Triumph Group, Inc.

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 Richard Ill, the company's Chairman and Chief Executive Officer; and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group, Inc.

Go ahead, Mr. Ill.

Good morning, everybody. We are extremely delighted, delighted and, in fact, very delighted with our quarter year-end and our year end.

We had record revenue and operating income across all 3 business segments, significant operating margin expansion across all 3 business segments.

Aerostructures operating margins, excluding curtailment gain, substantially higher as a result of improved execution and realization of synergies. We had significant growth in the Aerospace Systems revenue and operating margin due to higher aftermarket sales.

Record revenue growth and operating margin in Aftermarket Services, despite expenses which were associated with customer bankruptcies. We also had a record year-to-date cash flow generation.

We had cash flow generation of $349 million before pension. And today, we'll cover $227 million after pension expense.

And we reduced debt by $150 million. That's all delineated in the press release as well.

The integration of Vought into Triumph is progressing very well. We had a number of manufacturing decisions, which we've talked about in the past.

It has now increased to 34. Of those 34, 10 have been substantially completed, 18 are in the implementation stage, 2 are in the planning phase and 4 of those are not going forward.

We are, in fact, on target to deliver $50 million a year on a run rate by June of 2013.

As we've said in the past, we think we will exceed, but we're running approximately at $3 million per month to date. We continue to proactively and effectively manage our pension obligation, as Dave will discuss.

Our backlog remain strong. We have a very strong balance sheet.

We exceeded our debt reduction goal, and we have created a strategic partnership with DAHER, which further expanded our business with Airbus, one of the goals that we set forth in our Investor Day discussion in Dallas. And we are positioned to benefit from increasing OEM build rates.

I'll discuss a little bit more of that in the end, but I'd like to turn it over to Dave at this point. Thank you.

Thank you, Rick, and good morning, everyone. Before I start with the numbers, you should have already noticed that we added a disclosure schedule to the press release, which reconciles some of the special items in the quarter.

Our intention in adding the schedule was to highlight and clarify the impact of 2 items: integration costs and a net pension curtailment gain.

Now turning to the income statement. Sales for the fourth quarter were $946.4 million compared to $919.1 million for the prior year period, an increase of 3%.

Operating income increased 69% to $183.2 million. Included in operating income was approximately $2.6 million of integration expenses related to the Vought acquisition and a $40.4 million net curtailment gain.

This net gain resulted from significant changes that we made to the Triumph Aerostructures to find benefit pension plans.

Because the gain is so large, we highlighted it on the face of the income statement and we did not include it in operating income or EBITDA of our Aerostructures segment.

The most significant benefit of this action is not the one-time gain being realized, but rather the real reduction in our pension obligation that it creates, which I'll discuss in a few minutes.

Excluding the integration costs of the net curtailment gain, operating margin was 15.4% for the quarter. Income from continuing operations improved 97% to $106.3 million, resulting in earnings per share from continuing operations of $2.03 versus $1.05 per diluted share for the prior year quarter.

Excluding the integration costs of $0.03 per share and net curtailment gain of $0.50 per diluted share, income from continuing operations was $81.9 million, or $1.57 per diluted share.

EBITDA excluding the curtailment gain increased 27% to $165.3 million, resulting in a 17.5% EBITDA margin. The number of shares used in computed diluted earnings per share for the quarter increased to 52.3 million shares, primarily due to the dilutive effect of the company's convertible notes.

Turning now to our full year fiscal results. Sales for the fiscal year increased 17% to $3,407.9 million compared to $2,905.3 million for the prior year.

Operating income increased 64% over the prior year to $514.7 million with an operating margin of 15.1%. Included in operating income was approximately $6.3 million of integration expenses related to the Vought acquisition and $40.4 million net curtailment gain.

Excluding the integration costs and the net curtailment gain, operating margin was 14.1% for the fiscal year.

Income from continuing operations improved 85% to $281.6 million, resulting in earnings per share from continuing operations of $5.43 per diluted share versus $3.21 per diluted share for the prior year.

Excluding the integration cost of $0.08 per share and the net curtailment gain of $0.50, income from continuing operations was $259.7 million or $5.01 per diluted share.

EBITDA excluding the net curtailment gain grew 48% to $567.4 million, resulting in a 16.6% EBITDA margin. The number of shares used in computed diluted earnings per share for the fiscal year was 51.9 million shares.

Looking now at our segment performance. Sales in the Aerostructures segment for the fourth quarter increased 2% to $714.2 million.

Fourth quarter operating income increased 31% over the prior year quarter to $119 million and included a net favorable cumulative catch-up adjustment on long-term contracts of $7.8 million.

From a program perspective, the cume-catch is broad-based and reflects the balance between improving contracts and contracts where performance is lessened. The cume-catch is primarily attributable to net improved performance in our factories and reflects a short-term sustainable margin of approximately 16%.

The segment's operating margin for the quarter increased 370 basis points over last year to a record 16.7%. EBITDA for the quarter was $133.7 million and an EBITDA margin of 18.7%.

For the fiscal year, sales for the segment increased 21% to $2,571.6 million versus $2,126 million in the prior year. Operating income increased 51% over the prior year to $403.4 million, with an operating margin of 15.7%.

EBITDA for the fiscal year was $465.8 million at an EBITDA margin of 18.1%. With regards to SAP, we are continuing to see improved performance in certain areas.

However, we are not yet in a position where we are experiencing substantial savings. And at this time, we cannot accurately project the timing of when the savings will ramp.

In our Aerospace Systems segment, sales for the fourth quarter increased 3% to $151.7 million. Fourth quarter operating income increased 18% over the prior year to $26.4 million with an operating margin of 17.4%.

Operating margins in this segment improved approximately 340 basis points sequentially and 230 basis points year-over-year, driven by higher aftermarket sales. EBITDA for the quarter was $30.8 million at an EBITDA margin of 20.3%.

For the fiscal year, sales for the segment increased 8% to $551.8 million versus $513.4 million in the prior year. Operating income increased 20% over the prior year to $90 million, with an operating margin of 16.3%.

EBITDA for the fiscal year was $107.4 million at an EBITDA margin of 19.5%.

The segment's operating results included $1.3 million of legal cost associated with the ongoing trade secret litigation for the quarter and $3.2 million for the fiscal year.

Our Aftermarket Services segment showed strong growth in the fourth quarter, reporting record sales of $83.1 million, an increase of 20% over last year. One item contributing to the strong revenue growth was the thrust reverser [indiscernible] program for Delta Airlines that will carry over into the first half of fiscal 2013.

In addition, during the fourth quarter and early in Q1 of fiscal 2013, our thrust reverser and APU businesses secured 2 new large, long-term contracts with FedEx, which will drive growth in fiscal '13 and '14 as the programs ramp up.

Fourth quarter operating income increased 57% over the prior year to $11 million, with a record operating margin of 13.2%. EBITDA for the quarter was $13.3 million and an EBITDA margin of 15.9%.

For the fiscal year, sales for the segment increased 7% to $292.7 million versus $272.7 million in the prior year. Operating income increased 11% over the prior year to $31.9 million with an operating margin of 10.9%.

EBITDA for the fiscal year was $41.3 million at an EBITDA margin of 14.1%. The segment's fiscal year and fourth quarter operating results included expenses associated with the bankruptcies of American Airlines, Pinnacle and Aveos of $1.1 million and $500,000, respectively.

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 '12, '13 and '14.

The fiscal '14 amounts assume that all fiscal year 2013 actuarial assumptions are met.

Turning now to backlog. Our backlog takes into consideration only those firm orders that we're going to deliver over the next 24 months and primarily reflects future sales within our Aerostructures and Aerospace System Groups.

The Aftermarket Services Group does not have a substantial backlog. Our order backlog as of year end was $3.91 billion.

Heritage backlog increased 7.7% year-over-year. Military represented approximately 30% of our total backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place is the Boeing 747, followed by the Boeing 777 program in second place.

Third place is the Gulfstream G450 and 550, followed by the Osprey combat helicopter in fourth place. In fifth place was the C-17 Freighter with the Boeing 737 Next Generation in sixth place.

Seventh is the 787 program, and in eighth place is the Airbus A330. The C-130 program is ninth and in 10th place is the 767.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of revenue, net sales of Boeing Commercial, Military and Space totaled 46.6% of our revenue and is broken down 69% Commercial and 31% Military.

Looking at our sales mix among end markets, the next slide shows the comparative fiscal '11. Commercial aerospace increased to 52%, the year-over-year growth driven by increases on all commercial programs, and military decreased to 32%.

The year-over-year decline attributable to lower C-17 and UH-60 sales, partially offset by higher Global Hawk sales. Business jets increased to 13%, while regional jets remained unchanged at 1%.

Non-aviation decreased to 2%.

Finishing our sales analysis, the next slide shows our sales trends for the fourth quarter and the fiscal year. Total organic sales for the quarter increased 3%.

Breaking that down by segment, all of the Aerostructures and Aerospace Systems segment sales for the fourth quarter were organic.

The Aftermarket segment same-store sales for the quarter grew 15% to $79.7 million. With respect for the fiscal year, total organic sales increased 7% over the prior year to $1,477.1 million from $1,384.9 million.

Breaking that down by segment, fiscal year same-store sales for Aerostructures segment was $636.9 million compared to $598.7 million in the prior year period, an increase of 6%. Same-store sales for the Aftermarket Services segment was $288.4 million compared to $272.7 million, a 6% increase.

All of the Aerospace Systems segment sales for the fiscal year were organic. Export sales for the fourth quarter increased 8% to $122.1 million and for the year increased 17%.

Turning to the balance sheet in the next slide. We generated $349.1 million of cash flow from operations before Triumph Aerostructures pension contributions of $121.9 million.

After these contributions, cash flow from operations was $227.2 million. We are pleased with our cash flow for the year.

Inventory for the year increased $48 million, of which approximately $20 million related to the Bombardier win. The balance of the increase represents some additional nonrecurring investment and some limited growth in production inventory.

We feel good about our efforts in this area, and we remain committed even better inventory management.

With regard to pension, our performance during the year was fantastic. Despite close to $300 million in headwinds from lower discount rate, updated mortality tables and a lower assumed rate of return going forward, we ended the year with a lower underfunded position as compared to 3/31/11.

Fantastic asset returns led by our LDI strategy, thoughtful plan amendments and reduced plan expenses allowed us to achieve the best-in-class result.

CapEx in the quarter was $35.3 million and $94 million for the year. Net debt at the end of the year was $1,129.2 million versus $1,272.7 million at the end of the prior year, representing 38.6% of total capital.

During the year, we reduce our debt by approximately $150 million. We remain on track to equal or exceed our debt reduction target of $750 million in 5 years following the Vought acquisition.

The global effective tax rate for the year for income from continuing operations was 35.6% and reflected only 9 months of the R&D credit, which expired on December 31. From a cash tax perspective, we expect to pay virtually no cash for fiscal '12.

We expect minimal cash tax to be paid in fiscal '13, and we expect to increase -- to be increasing to a low to mid-teen cash tax rate in fiscal '14. Before turning it back to Rick, I just like to say to Rick that I've enjoyed sitting to your right for the past 20 quarterly conference calls.

It's been fun. With that, I'll turn it back over to Rick.

Thank you, Dave. As Dave has mentioned, I'm going to go over our fiscal '13 outlook and some of the issues there.

The first thing I want to remind you is that the fourth quarter, we're very pleased with, and it's our strongest quarter of the year, it has been for a number of years. And you can't take the fourth quarter and multiply it by 4 and come up with your analysis of what next year will be.

Our backlog remains strong, as Dave mentioned, at $3.91 billion, and we continue to remain focused on improving our execution, driving the integration and controlling our costs.

At our Investor Conference, we said we would reduce $750 million in debt by fiscal year 2015. And I'd like to reaffirm that number.

We have actually reduced debt $230 million plus pension contributions since the Vought acquisition. So we're very pleased with that.

For 2013, we are projecting revenue of $3.5 billion to $3.7 billion and EPS from continuing operation, excluding integration costs, of $5.45 to $5.55 per share. That guidance is based upon, in the press release, a share count of 52.5 million shares; capital expenditures and investments in major new programs of $130 million to $150 million, of which $50 million will be in inventory; pension income of $27 million and cash contributions of $110 million; OPEB expense of $15 million and cash expenditure of $37 million; interest expense of $70 million; based also on current production rates, and we'll have very strong commercial growth and double-digit commercial double-digit growth; we'll have some nonrecurring development activities for the KC-46A tanker next year -- or this year, rather; we'll have continued strength in the Aftermarket Services segment, which will be up approximately 10%.

One of the major factors, as Dave mentioned, was the contract we received from FedEx, which will go on for a number of years. It's predicated on a tax rate of 36.5%, which essentially reflects the expiration of the R&D tax credit.

The only uncertainty we have in our guidance is the military area, which remains uncertain as sequestration looms toward the end of the year and the beginning of 2014 calendar -- '13 calendar, rather. And we expect that our military to be down in single digits in revenue.

We really only have one area of 2 programs that we're a little bit conservative on, and that's the 787 and the 747 commercial shipments. And we're a little conservative there on our planning due to the fact that we have shipped a lot to Boeing, and Boeing has a fair amount of inventory in the products we shipped them for those 2 aircraft.

So it's unknown what -- how much we'll ship next year. This is not a reflection of what Boeing is doing with those programs.

I think those programs are very strong and, hopefully, will get stronger. But we're a little conservative on our shipments because of what we've already shipped.

I would be remiss if I didn't comment on the leadership succession of our company. Jeff Frisby, as you saw the announcement, will take over as the CEO at our annual shareholders' meeting in July.

And suffice it to say that the company is very well positioned with his leadership to continue our growth and our focus on improving execution. Jeff's been with our company since we acquired his company in 1998, and he's been the head of the Aerospace Systems Group.

He's been President and COO for a number of years. And I think the company is in more than good hands when Jeff takes over as CEO.

So at that, I'll open it up to any questions.

Crédit Suisse. Rick, can you talk a little bit more about the strategic partnership you mentioned with DAHER on further expanding your business with Airbus?

Specifically, what platforms this gives you more content on and how meaningful this is?

I think that DAHER is a company that will take the insulation, acoustical and thermal insulation blankets that we manufacture, and work with Airbus to install those blankets. And the importance of it is, number one, that we now are involved with Airbus in the insulation business from the manufacturer of the blankets to the insulation of the blankets with Airbus.

But more importantly, it gives us a better inroads to Airbus to expand the other businesses that we potentially can do with them. And that includes virtually all Airbus aircraft.

So it gives us a great opportunity to expand our reputation with them. It gives us a great opportunity to expand the many products that we can offer Airbus.

So it's a little bit of an expansion of what we talked about in our investor conference, and it's -- we have some minor partnerships, but this is a fairly major partnership that we get some inroads in to Airbus.

Okay. And then are you picking up any temporary business from the disruption at Spirit?

A little bit here and there, but not a lot to talk about. Spirit was the -- we've talked to Jeff Turner and we offered our assistance in having him get back in shape.

They're essentially back in operation. There were a couple of areas that they needed more help, and the plant damage was a little more severe in a couple of their processing areas.

And we've offered to help them out. But they're basically back in operation full-tilt, now.

So it's not really, it won't -- it's not really a big bump to revenue or anything of that nature.

Okay, great. And then just one housekeeping for Dave.

What are your expectations for corporate for the year?

$50 million.

I guess, in the context of the guidance, could you talk about -- you have out there these fiscal '15 -- expectations for fiscal '15 of $4 billion in revenue and $650 million in earnings, which based on where you've guided '13, look a bit conservative. Are there any changes to those expectations?

No, not really, because I'm not smart enough to tell you what's going to happen. I don't know who's going to get elected.

I don't know what's going to happen with the economy. And 2015 is a couple of years out.

So I just assume, keep it at that number. We were -- we remain confident that we can reach that number.

And as far as I'd go, I'd say that we feel confident we might be able to exceed it, but I'm not that big a guru to tell you what's going to happen in the next 3 years. But the important point is that we think we can continue to grow our company.

Okay. One question on the margin side.

It looks like last year in '12, x the benefit from pension, you did about mid-20% incremental margins. But it looks like your guidance for '13, adjusting for the benefit on pension, looks like more like mid-teens incremental margins.

Is that roughly right? And if so, why wouldn't incremental margins be in the same range as what we saw this year?

The math would suggest that, David, I think that that's -- statistically, I would view that we should deliver the same incremental margins. I mean, the level of increase in the synergies is slowing down a little bit.

And again, I think we're being a little conservative on some of the commercial growth versus the military softness that might happen. But we're not backing off where we would think our incremental margins would come from.

Okay. And last one for me.

In terms of the end markets, did I hear you say you expect commercial aero up low double digits next year, even with some conservatism around 787 and 47-8 shipments?

Yes.

Yes, very low double, but yes. Over 10%.

Okay. And that -- is that the benefit on the Aftermarket side?

And what are you expecting on business jets? You had some commentary in there about Cessna being weak and Gulfstream lower.

I think we would have business jets being flat. And Aftermarket, Rick had already said, the Aftermarket segment will be up over 10%.

Deutsche Bank. It's Amit Mehrotra here for Myles Walton.

In the past, you've helped us out separating the Aerostructures margins between Vought and legacy Triumph. Can you give us some color on where those stand right now?

And how much more margin expansion potential do you see at Vought?

Maybe Dave can do that. But before he does, at some point in time, we're not -- we'd like not to talk about heritage Triumph and Vought.

We're one company and we're delivering many solutions to our customers. And so from my perspective, suffice it to say that we feel very good about the integration and the product movement and the things that we're doing to execute properly.

And I think it's improper at one point in time to separate Vought from the rest of the company for a lot of reasons, none the least of which we don't intend to have 4 segments, heritage Triumph and Vought. So...

I mean, the color I'll give you is both groups continue to increase, and that's what we've always maintained. Our goal was not to have heritage Vought get to heritage Triumph Aerostructures profits.

Our goal was to improve both. And if the gap closes, so be it.

And with all the integration moves we're making, those lines continue to be blurred. And that's a good thing, because we're not going to get into get to intercompany discussions of where the profit goes.

I mean, those drive incentive targets. But the good news is both groups are continuing to raise the bar.

And as Rick said, as we get through the last quarter here where there'll be any disclosure of it, I think we'll be talking about Triumph Aerostructures, not Vought Triumph. But both are going in the right direction.

Okay. Just one follow-up question on cash flow.

Can you just walk through some of the moving parts on FY '13 cash? Should we expect sort of the step-up in line with the pre-tax earnings in '13?

Or will there be some, I guess, investment in working capital to step up in production.

I think the major moving pieces is you've got the normal pension, cash and OPEB cash in excess of the P&L impact, that's about $106 million bad guy[ph]. D&A is $100,000, $100 million to the good.

CapEx may be at the mid-point of our guidance is $140 million, so there's a little bit of drag there, mostly Bombardier. Dividend right now is scheduled to be $8 million.

And I would think maybe $20 million to $30 million of working capital usage. So we should be north -- well north of $200 million in cash flow available for debt reduction.

And again, equaling or exceeding our targets. Those would be the big moving pieces.

Yes, Sterne Agee. Rick, I guess, not to bring up Vought.

I will eventually talk about Triumph Aerostructures. But Vought on the integration, you mentioned that 4 of the programs are not going forward.

Could you give us a little color on why that is or if you just came to be that it wasn't needed?

We think, as we've said all along, we have been analyzing what programs are better off being produced at other Triumph locations out of Vought locations, what programs could be produced better at some of the Vought locations and what products are better produced outside of Triumph, and that's been analyzed specifically by a team that meets once a week and our supply chain management people. And although I can't tell you specifically which 4 programs are not going ahead, but I can tell you that it was determined that those 4 programs were better left where they are and there's no changes going to be made.

The other ones I mentioned, there are going to be changes made. Or if it's in the planning stage, potentially been -- changes being made.

And that's an ongoing issue, an ongoing process, as we go forward.

Typical analysis, Peter, comes down to, as Rick said, I mean, it's -- would moving that last work statement create incremental capital so that the return on it or are we using precious capacity to fit that last piece in. And so sometimes it's rather clear, sometimes it's a judgment call.

But one of the things, Jeff Frisby, is one of his quotes that you'll probably hear in the future is our goal is always to optimize those synergies. We're not just trying to maximize them and force them in there.

So we're trying to -- that's our philosophy, is to make the best decision, not necessarily the maximum possible. Because then, the next piece of new work you get, you don't have capacity.

And so -- those types of the calculations.

Okay, now that's helpful. And then, Dave, I guess on the Aftermarket business, Aftermarket Services.

You -- we've continued to see very good margin performance throughout fiscal '12. And even with, if you back out the bankruptcies, you're hitting kind of almost consistently in the mid-teens here.

Is it -- should we be assuming just kind of comfortable margin -- a double-digit margin performance going forward? What's really driving that improvement?

I'm sure there's a little bit of mix, but what else is going on?

More business.

I think it's a little bit of volume, Peter, and a lot better execution. We've had a pattern over the last few years, where just -- for instance, just as Asia got profitable, the recession hit.

And then just as the recession recovered, we had some issues in Phoenix. And I think we're now entering a stage where all our companies are raising the bar and doing very well.

And so we're -- we've talked about whether we raise that guidance of where we expect those margins to be. I think right now, we're getting close to that point.

But I think, at this point, we're still staying with that high double -- high single, low double. But we've had the same discussions internally.

I think we're doing very well in that group.

Yes, okay. No, that's evidence there.

And then just lastly, you had 7% organic same-store sales for the year. And you're expecting Aftermarket Services to be up 10%.

You got commercial up low -- low double digits and military down modestly, I guess. Is there -- how should we think about Aerostructures versus Aerospace Systems?

Is there -- this year they were essentially almost equal, 6% and 8%, respectively. Directionally, I know maybe you don't want to get that granular in your guidance, but how are you thinking about the year-over-year growth in those 2 businesses?

I think when you look at our makeup by segment, the most commercial-centric group of the OEM businesses is Aerostructures, and the most military-centric is Aerospace Systems. So you would think that, going forward, that we're going to have a little more growth in just from a pure market perspective.

Obviously, there are share gains and all the things we do to, hopefully, gain market share. But just from a market perspective, there's going to be more wind at the back of Aerostructures than there is in Aerospace Systems.

Stifel Nicolaus. At any rate, on the manufacturing decisions.

Are there any that are dependent upon contracts that you've got with suppliers that might take longer to come up for decisions?

Well, those are the ones that we're looking at and analyzing. And I'm going to get back to my notes and remember how many that was.

But those are the ones that were, in fact, we're analyzing to see what is going on, but not really dependent on any contracts. There were 2 in the planning phase, and 18 are in the implementation stage.

And those 2 that are planning on, I mean, that obviously depends on the contracts that we already have and the build rate issues, and that's the only thing we can base anything on. So to a certain extent -- but not necessarily any specific contracts that I can report to.

It's a matter of analyzing the manufacturing costs and the efficiencies we have within those systems.

Okay. Could you talk a little bit more about the relationship with DAHER?

Do you think there's -- I mean, will you have to build plants overseas to work with them? Or are you going to expand into additional areas?

Or is it pretty much things you can do right now?

At this point in time, it's things that we can do right now. So it's not a matter of investing any more money overseas.

We have a joint venture in China that'll be building some of these blankets. And there's no need to build anything more at this point in time.

I'd love to be able to tell you we have to build another plant, but that's not the case at this point in time.

Actually, Stephen, this case with DAHER, one of the benefits besides the additional volume is some capital avoidance. Because we will be selling the blankets to DAHER.

We will be installing them for the most part. So we're taking advantage of our abilities to deliver very competitively priced blankets, and DAHER has the infrastructure in Europe with DAHER.

So it's really a nice deal. Also, just to be clear, there's no joint venture with DAHER.

This is a contractual relationship. But we talked about it at Investor Day that we want to develop strategic relationships.

But there's no common equity here, but it's very close working together.

Yair Reiner from Oppenheimer & Co. So on the 747, can you give us a sense of where you are right now relative to the rate hike from 1.5 to 2 planes per month?

And then, in your guidance, you indicated that you're being somewhat conservative because Boeing has some inventory. Can you tell us what you're assuming in terms of the shipping rate for the year?

We're at 2 a month. And all we try to suggest is that we've shipped a lot more fuselage panels than Boeing has delivered.

And I don't want to get into specifics here about how many ship sets. All I could tell you is we backed off a little bit because we believe, at some point, when that program gets smoother in Everett, at some point, Boeing is just not going want to have the amount of product they have from us today.

So we're just trying to be a little conservative. If as it gets through the year, that's not needed, that would be fantastic.

But we're not predicting any kind of Boeing pause in production like happened this year. It's just purely they have a lot of panels and we're trying to be a little bit conservative in that.

So we're not backing off a lot, but it's our largest program. So...

Understood. And then on the C-17, I believe Boeing's current backlog for the program extends to early 2014.

They've given some indication that they may come to a decision about the future of that program later in 2012. In the event Boeing determines that it will need to wind down the line in 2014, can you give us a sense of what you might need to do on your end in terms of facilities, restructuring, et cetera, to deal with that?

And to what extent have you start working to those scenarios?

Well, first of all, we've taken that into consideration in our planning going forward and the integration of Vought and the programs and the decisions we're making on a number of manufacturing decisions, so that's number one. Number two, we've consistently said that if the C-17 goes away, which we have also said we don't think it'll happen, the only way it could happen right now, in my opinion, and I'm a little bit of feared of is sequestration, because what's going to happen with sequestration, as you well know, there's going to be another $500 billion taken out of the Defense budget, making it almost $1 trillion.

And even if you say it real fast, it's a lot of money, and it's going to come out of that. And I think it will come out more upfront than at the end of the 10-year period of time, which would put the C-17 in potentially more danger.

However, I think it'll go at least through 2014. But we've also said very consistently that the increase in the commercial markets, the going to full production on the 787 and the uptick in the commercial markets is enough to more than offset the loss of the C-17, which are things you've always got to plan for going forward in the -- in our projections going forward, including the number that we projected for 2015.

Got it. And then just one housecleaning question.

It looks like OPEB and pension together are going to be about a $16 million tailwind on the income statement. Is that going to be a benefit on the unallocated expenses?

Or is that going to show up as a benefit on the Aerostructures?

It's all Aerostructures.

Wedbush Securities. Just wanted to follow up on the guidance and some of the earlier questions, when I back out the pension benefit just discussed and some estimates for synergies, it looks like the margin improvement assumptions within each the segments is -- it's very conservative.

Can you just talk about, from a -- volume aside, from a lean and productivity standpoint, is there much we should be thinking about in 2013? Or how's your -- how would you frame that discussion relative to synergies and pension, is there any other benefits we're going to see in 2013?

Before Dave gets a little more specific on that, let me say one thing about that comment. For almost 20 years, everybody has considered us being a very conservative company.

And it's been said as, why are you guys so conservative? Well, the opposite side of being conservative is promise the world and don't deliver.

So I'd rather be conservative on that nation -- notion, number one. Number two, we've also been very conservative in regards to talking about our balance sheet.

And frankly, I feel very proud about the fact that over a long period of time, up to and including the time we founded the company, that we've been conservative in that nature. We've said that we would maintain a very positive and good balance sheet.

And I think we've done so. I don't think that the -- I'm not saying you're doing the math.

But I don't think the guidance for next year is overly conservative. We've told you where we're going to be conservative.

We've also said where there is a lot of unknowns going forward. And I just don't know what's going to happen.

We don't think that we're overly conservative for next year. As a matter of fact, if we're conservative in anything, as was mentioned on the calls and a question, is going forward to 2015 or '16, depending on assuming the economy gets a little better and stays going.

So maybe Dave has some more specifics on that...

Yes, no, I appreciate that, Rick. Let me just say, I guess the -- really, the bottom of it is, is there a lot more -- or not a lot, but how much more margin improvement should we think about next year, considering you had such phenomenal improvement across all of the businesses, especially Aerostructures and, of course, Aftermarket in the most recent quarter, as we head into 2013?

And I guess, what I'm getting at is, is there much more of an upside, and to what extent of that upside can I think about from volumes and lean initiatives? And as I think about incrementals that give you, obviously, more upside relative -- I can appreciate the conservatism and, clearly, that's the way to go.

But just trying to wonder to what extent you're starting, maybe, to bump into some ceilings, perhaps, here, and then how you will be addressing that?

I think there are some upsides, as we've talked about, in the Aftermarket Services segment. The thrust reverser contracts and the APU contracts will be pure throughputs at our plants.

And by definition will, in fact, make us more efficient and there might be -- there's going to be some margin expansion there. We've talked about the conservatism in the 747 and the 787.

Long term, that will give us some uptick also because, well, the 787, for example, hasn't gotten the full production rates yet. And in regards to the Aerospace Systems Group, as you remember, we also have Aftermarket Services of our own products there, where we repair and overhaul our own products.

And I think we'll get some margin expansion there as we have more throughput through our plants in those products. I don't know if that totally answers your question.

We're optimistic that we can have that and/or essentially maintain or have some growth where I've mentioned.

Yes. I think, Ken, that when we look at what our -- when we look at our internal plans, which are consistent with what we've given you in the public, I mean, we would see that margins in Aerostructures year-on-year, full year, would be a little higher and they'd be higher in Aftermarket.

And given the heavy military concentration in Aerospace Systems, we'd be flattish, but hopefully, up. But I think that long term, we still think that there are multiple hundred basis points of improvement in every one of our segments.

But that's long term, and that's static revenue and a lot of assumptions that Rick talked about. But I don't think anybody here believes we're hitting some ceiling.

We might have a couple of businesses that just knock cover off the ball month after month that maybe there isn't too much upside. But when you look at the segments themselves, there's plenty of room for continued improvement at all 3 for sure.

Well, that's very helpful and I appreciate it. And if I could, just one follow-on.

Obviously, for very good reasons, you've been very quiet on the M&A front. But what's your outlook now?

And as you -- within 12 months, you'd be at approximately the 3-year anniversary of the Vought deal. How has your thinking or how do you see thinking evolving regarding potential use of cash when you're in a better position as you continue to delever and move forward from an M&A standpoint?

We have never intended to go out of the acquisition business. We think we're good at the acquisition business, and it's certainly a growth factor going forward.

For reasons, which I -- to which I think you were alluding with debt, et cetera, we have slowed down certainly on larger acquisitions. We're looking at some.

We haven't done any for 2 reasons. Number one, the debt, which we're very sincere about reducing, number one.

Number two, the margins, the multiples where we have to pay. And we've been many times the preferred buyer without the preferred price.

And that probably will maintain, if in fact, we're looking at 11, 12-plus multiples that you have to pay. But we're not out of the acquisition business.

We don't put it in any of our planning going forward. But I can assure you that we'll probably be making some acquisitions.

Whether it be this year or next, I can't speculate. But we're not out of that business.

KeyBanc Capital Markets. I guess, Dave, if I can, just take another stab at the fiscal '13 guidance.

You've obviously got a number of these manufacturing decisions, I guess, 18 in the implementation stage. Do you have a goal of how many you're going to complete this year?

And I'm assuming because we've seen roughly $16 million in favorable cume catch-ups the last 2 quarters, we're going to see more of those in fiscal '13. And are those contemplated in the outlook?

We don't have a target other than get them done according to the schedule. There's no, like, we got to get the 37 by the end of the fiscal year.

Remember, we're -- in many cases, we're trying to move work while programs are ramping. So the last thing we want to do is make a mistake.

So we're trying to be as fast as we can but thoughtful on how we do it because we don't want to mess up production for our customers. I would expect that there would be some, if we continue to improve, whether it's related to manufacturing decisions or otherwise, that we would continue to see improved performance out of Aerostructures and have favorable cume catches.

The answer is, yes. Our philosophy is, generally, that until a manufacturing decision is in and the savings are proved, we don't yet put it in our guidance.

So that, hopefully, that should provide some incremental benefit as we go through the year. So I think it'd be irresponsible to assume a major manufacturing move and put it in your numbers when there sometimes you even need customer approval, which is sometimes very difficult to get or not timely.

So that's more of a wait-and-see approach.

Sure. Okay, that make sense.

And then just on the SAP. I think you talked about maybe getting back to kind of the pre sort of initial expense levels before -- can you give us a sense of where you are right now?

It sounds like maybe it's becoming a little bit more hairy or challenging than you maybe thought it was.

Correct. It wasn't a number.

It was we thought we'd be at a level of efficiency by March that was equal to where we were before we flipped the switch on May 1 last year. And unfortunately, that is not the case.

I mean, it is improving, and we're getting there, but it's not what we had hoped when I made that comment 6 months ago. So again, we'll -- as I've said before, I think we're going to be very cautious on the SAP savings, and you'll probably hear about it more historically than forward-looking.

And we'll tell you when we're getting them as opposed to projecting when they might come. That's just proving very difficult at this point.

We've sort of continually asked all our people as we go forward, "Are we going to be better off with SAP when it fully gets implemented properly, and we get those benefits?" And consistently the answer has been yes.

So we're going through trials and tribulations. But at the end of the day, whenever that is, we'll be better off.

Okay. Can you quantify the amount of maybe headwind there is on earnings this year?

I mean, or say, above average spend, no?

It's really hard to do.

I mean, it was an unfavorable -- it reduced the otherwise favorables.

Okay, okay. Last question for me.

Just on -- you mentioned the bankruptcies. Obviously, the landscape is getting pretty challenging out there.

Can you just give us the mechanics of how and why you were hit with those charges? And if anything else out there is sort of threatening to hit maybe in the Aftermarket side?

I mean, I don't want to be simplistic here, but we've done business with these customers forever. We manage them when we see the cash flow or indications.

And so it's always disappointing to have a bad debt. We take a very aggressive approach that when a bankruptcy is declared, we write it off completely or we [indiscernible] completely and hopefully there's a little bit of recovery one day.

But I think in the Aftermarket world, if you're not prepared to do business with anyone that has a challenging environment, I think you're going to make -- you're going to be sorry. So we'll get a lot of good business out of some of these going forward, and...

Is American more of an opportunity as they look to outsource potentially, as they're still kind of in flux here more of their in-house?

Absolutely.

It's Stephens. Dave, did you give -- you talked about the sort of the pension liability coming down.

Did you give a number? And sort of how much of the benefit -- how much of the come down there was related to the curtailment?

The curtailment -- well, let me give you the -- I mean, I'll give you all the benefits if you want. I mean, in our -- in an actuarial loss, the 10K of $234 million, and the curtailment benefit is netted in there.

So you could imagine what that would have been without it. Mortality table changes were about $40 million.

And then you had some -- the contributions, the plan amendments and the -- some fairly staggering asset returns. So the curtailment really would be in that actuarial bad guy [ph] of $234 million was netted with the curtailment gains.

So a lot of headwinds for discount rates.

Yes. And do you have a number, what the actual liability was versus where it was last year?

$363 million to start the year, $359 million to end the year, that's pension. OPEB was $369 million to start the year, $380 million to end the year.

Obviously, there's no funding on the OPEB side. So nothing to offset the mortality and the actuarial, the discount rate impact.

Do you guys have any significant sort of LTAs coming up with Boeing or other large OEMs in the near term, where, obviously, as these things come up, your margins have gone up dramatically, and I'm sure OEMs take note of that where there's a risk, that they're going to be looking for some of that?

Within 15 minutes after this call, Boeing will be calling us. But the answer is we don't have any specific that I know of coming up.

But trust me, that's an ongoing conversation.

Sure. In terms of the year, sort of how it lays out, is there anything that we should be thinking of in terms of the quarters that would sort of be unusual in terms of timing of sales and earnings that we should take account -- take into account?

I don't think there's anything on the sort of non -- there's no corporate debt, tax. None of that should be anything other than normal progression.

I think what obviously is happening is if 787 ramps, let's say, versus the second half of the year, we could catch part of the next ramp on 737 towards the end of the year. Maybe some little bit of build-up on 777, A330 going up.

So I think all of those things favor the second half of the year from the commercial perspective. So it's just I think we're all -- I don't think we have a hockey stick out there.

But the market tailwinds are clearly, the longer you get into the year, the more commercial will be. But also, probably, Q4 would be the first time maybe there's a little bit of risk on sequestration or Defense cuts.

But -- and I think other than that, I think everything should be sort of what you'd expect.

Okay. And lastly, in terms of the Vought integration costs.

You've been running at a pretty consistent $0.02 to $0.03 a quarter. Any reason that, that would change?

No.

D.A. Davidson.

You mentioned, Dave, conservatism on 787 and 747-8, and I think we tried to get a number out of you on 747 in terms of ship set. Are you going to give us one 787?

No, no.

Good try, though. It was very good.

Is it -- would you say that the channel -- the inventory there is a little more or less than 747?

I think it's probably around the same. I mean, it's not months and quarters worth of excess inventory, but it's -- or I don't want to use the word excess, just advance inventory there.

So I think that's -- and again, it's -- I think we're going to see growth. We're just tempering it a little bit.

I don't want to make too much of it.

It's just a matter of the delivery rate of the aircraft. I mean, in 787, that will disappear when the 787 gets to full production rate.

And at that point in time, it's actually a benefit for us because, as we've consistently said, the margins in that are positive, but they're currently dilutive to our margins. But when it gets to full production rate, it will in fact be accretive to our margins.

Yes, I think, J.B., maybe people are overplaying the comment. We actually believe we'll have higher 787 and higher 747 sales in '13 than we did in '12.

It's just we don't think we're going to get the full benefit of the rate increases in '13 because there's obviously in a -- when a program ramps up, there's a disconnect between our deliveries and Boeing deliveries. So...

But just the timing issue between the production rate and the delivery rate that you're sort of experiencing, which sorts itself out over time.

Right.

Okay. And then can you maybe give us an update on Mexico?

Mexico is doing well. It will produce a net benefit for the company of a sizable amount in fiscal '13.

The cost will remain in corporate, so Mexico itself will -- that entity will show a small loss, but there are benefits in the other companies. So it'll produce a benefit in the millions of dollars for Triumph in fiscal '13.