Triumph Group Inc (TGI) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Triumph Group conference call to discuss our fiscal year 2013 fourth-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 be a question-and-answer session following the introductory comments by management.

On behalf of the Company, I would now like to read the following statement.

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

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com.

In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I would like to introduce 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 and good morning, everyone.

I want to add my welcome to Triumph Group's Fiscal Year 2013 Fourth Quarter and Year-End call, and I'll also remind you that there is a slide presentation that you can follow that accompanies the audio portion of this call.

We'll go ahead and jump right into the slide deck and talk about Q4 and fiscal year 2013 and review. Dave will provide a lot more detail, but at a high level, we had a very successful quarter and fiscal year. We reported record revenue and earnings for the quarter and the fiscal year. We reported year-over-year operating margin expansion across all three of the business segments for the year. Our integration of Aerostructures continues to progress well and we are still on plan to deliver the synergy target of $50-million-per-year run rate by June of this year.

We had significant growth in Aerospace Systems revenue and operating margin, certainly helped by the new acquisitions that we made in that segment. We had record revenue growth and operating margin in Aftermarket Services. This was due to both share gain and improved operating performance. And the last bullet, but certainly a very important one, was our record cash flow generation. Dave will cover more in detail, but we continue to proactively and effectively manage our pension obligation, which we still believe is an important thing for us to do to manage the risk that is included in that.

The construction of the Red Oak facility is on budget and on time, and we'll continue to provide updates on this issue since it is an important part of our future plans.

And finally, we end up -- we have a strong balance sheet. This year, we issued new high-yield bonds at 4.875%, we extended our accounts receivable securitization program until 2016 and we reduced our debt by $181 million.

On the next slide, we successfully completed the acquisition of Triumph Processing Embee division and Triumph Engine Control Systems. These two companies provide us new capabilities and better balance within our business, as we discussed at our February Investor Day. They both also position us well for future growth. Additionally, we completed the sale of our non-core aftermarket services instruments companies in early April.

Dave will now provide some additional color on Q4 and FY13, after which I will return to discuss our future outlook. Dave?

Thank you, Jeff, and good morning, everyone.

Before I start with the numbers, you should have already noticed that we included in the press release a couple of tables which reconcile some of the special non-recurring items in the quarter and the fiscal year. While the actions we took this year will make us a better and stronger company in the future, they created significant expense, mostly non-cash and noise in the quarter and in the year. Our intention in adding the tables was to highlight and clarify the costs related to the Vought integration, curtailment, pension remeasurement, early retirement incentives and the Jefferson Street move, as well as the deal costs related to the acquisition of Triumph Engine Control Systems. All of these items we had previously highlighted as likely items in Q4.

Turning to the income statement, sales for the fourth quarter were $986.3 million, compared to $946.4 million for the prior-year period, an increase of 4%. Organic sales growth for the quarter was 2%. Operating income was $113 million versus $183 million for the fourth quarter of the prior fiscal year. Included in operating income for the quarter was approximately $36 million of one-time costs. The breakdown of these non-recurring costs is detailed on the next slide for your reference, as well as in the press release. Excluding these items, operating margin was 15.1% for the quarter. The prior year's quarter included approximately $2.6 million of integration expenses related to the Vought acquisition and a $40.4-million net curtailment gain. Excluding these items, operating margin was 15.4% for the prior year's fourth quarter.

Income from continuing operations was $65.6 million, resulting in earnings per share from continuing operations of $1.24 per diluted share versus $2.03 per diluted share for the prior-year quarter. Excluding the non-recurring costs for both periods, income from continuing operations was $88.8 million, or $1.68 per diluted share, versus $1.57 per diluted share for the prior year's quarter.

EBITDA, excluding curtailments and early retirement incentives totaling $29.3 million, was $169.8 million, resulting in a 17.2% adjusted EBITDA margin. The number of shares used in computing diluted earnings per share for the quarter increased to 52.7 million shares, primarily due to the dilutive effect of the Company's convertible notes.

Turning now to our full fiscal year results, sales for the fiscal year increased 9% to $3.703 billion, compared to $3.408 billion for the prior year. Operating income was $531.2 million versus $514.7 million for the prior fiscal year. Included in operating income for the fiscal year was $44.2 million of one-time costs. The breakdown of these non-recurring costs is detailed on the next slide for your reference, as well as in the press release.

Excluding these items, operating margin was 15.5% for the fiscal year. The prior fiscal year included approximately $6.3 million of integration expenses related to the Vought acquisition and the $40.4-million net curtailment gain. Excluding these items, operating margin was 14.1% for the prior fiscal year.

Income from continuing operations was $297.3 million, resulting in earnings per share from continuing operations of $5.67 per diluted share versus $5.43 per diluted share for the prior year.

Excluding the non-recurring costs for both periods, income from continuing operations was $325.9 million, or $6.21 per diluted share, versus $5.01 per diluted share for the prior fiscal year. EBITDA -- excluding curtailments, early retirement incentives totaling $34.5 million -- was $669.6 million, resulting in an 18.1% adjusted EBITDA margin. The number of shares used in computing diluted earnings per share for the fiscal year was 52.4 million shares.

Looking now at our segment performance, sales in the Aerostructures segment for the fourth quarter increased 1% to $720.7 million. Fourth-quarter operating income was $110.9 million and included a net unfavorable cumulative catch-up adjustment on long-term contracts of $10.2 million, primarily related to the 747-8 program. The segment's operating margin for the quarter was 15.4%. The segment's operating results and cumulative catch-up adjustment include non-recurring charges of $1.8 million for pension remeasurement and $1.4 million related to the Jefferson Street move, as well as $1 million for early retirement cash incentives. EBITDA for the quarter was $129 million and an EBITDA margin of 17.9%.

For the fiscal year, sales for the segment increased 8% to $2.781 billion versus $2.572 billion in the prior year. Operating income increased 16% over the prior year to $469.9 million with an operating margin of 16.9%. EBITDA for the fiscal year was $540.3 million and an EBITDA margin of 19.4%. With regard to SAP, we continue to make progress towards stabilization and productivity. However, we do not yet see a path to short-term financial returns.

In our Aerospace Systems segment, sales for the fourth quarter increased 21% to $184.1 million, of which $20.9 million were attributable to Embee and Triumph Engine Control Systems. Fourth-quarter operating income increased 27% over the prior year to $33.4 million, with an operating margin of 18.2%. EBITDA for the quarter was $39.5 million and an EBITDA margin of 21.4%.

For the fiscal year, sales for the segment increased 12% to $615.8 million versus $551.8 million in the prior year. Operating income increased 15% over the prior year to $103.2 million with an operating margin of 16.8%. EBITDA for the fiscal year was $122.9 million and an EBITDA margin of 20%.

The segment's operating results included $1.3 million of legal costs associated with the ongoing trade secret litigation for the quarter and $4.8 million for the fiscal year, as well as approximately $900,000 of costs associated with Hurricane Sandy for the quarter and $1.6 million for the fiscal year. As Jeff commented, both acquisitions are progressing well.

As in prior quarters, we thought we would offer a brief note on the status of the previously-disclosed trade secret litigation with Eaton. The dismissal of all of Eaton's claims against us remains on appeal before the Mississippi Supreme Court, and we continue to prosecute our counterclaims against Eaton before the State Trial Court in Mississippi. The State Trial Court has set trial on the counterclaims to begin on November 4, 2013, and discovery and pretrial practice are underway. Our antitrust claims also remain pending in North Carolina.

To anyone who wants to know more, we commend you to the documents filed in the public record and prefer to let those documents speak for themselves.

Our Aftermarket Services segment showed continued growth in the fourth quarter, reporting record sales of $83.9 million. Fourth-quarter operating income increased a strong 18% over the prior year to $13 million, with a record operating margin of 15.4%. EBITDA for the quarter was $15.2 million and an EBITDA margin of 18.1%.

For the fiscal year, sales for the segment increased 7% to $314.5 million versus $292.7 million in the prior year. Operating income increased 42% over the prior year to $45.4 million with an operating margin of 14.4%. EBITDA for the fiscal year was $54.5 million and an EBITDA margin of 17.3%. The segment's fourth-quarter operating results included a net loss on assets held for sale of $800,000, which was primarily attributable to the sale of our instruments companies, which we determined to be non-core. Our overall results are particularly good, taking into account the ramp-up of our large recent wins and the relocation of our Phoenix-based APU operation, which was executed in a seamless and professional manner.

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 cash contributions for fiscal years '13, '14 and '15. The fiscal '15 amounts assume that all fiscal '14 actuarial assumptions are met. You will see that we expect decent funding reductions in fiscal year '15.

As we have previously discussed, the rules for recognizing asset returns in excess of actuarial assumptions and the rules on actuarial losses due to discounts rate decreases are not in symmetry. As expected, our fiscal 2014 pension income is less than what we previously estimated. Under our accounting method for aerostructures, $1.8 million of this fiscal 2014 unfavorable item was booked in the quarter and highlighted as a non-recurring item.

With regard to our pension liability at March 31, 2013, our net underfunding was essentially unchanged since the beginning of the year which, in the face of discount rate reductions, is quite an accomplishment and one that we are proud of. Looking at the components, our gross liability has increased $148 million, which was almost entirely due to the drop in discount rates. On the asset side, the combination of large contribution and excellent asset returns allowed us to offset the increase in the liability.

Lastly, as we've previously mentioned, one of our major actions related to the Vought synergies is the upcoming closure of a portion of the Dallas facility, and that created a non-cash pension curtailment in the fourth quarter of $23.7 million. This was included on the corporate line on the face of the income segment and not in the operating income or EBITDA of our Aerostructures segment. The curtailment loss is related to the UAW early retirement windows offered to certain eligible employees and the pending closure of our fabrications operations at Jefferson Street. The loss was due to the realization of early retirement subsidies and the accelerated recognition of a portion of the unrecognized prior service costs.

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 within our Aerostructures and Aerospace Systems groups. The Aftermarket Services group does not have a substantial backlog. Our order backlog as of year-end was $4.53 billion, up 5% from the prior year. You will notice that our backlog is substantially higher than we what we had previously presented. During Q4, we detected an inadvertent error in how one portion of our 24-month backlog was being reported. We have estimated the similar impact at 3/31/12. Military represented approximately 27% of our total backlog. Our backlog would have been down slightly were it not for the acquisition of Triumph Engine Control Systems.

Our top ten programs listed on the next slide are ranked according to backlog. In first place was the Boeing 747, followed by the Gulfstream G450 and 550 in second place. In third place was the Boeing 777, followed by the 787. In fifth place was the Boeing 737 next-generation, with the Airbus A330 in sixth place. Seventh was the C-17 freighter, and in eighth place was the Osprey combat helicopter. The Boeing 767 tanker program was ninth, and in tenth place was the UH-60 Blackhawk helicopter.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military, and space totaled 49.4% of revenue and is broken down 73% commercial and 27% military.

Looking at our sales mix among end markets, the next slide shows that, compared to fiscal '12, commercial aerospace sales increased by 20% to $2.114 billion, representing 57% of our sales. Military sales of $1.027 billion decreased 6% year over year and represented 28% of total sales. Business jets increased 6% to $451 million and represented 12% of sales, while regional jets remained unchanged at 1%. Non-aviation accounted for 2%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter and the fiscal year. Total organic sales for the quarter increased 2% from the prior year to $967.7 million. Breaking that down by segment, all of the Aerostructures and Aftermarket Services segment sales for the fourth quarter were organic. The Serospace Systems segment same-store sales for the quarter grew 8%.

With respect to the fiscal year, total organic sales increased 8% over the prior year. Breaking that down by segment, all of the Aerostructures segment sales for the fiscal year were organic. Same-store sales for the fiscal year for Aerospace Systems was $593.6 million, compared to $551.8 million, an 8% increase. The aftermarket services same-store sales for the fiscal year grew 5%.

Export sales for the fourth quarter increased 12% to $137.2 million and for the year increased 9% to $504.1 million.

Turning to the balance sheet on the next slide, for the year we generated $453.2 million of cash flow from operations before Triumph's Aerostructures pension contributions of $109.8 million. After these contributions, cash flow from operations was $343 million. We are pleased with our cash flow for the year.

Inventory for the year increased $168 million, which approximately $52 million was attributable to the investment in the Bombardier Wing, $40 million attributable to reduced customer advances and $40 million to the fiscal '13 acquisitions. We remain focused on improving our inventory management.

CapEx in the quarter was $53.1 million and $142.8 million for the year, of which $24 million was for Bombardier and $18 million was attributable to the Jefferson Street relocation.

Net debt at the end of the year was $1.298 billion versus $1.129 billion at the end of the prior year, representing 38.8% of total capital. Excluding acquisitions, we reduced our debt by approximately $181 million. We remain on track to equal or exceed our debt reduction target of $700 million in fiscal years '14 through '16.

During the quarter, we issued new bonds at sub-5% rate and also extended our accounts receivable securitization program until 2016.

In Q1 of fiscal '14, we have seen some large puts of our convertible notes totaling $65 million, which we will finance via our revolving credit facility.

The global effective tax rate for the year for income from continuing operations was 35.8% and reflects 15 months of R&D tax credit. From a cash tax perspective, we expect to pay virtually no cash tax for fiscal '13. We expect minimal cash tax to be paid in '14 and expect to be increasing to mid-teen cash tax rate in fiscal '15.

As you saw in the press release, there are a lot of moving pieces for fiscal '14. In terms of financial guidance, a few specific comments. Our guidance for fiscal '16 that we presented at our Investor Day remains intact. Fiscal '14 bears a large expense associated with the Jefferson Street move and, as presented at Investor Day, turns slightly positive in '15, but in fiscal '16 produces substantial savings. The construction of the new facility of Red Oak, as Jeff said, is on budget and on time, and we expect to be in a position to exit the Jefferson Street facility in the first quarter of our fiscal '15. Fiscal '14 has a large hole in it associated with the 767's move from commercial to tanker freighter. This includes an almost 50% reduction in deliveries that will happen in Q2 through Q4. That reduction will not only create a loss of revenue and profit but will also impact our costs in factories where 767 have a substantial part of the work. The good news is that, with the freighter and tanker orders, we believe this to be largely an anomaly for '14 only. We are seeing the expected reduction in military programs. We have won new content on many of these programs, but in most cases, we will feel the pain of the drop before those new programs start up. Our interest expense is higher, reflecting the Q4 high-yield issuance. In terms of revenue, we have agreed to certain price concessions with our customers. It is our goal that we will be able to protect our margins even at lower sale prices.

Our guidance does reflect an estimate for the impact of the Boeing reduction in build rates to 1.75 per month on the 747. As of today, we do not know precisely when that will impact us.

Regarding the quarterly flow of earnings, we currently see the first and second half of fiscal '14 being fairly comparable, with quarters 2 and 4 being the strongest. This is, of course, our current view and subject to change as the year progresses. While we are not aware of how the analysts arrived at their estimates for fiscal '14, we expect that the reduction in 67, 47 and the pension change account for the great majority of the difference.

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

Thanks, Dave.

I'll spend a couple minutes now and talk about our fiscal 2014 outlook.

As Dave pointed out, our backlog remains strong. It's over $4.5 billion now. We will, in fact, remain focused on improving execution, driving integration and controlling costs, and I'll come back to that again in a minute. We will continue our strong cash flow generation as has been our practice. And our fiscal year 2014 guidance is revenue of $3.8 billion to $4.0 billion and earnings per share from continuing operations, excluding Jefferson Street relocation costs, of $6.30 to $6.40 per share. This guidance is based on a reduction in the 767 and 747-8. Now the 767 reduction that Dave described -- we covered this fiscal year '14 specific issue in February's Investor Day. And the 747-8 reduction includes the recently-announced rate reduction, although -- also, as Dave pointed out -- the cut-in point is not crystal clear yet. Additionally, our guidance reflects a 747-8 scheduled price reduction that was in place at the time of the Vought acquisition that relates to moving down the learning curve of a new product.

Also, our capital expenditures and investments in major new programs in this next fiscal year is $340 million to $360 million. The guidance is also based on the current production rates as detailed in the press release. We have included the projected cost of two union negotiations that we expect to complete during the fiscal year, and we have forecasted continued strength in the Aftermarket Fervices segment of the business.

I want to talk for a minute about the pricing environment. And much has been said about Boeing's Partnering For Success Program. This program is just one piece of a pricing environment that continues to challenge all manufacturers. It has really been part of our lives for several years now. Now we certainly support the goals of Boeing's Partnering For Success Program, as well as those cost reduction programs in place with our other customers. The reason we support these goals is that they align well with our own strategic direction. When I talked about improving execution, driving integration and controlling costs, it's all part of a strategy to increase the value proposition we can supply to our customer base. We have always felt like partners to our strategic customers and believe that when we help them succeed, it is in our own best interest as well.

In terms of new business, we see many opportunities that are out there. We talked a bit about the pipeline in our Investor Day meeting and certainly, without getting into a lot of detail, the pipeline is still full, opportunities exist and things are very robust. We have, in fact, had some significant wins recently that we hope to be able to announce soon, as soon as we get customer approval to do so. And certainly the guidance is based on additional details highlighted in the press release.

And as Dave pointed out, our FY2016 guidance remains intact. Our $8.25 a share is what we had talked about back then. That still is intact. And this is an important point because all the issues that were described above on this slide were well-known to us when we provided fiscal year '16 guidance in February, with the exception of the 747 rate reduction. The punchline here is that the plans we laid out at that time are still in place and we're still on target.

So with that, I would like to open up the lines for any questions you may have.

At this time, the officers of the company would like to open the forum to any questions that you may have. (OPERATOR INSTRUCTIONS.) Our first questions comes from Sam Pearlstein. Please state your affiliation followed by your question.

Wells Fargo. Good morning

Good morning, Sam.

Good morning.

Can you talk a little bit more about the Aerostructures' top line? And you highlighted the defense portfolio being down 10% or 15% in the 67 and 47, but what are you assuming with regards to the business jet aspect of it? Do you deliver any global 7000, 8000s this coming fiscal year or is that business jet all the Gulfstream side?

On the Aerostructures side, business jets is primarily Gulfstream, but we certainly have some work with Cessna and other customers there. It's not all Gulfstream but those are the big programs. All of military is not down 10% to 15%. It's a few programs that we highlighted, because C17 is indeed flat so the whole -- the military business will not be down that much. And in fact, including the acquisitions, military overall will be flat for the year. But it's a few programs, mostly V22, H60 and C-130 where we see sort of 10%-plus -- or plus declines.

But is business jets flat within Aerostructures next -- in fiscal '14?

Slightly down.

Slightly down. Okay. And then just within the ranking of your backlog, I see C-17 and C-130 really drop down. How much of that is the market over the next 24 months versus the adjustment you mentioned in terms of how that was being calculated?

I think the adjustment did not force any of those -- did not have an impact on where those fell in the top ten.

So that's just more where the 17 falls once you get out into '15.

That's right.

Okay. Thank you very much.

Thank you.

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

Thank you. Yair Reiner from Oppenheimer. So congrats first on the strong quarter. If I look at the guidance for next year and I assume as you guide that Structures is going to have better operating income and Aftermarket has better operating income, it looks like for Systems you're looking at operating profit being up somewhere around $20 million for the year, which I guess includes both the contribution from GPX and the -- plus anything organically from the base business. I guess it strikes me as somewhat small relative to the investment you've made in these two acquisitions over the last few months.

Yes. Yair, I don't think it should be. I think that what we had indicated was that Embee would come out slightly above our current average, and that acquisition has pretty much hit the ground running, but it's relatively small. We were very clear that Triumph Engine Control Systems would start out life in Triumph as being dilutive to our margins, but that we saw tremendous potential there for it to improve. And so having owned it only for 12 days in fiscal '13, fiscal '14 will not be the year that we were off -- that margins go dramatically higher. We think it'll improve. So I think we went out of our way to indicate that that clearly would be dilutive and that's really what would be driving down system -- Aerospace Systems margins in fiscal '14 because a $200-million acquisition in that segment is rather impactful. But there's nothing bad happening to the rest of the companies.

Yes. And I'd just -- I'd like to add that the Engine Control Systems acquisition -- we do feel, over time, is going to really provide a tremendous value to the Company and the margins, as Dave alluded to, will not, in fact, be dilutive as we move forward in the calendar.

Okay. And then on Aerostructures, the cumulative cash was negative in the quarter. You've stated repeatedly in the past it's going to positive sometimes, sometimes negative. I guess what's interesting is that there's certainly been a pattern and I think that over the last 8 quarters, in all but one quarter, the cumulative catch has trended downwards. I was wondering if you could kind of help us explain why we see these trends and where we might see them begin to reverse perhaps.

Yes. So first some commentary on that. It is -- it's not exclusively, but it's largely 47, and there's no doubt that we have -- that we've had some challenges with that program. Now the program's solidly profitable so this is just a reduction in where the margins -- we thought they would be a quarter ago -- still not a good thing, but still a good program. And there's just been issues. We have new leadership in one of the factories and we think we're going to turn the corner on that. Also keep in mind that only the former Vought business is on an accounting method that triggers cum catches, so many of the synergies -- in fact, a majority of the synergies -- at this point are profits that show up in the Heritage companies. And so there's increased profit and increased margins. And, in fact, margins at our Heritage companies are up, partially because of the work transfer from Vought. So it's sort of a mixed bag there. But we would hope that they start to turn positive again, but again, it's been mostly about 47. By the way, we have a number of contracts that are positive as well and this is just the net, which is mostly attributable to 47.

Got it. Thank you.

Our next question comes from Julie Yates-Stewart. Please state your affiliation followed by your question.

Credit Suisse. Good morning. Thank you for taking my question.

Good morning.

Dave, can you update us on where you think you can take margins longer term in Aerostructures. I know you don't -- you're not willing to give a longer-term target, but I think in the past you've said you still have a couple hundred -- more multiple hundreds of basis points to go. Is this still the case from the 17% level in '13, even with the rate cut and the military pressure and the challenging pricing environment?

Yes. Absolutely. I think that we have that potential and we're not backing off that. Obviously, rate cuts make that difficult or more difficult, but when we look at our companies and look at who's performing well and who needs to improve, we definitely see a path towards higher margins.

Okay. Great. And then I know you've mentioned that defense would be down and that was assumed in the guidance, but is there a specific growth rate that you're assuming and what does that assume for sequester?

I'm sorry, Julie. You cut out there for a minute. Can you repeat that?

Sure. Just what are your assumptions on the military in FY14 in guidance and does than imbed sequester?

No, I think at this point the -- I think sequestration would hurt the aftermarket first, then spares. I think at this point we have confirmed POs for a majority of our work. I guess if you envision a -- some different version of sequestration where confirmed orders mid-production get cancelled -- we don't expect that. We see that the production rates we have for '14 being pretty solid, but as I said, V-22, H-60, C-130 are all down 8% to 12% just from the normal budget reductions, not sequestration. So -- but I don't think we see a huge amount of risk on those down numbers for '14.

Right. I think you've got to -- the overall fiscal issues that drive pressures on the government budgets anyway, regardless of how sequestration plays out, is the larger macro issue that we're facing, and I think it's interesting to note that most of the defense primes are spending a lot more time selling their vehicles -- aircraft and others -- to foreign military sales. And we've seen a pickup there. So -- and I'm not -- certainly that's not going to -- we don't anticipate that eliminating the impact of sequestration, but it certainly is -- I think is going to help stabilize the production environment.

Okay. Great. And then one last one. Just Aerospace Systems margins in the quarter looked very strong. Was that primarily mix or what were the -- what were the drivers there?

I think Embee did, from a -- was clearly additive to margins. They had a very quarter, which was as we had modeled in the acquisition. A little bit of help from Engine Controls. And again, the normal phenomena -- the biggest piece is that when we look at the aftermarket sales of Aerospace Systems, those were up nicely, and that's probably the largest contributor to the margins.

Okay. Great. Thank you.

Yes.

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

Hi. Goldman Sachs. Good morning, everybody.

Good morning.

So clearly the path to the fiscal '16 revenue target wasn't as linear as I guess we all thought. Can you maybe just -- I get what you're saying the drivers are of that, being 767, 747-8 and then military. Can you maybe just specifically quantify the revenue decline from those three items in fiscal '14?

I don't think we want to get into ship set values. There's -- it's well over $100 million if you're looking at military reductions, the hole in 767 -- which, by the way, will snap back in the future. So by '16, we believe 67 rates probably at higher values because of the changes that'll have to happen for tanker, will largely come back to '13 levels. I don't -- we're not changing 47 at this point long term. But if you're asking what's the impact of less V-22s, less H-60s, C-130 and the two commercial programs, yes, it's well over $100 million.

And that -- everything you just stated gets you to the totality of your revenue headwind in fiscal '14 versus '13?

Well, those are the big moving pieces. If we have one less G-450, that's a headwind.

Right.

But if -- I'm giving you the highlights.

Right.

Yes.

And then you sort of alluded to it there, but you then would have to grow -- you'd have to go from close to flat organic revenue growth this year to a mid-to-upper-single-digit organic revenue growth profile two years consecutively to get to that $4.5 billion longer-term target. Get that the 67 will see that easier comparison, but 47-8 probably doesn't get better, military probably doesn't get better. You're getting closer to -- or you're getting to higher rates on other legacy programs that are still growing. I guess I just -- I struggle to see why you'd have that significant of a snapback in the total company organic revenue growth. Is there -- are there any other drivers there you can help me understand?

Yes. One is the Bombardier Wing, by '16, should be meaningful. And, as Jeff alluded to, we've had a couple nice wins that -- not acquisitions, but program wins that we would love to announce, but our customers have either requested or mandated that we not do so, so we have to respect their wishes. So there will be some nice wins that we announce that I think make that 8% or whatever -- the high single digits -- pretty achievable.

Yes. Okay. And then just one other question -- basically the same question but on the margin line as a follow-up to Julie's question. If I take the long-term revenue guidance target and the long-term earnings guidance target, I think I can get there with a segment operating margin somewhere in the mid-17% range. That's a segment operating margin you guys have already posted. It's not that much higher than where you ended fiscal '13. That'll be three years of incremental margins, three years of more cost reductions. You'll have the full accretion benefit of the Jefferson Street move, whereas you have none of it in fiscal '13. How much of that is just -- it's a long-term target. You want to layer in some conservatism and there's upside to that? Or how much of it is there are a handful of things going the other way that I'm not factoring in?

I think it's a little bit of both, Noah. I think that there will be some price reductions, so we modeled in price reductions, whether it's Partnering For Success or other customer initiatives. So we will have some programs where revenue goes down, hopefully margins stay even, and certainly when you're given a 3-year target, you're not going to be pushing the edge. So it's a lot of moving pieces, but I don't think we're -- we're not hedging it by $1.00 or $0.50. Is there a little conservatism? Sure.

Anything else specific going against you you can call out other than pricing?

I don't think we see a lot of pressure from commodity costs or those things. No.

Okay.

Yes.

Thanks a lot.

Thank you.

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

UBS. Good morning.

Good morning.

Specifically on V-22, you call out a 10% to 15% decline there. Is that reflecting the move down already in rates from roughly 40 a year to 20 a year? I don't think at the bell level that's not supposed to happen here for a few years, but you -- are you already seeing it on your end?

We were at 40 and we're going to be down about 15%. So about 6 units is what we see.

Okay. So it's fair to think about that there's still another step down on that program to come beyond that.

Absolutely.

Okay.

Oh yes. Absolutely.

Right. But don't discount entirely the fact that there is likely to be a robust foreign market for this aircraft.

Right. Okay. And Dave, you highlight in fiscal '15, I believe, it has lower pension funding than you had been showing before by about $40 million or so. Is that permanent or is that just a push-out as part of the Hill legislation? And what's the plan in terms of what you're going to do with the extra cash?

Well, I think the extra cash would be available to -- for the normal things. So when we think of extra cash, we think of debt reduction and acquisitions or the ability to expand capacity. And as far as the number, we believe that with one more solid year -- meaning fiscal '14 -- of very large contributions, we -- when we look out, we're not specifically taking advantage of funding relief there. It's more making sure that the plan does not get over-funded because in a frozen plan, being over-funded is not a nice place to be. So we think that we would step it down a little bit and make it more even going forward so that if discount rates snap back, if some of the things we're looking at to take part of the obligation off the books completely -- you never want to be in an over-funded position in a frozen plan. But we're not using some special loophole to reduce our contributions. That would be what's required.

Okay. And you mentioned a couple times Boeing's Partnering For Success Program. Have you specifically signed up for it? What have you signed up for? Is this across the board in terms of your products that you supply into Boeing or does it differ by specific programs? Just some color on exactly if you've signed up for it and what you've signed up for. Thanks.

We -- I think I made my statement about how we're partnering with all of our customers. We're -- we certainly -- as I've said before, we're supporting the Boeing's Partnering For Success Program and I don't think there's a one-size-fits-all in these types of things, so I don't think I'd really like to get into any of those details.

Thanks.

David, I would say that they all have different flavors, too. In some cases, a small reduction is almost viewed as a toll to get new work. And so when we evaluate the ability to secure more work. In others, it's -- they want the price down, period. In others, it's giving us more work but lowering the -- lowering some price.

Yes. And I want to add one other thing. And Partnering For Success is the new catch phrase for -- from Boeing and most of our customers have their own phrases for whatever it is that they want to use to reduce our prices. But this is not anything that's particularly new. It now has a name. But we've been living in a deflationary pricing world for several years now. Most of our long-term contracts that we have entered into with Boeing have had deflationary pricing and, as a result, our cost-reduction activities have been in high gear for many years so that we can outpace with our cost reductions any type of margin degradation that we might see. So I guess I don't want to over-focus on a particular program because this has just finally got a name, but we've been living in this world for a while.

Thanks, guys.

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.

Good morning.

Question, I guess, on Aftermarket Services. This was, I think, one of the lower growth quarters we've seen more recently. Was this just more or less a tougher comp -- comparison or did you see something change in the regional markets that you're in?

Clearly a tough comparable and we did see -- I think it lasted a little longer than it might have, but we talked last year that what drove some of the large Q4 was the Delta Retrofit Program, and we had expected that to sort of sunset earlier. Delta remains a great customer, but as far as the Retrofit Program -- and this quarter, we did see some meaningful decline. So what you saw was sort of the ramp in FedEx, from a new business perspective, slightly outpacing the end of that program at Delta. And it was an awfully difficult comp, so --

Okay. And that's what I understood. And then on the -- just for the outlook, though, you mentioned on -- continued strength in the aftermarket services. You did 5% growth for the year. Is that -- that's kind of just the mid-single digit. Is that a good goal that we should be thinking about for '14?

About that. I think that what we indicated was that we'll be probably flat as a segment or up a couple million, but when you think about replacing the sale of the two instrument companies, I think that'll get to, like, 6% in the model -- something like that.

Okay. And just one related to aftermarket. I know that you have a decent amount of spares volume within Aerospace Systems, both commercial and military. In particular, I guess, on the commercial piece -- I assume the military piece is soft a little bit -- but -- because of off-tempo -- but what are you seeing on the commercial piece and how should we think about that going forward?

Well, I think, Peter, we still have opportunities. We're not like the GEs of the world in that we have -- I don't think we do such a good job of capturing all of our market yet. So I think we have some great opportunities in front of us. So even if we were to say that, on a macro level we see a slight reduction in that, we have more than an adequate ability to pick up our own market share and still see an improvement in that area.

Okay. And just one last -- I just want to circle back with you on this Partnering For Success. And obviously, you -- as you've given a lot of color and Boeing's given a name to it -- but they're looking for double-digit price decreases over essentially a 5-year period. Is that anything different than what you've previously seen or, again, is it just this is the latest flavor of the month regarding this program?

I would not attribute the phrase "flavor of the month" to this program. I would not do that. But I would say that this is not -- in its scope is not largely different than what we've seen in the past.

Okay. Thank you.

Thank you.

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

Deutsche Bank. Thanks. Good morning.

Good morning.

Jeff, could you maybe -- I know you can't -- you don't have the authorization to disclose the contracts and sales that you've won, but can you talk maybe about the size scale of them a little bit more, maybe on the markets where you're seeing the opening of opportunities, whether these are expansion of ship set or new products, and whether or not it's kind of tier 1, design build or more built-to-print?

I think probably would say -- I really can't say all of the above because you covered a lot of different things and that would call out a lot of contracts. But we're -- we are seeing opportunities in all of those areas. We're seeing -- I guess -- as close to all of the above as I could get, because we're seeing and winning some built-to-print contracts. We're winning some design contracts. We're winning some new programs. We're winning some existing programs. And at different tiers. And they are of significance. And I'm really sorry that I can't announce these things because they are exciting things, and when you hear about them, you'll understand that they're a big part of our strategy going forward. So we'll just -- we'll announce them just as soon as we can.

So just so I'm clear, though, they're big enough that they make an impact in '16 and they come on quick enough.

Yes. They're significant enough for us to have -- we don't do press releases for every $10,000 contract we win.

Yes.

But these programs that we're going to announce -- we would have announced because of their significance in size.

Okay. Great. Dave, on the cash flow, just want to understand or interpret the cash for debt reduction in the press release. Is that including the cash you have on the balance sheet or is that -- the number you talk about in the press release is available for debt reduction -- is that what you're -- is almost free cash flow after dividends?

That does not include the cash. It's the -- start with operating income, add back D&A, working capital --

Yes.

Less interest, cash taxes, pension and CapEx and dividends.

So -- okay. So that's the 150.

Yes.

Okay. And then I think you alluded to it, but the size of the divestiture -- did you say it was 6 points to aftermarket?

About that. So it's around $20 million, $25 million.

Okay. And then the last one, you gave a 15 pension expense or income, rather, and it's a -- obviously a pretty good growth year on year from '14. Your crystal ball for '16 and what's baked into the $8.25 in the '16 target -- is there another step-up there?

Modest.

Modest.

But yes. If this thing keeps producing better and better results, it might be -- I think it's in the 75 range or so.

Okay. So about 120 basis points of expansion from '14 to '16 you can get from that.

Well, I -- I'll trust you on the math.

Okay. Alright. Thanks again.

Yes. Thanks.

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

Stifel. Good morning, Jeff and Dave.

Good morning.

Good morning.

Sorry to go back to Partnering For Success, but I know you said you'll be protecting your margins. Are you able to do that all on your own or are you depending in any way on Boeing for better pricing on some of your materials?

It's a partnership, Steve. There's -- there certainly are -- Boeing does provide us a benefit when they have some of their -- for example, you are well aware of their titanium supply agreement. Those kind of things are very helpful. There are some benefits that Boeing is providing, and not the least of which is also helping us to implement some value engineering changes which takes the cost out of their airplane and takes the cost out of our manufacturing cost to build their -- the part of their airplane. So it is truly a partnership. Some of it comes from some of the supply chain leverage that Boeing can provide and some of it comes from their engineering support and some of it comes from the enhanced volumes that they're providing.

Okay. Thanks. I just know sometimes when there's a -- like a limited partnership, limited really has a big meaning. So thanks for the additional information.

I hear you on that.

Second, on your top ten list, I know it's ranked by backlog. That's the way you've always done it. If you resorted it by contribution to operating income, would it be materially different or look pretty much the same?

We occasionally look at it at sales. I don't think it would be very different, Steve.

Got it. Thanks very much.

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

Imperial Capital. Good morning.

Good morning, Ken.

Good morning.

Just wanted to follow up on Jefferson Street. I know obviously you've got a fair amount baked in for '14 to accommodate that. How would you sort of characterize the risk with the move and specifically to the timing of when you might start to see the benefits coming out of '14 and into '15?

Well, '15, as we said at Investor Day, is -- should be a monster improvement over '14, but as compared to '13, it's a couple million bucks -- maybe $5 million at the operating income level and $1 million, given the interest expense and drag on -- at the net income level. So right now, we're on budget, on time. We believe we'll be able to hit the model we shared with you at Investor Day. So I think '15 will have some tailwind as compared to '14 for sure, in that that $45 million of expense should disappear. And then it really gets interesting in '16 when it turns largely positive.

Okay. So --

But we're building a brand new building and moving a lot of parts that have been at Jefferson Street for a long time. There's obviously risk. We've built in disruption to the model. It's in those numbers. So we -- right now we think the model holds. We hope we beat it.

Yes. No, definitely. I guess it's fair to say, you've obviously -- you're well into the construction of the new facility. You don't see -- from a timing standpoint, everything looks to be on track at this point.

Yes.

Yes.

And then is there -- as you go through that move, clearly you've taken the reserves and done what you need to do from a customer standpoint. Are there any other issues that have come up with either your government -- your military or your commercial customers as part of this transition that may, in fact, be creating new opportunities at the new facility? Obviously you're going to be in a better cost standpoint. Or how should we be thinking about that?

Well, those -- certainly we're thinking about that continually and there's no doubt that this new facility which will be state-of-the-art, which will be lower-cost, which will have a very capable workforce -- an experienced workforce -- is one that should provide us a great deal of opportunity, and we're counting on that happening.

But we were clear at Investor Day that we have consulted with our customers. Some customers may help fund it in exchange for cost reductions -- price reductions -- but what we were clear at Investor Day was we have not included any new business capture because of the fact that Jefferson Street -- now Red Oak -- will now be competitive. And we do believe that there is new business win potential, probably for the first time in a long time, that can go into that facility or those capabilities. But that should all be incremental to what we showed you.

Great. Thank you very much.

Thank you.

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

KeyBanc Capital Markets. Thanks for taking the question, guys. Good morning, Jeff and Dave.

Good morning.

Not to harp on this, but looking at sort of the new business wins, if we go back to the Investor Day slide deck, I think between February and April you kind of highlighted $400 million or so of cumulative awards. Can we assume that this is what you're talking about? And maybe can you give us a sense of the probability or success rate of those awards that you laid out?

No. I just -- I think I'd like to just leave it in terms of the fact that the opportunities are still out there, that we're getting new ones -- I won't say every day, but certainly every month, we're getting new opportunities to look at, and we are continuing to hone our ability to select those opportunities that we think we'll be most competitive on and most successful in taking advantage of once we win them. So I think that, from a new business standpoint, there's no shortage of opportunities that are out there in front of us.

Okay. That's fair. And then maybe just one last one, if you can give us an update on your -- the current M&A environment. And just looking at that fiscal '16, I'm assuming that's still the current base of business just including Embee and the Pump and Control -- no other additional acquisitions.

That was what we had laid out as our model. And that does not mean that we're not still active in the acquisition world. And so again, this is another pipeline that certainly has a lot of activity and we will continue to participate as long as it makes sense and matches our strategy going forward.

Alrighty. Very good. Thank you, gentlemen.

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

Sure. S&P Capital IQ. Good morning, guys. Good quarter.

Welcome back.

Thanks. Dave, can you talk about the SAP system implementation? It sounds -- why is it moving sort of -- progressing so slowly? I thought by now you would have been maybe sort of seeing a path to getting ahead of the curve. Can you talk about -- is it the decentralized sort of construction of the company that you're having a problem with?

No, Eric. In fact, maybe I'd rather talk about Partnering For Success. But the -- I think it was -- I don't -- I can't give you a specific, crisp answer to whether it was the lack of commonality of the systems and aerostructures before, how long those systems had been used, whether SAP was the right system for us. I know we're working it hard. I still sit on monthly -- on weekly calls. We are making progress but we're continuing to spend money to make that happen. And it's a disappointment. And so your expectation is completely understandable, but that's not where we're at yet.

Okay.

. And we're making progress. Don't get me wrong. But we were hoping to -- by this time to have a path to some of the benefits that were in the business case, and that's just not where we're at yet.

Okay. Fair enough. In the difference between the 630 to 640 guidance and the 665 -- 565 to 575, is that all Jefferson Street or is there other sort of, like, Embee and Engine Controls sort of integration costs in there, or is that just all Jefferson?

I don't think it's either. I think it's our style just to give a range. So we have a budget. We looked at it and usually we just give a little bit of range when we're giving our first guidance of the year.

No. The difference between the two ranges.

Oh. I see. I thought you were talking about the dime.

No no no.

No. 100% Jefferson Street.

Okay. So you don't have anything in there -- we shouldn't see other -- or you're not modeling in other more integration costs for Engine Controls?

No. If -- we're not -- no. If there's something that comes up during the year that makes sense to do and is impactful, we'll let you know what it is. But no, the entire difference is Jefferson Street.

Okay. Fair enough. And just within the sales guidance, I guess you're giving a total range 3% to 8% growth. What's the organic growth implied in that?

It's about flat.

It's flat. Okay. Great. Thanks a lot, guys.

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

D.A. Davidson. Morning, guys. I have a question on 777-X. It sounds like we're getting a little movement there in terms of authorization. Could you talk about how you view the opportunity in terms of incremental business there, given your catalog is obviously a lot broader now than it was many years ago?

Well, I think generally we feel good about our opportunity on 777-X. We -- as you point out, we have an awful lot that we can offer. And so it's a little early in the day, even though we have already had discussions with several parts of Boeing about how we might participate. But we certainly believe that it'll be a good program for us.

Is that potential -- is it -- and I know you don't want to give ship set values, which I understand, but is it 20% more? 10% more? 50% more?

I'm not -- you're right. I think I just don't -- certainly it's a much larger wing. So as such, it'll be a little bit more square footage on that, but I guess I will say at this point we will not be building the entire 777-X wing. How's that?

Okay. Go ahead.

I just think at this point it's a little early to say what we're going to end up with, but I do think we'll participate on the program and hopefully we'll be in good shape on that going forward.

Okay. And then, Dave, you laid out -- you sort of parsed out the inventory increase. Could you go through that again? I couldn't write fast enough.

Yes. In round numbers -- the -- you mean you're talking about the increase for the year?

Yes. Part of it was putting stuff on the ground, part of it --

Yes. Right. Advances -- which you see on the face of the balance sheet -- are down $40 million. Bombardier Wing was about $50 million. The acquisitions were about $40 million. So that gets you the big chunks there.

Okay.

And then, really, there was a large increase on 47 as well. And so when you take out those four items, the rest of the companies -- in total -- performed reasonably well. We had some that were up more than they should have and we had some companies that had very nice reductions. Those are the big moving pieces.

Okay. And then just lastly, as a housekeeping matter, that moving cost -- any quarter where that -- is that going to be front-end-loaded, just from a modeling perspective?

We're going to do that -- it's not going to be in the EACs. It's going to be sort of on the SG&A line called out separately. And it'll be recognized as incurred. So I think by its nature it's going to ramp during the year. But it'll get more as the year progresses, but I don't have an exact estimate for you at this point.

And then the legal will kind of peak prior to that trial date probably?

I think if everything holds, that would be a logical assumption, but --

Right.

I'm not sure that I would apply logic to this.

Alright. Thank you.

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

Yes. Yair Reiner from Oppenheimer. Just a quick follow-up on aerospace systems in the quarter. 8% organic growth was quite robust and it sounds like aftermarket was particularly strong. I guess that's a bit different than what we've seen from a lot of your counterparts. I was wondering if you could just give us a sense of where the strength came from. Was it more commercial? Was it more defense? And how do you see that kind of playing out over the next couple of quarters. Thank you.

I think it was pretty balanced. I know that -- and we've talked about this -- some of the large aftermarket pieces in there, particularly sometimes in Q4, there's some foreign military sales. But it was -- I think spares and aftermarket was -- I didn't have a noticeable difference in commercial versus military. The only commentary I heard is frankly that on certain repairs where source inspection is required, the government might be moving a little slower than they once were. So -- but other than that, there's no huge disconnect between the markets.

Okay. Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's Fiscal 2013 Fourth-Quarter and Year-End Earnings Conference Call. This call will be available for replay today after 11.30 a.m. Eastern time through May 9, 2013, at 11.59 p.m. You may access the replay system by dialing 1-888-266-2081 and entering access code 1610837. Thank you all for participating and have a nice day. All parties may now disconnect.