Triumph Group Inc (TGI) 2014 Q1 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 2014 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 sedation.

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 the 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. Good morning, everyone, and welcome to our first-quarter fiscal-year 2014 conference call. I would like to add my reminder that there is a slide presentation included to go along with the audio portion of the webcast. Beginning with the slide entitled Q1 in Review, which is slide 3, I will generally discuss our performance in the quarter. Dave will follow with his more detailed review, and then I will be back to spend some time talking about our outlook.

Turning to slide 3, I'm going to start out by talking about the first-quarter performance. Overall, it was a very solid first quarter. We overcame several hurdles in the quarter. We saw the deliveries that we had planned to make to our small-midsize business jet customers be unexpectedly reduced. We experienced higher legal costs than budgeted, and we experienced a drop-off in those types of military purchases that one could describe as discretionary.

In terms of the segment performance, and again, Dave will go over these in far more detail than I, in aerostructures there are a lot of moving pieces in comparing this year to last. Basically, aerostructure stayed level, despite the challenges that I just described. Aerospace systems businesses did very well. There was organic growth in revenue and operating margin. And that coupled with very strong performance with our newly acquired Companies, gave us a strong performance in that segment. The after-market services operating margin performance was strong as well, and this came despite a short-term drop in military demand, as I just mentioned.

In terms of our market, this is certainly an exciting time in our industry. The industry as a whole seems to be reinventing itself to become more globally competitive, being able to offer better pricing and still maintaining or expanding operating margins.

In terms of our Red Oak facility, this is a project that we had made a number of assumptions that are pretty significant over the next couple of years. And in terms of what we can talk about now, since we are really still in the construction side of things, we can say that the construction of the Red Oak facility is on budget and on time. And that more details certainly will be available on future calls, as we get into actually the transfer of jobs and look at the build-aheads of inventory and the other assumptions that we've made, relative things like disruption and such. For now, we are happy to report that construction is on budget and on time.

The integration of Embee and Engine Control Systems continues to go well. Both of these Companies fit very well within the Triumph system and are strong performers, as the current quarter indicates.

We successfully completed the acquisition of Primus Composites, which we are operating as Triumph Structures-Farnborough and Triumph Structures-Thailand. I just want to give a quick aside on this acquisition. We have often stated that our backlog represented the best programs in the industry, with one exception, that being the A320. With the acquisition of Triumph Structures-Farnborough and Thailand, the A320 is now very close to the top 10. So stay tuned on that one.

And finally as we reported earlier in the quarter, we were awarded an Embraer contract to design and build fuselage sections and other components for their second-generation E-Jet family. And this is certainly an important development at a key customer that lays the foundation for future growth and helps us diversify.

At this point, I would like to turn it over to Dave.

Thank you, Jeff, and good morning, everyone. I would 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 $943.7 million, compared to $887.7 million for the prior-year period, a 6% increase. Organic sales for the quarter decreased 2%, primarily due to a decline in nonrecurring revenue. Operating income increased slightly to $141.3 million. Included in our results was approximately $3.6 million of costs related to the Jefferson Street facility move.

Excluding the Jefferson Street move-related costs, operating margin was 15.4% for the quarter. Also included in the quarter's results was approximately $1.3 million of acquisition-related costs, primarily attributable to the Primus Composite acquisition. The prior-year's fiscal quarter included $500,000 of integration costs related to the Vought acquisition and a charge of $1.2 million for early retirement incentives.

Net income improved 4% to $79 million, resulting in earnings per share of $1.50 per diluted share versus $1.46 per diluted share for the prior-year quarter. Excluding the nonrecurring costs for both periods, net income was $81.4 million, or $1.54 per diluted share, versus $77.4 million, or $1.48 per diluted share, for the prior-year's quarter. EBITDA for the quarter increased to $168.1 million, resulting in an EBITDA margin of 17.8%. The number of shares used in computing diluted earnings per share was 52.8 million shares.

Looking now at our segment performance, sales in the aerostructures segment for the first quarter declined 3% to $651.9 million. Organic sales for the quarter declined 4%; the largest single component was a decrease in nonrecurring revenue of $20.7 million. First-quarter operating income was $100.4 million compared to $120.1 million for the prior-year period, and included charges of $3.5 million related to the Jefferson Street facility move. And a net unfavorable cumulative catch-up adjustment of $4.7 million, of which $1.7 million was nonrecurring related to the Jefferson Street move.

Q1 also included approximately $1 million in Vought integration costs. The prior-year's quarter included a favorable $7 million settlement of a termination claim. The segment's operating margin for the quarter was 15.4%. EBITDA for the quarter was $120.6 million at an EBITDA margin of 18.5%.

In our aerospace systems segment, sales for the quarter increased 56% to $219.5 million, of which $70.7 million were attributable to Embee and Triumph Engine Control Systems. First-quarter operating income increased 82% from the prior year to $42.6 million, with an operating margin of 19.4%. EBITDA for the quarter was $46.2 million at an EBITDA margin of 21%. Embee's performance remains good and was accretive to the segment's margins. In addition, our historic businesses in this segment performed well and grew margins during the quarter.

For the quarter, the operating margin at Triumph Engine Control System was not dilutive, and in fact, was accretive to the segment average, primarily due to very strong after-market sales. While the operations and integration at Triumph Engine Control Systems are progressing well, and we remain confident in our ability to grow margins, the first quarter's operating margin is not indicative of what we anticipate for the remaining quarters of the fiscal year.

Our current view, as compared to when we filed the 10-K, while still preliminary, reflects the purchase accounting adjustments, ie, the favorable impact of fair value of contract liabilities, less amortization of intangibles and additional depreciation will be favorable by approximately $5 million for the fiscal year, of which $2.4 million was recorded in the quarter. Unlike the depreciation and amortization of intangibles, which are time-based and pro rata throughout the year, the amortization of contract liabilities is tied to specific shipments on specific contracts. Taking all of this into account, we would now project that Triumph Engine Control Systems will achieve an operating margin of approximately 10% for fiscal 2014.

We continue to deal operationally with the effects of Hurricane Sandy at our Freeport operation. However, from a P&L perspective, the impact was essentially flat in the quarter, net of insurance reimbursements. The segment's operating results also included significantly higher legal costs of $2.9 million associated with the ongoing trade-secret litigation.

We are now expecting legal expenses associated with this litigation for the fiscal year to be approximately $8 million versus our previous guidance of $5 million. As for the status of Eaton litigation, there is nothing significant to report as preparation for trial continues. The dismissal of all of Eaton's claims against us remains unappealed 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.

Our antitrust claims are 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.

Continuing with our segment review, sales in the after-market segment in the first quarter were $74.4 million compared to $80 million in the prior-year period. The year-over-year decrease reflected the impact of the divestiture of the instrument Companies. Organic sales growth for the quarter was 1%.

Near the end of the quarter, we saw reduced inputs on the military side, which we attribute to DOD budget pressures. First-quarter operating income was $11.3 million, with a continued strong operating margin of 15.2 %. The segment's operating results for the quarter included a residual loss on the sale of the instrument Companies of approximately $200,000. EBITDA for the quarter was $13.2 million at 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 2014 and 2015. The fiscal 2015 amounts assume all fiscal-year 2014 actuarial assumptions are met. As you can see, we expect significant funding reductions in fiscal 2015.

With regard to our pension liability, at June 30, 2013, our net underfunding shrunk approximately 33% to $240 million since the beginning of the year, primarily due to the increase in discount rates. Looking at the components, our gross liability decreased $173 million, offset by a decrease in assets of $67 million, which we expected and was driven by our LDI strategy.

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 after-market services group does not have a substantial backlog.

Our order backlog as of June 30 was $4.66 billion, up 7.8% year over year. Same-store backlog increased 2% sequentially and 4% from the prior year. Military represented approximately 30% of our total backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place is the Boeing 747 program, followed by the Boeing 777 program. Third place is the C-17 freighter, followed by Gulfstream 450 and 550 programs in fourth place.

In fifth place is the Boeing 787 program, followed by the 737 next-generation. Seventh is the Airbus A330, and in eighth place is the Osprey combat helicopter. The Boeing 767 program is ninth, and in tenth place is the UH-60 Blackhawk helicopter. Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military, and space totaled 45% of our revenue and was broken down 74% commercial and 26% military.

Looking at our sales mix among our end markets, the next slide shows the compare to Q1 of fiscal 2013. Commercial aerospace increased by 7% to $534 million, representing 57% of sales. Military sales of $261 million increased 4% year over year and represented 28% of total sales. Business jet sales were flat year over year and totaled $115 million, representing 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. Total organic sales for the quarter decreased 2% from the prior year. Breaking that down by segment, the aerostructures segment same-store sales for the first quarter declined 4% to $640.6 million, primarily due to the decline in nonrecurring revenue, as mentioned earlier. Aerospace systems segment same-store sales grew 6% to $148.9 million. The aftermarket services segment same-store sales for the quarter grew 1% to $74 million, and export sales for the first quarter increased 14% to $145.1 million.

Turning to the balance sheet in the next slide, we generated $37.6 million of cash flow from operations before we made $25.8 of pension contributions to the aerostructures' defined benefit plans in the quarter. After these contributions, cash flow from operations was $11.8 million. This number reflects our planned investments in growth programs, as well as the Jefferson Street location, which will improve margins in the future.

Inventory for the quarter increased $100 million. The components of this increase, which was mostly expected and included in our guidance, were $15 million in the Bombardier wing, $19 million from the Primus acquisition, $5 million from the Jefferson Street build-ahead, and $17 million in tanker non-recurring development activity. In addition, we saw an increase in 747-8, where the majority of our resourcing is occurring, and which therefore carries some need to buffer inventory for a period of time, although, our efficiency here needs to improve. Other than these items, our inventory performance was as expected and reflects improvement.

CapEX in the quarter was $56.2 million, of which $1.8 million was for Bombardier and $27.9 million was attributable to the Jefferson Street relocation. We expect CapEx and investment in major programs for the year to be approximately $340 million to $360 million. Net debt at the end of the first quarter was $1.4 billion, representing 39.5% of total capital.

During the quarter, we had some large puts of our convertible notes totaling $77.3 million, which we financed via our revolving credit facility. The global effective tax rate for the quarter was 35.6% and reflected the fact that the R&D credit will expire in December. In addition, the income tax expense for the quarter was reduced to reflect the reversal of tax reserve totaling $700,000. From a cash-tax perspective, we now expect minimal cash tax to be paid in fiscal 2014 and fiscal 2015.

In terms of financial guidance, a few specific comments. Since we gave guidance in May, we have seen a few headwinds, namely two Global Hawk ship sets will move into fiscal '15 at the request of our customer, as well as significant production cuts in the mid-lower sized business jets, as Jeff referred to. In addition, we are now projecting larger legal expenses, as previously mentioned. Despite these headwinds, we are maintaining our revenue and earnings-per-share guidance for the fiscal year. Regarding the quarterly flow of earnings, we currently see Q2 being slightly less than Q1.

A number of you have inquired in recent times about the potential impact of a further decline or elimination of the C-17 program. Our current backlog today supports production well into fiscal 2015. We continue to discuss pricing for additional orders, and of course we believe that a substantial aftermarket in the sells will continue regardless of new production.

However, in order to increase our transparency, we will disclose the following. Current production of C-17, if ceased today, would impact earnings on a recurring basis by approximately $0.50. This estimate does include our estimate of the fixed overhead that we could not eliminate.

This estimate does not reflect any one-time items that might result, such as a favorable termination claim; any non-cash asset impairments; or pension impacts, good or bad. And most of these items would primarily be recorded in the year that production might cease. There would be a favorable working capital reduction of approximately $50 million, which would provide greater flexibility for other initiatives. In addition, some of this impact could be mitigated by capital avoidance on other programs, given the capacity it would free up.

With regard to 747, a number have inquired on the impact of the quarter ship-set rate cut. The impact would be approximately $0.10 per year. I would caution you that both estimates are well reasoned but fairly high-level calculations and should be interpreted as such.

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

Thank you, Dave. Let's turn our attention to the outlook on slide 15.

As Dave pointed out, our backlog remains strong. Our backlog now stands at nearly $4.7 billion and reflects the strength of our underlying markets. The second bullet, as you may have noticed, is different than it has been in recent quarters. We have always been focused on improving execution, driving integration, and controlling costs.

But as I mentioned earlier, this is an exciting, challenging, yet optimistic time in aerospace. There is a new level of competitiveness that will be required of all long-term successful suppliers in our industry, and attaining that level will require not only controlling costs, but reducing them. The process of reducing costs in the midst of a growing market is one that has a large upside. This is not a hunker-down exercise but a reengineering, if you will, with the goal of achieving the competitiveness required to take advantage of the myriad of opportunities that exist today.

We will look inside our Companies, and we'll look to our supply chain. And this quarter, the second quarter, we will launch our yet-to-be-named program with our own supply base in an effort to strategically align with those suppliers that can join us in taking costs out of our systems for our collective benefits.

Internally, we are looking for ways to deliver a high-quality solution to our customers at a reduced cost. One outcome of this internal process is the idea of the combination of two of our Companies, Triumph Insulation Systems and Triumph Composite Systems.

It should be noted that in keeping true to our philosophy and operating model, this idea was generated by the Company Presidents themselves, seeing correctly in my opinion, that the future of these two operating Companies is optimized by joining forces to reduce redundant administrative costs; to make better use of low-cost facilities; and to drive new capabilities into our insulation systems business, and a new competitive cost structure to our composite systems business. Beyond the obvious cost-elimination benefits, this combination will allow both Companies nearly instant access to markets closed to them before.

Now I want to talk about new opportunities for a minute. I don't really want to get into the pipeline sizes or the number of announcements that we have or haven't made yet. The point of this bullet that says we are positioned to capitalize on new opportunities is that our opportunity stream is very strong indeed. The air show at Paris reaffirmed that we are in a strong position to gain market share on existing programs and primed to successfully participate on new ones.

Without getting into numbers of announcements, we are very confident that we will win significant orders soon. And so we will either announce those via press release or cover them in subsequent conference calls.

With all this being said, we are reaffirming our fiscal-year 2014 revenue guidance of $3.8 billion to $4 billion. And maintaining our earnings guidance, which is earnings per share of $6.30 to $6.40, excluding the Jefferson Street move-related costs, based on the current market conditions as we have delineated, current production rates with the exceptions of things that David pointed out in terms of Global Hawk, and weighted average shares of 53.1 million.

With that, I'd like to go ahead and open up the line for questions.

At this time, the offices of the Company would like to open the forum to any questions that you may have.

(Operator Instructions)

Yair Reiner, please state your affiliation.

Yair Reiner from Oppenheimer & Company. David, you went through the amortization numbers a bit quickly. Can you run through those again? And on a high level, I think you booked about $11 million of amortization of contract liabilities in the quarter. I think you've targeted $28 million for the year. So how should we think about the balance of the $17 million pacing for the balance of the year? Thank you.

I think that the rest of the year should be about spread evenly. The point was that when we filed the 10-K, we had expected $10 million from Triumph Engine Control Systems, and we're still finalizing the purchase accounting. And that number looks closer to $15 million, so that will $5 million better. That's what I was trying to communicate. But of the $5 million better, almost 50% of it all came in, in Q1. I think your numbers are accurate, and the balance at this point, assuming shipments happen as we expect, would be relatively pro rata through the last three quarters.

Got it. The Aerospace -- Aerostructures, sorry, business, the margins in the quarter were a bit lower than they have been recently. Can you maybe talk about some of the factors behind that? Thank you.

One, I think if you're comparing to prior year, we didn't have the large settlement claim. I'm not sure what number you're using. If you add back, obviously, the Jefferson Street cost, that closes part of the gap. We had referred in prior calls that some of our heritage Companies in Aerostructures had seemed dramatic drop-offs in some military programs, where perhaps our current view is that our customers were probably buying more than demand.

And so we do see some of that coming back in the second half of the year. But we had a couple Companies that were virtually -- ship nothing on some programs that had been fairly strong for them in the first quarter. I think you had the -- it's mostly tied to the revenue drop. Obviously there was another smaller, but negative cum catch. But many of our Companies in that segment are doing well. But I think those are the big headwinds, depending upon which -- it was about flat or up from fourth quarter down to last year. I'm not sure which measurement you're using.

Robert Stallard.

Royal Bank of Canada. Dave, if we could follow-up on that margin question, looking forward to the full year. Do you think it is fair to say that come the end of the year that structures will be down a little bit from where we ended last year and maybe systems a little bit better? And so it is basically steady, is that fair?

Yes, I think that is about right. I think on Aerostructures, we would see at this point that the year would get slightly better than where we were in Q1. And I think that in Aerospace Systems, I think we will be about where we were last year or maybe slightly slower. This was a blowout quarter for engine controls, combination of large fair value and very strong Aftermarket sales. It would be nice if our customers would order one-twelfth of their sales every month, and it would be nice and even. But it seems in our businesses, that is not the way it goes, and we do see some unevenness. So I think the margins in engine controls are going to, obviously, bounce around a little bit, not because of performance, because of shipments. So I think we're trying to guide you that we're very proud of Q1, but it's probably going to come down from here, but still have a very good year.

And Aftermarket, do you expect that to be relatively steady year on year?

Yes, we'd like to think it goes a little bit higher from here, but we obviously don't have the visibility. There's a lot of good opportunities in the market there, some very large opportunities coming up. Fortunately, I think our view is that the decline in military inputs that we saw has to be a timing issue, and will be recovered, at least partially, in the second half of the year or the last three quarters. Right now, our forecast says it gets a little better.

If you think about the fact that the Aftermarket Services group performed as well as they did, and now we are reading about the Air Force is starting to fly aircraft again and utilize all the products that we repair, I think that speaks well to the fact that there is going to be some recovery in that market. And overall, we have seen a lot of other activity on the commercial side that gives us confidence in that segment.

Secondly, Jeff, for you on this, market opportunities do you see out there in trying to adjust your cost base. Is there a bit of margin risk here, that the timing doesn't necessarily line up, that perhaps you have to take some concession on price before cost, or is it vice versa?

If I'm understanding the question, it is which comes first, the chicken or the egg?

Similar.

I think that there is going to be a mixed bag. I think that in certain parts of our business, we have certainly more pricing leverage than other parts of our business. And if in fact, we are willing in certain instances, to go out and offer a lower price prior to our having costs in line to really match up with those, then we will certainly get more business with the plan of reducing costs into that price level. I think it depends on the opportunity, but there is a bell curve of opportunities there. I think the important thing is that it is not only opportunities from companies that we traditionally have done business with, but there's a great deal of activity with a very broad level of our customers.

Noah Poponak.

It's Noah Poponak from Goldman Sachs. I wanted to ask about the business jet market. And I wondered if you could quantify how much lower your small cabin shipments are now going to be versus what you thought three months ago? And then I believe G4 or G5 moved down your backlog list with the programs that are above it, not really growth programs, which would imply that is declining. So I was wondering if you could speak to what you're seeing there as well.

G4 and G5, I asked that question earlier this week as I was analyzing the backlog, purely a timing issue. We tend to get orders from Gulfstream in large blocks, and I believe actually, there was a very large order we received in July. So I wouldn't read anything into G4, G5 declining because of the position on the backlog. It's again, it would be nice if our customers would order exactly the same amount every month, but that's not the way they do business. I'm sorry, the first question?

On the light end of the business share market, if you could quantify how much you are taking that down now in '14 versus your prior plan?

It is about 25%. It is rather dramatic, and it tended to hit a few Companies reasonably hard. So it's -- I have said before when we ended the year, our backlog in that part of business jets grew again at the end of March. And it has happened before. And then it seems like as soon as we start to think that the recovery, from our perspective -- this is not our customers selling planes, but our production. As soon as we start to think that inevitable growth off the trough is going to happen, then we have a production cut. Unlike some of our customers, they tend to happen quickly in that part of the market, so it was probably only one or two weeks after we gave guidance that, that came out. So, rather unfortunate.

Keep in mind, though, that when we -- by the time we find out about these production-rate cuts in the corporate office, our Company Presidents have -- already know about them and have already begun to react to mitigate their effects. When we think about a rate cut in these -- in a lot of our Companies that have a great deal of flexibility in what they make and when they make it, that these guys are already engaged in attempting to make up whatever it is that they would have lost. And it's unfortunate in the case of some of these markets that the announcements do come so quickly. And the reductions do come so quickly that there is a little bit of a speed bump or a little bit of an uphill patch before you get back to speed again. But that is one of the beauties of our model is that by the time we know about it, there is already changes afoot to help mitigate it.

That's very helpful. One last one, Dave, I know there is a lot of moving pieces on the cash flow statement this year. And there was very good detail at the Investor Day, and it sounds like you are tracking to that plan. I wonder if you could tell us if that is true, that the first quarter was generally tracking to that plan. Then to the extent that you are willing and able and have the numbers in front of you, if there is anything you can give us for a full-year range on where free cash to net income conversion is before and after all the moving pieces? Or if there are any numbers you can put around where you are looking for cash flow to come in for the year?

We had targeted at the beginning of the year when we gave guidance, $150 million of debt reduction, and that remains intact. So I think you are still looking at the -- if you're thinking about a classic cash flow statement, you're still looking at D&A of about $120 million. You're looking at very little taxes, and you're looking at CapEx, and what we called investment in major programs. Because a lot of this ends up on the inventory line. I'm saying $350 million, because our guidance is $340 million to $360 million, and then maybe a little bit of favorable add back for some non-cash expenses. So we are still in the range that we thought.

Sam Pearlstein.

Wells Fargo. You talked about the Global Hawk and the light jet and stuff moving out. What's the offset, or are you more comfortable at a different end of the range in terms of revenues? Or is it simply the Primus Composites acquisition? What is the offset there?

There are a number of -- 737 rate is going up. The 787 rate is continuing to move north. There are -- I think that -- our range is -- I think we're still comfortable with the range we have supplied for the year. Certainly, Primus will help us in that area, but I don't think we see anything other than the -- you think about the small business jet decline, and the fact our folks are already attempting to mitigate whatever they can within the lead times that they have. So we won't experience the full loss there in terms of sales. I don't think we have got a fundamentally different view of life than we did before.

Okay. And then if I look at the backlog programs, it looks like the C-17 jumped up a few slots. Did you get a certain order in the quarter that caused that?

Yes, as we commented on I think the last two quarters, although the -- from our perspective, I think the planes are not yet sold. Boeing has given us ever-increasing authorization on lot 26. So we are in a block now that goes out -- there is sold airplanes that actually lines up very well with our fiscal year. Now we have been given authorization to go ahead and build airplanes that would take us almost a whole other year. We were booking that as Boeing gave us authorization, and they stepped up that authorization. I think they -- what we hear from them is they are confident that the next 10 block is going to get sold. That is really why we had been winding it down, and now we went back to almost two full years of backlog.

That's great. One last question is, General Dynamics earlier this week on their conference call talked about some price increases for key suppliers on the 450, 550 lines. I know it's not the usual way, but can you talk at all about your contract? Do they have escalation clauses where the price could move higher rather than lower?

I don't believe so. We're not -- those are good programs for us, but I'm not aware of any escalators that we had on those.

I would really don't want to -- there have -- I'd really rather not get into -- they can announce what they'd like there. We -- over the last several years, there have been adjustments to 450 and 550 pricings that have been made. We're in good shape on that program.

Myles Walton.

Deutsche Bank. Dave, thank you for the color on the C-17, 747. It looks like fiscal '15 you are now doing some good tax work for low- or no-cash taxes in fiscal '15. And imagine the CapEx is obviously going to come down considerably. Are you going to get to full cash conversion net incomes, free cash flow in '15?

Usually you wait until later the year to start asking about this. (Laughter)

You threw it out there.

Myles, I think it will -- obviously it is going to get dramatically better. But I think that as long as -- even with pension funding coming down next year, pension income is likely to go up. I would have to think through whether the negative on the -- it is still over -- it's still a $100 million headwind there, whether tax impact would exactly offset that. I think we get much closer though. I think your instincts are right, but it's a little premature to talk about '15 cash flow. But directionally, it's got to get way better.

One other one, EACs, and you have gone through this in the past, Dave, where you're not always going to see a positive EACs within Aerostructures. And the benefits of the integration are happening elsewhere in the business. But we have now seen four or five quarters of them. I'm curious, should we expect more? Are these specific programs that are sunsetting, and there is -- you can't keep the cost structure out in front of the rate declines? Or is this trend going to stop relatively soon?

I certainly hope it stops soon, Myles. I will say that the principal contributor has been 47. And fortunately, I can tell you that the results have gotten better, but not as fast as we each time project. We try and do that as realistically as we can, and our block sizes are relatively short. So the answer is I hope so. It's are goal. I think things are improving, but it's not -- I can't guarantee you that this is the last quarter. By the way, we have some very positive stories in there. What you have are seeing is a net number, and it's been 47, a little bit of C-17. We would like to say that, but I don't think I can guarantee that. I think things are trending well, but -- trending better on that front.

One last one, Jeff, the M&A front, you've been pretty active this year in closing on a few good deals. What does the pipeline look going forward in the relatively near-term, next six, nine months?

Timing is always hard to predict with deals, but we -- certainly, there are no shortage of opportunities for us out there. So we are trying to match up, it's always the trick of trying to match up what we are willing to pay with what the sellers are willing to accept. We are engaged on a number of opportunities, as we usually are, in different levels of the process. We are staying active, and we still hope to get some deals done. And hopefully, we will get some done this year.

David Strauss.

(Operator Instructions)

We will move on to Julie Stewart.

Credit Suisse. Can you remind us when the rate cuts phase in on the various programs for the rest of the year and how we should think about the cadence of organic growth? And then the second part of the question would be, do you still expect flat organic growth with the Global Hawk push outs and the business jet headwind?

Yes, I think that to answer your first question, I think it would be consistent with our guidance that that's where it would be and that the military declines would likely offset the commercial growth, with business jet being reasonably flat. I think that's the case. I think on the rate cut side, I think we are already into the step down on the various large military programs. And it looks like the 47 rate cut will hit us perhaps in Q3, but most likely in Q4, where we would for the first time not be delivering at the original rate of two a month.

I think most of the military cuts that we have seen have already been phased in. Obviously, the tanker 67 ends soon. Then we will have some nice, nonrecurring revenue that probably will look like things are flat. And then we will start delivering an occasional tanker, so that's a little bit of a -- but that is all in the mix there. I don't think there is any big declines from here based on what we know.

Okay. And then, do you guys have a view that you can share on the opportunity for consolidation in the Aerostructures space after some of the rumblings about consolidation among your competitors earlier this week?

Those rumblings were pretty interesting. We'll just have to see how they turn out. Consolidation within Aerostructures is always something that is probably more talked about in Europe than it is in the US. I know Airbus is probably a pretty big proponent of consolidation, so they don't have to keep buying stakes in companies. That they really would rather be able to stand on their own. I think there is an opportunity for further consolidation there, if the economics merit. I think the hardest part of consolidation is that there are an awful lot of relatively troubled Aerospace suppliers, guys that are --have a lot of contracts but don't a lot of earnings. And the investments that you have to make in this market are very significant. It is something that can be consolidated, but it's not, I don't think, going to be a very easy process.

Dave, one more for you. You've talked about evaluating alternatives to the pension liability. Can you talk about where you are in that decision process and then the impact that the move-in rates had on your funding position?

I will keep answering your second question first. The discount rates created a -- improved our underfunding. We went from $350 million to $240 million, so pretty dramatic change in three months. That is obviously good news. We are still looking at two, as we've talked about, two separate pension actions. One would be going, and I'm pretty sure we're going to do this one. One would be going out to our existing deferred, vested participants, i.e, those people that have left Aerostructures with a vested pension but are not yet at retirement age and offering them lump sums. Many companies have done that, and we will likely, almost certainly do that this fiscal year. That probably is not a huge cash issue for us.

The second item we continue to study is would we go out and purchase annuities for existing retirees? We continue to study the viability of that. And from my perspective, that would be a Q3 or Q4 transaction at the earliest. I would predict that we'll do it at some point. Whether we do it this year or not, from my perspective, is mainly a capital allocation issue, because we would have to put more money up. So the issue is this year, in the face of all the cash flow that is going out, would we choose to put another -- use another, let's say $50 million to lop off a big chunk of the pension? So that is really a capital allocation issue, because that opportunity will be there in the future. So I think we will get one done, and we might do two. But we continue to spend a lot of time and effort looking at ways to reduce the pension issue for us.

Peter Arment.

Sterne, Agee. Most of my questions have been answered, but Jeff, on your comments about the combination or from the insulation and the composites Companies, it sounds like it was an organic effort out of the two Company Presidents. But I'm thinking about on a bigger-picture basis, thinking how Triumph has been built over the last two decades with a broad footprint. Is there an opportunity for other combinations internally to further reduce costs, thinking about the whole partnering for success and the pressures that are out there?

Sure. Obviously, we think about that all the time. It was, I think gratifying to hear these Company Presidents come up with this suggestion to combine their Companies, because it will provide us a great reduction in cost and provide a really a good opportunity to grow our businesses into areas they couldn't grow right now. I think that often what happens is once these types of things are introduced within our Company, that other folks see it and in fact, start thinking along the same lines. Certainly, we here at the corporate office have been thinking along these lines as well, and are looking for opportunities to follow suit.

There are a number of reasons that we have individual, independent Companies, and those are pretty compelling in terms of our operating model and philosophy. At the same time, this current marketplace mandates a new look, a fresh look at how we are individually structured and if we should be doing everything were doing in the places were doing it. So these things are continually being evaluated. I would say, no, this is probably not the end of that type of activity.

Thank you. Dave, quickly a clarification, the military piece in Aftermarket Services, how big is that? Is that about 10% to 15% of sales?

I think that's about right. It might be slightly higher, Peter. It is not like things fell apart. It's just we noticed on a few key programs that we have, one is power by the hour and one has traditionally been very predictable. We just saw a noticeable reduction as our customer indicated that they are flying the planes less, so that there is less service needed right now. Things haven't fallen apart, it is just that we're always on the lookout. Given lack of backlog, we're always on the lookout for good and bad trends. So while there's a lot of opportunities there for big wins, a lot of big bids coming up, which would probably impact '15 more than '14. This is a trend that cropped up in June that we thought we should give you a heads up on.

Cai von Rumohr

Cowen and Company. Jeff, on the G450, 550, I guess what Gulfstream said was that they were going to renegotiate a contract because a couple of suppliers had really not been doing as well as they should have for the work they were performing. So they made the point. Can you tell us, looking forward, should you feel better about your profitability on the G450, 550 as a result of this contract?

I feel good about our profitability on the 450 and 550 program. It is a good program for us. As I alluded to without getting into the detail, several years ago we had a similar discussion prior to our acquisition of Vought. There was a discussion with Gulfstream along those same lines, and I don't think Gulfstream made an announcement about it at that particular time. But I think that we had already benefited from that type of discussion.

Terrific, thank you. In terms of new business, can you offer a little bit more color? Specifically, I think you've said publicly that you have a large program that you've won, but the customer won't let you announce it. When might that occur? And can you give us any more color on any of the other new opportunities you see?

No, what I think I can say is that I'd really love for our customers to allow us to talk about the contracts that we have won. That would be very helpful. And we will certainly do that as soon as they will allow us to. That said, we are seeing I think significant opportunities, and we will be announcing as soon as possible, significant wins in not only in Aerostructures but also in the Aerospace Systems side, not only domestic, but also internationally. There are a lot of good things out there that we are very close, we think, very close to being able to announce. And as soon as I say that, we get a delay in when we can announce it. But it will come, and as soon as we can, we will make it as clear and concise. We don't like shrouding this stuff in mystery anymore than you like it shrouded in mystery.

A housekeeping issue, I missed what you said about margins in the Systems group. They were going to be 10% for the rest of -- was it 10% for the next upcoming quarters?

No. What I said was the acquisition of -- it was purely an Engine Control Systems comment, which was the acquisition that we closed in March of 2013. What we have consistently indicated is that, that is a rather impactful acquisition on a segment that was about $600 million. And you make a $200 million acquisition, it drives the segment. What we had previously indicated was that it was a company whose margins were in the high single-digits. It had a tremendous first quarter because of some very significant Aftermarket sales.

And so, what we were trying to indicate was that as much as we would love to be at over 19% for the rest of the year, that is not realistic. And that Engine Controls, now we believe, will be in double-digits, closer to 10%. The segment is not going to fall off the cliff, but it will come down from 19%, 200 basis points at least, which is where we had guided at the beginning of the year. It is just reaffirming that they're doing well. The segment is going to do well, but this is not the new run rate yet. We'd love to say that it would be in the future.

Given all the things that have happened in the change, in the mix, and the strong performance in the first quarter, could you update us in terms of approximately where we should look for the operating margins for your three segments for the year?

I think Aftermarket is going to be pretty close to where it was, hopefully a little higher. I think Aerostructures, I'd make the same comment. And I think Aerospace Systems would probably be close to where we ended last year in that 15%, 17% range.

That's very helpful. Thank you so much.

The next question comes from Eric Hugel.

S&P Capital IQ. Can you give an update on the ramp-up on the 787? Where are you now, and when do you guys start to see the step up to 10?

I think we are at 7-ish now, and I think we would start to hit 10 the end of this coming quarter, but most likely really in our third quarter.

Okay. With regards to the 37, this step up to 42, is that more in your fourth quarter?

Correct. Some of the early companies might get a little bit of December action, but I would think it would be mostly our Q4. As well as Jeff indicated that the -- I forget now exactly when A320 goes up next, but give that is becoming a more important program for us, that should provide some help as well.

With regards to the Jefferson Street move, can you give us a path to how those costs ramp over the year?

I think what you will see is, you'll see Q2 be heavy on capital, and I believe low on disruption and move, but higher than Q1. And then I think by the second half of the year, the capital should be rather -- should drop, not completely, because we're building the building now. Then some of the new equipment comes in. But the second half will be more move-cost-disruption oriented, and the first half of the year will be more capital-inventory build-ahead type. So those are the metrics.

When we're looking at the P&L impact, it should be much more second-half weighted?

That's right, because obviously, you don't incur move costs till you move stuff. And when you move stuff is when the disruption is likely to hit you the hardest, and those are the P&L items.

With regards to the tax rate of the year, where should be?

35.6%.

And lastly, just to make it clear, the $0.04 of Vought integration, that does not include the $0.02 or the Primus cost? Those are two separate things, right?

Correct. So we did not add back either the integration cost in Vought. I think we indicated near the end of the fiscal year that while we are still integrating, it was time to stop adding those back. If you would like to add them back, you are welcome to do so. And we did not add back the due diligence cost. Our typical style on due diligence cost is we would add that back when we start getting into investment banking fees and serious, serious money, not that $1 million isn't serious money. But that is a recurring-type spend. So that's our style, that we're not looking to get relief, so to speak, for the normal thing. But if we get into the heavy investment banking fees, we would usually add those back.

Michael Ciarmoli.

KeyBanc Capital Markets. Jeff, I know you didn't want to get too much into the business pipeline, but you guys did a great job back at the Investor Day showing us that pipeline. I guess through the end of July, awards of $800 million would have been decided. Can you give any color around your win rate on some of those programs? I know they span a number of businesses. Trying to get some clarity into what could boost your organic revenues from those opportunities you clearly laid out earlier in the year.

You'll remember that I didn't lay those out. Just think about what we have already announced since then. We announced I think a $1.7 billion pipeline. We just won a $1.7 billion Embraer contract. If you put those two numbers together, it looks like we just won everything in the pipeline. Things are so dynamic, that, that can't be the case. I would say that our win rate is generally, Jim Cudd pointed out, our win rate is lower than we want it to be, which indicates that we need to spend some time focusing on where we are competitive, why we are competitive. So this way, we don't end up spinning our wheels more than we need to.

I would say the pipeline is at least as large as it was back then. With it is just -- the pipeline contains different types of products, and the products span from Aerostructures to Aerospace Systems to large Aftermarket programs. It is pretty hard to quantify, other than to say that there is no let up. And that we are working hard to continue to gain our market share, not only in those programs that are going to be very important for our future, such as the Embraer second-generation E-Jets. But also those things that will impact us in between now and say fiscal-year '16, which will be more focused on market-share gains on existing higher production programs. We are focused on both of those things, and we are happy to win on the short term and on the long term.

Got it. And a quick one, Dave, as we think about some of the military programs transitioning from obviously what is not an optimal production space in Jefferson Street, can you have better margins on some of those legacy, mature programs, on lower volumes with a, obviously, more optimized footprint in Red Oaks?

Absolutely.

Perfect. Thank you.

The other thing Mike, -- and for others, I think that we do like to announce the Embraer-type wins. That's obviously a happy thing for us to do. But the success of our Company, traditionally, that doesn't relate to Aerostructures is the $10 million, $15 million, $5 million win, getting a lot of those. And we will find a way to communicate those to you. But those happen, I wouldn't say every day, but those happen with a lot of frequency. And if you have enough of them, it is real money.

Our style on announcing press releases has been waiting for the big, big wins. But it is not just the big, big wins that are going to drive our Company. Obviously, those smaller wins tend to require less upfront investment, less capital. They tend to get into the sales channel a lot quicker, so we are focusing on both. We're not just out there trying to do whale hunting, and we like that balance.

Steve Levenson.

Stifel. Could you please tell us on Primus how much of it is commercial versus military? And how much is Boeing versus Airbus versus other? And then, how that compares to the existing composites business?

Virtually all commercial, virtually all Airbus, although --

Airbus-related.

Or Airbus-related, so not all the revenues go to Airbus, but they go to others who are selling to Airbus. So there is some Boeing business, but it's primarily Airbus.

And with the Legacy business, I take it most of that is Boeing?

The legacy?

The legacy composites business.

Right.

Yes, that's right.

So is Primus part of the Companies that are being combined, and I guess that's where the opportunity is coming from?

No, I think that one thing -- you think about the composites businesses, when we think about that, we think about trying composite systems. When we combine insulation systems and composite systems, which are our two heritage [prime] Companies, our insulation systems business has a very broad exposure to Airbus.

That is where you have got the ability to bring composite systems capability into insulation systems, and give that access to Airbus. And actually then allow the insulation system's competitiveness and its low-cost capability, the cost structure back into composite systems, where now they are able to better compete for higher value, add products at Boeing and any of their other customers. That is really where that combination comes from. But the Farnborough and Thailand operations are not part of the combination.

Got it, thank you. Also wanted to ask if you have a view on additive manufacturing, 3D printing versus machining. And do you expect Triumph to participate in that?

Yes, this is really an exciting topic, and it's one that is full of possibility. The whole concept, I think the first time I heard about 3D printing was on some TV show, and some villain made a gun or something with this printer. And then I find that we actually have 3D printers in our Companies, and we're making tooling out of there. So we believe that 3D printing, additive manufacturing, near-net manufacturing, all of these new advanced processes for manufacturing have certainly a great promise and a great future. We are involved in researching this and staying up to speed with it. I don't really know what the full scope of what is possible with additive manufacturing yet. I don't know how much of an impact it can have on how broad of a part of a product base, but we will certainly make as full a use of that technology as we can.

Historically, Triumph has been known for a -- as a technology Company in terms of its product that it offers. And certainly, we don't want to be left behind in the technology of the process. And additive manufacturing does in fact look to hold promise to be one of those game changers, that if in fact, you are outside the tent on that one, I think you are going to be sorry.

Thank you. Last, do you think your own version of partnering for success here is going to lead to more than just cost savings? Is it possible that that's going to bring in some acquisition opportunities?

You never know how these things can -- I have often thought that any course of action that you undertake, the unexpected consequences usually outnumber the expected ones. I would say anything can happen, and certainly, that may be a possibility.

Noah Poponak.

Goldman Sachs. A couple follow-ups. Dave, what is in nonrecurring revenue, and where does that sit in the statements? Can you give us any color on how those comps change through the rest of the year?

The nonrecurring revenue is basically where you get paid to do the development work, or perhaps an assertion or perhaps a claim for obsolete -- for inventory that is now obsolete because our customer made an engineering change. So they tend to be very -- it is not like every month you have nonrecurring revenue. But the big one for this year, which we expect to be in Q2, would be the large development effort that we are undergoing to turn the commercial variant of the 67 into the tanker. Because for us, part of the structure we make will be directly impacted by the refueling capability. So Boeing is using us to engineer those changes, and they will pay us for those engineering changes. We expect to do that billing in the second quarter. It could slip into the third quarter.

Can you size that?

It could be $15 million to $30 million. It all depends. Sometimes it is partial with a long list of sign offs. There will be assertions, negotiations, so it's not a streamlined process as much as we would like. But that is the big one that is going on this year that would result in revenue.

Just one other one on the 747-8, from a high level, how you're thinking about that program. I think Boeing had another sequential decline in the unfilled order number when they reported the second quarter. I know they just took the rate down, but the step down wasn't that large. How are you thinking about the potential for another step down, and how are you preparing the business for that?

It's a colloquial-type of statement to say you hope for the best and plan for the worst, but we are in fact continually looking at contingency plans to go to 1.5 if such is the case -- or wherever the rate goes. But I do believe that the 747 program is still a program with a long future. I think that the discussions we have had with Boeing, and we are continually talking with Boeing about the 747 program. And they still have confidence in its future, as and we share in that confidence.

The question really becomes, how long are you going to run a program and what is the lowest rate that makes sense? And so we are looking at doing whatever we need to do to make sure we have a beyond a viable program, a program that generates adequate returns at a lower level. And we are taking the steps that we need to in order to make sure that happens. We still think the program has, I want to say legs, maybe I should say wings.

David Strauss.

UBS. Dave, the 747-8, the $0.10 you spelled out there, what exactly is that? Is that $0.10 stepping down from [$2] a month to [$1.75] a month? Is that what that represents?

Correct.

Primus, was Primus -- I know you announced Primus right after you gave guidance for fiscal '14. Was Primus in that original guidance or not?

Yes. We knew it was coming, and it's not that much revenue relatively speaking. And its earnings are fairly modest in the early years, as they ramp up on some of these new programs. There is not a huge -- it is not hugely accretive in year one anyway, $0.02. So effectively it was. We knew it was coming. It was just more of a matter of getting the paperwork done.

Got it. I think you said 47, you're going to step down here -- out three to six months from now on. On 67, are you at one a month on 67 now, or are you still at two a month?

I think we've got one more month of two, and then we really go to, over the last eight months, I think there is only a couple of deliveries on tanker. But then you have the nonrecurring. We are not going to be -- we're not going to produce eight [ship-sets] in the last eight months of the year. It will be less than that. Will be way less than 50% of the prior year; that was what we talked about when we gave our guidance. That does snap back nicely in '15, as we produce some tankers and I think some freighters. And then it should be another incremental amount in fiscal '16 as the tankers and freighters start to get even higher.

Last one, on defense, when you broke out the sales by end market, I think you showed defense up 4%. What was defense -- do you have an idea of what defense was organically?

Yes. I think it was down about 11%.

Julie Stewart.

Credit Suisse. Dave, to follow-up on your comment that the fiscal second quarter will be flat with the first quarter, is that on a GAAP or adjusted basis?

Adjusted. Yes, that's right.

Okay. Then on the $0.10 for 747-8, I'm assuming that's on an annual basis. And would it be a similar number if the rate went down to 1.5?

I think the next step down would be about the same number, yes.

Since there are no further questions, this concludes the Triumph Group fiscal 2014 first-quarter earnings conference call. This call will be available for replay at 11.30 am today through August 2, 2013 at 11.59 pm. You may access the replay by dialing 888-266-2081, and entering access code 1618421. Thank you all for participating and have a nice day. All parties may now disconnect.