Triumph Group Inc (TGI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2011 second quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing this slide presentation. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by management.

On behalf of the Company I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause Triumph's actual results, performance, or achievements to be materially different from any expected future results, performance, or achievements expressed or implied in the forward-looking statements.

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

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

Thank you. Good morning, and it is a good morning. We are very pleased with our earnings and operations for the second quarter. Our earnings per share from continuing operations were $1.70, excluding integration costs which we incurred during the quarter. We had organic growth in revenue in all three of our business segments, as well as generating $95 million in cash flow, and the cash flow was positive in all three business segments.

We continued to show results for the Vought transactions that are accretive -- that were accretive in the quarter. And we had, as you saw, meaningful improvement in the Aftermarket Services revenue growth and margins for the quarter. For a long period of time, over a year, we have been saying that we will have improvement in the Aftermarket Services group, which we have had. We also said that we needed some market improvement to get that, so we're very pleased with the fact that, number one, we improved the operations of our companies in the Aftermarket Services group, as well as getting a boost from the needed improvement in the marketplace.

The integration of Vought continues to progress very well. We're well on track to deliver synergy target of $15 million within the first 12 to 18 months. Now that's a sustainable run rate of improvement, and long-term those synergies are projected to be much greater than that. We have a strong backlog at the present time, and our balance sheet remains very strong, and Dave will get in to some of those numbers. We have a positive momentum in most of our markets. There's a few exceptions such as the business jet market, and a few programs within our commercial and/or military markets, but generally we have very strong positive momentum in those markets.

At that, I'll turn it over to Dave to discuss some of the numbers.

Thank you, Rick, and good morning, everyone.

Before reviewing our financial results for our second quarter, you'll notice that in connection with the Vought acquisition, we have are realigned our organizational structure into three reportable business segments; Triumph Aerostructures, which includes Vought as well as legacy Triumph structure and structure-related companies; Triumph Aerospace Systems, which includes the legacy Triumph systems companies, including actuation systems, control systems, gear products, and systems in other related products that are more proprietary in nature; and Triumph Aftermarket Services, our third-party MRO business which remains unchanged. We have adjusted prior-year period segment results to reflect this change.

Turning now to the income statement, sales for the second quarter were $769.1 million, compared to $313.1 million for the prior-year period, an increase of 146%. Operating income increased 132% to $86.1 million, with an operating margin of 11.2%.

Income from continuing operations improved 102% to $41.8 million, resulting in earnings per share from continuing operations of $1.67 per diluted share, versus $1.25 per diluted share for the prior-year quarter. Included in these operating results was $1.3 million pre-tax or $0.03 per diluted share of integration expenses related to the Vought acquisition. Excluding these costs, income for continuing operations was $42.6 million or $1.70 per diluted share. For the quarter, earnings accretion from the Vought acquisition was approximately $0.30 per diluted share. The loss from discontinued operations was $300,000 or $0.01 per diluted share.

Net income was $41.5 million or $1.66 per diluted share. Excluding integration costs, net income was $42.3 million or $1.69 per diluted share. EBITDA for the quarter increase 103% to $104.5 million, the number of shares used in computing diluted earnings per share was 25 million shares.

For the second quarter, sales in the Aerostructure segment increased 315% to $578.6 million. Organic sales growth for the quarter was 6%. Operating income increased 245% from the prior quarter, to $70 million, with an operating margin of 12.1%. Organic operating income increased 33% over the prior year, with an operating margin of 18%.

In our Aerospace Systems segment, sales for the second quarter increased 5% to $123.5 million. Organic sales growth for the quarter was 2%. Second quarter operating income was $17.1 million, with a 13.9% operating margin. Included in the segment's results was $400,000 of legal costs associated with a previously disclosed trade secret litigation. The segment's operating results were also impacted by a lower mix of spare sales and the timing on certain costs and shipments related to development projects.

In our Aftermarket Services segment, sales for the second quarter increased 20% to $68.7 million, all of which was organic. Second quarter operating income increase to 135% to $8.2 million, with an operating margin of 11.9%, which represents a 96% year-over-year improvement. Operating results for the quarter included a gain of $700,000 on the sale of certain intellectual properties.

Quarter two corporate expenses were higher than the prior-year period due to integration costs previously mentioned, higher worker's compensation expenses resulting from the alignment of our accounting method to the method employed by Vought, as well as higher compensation costs. The next slide summarizes some key financial assumptions resulting from the Vought acquisition. Please note that these estimates, other than pension and OPEB, are preliminary and are subject to change based on the finalization of purchase price accounting.

Starting with pension after OPEB expense, the fiscal 2011 pension expense for the post acquisition period June 16 through March 31 is estimated to be $16 million. Annualized for 12 months, the estimated pension expense would be $20 million. As a point of reference, the calendar year 2009 pension expense for Vought was $70 million. Cash pension contributions for fiscal 2011 will be approximately $136 million, and includes a voluntary contribution of $50 million.

The fiscal year 2011 estimate for OPEB expense is projected to be $20 million. The annualized estimate would be $26 million. The 2009 OPEB expense was $7 million. The OPEB cash contribution for the fiscal year is estimated to be $29 million. The chart on the bottom part of the slide summarizes the preliminary purchase accounting impact on the opening balance sheet as well as the impact on fiscal years 2011 and 2012 P&Ls when compared to Vought's preacquisition amounts.

With respect to fixed assets, there's a step-up in basis of $104 million, which ultimately results in decreased depreciation expense of $7.3 million in fiscal 2011 and $9.3 million in fiscal 2012. The decreased depreciation expense is due to the fact that the increase in useful lives under the application of the purchase accounting rules more than offset the impact of the step-up in basis. Amortizable customer intangibles has a step-up in basis of $213 million, resulting in incremental amortization of $6.2 million in fiscal 2011 and $7.8 million in fiscal 2012.

The fair value of contract liabilities is estimate to be $133 million, which is recognized as revenue as shipments under the contracts are made. The P&L impact for fiscal 2011 is $25 million and $31.2 million for fiscal 2012. The fair value of property leases is estimated to be $13 million, resulting in amortization expense of $2.7 million in fiscal 2011 and $3.4 million in fiscal 2012.

The total estimated net positive impact of these purchase accounting adjustments on fiscal 2011 diluted earnings per share as compared to our original estimates and those reflected on our pro formas, including with the 8-K filed in connection with the closing of the acquisition is approximately $0.50 of increased earnings in fiscal 2011. To clarify, the EPS impact of transaction and integration costs reflected in our guidance for the year in Q1, the impact of the transaction and integration cost was $0.71 per diluted share based on 18.7 million shares outstanding. The impact of Q2 integration costs was $0.03 per diluted share based on 25 million shares.

Our overall fiscal 2011 guidance is computed on a share count of 25.2 million shares for Q3 and Q4, resulting in a weighted average share count of 23.5 million shares at the end of the fiscal year. This amount reflects the shares issued in the Vought acquisition as well as our estimate of the shares associated with the convertible debt. Based on these facts and estimates, the EPS impact of the year to date transaction and integration costs will be diluted by year end to $0.60 per diluted share.

The tax rate for the remainder of the fiscal year will be approximately 36%, assuming the R&D tax credit is not renewed.

Turning now to backlog. Our backlog takes into consideration only those firm orders that we are going to deliver over the next 24 months and primarily reflects sales future sales within our Aerostructures and Aerospace Systems groups. The Aftermarket Services group does not have a substantial backlog. Our order backlog as of September 30 is $4.04 billion, which is an increase from our June 30 backlog of $703 million. Same-store backlog increase 15% year-over-year and 5% sequentially. Military represents approximately 34% of our total backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place is the Boeing 747 program, followed by the Gulfstream G450 and G550 programs. Third is the Boeing 777, followed by the C-17 Freighter in fourth place. In fifth place is the Osprey combat helicopter, with the 737 Next Generation in sixth place. Seventh is the C-130 program, and in eighth place is the Blackhawk helicopter. The A330 is in ninth, and in tenth place is the 787 program. Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military and space, totaled 44.9% of our revenue and is broken down 60% commercial and 40% commercial.

Looking at our sales mix among end markets, the next slide shows that, compared to fiscal 2010, commercial aerospace decreased to 45% and military increased to 39%. Regional jets decreased to 1%, while business jets increased to 12%. Non-aviation decreased to 3%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter increased 7% from the prior year, to $336.9 million. Breaking that down by segment, second quarter same-store sales for Aerostructures were $147.6 million, an increase of 6%. Aerospace Systems segment same-store sales were $120.6 million, an increase of 2%. All of the Aftermarket Services segment sales for the quarter were organic. Export sales for the second quarter were $99.3 million or an increase of 63% from the prior year.

Turning to the balance sheet on the next slide, we generated $95 million of cash flow from operations in the quarter, which was after making $71.6 million of contributions for the Company's defined benefit pension plan. CapEx in the quarter was $24.3 million. We expect CapEx for the year to be approximately $90 million. Net debt at the end of the quarter was $1.2 billion, representing 46.6% of total capital. The effective tax rate for the quarter was 33.2% and was favorably impacted by the resolution of prior-year IRS audits.

One final point before I turn it back to Rick. As you evaluate our cash flow and our backlog, both of which showed very positive results for the quarter, you should keep in mind that Triumph Aerostructures' pattern of collecting cash and booking orders is not as uniform as our historical business. In certain cases we receive only one or two orders a year for a given product, which will cause some chunkiness in our backlog. Cash payments are frequently not tied just to delivery of the product over the course of the year. Cash sell and backlog review would be valid indicators of the pace of our business if viewed on an annual or LTM basis, but could lead to false conclusions if judged quarter to quarter.

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

Thanks, Dave. Just to reiterate a few things that Dave talked about. We do feel very good about our backlog, which Dave mentioned is over $4 billion at the present time. And from an operating basis, we remain very focused on improving our execution, driving the integration with the Aerostructures group, and controlling our costs.

We are raising our earnings guidance, as you read in the press release, up to $6.60, excluding transaction and integration costs, and this raise to $6.60 is based upon current production schedule at our customer base; as Dave talked about, the preliminary purchase accounting results; and we use a weighted average shares of 23.5 million shares, which includes, as Dave mentioned, the estimate of shares from the convertible debt; and a tax rate in quarter three and quarter four of 36%.

So overall, we remain optimistic as we go forward, as we improve our operations and work on the integration. At that, I'll open it up to any questions.

At this time the officers of the Company would like to open the forum to any questions you may have. (Operator Instructions). Peter Arment, please state your affiliation followed by your question.

Good morning, Rick, and Dave. From Gleacher and Company.

Good morning,

Good morning, Peter.

Good morning. Dave, maybe you could just give us a couple of specifics on the backlog. The sequential gain is up 15%. What was driving that? Is there is anything you could highlight?

I think a lot of it is related to program announcements, so clearly we're starting to fill up the backlog with, let's say, seven 777s month, whereas we had been at five. Based on the current schedule of 787, we're -- as each month and quarter goes by, we're getting closer to a fuller production environment. So there's a little bit of natural headwind -- tailwind. We bore the headwind in prior quarters. And I also think our businesses are performing well, and that they are -- we continue to believe we're gaining some share. So I think it's a little bit of a few different things.

So you feel like you are getting back closer to match production rates?

Yes. I mean, just the way we keep our backlog. A quarter ago we would have been one less quarter closer to a full 24 months of seven 777s a month. It would have been two quarters or three quarters at five, and five quarters at seven. Now we're probably six quarters at seven and two at five, so it just -- it makes the backlog that much bigger.

Okay. And Rick, regarding some of the CapEx that you and Dave mentioned, $90 million for the year. Just how should we think about CapEx going forward, just given the rate increases that have been announced out there when you look at the operations? How do you view it with now having Vought in for at least the last four or five months under your belt?

Well, first of all, as Dave mentioned, we expect the yearly CapEx to be about $90 million. I think that the CapEx going forward might change a little bit because some of the issues that we now analyze are major programs that we look at from some of our customer base, where we have to make some CapEx investments to take on fully new programs. So I think as we look down the road, probably not too much in this particular fiscal year, but the CapEx may rise a little bit because the Aerostructures -- the ex-Vought Aerostructures group get in to more of the bigger programs. But as far as short-term is concerned, based on current business rates and build rates, we don't see much need for any new capacity. That might change as we go in to next fiscal year, but this year, short-term, I don't see us going beyond the $90 million. If it's beyond it will be a very small number beyond it.

Okay. And then just another related -- just -- on cash generation you continue to be really solid. Do you have any specific sort of debt to capital numbers that you are targeting over the next 12 to 18 months? I mean, I know the plan is to continue to do some deleveraging, but do you have a number that you are shooting for?

Our target has always been to have a three in front of our debt to cap number. In the 30% somewhere range, below 40%, and that's our target, and I think that in time we'll achieve that. I mean, we're very -- we feel good about the fact that we've made -- generated the cash flow that we did, including the fact that we put a great majority of our -- the money that we have to put in to our pension issue this year. We feel good about that, so we see no reason why we can't achieve 30-something% debt to cap.

And we think we have a fighting chance, Peter of accomplishing that by the end of fiscal 2012. It will be close, but we have got our eye on that.

Done with free cash flow, you're saying?

Getting that first number to be a three.

Yes. Okay. Thanks again. Terrific numbers. Thanks.

Thank you.

Thank you. Our next question comes from Myles Walton. Please state your affiliation followed by your question.

Hi, good morning. It's Deutsche Bank. This is Amit Mehrota here for Miles Walton. Good morning. Quick question on incremental margins. Seemed it was very strong in the quarter, around 43% when you exclude the Vought acquisition. Can you just give us a little bit of understanding around the drivers, around the strong performance, and what the sustainability of it going forward is as production rates ramp up? Thank you.

I think in the Aftermarket business, as Rick said, we have been maintaining this should have been -- this should be the result when we got some cooperation from the market. So we're very focused, particularly there, on not adding fixed costs, and when the margin and the revenue -- when the revenue came through pretty strong, a lot of it fell to the bottom line. So incremental margins in the 45% or so range where we weren't shocked, but we were happy to see them. And I think in the rest of the business we're very focused on fixed costs. It's one of our key metrics. And those numbers are not out of bounds from when were in the last uptick; we delivered very solid incremental margins. So I think we'll continue to deliver those, particularly in the markets that are growing fast.

Great, and --

And also --

Go ahead, sorry.

I also think that what we have done, as I mentioned, we have spent a lot of time on the integration, but spending a lot of time on the integration also means that we have emphasized the fact that we want to integrate our two Companies, Vought and Triumph, legacy Vought and legacy Triumph. But at the same time we have charged ourselves with the responsibility to making sure that the legacy Triumph companies continue to perform and continue to get better at doing what they do. And I think a lot of them have, in fact, done that. So we feel good about that fact, and that pertains to our philosophy of doing business, and our guys have performed pretty well in that regard.

It's just a good segue to my next question. It looks like Vought margins were about 10% in the quarter, legacy Triumph was more like 15%. Can you just talk about how much of that gap you guys think you'll be able to close over the next couple of years, and now that you have three more months of Vought under your belt, can you give us just a little bit more understanding on what you are finding there that's better than expected, and what you think might take longer than you originally planned?

Well, taking the first question, you have to remember that a lot of our companies, especially in the Aerospace Systems group, are proprietary products. They are design and build type of products, and we participate in the product through the lifecycle of the aircraft. And as a result, because of the design capabilities that we emphasize in that area, our margins have had a -- are a little bit higher. Plus the fact we have had a little bit longer time to work on that than we have the Aerostructures group.

I think that I really don't have anything negative to say about what is going on in the acquisition. I think that it's not necessarily a piece of cake of do the integration, because we are coming from two different cultures, but we clearly have a challenge in our whole Company to get more efficient for our customer base, and that means getting our margins higher and being responsible to the customer. So I think that we can -- we have found areas in the integration that we can certainly do a lot better, but we find those all of the time in our legacy companies as well. So it's really not a -- nothing sticks out that we have to do better.

It's a matter of merging two cultures, and taking a company where it has 6,000 employees and trying to put it together with another 6,000 employees. So those are challenges that we have, but I don't have anything specific that says, boy, we found something here that was so much different and is a gold mine. I don't think that's the way we look at it. We look at merging the two cultures and just getting more efficient at doing what we do.

I think the other point is that your numbers are pretty accurate on your margin assessments. I don't think we're spending a tremendous amount of time trying to compare the two segments, or the Vought versus the rest of Triumph. Vought is part of the family now. What we would like to see is that a year from now, you are asking us -- Vought is up to 12%, and the rest of the businesses are up to 17%, and what is that gap? But we believe all of our businesses have a substantial opportunity to improve, but there's no specific goal to get one higher at the expense of the other or bridge a specific gap.

Great. Thank you very much, and congratulations on a terrific quarter.

Thank you.

Thank you.

Thank you. Our next question is from Kenneth Herbert. Please state your question followed by your affiliation.

Yes, hi, I'm with Wedbush. Good morning.

Good morning.

Congratulations.

Yes. Just wanted to follow-up on the synergies and specifically from the cost standpoint. Dave or Rick, can you provide any more granularity now or details in terms of exactly where you are attacking this at this point? From the last call you talked a lot about some of the items specifically as it relates to SG&A or on the corporate expense line, but are you starting to find bigger stones to turn over, and can you give any more real specifics on your approach and the methodology here as you attack this?

I think whether it comes up to absolute dollar specifics, that's hard to do in some of the areas. For example, we have identified any number of opportunities in the procurement area; in-sourcing, resourcing product, whether it be raw material product or processes that we need performed, some of which can be done within -- in-house, if you will, where Triumph -- legacy Triumph companies can perform processes for legacy Vought companies, and that happens on a regular basis and is projected to happen over the next three years to development a significant amount of savings.

In regards -- and in addition to that, the procurement issue where we're putting a lot of emphasis on that, will in fact result in a lot of savings going forward. As we -- I hate to use the word bundle, but I can't think of another one right now -- bundle some of our procurement issues going forward and work together in performing certain processes -- and up to and including rationalizing something that we do in one of our plants that can be done a lot better and best practices, et cetera, with another plant. And that takes a lot of time to put that together, and we continue to work on that. And that's the number that we have publicly stated that will be savings well -- we would be disappointed if it weren't in excess of $50 million going forward over the next -- well, now 2.5 years or thereabouts.

So, it's hard to put numbers on that. We have had suppliers of ours significantly help us out on deliveries and pricing, because they don't want to have the opportunity to bid against a whole bunch of other people, so that has helped us already as we have gone forward, and we expect more of that. In addition to that, prior to the acquisition, Vought was already working on a conversion to SAP, and we're not including any of the savings we'll get in SAP in the numbers that we have publicly mentioned. So these numbers will be a little bit -- that will contribute to more savings going forward. So hope that gives you an idea of the type of thing we're talking about.

Yes, so I guess it's safe to say that as you continue to move up the income statement, so to speak, that $50 million will become a threshold that you'd feel pretty confident out in the next few years is certainly something you can surpass?

I think that's very true. I don't think I would have mentioned the number unless I was confident of the fact that it would be achieved.

Yes, I think, Ken, it's clear, as Rick said that, the -- I would say as a total Company, there's more effort being focused on the cost of goods sold side than maybe was the case a few months ago, where it may have been equal with the SG&A side, but there's always going to be a little bit of a lag. First we'll see some cash savings, as we procure lower-priced materials, whether -- or products, whether it's from Triumph or third-parties, and then it takes a little while for that to get through the income statement, whereas the SG&A savings are a little easier to do and coordinate, and you tend to get the benefits a little quicker.

So I think when we stick to our 12 to 18 months, that's why we haven't upped that number, but why Rick is pretty bullish, or is bullish that that number will be higher as we go down the road.

Yes, and just -- no, I appreciate that. And just finally on the revised guidance, the $6.60. If I understand correctly from slide 15, you are not incorporated synergies as part of that increase in the guidance?

Correct.

Is that correct? Okay. And just so I remember properly, the synergies weren't part of your in excess of $6 preliminary guidance for fiscal 2011 either, were they?

Correct.

Okay.

But keep in mind, the synergies we're getting right now through the P&L, they are nice, but they are -- a lot of the things won't kick in until the first of the year, because there are contracts that get renewed even for things like insurance and other items, so that we have some items locked in that are substantial but might not be hitting the P&L yet. So I think that's really why there --I don't think there's going to be dramatic synergies in this year's numbers, but going into 2012 we should have some nice tail wind on those.

Very good. Excellent quarter. Thank you very much.

Thank you. Our next question comes from Sam Pearlstein. Please state your affiliation followed by your question?

Good morning. I'm calling from Wells Fargo.

Good morning, Sam.

Hi. Can you just talk about -- in the release you mention that in the Aerospace System segment you had a -- I guess, a weaker mix of spares. Can you just compare the trends that you see in that piece versus the Aftermarket Services business that clearly showed a lot of growth?

Yes, I don't think -- I mean, you are comparing it to a prior quarter mostly, and there's a couple of our companies that -- the timing of the orders, they had a very good first quarter, and this is not anything from our perspective to worry about. This is -- we have always seen this, ups and downs when they were all part of the Aerospace Systems group. In fact, if you were to combine the Aerospace Systems group, legacy with legacy Aerostructures, you would see our margins were up both year-over-year and sequentially, so this is nothing more than a little bit of seasonality in the numbers, and it's just with the group being much smaller, it's magnified.

Sam, we really don't, on a monthly or quarterly basis, break the sales down. We might have a number of conversations along these lines, but we don't really break our revenue down on spares versus repair and overhaul type things. Spares are used in -- either sold directly or spares can be used in the repair and overhaul function, so we don't really track that to really adequately answer that question.

But we don't think there is a disconnect between our OEM spares and what the Aftermarket is seeing overall, it's a one quarter snapshot that you are looking at.

Okay. And then in the top ten programs that you list, we knew the C-130J was ramping up, and that's moved up. And I guess are you now at the new run rate for those new production rates, or is that still going to creep up? And I see the 787 dropped down. I know there has been push-outs in terms of some of the scheduling, but is that more of a function of things like the C-130 moving up than it is volume on 787 coming down? Can you just talk about those two?

I really think it's both. I mean, we're pretty much at the -- maybe a little more to go at some of our companies. Remember, our companies deliver products on a program at different times and in different phases of the production, so we maybe have a little bit of uptick left on the C-130. In regards to the 787, you are right. I mean, you read some holdups, but I think the 787 will continue to go upwards as the couple of month holdup or whatever it may be abates, and we get the push on the 787 products.

Yes, I mean, Sam, keep in mind the top ten programs is backlog. So these numbers are -- this ranking is divorced from sales. So I think the C-130 backlog probably reflects the full ramp. I don't think in production we're at the full ramp, and frankly, 787 is at an all-time high. So it didn't go down because -- in its place, because it dropped. The other programs went up more. So it's -- there's no negativity there at all on -- remember, this is backlog. And of course, 787 is the one program backlog to sales that's completely disconnected at this point.

All right, and then just one --

It's nowhere near one of our top ten sales.

Okay. No, that I realize. And then just one last question in terms of the guidance and the $6.60 and trying to just get down to what it might look like on a GAAP earnings basis. You talked about the cost to date of I think the $18.6 million for the integration. There was some small litigation costs in the quarter. You mentioned the tax benefit and even, I guess, a gain in after Aftermarket Services. Can you just quantify some of those moving pieces as to what those might look like over the course of the year?

Well, if we don't have anymore integration costs, and we have not built those in to the forecast because we are excluding them, what you are looking at $6.60 minus $0.60 of integration costs. So our GAAP number should be $6. I think if you -- the gain in Aftermarket is $0.015. I think those are all relatively -- the tax rate adjustment was $0.06 or $0.07. So I think if you are trying to normalize it, ex -- take the GAAP number and then maybe take a couple of goodies out, maybe you are in the $5.90s, but I think that the only big, significant number that's adjusting this is the acquisition costs, and that's on the slide of what we project that will be. That will grow by year end, but again, we will have more integration costs as we go through the year.

Okay. Thank you.

Thank you. Our next question comes from Eric Hugel. Please state your affiliation followed by your question.

It's Stephens. Good morning, guys. Good quarter.

Thank you.

Good morning.

Last quarter you talked about, in terms of your guidance, you were expecting in the sales range something slightly under $3 billion for the year. Is that still a good target?

Yes.

That hasn't changed?

No.

You talked about in the Aerospace Systems business some shipment delays on some programs. Can you maybe quantify that a little bit, and when those sales might actually ship?

I think they will ship this year. It's mostly on development programs where there's milestone issues and programs getting quantified like Bell, the 429, and some other development programs that were -- where we may have had revenue in the prior year. So these are really startup programs. There wasn't a lot of delay in that business yet. We haven't seen any on in-production programs.

The other comment I'll make, because a number -- not you -- a number of your colleagues have commented that the sales are light. We don't believe our sales are light. We're tracking to our number, and that's our number. I think the one thing that might be missed by people is that Triumph had between, let's say, $40 million to $50 million of sales historically to Vought. Those sales will disappear forever from an external perspective, so that when people combine our two companies, automatically there's a $50 million revenue hole that will never be replaced. So I don't know where the quarterly numbers come from. We have never given that guidance, but that might be one reconciling item. But we don't believe our sales were light in the quarter.

But your $3 billion number accounts for that. The elimination.

Yes. We said less -- slightly less than $3 billion --

Yes. No, I understand that. Cool. With regards to the third quarter, I guess there was a labor contract that was negotiated right at the beginning of the quarter at Vought. Are there going to be any costs in the third quarter associated with that?

No.

Okay.

We had -- as you are required to, we had built in to our projected rates under block accounting what we thought the impacts of the signing bonus, all of those types of things. And as a collective sum of items, I think we came in in the negotiations in pretty good shape there, so there's not going to be a big hit, for instance, for the signing bonus paid to the UWA members in Dallas. That had already been reflected in our rates and in the estimates.

Great. With regards to discount rate, do you have any idea of, one, I guess, the sensitivity [you see to that] in terms of changes and rates? And two, you set that rate I think at the 6.03% back in, what, the June/July time frame, and I'm looking at some pensions and discount rate numbers for certain plans, and it looks like based on where rates are today, just based on those models that rates are pretty much about similar. I know they have dipped back down and come back up over the last couple of month. Is that fair to say that where we are today, we're about flat with those numbers, or are we still below?

I think we're still below. I mean, rates of picked up, particularly in October, which helps, but September seemed to be a pretty low level. So I think we will see some headwind on the liability side if this were year end, and it probably would be in the order of magnitude of $150 million to $200 million on the liability. Our assets have performed extremely well, and we haven't done a detailed actuarial analysis, but you could think about $150 million to $200 million at today's rates on the liability. But we don't see a tremendous -- frankly, we probably would see slightly less pension expense if the year ended now, if this were year end for fiscal 2012.

Great.

We're not going to see big headwinds, based on that right now.

Okay. Great, and my last question. C-17, I guess we're in the -- it looks like we're in the final throws of signing with India a contract for ten. Can you please just remind us of where you -- it's a big program for you guys, and where we are in terms of the rate that you guys are producing at today? I know it's a different areas for -- different rates for different areas, but in general where you are at right now? Have you felt the impact of the step-down yet? And with the signing, where are you under contract now, and with the signing what does that add to the backlog?

Well, as we have said in the past, we see backlog that brings us out through 2012, mid-2012 to 2013, and we have started to -- some things become a self-fulfilling prophesy, and we have ramped down a little bit on that. But from a backlog point of view, we feel confident that we're going to be producing, as I said, through mid-2012 at a minimum. That's what they want to do. I don't think there's going to be a close down yet of the program. It's a rather volatile thing. The C-17 has content that is produced in virtually all of the states, and especially the large plant in California, so I don't see that ramping down to a great extent, especially when there's auditors from India and other foreign governments.

When Rick says 12, he means calendar. We would view that our fiscal 2012, and probably our fiscal 2013 would be in pretty good shape with those orders, and we clearly are, as Rick said, on the slide down from 15 to 10. We're not at 10 yet, but we'll be there soon. And we'll probably see a little hiccup this year. We may miss one shipment this year, just because of the strike impact. But --

That mid-calendar 2012, that's what is under backlog now or does that include supposing India signs?

I think India would stretch that out a little bit.

Okay. Great. Thanks a lot, guys. Good quarter.

Thank you.

Thank you. Our next question comes from J.B. Groh. Please state your affiliation followed by your question.

Good morning, guys. D.A. Davidson.

Morning.

Morning.

I had a question on the organic growth in Aftermarket. Obviously, great looking number. Can you -- and some of that is, I guess, the market returning, but can you parse that out between what you think is just the market returning and maybe share gain or new customer wins or anything like that? Or is that all just the market returning?

I don't think it's all the market returning, because I think that specifically we have the Triumph Air Repair in Phoenix that has increased and -- significantly, as well as our Asia plant has come up and produced more revenue, which was all organic. Certainly helped out by the market. Really never sat down and made a major analysis of how much of it was due to the fact that we got more efficient and we performed better from an operational point of view versus how the market is helping us out. That would have to be done vis-a-vis individual customers and our analysis of operational increases at each customer. So I think it's a little bit of both in that area. Especially in the APU area that I just spoke about.

Okay. Good. And then on the CapEx front, you gave us some numbers there, and then kind of you can get up to this 38 rate on the narrow bodies. Is there any incremental CapEx that you would have to do to say get to 40 if that number ever comes to pass?

No, we don't. If there's CapEx, it would be very minor in that area. We don't see that. Beyond 38, we probably would have some investment we would have to look at, and we've -- we're in sync with Boeing in that regard. They know that issue, and they are hearing that from a lot of other suppliers as well.

But like you said, it's not a huge increment.

No.

It's marginal. Okay.

It's not a huge if any increment.

Right, to get to -- to be clear, to get to current announced build rates, we don't see incremental capital.

Right.

Above that, there could be some -- I wouldn't say nothing, but it should be minor, but there would be something to get above today's rates.

It's not -- so what you are say it's not disproportionate to an increase from 38 to 40 or something like that?

No.

No.

And then lastly, on the legal. That was down. Obviously, it seems like there is not a lot of movement there, at least in this quarter. It kind of sounds like maybe something happens calendar Q4? Expectations of that amount rises over the next two quarters?

I don't have a clue.

Okay.

I mean, if you can get a lawyer to tell you anything definitive, you are a better man than I.

Appreciate that. Thanks for your time, and congratulations on the quarter.

Thank you.

Thank you. Our next question comes from Ron Epstein. Please state your affiliation followed by your question.

Yes, Bank of America Merrill Lynch. Good morning, guys.

Good morning.

Just maybe as a couple of follow-ons, could you give us a little more color on what you are seeing in the Aftermarket? Where? Is it aerostructure? Is it engine? Where you're seeing growth and what -- where you think the Aftermarket is going?

The growth and the quarterly success of that group is really somewhat across the board, Ron. We have -- I mentioned the fact that we had some business uptick and success in Asia, and that is both in the area of APU, overhaul and repair, and structural repair and overhaul such as thrust reversers. So it has really been somewhat across the board, and the products are accessories group; CSDs, IDGs, generators, that type of thing has always been good, so I really can't point to one with a possible exception of the APUs, because -- and that comes from a lower base. So as we were working on getting better at that product, but the fact of the matter is, it has really been somewhat across the board as has been the margins.

Okay. Okay. And then on APUs, at one point the APU facility in Phoenix was a bit problematic. Is that behind the Company now?

Well, that's -- Yes, that's what I have been indicating, vis-a-vis the Phoenix operation.

Okay.

And Asia. Asia was a little bit different situation going back a couple of years, because that was a startup operation, so we didn't have the same problems as we had in Phoenix, but it being a startup operation, it just took a little time to get that more successful.

Okay. And can you remind us, what is your exposure to A350 and the C-series?

Well, right now we're still bidding on a lot of things. I mean, we have products that we have won some contracts. I mean, I have got to think about it -- I would have to look it up to see what percentage of our sales type of thing, but it's -- we're certainly -- especially with the Vought acquisition, it gives us some more opportunity there on some of the bigger programs. So we'll be looking at that more and more as time goes by, and exposure is pretty good, and the quoting is pretty good on that.

Okay. Okay. And maybe one last question. I know you just did the big Vought deal. What are you thinking about cash deployment as we go forward? Are you looking at little bolt-ons now? And what is going on in the M&A market? I mean, how is pricing and things like?

Well, we have said that our focus will be on delevering, number one, and the integration of Vought into Triumph. So that's really number one, because we know we have the responsibility of that integration, the paydown of the pension -- unfunded pension liability and the like. That does not put us out of the acquisition business, and we will probably -- we have looked at some where it either didn't fit us or the pricing was extremely high. Pricing is still, I would say, relatively high as indicated on some of the recent acquisitions. I would say they are still up well over eight times trailing EBITDA, and that's a little higher than we want to pay. But we're still looking at some that have a tendency of being proprietary-type products that add to our product line for our customer base, and we will be looking at a number of acquisitions, as we go forward that add new products or extensions, as you say, bolt-on companies that give us a capability that we don't have. So we'll do that, but our focus and our emphasis is on the integration and the delevering.

Okay. Great. Thank you.

Thank you. Our next question comes from Tyler Hojo. Please state your affiliation followed by your question.

Yes, it's Sidoti. Just a follow-up to the last question on Aftermarket. Just kind of wondering what you guys are generating on either an annualized or quarterly basis from the Asia startup facility, and where it can go?

We don't -- I don't think we want to get in to individual companies. I will tell you the fastest-growing part of the Aftermarket group in Q2 was clearly Asia. That shouldn't come as a surprise, as Asia lead the whole sector out of the -- whatever doldrums we were in. And they are getting some nice traction, as I think there were airlines and cargo companies that didn't want to be their first customer on a particular product, and now they're getting a lot of really good traction, and they are performing well.

So Asia saw dramatic growth in the quarter, but when I look at all of the companies they were either flat or up in the quarter, so maybe a lot of the revenue growth came from Asia, but again, as we said for quarters now, most of our Companies were performing well, and the little tailwind of better volumes has proved to be just what the troubled companies needed, and they are all doing much better.

Okay --

I think the Asia business can be -- can continue to grow at a high rate.

Okay. All right. Good. All right, and then just -- just on Aftermarket again, I mean you are basically kind of at peak margin levels relative to where you have been historically in that segment. Where can you go there?

Well, number one, I think we can maintain where we are. It is always interesting to me when you have a target to get to, and you reach that target, and then we're expected to go higher than that immediately. I don't think we'll go higher than that immediately. Okay? I think the fact of the matter is our margins are -- we are very pleased with the margins. We think we can maintain them. We'll obviously attempt to increase them by getting more efficient, et cetera. But looking at going up another 5 margin points, probably just won't happen. Okay?

It's not -- we think we can outperform the market in some areas, but to outperform it in the Aftermarket business, which is a tough business to begin with, with no backlog, et cetera. We can, however, continue to manage our business better, whether it means managing our costs or our inventory, and things like that we can continue to do, so the return on investment will be better in that area.

Okay. Good. And just lastly for me, what were the Mexican startup costs in the quarter, and where do you expect them to be for the full year?

About $1.5 million for the quarter, and we expect those costs to be pretty close to the -- I think we originally budgeted about $5 million for the year, and we're getting very close to production starting up there. And later than we would have liked, but we're still very bullish on what we're doing there.

Great. Thanks a lot.

Thank you. We have a follow-up question from Eric Hugel.

Hey, guys, just two quick follow-ups. One, you did about $0.03 of AIT cost this quarter. Can -- I know the -- it depends on a lot -- but is that a ball parkish number we should think of going forward, or can it just change dramatically from quarter-to-quarter?

I think it is change relatively dramatically from quarter-to-quarter. For example, we don't book those costs until something happens, and some things will happen vis-a-vis -- we talk about the SAP program, and the integration -- some integration costs that we haven't booked any -- for some of the integration cost gains, there's going to be some cost to do that, and we don't book that, so I don't know how -- we're not going to go from $0.03 to $0.50. I am not talking about that. But by dramatically, I'm talking doubling or something of that nature. It could happen.

I think the only time we would get in to serious money, and that would be a little bit down the road, is if we ended up deciding to move production, and we get into major construction projects to deconstruct equipment, put it on a truck, ship it across the country, requalify it; those types of things, and I think that's premature for the next quarter or two. But if the payback is there and it's a good investment, we're going to do it. Right now the costs are primarily the costs of some additional resources on our integration team and some small amounts of severance.

That's great. Very helpful. And lastly, have you provided or can you provide a break out for the Aerostructures and the Aerospace segments, the sales and the earnings from the prior year? So we have comps as we try to model?

You'll get that in the Q this week. We have to give that to you, so you'll see it in a day or two.

Great. Thank you guys.

Okay.

Thank you. Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2011 second quarter earnings conference call. This conference call will be available for replay today, November 3, through November 10, 2010. You may access the replay system at anytime by dialing 1-888-266-2081. International participants dial 703-925-2533. Enter the access code 1489044. Once again, those numbers are 1-888-266-2081 and 703-925-2533. Access code 1489044. Thank you all for participating, and have a nice day. All parties may disconnect now.