Triumph Group Management Discusses Q3 2014 Results - Earnings Call Transcript

Jan.29.14 | About: Triumph Group (TGI)

Triumph Group (NYSE:TGI)

Q3 2014 Earnings Call

January 29, 2014 8:30 am ET

Executives

Jeffry D. Frisby - Chief Executive Officer, President, Director, Member of Executive Committee and Member of Finance Committee

M. David Kornblatt - Chief Financial Officer and Executive Vice President

Analysts

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Julie Yates Stewart - Crédit Suisse AG, Research Division

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Cai Von Rumohr - Cowen and Company, LLC, Research Division

David E. Strauss - UBS Investment Bank, Research Division

Kenneth Herbert - Canaccord Genuity, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Eric Hugel - S&P Capital IQ Equity Research

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

J. B. Groh - D.A. Davidson & Co., Research Division

Steven Cahall - RBC Capital Markets, LLC, Research Division

Yilma Abebe - JP Morgan Chase & Co, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2014 third 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. [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 risk, uncertainties and other factors which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

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

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

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

Jeffry D. Frisby

Thank you, Stephanie, and good morning, everyone. I want to add my welcome to the Triumph Group Third Quarter Fiscal Year '14 Conference Call.

It is customary at this point, I will remind you also that there is a slide presentation for your use that accompanies the audio portion.

We'll start today with Slide 3 titled Q3 in Review. As I stated in yesterday's press release, our third quarter was a solid one, with the exception of the 747-8 program. Dave will be covering the 747 in some detail as it relates to the quarter and I'm sure we'll discuss it in the Q&A session. With that said, I would like to take just a moment to provide a brief overview of the 747 situation as I see it today.

In a nutshell, the second bullet on the slide says it well. Improvement has been and is still being made, but we need to do even more. On the delivery side, at the beginning of the quarter, there were occasional flights of chartered Antonov cargo planes used to deliver our products to the Boeing production line in Everett. These flights have seized as have all other modes of expedited shipment. In fact, as we speak, we are now one part number shy of 100% delivery compliance on the 747 program. That one part number, while not on schedule, will not require a premium freight on its way to Everett.

Quality, as measured by a variety of metrics, has also greatly improved. While the costs to achieve these gains were high in this quarter and in our now nearly completed block, they're behind us and we expect a far more predictable path forward on this program.

Beyond 747, the quarter was also characterized by a surprising number of customer deferrals. Some of them were subtle and dialing back of customer mid-max levels that represent a combination of destocking and production rate declines in the military side. Deferrals were seen in growth programs on the commercial side as well, although we would expect that these sales would be recovered rather quickly. The pressure on the military side of our business continued and the down wave of demand that we had anticipated in aftermarket did not occur. We are still confident that there is still pent-up demand, but the timing and pace of the relieving of that demand is not certain.

And finally, the third quarter was also another quarter of weakened demand in the low-end business jet market.

Despite these market conditions, our companies performed very well. Our Aerostructures segment, excluding the 747-8 impact, delivered solid margins. Aerospace Systems performed well in light of the military sales decline and the segment was benefited by continued strong performance at our Triumph Engine Control Systems business. And in Aftermarket, sales and margins remained solid despite the lack of the anticipated pickup in military R&L. Cash flows were good in the quarter and Dave will provide more detail on that momentarily.

One of the biggest undertakings of the year has clearly been the construction of our new facility in Red Oak and the transfer of manufacturing operations from the Jefferson Street facility. Dave will provide detail, but the summary is that the project is on time and on budget and should exceed the benefits put forth in the original business case. Right now, it looks like a success story in the making.

There are 3 additional points of interest that are included in Slide 3 from the quarter. Firstly, as described in the press release that was issued after market closed yesterday, Triumph has received an award to machine and assemble structural components for the Airbus A350 XWB program. This win further solidifies our relationship with Airbus as a nice piece of business and a promising program for the long term. Secondly, as we disclosed in November, the Mississippi Supreme Court unanimously affirmed the dismissal of all Eaton claims against us. And finally and also very importantly, we successfully completed the refinancing of our high-yield debt and extended our revolving credit facility.

With that, I will turn it over to Dave and we'll provide some comments on our outlook shortly. Dave?

M. David Kornblatt

Thank you, Jeff, and good morning, everyone. I would like to start with a review of our financial results for our third quarter.

Turning first to the income statement. Sales for the third quarter were $915.8 million compared to $890.6 million for the prior year period, a 3% increase. Organic sales for the quarter decreased 6%, primarily due to production rate cuts in the 747-8 and 767 programs, a decrease in military sales and customer deferrals in December. Operating income decreased 37% to $84.8 million. Included in our results were approximately $13.3 million in pretax costs related to the Jefferson Street move, approximately $11.1 million of pretax costs associated with the refinancing of the 2017 high-yield bonds and a pretax pension settlement charge of approximately $1.6 million. These items were incorporated in the table A within the press release to make the impact easier to understand. The prior fiscal year's quarter included 3 -- approximately $300,000 pretax of integration costs and a charge of $2 million pretax for early retirement incentives. Net income was $35.4 million, resulting in earnings per share of $0.67 versus $1.43 per diluted share for the prior year quarter. Excluding the Jefferson Street costs, the refinancing fees and the pension settlement charge, net income was $52.2 million or $0.99 per diluted share. EBITDA for the quarter was $116.2 million, resulting in an EBITDA margin of 12.7%.

Looking now at our segment performance, sales in the Aerostructures segment for the third quarter declined 6% to $637.2 million. Organic sales for the quarter declined 9%, primarily due to rate cuts on the 747-8 and 767 programs, a decrease in military sales and customer deferrals. Third quarter operating income was $54 million compared to $117.5 million for the prior year period and included $13.1 million of charges related to the Jefferson Street facility move, as well as $25 million of pretax charges resulting from the reductions in the profitability estimates on the 747-8 program.

Operating results for the quarter included a net unfavorable cumulative catch-up adjustment of $21.3 million, of which $6.6 million was related to the Jefferson Street move, $2.9 million was related to the 747-8 production rate change and $9 million was related to additional 747-8 program cost, of which approximately 1/3 or $3 million was attributable to disruption costs at the Marshall Street facility caused by the bump and roll at the Jefferson Street facility. The remainder was attributable to quality, material and overtime issues. The $3 million is not included in our add-back for the Jefferson Street costs. Excluding the Jefferson Street facility move and the Marshall Street facility costs, the remaining long-term contract had a net favorable cumulative catch-up adjustment.

With respect to the quarter's $25 million of additional 747-8 program cost, as the next slide details, in Q2, we had expected to report additional program costs during fiscal 2014 of approximately $68 million, with $11 million being included in Q3 and $13 million in Q4.

During the third quarter, we further revised our program cost estimates to include an additional $17 million, of which $14 million was included in Q3 and $3 million will be included in Q4. As Jeff said, we have seen improvement in our performance metrics during the quarter but not to the level previously expected. The segment's operating margin for the quarter was 8.5%. Excluding the Jefferson Street move-related costs and the 747 program impact, the segment's operating margin was 14.8%. EBITDA for the quarter was $75.8 million, with an EBITDA margin of 11.9%.

As Jeff mentioned with regard to the Jefferson Street-Red Oak move, our team continues to do a great job planning and executing a complex move. The move of the Black Hawk, V-22, Global Hawk and F-35 have been successfully completed. A substantial portion of the G550 has been moved and about 50% of the C-17 has been moved. We have completed the closure of approximately 3 million square feet at the Jefferson Street facility.

The next slide updates the original business case model that we presented at Investor Day in support of our decision to move to Red Oak. As shown on the slide, we are now positioned to beat the benefits contained in the business case, which we are proud of. As for the specific fiscal year, the business case had assumed that we would remain in Jefferson Street for all or part of fiscal 2015. Part of that decision at the time was to mitigate risk and also to allow us to complete any C-17 work at Jefferson Street rather than at Red Oak, if that made sense. As you know, post Boeing's decision to terminate production of the C-17, we made the decision to go ahead and move the program to Red Oak in fiscal '14 and exit Jefferson Street by March 31, 2014. That decision was based on the comparison of total costs of the 2 options, those being higher operating costs and lower moving costs or lower operating costs but higher move costs. The additional expense in fiscal '14, which is reflected in the chart, represents the impairment of certain leasehold improvements, all non-cash, into fiscal '14 since we will now not be intending to lease Jefferson Street in fiscal '15. This impact was recorded in Q3. The business case assumed this expense will be recorded in fiscal '15, so this is a timing item only.

Additionally, the decision to accelerate the move into fiscal '14 has resulted in slightly higher labor disruption, particularly around C-17. However, as shown on the slide, these additional costs in fiscal '14 are more than made up for by the impact of close to $16 million in fiscal '15, resulting from the voids of rent and overhead costs in Jefferson Street. Completing the move in fiscal '14 and among other positive now results in fiscal '16 also being slightly better than the business case.

On the labor front, we have resumed negotiations with the UAW. We are hopeful that a new contract can be reached. In Red Oak, we continue to see a very high acceptance rate of employees wanting to transfer to Red Oak.

In our Aerospace Systems segment, sales for the quarter increased 50% to $211.4 million, of which $68 million were attributable to the acquisition of Embee, Triumph Engine Control Systems and Triumph Gear Systems-Toronto. Organic sales for the quarter increased 2%. Third quarter operating income increased 58% from the prior year to $32.5 million, with an operating margin of 15.4%. EBITDA for the quarter was $37.5 million and at an EBITDA margin of 17.7%.

During the quarter, we settled our insurance claim on Hurricane Sandy, a portion of which was booked in Q3 and a portion of will be booked in Q4 and early fiscal '15. The segment's operating results included $1.5 million, as compared to $900,000 in the prior year period, of legal expenses associated with the ongoing trade secret litigation. We expect legal expenses for the fiscal year to be approximately $7 million.

As for the status of the ongoing litigation with Eaton Corporation, we have previously disclosed that in November, the Supreme Court of Mississippi unanimously affirmed the dismissal with prejudice of all of Eaton's claims against Triumph and the engineer defendants. Eaton has petitioned the Mississippi Supreme Court for rehearing of the affirmance. That petition is pending. Meanwhile, Triumph's claims against Eaton remain pending in the trial court in Mississippi, but those proceedings were stayed by the Mississippi Supreme Court, while it considered a separate appeal by Eaton of a ruling by the trial court that would require Eaton to produce documents, Eaton claims to be protected by the attorney-client privilege. That appeal is still pending. There is also the antitrust case Triumph filed against Eaton in the U.S. District Court of North Carolina, which also remains pending. If anyone wants to know more, we refer you to the documents available in the public record and prefer to let those documents speak for themselves.

Continuing with our segment reviews, sales in the Aftermarket Services segment in the third quarter were $69.6 million compared to $74.6 million in the prior year period. The year-over-year decrease reflects the impact of the divestiture of the instrument companies. Organic sales growth for the quarter was 2%. Third quarter operating income was $9.3 million, with an operating margin of 13.4%. EBITDA for the quarter was $11.2 million, with an EBITA margin of 16%. In light of the softness of the military aftermarket, we are proud of these results.

The next slide is a pension/OPEB analysis for Triumph Aerostructures for your reference. As you can see, the table summarized the pension and OPEB P&L impact, as well as the planned cash contributions for fiscal '14 and '15. The fiscal '15 amounts assume that all remaining fiscal '14 actuarial assumptions are met. As part of our goal to derisk the pension plan, we completed a successful offer to the deferred vested participants in the Aerostructures defined benefit plan, resulting in close to $100 million in GAAP liability being satisfied at approximately that amount. This action triggered settlement accounting. Settlement accounting requires us to remeasure our assets and liabilities and reset the pension income or expense for the balance of the year. This resulted in a settlement loss of $1.6 million in the quarter. While this action helps to de-risk our pension situation and lower further volatility, it results in the lowering of our projected fiscal '15 and '16 pension income by approximately $10 million each year. These impacts are only estimates and will be finalized as part of our normal year-end processes. A portion of this has already been reflected in our fiscal '14 results and guidance.

With regard to our pension liability at December 31, our net underfunding was reduced approximately 57% to $149 million since the beginning of our fiscal year, primarily due to an increase in discount rates, good asset returns and the proactive actions we took in fiscal '13 and this year. Looking at the components, our gross liability decreased $350 million, offset by a decrease in assets of $154 million, which was driven by lump-sum distributions, partially offset by positive asset returns. Once settlement accounting is triggered in the year, it applies to all settlements in the year. As such, we are likely to experience some small settlement impact in Q4, which is not reflected in our guidance. Given the employee changes in the Dallas area, there is also a chance that a curtailment may be triggered in Q4 and this was not reflected in our guidance.

Turning now to backlog. Our backlog takes into consideration only those firm orders that are going to deliver over the next 24 months and primarily reflects future sales in our Aerostructures and Aerospace Systems groups. The Aftermarket Services group does not have a substantial backlog. Our order backlog as of 12/31 was $4.75 billion, an increase of 6% over the prior year. Military represents approximately 27% of our backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place was the 747 program, followed by the 777 program. Third place was the G450 and 550, followed by the C-17 in fourth place. In fifth place was the Airbus A330, followed by the 737 Next Generation in sixth place. Seventh was the Boeing 787 program and eighth place was the Boeing 767 and Tanker program. The Osprey combat helicopter was ninth and tenth was the UH-60 Black Hawk helicopter. Just outside the top 10 programs are the C-130, the Bombardier Global 7000, 8000, the CH-47 Chinook, the Bell 429, Global Hawk and the A320.

Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military and space totaled 44.7% of our revenue and was broken down 73% commercial and 27% military.

Looking at our sales mix among end markets, the next slide shows that compared to Q3 of fiscal '13, commercial aerospace increased by 3% to $529 million, representing 58% of sales. Military sales of $255 million increased 5% year-over-year and represented 28% of sales. Business jets sales decreased 6%, representing 11% of sales. Regional jets increased 114% to $15 million, representing 1% of sales. And non-aviation accounted for 2%. We have decided, for this purpose, to continue to report all 767 variants, tanker and freighter, into commercial. It makes prior periods more comparable. And as we're accounting for them in one block, it makes our reporting more consistent and streamlined.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales in the quarter decreased 6% from the prior year. Breaking that down by segment, the Aerostructures segment same-store sales for the third quarter declined 9% to $617.2 million, primarily due to 747-8 and 767 production cuts military sales decline and customer deferrals, as mentioned earlier. Aerospace Systems same-store sales increased 2%. The Aftermarket Services same-store sales for the quarter grew 2% as well. And export sales for the third quarter increased 27%.

Turning to the balance sheet in the next slide. For the 9 months ended 12/31, we generated $79.1 million of cash flow from operations before we made $45.8 million of pension contributions for the Aerostructures defined benefit plan. After these contributions, cash flow from operations was $33.3 million. As we mentioned during Q2, we had agreed with a major customer to defer receipts of certain receivables until our Q4. Adjusting for this deferral, which was received in full in January, cash flow from operations of $33.3 million would've increased to $119.8 million.

Inventory for the year increased $139 million. The components of this increase were $45 million in the Bombardier wing, $38 million from acquisitions, $21 million from the Jefferson Street build-ahead, $14 million in nonrecurring activity in the Embraer program. Based on the current forecast, pension contributions of $115 million, the completion of the Jefferson Street move and excluding acquisitions, we do not expect any fiscal year 2014 cash flow to be available for debt reduction.

CapEx in the quarter was $42.5 million, of which $1.3 million was for the Bombardier wing and $16.3 million was attributable to the Jefferson Street relocation. Year-to-date, CapEx was $161.8 million. We expect CapEx and investments in major programs in the fiscal year to be approximately $340 million to $360 million.

Net debt at the end of the quarter was $1.6 billion, representing 41% of total capital. During the quarter, we received puts of our convertible securities of approximately $18.5 million, which brought the quarter-end balance to $13.6 million.

During the quarter, we successfully raised $375 million by entering into a term loan with a maturity date of May 2019 and amended our existing $1 billion revolving credit agreement to modify the fee structure and extend the maturity by 18 months. We used the proceeds to retire the $175 million of senior subordinated notes due 2017 and pay off existing indebtedness under the credit facility, which have been used to fund the Triumph Gear Systems-Toronto acquisition. The call premium, the right-off of the unamortized fees and discounts associated with these bonds resulted in a charge of $11.1 million in the quarter. At the present time, it is our intent also to refinance the 2010 senior notes due 2018. Exact details of that will be announced at the time it is completed, which we expect to be in July.

The global effective tax rate for the quarter was 35.4% and reflected the fact that the R&D credit expired in December. In addition, the income tax for the quarter was favorably impacted by the true-up of our financial statement tax expense for the actual tax return that was filed in December. We continue to expect minimal cash tax to be paid in fiscal 2014 and '15.

With respect to our financial guidance, we now expect our revenue for the fiscal year to be approximately $3.8 million -- $3.8 billion and our full year EPS to be approximately $4.75, excluding Jefferson Street move-related costs and the pension settlement charge. To be clear, it does include the costs of the high-yield redemption. Our guidance reflects the previously described impact of the 747-8 and the continuation of military weakness at both the OEM and aftermarket levels and additional weakness in lower-end business jets.

Before I turn it back to Jeff, I'd like to have a brief comment. It's been an honor and a privilege to be Triumph's CFO and I will miss these calls and the interaction with our shareholders and analysts. I greatly appreciate your support over the years. I am confident you will quickly grow to both respect and enjoy working with Jeff McRae, who is a class act and a good guy. Jeff?

Jeffry D. Frisby

Thank you, Dave. And turning to the Slide 17 titled Fiscal 2014 outlook. As David detailed, our balance sheet and our backlog remain strong. We remain focused on improving execution, driving integration and reducing costs. As part of the comprehensive plan to reduce costs that enhance our competitiveness across the enterprise, we have launched the supply chain initiative to identify those suppliers who are willing and able to strategically align with Triumph for our joint benefit. We've contacted 350 of the 836 suppliers we deemed large enough and capable enough to participate. While it's early in the process, we believe the benefit to Triumph will be substantial.

Additionally, in January, we sold a small Aerostructures company in Wichita, Kansas, back to its previous owner at book value. This is certainly not a regular occurrence, but in this case, it made a lot of sense. As Dave reported in terms of FY '14 guidance, we now see revenue of approximately $3.8 billion and EPS of approximately $4.75, excluding Jefferson Street move-related costs and pension settlement charge. And this is based on the current market conditions, the current production rates, 747-8 program cost -- additional program cost of $1.04 per diluted share, this is a full year number, 747-8 production rate of 1.5 a month and a weighted average share count of $52.8 million.

In terms of long-term guidance, this has been an unusual year for Triumph in many respects. At this point in our year, we would not typically comment at all about our next fiscal year, as we are not yet halfway through our fiscal year '15 visit calendar. That said and since we have been discussing our FY '16 outlook regularly, we believe it appropriate to comment our preliminary view on FY '15 and our outlook on FY '16. Our preliminary -- and I'll say for the record again, preliminary guidance for FY '15 and our update in FY '16 reflects an EPS figure of approximately $5.75 and $6.75, respectively. These represent strong year-on-year growth numbers from our current levels and a return to earnings growth. As compared to our prior long-term guidance, these numbers reflect the following: first, the impact of the 747 program, both in build rate and in performance; two, the impact of the C-17 production program ending in fiscal year 2016; three, lower military sales at both the OEM and aftermarket level, which remain a fluid and uncertain market; and four, lower-than-expected pension income. Now I want to also add that our cash flow should be in excess of $600 million over the next 2 years.

Finally, we have recently announced the change in our senior management team. David Kornblatt, as you know, will be stepping down as CFO to take on another role within Triumph. We are pleased that Jeff McRae has accepted the position of CFO and I look forward to working with him in the future and achieve the goals we've set forth. Jeff joined us by way of the Vought acquisition, although his background, outlined in the press release, is far more extensive. I would like to point out that Jeff's responsibilities at Vought Aircraft Division, until very recently, were limited to the integrated programs division in Dallas. Said another way, Jeff was not the person in charge of the 747 program. Since November, he has been one of the key people helping us to sort it out and to fix it. He has also been the one spearheading the effort to transition Jefferson Street to Red Oak. So I view this change as the best of 2 worlds. We get all the benefit of having Jeff here full-time and utilizing his many talents for Triumph's gain. And at the same time, Dave will still be onboard, providing useful insight derived over the years he so ably served the company in the CFO role.

At this point, I'd like to open the lines to answer whatever questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Joe Nadol.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Joe Nadol, JPMorgan. My first question is just on the customer deferrals you mentioned. Could you help quantify that a little bit more? Perhaps, mention what commercial programs you saw it on and how quickly you expect to get it back.

M. David Kornblatt

Yes, the impact was probably in the $30 million, $35 million range across the company. The min-max is a little subjective, but we did see a slowdown. And we did see it on a number of programs, sometimes in indirect sales, but programs like the 737, the 777, the 650. And again, those were not necessarily all to Boeing or Gulfstream but through indirect sales. So those are programs that you would not have expected to see any deferrals on and yet we clearly saw them. And we would expect the commercial ones to pick back up. I think the military sales, some of those have already slid out of the year, like Global Hawk and a few others that will not be recovered.

Joseph B. Nadol - JP Morgan Chase & Co, Research Division

Okay. And then just secondly, within Aerostructures, the 9% organic growth decline, could you quantify how much of that -- or what commercial was versus military, even roughly?

M. David Kornblatt

I think the lion share is -- if you consider 67 commercial, at least 2/3 of it or more is commercial.

Operator

Our next question comes from Julie Yates Stewart.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Crédit Suisse. Jeff, the Airbus win announced last night, is this 1 of the 2 that you've been waiting to announce since last year or is this an incremental win?

Jeffry D. Frisby

This is an incremental win, Julie. We've got additional projects that have been painfully slow in finalizing with our customers. So we've got that more -- more in the pipeline that, hopefully, we'll be able to announce.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. And then your prior FY '16 target included what you had termed a legal revenue wedge for new wins and M&A. Does the news of $6.75 still includes something for new wins and M&A?

Jeffry D. Frisby

Not a significant amount for -- well, new wins, probably there are some. As we look at our existing companies and as their business plans include some incremental new wins as they normally would, that would be in there, but we're not including any major program wins in that, nor are we including any significant acquisitions.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. And then just last -- one last housekeeping for Dave. Just what's the quarterly run rate we should expect for interest after the refinancing?

M. David Kornblatt

I think it would be -- well, it's not going to be too recurring. I mean, interest should be about $17 million in this quarter. And then that should be a good number for first quarter, hopefully a little less as we get a little cash. And then there'll be a nice step-down for the balance of fiscal '15 as we pay off the 8.6% bonds in fiscal -- in July of next year and whether -- I can't give you the interest rate savings on that, so we'll see what the high-yield markets are like or when other term loan or cash flow is so strong, we do some of it off the revolver. There's a lot of variables that we'll look at over the next couple months.

Operator

Our next question comes from Yair Reiner.

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Oppenheimer & Co. First, David, just wanted to offer you my best wishes on the new post in Triumph and your other endeavors.

M. David Kornblatt

Thank you.

Yair Reiner - Oppenheimer & Co. Inc., Research Division

So first then is a housekeeping question. The amortization of acquired intangibles has been coming in a bit higher than you forecasted at the beginning of the year in both the Structures and the Systems business. Can you give us a sense of kind of what's been behind that and then how we should think about those lines going forward?

M. David Kornblatt

Yes, that's really a result of continuing to refine our estimates surrounding the Triumph Engine Controls business and the Triumph Structures International, the former Primus business. So as we further refine those estimates, we'll start to take that amortization. There's also a negative impact in that, that does impact the purchase price and we end up with a little more depreciation and amortization as well. But I think this is about the right run rate for the next quarter. And then I believe next year, though, that number comes down because some of the fair value at Aerostructures is going to start to disappear in greater numbers. So we'll give -- we'll include that in our guidance when we give the detailed guidance in '15.

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Okay, great. And then a question about Aftermarket. First, can you give us a sense of how things have been shaping up in terms of commercial versus military? And then, I guess, if I can compare your comments with those of some of your peers, it seems as though there's been some bifurcation. I guess, some companies out there have been seeing a bit of a bounce back in the aftermarket, others haven't. Any kind of maybe qualitative commentary you might have about some of the kind of imbalance in the market?

Jeffry D. Frisby

Well, I think that there's always been kind of different forces that drive, we'll just call them, airlines and those type of customers to bring their products out to repair. Some of those being seasonality and some of them being the type of aircraft they have and maybe they're going to be utilizing parts off of aircraft that they're no longer -- maybe they parked to put in the desert versus the military one right now, which things that we have heard is the customers who have assets for us to repair indicate to us that they have them ready for repair, but they don't have the money to do it. And there are some, I guess, reluctance of those customers to turn loose of those parts if they get the money, not knowing, for example, how many hours these aircraft are going to be flying and those types of things. So I think we've got 2 different dynamics in play in terms of the decision-making process. And I think how that manifests itself is that we're seeing a far better market in terms of the commercial at this point than the military. That said, once the -- we just got a new defense budget passed. They're talking some about some additional money being available. How exactly that is going to fall through and whether that will open a floodgate or whether that will just allow the military depots and such to just kind of meter the product out, I don't know how that will play out, but it certainly is a bifurcated state.

Operator

Our next question comes from Ron Epstein.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Bank of America Merrill Lynch. A couple of quick questions. It looks like you lowered the guide by about $0.50 and $0.22 of that looks like it's attributable to the 747-8. What's the other $0.28?

M. David Kornblatt

I think that is primarily the military aftermarket not coming back. As I mentioned earlier, we did lose some orders out of the year, so some of those deferrals will help in Q4. Others have slid out of the year. So it's mostly losing a few big shipments. And certainly a more pessimistic view, we're running out of time, even at 30-day turn times for the aftermarket to return the way we wanted it to. A little bit of pension hit hurt a little bit in the year because of the settlement, but not a huge amount.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay. And then, I guess, just help me understand, what's up with the 747-8? I mean, how did that thing get so far off the rails, right? I mean, your piece of it isn't all that different than what you're making before, right? I mean, how did this program get so out of control? And I guess, what I'm asking is, why shouldn't we worry about other programs doing the same thing?

Jeffry D. Frisby

Well, I think there's a couple questions there. We talked about the problems that we have had in terms of -- since the -8 became the -8, we have had a number of issues attempting to build the aircraft and that has resulted in a high amount of quality concerns. And that has, I think, specifically affected us in this quarter as we're at the end of our block and there were some late arriving material charges that, I think, were specifically attributable to parts that we've had to replace over the last few aircraft for our internal quality issues. The fact that we're actually getting positive cum catches on our other programs are indications that we are not just systematically falling apart in this division, that we have a specific program that is giving us quite a lot of challenge. And in this quarter, specifically, we spent an awful lot of time, effort and money to recover a schedule that we were -- that we are far behind, that we're flying large pieces of aircraft into Everett at enormous costs. And we, for example, did not anticipate spending a great deal of time over the 2 holiday periods working, but, in fact, we saw an opportunity to regain schedule and kind of

reset ourselves, which we have now achieved at considerable cost for the quarter. But where we sit now, basically, at the beginning of the new block and at a time where we are basically on schedule now, which means we are not running around like chickens with our heads cut off and not experiencing an awful lot of -- you could argue, I think, correctly that a fair percentage of the quality issues come from a great deal of haste and working so much overtime. So I think we're going to see some improvement there. And I also believe that as we enter a new block, we'll have far more predictability, as we have seen in the early days of that. So I think that what is going on with the 747-8 has been -- basically, even though it's been a program that's been around for many, many years, it really is, as advertised, a relatively new aircraft. And so we have been developing it as it goes. And we're making the improvements now we need to make. And we are now in a position where we no longer have to work excessive overtime. We should not see any more premium freight. So I think we're going to have far more predictability going forward.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay. Okay. And have you thought about -- I mean, I'm certain you have. Can you share with us your thoughts about the 747-8? There's a lot of discussion that the 777X could vent the demand for the 747-8 program even more so than it is. If that were to happen and -- do you have a plan in place if the 747-8 rate were to down for, let's say, 1 month or less than 1 a month or something like that?

Jeffry D. Frisby

Yes, we do. And this is certainly not something that's lost on us. The 777X is an exciting new aircraft. And Boeing will make the case that there is always going to be a place in the market, primarily in the freighter side, I think they'd say, for a 4-engine aircraft of this particular size. But I think that we're still going to have to see about that. But in the meantime, we are, in fact, putting plans together in terms of what may happen with a reduction and a further reduction in the 747. We certainly don't see that happening any time in the near future because it's certainly expensive for everyone to do that, not just us but Boeing company as well.

Operator

Our next question comes from Peter Arment.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Just a question. I guess, I know you talked to just initially preliminary about the '15 and '16 kind of outlook. But could you give me just a little color on how you -- what you're assuming in terms of just overall defense, what that looks like? I mean, is it flat or only modestly down? Were you assuming something different than kind of what we currently experience in terms of the negative growth?

M. David Kornblatt

Yes, I think it's modestly down, Peter. I mean, we're looking at the -- we have our Washington people and -- looking at what the government has put out in terms of build rates of the key programs and other than, perhaps, Tanker, eventually, CH-53K, there isn't -- there aren't many programs. JSF should be going up, but that's not a huge program for us. So I think you got some programs that are flat, other programs that are down. There seems to be some optimistic views on some foreign military sales of V-22 that's working their way through Congress. I think that it's not clear to us. I don't believe Boeing has -- or Bell has stated whether they would use those orders to hold rates and not drop or, perhaps, expand their backlog so that's a little fluid. But obviously, selling those planes is positive, so I think it's generally down.

Peter J. Arment - Sterne Agee & Leach Inc., Research Division

Okay. And just, David, just quickly on the military again. On the 28% of kind of overall sales mix, what's the mix of international? Do you guys break out that at all?

M. David Kornblatt

No, we don't. I mean, I'm not sure we always know. And that's not something that we track.

Jeffry D. Frisby

Peter, one other comment on the FY '15 plan versus, say, an FY '16 plan. We're talking about macro views here of how we think V-22's going to go or how -- what we think is going to happen on F-35. And those numbers kind of change, but as we issue in, whatever it is, end of April, beginning of May, whenever we come out and actually issue our official guidance for FY '15, this is done at a far more molecular level in terms of -- within those programs, we see some swings that are continually happening with our companies who are daily fighting to gain market share on those same number of aircraft. So what you'll get from us in the near future is the picture that, that should be far more certain than just our ideas of maybe how many V-22s will be delivered to Israel versus wherever else they're going to be going over the next couple years. So I think that there's a lot more going on in each of these markets than just the overall macro stuff, which is usually what drives our longer-term forecasts and outlooks.

Operator

Our next question comes from Cai Von Rumohr.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Cowen and Company. So I didn't really catch, when you talked to '15 and '16, $600 million in cash flow, is that cash flow from ops, is that 2 years or -- give us a little...

M. David Kornblatt

That would be the -- Cai, that would be the total for both years after everything.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

So that's free cash flow for both years?

M. David Kornblatt

Right, after dividends, after CapEx.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Well, it's free cash or it's cash flow available to reduce debt after dividends?

M. David Kornblatt

Exactly. Cash flow to reduce debt after dividends.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Got it. And what is the revenue number that would go with kind of those EPS numbers, approximately?

M. David Kornblatt

I don't think we're prepared to give those yet. I think we want to update the big punch line item. As Jeff said, we're less than halfway through our business plan reviews. So we'd ask for your patience on that one.

Cai Von Rumohr - Cowen and Company, LLC, Research Division

Got it. And tax rate for this year or for the full year expected to be approximately what?

Jeffry D. Frisby

35.4%

M. David Kornblatt

35.4%.

Operator

Our next question comes from David Strauss.

David E. Strauss - UBS Investment Bank, Research Division

UBS. So on this -- on fiscal '15 and '16 guidance, I might have missed it, but on 747-8, it looks like you're still booking that at a kind of a low single-digit margin. Is that roughly correct and is that the assumed margin out in '15, '16 on your revised guidance?

M. David Kornblatt

It's almost a 0. It's like a 1%.

David E. Strauss - UBS Investment Bank, Research Division

And that's what's baked into '15 and '16 as well?

M. David Kornblatt

Correct.

Jeffry D. Frisby

Correct.

David E. Strauss - UBS Investment Bank, Research Division

Okay. And Cai asked about the cash available. What have you assumed in '15, '16 as far as deleveraging?

M. David Kornblatt

Right now, that would assume that, that cash flow goes mostly to deleveraging. So like the '15 cash flow would help with interest, but again, that's mostly revolver interest, so it's not huge savings. I mean, we would obviously look at where we are at the end of '15 or during and look at our cash flow, acquisition pipeline, what the pension world is like, share repurchase. I mean, our model would say it's used for debt reduction.

Jeffry D. Frisby

Yes.

David E. Strauss - UBS Investment Bank, Research Division

Okay. And on '15 and '16, the guidance you gave, does that include any step-down at all in C-17 in terms of the overall production rate or booking rates on that program?

M. David Kornblatt

Yes. It projects some level of spares, but that -- some of the Triumph companies will lose some work in '15. Most will lose work particularly in '16. And in terms of Aerostructures, it's kind of a half bag. We'll get just 1 quarter of production and, perhaps, some spares. The larger opportunity we talked about prior quarters has not played out yet.

David E. Strauss - UBS Investment Bank, Research Division

Okay, so it's mostly out of the numbers in '16...

Jeffry D. Frisby

[Technical Difficulty]

Operator

Our next question comes from Ken Herbert.

Kenneth Herbert - Canaccord Genuity, Research Division

Ken Herbert with Canaccord. Jeff and Dave, just want to do -- on a slightly different track, the announcement you announced on the A350, it looks like that leverages the Nashville facility pretty extensively. Can you just talk about capacity you have there and ability to add more volume, specifically on the composite side within the organization?

Jeffry D. Frisby

Well, I think that a couple of things. It does not really add a tremendous amount of volume to our Nashville facility. A lot of that machining, for example, is going to be done in Kansas City. We have a lot of room in Nashville. And so we do not have capacity constraints there. And in terms of composite capacity, we still have extensive capability not only in Nashville but in other sites and not only in the U.S. We have one of our best opportunities for future composite expansion is our Thailand facility.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay, okay, that's helpful. And then could you just provide an update on the Global 7000 and 8000? You haven't talked about those programs as much. I assume they're on schedule. Have you seen any slippage with any concerns from your customer there from a cash standpoint? Anything else you can talk about the schedule there and provide an update, that would be helpful.

M. David Kornblatt

Yes, I think from a marketing perspective, while the information is really confidential, we don't see the details, Bombardier indicates to us that it's selling well. We have not seen any cash problems. Although we're mostly in the investment mode, but there is a milestone payment that is due this quarter, but we have no reason at this time to believe they're not going to honor that commitment. And I think we're in the difficult, challenging part of the design and the normal back and forth and but there's nothing that we're overly concerned about or -- on the program. But it's a normal program that has its challenges.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay. And then just finally, can you comment at all on the M&A pipeline and, specifically, anything you can say around the due diligence process you're in regarding the Tulsa assets?

M. David Kornblatt

I think the acquisition pipeline remains robust. We're seeing good opportunities. And as we've indicated, that our direction was more in the Aerospace Systems aftermarket world and there are some good things we're looking at, some competitive bid, some more negotiated. So that pipeline remains pretty good. And we hope to get some deals done. And the Tulsa facility, the Gulfstream Park, the only acquisition that we've ever talked about before we did it and we continue to invest a lot of time and effort doing the diligence. And we remain very interested in getting on those 2 wings because those are 2 fantastic programs. So we're working it hard, but there's nothing to announce.

Operator

Our next question comes from Myles Walton.

Myles A. Walton - Deutsche Bank AG, Research Division

Deutsche Bank. The first one was a clarification, Dave, on the cash flow for this year. So I think, previously, it was just kind of breakeven free cash flow or cash available for debt reduction. Is that still a reiteration or is it now creped into a use given the outlook for net income?

M. David Kornblatt

No, I think it's about the same, Myles.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. And then in terms of the walk between where you're going to end up from '14 into that $5.75 in '15, I mean, it looks like you'll pick up -- just correct me if I'm wrong -- you'll pick up about a quarter on -- you'll pick up about $0.28 on the pension, you'll pick up about a $0.10 on the refi, you'll pick up another $0.25 from the Jefferson Street move and then slightly lower 747 charges kind of gets you to that number. So I'm just kind of curious, do you see -- what are the puts and takes in the actual underlying business that are kind of getting, so that's not a lot of core EBIT growth in that year, or have I got a couple numbers off?

M. David Kornblatt

No, I think you're -- you might be actually a little light on interest because, keep in mind, we'll get asset or costs to get the -- to redeem the high-yield bonds. We'll get 9 months of savings on those next year, so...

Myles A. Walton - Deutsche Bank AG, Research Division

The nonoperational items, they'll walk you to almost $5.75, so is the core business having real big puts in the military side offsetting some growth in commercial?

M. David Kornblatt

There's a little bit of that. Yes, I mean, I would say that the quarter from Red Oak is very operational. And again, we're not finished with our review. We did lose -- I mean, pension will be up but not up as much as we had hoped originally. So I think that's -- but I think you got it about right. But again, it's -- we're just trying to give you a directional number here.

Jeffry D. Frisby

Yes, let me just -- we just snapped a rough line here and we will -- we'll be able to provide an awful lot more detail and a firmer number when we talk again at the end of the year.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. And then as you go into the next accounting block, Jeff, I mean, is the plan to effectively book at 0 to kind of recapture some contingency at the start of that accounting block or would you be in a profit kind of day 1, at the start of the accounting block.

M. David Kornblatt

0 to 1.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. Right. And then the kind of the last one, in terms of the pension longer-term strategy with your funding ratio now towards the -- almost fully funded, are you -- how are you weighing the benefits of immunization versus the detriments of headline income over the next several years?

M. David Kornblatt

I mean, we think about it a lot, Myles. And that's the balance that we'll have to weigh. I think that -- I think immunization can happen in a variety of scenarios by going more fixed income and de-risking it that way, but those are things that we -- not only is it just a P&L risk or the taking away, it's also a big capital allocation issue. I mean, when you say we're getting close to fully funded, you're looking about -- I mean, insurance companies, that's why they're profitable, they take a pretty big premium over and above your GAAP liability to immunize, so you're not going to get out for your GAAP liability. So when we think about being fully funded, that might be $200 million light. And so to me, it's way more a capital allocation issue about debt reduction, share repurchase, better dividends, investment in new programs than just sort of accounting engineering capital allocation issue. All right?

Operator

Our next question comes from Michael Ciarmoli.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

KeyBanc Capital Markets. Dave, just on the top program movement, you guys obviously saw some struggles with the Tanker, but that leap-frogged the Black Hawk and the V-22. What kind of condition are those programs in? I mean, do they get materially worse in the quarter?

M. David Kornblatt

V-22 would not -- I mean, it could have been an order issue. The 67 probably leaped a little bit because more of the tankers are filling up the 24-month backlog. And we are on -- we talked about this before that our contract at Aerostructures on Black Hawk is one that is winding down. We knew that when we bought Vought. So I think -- although the heritage companies continue to pick up Black Hawk work and we're always hopeful that Sikorsky would extend the contract, right now, I think the Aerostructure piece of Black Hawk is probably continuing to diminish this quarter.

Jeffry D. Frisby

Mike, if you think about the 767 and I think you know that we had talked about a significant reduction this year in that production rate. So if you think about our backlog and those -- and that list as being a forward-looking 24 months as we go through and just have -- get the kind of gaps behind us, it just naturally will be -- it will look like a higher growth and they move up the list in that regard.

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Okay, fair enough. And then, Dave, I know you're always saying you've got rough estimates out there. But if I were to bridge the gap from the $8.25 now down to your $6.75, you got the C-17, the 747, is there anything else in that outlook? The military, if it's softer, I mean, are there any other material movements resulting in that $1.50 step-down?

M. David Kornblatt

There -- we're not going to get into individual programs, but what I could tell you is that, particularly in military, it's just a little bit here, a little bit there and all of a sudden, it adds up to a decent number at this point. So there isn't another C-17, 747 out there in terms of either a program dying or profitability vanishing. But since we gave that guidance, I think we are a little more bearish on military build rates. I doubt that would surprise anyone but...

Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division

Sure. And then just the last one, the A350, a nice win. A $20 million annual run rate. I mean, is the tip of the iceberg? Can you give more content on that program or should we think about this as kind of a max content on the A350?

Jeffry D. Frisby

No, no, clearly, don't do that. In fact, we have one additional product on the A350 that we have not announced simply because it's just the kind of stuff we normally win and it's done, as for example, in the systems companies. And so we're adding A350 content regularly. So when we put some headline wins out there and hopefully we'll be putting some more out, that's just simply what it is. The headline, it does not, in anyway, encompass our ship set value on A350.

Operator

Our next question comes from Sam Pearlstein.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Wells Fargo. Can you help me with the -- that $7.75 down to $6.75 for fiscal '16, just call it $1, Jefferson Street is getting better and I know pension is a little bit less. But what are the moving pieces that kind of take you down that dollar?

M. David Kornblatt

I think 747 is the lion's share of it. It's probably close to $0.80, just at Aerostructures. Keep in mind that heritage Triumph companies have decent content on that, so they're losing 2 to 1.50 per month, so even on our -- in some very good programs there. I think that's the biggest. There are some step-downs or, in a couple of cases, programs that were scheduled to go up that are now staying flat that had been built into our original guidance. But the lion's share of it would be the 747.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

So when you -- I thought when you had taken the charge back in September, the sense was that the future blocks would also still be at relatively low margin and, therefore, when you were still comfortable with that number of $7.75, that some of that already embedded a lower margin on the 47. Is that different now?

M. David Kornblatt

I think we were using a slightly higher starting point given -- you're asking for the -- I'm not sure which one you're trying to bridge, Sam, but, I mean, the biggest drop from Investor Day to now is the 47. If you're asking for a bridge from September, when we believe it was still achievable, I think there it's -- as we went through our business planning process, it's -- this isn't going to ramp, this is going down, this is being deferred, still a good program and we'll detail all that. So I think it depends which one.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Yes, I was thinking more the latter, but it is still program by program.

M. David Kornblatt

That's right.

Samuel J. Pearlstein - Wells Fargo Securities, LLC, Research Division

Okay. And I guess, just a bigger picture question is, we've now seen the September change to now is, why should we believe there's not another 47 adjustment to come. What are you doing differently about your forecasting or estimating now versus back in September?

M. David Kornblatt

I think it's probably the different level of detail. But I think the point that Jeff's made earlier that now that we're back on schedule virtually 100%, we are -- we're not judging when we're going to have premium freight or when it's going to stop or, in many cases, early, that has a tremendous number of benefits. So I think we've taken out a lot of variables that would lead to a repeat of this. But your question's a good one and that's to show you that it doesn't reoccur. I mean, it's -- we would've been shocked if you didn't ask it. But I think the fact that we're on time is a very good indicator that a lot of the variables. As long as we can keep them sustained and get even better, is what leads us to conclude that the program, a, stays profitable; and, b, that we're not looking at another disappointment in 90 days.

Operator

Our next question comes from Eric Hugel.

Eric Hugel - S&P Capital IQ Equity Research

S&P Capital IQ. Dave, just to follow up on that last question. How long have you been running at this -- on the 787 -- or on the 747-8 at this sort of caught-up rate now that you're comfortable that you can maintain this?

M. David Kornblatt

Weeks.

Jeffry D. Frisby

Yes, just early -- just not long. Maybe they -- certainly, within this month, I would say.

M. David Kornblatt

And that was, to Jeff's point earlier, that we decided over the holidays in December to put on the throttle and get caught up. And that was -- I think our guys did a good job in Dallas, but that was not without a cost and some of that's reflected in the numbers you're seeing. But getting caught up is -- was very important.

Eric Hugel - S&P Capital IQ Equity Research

And the schedule that you have, this Table B, does any of these costs extend into '15 or is all these costs -- or you're not expecting any more of these charges to play out into '15?

M. David Kornblatt

Correct. I mean, we haven't issued the guidance for '15, so that would be in our number for -- we've assumed this very, very low, nominal profitability in the number that Jeff gave you for fiscal '15, but there isn't, like, another still on effect that it's deferred.

Eric Hugel - S&P Capital IQ Equity Research

Okay. One more question on the 747-8. Just remind me, in terms of your contract with Boeing, if Boeing reduces the rate farther below 1.5, is there a point where you can renegotiate the price per unit?

M. David Kornblatt

Yes, but I don't believe -- it depends what the rate cut is, whether that would cover 100% of the impact is...

Jeffry D. Frisby

There's a contractual trigger point with lower rates and -- but I don't think anybody wants to go there.

Operator

Our next question comes from Steve Levenson.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Stifel. Jeff and Dave, just in relation to the deferrals, we've seen this with at least one other company. Do you think this is going to become a pattern, where the honors to hold inventory goes on to the suppliers, or do you think this was just a calendar year-end situation that's a one-time event?

M. David Kornblatt

We see it every quarter, Steve, but this was sort of on steroids and I think it was very much working capital-driven. So we're not -- I don't think we're anticipating anything like this at the end of our fiscal year. I'm sure we'll get a feel but not -- we always get that, by the way. It's just this quarter, it seemed to be sort of unprecedented.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Got it. Are there still Boeing personnel at Marshall Street or have they now gone home?

Jeffry D. Frisby

There are. I don't want to say this too candidly, but there is still Boeing personnel there. I think that there's still American military personnel in Germany. I think that we're always going to have Boeing people in our plants and they probably should be there and most of them are very helpful. [indiscernible] that the kind of the armies of folks that they've had there have been -- have certainly been reduced and we just have a small contingent there.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Got it. Last one. Apparently, Boeing is getting pretty serious about partnering for success. And we've heard that they've sent out some letters to certain suppliers telling them not to bother bidding for 777X work. Did you get one of those letters?

Jeffry D. Frisby

We have not received such a letter. In fact, we're working with Boeing on 777X now.

Operator

Our next question comes from J. B. Groh.

J. B. Groh - D.A. Davidson & Co., Research Division

D.A. Davidson. You guys mentioned briefly your kind of a supplier initiative that you have. Could you kind of maybe go into some details on that and how should we kind of -- one, how should we gauge the success of that going forward; and two, is any favorable impact baked from that into this '15 and '16 numbers or is there incremental potential there?

Jeffry D. Frisby

Well, I think that we'll -- I'll keep you guys updated on what's going on with that. I think it will be successful from a cost reduction standpoint and should, in fact, also benefit the suppliers that are -- that want to participate. The benefit that we expect to achieve there at this point, I think, can be counted in the -- maybe in the low tens of millions of dollars potentially on an annual basis. And is that baked in? I would say that it's not entirely baked in. I think if we went to our company and say -- and they would try to convince us that it's already in their plans for next year. But and that may partially be correct. But I think there is incremental benefit that should provide us some conservatism in the numbers that we're putting out. So there'll be a benefit to that.

Operator

Our next question comes from Steven Cahall.

Steven Cahall - RBC Capital Markets, LLC, Research Division

From Royal Bank of Canada. I was wondering if, first, you can talk about the $17 million in additional 747 program charges, how much of that was expedited shipments versus sort of everything else that you gave some color on?

M. David Kornblatt

I think that was probably $3 million or so. That was the Antonovs. There probably is a premium rail in there that I don't quite have a handle on.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. So I guess, in the -- my kind of follow-on is that looks like then we had a pretty significant increase in program costs outside of the shipping stuff. So I guess, what can you say to give us the most confidence that the $3 million for Q4 doesn't do something similar to what the $11 million did in Q3? What -- how do we just think about that?

Jeffry D. Frisby

Well, I think it just -- we'll basically say it again, that there's a certain pace, there's a certain phonetic activity that happens when you're behind and that leads to quality issues, that leads to all types of things. We are now back on schedule working at an overtime level that is more normal. We will have, in fact, some impact on additional bump and roll as Jefferson Street shuts down and more new mechanics head over to Marshall Street. But we think we're in far better shape not only being in good stead on delivery but also in the fact that we're, basically, starting a new block, a new block that has been projected to come in at basically breakeven and one that has some ability to fail in minor ways and not negatively impact our ASCs. So I just don't expect to see it.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay, that's very helpful. And then just a quick follow-on, a couple maybe assumptions that are in the FY '15, '16 numbers. Could you tell us what the assumption is on both the 747-8 production rate and also just, roughly, what you're expecting in terms of commercial aftermarket growth?

M. David Kornblatt

I think 747, 1.5 per month for, basically, forever now. I think that's our marching orders for the foreseeable future. And commercial aftermarket growth, I prefer to defer that until we give a specific guidance.

Operator

Our next question comes from Yilma Abebe.

Yilma Abebe - JP Morgan Chase & Co, Research Division

JPMorgan. My question is a follow-up on that $600 million of cash flow over the next kind of 2 years. As we you look at '15 and '16, is there anything to believe 1 year would be significantly better or worse than the other?

M. David Kornblatt

They're both very good. They're both around $300 million. So no, it's not like it's $100 million and $500 million. They're relatively even.

Yilma Abebe - JP Morgan Chase & Co, Research Division

Okay, Dave. And then one last one. Your leverage is relatively low. You've talked about debt reduction. Why the need to reduce that from current levels?

M. David Kornblatt

I think we have plenty of debt capacity. We've always highlighted that we view ourselves as a pretty conservative company. And frankly, we're sort of at the higher end of our comfort level and that's sort of a very traditional view of Triumph since probably 1993. So the bankers would lend us all kinds of money, given our pretty typically good cash flow and our EBITDA. But I don't believe we think we're lowly leveraged at this point. So we would like to reduce the debt a decent amount and then balance it with other things. So I think that's more of a philosophy issue.

Operator

Our next question comes from Myles Walton.

Myles A. Walton - Deutsche Bank AG, Research Division

Deutsche Bank. Just have one follow-up question. I asked it last time, but the stock, where it is, I think it's pertinent to ask it again. So share repurchase as a option of capital deployments given $100 million of free cash flow in the fourth quarter and $300 million each of the next couple of years being generated, why not go on the aggressive for share repurchase at this point?

M. David Kornblatt

Well, I'm sure we'll talk about it, Myles, at our upcoming board meeting. And in terms of aggressive buy, I don't think that's in the cards in the near term. But again, I think that we look at our debt levels and I think we'd like to clear the year and see 47 stabilize before we would get aggressive. But I think we're way off from your thinking, that it's something we might want to do.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. Then there's no deals or kind of M&A that's in the pipeline that's preventing you from doing this, it's just a measure of whether or not you've made the decision to do that yet?

M. David Kornblatt

Correct, it's not like if these 3 deals fall apart, we're jumping in head first, that's not the analysis.

Operator

Since there are no further questions, this concludes Triumph Group's Fiscal 2014 Third Quarter Earnings Conference Call. This call will be available for replay after 11:30 a.m. today through February 5, 2014, at 11:59 p.m. You may access the replay system by dialing (888) 266-2081 and entering access code 1630473. Thank you all for participating and have a nice day. All parties may now disconnect.

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