Triumph Group Inc (TGI) 2013 Q1 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2013 first quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. You are currently in a listen-only mode. There will also 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 the website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group, Inc. and it may not be recorded, transcribed, or rebroadcast without explicit written approval.

At this time, I would like to introduce, Jeffry Frisby, the company's president and Chief Executive Officer, and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group, Inc. Go ahead, Mr. Frisby.

Thank you. I would like to welcome you all to the first quarter fiscal 2013 earnings conference call. My name is Jeff Frisby and I was named CEO of Triumph Group on July 19. For those of you who are not aware, I have been in aerospace my entire life, and have been with Triumph for the past 14 years. The most recent three years of that time was I held the position of President and Chief Operating Officer. I've had the pleasure of meeting many of you already, and I look forward to getting you all better as time goes on.

At this point I would like to review our first quarter operations.

I want to start out on slide number three and just point out that we had a very strong quarter. We had significant operating income growth and year over year operating margin expansion. We note here that this is particularly true in Aerostructures and Aftermarket Services, although Aerospace Systems' margin would have also increased if it were not for the higher legal expenses that we'll go over a little bit later. We had record EBITDA and record cash flow generation. The all-important integration of Vought continues to progress well, and we are still on track to deliver the $50 million a year run rate synergies by June 2013. Currently, we feel that we're just about the rate of about $3 million per month in synergies, so we are on track to deliver the full synergy value within the next 12 months.

We are continuing to proactively and effectively manage our pension obligations. Dave will cover this more extensively in his comments. Our balance sheet has strengthened over the first quarter. We have reduced our debt by $60 million and significantly, we have amended our revolving credit agreement to increase the size of our revolver to $1 billion and extend the term, as well. And in a significant event on the legal front, the criminal case against the former Eaton engineers has been dismissed in its entirety with prejudice by the government. And so the engineers are now in fact back to work and that's good news.

Okay. Well, that sums up my initial review comments. I'd like to ask Dave to add his remarks.

Thank you, Jeff, and good morning everyone. I'd like to start with a review of the financial results for our first quarter.

Turning to the income statement, sales for the first quarter were $887.7 million compared to $845.1 million for the prior period, a 5% increase. Operating income increased 34% to $140.9 million. Included in operating income was approximately $0.5 million of integration costs related to the Vought acquisition and a $1.2 million charge for early retirement incentives offered to certain Triumph Aerostructures employees. Income from continuing operations improved 50% to $76.3 million resulting in earnings per share from continuing operations of $1.46 per diluted share versus $0.99 per diluted share for the prior year quarter. Excluding the integration costs and the early retirement incentives, income from continuing operations was $77.4 million or $1.48 per diluted share. EBITDA, excluding the early retirement incentives for the quarter, increased 31% to a record $166.9 million, resulting in an EBITDA margin of 18.8%. The number of shares used in computing diluted earnings per share for the quarter was 52.3 million shares.

Looking now at our segment performance -- sales in the Aerostructures segment for the first quarter increased 4% to $669.9 million, all of which was organic. First quarter operating income increased 37% over the prior year quarter to $120.1 million and included a net unfavorable cumulative catch up adjustment of $1.3 million which is primarily related to C 17, offset by a favorable $7 million settlement of a termination claim. As we have previously pointed out, not all the synergies will contribute to favorable cumulative catch up adjustments. A sizeable portion will favorable impact the margins of our heritage companies, which are indeed higher year over year. The segment's operating margin for the quarter increased 18% as a result of improved execution, synergy realization, lower pension expense, and a favorable customer settlement. EBITDA for the quarter was $137 million at an EBITDA margin of 20.5%. With respect to SAP, we are continuing to see progress and improved performance in certain areas, but we are not where we need to be.

In our aerospace system segment, sales for the first quarter increased 6% to $140.5 million, all of which was organic. First quarter operating income increased 5% from the prior year to $23.5 million with an operating margin of 16.7%. The segment's operating results included $1.7 million of legal costs associated with the ongoing trade secret litigation with Eaton Corporation, an increase of $1.1 million from the prior year quarter. A key event in the quarter, as Jeff said, related to this ongoing litigation. As we have reported, the US Attorney's Office for the Southern District of Mississippi had indicted five engineers of our subsidiary Frisby Aerospace now known as Triumph Actuation Systems who were former employees of Eaton Aerospace, stating various charges based on allegations of trade secret theft from their former employer. On May 30, 2012, the United States District Court for the Southern District of Mississippi dismissed the indictments pending against the engineers in their entirety and with prejudice at the request of the government.

This brought a close to the criminal proceedings in Mississippi and, perhaps as significant, the engineers have returned to work. The previous reported civil actions remain pending -- specifically Eaton has appealed to the Mississippi Supreme Court the December 22, 2010 dismissal with prejudice of its civil case against Triumph Group, Inc., Frisby Aerospace, Jeff Frisby, and six engineers who are former employees of Eaten, including the five already mentioned whose indictments were dismissed. The civil action and counterclaims by Triumph and its subsidiaries against Eaton remain pending in the Circuit Court of the First Judicial District of Hinds County Mississippi, the United States District Court for the First District of Mississippi, and the United States District Court for the Middle District of North Carolina. Although we do not comment on pending litigation, and will decline to answer questions addressing its details, the dismissal of the criminal case against the engineers, like the dismissal of Eaton's claims a year and a half ago, was clearly a significant decision for our company as well as for the engineer defendants. To anyone who wants to know more, we commend you to the public record, which now contains many of the pleadings of the parties, and the opinions and orders of the court. We prefer to let those documents speak for themselves, especially Judge Yerger's opinion dismissing Eaton's claims in December 2010.

Continuing with our segment review, our Aftermarket Services segment continued to show strong growth in the first quarter, reporting sales of $80 million, an increase of 14% over last year. Organic sales growth for the quarter was 9%. First quarter operating income increased 70% of the prior year to $11.8 million, with a record operating margin of 14.8%. EBITDA for the quarter was $14.1 million and an EBITDA margin of 17.7%.

The next slide is a pension OPEB analysis for Triumph Aerostructures for your reference. As you can see, the table summarizes the pension and OPEB P&L impact as well as the required cash contributions for fiscal 2013 and 2014. The fiscal 2014 amounts assume that all fiscal 2013 actuarial assumptions are met. We have estimated that the potential funding relief under the highway bill is approximately $50 million annually over the next few years. As the rules and calculations are finalized, we will continue to study this opportunity and evaluate whether we will take advantage of it, as we remain committed to get the pension funded as quickly as possible.

Turning now to backlog -- our backlog takes into consideration only those firm orders that we're going to deliver over the next 24 months, and primarily reflects future sales with our Aerostructures and Aerospace systems groups. The Aftermarket Services group does not have a substantial backlog. Our order backlog as of June 30 was $3.9 billion, a 3.7% increase year over year. Military represented approximately 28% of our total backlog. Our top ten programs listed on the next slide are ranked according to backlog. In first place is the Boeing 747program followed by the Gulfstream G450 and G550 programs. Third place is the Boeing 777 program followed by the Airbus A330 in fourth place. In fifth place is the Osprey combat helicopter, with C-17 freigher sixth place. Seventh is the Boeing 787 program and in eighth place is the 737 next generation. The C-130 is ninth and in tenth place is the 767. Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military, and space totaled 48% of our revenue and was broken down 72% commercial and 28% military.

Looking at our sales mix among end markets, the next slide shows that compared to Q1 of fiscal year 2012, commercial aerospace sales increased by 12% to $498 million, representing 56% of our total sales, whereas military decreased by 5% to $250 million, representing 28% of total sales. The military decline as a percentage is primarily attributable to commercial growth and to a lesser extent lower C-17 and UH-60 sales. Business jet sales increased 9% to $115 million and represented 13% of sales. Regional jets remained unchanged at 1% and non-aviation continued to account for 2% of our total sales.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter increased 5%from the prior year. Breaking that down by segment, all the Aerostructures and Aerospace System segment sales for the first quarter were organic. The Aftermarket Services segment same store sales for the quarter grew 9% to $76.8 million. Export sales for the first quarter increased 12% to $127.1 million.

Turning to the balance sheet in the next slide, we generated $127.2 million of cash flow from operations before we made $25.1 million of pension contributions to the Aerostructures defined benefit plan in the quarter. After these contributions, cash flow from operations was a record $102.1 million. We are very pleased with our cash flow for the quarter. There was modest inventory growth in the quarter. The material portion was attributable to investment in the Bombardier wing, a reduction in advances, an increase in certain non-recurring programs, and inventory to support increased rates. Our pension performance remained good during the quarter although a further reduction of discount rates resulted in a minor reduction in our funding percentage.

During the quarter, we initiated a few programs with respect to our defined benefit pension plans. Both of these programs have the goal of standardizing our plans to eliminate complexity and cost and also to reduce the amount and volatility of our pension obligations. Specifically, we offered an early retirement incentive to our union work force in Nashville. The result was approximately 50 people took the offer and this is what created the $1.2 million charge, mostly noncash, in the quarter. This charge is reflected on the face of the income statement. For segment reporting, you will see that we included this cost in Corporate. Long term, this reduces our pension obligation and removes some volatility in future years.

The second item was an offer to certain members of our salaried work force. That program is not yet concluded but we expect approximately 150 people will accept the offer and we will account for that program in the second quarter. We expect the charge for that program to be somewhere between $2.5 million and $4 million. However, there are certain variables that are not yet known, so this number is only an estimate. We may offer similar programs in the future and we will advise you as those are concluded.

CapEx in the quarter was $37.1 million, and included approximately $11 million to buy out some expensive operating leases in Aerostructures. We expect CapEx and investments in major programs for the year to be approximately $140 to $160 million.

Net debt at the ends of the quarter was $1.1 billion representing 36.4% of total capital. During the quarter, we upsized our revolver to $1 billion with a $50 million accordion feature and extended the maturity to five years.

The global effective tax rate for the quarter was 36.5% and reflected the fact that the R&D tax credit expired back in December of 2011 and has not yet been extended .In addition, the income tax expense for the quarter included approximately $2.2 million of additional tax, or $0.04 per diluted share, due to the recapture of domestic production deductions taken in earlier years. Associated with a refund claim, we expect to file in the second quarter. From a cash tax perspective, we expect minimal cash tax to be paid in fiscal 2013 prior to the refund claim, and we expect to be increasing to a low to mid teens cash tax rate in fiscal 2014.

With that, I'll turn it back over to Jeff. Jeff?

Thank you, Dave.

I'd like now to give you an overview and go over our fiscal 2013 outlook.

As you have heard and now seen, our backlog remains solid. We will continue our focus on driving the integration benefits, improving our execution and controlling our costs, as has been our practice. We feel that we're positioned to benefit from increasing OEM build rates and to capitalize on new opportunities -- and these new opportunities are not only in the commercial arena. There are opportunities, as well, in the military side of things. We want to at this point reaffirm our fiscal year 2013 revenue guidance of $3.5 billion to $3.7 billion, and we are raising our earnings guidance -- our earnings per share from continuing operations -- to approximately $5.65, excluding integration costs and early retirement incentives. This is based on our first quarter performance, the current market conditions, current production rates, and projections, weighted average shares of 52.5 million. Now, some of you have already written that a $0.20 raise is overly conservative. We respectively disagree. We believe it to show confidence in our ability to continue to operate at a high level, and we believe it's appropriate , given the fact that we're early in our fiscal year and we're still facing significant uncertainty in our defense marketplace.

With that, I'd like to open the line for questions.

At this time the officers of the company would like the open the forum to any questions that you may have. (Operator Instructions). Our first question comes from Julie Yates. Please state your affiliation followed by your question.

Credit Suisse. Good morning. Nice quarter, guys -- and Jeff, congratulations on the appointment.

Thank you.

Jeff, you mentioned opportunities on the military side when you were talking about the FY 2013 outlook. Can you elaborate on what some of these are and what's driving any incremental opportunities in military?

Well, the military market is one that is certainly full of -- as I mentioned, full of uncertainty. And what that is driving is a lot of change within our military customers. A lot of those customers are looking for ways to reduce their costs. And some of those things include deciding actually to put outside things that they currently are doing inside. And so we are seeing opportunities for I guess I don't know if you would call it insourcing or outsourcing from some of our military customers as a way to reduce their fixed costs. So that's one of the ways that we're seeing the opportunity.

Okay. And is that on the Aerostructures side or systems?

It's primarily on Aerostructures. If you think about what's involved in an aircraft, the biggest volume of, you know, weight and everything else, I mean a structure is the biggest piece of an aircraft. We are also seeing opportunities on the Systems side as well.

Okay. Great. Thank you.

Our next question comes from Rama Bondada. Please state your affiliation followed by your question. Please state your affiliation followed by your question.

The Royal Bank of Canada. Starting with your aftermarket segment, we heard from a lot of your aerospace peers in the last week about a decline in the aftermarket and (MRL) work for airlines getting pushed, right? Can you give us some color on what you're seeing this segment and what visibility you have here?

Rama, our visibility is usually orders of house. So again as we always say, we don't have a substantial backlog. But we did have a couple key wins and I think our guys are capturing some share out there. I continue as we see more and more people say their business is softening, I continue to check in with our guys, and they're not indicating that they see their business having the same trajectory. So right now, we seem -- our guys seem to be doing a good job, finding the niches, finding the opportunities. You combine that with a couple nice big wins that we talked about last quarter, and, I think our guys are feeling pretty good.

I think that Dave's point is correct. We do have -- we have had a couple wins that we talked about previously. And our very model of operating, with the autonomy at the local level, allows our companies to take advantage of quickly moving around in the marketplace and seeking out those opportunities and taking advantage of them. So I think we're seeing a lot of that, as well. And I think the quarter's evidence of that. And I believe that you're going to see continued strong performance in that segment.

And switching gears, I think it was last November when you guys guided to $18.5 million in integration costs for second half of 2012 and all of FY 2013. By my calculation, it's currently $5.2 million at this period. Is $18.5 million still the target for integration costs? And should the early retirement charge count towards this $18.5 million?

Rama, I'm a little confused -- the target is to get a $50 million run rate, a little more than $4 million a month, year from now.

Right. This is on the integration costs not the synergies.

The integration costs, yes. No, this pension would not be part of that. This has its own pay back and this is not the result of, you know, moving manufacturing or some of the corporate elimination type costs. I'm sorry.

And is that $18.5 million still the target for the costs?

Yes. Yes.

Great. Thanks a lot. Appreciate it.

Our next question comes from Noah Poponak. Please state your affiliation followed by your question.

Hi. Goldman Sachs. Good morning, everybody.

Good morning.

Good morning.

I was wondering if you could talk about cash flow a little bit. The numbers look pretty good pre-pension. Just what the drivers of better cash flow are there in the quarter, and if you can comment at all on what you expect for the full year.

Yes. The big moving pieces are consistent. The only -- in the quarter what you'll see when you get the 10-Q which will be filed pretty soon is we did have a source, a pretty large source of cash from receivables, given the strong sales in Q4, and we had some inventory growth. It's our plan that you'll see we'll lose some of that receivable tailwind, but we'll also see some reduction in the inventory growth. So my view is both of those should be of small usage of cash for the year. You then have a pension and OPEB which combined are significant, and that's on the slide. So that's the major outflow. And then you have the CapEx and investment in the Bombardier program probably outstripping D&A by about $30 million or $40 million for the year.

And then the one good favorable item is that we're not going to pay any tax. And if we actually get that refund we're going to file for this quarter we might even be positive on cash taxes. So I think we're sticking with for now, that we should have true debt reduction capability of about $200 million during the year, assuming we -- there's no acquisitions and hopefully that's not the case. But that would be the numbers.

Okay. Very helpful.

And then if I move over to the P&L, the segment margins, even when I make the adjustments, are very good. It looks like to get to your new earnings guidance, they have to be somewhat significantly lower through the rest of the year relative to what you just put up in the first quarter. Can you maybe speak to on a segment by segment basis which ones are the least or the most sustainable and why?

I think they're all sustainable. I mean I think that one -- one item is I don't believe we'll have a repeat of the $7 million customer settlement. We have other claims in, but they usually have a life of their own as to when they're resolved. This was a 747-4. So to put that in perspective, this wasn't Dash 8. So we don't predict those nor do we include those in our guidance. So I think Aerostructures will continue to do well, but obviously where we think we're going to lose that.

Aerospace systems continues to trend, and Q4 and Q1 seem to be the highest with regard to aftermarket sales in that segment, in the aerospace systems. So I think you're going to see our margin year on year for 12 months go north. But you -- the last couple years we have seen volatility quarter to quarter even by $3 million, $4 million, $5 million of aftermarket sales bouncing around. And, you know, I think in the aftermarket group, you know, we're bullish. We think our margins are sustainable in the double digits now. But one quarter at 14.8%, I'm not sure we're prepared to sign up for that quite yet. So we may be a little bit of -- not concern but a little conservatism there.

Got it. Okay. Thank you.

Thank you.

Our next question comes from Peter Arment. Please state your affiliation followed by your question.

Yes, Sterne Agee. Good morning Jeff and Dave.

Good morning.

Jeff you've done a lot of changes within the Triumph now that they -- you bought Vought, particularly how it's been organized and pursuing new business. Can you give us -- how are things going there in terms of on the commercial opportunities? I know you mentioned on the military front.

Well, you know, that when you take an operation like the Triumph Aerostructures division and one that had the culture that it had or I even could say a multiple cultures coming from Northrop and Grumman, and Vought, that it takes a while to get the ship turned. And I'd say that we have made significant progress in turning that ship.

From the business development standpoint, we are seeing a lot more opportunities across the board not only on the military side but on the commercial as well. One of the contracts that we have, in fact, won there that probably before the acquisition would not even have been considered was the win that we made -- we had with Bell that Bell talked about on their 525 Relentless program. It's not a -- it's not really a huge win, but it was a good win and that it's a contract that we're able to execute and we feel like it can then allow us to build on that, build on that relationship. But that's one example of where the heritage Vought divisions have, in fact, become more Triumph-like and have gone out and won contracts it probably wouldn't have bid before.

And the opportunity with Airbus setting up a plant in Alabama, how are you viewing that?

Well, we've had some discussions with Airbus on that. And you got to remember that while they probably -- we think there are going to be some opportunities there. It certainly can't hurt us to have Airbus have a US presence. But they're talking about a maximum rate of four aircraft a month, more or less, coming out of Mobile. And when -- if they get to that rate, it's really not enough quantity for them to really change very much in their supply chain. I think if, in fact, they start small and grow larger so that they're making a significant percentage of their aircraft production, then we would have significant opportunity there. I think we have -- I think we probably have incremental opportunity.

Okay. And, Dave, just a follow-up on the aftermarket question -- you get a lot of that, you do have some aftermarket spares volumes within Aerospace Systems. Are you seeing the same consistent organic growth that you saw in the Aftermarket Services? Just a little color on that.

Yes. Approximately the same

So there's really no change, you're not -- so the difference is out there in the marketplace you guys continue to take share, that seems to be the difference?

Yes. I mean I think we're executing well. It's amazing how much business you get when you're executing well.

Okay. Nice quarter. Thanks.

Thank you.

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

Deutsche Bank. Good morning, guys. Just a follow-up to keep the chain of thought going on the aftermarket within Aerospace Systems -- it looks like it was up 18% maybe year on year if I have the amounts right and it also looks like the next two quarters you have pretty easy comps. So to just tie the last couple on aftermarket within Aerospace Systems segment -- is that the case that you have relatively easy comps for the next couple quarters there? If that's the case, why wouldn't margins actually sequentially improve?

Well, I think what we've seen, Myles, is that you say they're easier comps because they're lower. What we've indicated the last couple quarters is that a couple of our larger customers tend to order in the fourth and first quarters so that our sales are clearly not proportionate during the year. So if they change those patterns, I would agree where we pick up more share, I would agree that they should be easy comparables. But so far, things are playing out as they have historically been that Q4 strong, Q1 strong, I guess we're bracing or expecting that Q2, Q3 will moderate a little, leading to a strong fourth quarter. So at this point, I don't think we're prepared to dismiss historical patterns. So I guess I would -- I hope you're right, but that's not what we are expecting.

Okay. And then a sequential or seasonal question. Last year you had the issues with the 747 deliveries and nonrecurring at head winds in the middle of the year. This year, I presume there's not. So any reason to not think we -- or any reason why I shouldn't think we have accelerating organic growth the next couple quarters off of those compares?

Sounds reasonable, yep. I think you're right on that.

Okay. And then believe it or not, three clarifications. One is the CapEx pre-production, I think it went up $10 million versus what you were thinking before. Is that just the buyout of the leases?

Correct.

Okay. The next one was the Pension Relief Act that you mentioned, $15 million annual lower potential contributions, is that starting this fiscal year or next fiscal year?

I think because of our fiscal year, we could actually get it this year. But that remains to be seen. I mean there's a lot that's tied to rules that, you know, the Congress punted on either in the DOL or IRS. And there was a lot of math that goes on here, I'm probably answering more than you want to know. But for instance we want to stay above certain funding percentages to allow for lump sums because that's obviously a good thing for us and sometimes a good thing for our employees. So we have to monitor what discount rates are doing, how our investments are doing, do we take advantage of relief -- we don't want to go below funding percentages. And frankly, my going in position is I'm not sure we're going to take advantage of it even if we could. We have got to get the pension behind us. The cash flow's here now. Let's get it fully funded. That leads to opportunities to get rid of the pension obligation. So right now, my instinct is plow ahead, get it behind us and move on.

Okay. Sounds good. And then the last clarification was on legal costs. With the criminal now behind you, the higher run rate of expenses in the quarter, is $5 million still the right number for the full year?

In our guidance it's $5.3 million, so we're still budgeting at $1.2 million a quarter and then $1.7 million. It's nice to have the criminal behind us but the war rages on.

Okay. Thanks again.

Yes.

Our next question comes from David Strauss. Please state your affiliation followed by your question.

UBS, good morning.

Good morning.

Good morning.

Can you guys talk about what you're assuming, what's baked into your revenue guidance for defense business the rest of the year? You've obviously been down a fair amount of the last couple quarters in defense.

I think, you know, I think we're planning to see year on year declines of a small amount like we saw this quarter. Some of that relates to the defense budget, the potential looming sequestration. Others we've talked about before, that some of the H 60 cabins that we had at Aerostructures, Sikorsky moved those to Poland. And we knew that when we bought Vought that that was a possibility. So it's as much sort of those little market share issues as the macro environment. But I think it's going to be down, single digits is what I would expect.

Okay.

We have some of these wins. That's not our goal, but that's the current reality, I think.

And, Dave, the charge that you highlighted you'll be taking, I know you arranged the charge in Q2. Is that baked into the guidance?

No.

It's not in the guidance, okay.

No.

And cash taxes, I think Dave you said you're expecting mid-teens kind of tax rate in 2014 -- is that a change I thought you weren't going to be a cash tax payer until 2015.

Because of the carry back, that changes it a little bit. That's right.

Okay.

That's why we keep updating in each quarter. It's kind of fluid.

Okay. And last one, you guys obviously have this fiscal 2015 guidance out there, a number you put out in your investor conference for $6.50. Is that still valid in light of the upside that we just saw?

Well, I think what we can -- what we can say is that we gave that guidance at a time where we thought that was the best that we could, in fact, do. I think if we were to restate that guidance today, which we are not going to, that we would still be pretty comfortable on the revenue side but that I think weigh probably would be a little bit more bullish on the earnings per share. We'll be taking a look at that as we go forward and seeing if later on in the year when some of this uncertainty around the election potentially, if this uncertainty around sequestration ever stops, then I think we would be in a better position to give you an update on that and potentially even go out another year.

Great. Thanks, Jeff.

Sure.

Our next question comes from Yair Rainer. Please state your affiliation followed by your question.

Thank you. Oppenheimer & Co. Just to stay on defense, you cited the uncertainty there as the reason for taking what still looks like a conservative approach to guidance. Can you maybe unwrap that for us a little bit? It would seem as though as far as 2013 goes, I mean your fiscal 2013, you and your customers probably have all the orders signed and funded at this point. I can see where there might be some risk around 2014, but what do you think the real risks are in terms of the next nine months ahead?

We're seeing already -- it's funny because sequestration hasn't really started yet because it's not really supposed to be enacted until January. But already folks in the industry have stopped hiring, have stopped investing, have done any number of things in anticipation of who knows what. And so we have, in fact, seen some of our customers' ordering patterns disrupted, them taking a closer look on what they have in inventory, versus what they think they may need. There is actually still a reasonable amount of uncertainty, probably more in the next fiscal year than there is in this one. But there's enough uncertainty in the fiscal 2013 to give us pause and get our attention.

Keep in mind there's also an aftermarket that we do with the -- sometimes direct to the government, sometimes to our OEM customers both in our Aerospace Systems group and in Aftermarket. And I think those could be more at risk according to the timeline. As you rightly stated, we do have long lead items on new builds. But clearly, the aftermarket opportunities we've seen before, even in a non-sequestration world, where funding just gets delayed and we get shut down. So I think there are risks that could play in to hit us this fiscal year.

the funding cycle, as you know, for the defense budget ends on September 30. And typically, that is a relatively volatile time. And I would think in this particular budget situation that it's going to be -- there will be the question whether, in fact, we're going to have a budget that they can actually operate from or whether it's continuing -- whether they can only operate under their last fiscal year funding terms. So we're going to know more in the next six months or so.

That's really helpful. Can you give us a sense of how much of your aerosystems business and aftermarket goes to defense?

Those are -- I believe in aerospace systems it's in the 40s or 50s. That's in our standard IR presentation. And I believe in aftermarket, it's 17%. Although this quarter was slightly higher. We had very significant APU inputs on C-17. But those are typically the numbers.

Thank you. And just one more quick one. What was the inventory increase attributable to the Global Express this quarter?

You're talking about the Global 7000/8000?

Yes.

About $9 million.

Thank you.

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

Stifel Nicolaus. Good morning Jeff and Dave. Nice job.

Thank you.

Thank you.

Boeing and Airbus have both talked about wanting to see more consolidation among the smaller contractors in the supply chain. And you haven't been quite as active in M&A since the Vought transaction as you were before. Are there any holes you're looking to fill especially now that the debt has been reduced quite a bit?

Well, we have, in fact, we want to participate in this acquisition market. And we intend to. The pipeline is, in fact fairly full and we are looking for opportunities that fit us fairly well. What we are doing, though, is making sure that we remain disciplined in our acquisition strategy. The multiples that we're seeing being paid in the commercial world are -- tend to be a lot higher than we're comfortable paying. But that doesn't mean that there's not going to be the opportunity for us.

On the military side, we're not -- we're not against making military acquisitions as well as long as they're at the right price. But many of those military companies that are on the market are attempting to sell based on 2009 earnings or something of that nature and we're preparing to or we're able or willing to buy, in the face of sequestration, a reasonable multiple. So basically the twain haven't met yet. It doesn't mean that they won't. And so we are still anticipating making acquisitions in this fiscal year, not particularly because Boeing and Airbus think it's a great idea but because it's what we have done over the last 15 years and what we intend to continue to do.

Okay. Thanks. And you were talking about the Bell 525 before. So would you consider -- I know there's nothing backlogged yet. I guess they don't have any orders yet. But would you consider that sort of an average size ship set value or above or below?

Yes. I think it's actually fairly small. It's one of the reasons we -- you know, Bell announced that one. We did not put out a press release on that. But it just did show that we are, in fact, competitive in that commercial helicopter market which I think is a good sign. We haven't won a structures contract from Bell in a while, so we were pretty happy about what we won. But it was a small win.

Okay. Thanks. And last one, anything new on the tanker? That's one military project that seems like it's going to go ahead at least at some level pretty much regardless.

the tanker is continuing to progress as it was planned. There's still some design activity, some modification activity that's going on. So we're participating as we thought we would.

Great. Thank you very much.

Sure. Thank you.

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

Imperial Capital. Good morning David and Jeff and Sheila.

Good morning.

Just a quick question more for Jeff. It sounds like you're still obviously very committed to pension from a cash standpoint even with the potential of opportunity from the Highway Bill, obviously debt reduction sounds like it's a priority but now acquisitions sound like they're much more back in the mix. Can you just talk about or just kind of restate or refresh your priorities now from a cash standpoint in terms of utilization for this year heading into the second half of the year?

Yes. Ken, did you want Jeff to answer that?

Either one. But I'd be specifically interested in some comments from Jeff on this as well in terms of his priorities.

All right. Well, we have very strong cash flow which we're happy about. When we came out and gave our debt reduction projections -- it was meant even though we certainly want to delever and have done so -- it was done to state our confidence in our ability to generate free cash in addition to the pension obligations that we have. So I think if we wanted to take a look at what we wanted to do with that cash, I think our first priority would always be to continue our debt reduction because that allows us a great deal of flexibility. We also want to make sure that we take care of the pension obligations that we have because that particular liability is one that is -- probably the only one that can change overnight and can -- it's one that we'd really like to get behind us in our entirety.

But in terms of acquisitions, I don't think it's ever been the case that we haven't been willing to make an acquisition should the right one come along at the right price. And that's really where we still are now. We want to continue to grow our company internally and externally as we always have. And we're not going to say now that acquisition is such a priority that we're willing to pay a higher multiple at the expense of the other priorities that we have. So I'd like -- I guess I'd say that debt reduction is number 1. Pension issues are number 2, but that acquisitions are always in there. They're kind of the -- you know, when the wild card shows up, we want to be able to play it.

Okay. No, that's very helpful. Thank you.

And if I could, just on the quarter, even with the -- even with the charge within the Aerostructures segment, obviously, very good margin performance on top line growth, so to speak. Can you talk about, then, within the segment for the rest of the year specifically? I know, Dave, you mentioned you're comfortable with these levels from a margin standpoint. Is there anything in particular where we could see upside as volumes pick up or any inflection points on this segment more from a volume standpoint that we should be watching out for?

Yes. I think as we get into that sweet spot of the next move up by our customers, so we have a number of them coming this year where we'll start the ramp up on 777, we'll start the ramp on 737 to 738, A330 we're going to get some tailwind. So I mean I think that, you know, I would hope that there's margin -- we're still maintaining a couple hundred basis points of margin upside on all our businesses, and I think over the next year, you're going to have some nice tailwind from volume, tailwind from synergies. And the biggest one of all is good execution, which I think we've done, overall, a pretty good job. We still have a number of companies that are way below average in the numbers you're seeing. So if they can participate, and we have plans to do that, those are awfully impactful. So I think we've got the right mixture, and I think military will be a modest headwind but I hope we can minimize that.

Great. Thank you very much and great quarter.

Thank you.

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

KeyBanc. Good morning, guys. Nice quarter.

Good morning.

Thank you.

Dave, maybe on the revenue guidance for the year, what are the puts and takes from the high end to the low end of the range?

I think the high end is, you know, 787 -- I listened to the call Wednesday. Boeing was very bullish about 787 going to 5 and then tracking towards 10. So I think if that happens, you're going to see, A, 787 move up in the backlog. It's at an all-time high now. And I think those sales could help us get closer to the high end. You know, and we talked about that we see some deferrals possibly on some of the programs because of how many ship sets we've shipped. So if that doesn't materialize, those are the things that would modestly tweak us from somewhere in the middle between the two numbers to the higher end.

Okay. Perfect. And how important is it for you guys for Boeing to get some more orders on the 747-8? I mean how should we think about that program going forward for you guys?

Well, you know, Boeing is still very bullish on that program and I think that more orders are better than fewer orders.

We've got a substantial multiyear backlog here. But obviously, we'd love to see more orders just as they would. But, you know, I don't -- we have not heard that because they haven't gotten orders that anything changes even in the medium term, let alone in the short term.

Okay.

So I think we're covered for quite a while there.

Okay. Perfect. Then last one here, just on the -- talking about these margins again, can you sort of quantify or help us understand? You just said you've got some companies performing below average. What sort of a head wind you're encountering right now from SAP if you can maybe help us understand how that could impact the margins going forward as well?

Well, I think it's not a huge number. But, you know, it's -- I don't want to put a number on it, Mike. I think there's going to be two -- there's going to be two movements on SAP. One will be it no longer being a cost relative to where we were before we went live. And that will be a minor help to margins. And then I think that when we start to get the savings, which is a combination of cash flow and some head count, I think then it could be impactful. But as we said, we're reluctant and we're not going to put that number out there at this point. So it doesn't change the game, but it's one of many things that could be a positive.

Okay. Fair enough. If I could just speak one more. Jeff, you said you're more bullish on the fiscal 2015, $6.50 target. Does that number hinge, or bullishness hinge, upon the outcome of the C-17 at all?

There are quite a lot of moving pieces in there. And certainly C-17 will be a factor, as would a lot of other program decisions that are going to be made in the next six to nine months.

Okay. Great. Thanks, guys.

Thank you.

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

DA Davidson. Thanks for taking my call, guys. I just had a question on -- there's a little bit of movement in the top ten programs, you had a couple Boeing programs drop, and the A330 take a few steps up. How should we interpret that? Is that just timing of orders or how should we look at that?

Well, I think proportionally, A330 has gone up more than the others.

Right.

Obviously, we're not going to get into ship set values but it is a dollars chart, so it's a pretty good work statement. I think if I were to predict the future here, you'd be looking at 787 climbing the ranks slowly but surely to a top three program. A330 probably staying where it is. And I think 767 will change its name. But I think those are the programs that will probably stay for a while. But I think the big movers will be 787 and obviously depends what happens on C-17. And, you know, the ones that are in 11th and 12th, 13th place are things like the H-60, the Chinook that I know we're anxious to get back in the top ten. So we'll see about that.

They will pop in and out. And then on the max, is there any -- is there any incremental risk or opportunity there with relative to what you currently do on the NGs or is it just going to get the same?

Well, I think that on balance, we probably have more opportunity than risk I'd say. It's -- you'll note that even at the high volume levels, that the NG is being built, the -- it's still number 8 on our list. So I think that anytime that there's a change to an aircraft, and opportunities show up, and there are some changes that are happening here. I like our chances in terms of picking work statement up. I don't think a lot of what we have is at risk of being lost. But there's -- in balance, I think we got more upside than downside.

Great. Thank you.

Our next question is a follow-up from Noah Poponak. Please state your affiliation followed by your question.

Yes. Goldman Sachs. I was kind of wondering about the move onthe G4, G5. It looks like those -- that went up ahead of 777. And we all know 777's ramping. But it sounded like on the GD call large cabin orders slowed a little bit. They were talking elongated buyer contract cycles. They just sounded a little more tepid on G4/G5. So I am kind of wondering just what the mechanics were of that change and just how you're feeling about growth in that program.

What we could tell is you what our customer says, and that's a very solid program. And all I could tell you is the discussions our guys are having on those programs is can we get another one in this year, can you get two more wings in this year. And it doesn't sound like they're trying to burn down the backlog.

Okay.

What we're seeing seems to imply a little bit of strength, not weakness. And I interpreted -- I didn't listen to the call. I read a lot of analysis. So you're probably ahead of me on that. So I thought the longer sales cycle was more of a comment on G650. But was it specific to all the programs?

Yes. I guess I thought it was. You know, we've had so many of these I got to go back and look. But the order activity has kind of slowed for all of Gulfstream. If you strip out G650, book to bill is still below 1, so it does seem G4/G5 has maybe slowed a little bit but it's only been a couple quarters so just trying to check on that.

Yes. It's one we check -- and again, the tone from the customer seems to be in the near term more bullish, not less bullish.

Okay. And just one other follow-up on the acquisition discussion. Is there a kind of size range that you're looking at that we should all be thinking about?

I think that we would -- if things were perfect, we'd like to go back to the old Triumph acquisition a little larger. So something with revenue, $60 million to $100 million, maybe a little more. Preference would be more in the aerospace system side. If it was aerostructures, I think we would want to bring certain customer concentrations. But I think we'd rather do a couple of those a year. It's not like we're only out looking for the next multibillion dollars deal. So I think we would like to get back to our typical deal. There's good flow there. That doesn't mean we won't look at a bigger deal but if you said what would you -- if you could target the perfect one, that's what it would be.

Got it. Okay. Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2013 first quarter earnings conference call. This call will be available for replay after 11.30 AM today through August 3, 2012, at 11.59 PM. You may access the replay by dialing 888-266-2081 and entering access code 1584666. Thank you all for your participating and have a nice day. All parties may now disconnect.