Triumph Group Inc (TGI) 2012 Q2 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 2012 second quarter results. The 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 have 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 statement.

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 web site 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, everybody. I'll talk a little bit about our second quarter with which we're very pleased with our performance. We had significant operating income growth and year-over-year operating margin expansion. The aerospace systems and the aero-structures operating margins were particularly strong as a result of our execution and the realization of synergies from the Vought acquisition. In addition to that, we had a strong year-to-date cash flow generation. As we've discussed in the past, the integration of Vought into Triumph Group is progressing very well. We're well on track to deliver annual synergies of $18 million within the first 18 months, and $50 million per year after three years.

As Dave will discuss, our backlog is very strong at $3.76 billion. And in addition to that, we closed yesterday, you might have seen the announcement on a small acquisition, which will expand our capabilities in interiors.

I think there's a couple other things I'd like to mention in regards to the quarter two review. It was picked up by most of you in what you wrote. We did net a couple of large items which negatively impacted the quarter. Number one, we lost two 747 ship sets due to a Boeing pause in production. If you recall, they did that a little while back.

In addition to that, from a cash perspective in the quarter, we lost cash of $51 million when one of our largest customers decided not to pay on time due to their -- which they were contractually supposed to do, but that hurt us $51 million in the quarter. But with respect to the 747, we'll recover 1 of the 2 in the second half of the year and the $51 million was already received in October. So there's no impact on the year as we go forward.

Before I turn it over to Dave, I just want to say good morning to one of our backers from our IPO, Gerrit Vreeland from Deutsche Bank who's in the hospital bed with 2 new knees. So I've got to say good morning to him. With that, I'll turn it over to Dave.

Thank you, Rick, and good morning, everyone. I'd like to start with a review of the financial results for the second quarter. Turning first to the income statement, sales for the quarter were $790.5 million compared to $768.2 million for the prior-year period, a 3% increase, all of which was organic.

As stated in the press release, sales for the quarter were negatively impacted by a reduction in development of two aspects of the 747 program. Adjusting for these items, sales growth in the quarter would have exceeded 10%. Operating income increased 26% to $108.5 million with an operating margin of 13.7%. Income from continuing operations increased to $58.6 million, resulting in earnings per share from continuing operations of $1.13 per diluted share versus $0.84 per diluted share for the prior-year quarter. Included in these results were $1.1 million pretax which equates to $700,000 after tax or $0.02 per diluted share of integration expenses.

The prior year's operating results included $1.3 million pretax of such costs. Excluding these expenses from the current-year second quarter would result in income from continuing operations of $59.3 million or $1.15 per diluted share. Net income was $58.5 million or $1.13 per diluted share. EBITDA for the quarter increased 28% to $132.2 million. The number of shares used in computed diluted earnings per share for the quarter was 51.6 million shares, and reflected the 2- for-1 stock split that was issued in July.

For the second quarter, sales in the aero-structure segment increased 2% to $588 million, all of which was organic. Revenue for the quarter reflected the fact that there was less nonrecurring revenue principally related to the 747-8 than in the prior-year quarter as well as the 2 last 747 ship sets, one of which will be made up as Rick said in the second half of the fiscal year related to Boeing's previously announced pause in production, as well as lower C17 revenue as production settles in at 10 per year.

Adjusting for the 747 item, sales would have grown in excess of 10%. Operating income increased 32% from the prior year to $92.5 million. The segment's operating margin for the quarter increased 360 basis points over the prior year to 16%.

In the aerospace systems segment, sales for the second quarter increased 8% to $133.8 million, all of which was organic. Second-quarter operating income increased 32% from the prior-year quarter to $22.6 million with an operating margin of 17%. The segment's operating results included $500,000 of legal costs associated with the previously disclosed trade secret litigation.

In our after-market services segment, sales for the second quarter increased 3% to $70.5 million, all of which was organic. Second-quarter operating income was $7 million with an operating margin of 10%.

The prior year's operating results included a $700,000 gain on the sale of certain intellectual property. The next slide summarizes some key financial data related to the Vought acquisition for your reference.

With regard to pension, at September 30, 2011, we estimate that our net under funding with regard to pension would have increased by approximately $100 million since 3/31/11. This is almost entirely due to a drop in interest rates. We estimate that our pension expense or income for fiscal 2013 will remain close to what we originally projected at the beginning of this fiscal year. Given the strong asset returns in October, over 50% of that $100 million will have been recovered.

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 aero-structures and aerospace systems groups. The after-market services group does not have a substantial backlog.

Our order backlog as of September 30 was $3.76 billion. Heritage backlog increased 11% year-over-year and 1% sequentially. Military represented approximately 31% of our total backlog. Our top ten programs listed on the next slide are ranked according to backlog. In first place was the Boeing 747 program, followed by the Gulf Stream G450 and 550 programs. Third was the Boeing 777 followed by the Osprey Combat Helicopter in fourth place.

In fifth place was the 737 next generation with 787 moving up to sixth place. Seventh was the C17 freighter, and in eighth place was the C130 program. The Blackhawk helicopter was ninth, and in tenth place was the 767 program. The drop in backlog -- Blackhawk backlog primarily relates to a delay in new orders in anticipation of the next multi-year award as well as some loss of aero-structures volume on certain models to Sikorsky.

Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military and space totaled 45.6% of revenue, and was broken down 67% commercial and 33% military. Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2011 commercial aerospace increased to 50% and military decreased to 33%. Business jets increased to 13% while regional jets remained unchanged at 1%. Non-aviation remained the same at 3%.

Finishing our sales analysis, the next slide shows our export sales for the quarter. Export sales for the second quarter were $111.8 million, an increase of 13%.

Turning to the balance sheet and the next slide, for the six months ended September 30, we generated $122.1 million of cash flow from operations before we made $61 million of pension contributions to the aero-structures defined benefit plans. After these contributions, cash flow from operations was $61.1 million. The year to date cash flow was negatively impacted by a $51 million contractual payment as Rick mentioned that was due at the end of September but it was not received until October.

CapEx in the quarter was $18.3 million and $33.9 million year-to-date. We now expect CapEx in investments and major programs for the year to be approximately $120 million to $135 million. Net debt at the end of the quarter was $1.2 billion, representing 41.4% of total capital. We did see an increase in conversion activity on our convertible note in early October, which we financed with our revolving credit facility.

The global effective tax rate for the quarter was 35.5% and reflected only nine months of the estimated R&D tax credit due to its expiration at the end of the calendar year.

Finally, as Rick mentioned, we continue to deliver on our synergy targets. We have previously mentioned that there would be costs incurred to make the savings possible. We expect to incur the following costs over the next approximately 18 months. In the category of expense and nonrecurring expenditures, particularly moving of fixed assets, first articles, et cetera, approximately $10 million; Non-cash costs for retirement of fixed assets of approximately $4.5 million; and capital of $4 million. To the extent these costs are incurred in fiscal 2012, they are not reflected in our guidance. At this time, the split between 2012 and 2013 is not being provided. With that, I'll turn it back over to Rick.

Thank you, Dave. Just commenting a little bit on our future outlook as we both mentioned our backlog remains strong. We clearly remain focused on improving our execution, driving the integration that we have talked about, and controlling our costs.

We are reaffirming our revenue guidance of $3.2 billion to $3.5 billion for the year, and we are raising our earnings guidance, our EPS from continuing operations of approximately $450 million excluding the integration costs that Dave just talked about based upon strong performance to date, current market conditions, current production rates, and weighted average shares of 51.6 million, which includes an estimate of additional shares from convertible debt. At that, we'll turn it over to anyone for questions.

At this time, the officers of the Company would like to open the forum to any questions that you may have. (Operator Instructions) Your question will be taken in the order it is received. Please stand by for your first question. [Julia] Yates, please state your affiliation followed by your question.

Credit Suisse. Nice quarter, guys. Did the absence of the two 747 shipments help your margin mix? Because it appears that guidance implies that margins will come down a little bit in the second half of the year? Is that because of more 787 and 747 shipments?

No, I don't think so necessarily. I mean, I really don't have in front of me the exact margin on each ship set, but I don't think it's going to affect it that much. We were only culling it out because of the shortfall in revenue because of that, because it is our largest backlog item. It's our largest program by backlog.

Yes, I mean it would be a very small impact. The margin improvement is not related to that.

Okay. Then, what rate are you guys shipping on 787 currently?

It's a mixed bag, but I think some places we've been shut down a little bit. Other places are -- other parts of our Company are at 3 a month. It does appear that the ramp we were expecting to see in Q4 may -- in our Q4, may slip a little into the first quarter of fiscal 2013. But we have not seen a robust ramp yet.

Okay. Thank you.

David Strauss, please state your affiliation followed by your question.

UBS. Good morning. Dave, can you talk about what the plan is now on the debt side of things, the plan for the conferred -- you've been talking about $750 million debt pay down, and as well the cash outlook this year? I think you took down your CapEx forecast a little bit. And how does that change things?

Yes. I mean, nothing's changed on the debt front. I mean, to us, we're going to -- on the conversions we've had on the convert. We continue to pay the principal in cash which is required and we continue to issue shares in the money part; that's the equity component. And we will continue to do that.

We did not elect to call the notes, as was our right on October 3. So, it's really up to the investors to decide if they want to put them back to us or sell them in the open market if they have held them long enough in their view. So, really, the increased activity I referred to will just show our convertible debt going down a little next quarter, and that will be, obviously, slightly higher on the revolver, so no change there.

We had talked about, about $100 million of debt reduction for the year, and we're still in that range. Obviously, the CapEx slowing down a little should give us a little extra tailwind there. But we're still in that approximately $100 million range.

Okay. And you mentioned the pension outlook next year based on where things stand. Can you give us some color on what you are assuming for the discount rate under the scenario you laid out?

Yes, I can. What we did was I had our guys just -- we're not into the predicting business, so, I just said to them, assume that the discount rate, which for us was about 4.93%, that would remain in place at March 31 and that we would make 8.5%, which is our assumed rate of return from September to March. Just tell me where we would stand, and that's how we came up with those numbers on the under funding.

We're in a unique situation and that's so much -- because our plan is semi frozen and because a large percentage of the participants are retired, that on the expense side, the change in interest rates is less sensitive to expense because you're getting a lower interest rate to calculate the interest cost element, and that has a positive effect. So, we're in a unique situation given the maturity of our plan. So, that's why the estimate that's on the purchase accounting slide indicates where we don't think that number's going to change much for fiscal 2013 on the expense side. Cash we think while still be in that range of what we provided.

Okay. Great. That's helpful. Last question, your synergy targeted $50 million. Did you get -- in terms of the $50 million versus the $18 million, where do you stand today? What do you -- if you had to guess, what do you think is reflected in numbers today? And the costs you laid out, are those to achieve the $50 million in savings or something above that?

David, we've publicly said that one of the issues is in 3 years, we will get a total of $50 million. We've also said that $18 million of it was the low-hanging fruit, and in fact, we've achieved a great deal of that already. So, of the $50 million, $18 million of it is a great amount of that is baked into this year's earnings.

Going forward, that becomes some of the harder issues in moving products around. The supply and management and the supply chain issues that we'll deal with in the first 3 years of the integration. So, I think that $18 million is fairly baked in now, but the other $32 million will be baked in over that 3-year period of time after the end of this fiscal year. I mean, we're not going to split hairs as to whether something gets going in next March or something like that, but basically, that's longer term.

The other thing that is longer term, that we haven't baked anything in on, is the savings that we have from SAP. And we haven't delineated any numbers in that, nor will we for a while once we know what they are.

But the costs, the cost, David, that you were specifically asking about, those are the costs to achieve the $50 million.

Okay. Great, thanks a lot.

Myles Walton, please state your affiliation followed by your question.

Deutsche Bank. Good morning, guys. In terms of the sales in the quarter, you talk about 10% organic growth correcting for the 747 deliveries and the nonrecurring 747-8 decline. Can you parse out how much of that $60 million was related to timing and deliveries versus the wind down in nonrecurring?

Myles, then you'd be able to figure out the 747 ship set value. The answer is, we're not going to parse that out.

Could you let me know --

It was a great try, though. I'm going to give you $5 for a good try.

Could you let me know if the wind down in nonrecurring is going to be a continued headwind for the rest of the year?

Yes, but smaller each quarter.

Okay. And then, if you look at military year-on-year was that $35 million lower, all C17 re-base lining the production rate or was there also some impact of the UH60?

A little bit on Blackhawk, mostly C17.

Okay. Okay. And then the interest rate -- or interest expense run rate here in the back house, Dave, you had the callable option go, which I assume is going to lower the required interest expense provision. Is this run rate minus a $1 million about the right quarterly run rate from here on out?

Correct.

Okay. Then last one for me on the margin side, which obviously, you are crazy good. If you looked at the commentary in the last quarter, you talked about some pressure on the Aerospace Systems pulling back potentially in the near term; that didn't happen. So, should we expect those to moderate, number 1? And then number 2, the Aerostructures margins, you said in 1Q that you thought those were sustainable. Can you make the same comment about these here in 2Q?

I think the second 1 first. Don't forget that the integration savings are baked into the things at Aerostructures. So, at least for the foreseeable future, yes, we see those margins being sustained. The only downside we may see on that in the short term is that we're spending money on the 6,000 -- 7,000, 8,000 at Bombardier which affect those margins in that group. But despite that, I think our margins are, in fact, sustainable. Aerospace Systems, again, we're working on execution and controlling costs, and there might -- there's pressure on those margins. There's no doubt about that, on existing programs, especially some of the military programs, but we think they're substantially sustainable. I mean, we might have some hiccups here and there, but I doubt it.

I mean, Myles, I think if you want to think about why Aerospace Systems came in flat which was frankly a very good result, legal was a little less than we thought, and that's where those costs sit. And performance was a little better. So, I think there's a combination of both. But I think on Aerostructures, I think we're committed to the margins continuing to stay higher year-on-year. I just hope that if it's up 200 basis points next quarter, but down sequentially, that doesn't -- I'm not giving guidance on that area but as an example, there's a lot of moving pieces right now. So, I think we're on the road to higher margins is the main thing.

Okay. Great. Thanks so much.

Yair Reiner, please state your affiliation followed by your question.

Yes, Yair Reiner for Oppenheimer & Company. On the Blackhawk, could you quantify the amount of content that's moving over Sikorsky on that?

It's a moving target. They've taken back a couple of the models. We're hoping to get some of those back, but, it's still going to be a top 10 program, and it's a moving target. So, we'll update you each quarter. You'll see the backlog, it either slipped -- it was down fairly substantially this quarter. But, and again, part of the drop in the backlog was just the delay in the next multi-year has not been awarded to Sikorsky. But it's hard at this point for to us exactly pinpoint the exact percentage decline. So, I don't think we're going to attempt to do that.

Got it. And then on CapEx, you took your target down by about $10 million for the year. Are there specific programs that have now -- you see lower production rates this year or what else is behind that?

I think it's just lower spending. It's not tied to any program. I think our guys are just being a little more thoughtful than what their budgets originally looked like, and we're just seeing less spending. We haven't turned down any programs that had a good return. We're not in that mode.

I would agree with Dave. Don't read anything into that at all. We're just trying to control our costs and enhance our return on net assets, et cetera. It's just managing properly, we think.

Thanks and congrats on the good performance.

Ken Herbert, please state your affiliation followed by your question.

Wedbush. Good morning, Dave and Rick. First question, can you provide any more granularity specifically within Aerostructures or Aerospace Systems? I mean, obviously, very good margins. Were these in terms of maybe the mix in the quarter of nonrecurring versus ongoing lean or other synergies? How we could maybe think about the elements of the margin improvement.

Potentially a very long answer to that question. We've said, for 8 or 9 quarters in a row that we're focusing on execution and taking costs out of the system. I think that the increased margins and the margins that we just said would be held at Aerostructures, have been a result of working on that execution. I really can't point to any specific program that has helped us. I mean, there are certain programs that are more mature than others and those margins have a tendency of being a little higher, as you would expect, because the build rates are higher. An example of that would be 737, but I don't think there's anything going on that is, in fact, raising those margins.

We have -- all our programs are, in fact, positive. Even the 787, which we've consistently said has been profitable, remains to be profitable and will, in fact, be equal to our margins and the rest of the Company going forward as they get the full production. So that's 1 of the reasons we're optimistic about our margins going forward. As the 787 ramps up, those margins will go up and be equal or beyond the margins that we currently have in other programs. So, there's really not 1 program that we can point to. I mean, we have margins all the way across the Company depending on different locations.

Ken, I would agree with Rick on that. I can't give you without giving you the specific numbers. When you think about Aerostructures, I think the big moving pieces would be -- obviously, there's pension improvement. There was -- that was a significant number. There was another significant number that was positive which purely relates to our execution. Another positive number on synergies, and the only other significant number was disruption costs that we built into our EACs for SAP. That's going well.

It's starting to go better, but we clearly are still in the heavy lifting phase there. So, I would think those are the 3 or 4 items that net out to a nice positive that are really moving the needle in Aerostructures. So, one would hope that as the synergies go up, the SAP distraction comes down. That gives us a little bit of tailwind. But as Rick said, it's not G450's doing great and this one's doing poorly. I think it's more the execution across the board is very good.

Okay.

And Heritage Triumph.

Yes. I mean I'm just trying to get a sense, obviously, in terms of any one-time items here. Because you saw such a nice pop in the quarter relative to -- and you addressed this earlier, but relative to what's sustainable here, as we move into the second half of the year in fiscal 2013.

We didn't have any significant one-time reserve reversals or anything like that.

Okay. Great. And then on the revenue guidance, it implies a relatively flat second half of the year. Can you just talk a little bit about what you're seeing? I mean, I know, commercial original equipment volumes, with the exception of maybe some pause on a few Boeing programs, but when you look at 737 and other programs, should be moving up. Can you just talk within the business about the puts and takes in the second half of the year from a top-line perspective?

Ken, I think you're -- at the low end of the range, we might be flat. At the upper end of the range, you are looking at a pretty nice increase over the second half of the year. So, I'm not going to -- I don't want to pinpoint where our forecast exactly is, but suffice it to say, we think the second half will be equal or better than the first half in revenue.

Okay, no I was talking year-over-year.

Oh, I thought you said relative to our guidance.

Oh yes, no I mean the guidance for the second half of the year implies flat with the second half last year.

I think that you have -- we're not seeing any huge ramp ups this year. I mean, we're going to start to see a little bit of impact from 737, but we're seeing C17 come down, a little bit down on Blackhawk. And now, it appears as though 787 is going to not ramp quite as quick. So, I think the big ramps come in 2013 and 2014 for us.

Okay. That's helpful. And just finally, can you comment on the after-market services segment and what you saw in the quarter there? I know you had the one-time issue which made the comps a little harder from a margin standpoint. But can you just comment on that business and looking into the second half of the year?

I think we've -- with the margin -- we've consistently said that what we think can happen in that group is the margins could be high, single digit to low double digit and that's exactly where we are. We continued to do well across the board in that segment from a sales point of view. We've had some little hiccups, although it hasn't affected our P&L yet in Thailand with the floods. Although it's not affecting our plant or the airport, which are the 2 key areas as far as we're concerned. But the group continues to do well and has good input on third-party repair and overhaul. So, we feel very good about sustaining those margins and going forward with it.

I mean the one thing, Ken, that just to get it out there so we don't have this conversation in 3 months. Last year's third quarter was the blowout quarter in after-market where we had been up 45% over the prior year. So, I -- if you're counting on year-over-year revenue growth, that's unlikely in Q3. We do expect to do well sequentially and our business there is -- the market is staying strong. So, we expect to do that, but we've impressed upon our people the need to deliver margins for more than anything in that group.

Okay; no, that's good. You always talked about, at least the last 1 to 2 quarters, all of the locations essentially performing to plan or hitting or exceeding margin targets. Would it be safe to assume that you're in the same situation today?

Yes. I think we've said substantially all, but yes.

Okay. Perfect. Thank you very much, guys.

Ronald Epstein, please state your affiliation followed by your question.

Yes. Bank of America Merrill Lynch. Good morning, guys. I just want to maybe dig down a little bit more on the margins in the Aerostructure business because they're really good, right? How sustainable is that, A? B, how of that is attributable to when you guys purchased Vought, any changes in contracts that will amortize off over time? I'm just trying to think as we model this will out, should we think about this as a 15% to 16% margin business for the next year, 2 years, 5 years. I mean how do we think about that?

Well, again, we've talked about this a great deal. For example, when we talk about the integration savings. We've said $50 million over the 3 years. Of that $50 million, a certain percentage is, in all probability, going to be given back to our customer base in regards to some of the savings that we achieve in the integration. Having said that, $50 million is a great deal of money that goes to our -- increasing our margins. So, I would say that -- and it's very hard to go out on a limb and say, okay, we're going to be -- our margins will be 16.35%. Really, I can't do that because I don't know that number but I think that the margins that we have now for the foreseeable future are in fact sustainable.

I think that in regards to some of the contractual issues that we've had, there's really been nothing that has changed in that regard. You know and I know that there's constant pressure on, from our major customer bases for a reduction of prices, especially as you go out on multi-years and things like that. But at this point in time, there haven't been a lot of issues in that regard. Our relationship with our customers is very good. That doesn't stop them from trying to get lower prices and more efficiency out of us. We're committed to becoming more efficient as we go forward. So, but there's really been nothing that's changed in a big way on that, other than we've had build rates go up on a number of the programs that we're on.

Okay. But just what I'm trying to I guess get my head around is when Vought was bought, their margins were a lot lower. So, when we look about it today, what are you guys doing different to make that business so much more profitable? I mean, their margins were lower in those businesses even when they had higher volumes.

I think it's a combination of execution, clearly better pension and the synergies flowing through. If you, then, leap forward, I think most of that continues and we should be net positive volume. I mean military and C17 is not going to be helpful, but on the commercial side it should be very helpful volumes. So, I think that we've commented before that Vought clearly has broken out of our acquisition model.

Yes.

And their margins are better. Some of it is the pension which is just a nice benefit, but most of it real execution. I think the people there are doing a good job.

Okay. Great. Perfect, cool. Thank you very much.

Steve Levenson, please state your affiliation followed by your question.

Stifel Nicolaus. Good morning, Rick and Dave. Thanks for all the data. Just curious, Boeing and Airbus are both talking about reducing their supply chains -- reducing the number of vendors they deal with. Do you see opportunities on 737 Max and A320 Neo to supply additional parts and maybe take some share?

Yes. I think we see a lot of opportunity. Boeing and Airbus announcing that they're going to reduce their supplier base is, of course, nothing new.

Right.

They do that about every year, and that's what I mean by pressure on pricing. But I think that, there is a lot of opportunity in regards to the 737 Max and the A320. One of our strategic issues that we want to increase is more content on Airbus. We do the A330 wings right now, but we do want more content on Airbus across the board. So, it's clearly an opportunity for us.

Okay. Thanks. In relation to materials, availability, and pricing, are you seeing any shortages or anything going on allocation? What direction are you seeing in material pricing or are you covered with long-term agreements?

I think that we're covered on the pricing side, Steve, either through indexed contracts, backed up purchase agreements, Boeing-provided material, but it's something we always watch is the lead time on the materials. But I don't think we've been plagued by shortages at this point. We work very hard to avoid those.

Got it. Thanks. Last, on the defense budget, I know there's some talk -- I know on V-22, talking about targeting that. I figure it's going to continue to be made but they are talking lower numbers. At what point, if you can say, does it cause pain or if it's just a few units per year, is it not material?

Anything causes any pain, but if you have any insight as to what this government's going to do, let me know about it, would you?

I'll have to toss my coin.

Because I don't have a clue what they're going to do. We've had some conversations lately with people such as the Chairman of the Armed Services Committee of the House. He's drawing a line in the sand on the defense budget and not reducing it anymore. The President is drawing a line on social security and Medicare. So, when you start asking questions, what's going to happen in Washington, I really don't have a clue.

We do have some specific areas like the C17 that is being pressured to go away. And I underline that we think it's going to be maintained going forward, albeit at a lower level. We think that's a plane that will, in fact, survive at a longer than they're talking about. The V-22, I know the Marines are very big on staying with the ship set numbers there, and we haven't heard anything other than the fact that there is pressure on our margins in the military area. Because the only way they can maintain the number of V-22s is by lowering some of the price, so it can fit within the budget. So, that's the only thing -- the only news I can give you on that. And that's old news anyway. We haven't heard anything specific about cutting any of that program.

Got it. Thanks very much and see you on Thursday.

J.B. Groh, please state your affiliation followed by your question.

D.A. Davidson. Thanks for taking my call, guys. Dave, just had a couple on -- for you on the tax rate. Could you give us some guidance -- or the balance of the year there?

35.5% should be the rate for the rest of the year.

Okay, so no change there, and then on the balance --

Unless R&D gets expended, to retroactive, so to speak, or in time for it not to expire. Then, we would we get a little bit of benefit.

Couple points or something in Q4?

Yes, most likely.

Okay. And then on the balance sheet, the inventory was up a little bit. Was that -- how much of that is related to this hold back on the 747?

A little bit. What happened in the quarter, I'm not sure if you are looking at the gross or the net number. I think you see that in the quarter we burned down some of the advances, by about I think $17 million since the beginning of the year. But frankly, a much larger number about $40 million, I believe, from the end of the first quarter. So, that had a big part of it. So, there was a modest increase in the amount of gross material that we owned. Advances were burned down rather substantially and the net of those were an addition to the inventory. And I think maybe a little bit in SAP related effects.

Okay. That's helpful. Thanks again for the questions and see you Thursday.

Eric Hugel, please state your affiliation followed by your question.

Stephens. Good morning, guys. Can you talk about -- I'm looking at the -- on the Aerostructures, your margins in Q1 of this year 13.7% pops up to about to 15.7% this quarter. Is it safe to say that most -- and on lower volume. Is it safe to say that 200 basis points, most of that, is the synergies dropping down?

Synergies and performance.

Fair enough. With regard to the synergies, you talked about last quarter being at about that $18 million run rate. Can you give us an update as to where we are currently?

Well, as I was trying to say before, that in this particular fiscal year, most of that $18 million will be baked in. I really don't know the number exactly how much of it will be, but we said that $18 million would be in the first 18 months. We've had actually by the end of this fiscal year, we will have had 15 of the 18 months. So, or actually more than that. Almost 18 months of the 18 months. So, by the end of this fiscal year, those numbers will in fact, be baked in essentially.

I mean, I think Eric, going through the P&L it's about that run rate which is about $4.5 million a quarter. I think our cash is better than that, but there is a time delay on inventory in recognizing some of that. But, I think Rick's right. I mean we're tracking at the $18 million or probably slightly better. As we said before, this was going to be a very nice, I believe slow, linear move from $18 million to $50 million.

Each quarter, we're going to get closer and closer. And we're going to talk a little about this on Thursday. We're going to get closer and closer to more and more of the major moves getting done. And as that gets -- those moves get done, the synergies will start to flow. So, hopefully it's a nice relatively steady linear line over the next 2 years to get to the $50 million and hopefully above $50 million.

Great. And lastly, Dave, I know you guys don't give quarterly guidance. But I know Dave, we've had this conversation before, third quarter for you guys is typically a seasonally weak quarter. The holidays, Boeing likes to shut down early. I would assume that a lot of the guys that you ship to don't maybe want to hold inventory over their year end. Given the 747 issue in the stoppage in the second quarter and maybe some of the rate step ups, so, would you expect to see that typical seasonality in this Q3?

I mean, I'm not sure we're going to see early shutdowns, but I guess if you are trying to get out what's the split between Q3 and Q4, we've publicly always said our Q4 is strong. I think Rick's words are, incentives work. So, it's clear that we would think Q4 would be better than Q3.

Would you expect, though, Q3 to be worse than Q2? I mean given the seasonality. Because that's what we typically see.

I think Q4 will be better than Q3. Let's leave it at that.

All right. Fair enough, guys.

Kevin Ciabattoni, please state your affiliation followed by your question.

KeyBanc Capital Markets. Good morning, guys. Most of my questions have been answered here. Looking at the Aerospace Systems segment, top-line growth there came in a little lighter than we were expecting. Can you just give us some color as to what you saw there, in terms of revenue growth and sales?

I don't know what you were expecting. We were sort of pleased with the 8%. And obviously, we have more than C7 -- more than Aerostructures volume on 747 and we have C17 volume in that group and so, there's a little bit of headwind there. We didn't -- we don't think it warranted the analysis of Aerostructures, where obviously, 747 was so impactful. So, business is good in that market -- in that segment.

Okay. Then, if you could give maybe just a little more detail on the acquisition you announced last night, as to how you expect that to fit into the after-market business?

It'll fit in as part of Triumph Interiors, which is located in Pittsburgh. The acquisition is located in Atlanta and they'll operate as one Company and be reported internally as one Company.

The people that have that Company have a very strong relationships with the airlines, and we expect it will contribute -- it will be immediately accretive. Although, don't go out and expect a jump in revenue. As we said in the press release, it's a $3 million revenue increase for the balance of the year. So, albeit, immediately accretive, we think it is in the future something that can contribute to the after-market services group both from what they offer and both what we can bring in over and above what products they actually produce.

Okay. Great. Thanks. That's all I have.

Tyler Hojo, please state your affiliation followed by your question.

Yes, good morning. Sidoti. I wanted to ask you about your Thailand facility. It sounds like your -- from what you said, your facilities weren't impacted. But maybe there was some volume increase just because of the surrounding areas. Is that accurate? Or maybe just a clarification.

I don't -- I think our biggest problem going forward is the fact that some of our employees in our plant -- the employees in our plant have been affected by the flood in their homes. So, they've taken some time off to take care of their families, et cetera.

As far as our plant is concerned, we've had no effect at all in the airport, which was important to us because our products get flown into the airport for repair and overhaul -- has not been affected, either. So, we're more worried about our employees and their families than anything else. And so far it has not hampered production there.

Okay. Understood. And maybe, just as a follow-on to that, maybe you can talk a little bit about how the growth prospects of that particular business within after-market services is looking. I mean, is there more room for growth there?

In Asia?

Yes, that's correct.

In Bangkok; well, if you talk to the manager of Asia, his answer is absolutely yes. As a result, we're reviewing right now some expansion in Asia, but we're not ready to announce that. We'll talk a little bit about it probably later this week, but we do see some growth there. We've built that plant there to participate in the MRO business in Asia, and I think that we've gotten to a point that things are very good there. We expect that it could be better.

Okay, great. Then, maybe if you could just comment how the Mexican start-up has been tracking this year?

I think it's been tracking very well. We have a Board meeting later this month, which we've prepared a lot of information for. We've done a lot of comparison of the hours of product that have been produced in Mexico. That product gets shipped back to the United States and has either been shipped by our companies in the US that are utilizing the Mexican production facility or product has been assembled and further produced and put into inventory. But so far it's been very successful.

We're going to get very quickly to the point where the input and the capital costs are going to cease in Mexico and we'll be able to take even more advantage of the hour differential and the cost differential per hour that will be shipped by our US companies. So, I would say at this point in time, it's been very successful. It's projected to be a lot more successful but it takes time.

Okay. Great. Is that facility profitable yet or break-even?

The facility itself is not profitable. When you factor in the benefit to the other companies it's probably still in a small loss, but it's tracking reasonably close to what it was budgeted to do this year. And I think we're approaching the point at which the benefit would be equal to the cost. Then, once you get more volume in there, then it obviously turns very positive. So, probably a little behind schedule on that but still very bullish on it.

The original plan -- the original plan was for a lot of the profitability to take place in the US companies that are taking advantage of the low-cost labor in Mexico. That's exactly what's happened, and it'll progress as time goes by both in the Mexican costs and Mexican P&L, and in our profitability in the US.

Okay. Great. Thanks for that color. Then, just lastly for me, I was hoping that you could maybe just comment on what your acquisition appetite is. This is the first I think deal that you've announced since Vought.

Well our acquisition appetite is -- I think, still remains in tact. We have been very conservative and we are going to remain that way. We're not going to do any bet the farm type of acquisitions but we are looking at a lot. We're not necessarily prepared to pay 15 -- 14, 15 times EBITDA like some other companies are. That's not our style. As a result, we've finished second or worse on a lot of bids. But that doesn't mean we're out of the acquisition business. We'll, in fact, continue to look and continue to strategically advance in products that we want to be in.

Do you think that we'll see more deals on the after-market side of the business?

We're not -- we don't really not going to -- we're looking in all different areas. One of the issues with some of the after-market business is the fact that a lot of those companies don't have much in the way of assets, and therefore we're paying for more good will than some of our manufacturing companies that we acquire. So, that's one consideration. But we're not discriminating on what we're looking for. We'd like to be more in some of the after-market. But I can't predict because we don't have any more on the docket in that area, but we're looking.

Okay. Great. Thanks a lot.

David Strauss, please state your affiliation followed by your question.

UBS. Dave, follow up, did you break out legacy Aerostructures, revenue growth and margins?

No.

You're not going to do that anymore?

No. I think the one metric we're going to continue to do is backlog because we believe that the pace of orders in the Heritage side is truly reflective of our business, whereas the order flow and the backlog with Vought is a little more chunky. But, I think we, obviously, Aerostructures is very Vought dominated. But I think we'd prefer to start talking Aerostructures, not the 2 different mini segments there, or mini divisions.

Okay. Maybe, could you provide a little color on Vought -- I mean are Vought margins at this point approaching the corporate average?

Sure, yes.

They are? Okay.

Yes.

Then, legal for the year, I think you've been guiding to $5 million and you are at $1 million -- a little over $1 million I think halfway through the year?

Yes. We expect -- what we've forecasted is $2.4 million in the back half of the year is in our guidance. Okay. Great. Thanks.

Are there any additional questions? Since there are no further questions this concludes the Triumph Group fiscal 2012 second-quarter earnings conference call. This call will be available for replay after 11.30 a.m. today through November 8, 2011 at 11.59 pm. You may access the replay system by dialing 888-266-2081 and entering access code 1554799. International participants may dial 703-925-2533. Thank you all for participating and have a nice day. All parties may now disconnect.