- and I will be taking all kinds of questions a bit later, but now I'd like to introduce Jim Cudd, our Vice President of Business Development.

R. Cudd

Thanks, Jeff, and I'd like to welcome everybody. I'd like to share a little piece of wisdom about life in North America as reflected on this slide. If you're naming your children or you're advising people naming children, 3 names is okay, just don't have the primary identity tag be the middle name because later in life, they will hold the name confusion with TSA against you.

Jeff covered a lot of what's here, I'd just like to make a couple of points. I'm not going to go through a lot of the correlations of revenue, passenger miles and commercial build rates and all that sort of stuff. I want to hit a couple of high points and then get into a little more depth of where we're seeing opportunity, the pursuits that are in front of us and why they're there, given the condition, the different segments that we're experiencing today.

On commercial air transport, Jeff covered that pretty well. In business aircraft, the second bullet point up there, it reflects the somewhat tumultuous situation that we have in that segment in general. Hawker has essentially exited. There are quite a few new programs that are out there. And in my opinion, nobody really has a killer product lineup. So when I say program-based success, what I'm looking at there is that I think you're going to see the traditional market philosophy of: Have a product line that a customer can grow through you with, start small and get a bigger airplane as you get bigger or mature. That may really be something that goes by the board in the next decade. There were 6 major business aircraft manufacturers, there is now 5. They all have strong -- very strong offerings in different points. We think we're pretty well positioned, as Jeff described a little bit, against some of the stronger programs. We're not on all of them, but we are pursuing improved positions in those as well.

Commercial helicopters, not much to say there. The oil patch drives a lot of that, and that's pretty healthy and it looks like that's not going to change. And on military aircraft, lots of headlines with sequestration in North America, but nothing that really seems surprising to us in terms of big changes in what's been talked about for production rates on aircraft programs. Upgrades and retrofits are only going to grow in that market. I think Jeff mentioned that the C-130 was designed in the '50s. The one projection for the B-52 is that by the time the last aircraft goes out of service, that program will have been in service for 90 years. So there's a long life in all these military airplane programs.

We have a process of tracking opportunities that we call a pipeline, and there's some statistics here on this. What this includes is opportunities that our customers have identified to us that they're capable of describing in terms of what the content would be, what program it would we be on, why they're doing it and something about when it's going to happen. So it's more than a gleam in the eye or an expectation. The top graph shows $1.8 billion of opportunities and it's spaced out over time. So the numbers that are related to what the annual sales rate would be if we won that program. So if we won everything out through August 13, which, if I get the right button, is that bar right there. It would say that we would have picked up a little over $1 billion in sales, annual sales, that would grow over time from the win point of that contract. So it might take 18 months to 2 years for that program to grow all the way up. But if we won everything, that would be $1.2 billion of sales on top.

So you see, most of this stuff is out through this current year. There's a couple of things out here in 2014 that we're tracking. And then this last piece, which is about $500 million of opportunities, are things where it's not date-specific yet in terms of when that contract is likely to be awarded. Our target, my personal target for my sales team is to win something in the 20% to 30% range of the things that we're tracking in. We're about in the high teens, low 20s for the past 9 months.

A couple of other breakdowns of that opportunity set. These are our top customers. And rather than put names in, I just said commercial, regional, regional and business. So there's a customer out there that has something over $1 billion of opportunities that we are in the process of tracking or bidding on that are in the commercial aircraft world. The reason there's more than one commercial, some of these are obviously first-tier suppliers where we're putting in a second-tier bid. So we might be bidding to a Spirit, Premium Aerotech or an Aerolia type of situation.

And then on the right is the breakdown by our major product groups. These set of things here I'll refer to later as aerostructures components. So we kind of break the world into 2 pieces. Integrated aerostructures, which are big and recognizable pieces of airplanes like wings and fuselages and empennages. And then these things, which are aerostructures components, could be spars or structural components of another type or a flight control surface. And that gives you a sense of how that breaks down as well.

Of these $1.8 billion, there's about 250 separate opportunities that make up this database of -- in our pipeline. About $1.2 billion of what's out there, that we're tracking and pursuing, is work that is coming out of an OEM, as opposed to moving from an existing supplier on a competitive basis to potentially another one, if it you were to be won by somebody new. So that $1.2 billion that I'm talking about would be something like a Boeing, an Airbus or of Premium Aerotech production, which they've decided to move out of their facilities to a supplier, as opposed to competing it between an existing set of suppliers that are already supplying to them.

This is my attempt to -- I've been getting a hard time in this picture. To make this simple complex. What I have up here is kind of a timeline for a standard commercial aircraft program. Business aircraft are pretty close and military, perhaps a little longer, but this is 0 to 50 years. So there's a time when people are talking about the aircraft in concept, it goes in the design and development, which is nominally 5 years. It can be longer, as we've seen in recent history. It'll stay in production for quite some time. And then it'll stay in service all the way up to kind of a 50-year timeframe. And this is consistent with the ICAO average aircraft life of about 26 years.

Where we see opportunity sets are represented by these somewhat hard to see little shadings, I want to talk about those a little bit. So in this portion of the aircraft program development, where we're talking about concepts and we're getting into early design, you see an opportunity window, that I'm calling ground floor, where the integrated aerostructures, the big recognizable pieces of the airplane, and a lot of the systems opportunities are selected by the customer. So Airbus or Boeing or Dash or somebody will decide that their electrical system, their engine, their hydraulic system is going to be supplied by vendor X, Y or Z, or wings or whatever, then that gets made in this period of time. And it's generally just before they go into formal design and development and the first year to 2 years afterwards.

There's another phase here that starts once they've kind of made those decisions, and then they start selecting things like components of that go into these systems, as well as a lot of decisions about who the second-tier or smaller component suppliers will be. And that's a place where we have a lot of opportunity, but it requires that you have a new program in order to do that. Kind of midlife, there's 2 phases. The big one being the aerostructures components, where you have a supply base that's making spars or landing gear components. And you see those things competed on 5-year intervals, and it's just a rolling situation and it's a big piece of what we do today. We're good at it. And the nature of the market has been always be out there ensuring that you've got a market-based price as the OEM.

There's also a phase, which is a small opportunity -- smaller opportunity on integrated aerostructures, as well as components, where an airplane will go through a modest redesign or a supplier will get into trouble and the OEM will come out and say, "I think I want to move a piece of aerostructure, but I want to change a major component in the system, a hydraulic pump, the landing gear actuator." Those require that you be far enough into the program that's pretty stable, and the problem that has manifested itself or the opportunity. But also, that there's enough runway left in the program that it justifies a nonrecurring investment. Because these kinds of changes usually require a fairly substantial, nonrecurring investment in tooling, in plant, in development and in certification. So that's kind of the dynamics of the world we're in. And then down here, the third-party aftermarket. It starts after warranties, so 2, 3, 5 years into production, and then kind of runs all the way to the end of the program.

And what I want to do now is kind of go through in ground floor and where these changes are occurring, where the programs and the opportunity sets that we're pursuing and what are the magnitude of those? So in integrated aerostructures, which is these types of things, big pieces, recognizable airplane pieces. On the ground floor, Jeff talked about Embraer, we have some large business shot opportunities as well as some mid-size, and there are some classified programs out there as well. And this totals about $500 million of annual sales run rate, were we to win it all. And the award dates are kind of out through the current calendar year.

In the change area, the Max and the Neo are really interesting programs and this may be the first time in aviation history where a major aircraft redesign has really seen control by the airplane companies over the engineering organizations. Because in both of these programs, they really have limited it to re-engine. The pylon in the nacelle of the engine and the immediate systems around those are changing in the case of 737 a little bit on the landing gear. But they're pretty much leaving the rest of the airplane alone. So we're seeing opportunities associated with changes around the propulsion systems and some of the things that are directly affected, but the rest of the airplane is not changing a lot.

We also see a lot of change, obviously, with rate increases, in particular, the European manufacturing basis is kind of saying enough. If the rate is going up, we need to push stuff out, rather than expand our plants in Europe. And we also have the A350 coming. So we really want to create a little bit of capacity opportunity to dedicate to that new program as it ramps up. So we're seeing entire pieces of 321, 320 and 330, and some of the other Airbus programs, come out as opportunities to build for the full production rate, a panel or a structural element, that is currently in Europe that they're looking to outsource the entire production rate. It's not just the rate increase, the last 10 aircraft of rate, but the whole 42 rate for like the A320 or single-aisle airplane, which means that once you win the work, it's likely to stay with you.

On aerostructures components, as I mentioned, a lot of things that are tend to be machined or composite assemblies. And the large business jet has significant amount of opportunities because that's fairly well along in its design cycle. And the 737Max is also kicking up a number of opportunities associated with some of these changes. This is not a very large opportunity set. As I pointed out earlier, the dynamics of this part of the generation of opportunity from us aren't really well supported in the commercial aerospace world, nor are they in military. So we have about $100 million of annual sales opportunity here and these are pretty near term through the third quarter of the calendar year.

In the change area, rate increases, again, driving a lot of opportunity there. And this is that sort of wire op window of opportunity during the production phase and there's a lot of work there. This $780 million of opportunity doesn't include kind of follow-on or adjacent opportunities that our individual business units kind of see one-on-one with their customers. So if they're manufacturing a set of structural parts and the customers says, "You know, I really like to increase your rate or move some additional parts," which are very similar to those into the business. There's another set of opportunities out there that we don't necessarily track at the corporate level in this opportunity set. But this is where the lion share of big business opportunity is for us at the current time. And obviously, that will change as the industry moves ahead, as new programs, like 777X or something that Airbus might do with their product line come out in the next couple of years. Opportunity sets are going to move back into this area of ground floor opportunity.

These are the systems, and as I pointed out before, it's a pretty small number, $75 million. And it's these types of airplanes, again, because there's not lot of major redesign or new programs out there, the opportunity set is a bit limited on the system side. But for changes, these programs that Jeff described, and about $90 million of sales rate opportunity for those.

In the aftermarket. It's a little difficult to break this one down because, as you know, there's a lot of customers, there's a lot of product out there. But what I try to do is say, in our 3 major area, which are structures, the auxilliary systems components and the instruments, these are some of the types of things that we do. It's not an exhaustive list, it's an illustrative one. Although in structures, the thrust reversers, flight control surfaces and interiors are the vast majority of our business. We are trying to expand in these areas. So on Structures, the Asian operation is being expanded to be able to service thrust reversers and flight control surfaces in that region. So we're adding capabilities like autoclaves and composite support.

Another place where we're seeing real big opportunities are our plane side operations. This has been kind of the Holy Grail of the aftermarket. If you bring in an airplane for a C check, can you take off components like the thrust reversers or flight control surfaces, and repair and return those to the airplane before it completes the C check, so you don't need to exchange parts, it takes out inventory and all the complexities associated with model commonality or compatibility. And we tend to focus on specialty fleets here as well, and I focus on them. It's a big opportunity for us. So at either the beginning or the tail end of a program's life cycle, and particularly, the tail end, where you get down to a few cargo aircraft that are flying. We have pretty unique capability around either significant repair or actually manufacturing new parts to specification on a one-off basis to support some of these older programs that have small fleets, and that's proved quite lucrative for us.

In components, which is a very vast opportunity set, the Middle East and Europe are operators that we're targeting for increased market share. We do a little bit of business today, but we really haven't been that aggressive. We've been using reps mostly in that part of the world and we'll be upgrading and expanding our -- on salaried staff to pursue opportunities there. We're actually seeing quite a bit of interest from the larger carriers. I think they're a little bit shopworn with the big OEM powered by the hour or usage kind of contracts, and they're looking for a viable third party either to help discipline that market or to take down some substantial opportunities, and that's really played to us quite well.

Again the specialty fleets, a lot of cargo carriers. I think a good example that would be the 757, as it goes out of passenger service into cargo. Low volume spares, as I described a moment ago, as well. There are some engine programs out there that have no spare thrust reversers in the nacelle components form because they were very short run and unique themselves. We have the opportunity to actually build spares for those programs. And the operators, as I said, who really want to step out of the OEM networks, either completely or partially, this has proven to be a good [ph] opportunity for us as well.

And then the instruments, Europe and the Middle East are also places where we see opportunity. Both of these last 2 categories, we would service out of our North American operations for the present time. It turns out that the shipping cost and the time required for these type of components is really not an impediment to being able to service from North America operators in the Middle East or in Europe. It's much more difficult with large structures. The cost becomes prohibitive and, in some cases, just finding a suitable transport device to haul a thrust reverser around can be a big issue.

Longer term, I chose that first -- or I chose the first word carefully. In recent months and in the past year, there has been some fairly large companies that have gotten into financial trouble as a result of aggressive positions that they've taken on some of the bigger OEM programs, as you are all aware. The word trudge means that while the OEMs and some of the first-tier suppliers have experienced some very punitive situations in trying to rescue those suppliers or keep the production line going, they're having a very hard time moving away from them for 2 reasons. One is, it's very costly and time-consuming to change sources, as well as they do still like the really low prices that they got, that got those companies into trouble. So there is this slow process of recognition that taking the lowest-cost supplier, if you know he can't survive in that price, and choosing them as your supplier may have downstream distress that you really want to avoid. So as Jeff said, we're careful about not overcommitting or chasing business which we know is not successful business. And I think some of the big OEMs are kind of moving back to a more stable point in terms of some of their procurement practices.

New programs, I won't repeat that again. On innovation, it turns out that there's an awful lot of benefit for both the OEMs and the aftermarket customers. If you can shorten the supply chain. There's a kind of a near-term tactical benefit that if you have of part that's flowing through a long chain of progression that requires something like a processing step and you outsource that -- and we do a lot of that work as well, like in Embee in their processing organization. If you've got schedule issues and we supply you a 15% to 20% premium price and the 1/10 lead time, often times, it turns out that that's a better deal than going for the lower price and the extended lead times. So one of our processing units has an average turn time from receipt dock to shipping dock of 3 days, and the industry average is 10 weeks. That makes for a very compelling reason to earn a premium. So we're working hard in a number of our businesses to improve and shorten the lead time.

The other thing that I think the OEMs and the big guys recognize is that, if the industry is driven by revenue passenger miles in the commercial side, and we've all seen cycles up and down and the fact that there's an enormous amount of inertia in the supply chain. If they can take out some of that inertia, they take out a lot of risk, and there's a premium to be paid to do that. It's the analogy of something like trying to chase a Porsche around the racetrack in a tractor trailer. If the Porsche is the demand for revenue passenger mile and the 18-wheeler is the production chain or the supply chain of aircraft, the Porsche darts around and the truck just barrels ahead, so when demand goes down, you've got this enormous overshoot. And we see that in programs and we see it in the larger industry cycles, and it's very expensive for everybody in the supply chain to have 18 or 24 months of inertia that you have to bleed off over an extended period of time. So collapsing supply chain link for our customers has proven to be a very effective way to generate a premium position in the industry for us.

System and component performance in our Systems business is lighter, higher performance, longer life, better durability, more resilient, all of those things are things that we're investing in R&D and they do make the difference. And I'd add one more to that, which is the -- in the aftermarket, it used to be that third-party that was outside of, say, complete OEM circle, meaning using some DDR or PMA parts that the OEM was not approving, if you are trying to do that in Europe, it was very difficult. Lufthansa and some of the other major carriers are now much more amenable to third-party supply that includes that approach because of the savings. I think the concerns were around safety and people standing behind those products, and I think a lot of that has ameliorated over the years. The leasing company are still holdouts, but that has also opened up opportunity for us as well.

Thank you for your time. Next, Jeff McRae, from our integrated products division in Vought will take you through his section -- or do we have a 5 minute break? We are not? Okay. So, Jeff?

Jeffrey L. McRae

Good morning. I hope the topic is not dragging people out of the room, but it's more biological. I'm Jeff McRae. Within Triumph, I have responsibility for our facilities or companies in Nashville, Tennessee; Milledgeville, Georgia; Red Oak, Texas, and our Jefferson Street facility, which we're going to talk about today.

Jefferson Street. You might catch me using JSF at times as I go through this discussion, it's not talking about joint strike fighter, it's talking about Jefferson Street facility. A lot of history in this facility. The facility is located in the southwest corner of Dallas. About 4.8 million square feet under roof, residing on over 300 acres of property. It adjoins the former Naval Air Station in Dallas, which is you see at the bottom of the photo there, which was BRAK [ph] back in 1998, and now it's property owned by the City of Dallas, although no longer operated in this capacity as an airfield.

A vast facility with a lot of history. The facility was first constructed in the early 1940s to support the war effort, produced full-scale aircraft, P-51, Mustang fighters, B-24 Bombers through World War II. It was idled for a period of time after World War II, and in 1948, the U.S. government, for national security reasons, encouraged Chance Vought Aircraft to relocate its facilities from Stratford, Connecticut down to Dallas. They did that in the 14-month period in 1948 and 1949. Ultimately, between the years 1950 and 1980, over 15,000 production aircraft were rolled out of this facility including F4U Corsairs, F-8 Crusaders, A-7 Corsair IIs. So it was a facility that ultimately was designed to bring metal in one end and fly aircraft out the other. A lot of history in this facility.

As we look at it today, this facility supports a number of military programs, I'll talk in specifics in a little bit. It supports the Gulfstream G550 wing production, and it also supports commercial rotorcraft programs for Bell. It's still consists of a large composite fabrication capability, really focused on large complex composite parts, vertically feeding many other programs that we execute at this facility. It still contains a large metal fabrication capability. We've talked previously about the decision to shut down that metal fabrication capability. We are in the process of operating offloading that to the supply chain, a lot of that work from metal publication standpoint is going to other Triumph companies that support structures and fabrication. Ultimately, that is a large part of our exit plan here. Along with that metal fabrication, comes a significant amount of chemical processing that was conducted here but ultimately, this facility was built soup to nuts, I'll go through some of the specifics on the facility, but it really was a large city that was built to produce aircraft.

The ownership of facility, the U.S. Navy built the facility in the early 1940s to support the World War II effort. It has, since 1948, been occupied by Triumph and predecessor companies under various forms of facility use agreements with the Navy. I'll talk in a minute on ownership status. But now, it's owned by a private third-party. In the late 1990s, the Navy actually declared this property excess to need, which effectively, set in motion a divestiture of the property that has now just been completed. Through the 2000s, there were a number of discussions with Vought, with the State of Texas, with the City of Dallas as potentials to take over ownership of the property. Most of those discussions fell apart around environmental liability and the responsibility for it, as well as the need for capital improvement that have been deferred over time by the Navy.

In 2008, the Navy also acquired what is known as Cottonwood Bay, which is a body of water to the south of this property. It's an environmentally sensitive piece of property that the Navy has the requirement to remediate. It adjoins our property. It also adjoins the Naval Air Station. And if you think through the years of practices primarily around the air station and things that would be spilled on the runways and dumped into the water, it's a pretty sensitive piece of property. What the Navy did is they actually ultimately joined the property we occupy with the Cottonwood Bay property and put that property up for public auction with the winner taking on the responsibility for the environmental remediation. That sale a was completed on October 5, 2012, to a Dallas-based real estate investor with a history of doing environmental remediations on industrial properties, and they and Triumph have been in discussions on extending lease arrangements and different opportunities we might have on the property. I would say, we haven't had great success in arriving at lease structures that would allow us to stay in this property for the long term.

Jumping a little bit here, just to reiterate the programs that are executed. At the Jefferson Street facility. Commercial rotorcraft, we have an agreement with Bell, we're supporting the development of the Bell 525 Relentless and have a significant level of scope that ultimately would lead to producing cabins up for this aircraft. We are also in discussion with Bell on a number of elements on this aircraft beyond the cabin. C-17. C-17 historically has been the largest program that we've executed at this facility. We produce, among other things, the entire tail section of both the vertical and horizontal for that aircraft in Jefferson Street. We also produce them as nacelles and do the full engine buildup for this aircraft at Jefferson Street. V-22. We produced the composite tail section for the V-22 at JSF and ship that to Bell and Amarillo. For Global Hawk, we produce the Global Hawk wing for the U.S. Air Force, as well as the derivative Triton aircraft for the U.S. Navy, that is a 130-foot long wing that's shipped out to Palmdale, California in a single piece. For Black Hawk, we have historically supported Sikorsky on the production of the cabins for H60. Over the years, we produced ML and S model cabins. As we look forward, we will be focusing on S model cabins and still supporting on aftermarket support to Sikorsky. And F-35, we do the bypass -- engine bypass duct for the VTOL version of the F35. So the vertical takeoff version. We don't have that scope on the conventional takeoff version of that aircraft.

Business jets. We produce a fully integrated wing for Gulfstream on the G550. That wing is shipped directly to Savannah, where it's joined with the fuselage. And then on Global 7000/8000, the engineering organization that designs the 7000/8000 resides at the Jefferson Street campus. And I failed to mention on the first chart, on top of the manufacturing activities at Jefferson Street, we also house the design engineering organization and a number of functional support groups that support really the 6 heritage Vought companies, things that had always been in a central mode that we've kept in the central mode and are housed in this facility. And on the engineering side, we also house a structures test lab where we've done a number of different types of structural testing for OEMs, and also supports advanced development programs for us.

This is really, as we think of the facility, what Jefferson Street is. And I won't read through all of these. But as I talked in the first chart, this really is a facility that was designed to bring metal in one end and fly airplanes out the other. You can pick the statistics whether it's 163 active restrooms, whether it's 7,700 air filters that we replace a year, whether it's 105 roll up doors, whether it's 619 in-plant vehicles, it's a facility that is vast in nature, it's complex in how it was designed, and it's very costly to operate. We still operate a powerhouse 24/7, 52 weeks a year on this facility. We operate a full-scale waste treatment facility. We operate 3 deionized water facilities. You can go through here and see the enormity of what this facility really is. A lot of this was driven by the metal fabrication activity, which helps. But in the end, it doesn't help enough for us to diminish how much we pay to operate this facility, which you can see in the corner, we currently spend between $35 million and $40 million a year just from a facility operations standpoint. The facility also has a number of deficiencies that have grown over the year from a capital standpoint. Our estimate is there's probably in the range of $72 million of deferred capital that will be required to keep this facility running for the long term, probably $5 million to $8 million a year would be needed to invest in it.

Which really leads us to the assessment that we've gone through as the viability of Jefferson Street. With the Navy sale of the property, it ultimately will eliminate what I would depict as a subsidized rent structure for the facility. We've always operated with a rent-in-kind approach, which allowed us to use the dollars that would have been paid to U.S. Navy to put them back into the facility to take care of long-term capital maintenance. Without a change, that will go away. Also with the decision that we've made to offload all the metal fabrication that we have historically done in this facility, it creates a need for a significantly reduced footprint, and ultimately, both of those elements leave us with a site that really is not going to be cost effective for us to continue running for the composite manufacturing and the assembly integration programs that remain at Jefferson Street. And ultimately, it limits our ability to grow this business at Jefferson Street.

Which drove us to the decision of exiting Jefferson Street. We say accelerated exit from Jefferson Street. We have always known that as the C-17 program sun-setted, it would create a significant pressure on this facility. With the sale of the property, I really look at this more so as an acceleration of an exit as opposed to an unplanned exit from this facility.

The strategy that we're employing to exit Jefferson Street. We've talked about exiting metal fabrication. We will have that activity completed by the end of fiscal year '14. We are looking at all ways in which we can utilize both capabilities and footprint that we have existing across the Triumph family as we look at moving certain elements of the existing programs elsewhere. And really the most important part of this strategy is expanding our facility in Red Oak, Texas. This is where we built the facility to produce the Global 7000/8000 wing for Bombardier. A key aspect here is in the move to Red Oak, we are looking at maintaining our existing workforce. So as we've looked at moving programs around in the past, we've always looked at a significant risk of the learning because of the laws of the efficiencies we gain with the labor force. This is a situation where we believe we'll be able to retain much of that workforce and greatly mitigate the risk of this move. But ultimately, we will plan on being out of Jefferson Street by mid-fiscal year '15. There's a couple of the dynamics that could keep certain elements of our business at Jefferson Street that we're still in discussions with it with the new landlord at Jefferson Street.

Let me talk about Red Oak a little bit. Red Oak is a veteran community, about 20 miles south of Dallas, about 30 minutes from the existing Jefferson Street facility. In 2011, we secured roughly 100 acres of property from the city in order to construct what you see on the screen there, which is an actual photo. We've now completed the building that we will construct, will produce the Global 7000/8000 wing and we have received great support from the local governments, the city, county school district, as well as the State of Texas as build this facility. As we look in expansion of this facility, they all continue to provide significant support to us.

As we look at what long term, we believe this facility would look like, if you'd focus on the -- I'll call it, salmon color there, which represents an existing 240,000 square foot building and the white elements, the white is what we are proposing or will use as an initial expansion of this facility. It ultimately ends up being about a 650,000 square foot facility that would absorb all of the composite fabrication activities we perform at Jefferson Street, as well as all the program activities that we perform at Jefferson Street. The layout of the property also gives us great opportunity as we look forward and as business meets demand to further expand if needed. As we ran business models for this, we did not assume any new business coming in here, it really is justified based on our existing business.

So the opportunity. In the end, this will allow us to remove 4 million square feet of high cost inefficient space. It's actually getting rid of brick-and-mortar while being able to maintain the revenue stream that we have at Jefferson Street. Reducing our facility cost between $25 million and $32 million a year, and that is net of the load depreciation for the new facility. It will allow us to avoid over $72 million of long-term capital that we would believe would be needed at Jefferson Street over the next several years. We will structure the new facility to drive workflow improvements and garner efficiencies from a labor standpoint in the tune of $6 million to $10 million a year. And I will repeat, and that is using the existing workforce.

We've also secured a number of tax incentives from the local governments amounting to over $14 million over 15 years. And once again, have built a business case that even though we believe this will set us up with a domestically competitive facility for large composite structure and integrated assemblies, we have not incorporated the capture of new business in our modeling.

It's going to cost us something. We've laid out a capital plan that would have us investing between $90 million to $102 million into this facility. This is both the cost of the building as well as certain upgrades and refurbishment to existing equipment and some new equipment. We're looking at between $28 million and $40 million of nonrecurring expense. This is the expense to move. This is assumed levels of disruption that we'll see over the next year. And also, the cost that will take us to recertify processes as well as equipment in the new facility. In order to facilitate the move, we will build inventory on pretty much all our programs to the tune of $33 million to $45 million during FY '14. Now offsetting these impacts, we are looking at receiving between $40 million and $60 million of funding from customers, from state and local governments and through tax incentives. I would say that we have secured the bottom end of that and continue to have discussions with customers on additional investments. I'll show you in a little bit part of the deal with customers is ultimately returning part of the benefit to our customers. And ultimately this puts us in a much better position to execute at a lower cost on our military programs ultimately, we'll provide some of that benefit back to our customers.

We are still working through some potentials of mitigating the amount of spend that we will incur. Much of that revolves around the C-17 program. We have reached an agreement with the existing landlord to extend our lease agreement through January of 2015. It gives us more opportunity to assess, to see where C-17 is and really to see how many planes Boeing has sold and make a determination of whether we move the C-17 production to Red Oak or not, or rebuild out at Jefferson Street. The other element that we're evaluating is our test lab facility that resides at Jefferson Street. We have requested from the landlord specific elements of Jefferson Street that we would willing to stay on and are working to see if there is a feasible business case to stay in certain elements that would allow us to maintain that test lab facility at Jefferson Street. Absent that, the capital numbers include effectively recreating that capability in Red Oak. But overall, we're looking at a cash use in FY '14 of up to $145 million for this project.

From a schedule standpoint. We have been mitigating the risk of this activity by doing a lot of the groundwork over the past couple of months. We have actually begun pouring piers for foundation in the last 2 weeks. We will shortly begin the steelwork. Ultimately, the move would have us beginning to occupy the expanded facility in Red Oak in the October and November timeframe with the entire facility completed by the end of fiscal year '14. You can see the details on some of the moves. The other aspect of this is, we're going to use the building we built for Bombardier wing production to draw some synergies and move some things earlier. We've effectively facilitized [ph] Bombardier building for full-rate production of the wing. Obviously, it's still in its development phase, so we have about 3 or 4-year period where we can put some other things into that building, which allows us to mitigate how much space we build, new space.

Jumping into the business case. For the business case perspective, we've talked through the investment. This shows everything at the high end of the investment and the recurring cost. So we're looking at $102 million of capital, roughly $40 [ph] million of nonrecurring. Working capital growth beginning with inventory build, which ultimately ends up being offset by advances that we'll receive from customers that will help fund part of the move. So being able to mitigate some of the actual working capital growth. We are projecting actual revenue reduction when we get out into 2015 and '16. That is the dynamic of customers funding part of this investment and us returning that via lower pricing on existing programs to them. Obviously, as I mentioned, we haven't assumed, even if though we believe these positions as well, to have any new business in this facility, that would only improve the ultimate business case that we're looking at.

From an operating income standpoint, based on our current assumption that all of the nonrecurring costs will be expensed as incurred. We're looking at about a $45 million incremental degradation to operating income in FY '14, but ultimately turn that to a $5 million positive incremental benefit in '15 and a $35 million benefit in '16, and we would expect that for years beyond. On an earnings per share basis, a $0.64 a drag on earnings per share at FY '14. And then ultimately, returning it to an incremental positive earnings per share in FY '15. The actual accounting, ultimately, will depend on how the accountants tell us we need to throw this through our block accounting, so it could drive some dynamics in the timing and the impacts we're seeing. But that's generally the broad program right now. We're up and running. In my mind, this will create great value for the business. It would take that Jefferson Street facility effectively off our balance sheet, create a great opportunity for us to grow our business that did not have that opportunity in the facility it was in.

Jeffry D. Frisby

And with that, I'll turn it over to Dave Kornblatt.

M. David Kornblatt

Good morning. What I'd like to do is go over a few things. One, a review of Q3 very briefly, update you on some financing issues, talk about Q4 a little bit, look at our margins over the medium and long term, cash deployment, some thoughts about Jefferson Street and additional comments on our long-term guidance that you saw this morning from Jeff.

So Q3, in our view, is a very good quarter, continuing a trend, revenue up 8% and all the other metrics up greater than that. So as always, our benchmark is are we improving our net income and our earnings quicker than our revenue growth, and all that revenue growth was just about 100% organic. So in our view, a very good quarter and similar trends of what you heard, commercial is up strong, military was down and business jets were pretty flat, but a good quarter overall.

Going by segment, Aerostructures delivered another strong quarter at 17.4% operating margins up year-on-year. Good result out of Tribera [ph] structures and particularly, very, very strong results at our heritage Triumph companies. Again, where a lot of the synergies end up is in the heritage companies. So they're the beneficiaries of a lot of outsourcing from Vought. So good performance there and a continued trend. Remember, when we bought Vought, we essentially bought a 10% business. Vought is slightly dilutive to this number, but not much. So we've come a long way in a relatively short period of time.

When we look at Aerospace Systems, good performance there, up 6%, margins -- we seem to have fallen in a pattern in the third quarter of 12.31 each year where it seems to be the lowest quarter for our aftermarket sales in that segment. I don't know why that is. It's not tied to the government's fiscal year. It could just be our customers shut down earlier and earlier in that quarter, but there's a clear drop off. So it doesn't take much sales at 50%, 60%, 70% margin to have your margins drop. So year-to-date, we're above these numbers. But it really seems to be a Q3 phenomenon and it's very clearly traceable. So we have been in the 15%, 16% all year and expect to stay there. So good performance there.

And as Jeff alluded to, in the Aftermarket, up 9%. And again, our goal here is to be in the low double-digits. This is not a -- I preach this all the time, I would not encourage you or I would discourage you from looking at this business sequentially. I think it's a trailing 12 months-type business. I don't consider 13% in Q3 any different than 14% in Q2. One or 2 shipments in and out of a quarter can move the needle here. We think we're operating very well for third-party aftermarket. Again, this is all third party and the needle continues to move up. And the nice part is this is a function of our best businesses growing, and our businesses that are not doing all that well are starting to improve. So it was a good team effort from the 10-or-so companies in the Aftermarket group.

Our backlog remains strong, up a little bit year-over-year, and military is now 28% of our backlog. If you went back a year, it was probably 32%, 33% of our total backlog.

Go through our top 10 programs, no big changes here. The 787, again, this is not a sales chart, it's a backlog chart, although probably the only item that's divorced from this chart. If we were to compare it to a sales chart, it would be 787, and so it will climb as time transpires.

We limit our backlog to 24 months of confirmed orders, so that's what this shows. Eventually, #9 will get a different title as we move into the tanker, but I don't expect it to change much on the chart. And unless we change our mind, we're not going to start disclosing 737 Next Gen from Max and A320 once it gets in the top 10, today's model versus Neo. We'll just retain the product family. I don't think we want to use up that many slots on essentially 2 programs. And Boeing remains our largest customer, and you can see the balance there. Virtually, every program, virtually every plant is made up of that number.

Our cash flow is very strong, this is the year-to-date chart. And you could see the effect of the pension contribution. So $334 million of cash flow before the pension contributions and $103 million of pension contributions bring us down to about $230 million from operations.

CapEx is up year-on-year. The lion's share of that is the completion of the existing Red Oak facility for the Bombardier wing, as well as a little bit more for capacity on some new programs and build rates going up. But that's really the one big spike in CapEx.

Our balance sheet, which remains very strong, you could see the components there. We ended up the quarter at net debt to total cap of 36%, which is where we like to be. We like to have the first number be a 3, and we'd like it to be low enough in the 3, so that the next deal doesn't make us -- push us into the 4s. So I think we're well positioned and we should end the year in the 3s even with the completion of the Goodrich acquisition.

So likely, what will happen is the revolver will be at 0 at the end of the year when we get the proceeds of high-yield notes that I'll talk about in a few minutes,

But we're in good shape. Obviously, we've got, for those of you that follow us, over the next year or so, we have some very expensive debt that will enter its realm where it can be called in a modest premium. So the $173 million notes are at 8%. Those can be called at a 4% premium in November. And the $348 million, the 2018 notes can be called next summer. Those are 8.6%. So if rates stay where they're at, I wouldn't be surprised to see us be back in the debt markets to refinance those.

And our revolver is -- we have about $1 billion revolver. So we have plenty of capability to invest and grow.

I'm sure you saw last week, we put out the note that we completed. We haven't gotten the cash yet, but $375 million of 4.875% notes, not bad for a high-yield issuance. I think there, some of the bankers have a new name for them like meaty meal, but that's pretty attractive for guys like us. So we are very pleased with that. We'll get the money, I think, on the 25th or 26th. We pushed that out as far as possible to tie closer to the Goodrich deal, because borrowing at 4.875% to repay 2% debt on the revolver is a little bit uneconomic. So just push that out as long as we could. And you'll see in the next couple of days, an announcement that we're just pushing our accounts receivable program out to 3 years, the 18 months into a 3-year deal. Rates have come down even further and is very attractive. So we're just going to push that out. No changes to the program. You will see that in the next day or so.

Our growth strategy, again, as we talked about, is again, integrating a broad range of products. We would like to rebalance our business mix and get some diversification, continued margin expansion and strong cash generation. Things we're not going to compromise for on as we go forward.

From a margin perspective, there's nothing new here. There's also nothing new that we're not going to give you a peak margin target, so you can save that question.

And really, how we get to these numbers? We look at our companies, there's how many in each segment, and we look at where the strong performers are, where the medium performers are and where the weak guys are. And when we look at the medium and the weak, we see plenty of room for margin expansion. We have a few companies that are just knocking the cover off the ball every month, day in, day out and the numbers are staggering. But unfortunately, we don't have too many of those, and we have a lot of companies that are at segment average or below average. And so when we look at them just improving a modest amount, we get a couple hundred basis points of margin. There's nothing overly scientific about how we get to these numbers. So despite the fact that 2 years ago, when we were 200 basis points lower than we are today, we said there's a couple of hundred basis points of improvement. We continue to believe there's another couple of hundred basis points of improvement to be had. Are there pressures on the military side? Are there pressures from our customers to lower pricing? Yes, but a lot of that's nothing new, and we think we can still continue to grow margins.

If you look at the catalysts, I put the drivers on the right, I think you heard from Jeff about Jefferson Street and we've always talked about the synergies. Execution is always a part of it.

In the Aerospace Systems segment, I think the one thing that really could drive that is for us to start eating more of our own lunch on the aftermarket as Jeff referred to, just as we're picking the pockets of OEMs and others on our third party business. There's a whole lot of people that are very successful on our products. And it doesn't take a lot of regaining of that product to drive our margins north, and we've had some success. That's part of what's going on there. Obviously, when the Eaton litigation reaches its final happy ending for us, that's 100 basis points there, but that's sort of a given.

I think you'll see margins take a slight dip down. We've been very clear that MB [ph] will be dilutive to margins, accretive to earnings coming out of the gate, but I think in a semi-linear fashion -- I'm sorry, GPECS will drive that. You'll see that come back in a semi-linear fashion over probably a year or 2. You will start to see the margins come back up. And it's a pretty big acquisition for that segment, so that's the only real headwind you would see there.

And Aftermarket, again, I think it's a little bit less than 200, but again, plenty of room for expansion there. We still have a couple of companies there that are not doing very well. They're profitable, but very dilutive to margins and we think we can make them healthy. So again, it's really that kind of analysis that we see.

Cash generation has been a good story. This just gives you a 3-year snapshot. Not only does it show the number increasing, but any measure of total debt, adjusted EBITDA, I think we're continuing to do in spite of the large headwinds we get from the pension. And frankly, this year, we've done a not great job on inventory. I wouldn't say it's been horrible, but it has not been a stellar year on our inventory management, and those are things we'll want to get back under control. So our cash flow, so far though, has remained very strong.

In terms of cash deployment, I took the easy way out here and we have 3 #1 choices, because I didn't want to rank them. And frankly, I don't think if we continue to execute well, I'm not sure we're going to need to make that choice. I believe we'll be successful enough to continue to make accretive acquisitions, deal with the pension and de-leverage as we've made commitments to our shareholders on all 3 of these and to the rating agencies, to our bondholders, to our banks, and we intend to honor those commitments.

We are looking at some pension advanced funding strategies, not on the scale of Verizon and General Motors, but we are looking at perhaps picking off some populations here and there, and to accelerate the -- or minimize the volatility that the pension creates. We're not at a point where we're prepared to announce that, but we're spending a lot of time and effort looking at whether there's an opportunity to de-risk $300 million, $400 million, $500 million of the pension liability, which just makes everything better.

My view is every time I talk about pension and not Aerospace, it's a waste of time with guys like you. So our goal is to get the pension behind us and make it not the number it is today.

And then, second choice would be to increase the dividend. We've casually talked about that whether it would be an increase to the quarterly dividend, which granted today is not all that impressive, or an occasional special dividend. We leave those open, but I think that would come after more acquisitions, dealing with the pension and de-leveraging.

On Jefferson Street, Jeff did a great job explaining it.

Just a couple of thoughts. This is a big commitment, it's like an acquisition so we're going to take it seriously. It was presented to our board multiple times before we got their approval. It's a big undertaking.

With that said, I have a lot of confidence that we're going to deliver on the savings. This is not your typical let's move out of a high cost labor. Let's go to some -- to a third -- to a low-cost country and just money will pour out the bottom as we arbitrage labor rates. We will spend $10 million less on electric. I mean we will spend $10 million less on maintenance. I mean there is no way that some of these savings are not going to occur. And so we are very bullish that we can deliver these savings.

Now is it still a monstrous effort to move these programs? Will all our employees transfer? Will we make some mistakes along the way? Probably. But when you look at the lion's share of the savings, 15 -- or you don't have to look at my favorite, I used to be in that industry, is 1,600 air-conditioning units. I mean 7,700 air filters. I mean that might be more than we spend in the 30 years of building less, that many air filters. So the type of savings that we're going to get out this, I think, are going to happen. And then you factor in, I believe the opportunity to gain new business more than offsets the risk of the really hard work of can you keep production going, do you make mistakes, all those things. And the fact that we're going to have, hopefully, the same workforce should mitigate that.

So we're pretty bullish on this. It will be distracting in our '14 numbers. We'll try and call that out in our typical fashion so that you can measure how the rest of the company is doing because it will be sort of distracting, and we'll work on doing that as best we can.

On the long-term financial goals, I think Jeff summarized them rather well. Just a couple of comments. Obviously, the debt reduction target depends on either large new programs, that Jim's pretty much promised us he's going to win, or acquisitions that we're going to make. And then obviously, the impact of Jefferson Street and the exact timing. We're still running through the accounting exactly on this, given it's been our first one since we've owned Vought. We have some choices to make. There is a little bit of flexibility as to what our period cost, would have to go into the EACs [ph], and we're balancing what's the better answer there. My personal preference would be if we could get as much as possible into '14, keep the distraction to 1 year, and then we emerge from '14 pretty much in a clean slate mode. But it's unlikely that all the cost will be able to be captured in fiscal '14.

So when we update, when we give you our guidance for fiscal '14, we'll have that ironed out and we'll probably give you the guidance with and without Jefferson Street. So that you can hold us accountable to however you want to hold us accountable on, year-on-year improvements and things like that.

So with that said, the last thing I want to cover is just Q4. Q4 is going to have some noise in it. I'm not updating any kind of number, our guidance remains $6.05. But just to reiterate, there's going to be noise from a different pension number for fiscal '14 that unfortunately gets clawed back into fiscal '13 because of the percentage of completion EAC accounting. That could be $5 million to $10 million.

The decision to get out of fabrication will likely cause a curtailment of some kind on the pension. The decision to move out of Jefferson Street will likely have us look at all the assets at Jefferson Street, decide which ones are not going to make the move and then we have to start taking accelerated depreciation on those. The leasehold improvements at Jefferson Street, which now might have a life beyond fiscal '15, will have to start taking accelerated depreciation. So we will call all of these items out, so don't react to the first number. When you read the press release, it will require some explaining, but I think we do a good job of giving you those details. And with that said, I'll turn it back over to Jeff.

Jeffry D. Frisby

Thank you. I think as -- and I will see how this works. It always reminds me of a meeting at an air show. Every once in a while you just get these weird noises. These pesky airplanes flying over, you can't hear anything. I guess they're trying to make us feel at home with all this construction going on. So at this point, I would like to open up the floor for questions. Cliff [ph]?

Unknown Analyst

The issue of the margins in the Aftermarket, is there something different about your business? Most people have lower margins in the Aftermarket, but also much lower assets. Can you talk a little bit about this, if there's something that's unique in that area?

M. David Kornblatt

Are you talking about our Aftermarket segment?

Unknown Analyst


M. David Kornblatt

Well, most people do have lower margins than us, so I'm not sure what...

Unknown Analyst

Lower margins from the OE business, but with so much lower assets.

M. David Kornblatt

Our segment is all third party, the segments. It means we're -- I'm not saying we're working on a Honeywell APU, a Goodrich thrust reverser. So if you were to compare us to other third parties, our margins are very high. Our assets really, I think, is the investment in rotables. And probably, that, of all our segments, they're the most inventory challenged.

Unknown Analyst

You have the flow issue in your inventory in the...

M. David Kornblatt

Flow, it's also when you're in third party land. Over the years, we've had to make decisions on how much inventory for existing programs, and you get on the wrong side of a retirement and you have a little too much inventory. That's part of the risk in that business. But the RONA [ph] in that business, which is a key metric, has gotten a lot better.

Unknown Analyst

Just one last thing and that is that my mama taught me that free advice is what exactly what you pay for, nothing. But if you have a red card system for things that are deficiencies or items to be approved, I would encourage you to have a green card system to recognize good activity as well.

Jeffry D. Frisby

I appreciate that. I'm not sure there's a green card in soccer, but that's a good point. And one other point on the Aftermarket business. While we really like to be compared with the public comparables on this, but they're fundamentally different businesses. If you think about the AAR model or the old Goodrich division that long ago used to be called TRAMCO, these were heavy maintenance facilities, which is not the part of the business that we're in. And so it's a fundamentally different business and I think the margins in those -- in the areas that we participate are far more, I guess, maintainable, and that we, in fact, have some room to grow.

Unknown Analyst

Just a -- I guess just 2 questions, mostly for Jim, which is, first is, why is a rate increase considered an opportunity? Am I missing that if the 737 goes up, wouldn't you naturally get that? I just want -- when you quantify the numbers or are you getting more outsourced business as the OEM ramps up? And secondly, is there a threshold when it comes to you in terms of these opportunities, kind of an individual business unit decide to bid on something, or does it have to come to a centralized business development area?

R. Cudd

The rate increase, as an opportunity, has mostly been in Europe where the customers have -- or the existing supply base just kind of made the decision that they don't want to add capacity. So when the rate goes up, they have to make the decision of do they outsource the increase or they outsource the whole thing and preserve capacity for something else, and they've done the latter. So we see it as an opportunity to ride in places where we're sole source, the rate just naturally comes to us. But there are lot of places where there are 2 sources or even 3 with an OEM, and they have to decide where the increase goes. Does that answer your question?

Unknown Analyst


R. Cudd

Okay. And the second question on threshold. It isn't necessarily a threshold. We really don't track much below $1 million of sales per year at the corporate level. It really is more how it comes to us. So if it comes from a customer through one of our corporate account leaders, it would tend to go into the system. If it's pretty obvious that it goes to just one business because they have a unique capability, they would just go straight into that business and not get included in the pipeline activity that I'm tracking.

Jeffry D. Frisby

One other point I'd like to make on that, and that is we learned on 787 that -- we told our companies that we're really excited about that program and we wanted to get involved on it. So we had any number of company presidents out there individually pursuing these products, and each of them were making investment decisions on their own. And so while we're happy we're winning all these things, we're starting adding up all the investments we're making, and we came up with a lesson learned, that what we are going to need to do at corporate, one of those gutter bumpers, is that if you're winning a new product, new program and you are expecting to invest in capital over a certain level or experience a growth inventory in a certain level, because that we need to see and we need to approve. So that's just one of the things we've kind of added to the -- our guidelines.

M. David Kornblatt

Our board, one of our directors is here, they don't take kindly to the request for capital. When they pitch is we have to do it because we already signed the contracts. So it's become almost a hanging offense to do that. So we do like to be involved in that situation.

Unknown Analyst

On the 69 [ph], so I just want to make sure, C-17 in '16, would you presume to store at 10 a year and 747 to store at 2 a month? That's what's in the guidance.

M. David Kornblatt


Unknown Analyst

Okay. Dave, I've got to ask you a pension question. I think the guidance for '14 had been $47 million in income. What does that number look like now and what have you assumed out in your '16 number for pension?

M. David Kornblatt

Yes, I think if today were March 31, I think $47 million would be closer to $30 million. We're still praying to the discount rate gods each night. Hopefully, our prayers will be answered before March 31. And obviously, assets continue to do well. But if today we're March 31, that's what you would be looking at. So it's that delta of maybe $17 million, some of that's going to get yanked back into '13.

Unknown Analyst

And what is -- what have you assumed for '16 in the long term?

M. David Kornblatt

I think the pension income in the $60 million range.

Unknown Analyst

Precision Castparts has made a big move into the Aerostructures components market. Could you maybe just talk about how you guys stack up relative to them, what you're seeing in terms of competition out of them?

Jeffry D. Frisby

Well, we actually get asked that question a fair amount. Precision Castparts is certainly a solid company. They compete against some of our Triumph companies. We don't really run across them that much. They are a pretty big supplier of ours. And there's -- the good side of that is that you have -- a potentially undercapitalized individual company then becomes part of Precision Castparts. It makes for a more secure supply base. So in that regard, we're comfortable with those acquisitions. When any company starts amassing a large percentage of your supply chain, that presents some type of risk to you. If they decided to pull a TransDigm and turn around and just dial our prices up regardless of any logical sense -- I mean, no disrespect to TransDigm, they're doing very well -- but they -- but we do have kind of a side door because most of what Precision Castparts and their companies do, we can also do. So we can only be held up if that's what's going to happen for a very short period of time before we can just in-source a lot of that work. So we see it generally as a positive. We're certainly keeping a close eye on what's going on there, and we don't see them as showing any indication that they want to move up the value stream into Tier 1. Okay?

Unknown Analyst

Dave, in your review of the third quarter, you mentioned you're always looking to grow the bottom line faster than the top line, and I think the company thinks it has the opportunities to do that longer term. If I'm looking at the '16 numbers, the difference between the revenue growth target and the earnings growth target on average over the next 3 years is only a few percent. And you're getting a few percent from Jefferson Street, and you're getting a few percent from the accretion to the P&L, just from paying down debt. So it sort of looks like the fiscal '16 earnings number doesn't really capture the margin expansion that you're talking about, unless there's some other below-the-segment operating income line driver that I'm missing.

M. David Kornblatt

Well, we know you're going to take the number up, so we have to start the bidding at a certain level. Seriously, I think that, one, I'm not sure -- we haven't dialed up the improvements yet in Goodrich to that point. Not that, that would be that impactful to the whole enterprise, it will be very impactful to Aerospace systems. Again, we have built in deflationary pricing, some we know about, some we forecasted. Interest expense is actually going to go up a decent amount here. And then as we delever, it should come down. But I still think the income is going to grow faster than the sales, and that's always our benchmark. I mean, at some point, it will slow down a little bit. So I think it's just the nature of a little conservatism there.

Unknown Analyst

Okay, great. That makes sense. And then just one other one, Jeff. Earlier, in your prepared remarks on 747-8, I think you said something along the lines of -- for now, Boeing is saying they'll hold that rate, but you're looking at strategies for how to handle it if the rate comes down. But then when you were going through the '16 targets, you said you didn't see much risk at all to turn announced rates. So I'm just trying to hone in on the -- Triumph's latest thinking on how much risk there is to the 747-8 rates.

Jeffry D. Frisby

Well, I think in terms of all the programs that we're involved with, certainly, 747 is one of the least certain. And I think that -- my sense is that if we held this Investor Day in May rather than now, that there will be additional orders for that airplane, and a little bit more certainty will come in. We -- as I've said before, it's an important airplane for Boeing, so it's in their best interest to keep this aircraft up. We do believe that the freighter market is not tapped out yet, even though it's going to take a while to come back. So I think they just made a filing with the SEC that said they might have to bring their rate down. So we're reacting to that as something that is in the realm of possibility. And as I've said, we have put into play certain plans to counter that to the best that we can. But for now, what our vision is, is that we're going to continue at 2 per month.

Unknown Analyst

A couple of questions. First, on Airbus.

Jeffry D. Frisby

Where are we?

M. David Kornblatt

Over here.

Jeffry D. Frisby

Behind the restroom.

Unknown Analyst

Could you talk a little bit more about your opportunities on A320 and A350? You mentioned it earlier. But with A350 largely designed in at this point, what can you add? And then how meaningful might A320 be as they shift work outside? And then I have a second question on M&A.

Jeffry D. Frisby

You want to answer it -- I'll be happy to answer all these questions. Yes, I think you guys get tired of hearing from me. But in terms of A320, there are a number -- and we just spoke specifically about the Aerostructures packages that are coming out of Europe that are specifically coming out in order to make room in factories for A350. These are not only coming out of a Tier 1 supplier, some of them are also coming out of Airbus directly. And we have a -- we're a bit premature in anything that we can announce, but we are in fact confident that we will gain market share there. We also have an ability, as you know, to acquire companies, and that's another avenue for gaining market share on some of these aircraft. The A350, we have already penetrated in a number of areas. And while some of the large initial -- what I guess Jim would call the ground floor opportunities have been awarded, there still are tremendous opportunities to hit those other tiers, which often times are just as lucrative and potentially more so.

Unknown Analyst

Your answer actually points right into the M&A question, which is, when you think about the 3 segments, where would you concentrate M&A? Do you want to get away from structures? You alluded to this earlier, you're not just a structures company. So you focus on the other 2 areas, or might there be an interesting opportunity with a distressed property in the structures world?

Jeffry D. Frisby

Yes. I'm happy to answer that. Obviously, our kind of dream sequence is to acquire things that will specifically increase our balance, but we also have talked about trying to increase our diversification and the strategic importance of picking up A320, A350 type of work. So that means, very definitely, if the proper acquisition came along that was in the structures marketplace, that had the proper exposure to those programs, we would certainly look at that because that would fit a strategic need of ours.

M. David Kornblatt

And just to clarify, though, you said distressed. I don't think that's where we would go.

Jeffry D. Frisby

I didn't hear distressed.

M. David Kornblatt

No, you -- he said distressed. I think, adamantly, we've always said we don't buy fixer uppers at least on purpose.

Jeffry D. Frisby


M. David Kornblatt

Occasionally, we get one wrong, but -- we could have all the Airbus revenue we want, but we won't get much profit. So the acquisitions to get large structures through acquisitions is -- it's there, but it's not the whole population. So we're not going after the distressed guys.

Unknown Analyst

Okay. How about BizJet? You mentioned Airbus, so I'm thinking BizJet.

Jeffry D. Frisby

Yes. The same exists. It depends on what part of BizJet that you're in. Obviously, if -- we would have an appetite to pick up companies that are working on the low end of the business jet market, but those multiples that we would be willing to pay would be significantly less than those that are maybe involved in the higher end. So it's one of these things that depends, but we're aiming at the diversification on both -- in both areas, in the segment diversification and our program and product diversification.

Unknown Analyst

Jeff, I wanted to ask about the proprietary aftermarket, expanding your market share there? How meaningful is that? I mean, you've talked about trying to get back eating your own lunch. If you could just give us an example of something where you've been able to do that or at least size the opportunity, what you're looking at on the market share gains?

Jeffry D. Frisby

Yes, I can. There's -- because this is kind of the world that I grew up in and -- in our Hydraulics business, for example, we have -- the OEMs typically have a kind of a latent arrogance about the fact that since you have a proprietary position, obviously you own the aftermarket. Well, it's not automatically so. And the OEMs have significant advantages in terms of the cost versus price of components' fares. If a third party person has to replace a piston, for example, they pay $1,000 for it. If an OEM has to replace their own piston, they may pay $200 for it. So it's a tremendous advantage. So you can utilize these advantages to offer programmed pricing to come to airlines, for example. And one example would be in -- and it's -- we've not specifically announced this because it's not been anything of that significance in value on its own. But when we would sign up an airline like Continental Airlines for our entire product line on a somewhat lower price point, then we have been doing one-offs in the past. So instead of making 80% margin on $10,000 worth of business, now we're making 60% margin on $250,000 worth of business. So it's -- so we have had examples that we really attempt to go after the airlines themselves and kind of take the market away from the third-party guys as opposed to just going out and trying to beat them on price all over the place.

Unknown Analyst

Is it the individual companies, though, that are going at this? Or is there a broader strategy?

Jeffry D. Frisby

Yes. There's a -- we are encouraging specific activities from the corporate level, but they're having to go do it.

Unknown Analyst

Yes. Dave, maybe just to follow up on the interest comments, I think you said interest expense would be going up. But if we think about that fiscal '16, if you do the pay down of debt and replaced some -- $500 million at 8% with 4.75, I mean, you should get a pretty sizable interest tailwind in that fiscal '16? Is that the right way to think about that?

M. David Kornblatt

Yes. I'll just -- my comment was, initially, it's going up this year...

Unknown Analyst

Right. Short term. Yes.

M. David Kornblatt

And then if rates stay where they're at and we could take out these other 2 tranches -- so they're acquisitions, yes. Interest expense would be part of that story.

Unknown Analyst

Okay. Fair enough. And then just on the C-17, can you maybe differentiate for us what the differences or maybe revenue headwinds would be in a sustainment-type operation versus the continued build operation?

M. David Kornblatt

Probably not. The -- we all have a very, very long-term business in supporting the aftermarket of the engine kits. That will go on decades, I imagine. So we'll always have that. But the -- we're not prepared to frame the ships at value on C-17. I mean, we've modeled in 10. We're negotiating. Jeff's negotiating blocks 26 and 27. There's rumors of orders. And again, we thought it was fairly bullish that Boeing gave us some level of authorization for block 26. They didn't -- they also didn't say, "Go build 10 aircraft worth yet" without permission. But it would be a significant drop in that program's revenue.

Unknown Analyst

Okay. And then just one last one. I think you guys mentioned Atlanta and Indianapolis facilities. Should we be thinking about any sort of start-up costs related to those operations in the short term?

M. David Kornblatt

Very small. I mean, Atlanta, we bought a company that on airport. And in Indianapolis, we're making an experiment to sort of joint venture with someone to provide that capability, play inside. But this is going to start out small and tested and see if it fits the bill. And if it does, I think we'll -- it'll be a good story. I don't think you'll hear us talking about it on our earnings calls as a reason why our margins are down or something like that.

Unknown Analyst

I'd like to ask you a portfolio question, the third party MRO business. It seems like you made a decision strategically to grow that business and it's, historically, a tougher business in the industry compared to the other businesses you're in. Goodrich, when they were in roughly your stage of growth, decided, as you mentioned, to exit and sell the business. And I'm wondering -- Obviously, you made the strategic decision to grow rather than exit. I'm wondering why. You mentioned RONA as one key metric you look at, but what were the drivers there?

Jeffry D. Frisby

Yes. A couple -- it's a good question. There's a couple of other reasons. But fundamentally, the business that Goodrich was in is not the business that we're in. We have made a decision long ago to never enter the heavy maintenance business. So we will not be growing into that business. The margins aren't there, the risks are too high and we're just not going to do that. The market that we are in is one that is in fact attractive from a margin standpoint, and we feel like we can grow that well. Strategically, beyond that, Dave pointed out -- or maybe it was Jim, I don't know -- that one of our facilities, one of the strengths we now have is out-of-production spares, manufacturing and out-of-production aircraft support. And there are very few OEMs that -- I mean, they all signed up to the agreements that say you've got to support this airplane until there's 5 left in the fleet, which is way beyond the production rate. And we all signed those deals and none of us like it. And by the time we get out there, we're kind of bad at it. We have companies within our Aftermarket business that are good at it, that in fact have signed agreements with a number of major manufacturers to support their out-of-production spares. Again, a very lucrative niche market and one that can allow us to say to our customers that -- everybody else can say they can do cradle-to-grave support, but we actually perform it. And this is how we do it. So it really helps us with that tail of product support and provides a good margin. But the initial comment is fundamentally, it's a different business than Goodrich's, is one that's important to understand.

Unknown Analyst

The way you measure returns, is it as good of a business as your other businesses?

M. David Kornblatt

It's not as good, but it covers its cost. It's accretive to earnings. I think it does make -- Jim certainly is more capable of addressing this, I think it makes Triumph Group better. And as long as it meets those metrics -- I'm not sure what we'd do with the $600 million or so that we'd get for it. Maybe if that was the only ticket to some compelling other investment that we otherwise couldn't afford, I think that maybe you have to make tough choices. But right now, we get plenty of inbound interest. I can assure you, unsolicited. People want to buy it. But I think right now it's an asset to the company. So...

Unknown Analyst

And then just one small one on the 47. That -- the Hawthorne facility, I believe, used to have price support when you went -- when the facility went below 2 a month. Is that still the case? Or...

M. David Kornblatt

There are clauses in the contract that -- in our pricing that if rates drop a certain amount, there is an adjustment to the arrangement.

Unknown Analyst

On the 737, you've talked a lot about the market share gains across platforms. Could you at least sort of book end organically from the NG to the Max sort of what the opportunity is for you if you execute on what you think is the new business in terms of the upside on that program or even in a percentage standpoint?

Jeffry D. Frisby

Well, you want me to just talk generally about that? About the opportunities on that?

M. David Kornblatt

Could you be just a little more specific?

Unknown Analyst

Well, okay. Can you see a 20% increase in the shipset content? 50%, 5%, can you even just give a little more granularity about sort of that opportunity as an example to help us think about what all the -- you talked a lot about the market share gains, just help me at least think about -- what does this ultimately mean to you?

Jeffry D. Frisby

Sure. It's a little hard to put it in the percentages of an existing shipset, but the opportunity sets are in the landing gear and then in the metallic stuff that goes around the pylon and the thrust reverser and the engine. And we've seen opportunities from both Boeing, as well as GE, for a nacelle engine, and pylon opportunities and the landing gear we're currently on. But there's an opportunity to expand our role beyond that. So I don't know, in the realm of annual numbers, it sits somewhere between $10 million and $60 million of sales per year, that rate that we could see associated with that airplane for the stuff that's on the table today.

Unknown Analyst

Okay, that's helpful. And just -- with Red Oak, does that satisfy any kind of additional capacity needs if you execute on this business? Or are you looking at other areas in which you might have to add capacity or significant CapEx?

Jeffry D. Frisby

You want to get that?

M. David Kornblatt

Are you talking about to move JSF into Red Oak? Or...

Unknown Analyst

Well, just beyond that. I mean, that sucks up a lot of Red Oak, but do you have capacity for the new business with further expansion at Red Oak or through other areas? Or are you looking at significant new investments necessary to support the new business if you execute on that $1.8 billion or whatever the number is?

M. David Kornblatt

Okay. We're going to -- at least with regard to the products at Red Oak that we would likely win new programs, the new facility will have some room for growth. But we've got an awful lot of land there. We've designed the building with a mindset that it could be expandable. But coming out of Jefferson Street, the last thing we're interested in is building too much capacity. So we can win some new work, and it would be covered by what Jeff explained, but we're not going overboard on that one.

Jeffry D. Frisby

Yes. And as you kind of look across the business, there's plenty of roof for added integrated aerostructures. So we're not -- it's not a real estate or a roof issue. Yes.

Unknown Analyst

Yes. A couple of questions about JSF risk. First, Boeing's 10-K says they run out of production in the of middle of next year 2014. So they may have to make a shut down decision this year. What's your time table? When do you need to know to have visibility that you're going to be able to move or continue at JSF before moving it? And secondly, what's the incremental margin on the revenues if you lose?

M. David Kornblatt

Wait. When you say shut down, you're talking about C-17 or 747?

Unknown Analyst

C-17. C-17.

Jeffrey L. McRae

Yes, on C-17. As we make a decision, our plan right now would have us have the ability to build out through lot 26, which for us will allow us to build through early 2015 at Jefferson Street. The orders we have in hand right now from Boeing would take us through early 2014, which is really lot 15. So depending on how many -- how they fill up lot 26, it would drive kind of a decision on whether we move that to Red Oak or we build it out in Jefferson Street. I think there's still optimism that there's additional planes beyond lot 26 in the international market. So part of what we're looking at is if there was a lot 27 or even a lot 28. At what point in time would we see that? And how quickly could we react to moving the production out of Jefferson Street to Red Oak. The window we need is probably about 3 months, and what we're -- our strategy is, is to try to build ahead as much as possible to give us as much flexibility as it becomes clear how many planes are out there as to how we would move.

Unknown Analyst

How should we think about the risk if basically they do decide to shut the line?

M. David Kornblatt

Well, I mean, there'd be a -- obviously, there'd be a sizable revenue loss. We don't disclose shipset value. Today, it's dilutive to our margins. So it would not come out. So in a properly sized new facility in Jefferson Street, you're not bearing that cost of having the capacity. That's what Jeff -- at some point, we're going to have to make this decision, but it's not going to be this week on stay at Jefferson Street, possibly even lease an existing building from someone else for 2 years to complete C-17 so that we don't have this whole big section of the new Red Oak that then is vacant for a while. So our goal is to manage that overhead, and I think we'll probably take the more conservative route on that.

Unknown Analyst

Got it. And a last one, I noticed from your chart you have a new UAW contract in September and presumably, you'll be kind of pregnant with the move. Have you had any discussions with them or any understanding in terms of -- are they going to use this to hold you off or your really good attitude? What's the mood?

M. David Kornblatt

Yes. I mean, we've had discussions with the UAW. They understand what our plan is. They have been supportive to date of the plan. Obviously, as we get into a negotiation of specific structure that we would look at in Red Oak, we'll, I'm sure, have disagreements as to what our desire is versus what the UAW's desire is. But we've made it clear that our desire would be to take them with us and not lose what we believe is a very capable, experienced and strong workforce. And that's -- part of the risk mitigation we look at in Red Oak is not having to replace that workforce. Myles? Yes?

Myles A. Walton - Deutsche Bank AG, Research Division

Dave, the first question on cash and the cumulative '14 through '16 debt reduction, is that a surrogate for free cash flow after pension?

M. David Kornblatt

That's the ultimate one for debt reduction.

Myles A. Walton - Deutsche Bank AG, Research Division

Is it a surrogate for free cash flow?

M. David Kornblatt

Well, so many definitions -- I mean, it's -- after dividend, after CapEx, after working capital growth, after tax.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. So is it -- what is the net drag from JSF in there? I know it's $150 million in 2014. Do you recover half of that by the full year period, full 3-year period?

M. David Kornblatt

By '16?

Myles A. Walton - Deutsche Bank AG, Research Division


M. David Kornblatt

Yes. Maybe a little less than half, but about that.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. And then, Jim, the question on your $1.6 billion opportunity set build up, how much of the $600 million that's kind of transitioning amongst the suppliers under LTA's expirations, which it sounded like was kind of the implied number? How much of that is your own business that you're trying to retain? Or what is someone else looking at your business? Can you give us that boundary condition?

Jeffry D. Frisby

Yes. None of those numbers up there are associated with work we're currently doing that would have a follow on. This would all be new work. So of that $600 million, that would be stuff that Boeing or Airbus or somebody was sourcing out to the field, that currently is at a competitor that's already a supplier to them. So it would be looking for a lower price to move the work.

Myles A. Walton - Deutsche Bank AG, Research Division

So if I'm sitting in Spirit's boardroom, what is their representation of your work that's out for bid over the next -- your time horizon that you put up the next 2 years?

Jeffry D. Frisby

What a good question, because there's one more opportunity to differentiate ourselves from Spirit.

Myles A. Walton - Deutsche Bank AG, Research Division

I just wanted to needle you.

Jeffry D. Frisby

Yes. And that is that Spirit would not -- could not compete with anything that we're currently doing.

Myles A. Walton - Deutsche Bank AG, Research Division

Oh, and Precision Castparts?

Jeffry D. Frisby

Okay, a different question.

M. David Kornblatt

We really actually run that number up, but it's...

Jeffrey L. McRae

I would guess it's in the $300 million, $400 million range.

Jeffry D. Frisby

I was going to go $200 million, $300 million, so we're kind of in the same ballpark. But yes, it's in that range.

Myles A. Walton - Deutsche Bank AG, Research Division

And so you gave us your win rate. What's your retention rate?

M. David Kornblatt

It's probably more like 80%. 60% to 80%. We're losing some stuff, but we're hanging on to most of it.

Jeffry D. Frisby

Yes, I'd say it's on the higher side of that.

M. David Kornblatt

Is that it, Sheila?

Sheila G. Spagnolo


M. David Kornblatt

Okay. I think we're going to wrap it up.

Jeffry D. Frisby

Okay. Well, I want to thank you for your attention. You now are all experts on the Triumph Group. And certainly, I appreciate all the time you've spent with us and hope this has been informative. And if you have any follow-up question, certainly, they -- we will be happy to address them in a normal manner. Thanks.

M. David Kornblatt

Thank you.

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Source: Triumph Group, Inc. - Analyst/Investor Day
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