Triumph Group's (TGI) CEO Jeffry Frisby on Q1 2015 Results - Earnings Call Transcript

Jul.31.14 | About: Triumph Group (TGI)

Triumph Group (NYSE:TGI)

Q1 2015 Earnings Call

July 31, 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

Omear Khalid - Goldman Sachs Group Inc., Research Division

Seth M. Seifman - JP Morgan Chase & Co, Research Division

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

Steven Cahall - RBC Capital Markets, LLC, Research Division

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

David E. Strauss - UBS Investment Bank, Research Division

Kenneth Herbert - Canaccord Genuity, Research Division

Julie Yates Stewart - Crédit Suisse AG, Research Division

Christopher Mecray

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

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

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2015 first quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.[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 statement.

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 a property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I would like to reduce 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 the Triumph Group first quarter fiscal year '15 conference call. I'll take this opportunity to remind you that there is a slide presentation available for your viewing in addition to the audio portion.

Before I get into the slide deck, I want to make a few remarks. Many of you attended, either in person or by telephone, our Investor Day that we held in New York City on June 11. The theme of that day was that the Triumph was designed to be different, built to perform and positioned for growth. For the first time, we shared not only short-term guidance, but our long-term vision as well, long-term strategic plan that we have been executing for the past 2 years. We shared how, through the rest of this decade, we're going to mold our company into a more balanced enterprise in terms of segments, customers and programs, characterized by a focus on execution at all levels, leading to a predictable 8% to 10% year-over-year revenue growth and 15% year-over-year growth in earnings per share.

In the 7 weeks since we last spoke, we have made good progress on several fronts and have been benefited by a key customer decision. Shortly after Investor Day, we settled all pending litigation with Eaton, ending a 10-year legal battle and freeing us from the distractions associated with this type of activity.

Just prior to the close of the quarter, we completed the acquisition of the GE Hydraulic Systems businesses located in Yakima, Washington; Cheltenham, U.K.; Isle of Man; and Suzhou, China. We completed the first quarter with results slightly better than our June 11 guidance, and then were gratified to learn at the recent airshow in Farnborough, the Airbus had decided to launch the A330neo, effectively lengthening the production life of this important airframe well into the next decade.

Each of these accomplishments and milestones is important individually. But together, they provide us with solid momentum heading into the balance of our fiscal year and beyond. We'll get into more detail on some of these issues shortly.

There's one last item I'd like to cover before I get into the slides. There have been many questions asked and there has been much speculation around Triumph Group's interest in, and intentions towards certain assets owned by Spirit AeroSystems in Tulsa. I want to make a statement that will serve as the sum total of what we will say on this subject at this time. And we have long stated that we would have an interest in certain pieces of Spirit's Gulf Tulsa business, specifically the Gulfstream wings, should they become available. We have also long stated, since win-win agreements are hard to reach, that win-win, win-win agreements are far more complex and more difficult to achieve. That being said, we still have interest in reaching such an agreement if possible. And we will let you all know if and when we have something to report.

All right, then at that. Let's turn to Page 3 titled Q1 In Review. As I've mentioned, our first quarter results came in as expected. We had a solid start to our fiscal year. We're slightly above the upper end of our Investor Day guidance. In our Aerostructures segment, we had a solid quarter in spite of our lower 747-8 and 767 program revenue and the shifting of several C-17 shipments to quarter 2, which was also mentioned at Investor Day. And importantly, the 747-8 program is on track.

In terms of Aerospace Systems, organic sales were impacted by production rate cuts on V-22 program and decrease in military sales, but we had continued good performance at Triumph Engine Control Systems as well as other companies in the group.

Our Aftermarket Services business was down revenue-wise, but we had continued strength in operating margin performance despite military aftermarket weakness. I should add that we remain confident that this segment will recover well as the year progresses.

We successfully completed the acquisition of the Hydraulic Actuation businesses of GE, as I mentioned earlier, and we are excited about and we have high hopes for this acquisition. As we speak, efforts are underway to make the kind of improvements necessary to achieve the margin potential this business has.

GE operated this business in 4 locations, and as part of the agreement, we will be moving out of some shared facilities and will be able to achieve some benefit from consolidating footprint.

This business is also virtually, entirely proprietary in nature, and as such, should have a more vibrant aftermarket presence than they do. We are clearly executing plans to take greater advantage of this position.

Thirdly, as in the case of engine control systems, this company was, and I'll use the term, saddled with contracts that provided parent company benefit, but were in varying degrees detrimental to the individual site. And we're in the process of shifting course relative to these contracts. Now these efforts, among others, plus the natural lift you get from a large dose of autonomy and support, will add up to a very successful addition to our Aerospace Systems segment.

As I mentioned earlier, we settled all pending litigation with Eaton, and we received $135.3 million in cash. There's not much more to say about this, it's over. We received their payment and now we can focus on winning more business.

As you know, we successfully completed the refinancing of the high-yield debt due 2018, providing us some important interest reductions. And we executed a 750,000 share buyback for approximately $51 million and effectively repurchased an additional 284,000 shares when we redeemed our convertible notes.

I'll be back to address our outlook shortly, but I will now hand over to Jeff McRae. Jeff?

Jeffrey L. McRae

Thank you, Jeff, and good morning, everyone. I'd like to start with a review of the financial results for the first quarter.

Turning first to the income statement. Sales for the first quarter were $896.9 million compared to $943.7 million for the prior-year period, a decrease of 5%. Operating income for the quarter increased 70% to $240.5 million and included $8.7 million of costs related to the Jefferson Street/Red Oak facility transition. And $134.7 million of settlement gain net of legal fees related to the Eaton litigation.

Excluding these nonrecurring items, operating margin was 12.8% for the quarter. The prior year's first quarter included approximately $3.5 million of nonrecurring costs related to the Jefferson Street move. Excluding these costs, operating margin was 15.4% for the prior year's first quarter.

Net income was $128.2 million, resulting in earnings per share of $2.46 per diluted share versus $1.50 per diluted share for the prior year quarter. Excluding the nonrecurring items for both periods, net income was $62.1 million or $1.19 per diluted share versus $81.4 million or $1.54 per diluted share for the prior year's quarter.

Adjusted EBITDA, excluding the net settlement gain was $134.4 million, resulting in an adjusted EBITDA margin of 15.1%. The number of shares used in computing diluted earnings per share for the quarter was 52.1 million shares.

Now looking at our segment performance. Sales in the Aerostructures segment for the first quarter declined 6% to $611.9 million, primarily due to the production rate cuts in the 747-8 program, whereas we were still at 2 ship sets per month in Q1 '14. Lower revenues in the 767 program and the shifting of several C-17 shipments into the second quarter. First quarter operating income was $70.9 million compared to $100.4 million for the prior-year period, and included $8.7 million of pretax charges related to the Red Oak facility transition. Most of this is cost that was incurred in fiscal year '14 that is embedded in block accounting. Although we did incur some additional cost in the quarter related to the cleanup and disposal efforts at the Jefferson Street facility. We also saw a net unfavorable cumulative catch-up adjustment of $700,000. The segment's operating margin for the quarter was 11.6%. Excluding the Red Oak facility transition cost, the segment's operating margin was 13%. EBITDA for the quarter was $90.7 million with an EBITDA margin of 15%.

We continue to make good progress in ramping up production at Red Oak and anticipate being fully back on schedule and recover the pre-production performance levels on all programs by the middle of the fiscal year. The overall Red Oak business case continues to hold in line with previous guidance. As we move through the year, we will see segment margin enhancement driven by Red Oak as we get into accounting blocks that are being fully executed in Red Oak in FY '15 and beyond.

As Jeff mentioned, we also saw a continued stabilization in our 747-8 program in line with our expectations, which has allowed us to maintain a low single-digit margin on the current accounting block. Our margin calculation is based on the assumption that we maintain a production rate of 1.5 ship sets per month.

We also continued to make progress with the development of the wing for the Bombardier Global 7000 and 8000, and are on track to deliver the initial wings in support of the development effort this fiscal year.

The rudder, elevator and fuselage sections of the Embraer E-jet are also on track, and we anticipate making initial deliveries on those during the first half of fiscal year 2016. We incurred $34.5 million of development cost on these programs during the quarter.

Moving onto Aerospace Systems. Sales in this segment were $219.9 million, basically, flat compared to the prior year's quarter. Organic sales for the quarter declined 5%, primarily due to production rate cuts on the V-22 program and overall lower military sales.

First quarter operating income decreased 12% from the prior year quarter to $37.4 million with an operating margin of 17%. EBITDA for the quarter was $43 million at an EBITDA margin of 19.9%. And as Jeff mentioned, we did complete the acquisition of the GE Hydraulic Actuation Business at the end of the first fiscal quarter. The financial statements had incorporated a preliminary opening balance sheet for this business, while there was no material impact on the income statement due to the timing of the closing of the transaction. We still project this business to be immediately accretive, contributing approximately $0.07 to our FY '15 earnings per share, while it will be neutral from a cash generation standpoint, as we make investments to consolidate the overall footprint of the business, as we work to consolidate the European elements into our existing actuation and motion control business in the U.K.

We expect to drive segment average margins from this business in the midterm, and we will see positive cash generation and EBITDA in FY '16, consistent with our expectations.

Excluding the impact of GE, we anticipate improved margins in this segment during the balance of FY '15, driven by aftermarket, which was light in the first quarter in the segment.

Moving to Aftermarket Services. Segment revenues here in the first quarter were $67.6 million, compared to $74.4 million in the prior-year period. The year-over-year decrease reflected the timing of completion of certain contracts and continued softness in the military aftermarket. First quarter operating income decreased 7% over the prior year quarter to $10.5 million with an operating margin of 15.5%. EBITDA for the quarter was $12.4 million with an EBITDA margin of 18.3%.

On the commercial side of our Aftermarket segment, we have seen an increase in the pace of opportunities, which will drive a level of recovery in this segment, although weighted to the second half of the fiscal year and offsetting some of the softness we are seeing in the military aftermarket. We anticipate holding margins at Q1 levels in this segment for the balance of the year, with some opportunities for improvement driven by product mix.

As Jeff mentioned, during the quarter, with did repurchase 750,000 shares for approximately $51 million and effectively repurchased some additional 284,000 shares with a redemption of our convertible notes, bringing the total number of shares repurchased or effectively repurchased to 1,334,000 shares. We will continue to tactically repurchase shares as part of a balanced approach to capital deployment and managing our overall liquidity position.

For your reference, we have included a Pension/OPEB analysis for Triumph Aerostructures, which remains in line with our previous disclosures. During the quarter, we did contribute $45 million to the pension plan in line with our fiscal year assumptions.

Turning now to backlog. Our backlog take 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 June 30, was just over $5 billion, up 7.4% year-over-year and did include the incorporation of approximately $230 million of backlog held by the GE Hydraulic Actuation business, which significantly improved our position on the Boeing 787 program and the Airbus A320 and A380 programs.

Same-store backlog increased 1% sequentially and 1% from the prior year. Military represented approximately 26% of our total backlog.

Boeing remained our only customer to exceed 10% of total revenue. Net sales to Boeing commercial mil -- and military and space totaled 42.6% of our revenue and it was broken down 68% commercial and 32% military. For your reference, we have included in the appendix charts reflecting sales by market and sales trends.

Now turning to the balance sheet. During the quarter, we did utilize $6.8 million of cash flow from operations before pension contributions of $45.2 million. Inventory for the quarter increased $90.4 million, of which approximately $34.5 million was attributable to nonrecurring investment in the Bombardier and Embraer programs and $48 million was related to the GE acquisition.

We also ended the quarter with a significantly elevated level of accounts receivable, which included $135.3 million related to the Eaton settlement, $26 million related to a tax refund due to the completion of the IRX -- IRS examination of our NOL carryback claim, and $15 million related to the closure of a claim from a prior acquisition. These 3 payments have all been received in July.

CapEx in the quarter was $23.1 million, and we continue to project CapEx for the year to be in the range of $120 million to $140 million, and expect nonrecurring investment in major programs to be approximately $120 million for the year.

Net debt at the end of the first quarter was $1.7 billion, a $211 million increase from the end of the previous quarter, reflecting cash use of $51 million to repurchase shares; $65 million to fund the acquisition of the GE hydraulic business; $35 million used to fund the call premiums related to the 2018 higher notes and the convertible debt, as well as financing fees on the new debt issuance; and $45 million in pension contributions.

Net debt represented 42.4% of total capital, and total debt to trailing 12 months adjusted EBITDA was 3.4x.

Although ending the quarter over our targeted leverage position, we anticipate bringing this back within the targeted range over the next 2 quarters.

Based on current interest rates, we anticipate a quarterly interest expense including amortization of fees of between $16 million and $17 million for the balance of the fiscal year 2015. The global effective tax rate for the quarter was 36% and reflected the fact that the R&D tax credit expired in December 2013 and has not yet been renewed. In addition, the income tax expense for the quarter was reduced by approximately $1.4 million to reflect the additional tax benefit resulting from the completion of the IRS examination of our NOL carryback claim and the reversal of tax reserves.

From a cash tax perspective, we currently expect minimal cash tax to be paid in fiscal year 2015.

In terms of financial guidance, we are reaffirming our FY 2015 guidance based on current projected aircraft production rates and a weighted average share count of 51.6 million shares. We expect full year revenues to be $3.8 billion to $3.9 billion and earnings per share, excluding the nonrecurring items, to be $5.75 to $5.90 per share.

We have good visibility into our business given our backlog and the anticipated benefit from recent activities.

Regarding the quarterly flow of earnings, we expect to see strengthening the quarters as the year progresses, with greater weighting towards the second half of the fiscal year. Driving results will be the realization of the full benefit of the GE acquisition, the Red Oak facility transition, recent wins and the general seasonality of a number of our businesses, increase in the cadence of opportunities in the Aftermarket segment and realizing the full benefits of the share repurchase made to date. We expect that Q2 will be higher than Q1, contributing 23% to 25% of full year projected earnings, excluding nonrecurring items.

We continue to project our full year adjusted EBITDA to be $665 million to $680 million, which excludes the impact of the Eaton settlement and nonrecurring costs associated with the Red Oak transition. And we expect to generate free cash flow after pension contributions for the year of approximately $385 million, which has been increased to reflect the Eaton settlement.

A number of you have inquired recently about the potential impact of further reduction in the 747-8 program production rate. But we currently do not have any indication that production rates from the 747-8 will change. If Boeing were to direct us to reduce production rates on the program, which we believe would most likely take program to a rate of between 1 and 1.25 per month, it would have a negative impact on the profitability of the program. Although we do believe we'd be able to maintain a slight positive margin on the current accounting block, our greater impact would be on future accounting blocks for which we would be put into loss positions, forcing us to recognize those projected losses on a current basis.

Given this scenario, our current estimate of the impact would be a pretax charge of approximately $30 million to $60 million. Obviously, the impact is highly dependent on the level of rate reduction, as well as the duration of any rate reduction. We will continue to work with our customers and suppliers and are taking actions to improve our internal cost structure and performance to drive improved margins on these programs and mitigate the impact related to any potential rate reduction.

And with that, I will turn it back over to Jeff.

Jeffry D. Frisby

Thank you, Jeff. Turning to our outlook. We remain confident in our fiscal 2015 outlook. Our backlog remains strong. It's over $5 billion now. We will remain focused on execution, increasing profitability, expanding our margins and generating strong cash flow. Execution is still the key that unlocks our ability to grow even more quickly. We reaffirm our FY 2015 guidance based on the current projected aircraft production rates and our weighted average share count of 51.6 million shares; revenue of $3.8 billion to $3.9 billion; earnings per share, excluding the items listed here, of $5.75 to $5.90 per share. And as both Jeff and I have already mentioned, it is weighted towards the second half of the fiscal year, with Q2 slightly higher than Q1.

Our adjusted EBITDA of $665 million to $680 million remains intact, and we should have cash available for debt reduction, acquisitions and share repurchases of approximately $385 million. Although there are certainly challenges ahead, our future remains bright.

With that, I'd like to open up the phone lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Noah Poponak.

Omear Khalid - Goldman Sachs Group Inc., Research Division

This is Omear filling in for Noah. I believe you have noted in the past that the Red Oak cost-saving targets only incorporate tangible and visible achievable opportunities and that potential upside could exist from higher efficiency savings once the facility is live and in operation. Are you now able to better quantify or describe those potential opportunities for us possibly?

Jeffrey L. McRae

Yes, Omear. I would say we are still very confident in being able to achieve greater performance in what we built into our business case. We, as we said in our statements, see the facility getting back up and being back at the performance levels that we exited Jefferson Street at by the end of the second quarter, middle of the year. From that point forward, we would expect to be able to see continued performance improvements. I don't know that I would be in a position right now to start quantifying additional benefits above the $0.50 that we've previously communicated around Red Oak, but we definitely are -- continue to be optimistic of being able to drive additional performance improvements.

Omear Khalid - Goldman Sachs Group Inc., Research Division

Great. And just a separate follow-up. Can you spend some time discussing your overall Airbus strategy. You have mentioned it a little bit

in your prepared remarks there. What type of content would you guys be potentially interested in, in going for on Airbus products going forward? Is it more on the systems side, more on the structure side or you guys have a preference or how are you guys thinking about that?

Jeffry D. Frisby

We're really aiming for profitable work on Airbus. And I actually, say that for a reason, there are an awful lot of companies, particularly due to the fragmented status of the Aerostructures business in Europe, there are an awful lot of companies in the business, not many of them making money. So we are looking for the right Aerostructures opportunity that fits our capabilities and allows us to perform in a way that will benefit not only Airbus, but ourselves. And we're also, at the same time, we're looking in and succeeding in achieving systems business wins as well. So one of the reasons we really were favorably viewing the GE acquisition. Because it had such a significant percentage of Airbus content on the actuation side. So it's a blend. I think that we're not really looking at one segment in preference to the other. But at the same time, Airbus is just one piece of our rebalancing strategy. They happen to be the one of the 2 of the duopolies in commercial aircraft production that we don't have as significant a presence in, so it becomes most prominent. But it's just one of our targeted customers that we are looking at in order to advance our cause of rebalancing our customers.

Operator

Our next question comes from Joe Nadol.

Seth M. Seifman - JP Morgan Chase & Co, Research Division

It's Seth Seifman on for Joe this morning from JPMorgan. Just to dig in to the cash flow a little bit further. Thanks for the outline of the receivables. I just wanted to follow up last year, it seems like we have been waiting for a receivable from a large customer and receivables continue to increase through the second half of last year. And then you outlined what drove the increase in Q1 and that we should see that reversed. Is there a bigger reversal happening there? Did we see the receivable, I think, it was probably about $100 million from a major customer in the second half of last year. And it got drowned out by other increases? Or is there a bigger reversal of that receivable -- of that than what should lay out in Q1?

Jeffrey L. McRae

Yes, Seth. I think what you're referring to is at the end of Q3 '14, we had a significant deferral of payments related to a customer that would have cleared out in Q4 of FY '14. As we said at the end of Q1, I would say that there is a level of, I won't call it slow payments, but timing around payments that we would have hoped to have received in Q1 that are drifting into Q2. I wouldn't say it's a specific customer that we're concerned on there, it was just a general drifting on collections. So from a timing standpoint, I called out 3 large items that are sitting in that receivables balance at 6/30. Those have all been received. So the total of those is roughly $176 million that came in here in the first few weeks of July. I would say that we should see continued improvement quarter-over-quarter from a cash perspective in receivables, but it's nothing specific to call out.

Seth M. Seifman - JP Morgan Chase & Co, Research Division

Okay. And then I guess just in terms of getting to the guidance. Probably, work through it, but you could tell us a little bit about the receivables, about the investments in capitalized inventory, taxes, pension. Any other working capital adjustments to be aware of in terms of how you get to the guidance for the year?

Jeffrey L. McRae

No. I mean, in our guidance, we have built in a level of improvements from a working capital standpoint outside of the investments in the nonrecurring programs that are hitting inventory. Part of that improvement comes at we have -- we begin to see some additional offsets to the investments as we have milestone payments on those nonrecurring programs that will be inflows from customers, which helps us offset some of the impact there and ultimately, gets reflected as a net inventory balance. But we see opportunity broadly, primarily in inventory as we go through FY '15 to continue to drive down and see improvements that will drive some of that working capital that we're depicting.

Operator

Our next question comes from Sam Pearlstein.

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

Wells Fargo. Can you just help me, I mean, how should I think about the proceeds from the Eaton lawsuit? Should that go towards buyback or any other purpose? Just because I'm a little surprised, it doesn't look like you bought back much stocks since the Investor Day. Didn't know if you were blocked out for certain periods or how should we be thinking about that, the extra $135 million?

Jeffrey L. McRae

Yes. I think there's a couple dynamics, Sam, that came into play in our mind. One, as we think of that $135 million, we view it in line with our broader capital and capital generation we're seeing in FY '15, and we'd look at a balanced approach to deployment of that capital. So I think we continue to see a very robust pipeline of acquisition opportunities. Obviously, we are also viewing share repurchase favorably as we look at where our share price is right now. As you think of activity, as we evaluated capital at the end of the first quarter, we knew we had allowed our leverage ratio to creep up with the share repurchase that we had completed with the expense we incurred with the takeout of the debt, and with the GE acquisition. As we looked at it, we felt comfortable at a leverage ratio of 3.4 and a debt to capital above 40%. We really do want to manage that into the target range on leverage of between 2x and 3x and really keep that debt to capitalization below 40%. So we really looked at it and balanced and didn't feel it appropriate to continue to extend ourselves in the first quarter. We also knew we were going to have a strong cash generation quarter in Q2, and we look at deployment of capital into 2Q pretty strongly.

Jeffry D. Frisby

And just a -- your other observation is right on. Since June 11, our Investor Day, we had about 2 days, I think, of -- even if we wanted to buy stock back until we entered a blackout period, which we're still in. So at that point, we could not act. So now we're in, as Jeff said, we're in a position that if, in fact, we think it's the right opportunity, we'll have the ability to participate.

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

Okay. That's great. And then just on some of the adjustments between the adjusted EPS and the GAAP EPS, it looks the Jefferson Street/Red Oak transition cost moved from $0.26 to $0.31 and then the refi cost looked like they moved down from 32% to 28%, so I don't know, Jeff, if you can help with that.

Jeffrey L. McRae

Yes. On Red Oak, we did see some additional cost that we had not anticipated in the first quarter. All of it was related to relocation activities, primarily additional cost around cleanup and disposal of assets at Jefferson Street that we thought we had fully captured that cost in fourth quarter, and we had a couple of additional activities we had to take care of there. No additional growth in the depiction from a disruption standpoint. We think all of that is behind us but some additional one-time cost on getting out of Jefferson Street. On the refi, it really is the final calculation based on the timing of taking out of those 2018 notes where there was a dynamic on the call premium based on timing that came in a little lower than what we had been providing guidance to.

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

Okay. And if I could just ask one last one, I appreciate you giving us the top 10 programs by the different segments. But is there any way to look at how those have changed since all the prior quarters would have been in aggregate. So if I just look at it from 3 months ago to now, what were the major changes amongst the top 10?

Jeffrey L. McRae

Yes. On the Aerostructures group, not a whole lot of change. The Bombardier Global 7000/8000 had moved into the top 10, I believe, last quarter. It is still there. We saw the 787 program move a little bit, but it really was just changing the positions. I wouldn't say anything of great significance on the Aerostructures side. On the Aerospace Systems side, the 787 program moving to the top of that list is driven by the GE acquisition with a significant content on 787. That also allowed the Airbus A320 to move up the list and also move the A380 up the list on the Aerospace Systems side. And I would say those were really the significant movements we saw in the quarter.

Operator

Our next question comes from Steven Cahall.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Royal Bank of Canada. Maybe just one, first on the 747, I think the quantification of some of the potential forward loss is very, very helpful. Is just the right way to think about the range, the amount of visibility you have and then also the difference between 1 versus 1.25? Is that really the main swing factors or is there anything else we should be thinking about from a sensitivity standpoint?

Jeffrey L. McRae

Yes. As we went through this analysis. Obviously, a lot of variables in play. One, being if there was a rate reduction, what is the timing of that rate reduction. And then what is the magnitude of that rate reduction and then for how long does it -- do we move forward at a lower rate. I would say the biggest dynamic impacting the range is really rate. So between 1 and 1.25 drove most of the dynamic between the $30 million and $60 million that we depicted. Keep in mind, on this contract, we're under contract through unit 1574. We know Boeing hasn't sold all those planes. Our analysis assumes that we run out through the end of the contract.

Steven Cahall - RBC Capital Markets, LLC, Research Division

That's great. That's very helpful. And then just a follow-up maybe on the GE acquisition. I think, if I heard correctly, you said you expect that to be positive EBITDA by FY '16. So maybe kind of 2 questions. Is there much risk to that transition process or is this really the big contract that you talked about rolling off, and so there's not a lot of operational risk there? And then with the 787 moving up in Aerospace Systems, is this part of the issue there, is either coming to a learning curve or moving to a development contract on the 787 that rolls off next year.

Jeffry D. Frisby

Okay. So I'll try to remember both parts of the question, I'll answer the second one. The 787 program is fully developed. There -- in any program like this, you typically develop the system and get it qualified, get it delivered, and then there's typically a period of time where you go back and see if there's anything you can do to increase the value engineering possibilities in terms of cost reduction or in terms of weight reduction. And so there will be minor tweaks to this system in terms of improving it. But any kind of development activity on this program is well behind it. On the -- let me see, on the first part, talking really about operational risk and the integration of this company, the risks involved here are just those inherent with moving a -- anytime you move product from one place to another, we have to move out of Suzhou, China, for example, and we have to move our operations out of Cheltenham, out of the facilities that we share with GE. There are some risks inherent in moving any of those types of things. We have a lot of experience in doing that. So we don't really expect a great deal of downside to that. We plan for certain capital expenditures and other operational expenses in order to do that. But at the end of the day, we end up with, I think, a far more cost-effective footprint as we better utilize some of the facilities that we're moving this product to. So I think on balance, we're looking at a pretty positive experience here.

Operator

Our next question comes from Yair Reiner.

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

Oppenheimer. Just going back to Aerostructures for a bit. If I take out the impact from the cumulative catch-up adjustments, it looks like margin in the first quarter was a touch over 13%, which is actually a bit below where you've been trending over the last year. Maybe you can talk about what's driving that and why you expect it to improve as we move through the year.

Jeffrey L. McRae

Yes. I think the main driver that we will see from an improvement in margin will be associated with realization of the Red Oak investment. And the dynamic we're in right now is most of the product that we're shipping out of Red Oak today are in accounting blocks that straddle fiscal year '14 and fiscal year '15. So many of those blocks are still burdened with the cost structure at Jefferson Street that's being averaged over the accounting block. As we get to the second half of the year and start completing the blocks that had Jefferson Street impacts, we'll get into pure accounting blocks that are just Red Oak and straddle FY '15 and FY '16. And we'll get the full benefit of the cost structure in Red Oak. That will be the primary driver of improvement as we look forward to the second half of the year. The only other nuance dynamic, I would say, in the first quarter that we saw is we did see a number of shipments on C-17 shift out of the first quarter into the second quarter. C-17 tends to be a program that we would generally see at or above average segment margins on. So what we have a little bit of a mix going on in the first quarter and that should correct itself in the second and third quarters.

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

And then just as a follow-up. You mentioned in response to an earlier question that you expect that kind of by the middle of the year, towards the second half of the year, the Red Oak facility should start to have JSF-type margins. I was hoping you'd maybe give us a little more detail on that because where to draw the line on what the JSF margins really were is a bit difficult given some of the disruptions that have happened over the last year.

Jeffrey L. McRae

Yes. Let me correct my statement, if I said margins. I meant to say performance, and performance really is recovery of the labor performance back to where we were, what I would depict as premove activity. So as we transitioned to Red Oak, getting tools set up, getting employees back on the tools and back up to fully up the learning curve, we're still working through that here in the first half of the year. But we definitely anticipate, and I'd say, that we're on -- we're there on many programs today. We'll be there on all programs by the middle of the year where our performance levels is at least at the level before the move activity started, which is -- has a relationship to margin. The bigger margin driver around Red Oak is really the cost structure in Red Oak versus Jefferson Street there.

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

Got it. You did say performance, I misread it to mean margin. My last question then I'll get back into queue. It looks like your guidance assumes that there's going to be some improvement in organic sales for the balance of the year. Can you give us kind of a rough sense of what you anticipate organic growth will be in the final 3 quarters?

Jeffrey L. McRae

Yes. It definitely, I would say, as we look at the first quarter, it was light from a revenue standpoint. Part of that was just timing of deliveries around C-17 that we will see come back in the balance of the year. I would say, other than the C-17 dynamic, we wouldn't see much additional growth from the Aerostructures standpoint. In Aerospace Systems, we will see the inorganic benefit of the GE acquisition come in. So we will get 3 quarters of revenue generation there. We had anticipated full year revenue out of GE in the $180 million range. We would anticipate in the last 3 quarters between $140 million and $150 million of revenue generation out of that business. And we would expect to see, what I would depict as, low to mid single-digit organic growth within systems. Much of that is we would expect some pickup in the aftermarket element of Aerospace Systems in the balance of the year. That tends to be a bit seasonal for us. And we definitely saw a light quarter from an aftermarket element of Aerospace Systems. So that will drive a lot of the pickup there. And then in Aftermarket Services, there, I think, we are still anticipating a significant improvement from a top line standpoint and being able to hold bottom line margins. We still believe we will return to -- closer to FY '13 top line levels in Aftermarket Services. The cadence of opportunities we're seeing, primarily in commercial aftermarket, has increased significantly in that business, turning opportunities to revenue happens pretty quickly, and we don't have a long lead like we do in our other segments.

Operator

Our next question comes from David Strauss.

David E. Strauss - UBS Investment Bank, Research Division

UBS. I want to talk or ask about the C-17. So last quarter, you had a negative in cash, this quarter, there was nothing. But can you just talk about your ability to kind of manage that program down in risk? Jeff, you mentioned the margins there are above average, risks that kind of the margin profile as you manage that program down and how you're thinking about it, given that, I believe, Boeing still has about 10 unsold airplanes.

Jeffrey L. McRae

Yes. I mean, on C-17, obviously, we're paying close attention because we definitely would expect a deterioration in labor performance as you get close to the end of production. And it's not necessarily folks aren't working as hard, it s that you tend to run into more issues with the parts flow and if you scrap apart, trying to get another

part from a supplier ends up creating disruption within the line. So we're definitely looking at kind of broad performance to degradate. That said, contractually, we believe we have a strong position to ensure that we're at least being kept whole for the dynamics of bringing a program to an end. So I wouldn't expect significant degradation in margin. I would expect some degradation in margin. But we think, ultimately, and we will work with the customer very closely to ensure that we're being compensated as this comes to on end. You also get that dynamic of, as it comes to an end, we still are optimistic of seeing a level of postproduction spares requirements that will allow us to at least help keep the line hot, so to speak, that will help us get through some of the tail-up issues we would see as the production units come to an end.

David E. Strauss - UBS Investment Bank, Research Division

And Jeff, when would you expect revenues related to new aircraft builds ending?

Jeffrey L. McRae

On the big structure side, it will end at the -- pretty much in line with the end of the fiscal year. It starts bleeding in, in early, in the third quarter fiscal year, when we get into the detailed parts that we supply into C-17. So you'll start seeing a slow diminishment in revenue, Q3, Q4 and it's completely done from a production unit by the end of Q4.

David E. Strauss - UBS Investment Bank, Research Division

Okay. Then my last question on Gulfstream. The expectation is that Gulfstream is going to announce a refresh, update, whatever you want to call it, on the G455/450 program sometime in the near future. And obviously, you have a very large role on those programs. Can you just talk about kind of how you see your role on whatever the future G455/450 looks like?

Jeffrey L. McRae

Yes. I mean, let me start, I mean, expectations -- and I think we have said this publicly. If not, we will now, is our expectation is we wouldn't see the same level of content on next-generation Gulfstream aircraft that we see today on the G550, where we deliberate fully integrated wing to Gulfstream. That said, with our structure, we can play at many levels of the supply chain feeding Gulfstream wings from a Tier 1, Tier 2, Tier 3. And I fully expect to have a high level of participation on any program Gulfstream launches. And although it might not be at the same level of supply that we have on the G550. I would fully expect it to look more like what we do on G450, where we supply a full wing box to Savannah. Not to say that we would be supplying a wing box, but I think revenue stream would look much like what we have on G450. And I think we will see a lot of opportunities to play at lower levels of the supply chain in the structures world. And I think there'll be a lot of opportunities for us to play on the systems side.

Jeffry D. Frisby

Yes. I think all that goes to say that each customer, as they approach each new airplane and assuming that Gulfstream actually has an airplane as you described, is they tend to go through kind of cycles in terms of what they want to do internally, what they -- they go through their own make buys. And our structure enables us to participate at whatever level is appropriate for that customer at that time and our relationship with Gulfstream is a very positive one. So we are very confident that we will play a significant role in whatever new aircraft they come up with.

Operator

Our next question comes from Kim -- Ken Herbert.

Kenneth Herbert - Canaccord Genuity, Research Division

It's Canaccord. I just wanted to ask first, within the Aerostructures business, as you look at your footprint, I know you've got a number of other facilities, Hawthorne, Marshall Street other areas that are very 747 dependent. As you look out a couple of years, what's the opportunity within Aerostructures for, perhaps, additional cost savings, either leveraging Red Oak or maybe some adjustments as some of these other programs, like the 47 especially sunset?

Jeffry D. Frisby

Ken, we're not just thinking about a couple of facilities. We continually look at our entire portfolio of facilities and equipment, and we're continually looking to optimize that. I would say that kind of all options have always been on the table. And one of the things I was just thinking about, when Jeff was answering a question on C-17, was the fact that while our revenues, some of structures, individual structures, companies, kind of Tier 2 guys are going down relative to that program, they are also winning new products on other platforms in order to replace that but at the same time, we're looking at optimizing our footprint relative to that program's decline. So it's something that we go over on a regular basis. And so I'd say that your assumption is correct, that we're going to continue to evaluate facilities like Hawthorne and Marshall Street. But that just goes for every one of our other facilities as well.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay, okay. That's helpful. And then if I could, on the Aerospace Systems segment. Now with GE completed, can you just remind us how much of that business now is aftermarket and specifically, maybe the split there between commercial and military. I know you talked about strengthening on the commercial aftermarket within that segment.

Jeffry D. Frisby

I'm not sure, I'm remembering it, I think the Aftermarket business is relatively light. I know the repair business is virtually nonexistent. And I would say it's the overall aftermarket business is probably in the teens in terms of a percentage, which it needs to be quite a lot higher than that. And the military, the commercial breakdown, do you remember what that is?

Jeffrey L. McRae

Yes, it's weighted more heavily towards commercial with 87, 320 and 380 being the largest dynamics there. The content on the military side, largest program is V-22. I would say the overall weighting in the business is probably 75%-25% commercial and military.

Jeffry D. Frisby

Maybe 80%-20% something like that.

Jeffrey L. McRae

80%-20%.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay. So within the whole -- within the entire segment, though, so this -- the GE business pulls the aftermarket mix down a little bit for the entire segment then?

Jeffrey L. McRae

Yes. The overall segment still runs about 80%-20%, OEM to aftermarket. So you might see initially a slight reduction to that. To Jeff's comments earlier, we're very optimistic we can drive a higher level of aftermarket into this GE business and so I would fully expect it in the midterm not to be a reducer of content from an aftermarket standpoint.

Jeffry D. Frisby

Yes, and remember that in our Aerospace Systems group, we have companies that are more built to print. This is -- those companies that are more proprietary we would normally expect to have a higher percentage of aftermarket. And this is clearly one of those. And so we believe that overall, we can -- those companies that are highly proprietary, we can in fact, drive more benefit from the aftermarket and we intend to do so.

Kenneth Herbert - Canaccord Genuity, Research Division

Okay. And then just finally, so the pickup you're seeing within the segment on the aftermarket in the near term, within Aerospace Systems, it's obviously the GE acquisition helps because you've got runway there to build that side of the business. But with other parts of the segment, can you point to any specifics, whether it be geographically or other areas where you're seeing some of the pickup or maybe, I think, you referenced a step up in cadence of quote activity and other activities that give you confidence on the second half recovery?

Jeffrey L. McRae

Yes. In Aerospace Systems, definitely expectation of a pickup on the aftermarket side in the balance of the year. We tend to see a level of seasonality in the aftermarket in this business. We also know we have a couple of what tend to be onetime sales each year that are falling in the second half of the year in that segment that, that will get us to where, I think, you would expect us to be in this segment. And we also have decent positions on programs that continue to -- you'll see pressures on ramping up such as 787.

Operator

Our next question comes from Julie Yates.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Crédit Suisse. Jeff, just on GPECS. I think last year you talked about seasonality in aftermarket. And last year you saw a big chunk of that in the fiscal first quarter. Are you seeing similar lumpiness this year? Or are you seeing a smoother profile through the year and then just broadly, how are margins progressing now that you owned the asset for 18 months?

Jeffry D. Frisby

Well, I'm not sure which -- well, I guess we can -- since we're both Jeff, we can both answer it. I think that inherently, in our Aerospace Systems group, we have some lumpiness. We generally see fourth quarter strength in some of our companies because there are some fairly predictable foreign military spares activities that happen at that time. In the earlier quarters, they usually -- the orders generally come in and the shipments usually come in, in big, big bunches. So we may not always see in the first quarter, some great strength, but we will see some lumpiness in that. And so we're confident we are going to see that. That we will have strong quarters in terms of that Aftermarket business in Aerospace Systems. Overall, the question on the margin growth.

Jeffrey L. McRae

Yes, I think overall, Julie, as it relates to the Engine Control business, as we had talked in the latter half of FY '14. We were very pleased with the level of margin improvement we had seen in that business. And we continue to see strong margins, what I would depict as above-segment margins coming out of that business. Much of that ends up being related to aftermarket. So you do end up having some lumpiness. But our expectation for FY '15 is we would see a continuation of above-segment margins coming on that business.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. Great. Very helpful. And then any more color on the military aftermarket? It's been a source of weakness for some time now. And I think the last few quarters you've talked about there being pent up demand. Are you starting to see -- do you have visibility on any of that demand starting to break free?

Jeffry D. Frisby

While we see the demand, Julie, it's not -- for example, the reason we see the demand will give you -- we have one of our companies that supports the C-17 repair business and our customer in this case has, in fact, delivered us all the -- all their stored units to -- that they were holding for repair. So we now we have them all. The trouble is, is that they have not authorized us to repair them because the funding has not been turned loose for that. So it's -- we see what the demand is, which is significant. It's just going to be a question of whether or not -- whether or not the need for the reentry of these products into the marketplace, which may be driven by flight hours on certain aircraft such as C-17, whether that drives a faster pace or whether we're just going to see kind of a normal ramp back up. But there is quite a lot of work out there to do. We just have to find what those triggers are to really get the funding moving.

Julie Yates Stewart - Crédit Suisse AG, Research Division

Okay. And then just last question. Is there any update on the pipeline of programs that you guys are bidding? And any color on win rate that you can offer?

Jeffry D. Frisby

Well, I don't think we have a lot of color on win rates. I would say that the pipeline is still robust and that we are still, I think, participating successfully. We have continued to win things of market share gains, things of this nature and continued -- continuing to maintain our position on most of our programs. We have a lot of discussions going on, and we would look forward to announcing those large wins when we get them. And in opportunities such as this, a lot of the wins we get are not -- usually don't enter the realm of really being worthy, volume-wise, of a press release. But when you multiply them 47x, they get to be pretty significant. So I guess when we get to quarterly opportunities, it's a good time to talk about some of those as we roll them up. So hopefully, we'll be able to do that. So I guess the answer, in a nutshell, is that the pipeline remains robust. We are still winning our -- at least our fair share, and we're confident that we'll continue to so.

Operator

Our next question comes from Chris Mecray.

Christopher Mecray

BlackRock. Could you just help us maybe just aggregate the cash flow forecast just a little bit given all the moving parts? If you take the Eaton settlement out and the other receivables that you got, have you, in fact adjusted your outlook for the year? And what, if anything, went into that?

Jeffrey L. McRae

As far as cash flow generation, we have not -- we have updated and reconfirmed what we had depicted previously of generation of roughly $250 million of free cash flow. Obviously, the first quarter was not a strong cash quarter for us. We definitely see the second quarter being much stronger with some of the elements we talked about that were held up in receivables at the end of the first quarter. And as we look at the balance of the year, similar to earnings, we would generally see the second half of the year from a cash generation standpoint being a much stronger half than the first half. But I would fully expect to see the second quarter being a strong cash generation quarter.

Christopher Mecray

Okay. So the weakness in the first quarter, which I do recognize is seasonally normal, isn't any worse than you would have necessarily expected?

Jeffrey L. McRae

No. No.

Christopher Mecray

Okay and one other thing. Sorry. Go ahead.

Jeffrey L. McRae

No, no, go ahead -- I hate to call it timing. But there's a lot of timing dynamics in that. And with the lower revenue in the first quarter, there's a little seasonality impact to it.

Christopher Mecray

Yes. Okay. The -- I don't know if it's material or not, but I assumed you had not anticipated the elimination of legal cost as of your Analyst Day. And I wonder what kind of tailwind that may provide for the balance of the year next year?

Jeffrey L. McRae

Yes. If you remember what we talked about in the fourth quarter was the expectation that if the Eaton activity continued, we were reevaluating alternative fee structures with our legal counsel, which really in our mind, was going to make legal fees associated with Eaton 0 for the year. Because we would have moved to some form of contingent basis on settlement. Ultimately, we never had an agreement in place there. As you can see, with the netting that we did between 135.3 and 134 that we're showing, we did have that legal fee that we're netting out against the settlement. So ultimately, you should see 0 impact related to legal fees in Eaton in FY '15. That is also how our guidance was built.

Operator

Our next question comes from Stephen Levenson.

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

Stifel. Just to expand a little bit on the future opportunities. Do you see opportunities for increased content on A330 Neo? I know you're pretty happy about the life extension. But with the bigger engine, will the parts that you make require strengthening or is there something in addition?

Jeffry D. Frisby

We do see that there will be some change. We think that we'll be able to protect the work statement that we do have. But there are going to be some additional packages that will invariably come out. And we like our chances of increasing our scope of work on that aircraft.

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

Okay. And can you give us a little bit more detail on not necessarily what you expect to get, but timing on things like 737 MAX and 777X?

Jeffry D. Frisby

Well, 737 MAX, we're already winning content on that and have announced several things on the systems side. The structures pieces are -- they've announced on 777X for example, Boeing has announced some substantial awards to some of the Japanese suppliers, for example. We have strong relationship with those Japanese suppliers. And invariably, those types of decisions as to who is going to supply product in through that channel comes a little bit later. So I would say, what we're thinking about, that we've got maybe within the next year, 9 months to a year, something like that where we will expect to be able to announce what we're going to be supplying on the 777X. I would suspect that we are going to continue to supply whatever is applicable that we're currently doing on a 777. I would think we would carry that over. But what we're really looking for is additional opportunity on 777X. Now we have won systems products on 777X as well. So we are continuing to make inroads there.

Operator

Our next question comes from J. B. Groh.

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

D.A. Davidson. I just had a quick follow-up on the backlog slide there. Is the total backlog between those 2 buckets sort of proportional to the revenue they generate?

Jeffrey L. McRae

Yes.

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

So structures is like 70-plus percent and Aerospace systems is 20-some percent of the total backlog. Is that fair way to look at it?

Jeffrey L. McRae

Yes. If you think of backlog being really those 2 segments with little coming out of Aftermarket Services, it should be pretty proportional between the 2, J.B.

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

Okay. So structures backlog isn't necessarily disproportionately higher?

Jeffrey L. McRae

No. No.

Operator

Our next question comes from Yair Reiner.

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

Oppenheimer. Just a quick housekeeping question. What is the amortization expense within interest? And also what is the interest rate you're paying out on the revolver?

Jeffrey L. McRae

Yes. The total amortization flowing through interest? Is that the question?

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

Exactly. And then also the interest rate on the revolver.

Jeffrey L. McRae

The revolver is running right around 2% today. The amortization flowing through interest -- I want to say it's in the $4 million to $5 million range. But I probably need to come back, specifically on that.

Operator

Since there are no further questions, this concludes the Triumph Group's Fiscal 2015 First Quarter Earnings Conference Call. This call will be available for replay today after 11:30 a.m. through August 8, 2014, at 11:59 p.m. You may access the replay systems by dialing (888) 266-2081 and entering access code 1640970. Thank you all for participating, and have a nice day. All parties may now disconnect.

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