Triumph Group Inc (TGI) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group's Conference Call to discuss our fourth quarter and full fiscal year 2017 results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. (Operator Instructions)

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 Daniel J. Crowley, the company's President and Chief Executive Officer; and James S. McCabe, Jr., Senior Vice President and Chief Financial Officer of Triumph Group, Inc.

Please go ahead, Mr. Crowley.

Thank you, Amanda, and good morning. Welcome to our conference call on Triumph's fourth quarter and year-end results.

Triumph demonstrated solid operational results and follow-through on our turnaround and transformation of the company. We ended the year by exceeding our adjusted earnings per share and cash guidance, and we're cash positive for the year. These results were made possible by the improving operational performance of our team, including on-time delivery and quality-level improvements year-over-year. The team has delivered favorable program EAC performance as reflected in our $57 million of net positive cum catch-ups. We also exceeded our cost-reduction goals by 50%.

This performance, in turn, enabled Triumph to improve our customer relationships. We continue to resolve outstanding claims and created new partnerships with our largest customers.

I summarized our agreements with Spirit and Northrop Grumman last year, and the progress with Northrop Grumman on new opportunities in particular has been very encouraging. And we're now in a position to report additional settlements with Boeing and Bombardier. Specifically, in support of Boeing's Partnering for Success initiative, Triumph and Boeing settled past claims and negotiated new prices, cash payments and standardized terms and conditions that resulted in a win-win for both companies. We helped Boeing on their affordability mandate on the 767 commercial and tanker programs, while securing price adjustments as well as cash advances and more economical build rates. We signed an MOA that relaunches our partnership and commits both parties to work together across Boeing commercial, defense and global services businesses. And Boeing and Triumph both point to the settlement as a great example of collaboration to help their customers and each other succeed in an increasingly competitive market.

Regarding our settlement with Bombardier announced this morning, we are pleased to move forward having addressed our mutual concerns about wing deliveries, development cost and recurring production cost as part of a comprehensive settlement agreement that resolves all outstanding commercial disputes and pending litigation. This settlement was a year in the making and allows us to reset the relationship and focus on delivering the Global 7000 wings in support of Bombardier's entry into service plans. Both parties will file to dismiss pending litigation and put our combined energies into accelerating wing and aircraft deliveries. Triumph is proud of our contribution to the program thus far, including delivery of all test articles and early production wings. With wing development now over 90% complete, we can see the end of the nonrecurring phase as we ramp up to production over the next few years.

We have a production representative factory in place now, we're adding rate tooling and are working closely with our supply chain and on-site representatives from Bombardier to accelerate the ramp.

Now while each situation is unique, I look forward to achieving similar win-win outcomes with our other OEM customers in the months ahead. And collectively, these settlements improve the financial outlook for our Aerospace Structures business, reduce our debt levels and improve our creditworthiness. They also improve the profitability and cash flows of these programs in our backlog as we transition to higher production rates.

Another step towards becoming predictably profitable, we paid down debt and worked with our banks to amend our credit agreements that will provide financial flexibility to fund our growth program. Triumph reduced our long-term debt by over $339 million in FY '17 as a result of divestitures, customer payments and advances and tighter cash management. The bank amendment provides covenant relief during our transformation and reduces unneeded line of credit capacity. The bank amendment contains a provision that allows our Aero Structures subsidiary, also known as Vought Aircraft Division, the option, if necessary, to commence voluntary insolvency proceedings within 90 days of the bank amendment. To be clear, we would only pursue such serious option if it were in the best interests of our shareholders. The company does not anticipate and believes it is highly unlikely that it will voluntarily file insolvency proceedings with respect to the Vought entity, despite having the ability to do so.

Clearly, the status quo situation across multiple contracts was untenable and required action. We continue to work with our largest customers to resolve past claims and assure that we have the liquidity needed to satisfy their needs. Our customers' responses to this need to bring the contracts and payments up to date, to pay for prior development and production deliveries and provide advances has been constructive and timely. And as we address the underlying causes of liquidity shortfalls in a joint fashion with our customers, the need for such an option is greatly reduced.

I want to acknowledge the hard work and support of our Boeing and Bombardier customers in reaching these successful agreements as they form the foundation for future success.

Moving on to Page 3 of the slide deck, our financial results for the fourth quarter were solid. Excluding a noncash impairment charge, we had operating income of $165 million and net income of $139 million. Aerospace Structures goodwill impairment is a reflection of a lack of orders in the past, losses on some sunsetting programs and lower profitability during the program development phases. However, taking this action now will help us to avoid future impairments in Structures as their business outlook improves. Excluding this impairment and restructuring cost, we generated $3.09 per share of earnings.

Our cash from operations was $454 million, while free cash flow was almost $500 million, driven by divestitures, program deliveries, contract settlements and customer advances. While these advances burn off over the next year or 2, we will continue to drive cash from operations and divestitures as we work towards a more predictable cash conversion ratio.

From a full year point of view, sales came in at $3.5 billion, within guidance. Adjusted earnings per share were $6.54, and free cash flow was $315 million, exceeding guidance.

Looking ahead, we forecast FY '18 revenue to come in between $3.1 billion and $3.2 billion, consistent with previously discussed rate reductions in C-17, 747, 777 and the G450 programs, as well as the 2 divestitures we completed last year.

Recall last year, we launched a cost reduction campaign targeting $300 million of run rate savings by the end of FY '19. On Page 4, you can see that we exceeded our FY '17 in-year cost reduction goals of $44 million by over 50%. We created our transformation office early in FY '17 to generate and track initiatives across operations, supply chain, SG&A and consolidations. The operational improvements stemmed from our deployment of the Triumph operating system with over 200 lean events run last year.

Our supply chain team aggregated our $2 billion of spend, and in FY '17 negotiated better prices for raw materials, components, services and supplies. In Q4, we focused on IT costs, factory consumables and chemicals.

SG&A savings were mainly in the headcount area. And we closed 2 plants in Oakdale, Pennsylvania and Everett, Washington, and created plans to close 3 others in FY '18 as we complete transitions of work to our other plants.

This year, we set an incremental goal of an additional $70 million in in-year savings that builds on our FY '17 results. Now Triumph is moving towards an open book management approach, so that everyone in the company knows how their work affects the company's financials and to get everyone in the great game of business.

On the cash side, after going after accounts payable and receivable line items last year, we launched the Triumph inventory process, or TIPS, initiative in Q4 to reduce our raw material work in process and finished goods inventory by over $100 million across all 4 business units. And this will be enabled by improved sales, inventory and operations planning processes across all 20 operating companies.

Turning to Page 5, our Integrated Systems and Product Support business areas continue to lead the way in value creation, generating a combined 38% of our revenue and 59% of our operating income in FY '17. In Q4, Integrated Systems delivered 20% operating margins, while Product Support contributed 16% margins and has grown 6% annually over the last 3 years.

Integrated Systems is bidding and winning new content on military and commercial platforms as OEMs look for ways to get price competition and introduce new technologies.

Product Support is partnering with operators, including FedEx, UPS and Delta, to improve aircraft availability, while winning new MRO work on the military side on platforms such as the KC-10 and C-17.

On Page 6, we summarize our progress on turning around Precision Components and Aerospace Structures business units. FY '17 was a difficult year for Precision Components as they worked through a labor strike, fixed red programs and paid for consolidation expenses. However, they contributed heavily to our cost reduction goals and new business wins, providing short cycle revenue, winning new work on the F-35, Cessna Longitude and military and non-aerospace and defense programs. We expect Precision Components' profitability to improve year-over-year in FY '18 and to follow through beyond.

Aerospace Structures' delivery schedule and quality performance on the 747, 767, Global Hawk and Global 7000 programs made it possible for us to obtain OEM settlements I mentioned before. And as part of our settlement with Boeing, we will maintain more economical build rates on the 747, which will maintain our experienced workforce and reduce our forward losses.

On the G650 program, we are coproducing the wing boxes and finished wings with Gulfstream in support of their customer demands. Our teams in Tulsa and Nashville are working hard to come down the cost curve, using outside experts from Gulfstream and lean consultants. And we expect G650 to be cash positive in 2019.

On Page 7, I summarize our competitive wins, including follow-on awards and contract -- or excluding follow-on awards and contract extensions. Triumph won $500 million in competitive awards in Q4 and $1.2 billion over the fiscal year. These wins are a mix of short-cycle component and MRO work and longer cycle systems content.

Our top 5 competitive awards in Q4 were on the A330 Neo stabilizer actuators, the Boeing 787 frames, longerons and stringers, and 3 awards for our Product Support business on the A330 Pratt & Whitney nacelles and the KC-10 refueling boom and APU. We continue to increase our win rate quarter-over-quarter and ended the year at a book-to-bill ratio of 0.97 to a goal of 0.95. Our focus on growing our military work to balance out the commercial program's cyclicality will also help moderate cash demands. We're also pursuing and winning orders with the engine OEMs for engine controls and gear systems for Rolls-Royce, GE and Pratt & Whitney.

Overall, our pipeline remains healthy at $13 billion across 539 active opportunities. And we're bidding and winning work on new starts related to military trainers, unmanned aircraft and helicopters.

Our backlog of approximately $4 billion was down slightly year-over-year, but the new wins were able to largely offset sunsetting programs. And we're looking forward to the Paris Airshow in mid-June.

A new area of emphasis for FY '18 is research and development. Triumph has traditionally spent much more on acquisitions than new business resources such as marketing and selling, bid proposal and research and development. And while our R&D expenses have grown modestly over the last 3 years to $112 million, including customer-funded R&D, we plan to increase expenditures in this area to create new products that offer higher performance and size, weight and power advantages to our customers.

There's about 50 projects across all the business units and a dozen opcos. About 25% of them cover multiple businesses; 20% are in mature areas that have a technology and manufacturing readiness level of 7 to 9; about half of them are in the mid-level maturity; and the remaining 30% are larger, broader initiatives that look over the horizon. Examples include wing fold actuators, additive manufacturing and advanced composites that will really differentiate our Structures products, plus technologies that will enable the electrification of aircraft, primary flight controls and innovations in fuel, hydraulics and pumps. We want to earn a reputation for innovation, and we aspire to solve our customers' hardest problems.

So overall, we continue to execute around our 3 imperatives of delivering on commitments, increasing financial predictability and driving organic growth. In the future, our company will reposition from a collection of unrelated businesses with mixed performance results to a single company known for quality, whose products and services are differentiated in the market, with higher levels of intellectual property, advanced technologies and long-term partnerships.

After a challenging first year of restructuring and transformation, my team are looking forward to continuing to improve our results year-over-year and moving towards our future state of a premier design, manufacturing and support company with a stronger portfolio of businesses whose comprehensive capabilities, integrated processes and innovative employees advance the safety and prosperity of the world.

I'll now turn it over to Jim, who'll go deeper into our financials. Jim?

Thanks, Dan, and good morning, everyone. We're very encouraged by our performance in the fourth quarter. We exceeded our guidance for EPS and cash flow, largely as a result of our successful outcomes on contract renegotiations we held with several large customers, along with improved execution throughout much of the organization. We strengthened our balance sheet and improved our financial flexibility with the cash we generated during the period along with the recent amendment to our credit facility. Our transformation strategy remains on track, and we enter fiscal 2018 well positioned to continue to make progress towards becoming a predictably profitable company.

On Slide 8, you'll find our consolidated results for the quarter. As anticipated, our net sales were down compared to the prior year fourth quarter due primarily to continuing production rate reductions on several legacy programs. Despite the sales decline, we were able to materially improve our adjusted operating and EBITDA margins as a result of improved performance and the more favorable terms and conditions we were able to negotiate with several customers.

Of note, our adjusted operating income and EBITDA excluded a $266 million charge for the impairment of goodwill in our Aero Structures segment and $14.5 million of transformation-related costs.

For comparison purposes, I'll remind you that our fiscal fourth quarter 2016 adjusted results also excluded goodwill impairment charge and other transformation and impairment charges totaling approximately $1.3 billion on a pretax basis.

With respect to our segments, on Slide 9, sales in our Integrated System segment were lower than the prior year quarter, in part due to the impact of our Newport News divestiture, which contributed $4.7 million of sales in last year's fourth quarter.

Additionally, unfavorable foreign currency fluctuations, particularly with the British pound, and fewer deliveries on the A380, the V-22 and military aftermarket and spares contributed to the year-over-year sales decline.

Integrated Systems' operating margin remained strong at 20% and, excluding a legal settlement in the prior year, was up 80 basis points, reflecting the benefits of our cost-reduction initiatives.

Also notable, Integrated Systems posted a strong book-to-bill in the quarter, driven in part by a new award from Korea Aerospace Industries to supply airframe mounted accessory drives for the KF-X fighter.

On Slide 10, sales in our Aerospace Structures segment declined year-over-year, in line with our expectations, as production rates on several legacy programs continue to decline. Higher volumes for the 767 tanker helped to partially mitigate the impact of the wind-down of these legacy programs, and we expect this program to continue to grow in our fiscal 2018.

During the fourth quarter, we conducted our annual test of impairment for goodwill and indicated an impairment of $266 million for Aerospace Structures. Excluding this charge, segment adjusted operating income was approximately $100 million, representing an adjusted operating margin of 29%, while adjusted EBITDA was 30%, up substantially from last year. Contributing to the strong margins for the quarter were net favorable EAC adjustments of $73 million in the fourth quarter. These favorable adjustments were the result of improvements in both pricing and delivery schedules on certain programs, which were the outcome of our ongoing efforts to negotiate contract improvements and settlements with several of our customers, particularly Boeing, Northrop and Gulfstream.

Turning to our Precision Components segment on Slide 11. You'll see that, despite lower sales related to reduced 777 volumes, we generated meaningful margin improvement over the fourth quarter of fiscal '16, reflecting the cost reduction actions we implemented during fiscal '17, including several plant consolidations. Our restructuring efforts will continue throughout 2018 as part of a process that we've been carrying out in consultation with our customers, who fully support our plans.

Importantly, over the course of our cost rationalization process, we've not only managed to maintain our customer relationships and meet their expectations, we've also continued to win new work, as evidenced by Precision Components' trailing 12-month book-to-bill ratio of 1.2 to 1, which includes new wins on the A350 and other programs that are on this slide.

On Slide 12, fourth quarter sales for our Product Support group, while modestly down on a reported basis, increased 12% organically when accounting for the divestiture of our APU business that we announced back in the third quarter. Sales growth was driven by new wins with regional jet and commercial operators for structures, interiors and accessories. Product Support is a solidly profitable business with significant operating leverage.

Fourth quarter operating and EBITDA margins improved substantially over last year, reflecting the strong organic sales growth as well as cost reduction initiatives, which included the completion of the facility consolidation. We see meaningful opportunity for continued profitable growth in Product Support in fiscal 2018.

Turning to Slide 13. Free cash flow was $498 million during the quarter. This includes $324 million in negotiated customer advances as well as $60 million in proceeds from the previously mentioned sale of our APU business. Excluding these inflows, fourth quarter free cash flow was $114 million, which exceeded our guidance and represents a material improvement from the use of cash in each of the first 3 quarters of fiscal '17. Our fourth quarter free cash flow benefited from the success of our working capital management efforts as well as more favorable pricing on certain contracts.

With respect to other cash uses during the quarter, we used $14 million for restructuring and invested $44 million for development programs, which is down from previous quarters as we move towards the production phase of these programs.

It's important to point out that we'll be working down the $324 million in customer advances that we received during the fourth quarter over the course of fiscal '18, which will result in disconnect between our net income and our cash flow as we move throughout the year.

On Slide 14 is a summary of our capitalization, leverage and liquidity. Our net debt is just over $1.1 billion and 57% of total book capitalization, and we feel very comfortable with our liquidity situation entering fiscal 2018. Our total leverage, based on our trailing 12-month adjusted bank EBITDA, is approximately 3.6x our net debt, and our senior secured leverage is 1.6x.

As you may have seen from our 8-K a few weeks ago, we signed an agreement with our lenders to amend our credit agreement. This amendment enhances our financial flexibility, which we expect to enable us to continue to advance our transformation initiatives.

Regarding our outlook, based on current aircraft production rates, we currently expect fiscal 2018 revenue to be approximately $3.1 billion to $3.2 billion and to increase in fiscal year '19, as production and backlog growth offset sunsetting programs. We plan to provide additional fiscal year 2018 guidance when we've analyzed the term of the impact of recently settled contracts and have greater visibility regarding the timing of ongoing negotiations with customers.

So to wrap up, we're pleased with the progress we've made in the execution of our transformation strategy in fiscal 2017, which was reflected in our fourth quarter free cash flow. While we have much left to accomplish, we're seeing the results of our efforts across our operations. We continue to win new awards and have made great strides in strengthening our relationships with our customers.

Our Integrated Systems and Product Support segments continue to deliver strong margins, and we are working towards improved sustainable profitability with our other 2 segments.

Our cash flow has made steady progress over the course of fiscal '17 and our lenders remain supportive of our operating plan, as evidenced by our recent bank amendment.

I will now call -- turn the call back to Dan, and then we'll be happy to take your questions.

Yes. Thanks, Jim. So looking back on my first fiscal year at Triumph, we've accomplished a lot as one Triumph team. We've got new organization focused on 4 business units with 20 streamlined operating companies. We've got a new operating company philosophy based on accountability and lean deployment. We've got a new biorhythm of operational, financial, strategic, new business and talent reviews. We've right-sized our footprint and headcounts in support of our affordability goals. We closed the first 2 factories, several more in the pipeline, and divested the first 2 noncore businesses. We had greater-than-planned cost reduction. We reduced our debt by 25%, updated our bank agreements, and we recovered dozens of red and yellow programs to green.

Importantly, we renegotiated major contracts with our OEM customers, improving cash and decreasing past due accounts and enhancing the profitability of our backlog. We reset our business strategies and we reenergized our business development team. And most importantly, we repaired customer relationships leading to new business opportunities. So based on these new strategies in Q4, we developed and have since approved our FY '18 operating plans, and the 4 business units are now 54 days into the new year. As we complete the remaining contract updates, we'll adjust our forecasts and provide guidance no later than our next earnings call.

Jim and I look forward to meeting with investors and analysts in the coming months to provide more details on where we're headed as a company. And Amanda, at this point we'd be happy to take any questions you have.

(Operator Instructions) Matt McConnell.

RBC. Just to be clear, the Bombardier resolution wouldn't have contributed to the cash in the quarter, is that correct? And then, would there be an expectation that in the first quarter there would be any catch-up payments there? Or any comment on that?

Yes, thanks. There was no cash related to any settlements in the quarter we just reported. And we're not going to speculate on specific customer advances in the quarter, but cash continues to improve. And as you saw, we were able to obtain advances from the key customer settlements I mentioned in last quarter, and we hope to continue that process with other customers.

Okay. And then -- and I know you're not giving a fiscal '18 outlook, but can you talk through some of the big moving parts on the cash flow for fiscal '18? And maybe starting with customer advances, the $324 million that got pulled into fiscal '17, what are the implications, then, for fiscal '18 free cash flow? And then maybe if you could touch on development programs, Gulfstream. Just what are some of the big moving parts that we should think about with respect to fiscal '18 cash flow and whether or not that would be a positive number?

I mentioned the $324 million advances in this last quarter of '17. That will impact cash flow in the next 12 to 18 months. And so that's one headwind we're facing in terms of cash flow going forward, is the reduction of that advance, should we not get other advances, but we may get other advances to offset that. The other drivers were obviously we have, and we disclosed in the presentation, the restructuring charges. I believe it's about $54 million in 2018 we expect in restructuring charges. And probably one of the most important things we're doing is the initiative on inventory reduction, the TIPS initiative. And we're targeting over $100 million reduction there. And you saw what we were able to do when we targeted a number on cost. So...

Yes, I'll touch on the development programs. We're done on Embraer E2 development. And G650 is not a development program. It's really a transition program from Spirit to us and then a ramp-up in rate. I mentioned Bombardier development. It's largely done and it's going to tail off over this year and next as we deliver the certification artifacts Bombardier needs for entry into service.

So we really are coming off several years of compounded development programs that hit us all in a short period and really drew down our cash position. So we're looking forward to getting to the other side of these programs. We still have development content in our Systems business, but it's much smaller.

Our next question is from Ken Herbert.

Canaccord Genuity. Dan, I just wanted to first ask, again, just to follow up on that question. When you look at the $44 million you used for development programs in the fourth quarter in terms of cash, I mean, it sounds like that steps down sequentially as we go through the year, just considering the risk reduction around E2 and Bombardier. So I'm just wondering if you can talk about specifically those few development programs excluding the advance and work-down of the payments you've received in the fourth quarter.

And is it fair to say on E2 that the -- obviously the risk profile was much lower there relative to other development programs, but that you're on track and you should be largely derisked on that as you move out of fiscal '18?

I'll start with E2. And I had a chance to meet with the CEO of Embraer recently. And they are very confident in the production ramp-up profile that they gave us. And they appreciate the hard work we've done on the fuselage and the empennage work. And it's been a program that's allowed us to -- there was a pause in production over the last year that allowed us to make sure we're fully ready for the ramp that's in front of us. So no concerns related to development on E2.

On the Bombardier program, it's really been a great team effort with Bombardier because we're introducing a state-of-the-art wing that has some really fantastic features that enable a level of performance that's really unmatched in the market. And to achieve that wing, it certainly took longer and cost more, but now we're just into the buttoning up of the design. And as I mentioned, all the test articles have been delivered, the flight test articles and then static and durability articles. So -- and the early test results in their flight test program, they've flown 3 now, are very positive.

So we feel good that we're coming down the back side of the risk retirement curve on the Bombardier program. So the profile of spending per month and per quarter, we have a very tight sight picture of what that will be. And we don't anticipate any big surprises coming out of those programs.

Okay, that's helpful. And just to follow up quickly, you highlighted in your remarks about a step-up in R&D spend, specifically within Structures, and you highlighted a few areas of opportunity and the bid pipeline. Can you just talk briefly about where you see opportunities? And then I know obviously you're facing some top line pressures as some of these programs sunset, but what's the new business climate now with a lack of sort of new starts on the commercial side? And how are you viewing priorities for the R&D spend to help maybe accelerate that effort?

Sure. Let me start with our Systems business. They -- the customers, they may have a proven airframe that isn't necessarily renewed during its life, but they upgrade all of the systems contents for improvements in reliability and size, weight and power efficiency. And right now, we're getting good inquiries from both Boeing, where we're a lead. One of our largest programs in Systems is the 737. And also Airbus, we're being pulled in for discussions about upgrading of components and also replacing competitors whose prices are not affordable. So even though we may not be building, let's say, the primary structure on some of the new start aircraft, we're getting lots of systems content, which is, of course, an attractive business for us.

In terms of R&D priorities, if you look at the components that go into an aircraft, some haven't changed over the decades. We still make mechanical actuators and controls. But increasingly, these parts are becoming smart. So they want embedded sensors that can provide prognostic health, feedback on the performance of the systems in flight, give them early warning into any replacement cycles that are needed. They also want this electrification of the aircraft. We do a lot of work in hydraulics, and that's a good business for us. But over time, many hydraulic components will be replaced by actuators, just like in your car with the steering rack. And electric motors are getting smaller. What used to be heavy AC motors -- AC current motors with thick wiring are being replaced by very lightweight motors that have high reliability and fewer parts. Our customers want this because today the dispatch rate has to be 100%. We all fly. We all know what -- how frustrating it is when an aircraft is delayed, if it's diverted or canceled because of a mechanical problem. And our customers are raising the bar on system reliability.

So we'll be working in all those areas and look forward to sharing more details in the coming quarters.

Our next question is from the line of Sheila Kahyaoglu.

It's Sheila Kahyaoglu from Jefferies. I guess, just on the revenue guidance, since you did provide that, what gives you confidence in -- it's still declining 10%, but what gives you confidence in some improvement? And can you maybe talk about what you expect within the segment with it?

Sure. We know what the programs that are contributing to the year-over-year drop in revenue are. 777, of course you know that's coming down in rate over the next 2 years. But we're seeing rate increases on 737, 787, A350, A330, the variance of A320. These programs are all going up in content. And we have enough of an insight into our backlog to know what our revenue is going to be this year with confidence. And of course the divestitures contributed about 2% of the reduction in year-over-year revenue.

So we have a good picture of where we're going to be on revenue. And having gone through now the 5-year plans of all 4 businesses, we spent a week going through all of their plans, we know how these new sales and production ramp-ups are going to contribute to revenues in '19, '20, '21. So we're confident that FY '18 is going to be a trough year for Triumph on revenue.

And then just one more on pricing, if you don't mind. The EAC adjustment within Structures, I guess you're certainly in a different position than you were a year ago. Can you talk about where you're seeing some pricing improvements? And what gave you that ability to kind of renegotiate these contracts?

The thing that made it possible to have conversations with all of our customers was improving performance. Boeing, Bombardier, Gulfstream, Airbus, they all have the same expectation: on-time delivery with quality. That's the price of entry. So getting performance fixed on programs like 747, 767, Global Hawk really created an environment where we could have these conversations. Now we're not able to provide details of individual settlements per our agreement with the customer, but they're obviously win-win. We wouldn't have entered into them if they weren't. And then the responsibility shifts back to Triumph to deliver on our commitments, having achieved those settlements. Jim?

Yes. Some of it is cost efficiency and some of it is negotiated changes in rates so we can more efficiently produce, and we're working with the customers on that. And these are win-win situations with the customer. We say if we could build a little faster and maybe source some of these, we could be more efficient and keep the price lower and keep our costs down. So that's the kind of discussions that we like having and we have had.

Does that impact the cash outflow for, say, the 747 and the Global -- sorry, the Gulfstream programs going forward, then? Are they lower than you previously anticipated?

Not materially, in the whole. From month to month they move, but materially they're the same.

Our next question is from the line of Peter Arment.

Baird. Dan, Jim, question. First, I guess, a clarification, Dan. You mentioned that you're going to have other negotiations with your other OEMs and you should be able to provide guidance by the next time you report numbers. So do we assume that, that will all be wrapped up? Are you just talking about having visibility on the analysis from your completed OEM negotiations for guidance?

No, we really don't have much more work to do. And we've already engaged with the other OEMs. And it's all been, as I said, I think, very constructive response. When we sat down with customers and said, "Hey, the current contract has these challenges for us and we need your help," they responded, because they need us and we need them. And often the problem on a given program can be solved through changes in supply chain approaches, how much work do we do versus third parties or our customers. And so it's really joint problem-solving, and that's been the spirit in which all the OEMs have met with us.

This doesn't remove the need for us to hit our delivery milestones. That's been the consistent theme from all the OEMs, is we need our products because Triumph's got critical roles on lots of programs. And as we've worked to improve our delivery, I mentioned Northrop Grumman on the Global Hawk program, that's hugely important to not only Northrop but to the Air Force, the Navy and their NATO partners. And our recovery on that program helped to enable the Milestone C award, the low-rate initial production award for the Navy Trident. So there's a direct connection between improved performance, contract dispute resolutions, follow-on awards and then joint success. And we want to repeat this pattern of behavior with all of our customers.

Got it. And just a follow-up just on the transformation progress that you're making, obviously $69 million in kind of the savings this year and an incremental $70 million talking about next year. That still implies, though, to get to your $300 million goal, a pretty big step-up in '19. How do we think about that?

It's true. And these savings are cumulative and add up year-over-year. And as I mentioned, we've only done 2 of the 5 facility consolidations that are planned. We reduced about 1,000 headcount towards our goal of 1,200. We ended up retaining some folks to finish out development efforts. And we're on track to our supply chain savings. So some of the savings are rate sensitive. And as programs increase in rate in the outyears, the savings number goes higher. But we're going after that with a strong focus. And the fact that we beat our plan for this year, it wasn't a given when we started FY '17 that we could, and the team feels good about it.

I'm really trying to develop not only a culture of continuous improvement, but one on, as I mentioned, open book management. And we share the financial results of the company with everybody. And they can see how savings on consumable materials or utilities, inventory contribute to the company's overall success. And so far, the response has been great.

Our next question is from the line of Robert Stallard.

Vertical Research. Just a couple of technical questions, if you don't mind. I was wondering what your expectations might be for CapEx and taxation in FY '18.

I think we haven't given the guidance for '18 yet. That'll be part of the expanded guidance we give before the end -- before next quarter's reporting. So...

As a follow-up, can you give us an idea of maybe, then, therefore the trend of where CapEx might be going from here? It came in at the low end of your range for fiscal '17. Does that imply that stuff got delayed into '18, or are we finding some savings there?

The trend is going to be slightly upward, I think is what I could say about CapEx going forward. That's what we would expect, a little bit of enhanced investment in '19.

It's mostly in support of the production ramp.

Okay. And then on the tax in Q4, it sort of like went the other way versus expectations. Is there something unusual there?

Taxes get trued up at the end of the year. And they were lower. So we went from about 17%, I think, down to the high single digits as a percentage for tax rate. And we guided to the 18% tax rate, but it came in substantially lower.

So is there any one-off settlements or unusual items in that?

No, it's just tax accounting. Most of it is noncash tax accounting impact.

Right, okay. And then finally, you've given overall revenue guidance for fiscal '18. I was wondering if you could give us an idea of how the individual divisions might be shaping up for next year?

We can't at this moment. We're still working on the guidance for each segment. I think we've talked about some of the trends, Dan did, and you know what programs are run on each segment, so I think you can get some guidance from knowing what we're on in those segments and from the trends from last year. But we just don't -- we're not giving guidance by segment for '18 yet.

And just to clarify, I think you said -- was it 2 percentage points of the revenue drop year-on-year is disposals, right?

Yes, that's correct. It's 8% organic and 2% due to the divestitures.

(Operator Instructions) Our next question is from the line of Cai Von Rumohr.

Yes, Cowen and Company. So Dan, if I do the math, it looks like gross inventories went up by about $190 million in the quarter, if I kind of adjust for the advances. Can you explain that? And maybe explain the $44 million used for development programs? Because, by my math, it was like $36 million in the third quarter. Are you just talking about the E2 and the Global 7000?

Sure. Most of our development spending in Q4 was related to Bombardier Global 7000, which was the right thing to do and necessary because we're going through this peak period of concurrency of development, shipping test articles, supporting certification efforts. So we understood that cost. Gross inventories are up, in part because of development, but also because we built ahead in anticipation of a number of consolidations. So we understand what the drivers are and we expect those to burn off in FY '18. Jim?

Yes, that's correct. We build inventory to facilitate consolidations to keep customers' expectations met. We also have some build-aheads I talked about on programs for cost efficiency that are going on. But that will reduce over time as we complete the consolidations.

And we do -- Cai, we do understand it's got to come down, though. That's part of why we launched this inventory initiative this year.

Got it. The advances increase of $324 million, how did that compare with your plan? And what was the quid pro quo? I mean, I know that you mentioned you build at a more efficient rate, but usually these customers don't give you advances unless they get something out of it, like lower prices. What sort of concessions did you have to make to get them to advance you that amount of money?

Let me generalize it, because our customers ask that we not speak to specific features of the settlement. But what I found is, when we sit down with the OEMs, a lot of them at the senior levels don't know what the cumulative cash demands that their individual program offices place on Triumph. And when we sat down with the senior leaders and we said, "Do you realize that Triumph is $300 million or $400 million negative across your portfolio programs," they said, "Wow, we didn't even realize that." And I said, "Well, a big chunk of this negative cash are claims that have been outstanding for 1 or 2 years, and sometimes for hardware that has already been shipped, and we just haven't been paid."

And when you bring that to their attention, I found the response to be reasonable and supportive. I think they don't always recognize that these individual negotiations on specific programs, that they add up. And we reached a point where we said, "Tilt. We need your help and to bring things up-to-date."

And Triumph, I think, had the right motivations over the last few years of putting customer first and continuing to spend. But you reach a point where that's not really viable and you're up against your covenants. So a big chunk of the conversation was just about educating customers about the consequences of individual decisions on programs and the need to keep things up-to-date. And once we did, I've been very encouraged by their responses.

So in terms of quid pro quo, there's always, in a claim resolution, there's a price that the customer is willing to pay and there's a price we're willing to take, and then there's a negotiation space between those 2. And what we were able to find is that there was an overlap between those positions and that we could settle at prices that were favorable to us but were lower than what they were carrying in their reserves for their program. So we didn't have to give away our bottom dollar to settle these contracts. And I think, based on my conversations with senior Boeing, Bombardier and other OEM customers, we both felt good about the outcome.

Our next question is from the line of Sam Pearlstein.

With Wells Fargo. Can you talk a little bit more on the advances? How should we think about the repayment of those? Are those on a per-unit basis in terms of shipments, so if we assume certain shipments, or is it time based? How does that get repaid?

So I'll start, and then Jim, you can help. Triumph for several years wasn't collecting advances. And advances are a normal part of the business. And as I said, once we made these points clear to our customers, many of them have the resources, the depth of cash to help us if we can help them in other areas. And so in having those discussions with them, I think we're going to -- you're going to see Triumph get back on a more balanced approach of cash advances versus cash use going forward. Jim, on the cash use?

Yes. So Sam, the couple programs that these relate to, it will be on a unit basis. And one of them burns off over about 12 months. One is over 18 months. And really, the customers are doing it to support the program. They recognize the working capital needs and some of the creative concepts we came up with to keep the cost down. Their contribution towards that was to help us with cash in the short term. So it really was a win-win, but it is on a unit basis.

And then if I can follow up, can you talk a little bit more specifically on the 747 in terms of the favorable adjustments? Is that program now profitable? And if you're going to stay at this higher economic order quantity, do you now finish that contract earlier than we would have expected beforehand?

So they were favorable adjustments on performance. And I recall a year ago, I think it was Boeing's assessment that we needed to add a couple hundred people in order to recover the schedule and quality. And we found that we could actually achieve that with fewer people, not more. So I'm proud of the teams out in Los Angeles and in Dallas that supported that program. It's not a profitable program. I think the way to frame it is it's -- it loses less money, significantly less money than it was before. But by finishing and staying at a higher build rate, we're able to get the throughput and efficiency at our factories that are needed to achieve those efficiencies. And we know what the configuration of the aircraft that we need to build, Boeing has a good forecast for their needs, and it will allow us to run the program out in a more optimal way.

Yes. I think that's exactly right. And it's negotiated changes to the program for our mutual benefit as well as our improved efficiency on the program.

And our next question is from the line of Seth Seifman.

JPMorgan. Dan, I wonder if you could talk a little bit more about -- maybe strategically about the future of Structures and maybe Precision Components as well? You guys have highlighted over the past several quarters that Integrated Systems and Product Support are kind of the priority areas in terms of growing the company and in terms of investment. But you've also made progress recently, it seems, in Structures. So maybe you can talk about how you're viewing that business over the long term and its relationship with Triumph.

Sure. When I joined the company, we looked at Structures and Precision Components. And there had been some of the view that maybe those businesses shouldn't be in our portfolio. And with the issues that existed at that time, we really didn't have an option to consider selling them. And now that we put the energy into fixing those businesses, you mentioned that Systems and Product Support are my priority, I'll tell you, my time allocation has really been towards Structures and Components for the first year, and it's paying off. We have a whole new leadership team down at Structures. And I think they're really reinventing that business with lean principles and changing maybe the culture from what's been historically kind of a cost-plus culture to one that's focused on results and driving performance for our customers.

So I'm excited about the turnaround that's happening there. Obviously, we'd like to have a few more anchor programs. We're -- we are working to win roles on new starts. I can't cover that in detail on this call. But the most important thing we've accomplished is getting these programs to a point where, either from a development progress or a contract terms and conditions, that they can be not only viable but profitable in the next phase. So I'd say, watch this space in the coming years on Aerospace Structures and listen for new awards as we win them.

On Precision Components, that business -- interiors, machining, fabrication and composites -- it was really a collection of small plants, many of them maybe undercapitalized and hadn't been invested in. We've now gone back and we're upgrading the equipment, the operating systems, ERP, the talent. And where we're doing that, we're seeing performance results and customer support. And that's why they led the way in new business awards in FY '17.

So yes, it's a turnaround. Yes, we're not satisfied with the profitability of either business. But we're taking the issues on head on. And we expect them to pull their weight over the 3-year forecast.

Great. And maybe just as a follow-up, I'm sure it's difficult to talk in any detail about the Global 7000 settlement, but maybe 2 quick questions on that. Is there a way to characterize, maybe just qualitatively, the level of profitability you expect on that program in the recurring phase, when we're sort of ramped up and have come down the learning curve?

And then secondly, does the settlement include any change in the scope of your work on the program?

So I'll start with the second question. No change in scope other than get it done and get the wings delivered, which is the mandate that we've always had. And in terms of level of profitability, we don't report profit by individual program, but we wouldn't have done a settlement if it didn't provide a favorable going-forward business case. So we feel good about the settlement. And I know it's important to Bombardier that we fulfill our contract commitments, and we intend to do so.

And our last question comes from the line of Robert Spingarn.

Crédit Suisse. I wanted to just follow up on that. If -- Dan, you just said you were not collecting advances when you might have been on this program. And you also just said that there was no change in scope. So I'm referring to the 7000. So was there also no change in the price? Was this simply -- as Jim said earlier, is this simply a timing issue?

So when I made a comment to not collecting advances, that was a general comment across all the OEMs. Each program has a different contract geometry in terms of advances and nonrecurring payments and milestones and recurring payments. So it's not a one-size-fits-all. And we did make our needs for cash clear to Bombardier and they were responsive to those requests. And we certainly discussed prices on a recurring basis, although I can't cover them in detail, but that was in scope to our negotiations.

Yes. I think we reviewed all the terms and conditions that were challenging for us both and we came to mutually agreeable settlements on those. So it really is a win-win, and we're very happy about it.

Okay. Look, you had to push the envelope a little bit a month or so ago in order to get there. So it sounds like it became agreeable, but initially, there must have been a stalemate, given what we heard last time.

And then separately, Jim, the 12-month advance versus the 18-month advance, within that $324 million, what's the relative size of those?

They're relatively equal.

Okay. All right. And then just one other one, Dan, if I may. You talked about some new work on 330 and 87 and that your strategy is to win some additional content where others are either too expensive or to become a second source. Is there any way to frame the size of this opportunity right now on an annual basis of what you're looking at or discussing with the various OEMs?

Well, I will say that the Systems awards on these new platforms represent the largest new business opportunities that Triumph has in our pipeline. And I won't quantify them by platform or by subsystem. But in the past, Triumph's tended to emphasize the new structural program awards because they're physically large and the quantities were high. And we're -- we are looking forward over the 5-year plan for those Structures programs to go into production and drive top line growth. But when I look at the pipeline, the programs that are most exciting and they're at the top of the list in terms of value, they're Systems programs. And it's because this hardware, it's mission critical. There's fewer suppliers that have qualified components to go on the aircraft. We've been spending years developing these hydraulic, gearboxes, actuation, fuel controllers, FADECs. And once you get on a platform, as long as you meet affordability and reliability goals, you tend to stay.

And some of our competitors have raised prices. And Airbus and Boeing are in a very contentious competition for market share. And as you probably read, most of the new aircraft sales are going to start-up airlines, and they're very price sensitive. And there's some new price points that are being set for follow-on awards that are more aggressive. So if we can come in with a subsystem design that has fewer parts, is lighter and costs less but still have good margins on it, it's a win-win for us and the OEM.

So we'll give you -- we need to show evidence of these awards over the next 3 quarters for the investors to see the specifics. But that's what we're excited about in terms of driving top line growth as well.

Just a quick follow-up on that, if I'm still here. You said most of this is Systems, but on the Structures side, and I didn't catch if you answered this one, Seth asked his question, when do you see structures growing again, either -- if you incorporate some reasonable expectation of winning some of these types of awards in Structures and then with the general production rates that we already know about.

Yes. Structures is going to grow just from the programs that we already have from a revenue ramp-up on 650, Embraer E2, Global 7000. And we just got the V-22 Multiyear 3. And then we're bidding on some new starts. So we feel like that program, although we've had some sunsetting of the 450s and C-17s, that, that business has a good outlook in terms of revenue.

So we're not exiting the Structures business. We're really recommitting to improving its performance and then supporting our customers as they ramp. It's a business that -- I think we'll do better in military over time as well. There's a number of rewinging, the T-38 rewinging; F/A-18; upgrades to helicopters, helos, UH-60. So all of these programs are on our pursuit list, and we look forward to winning our share.

Ladies and gentlemen, this is all the time that we have for questions today. This concludes Triumph Group's Fourth Quarter and Full Fiscal Year 2017 Earnings Conference Call. A replay of today's conference is available starting today, May 24, 2017, at 11:30 a.m. Eastern time and will end May 30, 2017, at 11:59 p.m. Eastern time. To access this replay, please dial (855) 859-2056 or (404) 537-3406. The password for this replay is 20731746. Thank you all for participating, and have a nice day. All parties may now disconnect.