Triumph Group Inc (TGI) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2011 fourth quarter and year end results. This call is being carried live on the Internet.

There is also a slide presentation included with the audio portion of the Webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. 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 and good morning, everybody. We had a strong quarter as I think you saw in the press release. We are proud and we're delighted of our results for the quarter and the year.

We had growth in Aerostructures revenue and operating margin. We had significant growth in Aerospace Systems revenue and operating margins. And continued revenue growth and improved execution in the Aftermarket Services group.

We had, and I'll come back to this in a little while, we can talk about the Aftermarket Services group because some of you mentioned that there was weakness in the group. We don't look at it that way at all.

Our growth year-over-year was 20%. In the third quarter it was 45% and we said, at that time, that that 45% was not sustainable and we feel very good about the 20% year-over-year growth.

We successfully completed the transformational acquisition of Vought Aircraft Industries and the integration of Vought is progressing very, very well. We're on track to deliver annual synergies of $18 million within the first 12 months to 18 months. And at least $50 million per year after three years.

Our accretion this year was, in fact, $1.97, which was delivered in 2011. If you remember back at the time of the acquisition, we had said that the accretion would be at least $1 a share. We have continued strong cash flow generation and we'll come back to this in a little while, of $277 million before a pension contribution of $134.8 million. The pension issue, we think that we very proactively and effectively managed the underfunded pension that we acquired in the transaction.

Our backlog remains strong despite the reduction resulting from the most recent 787 production schedule. Our balance sheet remains very strong. We have amended and upsized our revolving credit facility and retired our term loan. We have created, over the year, a significant shareholder value. In the one year, our fiscal year, we've created shareholder value of an add on of 27%.

If you look at it over a 13 month period of time, our increase in shareholder value was 70%. We are very much positioned to benefit from increasing -- of the increasing OEM build rates

At that I'll come back to a few things, as will Dave, but I'm going to turn it over to Dave to talk about some of the financials.

Thank you, Rick, and good morning, everyone. I'd like to start off with a review of the financial results for both the fourth quarter and the full fiscal year. First, turning to the income statement, sales for the fourth quarter were $919.1 million, compared to $352 million for the prior year period, an increase of 161%.

Operating income increased 129% to $108.4 million, with an operating margin of 11.8%. Income from Continuing Operations improved 116% to $54 million, resulting in earnings per share from Continuing Operations of $2.11 per diluted share, versus $1.49 per diluted share for the prior year quarter.

Included in these operating results was approximately $1.3 million pre- tax, or $0.03 per diluted share of integration expenses related to the Vought acquisition. Excluding these costs, income from Continuing Operations was $54.8 million or $2.14 per diluted share.

For the quarter, earnings accretion for the Vought acquisition was approximately $0.86 per diluted share. A loss from Discontinued Operations was $1.7 million, or $0.07 per diluted share, and included a charge associated with the termination of a long-term contract which will allow us to more easily sell the business.

Net income was $52.3 million or $2.04 per diluted share. EBITDA increased 114% to $130.1 million, resulting in a 14.2% EBITDA margin. The number of shares used in computing diluted earnings per share for the quarter increased to 25.6 million shares, primarily due to the dilutive effect of the Company's convertible notes.

Turning now to our full fiscal year results, sales for the fiscal year increased 124% to $2.9054 billion compared to $1.2948 billion for the prior year. Operating income increased 102% over the prior year to $314 million, with an operating margin of 10.8%.

Income from Continuing Operations improved 79% to $152.4 million, resulting in earnings per share from Continuing Operations of $6.42 per diluted share, versus $5.12 per diluted share for the prior year.

Included in these operating results was approximately $20.9 million pre-tax, or $0.66 per diluted share of transaction and integration expenses related to the Vought acquisition. Excluding these costs, income from Continuing Operations was $168.1 million or $7.08 per diluted share.

For the fiscal year, earnings accretion for the Vought acquisition was computed without regard to acquisition and integration costs, was approximately $1.97 per diluted share. A loss from Discontinued Operations was $2.5 million or $0.11 per diluted share.

EBITDA grew 83% to $384.5 million, resulting in a 13.2% EBITDA margin. The number of shares used in computing diluted earnings per share for the fiscal year was 23.7 million shares.

Looking now at our segment performance, sales in the Aerostructures segment for the fourth quarter increased 311% to $703.5 million. Fourth-quarter operating income increased 166% over the prior year to $91.2 million, with an operating margin of 13%. Operating margins in this segment improved 150 basis points sequentially which represented an organic operating margin of 18.1%, and a Vought operating margin of 11.4%.

The Vought margins in the quarter exceeded how we modeled the acquisition and is a result of improved execution, increased volume and the realization of synergies. EBITDA for the quarter was $105.3 million at an EBITDA margin of 15%. For the fiscal year, sales for the segment increased 251% to $2.126 billion, versus $605.4 million in the prior year.

Operating income increased 162% over the prior year, to $267.8 million, with an operating margin of 12.6%. EBITDA for the fiscal year was $308 million, on an EBITDA margin of 14.5%.

In our Aerospace Systems segment, sales for the fourth quarter increased 19% to $147.8 million. Fourth-quarter operating income increased 40% over the prior year to $22.4 million, with an operating margin of 15.1%. Operating margins in this segment improved approximately 110 basis points sequentially.

EBITDA for the quarter was $26.8 million, at an EBITDA margin of 18.1%. For the fiscal year, sales for the segment increased 9% to $513.4 million, versus $473.4 million in the prior year. Operating income increased 11% over the prior year to $75.3 million, with an operating margin of 14.7%. EBITDA for the fiscal year was $92.5 million, at an EBITDA margin of 18%.

In our Aftermarket Services segment, sales for the fourth quarter increased 20% to $69.6 million. Fourth-quarter operating income increased 78% over the prior year quarter to $7 million, with an operating margin of 10.1%.

EBITDA for the quarter was $9.6 million at an EBITDA margin of 13.8%. For the fiscal year sales for the segment increased 21% to $272.7 million, versus $224.7 million in the prior year. Operating income increased 156% over the prior year, to $28.8 million with an operating margin of 10.6%. EBITDA for the fiscal year was $39.9 million, at an EBITDA margin of 14.6%.

The next slide summarizes some key financial assumptions resulting from the Vought acquisition. Starting with pension and OPEB expense, the fiscal year 2011 pension expense for the post acquisition period June 16 through March 31 was $19 million. With cash pension contributions made during the year of $135 million. The fiscal year 2011 OPEB expense was $20 million, with OPEB cash contributions of $29 million.

Because of the proactive steps we have taken to reduce our liability and pension plan expenses, our net underfunded position with respect to the pension improved by over $282.5 million at March 31, as compared to the acquisition date. This was driven by cash contribution, asset performance well in excess of our 8.5% return assumption, and plan amendments, partially offset by lower discount rates.

The impact of these changes is reflected in the estimates for fiscal years '12 and '13. The fiscal year 2012 pension amount is estimated to be income of $14 million, with cash pension contributions of $118 million.

Because a great majority of our pension and OPEB costs are tied to production related personnel, and because of the nuance related to block accounting, not all of the year-over-year change in expense will flow through the P&L in fiscal '12 as a portion will go into lower inventory value. A rough estimate is that 40% of the improvement will be deferred to fiscal year '13.

The fiscal '12 OPEB expense is estimated to be $18 million with OPEB cash contributions of approximately $36 million. The fiscal year 2013 amount for pension and OPEB are shown on the chart and are based on the fiscal '12 results being consistent with our current actuarial assumptions.

The chart on the bottom of the slide summarizes the purchase accounting impact which is substantially complete with the remaining items to be finalized no later than June 15, 2011 on the opening balance sheet, as well as the impact on fiscal year's '11 and '12's P&L's when compared to Vought's pre-acquisition amounts.

With respect to fixed assets, there is a step-up in basis of $104 million which ultimately results in decreased depreciation expense of $7.3 million, in 2011, and $9.3 million in fiscal '12. The decreased depreciation expense is due to the fact that the increase in useful lives under the application of purchase accounting rules more than offset the impact of a step-up in basis.

Amortizable customer intangibles have a step-up in basis of $382 million, resulting in incremental amortization of $17.3 million in fiscal '11, and $21.8 million in fiscal '12. The fair value of net contract liabilities is estimated to be $124 million, which is recognized as revenue as shipments under the contracts are made.

The P&L impact for fiscal 2011 is $29.2 million and $28.5 million for fiscal '12. The fair value of property leases is estimated to be $10 million, resulting in amortization expense of $2 million in fiscal '11 and $2.5 million in fiscal '12.

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

Our order backlog, as of yearend, was $3.78 billion, which included $2.32 billion of Vought backlog. Same store backlog increased 14% year-over-year, which we believe is representative of our markets and our business. Military represented approximately 31% 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 550 programs. Third place is the Boeing 777, followed by the Osprey Combat Helicopter in fourth place. In fifth is the Boeing 737 Next Generation, with the Blackhawk helicopter in sixth place. Seventh is the Lockheed C130 program, and eighth is the 787. The C17 freighter is ninth and in tenth place is the 767 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 45.3% of our revenue and is broken down 63% commercial and 37% military.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal '10, commercial aerospace and military remained the same at 48% and 37% respectively. Business jets increased to 11% and regional jets decreased to 1%. Non-aviation decreased to 3%.

Finishing our sales analysis, the next slide shows our sales trends for the fourth quarter and the fiscal year. Total organic sales for the quarter increased 8% from the prior year to $382.9 million. Breaking that down by segment, fourth-quarter same store sales for Aerostructures was essentially flat at $171.3 million.

Aerospace System segment same store sales were $142.1 million, an increase of 14%. All of the Aftermarket Services segment sales for the quarter were organic. With respect to the fiscal year, total organic sales increased 8% over the prior year to $1.410 billion, from $1.3032 billion.

Breaking that down by segment, fiscal year same store sales for Aerostructures was $638.4 million, compared to $605.4 million, an increase of 5%. Same store sales for fiscal year for Aerospace Systems was $498.8 million, compared to $473.1 million, a 5% increase. All of the Aftermarket Services segment sales for the fiscal year were organic. Export sales for the fourth quarter increased 57% to $113.5 million, and for the year increased 54% to $394.8 million.

Turning to the balance sheet and the next slide in the quarter we generated $87.5 million of cash flow from operations, before Triumph Aerostructures pension contributions of $59.9 million. After these contributions, cash flow from operations in the quarter was $27.6 million.

For the year, we generated $277.1 million of cash flow from operations before Triumph Aerostructures pension contributions of $134.8 million. After these contributions, cash flow from operations was $142.3 million.

Because of the significant difference between our GAAP expense and our required contribution, we have decided to give you this enhanced disclosure so you can more accurately gauge our true cash performance. Our strong cash flow reflects a significant decrease in inventory for the year, as well as greater discipline and efforts in terms of cash collection.

CapEx in the quarter was $21.3 million and $90 million for the year. Net debt at the end of the year was $1.2727 billion, representing 43.8% of total capital. As Rick mentioned earlier, on April 6 we amended and upsized our revolving credit facility. The $850 million new facility is a five year agreement which includes a slightly better pricing grid as well as a more streamlined set of baskets and covenants.

Simultaneously with the upsizing of the revolver, we retired our term loan which will produce savings and will provide greater flexibility. In addition, to ensure maximum liquidity and flexibility, we have also reached an agreement to extend our $175 million accounts receivable securitization to three years, from its current 364 day term effective June 11th. The effective tax rate for the year for income from Continuing Operations was 35%.

In our press release and as Rick will soon discuss, we have provided you increased detail and visibility on some of the major moving pieces we will see in our fiscal 2012 results. We expect to perform and execute well in all four quarters of fiscal '12. But I hope you can see how the second half of the year will benefit more from increased production rates, synergy realization, and interest savings.

With that, I will turn it back over to Rick.

Thank you, Dave. As I said in the beginning of the call, we are, in fact, very proud and delighted with our results of 2011. But let's turn to 2012.

Our backlog, as Dave just mentioned, remains strong at $3.78 billion. And we remain focused on improving our execution, driving the integration and controlling our cost, as well as delevering our Company. I'd like to emphasize this for a minute because there are those out there that don't seem to think that we concentrate on our cash flow.

Under the theory that it is only through iteration and reiteration that you force an alien concept on a reluctant mind, Dave has talked about our cash flow, prior to our pension contribution of $277 million, and we would also like to affirm our commitment for a $750 million debt reduction by the fiscal year 2015, which includes the aspect of continuing to fund our pension liability and spend capital dollars to continue to grow our Company.

Our guidance for the new year 2012 will be revenue of $3.2 billion to $3.5 billion, and EPS from Continuing Operations, excluding the integration costs of $8.35 to $8.45 per share. This guidance is based upon a share count of 25.7 million shares, capital expenditures and investments in new major programs of $130 million to $145 million, pension income of $14 million, and a cash contribution of $118 million to the pension liability.

Vought acquisition synergies of approximately $18 million, current production rates and, as Dave mentioned, they'll change a little bit toward the end of the year, minimal impact in fiscal year 2012 of the KC46A tanker award to Boeing. That doesn't kick in really much at all until later years. And we do expect continued strength in the Aftermarket Services segment of our business.

In the past, we have been accused of being conservative in our outlook going forward. I might remind everybody that the opposite of being conservative is promising the world and not delivering. But I think that the numbers that we're projecting this year, A, we feel we are going to deliver that, and B, we don't think that there's a lot of conservatism in those numbers, because we continue to want to delever our Company and continue to grow.

On a quarterly basis, quarter one will include a $7.7 million write-off which is related to the retirement of our term loan. And we do have production rate increases and realization of synergies which favor the second half of the fiscal year, which Dave mentioned.

Overall, we remain very bullish on our new year and at that, we'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.

Yes, Gleacher & Company. Good morning, Rick and Dave.

Good morning, Peter.

Good morning, Peter.

Rick, thank you for all the color on the production rates. On the top line guidance, the range of $3.2 billion to $3.5 billion, could you maybe just highlight what are some of the puts and takes that would make up either coming in at the high end or at the low end. Is it some after market growth assumptions, or what could you maybe just give us a little color on that.

The first thing you have to remember, Peter, is that the Triumph Aerostructures, aka Vought, was only in our revenue since June of last year. And so, therefore, there's going to be increase in revenue because of that; they'll have the whole year.

I think the other thing that is a big number is the 787. What really happens there, when do they ramp up, and when do they start shipping. We've shipped a lot to Boeing already on the 787. But I don't think I have to tell anybody on the call that the world is suffering with pushbacks there. We're not long-term concerned about it. But it does have an effect on whether we hit the high end or the low end of that range, as you suggested.

Okay, no, that's fair. Because I think their expectations are they're going to be at 2.5 here very shortly, a month, and then ramping up at the end of the year again. Okay, and your lead times on that, I mean, the average I guess, because you do have a lot of different components. Is it 3 to 6 months?

That's really hard to give you an average on that because of the -- some of the products that we supply are at the beginning of the build rate, the build cycle on the plane, and some of them are all the way at the end of the build cycle. So it's hard to say an average. But if in fact they get to 2.5 and ramp up more later in the year, we should be more toward the higher end of that range than the lower end.

Okay, great. And then just a clarification. Does the $0.19 charge, is that included in the $8.35 to $8.45 EPS guidance, or is that -- ?

Yes.

That is included. Okay. And Dave, just quickly, a housekeeping. Corporate expense for fiscal '12, is there a rough estimate you could give us?

Yes, I think it's going to be around [$11 million a quarter, $10.5 million to $11 million a quarter].

Okay, great. And was there -- just one final, I guess. On the CapEx, Dave, was there anything new or unexpected for fiscal '12? I thought there were kind of previously indicated you were looking at maybe $100 million, roughly, for annually. That looks a little higher than what we had thought.

We have some programs that we've committed to that we're really not at liberty to talk about at this point in time, that are new programs that we're spending money on in the growth mode.

Some of those will not all show up in CapEx. Some would show up in inventory. But at this point, we're not prepared to announce what that win is. So I think your capital for the growing of our Company and keeping up with production rates of that $90 million to $100 million is accurate, Peter. The balance is a new win that you'll probably be hearing about relatively shortly.

Okay. Congratulations. And congratulations on the successful fiscal '11. Thanks.

Thank you.

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

Thanks. Deutsche Bank. Good morning. Good quarter. Guys, I was wondering if you could clarify first on the pension side. Dave, I guess the accounting for the lower pension expense, just want to clarify that I have it right. It's about a $30 million positive swing for you, but will flow through the P&L would only be about $20 million of that benefit, is that right?

That's about right.

Okay. And then the cash outlook for fiscal '12 in terms of the operating cash flow, can you give us some color in terms of the puts and takes there? And just to remind us that we'll have the same seasonal effect I assume as we saw last year, or I guess lumpiness as we saw last year?

Yes, I mean, I think that the major moving pieces, Myles, would be -- you could do the math of what, let's say, $8.40 times 25.7 million is. Obviously, you could back into the fact of that implies tax in the low [$100 million's], but we're going to pay very little tax, so that's a big source of cash.

With our investment that we talked about, CapEx and the investment in the new program, probably is a $40 million headwind to D&A of about $100 million. And then you have got pension and OPEB of about $150 million negative, and we'll continue to work off some advances of $50 million.

So, I think you're looking at perhaps in the neighborhood of $100 million of cash flow after all those numbers, which we're pretty proud of.

$100 million on the free cash flow side?

That's right.

Okay, great.

One of the things that we haven't made a big deal of, but it's probably worthy of a mention is that since we acquired Vought, in the 9 months we did burn down close to $100 million of customer advances, which is shown on the face of the balance sheet. And so when you really look at our cash performance, that's another major item of cash flow that we're pretty proud of. I mean, we would rather be on the positive side of that, but that's something we'll probably talk about more in the future.

Okay. No, that's great. And then I guess, Rick, on the synergy outlook, the $50 million in synergies, and you have $18 million you're confident for putting into this year's guidance, can you give us some perspective on, is this contracts that are rolling over? Is this kind of easy synergy? Or is this -- I don't want to put it lightly, but is this easy synergy or hard synergies in terms of the first $18 million, and then also the remaining $32 million?

Well, the first $18 million are very hard, most of which -- a lot of which are in place already, synergies that we've realized and will continue to realize during next fiscal year. The number of $50 million, as we've somewhat consistently said, I would be very disappointed if the number weren't higher than that. And those are synergies that relate to supply chain synergies, whether that relates to management of our suppliers, or changing where products are produced, for example, will it move from Triumph Aerostructures to another Triumph Company, how much we will take advantage of Triumph Mexico and things of that nature.

The only thing that is not in there is the conversion which is going on right now at Triumph Aerostructures to SAP, and whatever the savings are there is in addition to those numbers.

Okay.

It's in addition to those numbers because they had already started that process when we made the acquisition.

Got it. And then last one for me, back to Dave, the guidance, what does it assume for the convertible in terms of the call action in, I guess, October?

I think at this point it's neutral, Myles. At this point whether we call it or not, or leave it open, I think the same impact on the shares. It's in our denominator today, so I think that would be -- other than we would have to pay a dividend on it if we called it. So I think at this point we're still studying whether it makes sense for us to call it or not. But right now, it assumes our stock goes up mildly, probably should have a bigger assumption in there, but we would like to have that. That's where we're at right now.

Okay. Thanks again.

Thank you. Our next question comes from Ken Herbert. Please state your affiliation followed by your question.

With Wedbush. Good morning. Thank you.

Good morning.

Good morning.

First question is on the Aerostructures margin, just to follow up on the earlier comments, in terms of looking us at that out through fiscal 2012, would you say the key drivers there, as we look at that margin, would be 787, and 747-8? Or would there be something else there that we think or that you think would really be key this year in terms of the puts and takes on the margin for the Aerostructures business?

Well, I think that the ones you mentioned would be part of the drivers. I think that virtually all our programs, we're looking at the execution of our programs and the execution of taking cost out of the system. And as I mentioned in the question that related to realizing the synergies. So I think that virtually all our programs, with the possible exception as we go forward of the C17, which is going down in build rate, although until that goes out of business we do well on that as well. But I think all of our programs, certainly the 787 will help us, and I think that the 2 programs you talked about will contribute to the upside on that.

I mean, I think if your question was really revenue, Ken, I think it's clearly 747 ramping to 2, and 787 finally getting to a meaningful production rate. I don't think our margin deliverables are -- that they're particular to those 2 programs. You have got a very nice business, Triumph Aerostructures does, as well as all our structures companies, and the margins will be as much about execution and the synergies as a particular platform's growth.

Okay. And I guess that was the heart of the question is, as you look at margins, specifically in Aerostructures because I think it's where you have got a great amount of leverage here and obviously with the size, and you look at the puts and takes, should I think about that as upside really? I think the volume and the upside there is pretty well understood.

I guess I'm just really trying to get my head around the synergies and what that might -- synergies and then your ongoing obviously efficiency and productivity initiatives, where's the real swing factor? I guess it would be volumes, but how does that compare relative to what the synergies and the other productivity initiatives you may have flow through this year in terms of the real impact?

Well, you're correct in the fact that it would be based on some of the volumes, but part of the aspect of the synergies will be producing various parts and various components of the aircrafts at the proper locations, which takes a while and we've been working on that. And as we said, that will take a 3-year period of time to get up to speed on that and realize more of the synergies that we haven't identified publicly yet. But we think that a lot of those synergies will be realized in 2012 as we continue to execute.

The lion's share of -- if we're talking about synergies, Ken, will always be in the Aerostructures segment. But as you look at our other 2 businesses, the Aftermarket business had a great year in terms of its improvement, and we think that they can continue to do even better. And the Aerospace Systems group improved their margins in the year. But of the 3 segments, the one with the tailwind of synergies is obviously Aerostructures.

Yes. And just on that, finally, as you look at that $18 million, the guidance you've given for the synergies across the year, do we see a significant step-up after the June time frame, essentially when we cross the 1-year anniversary of the acquisition? Or how do you see the synergies flowing over the course of the year?

We'll see a step-up because they'll get obviously the full year involvement in the synergies, but I think that you're looking at about one-third of the synergies have been instituted already and then two-thirds of that will go forward as the year goes on. It won't necessarily start at June. We're starting to get some of them before that.

It's clearly back half of the year.

Yes. Okay. Great. Thank you very much, and great quarter.

Thank you.

Thank you.

Thank you. Our next question comes from Steve Levenson. Please state your affiliation, followed by your question.

Stifel Nicolaus. Good morning, Rick and Dave.

Good morning, Steve.

I see business jets did a lot better this quarter. Does that mostly have to do with Vought and the Gulfstream jets, or is there something else in there?

No, we basically, I have said right from the beginning, Heritage Triumph has been Cessna-centric, and Vought was Gulfstream-centric, and so there your question related to the fact was it mostly in the Vought area, and I would say yes to that question. Although where we've shipped some, too, but the increase and the percentage of our business which is now business jet, has increased because of the Triumph Aerostructures involvement with Gulfstream.

And our Cessna backlog and shipments remain at pretty low levels. So we view that as a future opportunity.

Okay, thanks. On your top-10 list, I think everybody's pretty much aware that the C17 is declining, but it looks like pretty much everything else is moving up. C130s question, is that steady, up, or down?

Well, right now it's somewhat steady. Over the last year it's been actually increasing. At this point in time, it's somewhat steady. We don't see a decline in the near future, defined as 2012.

Okay. Thanks. And this one's for Dave. On the purchase accounting, I guess there's still some adjustments to be made. Is there any chance that's going to impact guidance, or have you taken that all into account?

I would be surprised if it impacts guidance, Steve, but the -- particularly in the tax area and a few other small areas, it's just so complex that I think it would be foolish for us not to take advantage of the full one year. So we don't expect any big changes, but we're going to take the time we're allotted to get it absolutely perfect.

Okay. Thank you. And last one. There was an article in a Georgia paper that you're looking to hire 250 people. Does that have anything to do with the increased expectations for capital expenditures?

I don't think that -- .

Not in a big way.

-- big capital expenditures in Georgia. We have got to check on the issue of the 220 people, too. He has got to make sure that we're doing the right thing there. We still want to execute properly.

But that plant is on the right programs. It will get some natural tailwinds, but that's not spiking our CapEx.

Okay. Thanks. And in relation to that factory and the potential hiring, is that market share that you're taking, or is this just totally new work?

I think it's some new work and the existing programs getting some tailwind.

Got it. Thank you very much.

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

Stephens. Good morning, guys. Good quarter.

Thank you.

Thank you.

Just a couple of quickies here. In terms of -- you talked about the reduction in the, I guess in the net pension liability. Could you talk about sort of where we were and where we are now at the end of the year in the underfunded status.

We started out right about at $600 million, underfunded, about $635 million, and we're coming in around $363 million. So we're talking about a massive improvement there. And again, it was a combination of significant contributions. We did make some pretty thoughtful plan amendments and our investment returns were rather strong. And that still is net of some pain on the discount rate.

Right.

So in overall, I think everybody had good performance. I would say ours was better than most.

Great. In terms of, as we look out into this year, you guys have been sort of $0.03, $0.04 a quarter on AIT costs at Vought. Is that sort of the run rate that we should be thinking? Can you think of anything that might sort of increase that?

I think that in terms of the ongoing, I think that's about right. But as Rick referred to -- once we get into moving production, and significant production, you could be looking at things like non-cash asset write-offs, if that's the case. There could be small amounts for severance. There could be amounts from moving equipment because you can't capitalize those.

So it could go outside that range. I think a lot of it would be non-cash, but those rules are very -- it's a hair trigger on when you recognize those in terms of the accounting, and how you account for them. So that's the only thing that will be out there, but I think it's -- obviously we're very careful about taking those types of large write-offs; it has got to be worth it. And we do see that opportunity.

Okay. Can you talk to us about how your SAP system implementation is going, and maybe some timelines as to how it progresses?

I think the answer to that is I can comment on it but it hasn't been live for a very long period of time, so our real answer at this point is so far, so good. But you would be better off asking the question next quarter, because then we'll have some time under our belt and we can answer the question. Because we haven't really switched over until the end of last month.

Can you remind us sort of where or what -- did you just go across all of Vought, or are you starting at one or two facilities? How does that work out?

All of Vought.

All of Vought was, all the companies that were on their previous program, so they're all of Vought, they're working on it now.

Okay. In terms of -- I guess there was some news out of Boeing yesterday or the day before about sort of a production halt on the 747-8, I guess as they catch up. Is there any ripple down to you guys, or is that sort of a month slowdown doesn't really change anything for you?

The way we look at that right now is we don't think it will change anything at all with us. I suppose there's more to come on that, but the indication we've gotten right now is it's not going to mean much at all.

Okay. Dave, I guess in terms of the synergies, you've talked about I guess by July being at that $1.5 million run rate per month. Where are we going into the year?

I think we were in the saving $1 million or so a quarter. I mean, there is the cash savings, Eric, and then there's how quickly does it get through the inventory cycle. Because a lot of these things, you save insurance, a lot of it goes into those buckets.

So I think the cash savings always precede the P&L, but I think there's just some things that we can kick into full gear once we have the full anniversary of the deal, so I think it's more the back half of the second quarter and into the end that we'll really be at that run rate. But we're saving some money now. We're also incurring some extra costs, but I think that's about where we're at.

Okay. And I guess maybe lastly, I guess, Dave, last time we had talked we had maybe talked about if you guys could maybe give us some visibility as to top -- you could give us the backlog, maybe top programs by content value, not actually giving us the dollars. I know you won't do that, but just maybe order of -- so we can judge sort of sensitivity as programs ramp.

I think at this point we're going to stick to our traditional. I will tell you that over -- it's a little over 70% of our total backlog is in those top 10 programs, and then if you go down another five or six, you probably get up to 80%. So that's where the lion's share of the dollars are.

Great. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from JB Groh. Please state your affiliation, followed by your question.

Couple of housekeeping issues. Dave, did you give the legal expense in the quarter?

The legal expense in the quarter was -- I think it was just under $1 million.

Okay. So your assumption is that it gets a little bit higher throughout the course of '12?

Yes, I mean, we always start off with assuming that the judicial system works as planned.

Okay. And then on the Aftermarket Services business, I tuned in a little late, but this is a seasonal, little bit of weakness seasonally? I think you mentioned last quarter that those margins were pretty extraordinary, but is that just a seasonal impact on the sequential weakness in margin?

I don't think -- in the beginning I talked about that. We don't see that as a weakness at all. In the third quarter, as I mentioned, we went up, we were up 45%. Year over year at the end of this fiscal year, we were up 20%.

So albeit 20% is lower than 45%, we said that the 45% was not sustainable. So we don't look at this as a weakness at all. We look at it as the 20% or, in that area we'll continue to improve that group --- that segment from certainly a year, 1.5 year ago, but I don't think the 45% was sustainable in the first place. And we really feel -- we feel proud of the fact that we're at 20%.

The other thing, JB, is I think we've beat this drum forever, but given the nature of our business, what jobs come in a quarter can very much influence the margins for a given month or quarter. And so we view a 10.5% month, and then an 11.5% quarter, as long as all the businesses are performing well, and they are right now, and we don't have anybody as we've had in the past where we had to talk about losses somewhere, we really don't view that as a weakness, as long as all the companies are performing.

So if we bounce around the 10%, 11%, 12%, as long as that's steady as she goes and sustainable, I think we're very proud of that, and we're not going to view one as stronger and one as weaker. Sometimes it's two jobs can make all the difference.

Sure. Okay. Yes. Poor choice of words on my part. I was just trying to figure out if that was a seasonal impact, but it sounds like it's more job dependent, and that -- I guess traditionally in that segment you don't have a ton of visibility. It's kind of whatever comes in, comes in.

Right.

Okay. Just to help me out, what's the interest number that you have in your model for the year, including that 7.7% in the --?

It's around $85 million, $86 million.

$85 million, $86 million. And that includes the prepayment?

Yes.

Okay. Thanks a lot, guys. Great quarter.

Thank you.

Thank you. Our next question comes from Michael Ciarmoli. Please state your affiliation followed by your question.

KeyBanc Capital Markets. Hey, guys, thanks for taking the questions. Nice quarter. Dave, I guess just on maybe the same-store sales with the Aerostructures business, flat year over year. What moving pieces were impacted -- the growth rate there on a year-over-year basis?

Pretty much 777.

Okay.

If you go back 12 months to when we issued our guidance for fiscal '11, it was going to be down from fiscal '10. And one of the big moving pieces, which is big in our structures business, was 777 going from seven to five. So flatness in that business was not a surprise at all for us, and I think you're going to see some nice growth in fiscal '12. So completely predictable as to what happened.

Very good. And then just if I can, I just want to go back to Myles' question earlier on pension. It sounds like the P&L impact will be $20 million, so I guess that gives you sort of a tailwind in the $0.40 to $0.50 neighborhood this year?

I think so.

Okay. And then lastly, just with the kind of uncertainty around the G650, does that -- are you seeing any increased activity for the 450 and 550 right now?

I think 450 and 550 are very good and steady, but we would not see it that quickly in our production, frankly, as to whether Gulfstream is booking more orders or trying to give people other planes.

The 450 and 550 was part of the reason that our percentage of content in the business jet area has increased. So indirectly your answer is yes, if that continues during 2012.

Last question, and I'll jump off here. I know you guys mentioned in the release on the Air Force tanker program. Are there any near-term development expenses or CapEx that we should be thinking about for that one?

No, not near term.

Nothing dramatic.

That won't kick in --- that really doesn't kick in until 2014 or thereabouts. So we certainly don't have anything near term.

I mean there will be small items where we may get paid, hopefully, to help tweak our parts or do things that will help turn a 767 into a tanker. But nothing that we'll be calling out every quarter, I don't think.

Okay. Sounds good. Thanks a lot, guys. Nice quarter.

Thank you.

Thank you. Our next question comes from Jon Evans. Please state your affiliation, followed by your question.

Edmunds White Partners. Can you just talk a little bit about -- you talked about potentially the upside if you did upside the guide, it would be from the 787. Can you just help us understand or frame the margins in the 787? So as that ramps, is that inherently a better margin business for you in the structures, or is it dilutive to margins originally?

We have consistently said in the past that the 787 is -- the margins there, what we developed in past years and now are positive margins --- positive operating margins, but they will not be accretive to our current margins, at least until we get to production levels on the 787. So when we get to production levels on the 787, it will be at worst equal to the operating margins that we have now.

Couple things. We've been saying this for so long, but we think it's 2 to 3 quarters of consistent production when we get to that point. And it's not just a structure story. We have some very good content and some very good contracts and meaningful business on 787 in our Aerospace Systems group. So it's not just Aerostructures [plight].

Just to follow up then, what is that production ramp on a monthly basis? If they're going to exit at 2.5 to three a month, is that where you need to be to, or does it need to be higher than that?

I think my personal view is if we can have two to three quarters of them staying at that type of level, I think that's what we need to cost reduce and do the things we need to do to get the margins going in the right direction.

And the last question, and you're probably not going to answer this, but embedded in your guide, what did you assume for the ramp in 787 on a monthly basis, exiting the year.

Current schedule with a little bit of a discount.

Okay. Thank you.

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

Yes, hi, it's Sidoti. I think most of my questions have been answered. Just curious, I'm not sure if you said this. What were the Mexican start-up costs in the quarter? I think they were something like $3 million last quarter.

It was less than that. I think it's about $2 million.

Okay. And any expenses next year? I know you said in the press release it was going to be about breakeven to earnings.

Yes, I think what you're talking about is our Mexican set of books will probably show a loss, and there will be benefits at many of our operating companies, so the net effect to Triumph overall, consolidated, is about a breakeven for Mexico. I think Rick made the right point that if that plays a larger role in some of our synergy and integration discussions, that can obviously be improved, and we're hard at work on those right now.

Okay. Thanks, Dave. And just lastly, just to clarify Aftermarket Services performance. I don't think anybody's complaining with the 20% growth in the quarter, but I think perhaps where some of the confusion lies is if we -- I think back in February you guys were saying that thus far in the fourth quarter at that time, you hadn't seen any drop off in the performance. So did something happen beyond that, or can you provide a little bit of color in terms of what happened from the time of your conference call, third-quarter conference call until kind of the end of March?

People must have misunderstood. I read the transcript. I believe we said it was not sustainable. There's huge puts and takes between what military business we get and all that, but I mean, we were trying to characterize at that time that the market remained very good, and our people were seeing incremental opportunities, and that the airlines, the maintenance deferral was over and things like that.

It was not meant -- because I know we said that 45% was not sustainable. So I think going back to 20% growth, we're very proud of. So maybe there's just a little confusion there.

Okay. Understood. And I mean, when you look ahead, I know you guys don't give segment guidance, but what kind of aftermarket growth do you think is kind of reasonable on a go-forward basis?

You're talking over the medium term?

Yes.

High single.

Okay.

I think high-single digit is one that we could hang our hat on. I don't think that -- in the area of, for example, Asia, Asia has continued to improve in some of the business that we've seen. Our business there, as Dave I think indicated earlier, one of the issues that we have in the aftermarket service business, it depends on -- as he said, we have no backlog, and it depends on how many engines come in for us to repair in any given month and what those engines are. If it's an 85 series engine, that's an older engine that doesn't bring as much revenue or profitability. There are other engines that are newer and more profitable, so it depends on that. So it's very hard to project, which is the reason that we would stay with the high single-digit area.

Great. Thanks for that additional color.

Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group fiscal 2011 fourth-quarter and year-end earnings conference call. This conference call will be available for replay starting today, May 10, 2011, through May 17. You may access the replay system at any time by dialing 1-888-266-2081. International participants dial 703-925-2533. Enter the access code 1525286.

Once again, those numbers are 1-888-266-2081, and 703-925-2533. Access code 1525286. Thank you all for participating, and have a nice day. All parties may disconnect now.