Triumph Group's (TGI) CEO Jeffry Frisby on Q4 2014 Results - Earnings Call Transcript

| About: Triumph Group, (TGI)

Triumph Group (NYSE:TGI)

Q4 2014 Earnings Call

May 08, 2014 8:30 am ET

Executives

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

Jeffrey L. McRae - Chief Financial Officer and Senior Vice President

Analysts

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

Steven Cahall - RBC Capital Markets, LLC, Research Division

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

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

Julie Yates Stewart - Crédit Suisse AG, Research Division

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

Noah Poponak - Goldman Sachs Group Inc., Research Division

Matthew Akers - UBS Investment Bank, Research Division

Myles A. Walton - Deutsche Bank AG, Research Division

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

Kenneth Herbert - Canaccord Genuity, Research Division

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our fiscal year 2014 fourth quarter and year-end 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 Jeffry Frisby, the company's President and Chief Executive Officer; and Jeffrey McRae, Chief Financial Officer and Senior 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 our conference call to go over the results of our FY '14 fourth quarter and our outlook for FY '15. I'll remind you that there is a slide presentation that you can follow in addition to the audio portion.

I want to begin by telling you something you already know. Fiscal year '14, now completed, had quite a lot of noise in it, stated politely. There were quite a number of moving pieces and they were not all moving in the right direction. That said, this noise is by and large behind us in fiscal year '14. We'll have a few items to call out and deal with separately in fiscal year '15. Jeff McRae will cover these in some detail shortly.

We closed out the fourth quarter and the year in a positive manner. We are able to accelerate the shutdown of our Jefferson Street facility and our move to Red Oak ahead of our original plan. While we incurred additional cost to do so, I'm convinced that the earlier timetable will provide us better returns than if we had lingered in 2 facilities longer. Additionally, we exceeded our earnings projection for the quarter when you add back those items we had previously discussed. As a result, we are headed into FY '15 [indiscernible] annual report made the statements that we are designed to be different and built to perform. Our operating philosophy and our organizational structure make those statements true.

And with just a few exceptions over the years, our high level of execution affirmed this as well. This year's annual report, when it is released, will add the phrase "positioned for growth". Those of you who know Triumph well and who know me, are aware of how a trajectory of growth is part of our DNA. It is what we have historically done and what we will continue to do. Higher

[Audio Gap]

Over time, these changes will become apparent. In venues, such as today's conference call, you will just get a glimpse of what the future will hold for us. Consider that last comment a coming attraction ad for our Investor Day to be held June 11 in New York. We plan, at that time, to be able to widen the lens and provide you a broader view of why we believe we are, in fact, positioned for growth.

All that said, let's turn to Slide 3. As I have mentioned, we had solid fourth quarter performance. In Aerostructures, the underlying quarter was solid in spite of the military decline and lower 767 program revenue. Importantly, our 747 program was stabilized and is on schedule.

Aerospace systems delivered strong margins, expanding 280 basis points on a sequential quarterly basis. While we saw continued good performance in Triumph Engine Control Systems, many other aerospace companies also performed well. And in Aftermarket Services, we saw continued strength in operating margin performance, despite the fact that military still remained relatively weak.

Importantly, we successfully completed the closure of our Jefferson Street facility and our move to Red Oak facility ahead of schedule. Now this was no easy task, it improves our cost structure and competitive position going forward. We continue to proactively and effectively manage our pension obligations, and Jeff will go into much more detail on this a little bit later.

During the quarter, we increased our share repurchase authorization to approximately 5.5 million shares and executed a 300,000 share buyback for approximately $19.1 million. On the negative side, we were recently notified of a Stop Work Order on the final 3 C-17 production units. While this is certainly disappointing, and we'll go over the FY '15 impact a little later.

On the positive side, we were awarded a 3-year contract to provide overhaul and maintenance services for that same aircraft. Now the interesting thing about this award is that it resides in 2 segments, the Aerospace Systems and the Aftermarket Services, and illustrates the potential for bundling our proprietary products and our third-party repair activity.

And last, but certainly not least, we were awarded an Airbus contract to provide Wing Reinforcement kits for A319 and A320 Sharklets. This award has been close to complete for some time now, and we are very happy to be finally able to announce it.

At this point, I'll turn it over to Jeff.

Jeffrey L. McRae

Thank you, Jeff, and good morning. I will start with a review of our financial results for our fourth quarter. Turning first to the income statement. Sales for the fourth quarter were $936.4 million compared to $986.3 million for the prior year period, a decrease of 5%. Organic sales for the quarter decreased 11%, primarily due to production rate cut from the 747-8, lower revenues on the 767 program and a decrease in military sales.

Operating income for the quarter decreased 28% to $80.9 million, which included approximately $47.4 million in pretax cost related to the Jefferson Street facility closure and startup with the Red Oak facility, approximately $900,000 of pretax early retirement incentives offered to certain Triumph Aerostructures employees, and a net curtailment gain of approximately $400,000 related to the Triumph Aerostructures pension plan. The breakdown of these nonrecurring costs is detailed on the next slide for your reference.

Excluding these items, operating margin was 13.8% for the quarter. The prior fiscal year's fourth quarter also included approximately $36 million of nonrecurring cost. Excluding these costs, operating margin was 15.1% for the prior year's fourth quarter.

Net income was $42.3 million resulting in earnings per share of $0.80 per diluted share versus $1.24 per diluted share for the prior year quarter. Excluding the nonrecurring cost for both periods, net income was $73.5 million or $1.39 per diluted share versus $1.68 per diluted share for the prior year's quarter.

EBITDA excluding the net curtailment gains totaling $400,000 was $117.2 million resulting in a 12.6% adjusted EBITDA margin. The number of shares using computed -- used in computing diluted earnings per share for the quarter was 52.8 million shares.

During the quarter, our share repurchase authorization was increased to 5.5 million shares. And to clarify, this is a new authorization of 5 million shares, plus 500,000 shares from a previous authorization that was still remaining.

We executed a 300,000 share buyback for approximately $19.1 million. We repurchased shares in the quarter under a 10b-18 program. And as such, we only purchased shares prior to the blackout period. As we move forward, we are evaluating a more robust program, which would include establishment of a 10b5 program, structured to provide the ability to purchase shares during our blackout periods. And to ensure we are being opportunistic based on the valuation of our stock.

Turning now to our full year financial -- the full year fiscal year results. Sales for the fiscal year increased 2% to $3.763 billion compared to $3.703 billion for the prior fiscal year. Operating income was $400 million versus $531.2 million for the prior fiscal year. Included in operating income for the fiscal year was approximately $69.7 million in pretax costs related to the Jefferson Street facility move, approximately $900,000 pretax of early retirement incentives offered to certain Triumph Aerostructures employees, and settlement of net curtailments related to Triumph Aerostructures pension plans of approximately $1.2 million pretax. The breakdown of these nonrecurring costs is detailed on the next slide for your reference.

Excluding these items, operating margin was 12.5% for the fiscal year. The prior fiscal year included approximately $44.2 million pretax of nonrecurring costs. Excluding these items, the operating margin was 15.5% for the prior fiscal year.

Net income was $206.3 million, resulting in earnings per share of $3.91 per diluted share versus $5.67 per diluted share for the prior year. Excluding the nonrecurring costs for both periods, net income was $253.2 million or $4.80 per diluted share versus $6.21 per diluted share for the prior fiscal year.

EBITDA, excluding pension settlements and net curtailments totaling $1.2 million, was $523.7 million, resulting in a 14.1% adjusted EBITDA margin. The number of shares using computed -- used in computing diluted earnings per share for the fiscal year was 52.8 million shares.

Looking now at our segment performance, sales in the Aerostructures segment for the fourth quarter declined 12% to $632.6 million. Organic sales for this quarter declined 14%, primarily due to production rate cuts in the 747-8 program, lower revenues on the 767 program and a decrease in military sales.

Fourth quarter operating income was $36.2 million compared to $110.9 million for the prior year period and included $47.4 million of pretax charges related to the Jefferson Street facility move, and $16 million of previously disclosed pretax charges resulting from reductions in the profitability estimates on the 747-8 program.

The segments operating results for the quarter included a net unfavorable cumulative catch-up adjustment on long-term contracts of $27.4 million, of which $20.6 million was related to the Jefferson Street move and $6.8 million is related primarily to non-move related charges on the C-17 program, for which we have now been putting a stop work on the final 3 ship sets, for which we had previously been authorized for long-lead funding. The reduction in C-17 production quantities has put pressure on the profitability on the final production accounting block, due to lower projected labor performance, higher material costs and overhead absorption.

During the quarter, we did complete deliveries on the 747-8 program accounting block, and we began deliveries on the next accounting block of 25 units. We do not see any material change in our estimates on either block during the quarter, as quality, schedule and labor performance continue to improve in line with our expectations. This includes the impact we have seen from the bump and roll dynamic within our UAW workforce at our Marshall Street facility. With the final closure of the Jefferson Street facility in March, any future bump and roll will be minimal and contained within the Marshall Street facility.

Overall, the segment's operating margin for the quarter was 5.7%. Excluding the Jefferson Street move-related cost and the 747-8 program impact, the segment's operating margin was approximately 17%. EBITDA for the quarter was $62.4 million at an EBITDA margin of 9.9%. For the fiscal year, sales for the segment decreased 6% to $2.612 billion versus $2.781 billion in the prior year, driven by the lower production rate on the 747-8, lower revenue on the 767 program and lower revenue from military programs -- the largest piece being the B-22 program. Operating income decreased to $255 million, with an operating margin of 9.8%. EBITDA for the fiscal year was $344.1 million and an EBITDA margin of 13.3%.

As Jeff mentioned, we did successfully complete the closure of the Jefferson Street facility and our move to our new facility in Red Oak ahead of schedule. In doing so, we experienced a higher level of spending and disruption during the fourth quarter than previously anticipated. We also -- which will also bleed into fiscal year 2015, based on the treatment of the cost within the accounting blocks. This will be offset by the avoidance of any cost in fiscal year 2015 related to the Jefferson Street facility.

As shown on the next slide, which updates the cost and benefits associated with the Jefferson Street closure and Red Oak facility move and startup, we now anticipate a net $0.12 benefit to earnings per share in fiscal 2015, with nonrecurring expense of $0.26 per share related to disruption and accelerated depreciation being offset by a $0.38 per share benefit driven by the elimination of fixed facility costs at Jefferson Street and an improved cost structure in Red Oak. We are still confident in achieving a $0.50 per share run rate improvement relating to the Red Oak move.

On the labor front, our employees at the Marshall Street facility have continued to work without a contract since last October, when negotiations on our new contract have stalled, pending resolution of the UAW's appeal to the National Labor Relations Board ruling related to the Red Oak facility. During the quarter, we did communicate to the UAW our recognition, based on the number of employees that transferred from Jefferson Street to Red Oak of the UAW's right to represent the employees in Red Oak. But to-date, little progress has been made in negotiating an agreement with the UAW covering the employees in Red Oak.

Moving on to our Aerospace Systems segment. Sales for the fourth quarter increased 28% to $235.3 million, of which $71.2 million were attributable to the recent acquisition of Triumph Processing-Embee, Triumph Engine Control Systems and Triumph Gear Systems-Toronto. Fourth quarter operating income increased 28% over the prior quarter to $42.8 million with an operating margin of 18.2%. EBITDA for the quarter was $49.2 million and an EBITDA margin of 21.2%. For the fiscal year, sales for the segment increased 42% to $871.8 million versus $615.8 million in the prior year, of which $270.4 million was attributable to recent acquisitions.

Operating income increased 45% over the prior year to $149.7 million with an operating margin of 17.2%. EBITDA for the fiscal year was $169.8 million at an EBITDA margin of 19.9%. The segment's operating results included $500,000 of legal costs associated with the ongoing trade secret litigation for the quarter and $6.8 million for the fiscal year.

As for the status of the ongoing litigation with Eaton, we have previously disclosed that last 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 moved the Mississippi Supreme Court for rehearing of the appeal. But on March 20 of this year, the Mississippi Supreme Court denied Eaton's motion.

Meanwhile, Triumph's claims against Eaton remain pending in the trial court in Mississippi. But those proceedings are still stayed by the Mississippi Supreme Court, while it considers 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 in North Carolina, which also remains pending. If anyone wants to know more, we refer you to the documents available on the public record and we prefer to let those documents speak for themselves.

In the meantime, going forward, any legal charges incurred will be recorded as corporate expense and will not burden the Aerospace Systems segment with its cost. Moreover, we expect to be able to reduce ongoing legal costs through alternative fee arrangements as necessary. As a result, we do not expect the ongoing legal costs associated with the Eaton litigation to be worth addressing separately.

Continuing with our segment reviews. Sales in the Aftermarket Services segment were $70.5 million compared to $83.9 million in the prior year period. The year-over-year decrease reflected the impact of the divestiture of the Instruments Companies, as well as the timing of completion of certain contracts. Although we have begun to see improvement in the commercial aftermarket, the military aftermarket has continued to lag.

Fourth quarter operating income decreased 11% over the prior year quarter to $11.6 million with an operating margin of 16.4%. The margin expansion was driven primarily by a gain on the sale of a rotable asset and improved operating performance. EBITDA for the quarter was $13.5 million at an EBITDA margin of 19.2%.

For the fiscal year, sales for the segment decreased 9% to $287.3 million versus $314.5 million in the prior year, largely due to the sale of the Instruments businesses. Operating income decreased 7% over the prior year to $42.3 million, with an operating margin of 14.7%. EBITDA for the fiscal year was $49.8 million and an EBITDA margin of 17.3%.

The next slide is a Pension/OPEB Analysis for Triumph Aerostructures, for your reference. As you can see, the table summarizes the Pension and OPEB P&L impact, as well as the cash contributions for fiscal years 2014 and 2015. You will see that we deferred making a $70 million voluntary pension contribution that was previously planned for the fourth quarter of fiscal year 2014. We now plan on additional voluntary contributions in fiscal year 2015.

During the fourth quarter our pension liability was positively impacted by 2 efforts. First, we initiated a benefit freeze for all remaining non-union employees in the heritage Vought business that had not been previously frozen. This action resulted in a curtailment credit of $8.4 million with an anticipated long-term economic benefit of approximately $25 million. Second, due to the closure of the Jefferson Street facility, we were required to apply curtailment accounting to impacted hourly personnel, which resulted in a curtailment charge of $8 million. In future years, we anticipate that these 2 activities will result in increased pension income in the range of $1 million to $1.5 million.

With regard to our pension liability at the end of fiscal year 2014, our net underfunding was reduced approximately 37% to $227.4 million since the beginning of our fiscal year. This is due to an increase in discount rates, strong asset returns and the proactive actions we have taken over the past couple of years.

Looking at the components. Our gross liability decreased $229 million offset by a decrease in assets of $97 million, which was driven by lump-sum distributions and partially offset by positive asset returns.

Turning now to backlog. Our backlog takes into consideration only those firm orders that we are going to deliver over the next 24 months, and primarily reflects future sales within our Aerostructures and Aerospace Systems groups. The Aftermarket Services group does not have a substantial backlog. Our order backlog as of the end of the year was $4.75 billion, up 5% from prior year. Military represented approximately 26% of our total backlog.

The top 10 programs listed on the next slide are ranked according to backlog. The list remains largely unchanged from last quarter although making its first appearance in the top 10 was the Bombardier Global 7000/8000 program.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military and space totaled 44.9% of our revenue, and is broken down 73% commercial and 27% military.

Now looking at our sales mix among end markets. The next slide shows that comparative fiscal year 2013 commercial aerospace sales increased by 2% to $2.151 billion, representing 57% of our sales; military sales of $1.062 billion, increased 3% year-over-year and represented 20% of our total sales; business jets decreased 8% to $415 million and represented 11% of sales, while regional jets decreased 76% to $58 million and represented 2% of sales; non-aviation accounted for 2%.

Finishing our sales analysis, the next slide shows our sales trend for the fourth quarter and the fiscal year. Total organic sales for the quarter decreased 11% from the prior year to $847.2 million. Breaking that down by segment, the Aerostructures segment same-store sales for the fourth quarter declined 14% to $612.6 million, primarily due to the production rate cuts in 747-8, lower revenues on the 767 program and a decrease in military sales, as mentioned earlier. It also reflected the impact of the divestiture of a small Aerostructures company that we announced last quarter.

Aerospace Systems same-store sales for the quarter grew 1% to $164.2 million, while Aftermarket Services same-store sales decreased 9% to $70.5 million, primarily due to the timing of completion of certain contracts and continued military softness.

With respect to the fiscal year, total organic sales decreased 6% over the prior year to $3.407 million from $3.629 million. Breaking that down by segment, the Aerostructures segment same-store sales for the fiscal year declined 8% to $2.518 billion. Same-store sales for the fiscal year for the Aerospace Systems segment was $601.3 million compared to $593.6 million, a 1% increase. The Aftermarket Services same-store sales for the fiscal year declined 1% to $287 million. Export sales for the fourth quarter increased 20% to $164.6 million; for the year, increased 23% to $621.6 million.

Now turning to the balance sheet in the next slide. For the year, we generated $181.5 million of cash flow from operations before Triumph Aerostructures pension contributions of $46.3 million. After these contributions, cash flow from operations was $135.1 million. Inventory for the year increased to $124 million, of which approximately $41 million was attributable to investments in the Bombardier wing, $38 million to FY '14 acquisitions, $20 million from the Jefferson Street build-ahead, and $19 million for the Embraer program.

CapEx in the quarter was $44.6 million and $206.4 million for the year, of which $86.6 million was attributable to the construction and startup of the Red Oak facility. Net debt at the end of the year was $1.521 billion versus $1.298 billion at the end of the prior year, representing 40% of total capital. It is our intent to refinance the 2010 8 5/8% senior notes due 2018, which we expect to be completed in the first half of fiscal year 2015. The impact of the call provision of those notes and the unamortized financing fees will be approximately a $21 million charge during FY '15.

The global effective tax rate for the quarter was 35.4% and reflected the fact that the R&D tax credit expired in December 2013. In addition, the income tax for the quarter was favorably impacted by the true-up of our financial statements state tax expense to the actual state tax returns filed. From a cash perspective, we currently expect to pay minimal cash tax in FY '15.

With respect to our financial guidance for fiscal year 2015, we expect revenue year-over-year will be relatively flat, in the range of $3.7 billion to $3.8 billion, with Aerostructures down due to full year impact of the 747-8 and B-22 rate reductions and the end of the C-17 program, partially offset by growth in recent program wins, initial deliveries on the Bombardier Global 7000/8000 and growth in the Global Hawk 737 and 787 programs.

The lower Aerostructures revenue is offset by continued growth in our Aerospace Systems segment and year-over-year recovery in our Aftermarket Services segment. Earnings per share, excluding nonrecurring cost related to the Red Oak startup and taking out the 2018 notes, as previously discussed, is expected to be in the range of $5.65 to $5.75 per share. This guidance reflects the impact of the earlier-than-expected conclusion of the recurring production on the C-17 program and the continuation of the 747-8 program at a rate of 1.5 units per month, with a profit rate on the 747-8 program within our Aerostructures segment between 0 and 1%. We're also projecting generating $250 million in cash flow available for debt reduction, acquisitions and share repurchase. As we look within the year, our expectation is the second half will be stronger than the first half in both earnings and cash flow, as we put the remaining impact of the Red Oak move behind us and we realize lower interest rate due to taking out the 2018 notes.

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

Jeffry D. Frisby

Thanks, Jeff. As you have just seen, our backlog remains strong and in fact, growing. In fiscal 2015, we will remain focused on improving execution and efficiency, integrating our acquisitions and reducing our cost, both internal and external. As we look to continue our growth track, execution across the board will be a key catalyst. As Jeff reported, our FY '15 guidance is as follows: revenue of $3.7 billion to $3.8 billion, earnings per share excluding Jefferson Street Red Oak overhang costs and anticipated refinancing fees will be in the range of $5.65 to $5.75 per share.

Now I tend to oversimplify things. Although I risk doing so again, the way I view our guidance for FY '15 is basically this: We, preliminarily, estimated $5.75. Very recently, our C-17 program was negatively impacted by the stop work and we believe cancellation of the last 3 C-17 transport aircraft. Based on our diverse content and the various spots within the supply chain that we reside, we estimate a $0.10 FY '15 impact as a direct result. That cancellation, combined with the belief that we will at least partially mitigate it toward the end of the year, leads us to $5.65 to $5.75. And finally, we project, as Jeff mentioned, cash available for debt reduction acquisitions and share repurchases of approximately $250 million.

So at this time, I'd like to open the phone lines for 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 of JPMorgan. First question is just on the C-17. Where is the profitability now in your guidance for this year, what margin are you expecting to accrue? And how do we get confidence -- what kind of confidence can you give us that this is just the 3 aircraft and we're not going to get another charge next quarter?

Jeffrey L. McRae

Yes. Joe, I'm not going to talk to specific margin on the C-17. Historically, C-17 has been a fairly strong margin producer for us. As I think of the last 3 aircraft and the impact that we saw in Q4, we try to ensure that we capture what we believe the impact of the loss of those 3 aircraft is within the Aerostructures business. The 3 -- we're now dealing with a block that's effectively 10 units versus 13. We know we're going to have pressure on material as we go back to our supply chain for 10 versus 13. We know we're going to have issues with tail up as we're producing the last aircraft. And what we've tried to do is capture all of that as we've looked at Q4. So I'm not going to say it's not without risk going to the end of any production program, but I think we've tried to do a good job of capturing it here in the fourth quarter.

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

And is some of this -- the extra cost you expect for Red Oak in FY '15 is -- were you able to parse that between C-17 being abbreviated and the other issues you mentioned? I mean, how do you even separate that?

Jeffrey L. McRae

Yes. We've made an attempt to. And let me clarify first, as we think of the hangover of the impact of the move to Red Oak in FY '15, most of that impact we've seen incurred in the fourth quarter and -- but due to our accounting block structure, we ultimately spread that over the accounting block so some of the impact that we physically saw in the fourth quarter bleeds over to fiscal year '15. And specifically, the C-17, which was the last program that came out of Red Oak, as we accelerated the move, the greatest impact we saw was C-17, which we try to capture what we believe was the disruption impact of that. And that is flushing through the EACs on that accounting block. On top of that, we then try to discretely understand what we would see looking forward as impacts to having 3 fewer ship sets in that block. And that's not all just labor performance, it's also assuming that we're going to see hits from -- from suppliers on material and also has an absorption impact with fewer hours running through the Red Oak facility related to C-17.

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

You guys have mentioned a $6.75 EPS target for next fiscal year FY '16 last quarter. Clearly, the C-17 seemed to have some impact on that. Any update on that outlook?

Jeffrey L. McRae

Yes. Let me start by saying, I mean, the only thing we saw at a high level that has changed our view on FY '16 is the early termination of the C-17 production. So at this point, we would see no revenue or margin related to C-17 production units in FY '16. That said, we have made a conscious decision not to provide earnings guidance beyond FY '15. What we will do is at our Investor Day in June is to provide greater insight with how we see the future growth of the company, and that will include how we view both top line and opportunities for bottom line growth as we look forward.

Jeffry D. Frisby

Let me just point out, this is not -- we have traditionally done this when we have had our initial Investor Day and gave guidance, a longer-term guidance. Once we got out to the year before, we no longer continued that. We continue to look out on a larger horizon.

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

Okay. And then just one more. The CapEx in investment number was a little higher that we've been looking for and you had a big roll off of the Red Oak CapEx, which I guess is almost $100 million last year. So what -- can you help us understand what's in there?

Jeffrey L. McRae

Yes. And in our guidance, what we gave is both CapEx and nonrecurring investment in major development programs. So if we think of traditional CapEx, we think we get back into what I would depict as a normal range of spending on CapEx between $120 million to $140 million. The balance of that $250 million is the continued nonrecurring investment on the Bombardier Global 7000/8000 and the Embraer e-jets programs, which flushes in inventory.

Operator

Our next question comes from Steven Cahall.

Steven Cahall - RBC Capital Markets, LLC, Research Division

From Royal Bank of Canada. Maybe just to start off on the NRE projections for Red Oak and Jefferson Street. They were up pretty steeply in Q4 versus maybe what you guided to February '14 in Q3. And then '15 as well looks to be up from about $4 million to $20 million. Since there's no bump and roll in there, it sounds like, can you just give us some color as to what is in there and maybe speak to the phasing and if there's any risk that it bleeds into FY '16?

Jeffrey L. McRae

Yes, I mean, the 2 elements that go in there are the disruption related to the labor force as we moved the programs and got programs set up in Red Oak, and then the accelerated depreciation as we exited Jefferson Street and flushed through the balance of depreciation on any assets that were effectively abandoned related to Jefferson Street. The real dynamic that we're looking at is due to our accounting block structure, both of those cost elements go into the accounting blocks and then get spread over all the units in the accounting block. And a number of the accounting blocks span between FY '14 and FY '15. So you're seeing that hangover of cost that was incurred in FY '14 that doesn't flush through the P&L until FY '15 and the units in those blocks are delivered. We do anticipate, in the first quarter, some residual disruption in Red Oak as we finalize getting programs set up. But we would see that in the first quarter, definitely ending in the second quarter. We think FY '16 will be very clean and won't have any impact related to disruption or the depreciation. And we're still very confident that the original business case assumption that we will be able to generate the $0.50 a share benefit related to this on a run rate basis.

Jeffry D. Frisby

And one other comment. I mean, I think you have to understand that there is really an additional benefit that -- we did, in fact, spend more money and more expense in FY '14. But, we, effectively, by the end of this last fiscal year, had all of our employees under one roof far ahead of schedule. As such, we were able to actually, as one site and one company, start coming down the learning curve, which will be apparent in each of our programs in varying slopes. We started that process much earlier than we would have. So I think that we're actually going to be far ahead of the game as we start getting out towards the end of this year and also further into the next fiscal years. I think when we look back on this, it's going to be very beneficial to have exited Jefferson Street earlier even though there was some higher costs in the fourth quarter.

Steven Cahall - RBC Capital Markets, LLC, Research Division

That's very, very helpful color. Maybe just a follow-up on share count. In the past, you've given us some steerage [ph] of the weighted average shares to assume in guidance. Any thoughts on what we might be looking at for '15 relevant to the buy back changes?

Jeffrey L. McRae

We've used in our calculation 52.6 million shares.

Operator

Our next question comes from Cai Von Rumohr.

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

Cowen and Company. So I guess, on previous calls, you've talked about looking at Spirit's Tulsa facility and some of the business there. Could you update us, is that still an active negotiation?

Jeffry D. Frisby

We run -- we sit on a fine line here about what we discuss, what we don't discuss about ongoing and potentially ongoing acquisitions. So let me just say that we certainly have had an interest in part of the Tulsa operation. And when -- if we just want to go out and buy something, things can happen relatively quickly. As you know when you try to come up with a win-win type of situation, it takes a little bit longer. And in a situation like this, should it come to fruition, we've got to come up with a win-win-win. And that's just really adds a lot of complexity, so things take a while. And so, I guess, without going too much farther, I'd say we still have an interest and we're still hoping to make progress. We have nothing to announce.

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

And just -- sort of a housekeeping issue, you did not include the debt refi charge you had in fiscal '14 and yet, you are including in the release -- including it in adjusted earnings, taking out of the reported just to get you up to the adjusted for fiscal '15, even though the net benefit of that, because it happens early in the year, offsets most of it. What sort of the thinking behind that? And was that in your prior guidance because I didn't think that it was?

Jeffrey L. McRae

Yes. I mean, Cai, we've tried to be consistent as it relates to 'FY 15, knowing that it is a little inconsistent with how we've looked at FY '14 and we try to be consistent in saying in the $5.75 that we were previously projecting, we had included the benefit related to the lower interest cost but we had not included the cost of taking the bonds out. And for us, we wanted to make sure we were clear as we came out with formal guidance for FY '15, how we were looking at it. It was clear that the impact of taking those bonds out, whether you want to carve it out or you don't want to carve it out, we want to make sure it was fully understood. In our mind, it was not included in the $5.75.

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

And then the sale of the rotable asset, how big was the profit there?

Jeffrey L. McRae

It was a meaningful profit but it wasn't a distorting profit for us in Q4 and rotables tend to be a little lumpy for us. So some quarters we see them, some quarters we don't. We see them at different levels but it wasn't distorting, necessarily, to a great deal in the aftermarket.

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

And the last one, so C-17, can you just tell us how many ship sets you expect to do in '15 and '16 approximately?

Jeffrey L. McRae

Yes, if we think of the large Aerostructures element of C-17...

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

Yes, that's what I'm talking about.

Jeffrey L. McRae

We would look at that as a 10 left to deliver. And I say 10, it's not a full 10 but as we counted, we think of it as 10 and that would now, if Boeing ultimately does terminate those last 3 ship sets, which they have announced that they plan to do, they've only put us in a stop work, we'd be looking at 0 in FY '16. And Cai, my only caution is we feed a lot of different places in the supply chain throughout Triumph, so certain enterprises are ending earlier than those 10, so it's not a clean 10 across the enterprise.

Operator

Our next question comes from Peter Arment.

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

Stern Agee. Frisby, can you give me a little color on what you're seeing? Military aftermarket has been weak for a while now, how you think that kind of settles out as we go through fiscal '15, just given where budgets are settling out? And then I have a follow-up.

Jeffry D. Frisby

Well, my sense is that we're not really planning on seeing a huge uptick. What I think we have is we saw pent-up demand and I think we still see pent-up demand as I guess would be defined by -- we have certain visibility into some of the depots and some of the customers that have parts that we could in fact, repair. And in the past, when they got those parts for us to repair, they would send them to us. Then they came up with budget shortfalls and they started holding those and that was really how we defined the pent-up demand that we could actually see and put our hands on. That still exists and so we are planning on a continued activity in military but we're not planning on the floodgates to reopen. What I expect to see is that for whatever reason, whether it's just a drum beat of the reduced flying hours of the military fleet or whether it's a concern over future funding levels, that we will see a relatively subdued level of activity, kind of similar to what we see now -- just in terms of the military aftermarket.

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

And then just, could you comment on just kind of the -- you've has some very nice wins on Airbus there recently. Do you see more still in the pipeline there? And also related to kind of the OEM outlook, how are you progressing with Boeing's Partnering for Success programs?

Jeffry D. Frisby

Okay well on the Airbus front, we -- this is actually -- I'll cut one of the questions off at the path. This is actually 1 of the 2 announcements we've been wanting to make for some time and haven't been able to make because of a number of issues. So this particular project, the wing reinforcement project, is an exciting one and is that because we really can get into production relatively quickly and we should be able to do so, to some level, within the fiscal year and we had already planned on that. But that ramps up fairly well and depending on the success of the retrofit program and operator acceptance levels, could be very exciting for us and could provide us some type of bridge to where we end up getting the ramp-up of some of the programs like the A350 ones we have. That said, the opportunities to continue our expansion of Airbus work remain robust, they remain very positive and so we would certainly anticipate further inroads on Airbus platforms either directly to Airbus or through tier 1s, because as you know, we have an ability to operate at multiple tiers. So the question now on Boeing is that we believe that our relationship with Boeing is certainly solid as is evidenced by the C-17 repair contract, evidenced by the fact we continue to get looks and are in discussions on some of their new programs, and we are participating in the Partnering for Success program at each of our companies that are being requested to do so. We have a number of companies that have, in fact, already fully met those requirements and are rated -- I guess, they're rated green or whatever color they choose to call acceptance.

Operator

Our next question comes from Julie Yates.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Credit Suisse. Just a question back to the guidance, trying to bridge the preliminary $5.75 to the $5.65 to $5.75 offered today. Were there any other changes besides the $0.10 impact from C-17? It seems like there were, obviously, movements around the assumed benefits and cost from Red Oak.

Jeffrey L. McRae

Yes, as we went through the planning process and when we first talked $5.75, we were very early in that process. I would say there were a number of puts and takes with each of our businesses that ultimately gave us comfort on holding close to the $5.75. As Jeff depicted, our ultimate assessment was providing recognition for the impact of C-17 as we looked at it. As we looked at the Jefferson Street/Red Oak impact, although we were seeing a higher level of the carve out related to disruption and the accelerated depreciation, the bottom line recurring benefit really held pretty steady from what we were thinking in the original $5.75. If I look at that on a net basis, we were talking about a $0.25 good guy last quarter, which had about a much smaller carve out for disruption. We're still looking at about a $0.12 net good guy, which now has a much larger carve out, if I look at the recurring piece of it and it's pretty close. So movement in the carve out but not movement in what we're seeing in recurring benefit in Red Oak. So at the end, I think the C-17 is really the one piece that we would call out as kind of the macro level change that we felt we need to incorporate.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay, and there were no buybacks assumed in either, correct?

Jeffrey L. McRae

We're using 52.6 million shares as the basis for calculating. We will have many things we look at, how to mitigate that $0.10 impact on C-17. Share buyback would be one of those things we would look at as helping to mitigate getting back to $5.75.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay, and then just thinking about bridging from this year's adjusted $4.80 to the new range, you get a tailwind from incremental pension income, do you have the absence of the prior year cumulative catch on 747-8, lower interest costs, and then it gets you kind of the mid 5s but there is an incremental $0.20 to $0.30 and I guess and is -- I guess, is that Red Oak or is that margin improvement on other programs?

Jeffrey L. McRae

Yes, it's margin improvement. It includes that margin improvement we've seen at Red Oak, so I think you have the other big piece is pension, interest and the walk up [ph] .

Jeffry D. Frisby

And Julie, one of the things, for example, when you think about we're seeing -- when I say margin -- when I'm thinking about margin improvement in Aftermarket Services, for example, those are typically margin dollars that we're talking about and we do see some growth in Aftermarket Services. We have a number of opportunities that are pretty significant that we believe will come to fruition fairly soon. Now those things will probably start delivering toward the end of the year, so some of that stuff may be more back-loaded, but we're pretty comfortable we're going to see margin improvement in Aftermarket Services, as well as Aerospace Systems.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. And then just one more, switching gears to the top line. You talk about reposition for growth, do you expect to resume organic growth in FY '16 after down 6% this year and a flattish outlook for '15? Or will it be a little bit later, given the headwinds in military?

Jeffry D. Frisby

Well, I think we could discuss what organic growth is because once we've acquired a company, it becomes organic and some of the acquisitions we've made have helped position us better for growth. Some of the acquisitions that we will make will continue to position us. Some of -- we've won some longer term programs as you know, that will, in fact, help position us. We will continue to make acquisitions and to invest in programs that can help us in the mid- and long-term. So my sense is that we will return to top line growth in FY '16 but I guess, we could debate about how much is that actually organic and how much is not.

Operator

Our next question comes from Yair Reiner.

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

Oppenheimer & Co. So first, just a quick verification. The adjusted numbers for the fourth quarter, do they include any of the bump and roll impact? Because I think the third quarter numbers included some bump and roll or is that all excluded from the adjusted number?

Jeffrey L. McRae

Yes, we have not included the Marshall Street bump and roll impact in the carve out, so we've really isolated the carve out to Jefferson Street impact and the startup of Red Oak. It is incorporated in our assumption around profitability at 747, which is executed at Marshall Street. So as we're talking a 0% margin, we've assumed that bump and roll impact in there.

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

Got it, okay, very good. And then it sounds like inventory build associated with the move amounted to $20 million over the year, I think that's about 1/2 of what you initially anticipated if memory serves -- is that correct? And if so, what changed in the planning?

Jeffrey L. McRae

Yes, I mean, we ended the year at about $20 million. Part of the dynamic is really the timing of execution on the move. So as we accelerated, we were getting more programs up and running and pushing product out the door by the end of the year on those programs. I would say also that we didn't get as much built up as we had anticipated on certain programs, which put more pressure on the quarter as we looked at it.

Jeffry D. Frisby

It's funny, when you think about inventory build-aheads, it's always easy to put those things in a plan. It's generally not quite as easy to execute them across the board. I've moved an awful lot of projects and product lines and I've never seen an actually -- a fully-executed build-ahead plan that worked exactly how you laid it out. And in fact, I'm reminded of General Eisenhower. He said that planning is essential but plans are useless, and the thought being that when your plan meets reality, it really boils down to the old adage that the most successful person is the one with the best plan B. And so being able to adapt and to actually successfully pull off this move without significant disruption to our customers and to do so without quite the build-ahead that we thought we were going to have, I think is just further testament to what a good job those guys down there in Texas did.

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

Got it, great. And then just one more if I could. On the C-17 contract that you got for the repair and overhaul and the replacement parts, is that a contract you already had that is being renewed or is that incremental work?

Jeffry D. Frisby

No, we had those products before. We were able to retain them and were able to retain them on a multi-year basis. So that was a continuation of work that we had been performing.

Operator

Our next question comes from Noah Poponak.

Noah Poponak - Goldman Sachs Group Inc., Research Division

It's Noah Poponak from Goldman Sachs. On the 747-8 program, can you maybe just give us a little bit of an update on the 1 or 2 things incremental since the last time you updated us that maybe give you more confidence that you are fully stabilized there and there's no more surprises on your own performance and cost? And then on the volume side, what's your level of concern that there's potentially another volume reduction there from the OE and are you able to prepare for that or not?

Jeffry D. Frisby

Well, there's a number of questions there, let me -- on the volume front, first off is that we see how many announced aircraft that Boeing has sold on this aircraft and at the same time, Boeing continues to express confidence that they not only will continue to build at 1.5 but want to actually consider increasing the rate. I'm not considering that as something that is likely to happen, but I do believe that they intend to keep the rate at 1.5. It becomes very costly for them as well as us to go underneath that. That said, we are in the process of developing plans that we should have completed fairly soon, in terms of how we mitigate against reduced rates because while we hope for the best, we have to plan for the worst. And so we are looking at ways to mitigate whatever downside we might face, should the rate go down. And I just want to comment, you said fully stabilized, and I don't think I used the phrase fully stabilized when I talked about 747. It's like, I'm not going to say that the program is still in intensive care, but it's relatively a fragile program when you have virtually no profit on it and are projecting to have no profit on it. We have to execute our plans to continue to reduce our costs, and everything that we see right now indicates that we're able to do so and we are looking at it every week and we'll continue to follow through with that. So we're on schedule, we continue to be that now, which helps quite a lot and we're making improvements. That said, it is stable but it's not something that we have to -- that we can really take our eyes off. We have to be very, very vigilant and continue to manage it.

Noah Poponak - Goldman Sachs Group Inc., Research Division

And then just one other question. With the discussion of the second half of fiscal '15 being stronger than the first, I wondered if you wanted to actually maybe quantify that, either on the -- just the top line or just the margin or even EPS, just because it does look like the comps -- the way the comps set up and the way a decent amount of the moving pieces on margins shake out that the year could be fairly back-end loaded.

Jeffrey L. McRae

Yes, I mean, the 2 elements that I see driving the first half versus second half. The first is the completion of flushing through the Jefferson Street/Red Oak impacts through the P&L. So that and then the second piece is as we look at taking out our 2018 notes, that will happen in the first half of the year, we will see the interest benefit of that in the second half of the year. And that one, until we finalize how we take those out, what mechanism and what we replace with and at what value, it's a little bit hard to quantify exactly the interest benefit we will see there. Absent those 2 items, I don't see any significant distorters between the first half and the second half, Noah.

Noah Poponak - Goldman Sachs Group Inc., Research Division

Okay. I had thought the way that the year-over-year growth comparisons looked and at least, the way I thought some of the timing of contributions from some of the major programs that are -- that are not flat year-over-year, shook out. That first half revenue looked down, kind of mid-single digits and second half up mid-single digits to get you to that flat, is that not correct?

Jeffrey L. McRae

Well, you have that dynamic. It ends up starting to be offset by the C-17 dynamic as we go through the year where revenues there will be higher in the first half versus the second half just as that program tails off by the end of the year. So you got some moving pieces in there.

Operator

Our next question comes from David Strauss.

Matthew Akers - UBS Investment Bank, Research Division

UBS. This is actually Matt Akers on for David. Can you guys give us any color on your '15 guidance on where you see margins moving kind of segment-by-segment?

Jeffrey L. McRae

Yes. As I look at versus FY '14, I think the full year margins are probably more indicative in systems and aftermarket than necessarily the fourth quarter margins. So though we saw very strong fourth quarter margins, I don't know that I would sign up to holding those margins through FY '15 for the full year yet. I think the full year margin for '14 is a better indicator there. And then as we look at Structures, that one's a little bit tougher with all the noise in their but I think we should continue to see improvement, if you look at it, excluding the JSF/Red Oak carve out and you take out the 0 margin on 747, I would expect to see some improvement in margin year-over-year there.

Matthew Akers - UBS Investment Bank, Research Division

And then I guess, on the $70 million pension contribution that got pushed out, I guess, what drove that?

Jeffrey L. McRae

It really was -- as we looked at cash flow finishing out FY '14, it wasn't coming in as strong as we thought it would be due to a couple of factors. We're still of the mindset of continuing to de-risk the pension plan, so all that really was pushing it out of Q4 and we pushed it into FY '15 and really, it's just trying to kind of balance cash flow as we look at the business overall.

Operator

Our next question comes from Myles Walton.

Myles A. Walton - Deutsche Bank AG, Research Division

Deutsche Bank. The fiscal '16 or the next 24 months cash flow target had been $600 million. Just curious if there's any reason to think that that's changed at all, given kind of all the moving pieces that you've had over the last few months and it seems like that would still be an appropriate target.

Jeffrey L. McRae

Yes, that's still a good number to use.

Myles A. Walton - Deutsche Bank AG, Research Division

And then you mentioned the legal on Eaton, happy to hear we won't be talking about it a lot more, but the guidance for '15, does it include legal expense or is that a tailwind of $5 million, $6 million?

Jeffrey L. McRae

It includes legal expenses. Our expectation is it's not at the same level as we've seen historically and there's a little bit of opportunity there as we look at some alternative arrangements.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay, but it will drop through corporate expense as opposed to the $6.8 million that was...

Jeffrey L. McRae

Yes, we're not going to do impact of segment. So the segment should be clean.

Myles A. Walton - Deutsche Bank AG, Research Division

And then the other clarification, Jeff Frisby, you'd mentioned I think in answer to Julie's question about FY '16 sales will be up, talking about organic versus non-organic in discussion. But I guess, the question, if you didn't buy anything else today, not looking at what you bought in the past, but if you didn't buy anything else today, would fiscal '16 sales be up?

Jeffry D. Frisby

I have not looked at that. I don't know, when was the last year we didn't buy anything?

Myles A. Walton - Deutsche Bank AG, Research Division

I don't know.

Jeffrey L. McRae

Myles, at a macro level, I mean, obviously, the hole from C-17 will be an impact on FY '16. Offsetting that, you have Bombardier, 7000/8000 beginning to provide some meaningful revenue in FY '16. You have the continued ramp on programs like 87, 37 that's out there. So I don't know that we've looked at it without some assumption of additional wins, so eliminating acquisitions is one thing but it's also looking at what other captures will we have and then we still have a very robust pipeline of opportunity that would allow us to grow organically.

Jeffry D. Frisby

I've always considered the likelihood that we will continue to acquire companies assuming that they're the right strategic fit and that we can do so in a disciplined manner, pricewise. And we do have, as we mentioned, the aftermarket business is going to grow particularly towards the end of the year, as some of these large opportunities become reality. We have opportunities that are piling high. It's funny because we think about the C-17 and I just actually discussed this with some of our company presidents last month at a meeting we had, and we talked about -- I talked about my belief that we really should be more concerned with capacity constraints than what we're going to do to refill the C-17 pipeline because there are so many opportunities that we're dealing with right now, it's just a matter of timing. So when you talk about whether F '16 will be up or down without any acquisitions, we have to take a look at whatever the difference might be with the C-17 reduction and how quickly we win some of these other products.

Myles A. Walton - Deutsche Bank AG, Research Division

Okay. And then one last one to the cash flow statement or the balance sheet. The preproduction growth in the global in the E2 looks like it was about $75 million this year, about $125 million, $130 million in fiscal '15 is your expectation. What does it look like beyond that profile? Is that the peak in terms of net growth in preproduction inventory?

Jeffrey L. McRae

Yes. Global 7000/8000 should complete in FY '15. You shouldn't see any there beyond Embraer, will bleed over into FY '16 but it completes in FY '16 this year. So you probably have half-year spend in FY '16 on Embraer.

Operator

Our next question comes from Michael Ciarmoli.

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

KeyBanc. Just maybe on the fiscal '15, maybe another way, do you guys expect to see growth in commercial or how are you looking at growth on commercial versus military next year?

Jeffrey L. McRae

Yes, we're not seeing -- I mean, with revenues flat year-over-year, as we look at it commercial versus military, I don't expect big step function change in commercial up, military down. So it's a point here, a point there type of thing, Michael.

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

Okay. And then maybe just one more follow-up on this, Jeff McRae. The refinancing. You guys, you did the refinancing in third quarter of last year and you talked about the $5.75. Does this $5.75 now include additional benefits from the planned refinancing that you're going to get to? I just want to try and reconcile if you're baking in an additional savings.

Jeffrey L. McRae

So how we built the $5.75, it does not include the cost of taking the bonds out, which is really the call premium and any unamortized financing we had on those bonds. It does include lower interest rate in the second half of the year, assuming obviously, that we would be replacing those in some fashion with a lower-cost vehicle.

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

So that would be an incremental savings from then what you guys talked about last quarter?

Jeffrey L. McRae

No. That was how we were thinking about it last quarter.

Operator

Our next question comes from Ken Herbert.

Kenneth Herbert - Canaccord Genuity, Research Division

It's Canaccord. Just wanted to ask a question on Aerospace Systems. How much of the step-up in margin sequentially in the fourth quarter was maybe more sales into the Aftermarket from a part standpoint there, and what does the guidance assume for the mix within the segment in '15 for OE versus Aftermarket sales?

Jeffrey L. McRae

Mix, we're not seeing a significant change. It tends to be an 80/20 type of mix, OE to aftermarket within Systems. What we -- I will say, what we have seen during the year and in the fourth quarter, is a higher level of contribution coming from the recent acquisitions than what we would have assumed earlier in the year, primarily the Engine Controls business has continued to perform strongly for us and that's driving part of that margin improvement we're seeing.

Jeffry D. Frisby

That business can -- the Engine Control business is now -- it's our first full year of having it on board. That business, I would characterize as more than 50% Aftermarket and so, just its very existence in that segment helps drive that percentage up and so I think we're going to be able to at least maintain that going forward. We continue to try to drive our Aftermarket business forward.

Kenneth Herbert - Canaccord Genuity, Research Division

And then just as I look at specifically, the systems segment again, you talked about growth again here in the '15 and maybe thinking about margins on sort of a full year, just over 17% number relative to the stronger fourth quarter. You had 2 or 3 years here where you had a nice step-up in margins in this business. However, is it -- do I see a similar increase in the '15 or are you maybe implying that we don't see as much margin improvement perhaps in this segment.

Jeffrey L. McRae

On a percent of sales, I wouldn't expect significant growth in Aftermarket there. I think we will see some growth on the top line year-over-year '14 to '15 in Aftermarket, which will still drive some margin dollar improvement.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay. No, I mean, within Aerospace Systems, does the margin percentage step up again into '15?

Jeffrey L. McRae

As I sit here now, I haven't assumed it's stepping up '14 into '15. I think there's still opportunity for us to extract there.

Operator

Our next question comes from Ron Epstein.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Ron Epstein, Bank of America Merrill Lynch. I just wanted to follow up on the top 10 programs and just -- so, Jeff, in your prepared remarks, you talked about growth into the future and how do you think about managing your portfolio exposures around? So this year, we saw the C-17 issue pop up. When I look through your programs, I mean you've got B-22; A330 in the future, there may be some questions around that; the 47 we know about; kind of heard through the grapevine that the Global 7000 and 8000 might be proceeding slower maybe originally anticipated because of engineering assets being thrown at the C-Series. How do you think about managing those exposures and growth?

Jeffry D. Frisby

It sounds like you need to attend Investor Day.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

I did. I did attend, yes.

Jeffry D. Frisby

But what you're talking about are the very critical issues that are in front of us. And over time, and when we knew when we acquired Vought, that we had acquired a -- we got tremendous benefit out of it and we acquired a number of programs that's probably best years or largest growth years were behind them. So we undertook a long term plus a shorter-term strategy on replacing those. And we have won the Embraer E2 program, we've won the Bombardier global program, we now won some -- we've made our inroads into A350, A320. We continue to move the company from an Aerostructures side into kind of the new world order of airframes and on the, I will call it the heritage Triumph side, we've been operating much more quickly and have transformed kind of our backlog, I'll say underneath the level of Aerostructures more dramatically. And it's why I said what I said earlier that it's hard to see. It's like you're driving this really large boat instead of this really small one. We turned the wheel some time ago. We just haven't seen the ship change direction yet in a visible way but it will because of the things we've already done and that we're going to continue to do. And so, I will -- hopefully, we'll be able to effectively get that point across with some depth in -- next month in New York.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

Okay, and then maybe just 2 more questions. One follow on. One fear that I think investors have, new programs in recent history, and I am not trying to read across to you guys what's happened at other companies, but new program starts, particularly in structures have had, I don't know, more recently, a kind of sordid history of margin performance. How can we feel comfortable that, that won't be the case for you guys? I'm not saying it's going to be, but how come you're still comfortable it's not going to be?

Jeffry D. Frisby

I guess if the question is how can we assure folks that development programs don't have risk in them, I'm not sure there's...

Ronald J. Epstein - BofA Merrill Lynch, Research Division

No, not so much that they don't have risk, but how are you mitigating the risk, I guess, do you know what I mean? I mean, it's a more precise way to say it.

Jeffry D. Frisby

Well, I can only say, we have a pretty -- what I think is a pretty robust review process going into it where we -- I think one of the biggest issues that suppliers have when they go into a development program is not properly managing the whole change process and managing the changes in statement of work and not staying on top of those things, and some time later, trying to come back and reconstruct what was done. I think -- and we learned this lesson and have learned it many times through the years within heritage Triumph in smaller programs where we would develop systems work and these types of things that would change. And if, in fact, you don't properly manage your program development, you have a hell of a time later on, trying to come back and making -- and have things work out. Those same disciplines we've applied to the Aerostructures side as well. And it's why while the challenges still remain on things like the Global 7000 and 8000, we remain confident that we will, in fact, end up largely where we thought we would be when we entered into the program. And the same stands for the E2 program. So we have a -- I can't speak for other companies but we have a fairly robust system on managing our performance against those development projects and the big part of that is staying very close to the customer and making sure that they know, in a real-time manner, that we need to discuss some of these changes, again, before we you get too far down the road.

Ronald J. Epstein - BofA Merrill Lynch, Research Division

And then maybe just one last little detail. When I look at the top 10 program list, every program except Gulfstream -- is a program, right? I mean, you got Airbus A330, Boeing 767, but under Gulfstream, it just says Gulfstream. Is there anything to read into that or -- I mean, in the past in you posters or your slides, you'd say Gulfstream 450, 550. Is there anything to read in it that it doesn't specify a specific number?

Jeffrey L. McRae

Yes, the main thing to read into it is our customer's desire that we not talk to individual programs as we think of either revenue or backlog. It has -- we can provide color on and I think we'll do it as we get into Investor Day as we transition from 450 to 550 into future programs. Obviously, the content changes and dynamic changes but Gulfstream has specifically asked that we not talk to any specific program.

Operator

Your next question comes from Steve Levenson.

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

Stifel. Can you size the A320 opportunity for us and can you tell us if that's the program where you displaced an incumbent?

Jeffry D. Frisby

The A320 program?

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

The Sharklet and wing reinforcement?

Jeffry D. Frisby

Yes, that's a program that is a retrofit opportunity. Stephen, I think we pointed out that, that's a -- in the press release, that's $160 million program and that's an estimate because we really don't know exactly how successful the retrofit program is going to be. Our sense is that it will be, once the airline starts flying, these Sharklets, and see that in fact, they're getting the fuel burn benefit that they are anticipating, that they will -- a lot of other people will want to jump in the pool as it were. So that's a program that ramps up very quickly and then ends whenever all the customers get their wing reinforcements. And as -- in terms of incumbency, this is a -- reinforcing that, an existing wing, it's not something that anyone has been doing in the past, so this is -- there's not an incumbent on it.

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. Does it give you an opportunity on the OEM side going forward?

Jeffry D. Frisby

They are building the wings already prepared for the Sharklet, so it won't help us in terms of this particular product, but I think you're aware that any time you win a project like this, it gives you enhanced visibility. And successful execution on this project is pure goodness when it comes to future opportunities with that customer.

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

And last one is on C-17. Is there any program termination funding that you might receive from the prime contractor or from the government?

Jeffrey L. McRae

Yes [indiscernible]

Stephen E. Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division

And is that included in guidance?

Jeffrey L. McRae

Yes, we have not assumed that in FY '15. As we close out the program, we would fully expect a few things. There would be a negotiation around any of the dynamics of shutting the program down, disposing of tooling, storing tooling, all those things, looking at is there any inventory level? I think the other opportunity, as we look forward, and we've been responding to the customer on this is, as we think of postproduction spares, that I think comes into play a little bit earlier now, with the end of production. I still think it's an FY '16 opportunity as opposed to filtering into FY '15.

Operator

[Operator Instructions] Since there are no further questions, this concludes the Triumph Group's Fiscal 2014 Fourth Quarter and Year End Earnings Conference Call. This call will be available for replay after 11:30 a.m. today through May 15, 2014 at 11:59 p.m. You may access the replay system by dialing (888) 266-2081 and entering access code 1636202. Thank you, all, for participating, and have a nice day. All parties may disconnect now.

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