Daniel J. Crowley - Triumph Group, Inc. James F. McCabe Jr - Triumph Group, Inc..

Benjamin E. Arnstein - JPMorgan Securities LLC Gavin Parsons - Goldman Sachs & Co. LLC Cai von Rumohr - Cowen and Company, LLC Samuel J. Pearlstein - Wells Fargo Securities LLC Peter J. Arment - Robert W. Baird & Co., Inc. Kenneth George Herbert - Canaccord Genuity, Inc. Michael Ciarmoli - SunTrust Robinson Humphrey, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Fourth Quarter Fiscal Year 2018 Results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.

Please ensure that your pop-up blocker is disabled if you're having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question and answer session following the introductory comments by management. On behalf of the company, I would like to read the following statement.

Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note that the company's reconciliation of non-GAAP financial measures to comparable measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note this call is the property of Triumph Group, Inc.

and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I would like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer; and James F. McCabe, Jr., Senior Vice President Chief and Chief Financial Officer of Triumph Group. Go ahead, Mr. Crowley..

revenue, earnings and cash used. Jim and I will talk through a number of our operational and strategic accomplishments that occurred during the fourth quarter and the fiscal year. To put FY 2018 in perspective at a high level, what I'm most excited about is our sales growth.

Sales growth is an important issue because it shows the internal work we've been doing for the past few years to reset Triumph's foundation is working. I've talked with you about the need to deliver on commitments, become predictably profitable, and drive organic growth.

And over the last two years, we've taken considerable action to reorganize and consolidate Triumph into a one company culture, implement much needed operational improvements, and address contractual challenges in our Structures business. Our story is evolving. As we move along our path to value, there's a line of sight and we are nose up.

Looking at page 3, we finished the year on an upswing at the high end of our revenue guidance. Margins are improving in Product Support and Integrated Systems and we've significantly reduced volatility and risks in the Structures business, and it shows.

There are only a few remaining programs left and we are working through Global 7000 specifically where our cash use has been the highest. We reached an agreement with Gulfstream that will help position Triumph for positive cash flow in FY 2019 and profitability thereafter. Backlog and book-to-bill are up.

We've won contracts from customers who at one point had Triumph on a no-bid list. We identified and are pursuing new areas of growth on military platforms and are targeting for 30% of revenue to come from this area. And we strengthened our balance sheet to give us the flexibility to execute our strategy.

The result of these operational improvements is that we are now forecasting top line growth in FY 2019 and beyond. On page 4, we show the transformation results that are enabling our enhanced competitiveness and improving financial performance. Q4 was the first quarter we reported Aerospace Structures and Precision Components as a combined segment.

The consolidation of these business units is expected to contribute over $30 million in annual savings towards our cost reduction goals. The benefit of the consolidation is already showing, with leaders from the Structures business helping our Components factories on intercompany deliveries.

Triumph and our customers are seeing the operational collaboration and cost efficiencies as the combined business unit received our largest order of the year from Boeing for 787 composites. We achieved our FY 2018 cost reduction target of $96 million and remain on track for our three-year savings goal of $300 million.

These efforts have helped our cost competitiveness on new bids and will position Triumph for improving margin performance. In terms of portfolio reshaping, we've reduced the number of Triumph sites from 75 in early 2016 to 52 following near-term divestitures.

All in, we are now targeting divestitures worth approximately 20% of revenue versus our original goal of 10% to accelerate our turnaround. Our portfolio decisions favor retaining businesses that have high-margin and high-growth potential with more predictable profitability, and we expect to achieve this target by the end of FY 2019.

In FY 2019, we also plan to reduce our work-in-process inventory and past due backlog and decrease working capital by another $100 million to $200 million, having peaked last year. We expect these efforts to benefit our on-time delivery results, debt levels and interest expenses.

While more work is required, we continue to attack red and yellow programs as part of our operating excellence campaign, as evidenced by our recent Supplier of the Year Awards from Sikorsky Aircraft.

Triumph's Aerospace Structures Hot Springs group was awarded Elite Supplier status, and Triumph's Geared Solutions business won a Program Supplier of the Year for our continued support of the S-97 program, a demonstrator vehicle for the Army's Future Vertical Lift program.

Moving to page 5, I'll provide a brief update on some of the programs driving our cash use. Our G650 team ended the year with two more wing deliveries than planned.

Through extensive discussions with Gulfstream, we jointly concluded that it was more efficient to combine our three production lines in Tulsa, Nashville, and Savannah into one in Savannah over the next year.

And Triumph will continue to maintain responsibility for the wing, design support, and supply chain, while Gulfstream does wing assembly and delivers completed wings to their final assembly line.

This is a much more efficient approach to production that protects the program and allows Triumph to maintain significant program revenues with positive cash flow in FY 2019 and positive margins beginning in FY 2020.

We are working closely with Gulfstream to smoothly transition our assembly work to their active production line in Savannah by the end of FY 2019. And throughout this process, our relationship with Gulfstream remains positive, and we expect to expand our work in other areas including composite details for the G500 and G600 programs.

And we're in similar discussions on the G280 program with IAI to ensure a sustainable long-term production approach, and we're targeting resolution by the end of FY 2019.

Our last ongoing development program, the Global 7000, continues to accelerate towards entry into service in 2018, with engineering certification efforts nearing completion and 19 wings delivered to Bombardier's final assembly line so far with dozens more expected to be delivered in FY 2019.

Bombardier recently announced an increase in the usable range of the Global 7000 from 7,400 to 7,700 nautical miles enabled in part by the high performance of our wing. Our spend rate on the program remains high as a result of final development and early production ramp expenses.

But our investments to-date have yielded a design proven an early flight test with better than expected performance, a modern assembly factory, and an extensive supply chain. However, this increased spending and timing issues on production delivery payments from Bombardier have contributed to the company's largest use of cash.

We are working with Bombardier to resolve these issues and determine the optimal way to support the program and our shareholders. Following last year's contract negotiation with Boeing, our consolidation of the Boeing 767 program is going well.

We're using some of the cash advances received last year to fund the transfer of Boeing 767 structures work from our Grand Prairie, Texas plant to our Stuart, Florida plant and implement automation to reduce cost and improve quality.

This combination generates significant fixed cost and recurring savings, a portion of which we committed to Boeing under the Partnering for Success while improving Triumph's overall business case. The production rate on Boeing 767 for freighters and tankers is expected to increase over the next year.

Our outsourcing the Embraer E2 fuselage to Korea's ASTK has begun and will complete in the mid calendar year 2019 timeframe. Partnering with ASTK will allow Triumph's business case to be profitable while simplifying program logistics.

Triumph will continue to take the necessary operational and contractual steps to derisk our backlog, meet customer commitments and position the company for positive free cash flow and improved margins over the next two years. On page 6, I cover a few of the trends in our market.

Funding for military programs continues to increase in the DoD's 2018 to 2019 year budget where procurement spending increased $165 billion over sequestration levels. The DoD has launched new acquisitions to update and replace aging and under-maintained fleets.

After several years of the Budget Control Act constraining spending, there's a pent-up demand for aftermarket support, which we are now seeing translate into short lead time spares and MRO orders. I've discussed our goal to increase our military revenue from 20% of sales to 30%.

And our revamped business development team has increased our pipeline to $12 billion, roughly half of which is for military programs. In fact, half of our competitive wins last year were on defense related platforms.

Beyond our role in the T-X trainer for Boeing Defense, we're also supporting all three competitors on the Navy's MQ-25 refueling drone and pursuing service life extension programs to re-wing the A-10, F-15 and T-38.

Our Product Support business unit booked new orders for C-17 thrust reverser overhauls in FY 2018 and have since received the first 25 thrust reversers for repair with 100 more expected in FY 2019.

On the commercial side, higher narrow-body rates and associated engines are lifting our Integrated Systems business where Boeing 737 and Airbus A320 are our largest programs. Integrated Systems is also winning dual-source and takeaway programs in the military market.

Boeing commercial aircraft is moving forward with the Boeing 797 middle of market aircraft, and I recently met with their senior supply chain leaders to discuss roles that Triumph can play as they firm up their supply chain strategy and we look forward to supporting this exciting project. Internationally, we see Asia as a promising market.

We announced an agreement with China Southern, the world's sixth largest carrier to maintain engine components and signed an MOA regarding a joint venture for aftermarket support. On page 7, you can see some of the results of our organic growth initiatives.

Triumph is learning how to win again with win rates by dollar value, now growing from 22% last year to 49% in FY 2018. Engine and helicopter wins led the way on a competitive side with Product Support winning MRO contracts for line replaceable unit repairs on Pratt & Whitney's V2500, PW2000 and PW4000 engines.

Product Support was also elected by Boeing to provide aftermarket support in the Asia-Pacific region for their flight controls and engine nacelles program, as well as thrust reverser service for the regional fleet of Boeing 777 airplane.

Integrated Systems won a gearbox accessory drive award from Saab and won a PBL contract in support of the CH-53 helicopter.

Integrated Systems designed and built the landing gear and assembled the main transmissions for both the S-97 and the DEFIANT, while also providing the DEFIANT's high powered clutch for the thrust propeller and electric propeller pitch actuation system and the electric elevator and rudder actuation, really cool stuff.

While this is an investment in the future, Sikorsky has recognized our support and partnership. And we were publicly announced by Lockheed Martin as the design and build partner on their MQ-25 proposal. Our Composites business won a $750 million contract follow-on for Boeing 787 component details which extends the program by over a decade.

Now, a final note, we believe that the commercial supersonic jet airplanes are inevitable. We are closely following development as multiple new players emerge such as Aerion, Boom and Spike. And Triumph will play a role in this exciting new market providing engineering, products solutions, structures and fleet support.

Regarding our FY 2019 outlook on page 8, the company's combined operational recovery and our new business results are expected to provide top-line growth in FY 2019.

We're setting revenue guidance of $3.3 billion to $3.4 billion for FY 2019 which reflects year-over-year growth of 4% to 7% when adjusted for divestitures which is consistent with the growth rates of our overall markets.

After GAAP earnings losses in recent years, FY 2019 guidance is breakeven to $0.5 – or $0.50 per share in FY 2019 while adjusted earnings guidance is $1.50 to $2.10 per share. This revenue increases and its programs early in their production ramp up start to generate operating income. We expect our earnings to improve year-over-year.

We anticipate reduced levels of cash use this year as our restructuring and development expenses decrease and production deliveries increase particularly on the Boeing 737, Airbus A320 and Global 7000. As with last year, we are currently in a number of contract negotiations which we expect to have a positive effect on full year cash guidance.

As we complete these negotiations and plan divestitures, we'll be in a better position to provide full year guidance on cash and to delineate cash from operations, financing and customer advances.

As with past years, Triumph's management will continue to find ways to economically fund our operations, reduce debt, and improve cash performance, and we expect improved year-over-year cash flow in FY 2019 and 2020.

As Triumph celebrates our 25th anniversary this year, we look forward to completing our turnaround and accelerating along our path to value. Jim will now provide further details on our performance and outlook.

Jim?.

Thanks, Dan, and good morning everyone. Our full year FY 2018 results met or exceeded our original guidance reflecting our substantial progress in this transformation. FY 2018 was a year of significant accomplishments to Triumph.

We negotiated several important customer settlements, improving our business cases on key programs and strengthening those relationships. We increased our liquidity with $500 million of new financing. We increased our backlog 13% and improved its quality. We reduced costs including consolidating locations and segments.

And we continue to reshaping our portfolio with several divestitures. Looking forward, FY 2019 is the year Triumph returns to top line growth. But first, on slide 9, you'll find Triumph Group's consolidated results for the fourth quarter.

Our net sales of $897 million, decreased by 3% from the prior due to divestitures, organic sales increased by $7 million. The net organic sales growth include increased deliveries on the Global Hawk/Triton program and the Global 7000 and G650 programs, partially offset by Boeing and Gulfstream program completions and rate reductions.

Adjusted operating income improved sequentially from the third quarter to $71 million, representing an 8% adjusted operating margin. Our fourth quarter reported operating income included several items noted on the slide, which we've excluded in our calculation of adjusted operating income.

The most notable of these is a previously disclosed $345 million charge for the impairment of goodwill in our Aerospace Structures segment.

As we discussed when we reported our third quarter results in which we posted $190 million goodwill impairment, the $345 million impairment represents the remainder of the recorded (00:17:58) Precision Components segment's goodwill upon its consolidation into Aerospace Structures segment, which occurred at the beginning of the fourth quarter.

We view this consolidation as an important strategic step that will enable us to maximize the profitability of the combined operations. Now turning to our results by segment, on slide 10, Integrated Systems posted a sequential increase in sales of 15% over last quarter driven by favorable balance of OEM and aftermarket volumes.

Segment sales declined approximately 2.4% year-over-year, which included the impact from divestitures of $11 million, partially offset by 2% organic sales growth driven by OEM volumes on the Airbus A320, Boeing 737 and Boeing 787 programs.

Segment operating margin included $1.6 million of restructuring costs this quarter, but remained strong at 20% and improved sequentially driven by operating leverage on higher sales combined with the impact of our continuing cost reduction initiatives. Integrated Systems continued to expand its backlog during the fourth quarter.

The segment's year-to-date book-to-bill ratio was 1.26:1, driven in part by being selected to design, develop and produce fuel pumps and actuators for the advanced jet engine for sixth-generation U.S. Air Force fighter jets.

Turning to slide 11, our Product Support segment sales declined 2.4% from the prior year quarter due to the divestiture of the APU engines repair business. However, excluding the divesture impact, organic Product Support sales grew 20% from increased demand for accessory components.

Product Support's fourth quarter operating margin remained healthy at 17.2%, which was higher than the prior year quarter. A few weeks ago, we announced a contract extension with Pratt & Whitney for engine repairs which extends the program through 2019 and expands our scope of work.

Our plan is to continue to grow our Product Support segment to capitalize on the attractive margins and our increasingly strong reputation in this market. Slide 12 summarizes the fourth quarter results for our Aerospace Structures segment, which now includes our former Precision Components segment.

This business was up sequentially over 16% compared to the third quarter. This was Aerospace Structures' second consecutive quarter with a healthy sequential gain in sales, which was driven by increased deliveries on the Global Hawk/Triton program and Global 7000 and G650 programs.

The modest year-over-year sales decline was largely attributable to the completion of the continued rate reductions on certain Boeing and legacy Gulfstream programs. Aerospace Structures' year-to-date book-to-bill ratio was 1.13:1, supported by the Global 7000, Boeing 767 tanker, and E2 programs.

During the fourth quarter, Structures had a net favorable cum catch-up adjustment of $7.4 million, reflecting both our improved operating performance and our enhanced customer relationships. Adjusted for the goodwill impairment, this segment's operating margin was 3.7%.

We continued to derisk and improve the size and quality of the backlog in this segment this quarter as evidenced by follow-on contract awards from Boeing on 787 and 767, our E2 partnering agreement with ASTK, and our supply chain optimization agreement with Gulfstream on the G650.

Turning to slide 13, free cash use was $101 million during the quarter and $331 million for the year. While we still have more work to do, we were pleased with our steady improvement in this area as we used less cash in FY 2018 than we originally anticipated.

Working capital increased $108 million this quarter, including a $57 million investment in Global 7000 inventory and a $55 million reduction in customer advances. Without this $108 million working capital increase, we would have reported positive free cash flow for this quarter. On slide 14 is a summary of our net debt and liquidity.

Our net debt at the end of March was approximately $1.4 billion. Our cash and availability are sufficient for our needs at about $680 million, and we are in compliance with all of our debt covenants.

Regarding our 2019 outlook, on slide 15, we expect revenue for the fiscal year 2019 to be approximately $3.3 billion to $3.4 billion, up from fiscal 2018 as development programs enter production and sales from continuing programs and new wins offsetting the sunsetting programs.

In addition, we're projecting 2019 adjusted earnings per diluted share of $1.50 to $2.10. We expect our effective tax rate to be approximately 17% for the year, with a potential opportunity to lower our rate through the release of valuation allowance and the use of deferred tax benefits from prior divestitures.

Our capital expenditures are expected to be in the $50 million to $70 million range. We also have two accounting standard changes in FY 2019. They are revenue recognition and pension accounting. Our estimates of both are included in our guidance.

The adoption of the new revenue recognition standard is not expected to have a material impact on our FY 2019 revenue compared to the prior standard. The cumulative effect of adopting the new revenue recognition standard will be a decrease in our retained earnings.

We will provide our estimated range of this retained earnings decrease in our disclosures included in our Form 10-K to be filed later this month.

Regarding the FY 2019 pension accounting changes, as previously disclosed, the impact of the pension accounting changes will be a one-time, non-cash charge in our first quarter now estimated to be between $88 million and $92 million.

This estimate is lower than the previously disclosed estimate because a portion is now captured in the adoption of the new revenue recognition standard within retained earnings.

Additionally, this accounting change requires substantially all pension income to be presented below operating income, resulting in lower operating margins primarily within the Aerospace Structures segment. Slide 16 shows some of the key drivers for our 2019 adjusted earnings per share estimate.

The headwinds include a couple non-cash drivers like the decline in amortization of contract liabilities, which reduces about $55 million from FY 2018, and the pension/OPEB income, which reduces about $11 million. These are both year-over-year reductions to non-cash income.

Our assumed income tax rate has increased from 2% to 17% and our interest expense is expected to increase about $6 million, primarily from a higher assumed effective interest rate. Our tailwinds include 4% to 7% organic sales growth and further cost reductions of up to 1% of sales.

So, looking forward at fiscal 2019 with respect to cash, at this time, we expect that our FY 2019 cash flow will be meaningfully improved from our $330 million use in FY 2018, but we're not going to provide any guidance range because the range of outcomes is quite wide.

We continue to see the possibility for contract settlements, divestitures and working capital improvements, along with variability of development spending, production inventory build and cash restructuring costs during this transition. We will provide updates on our new FY 2019 cash flow in the coming quarter as we gain greater clarity.

In summary, we made significant progress in FY 2018 towards profitable growth and positive free cash flow. We're confident in our ability to deliver organic sales growth in FY 2019, thanks to the hard work of the entire Triumph's team and this growth is reflective of our strong and strengthening customer relationships.

FY 2019 is the year Triumph returns to top line growth. Now, I'll hand it back over to Dan to wrap up. After which, we'll welcome your questions..

Thanks, Jim. So, in conclusion, we continue to improve last year, and we're benefiting from strong tailwinds in our core markets. Our top-line is growing with this next year of being the first year in four years where new awards more than offset sunsetting programs.

Our profitability and cash flow are expected to follow the revenue trend as we derisk our program and company portfolio. The strategic choices we are making both on divestitures and programs will create a more focused and cost efficient company and we're excited about the opportunities in Integrated Systems and aftermarket segments.

Our turnaround and transformation remains on track as we pursue our best path to value for our customers and shareholders. At this point, we'd be happy to take any questions, Kevin..

At this time, the officers of the company would like to open the forum to any questions that you may have. Our first question comes from Seth Seifman with JPMorgan..

Hey. Good morning, guys. This is actually Ben Arnstein on for Seth..

Good morning..

Good morning..

I was hoping you could give a little bit more color on the cash flow for this year. I mean I think you had previously talked about getting to somewhere around breakeven cash flow in FY 2019 excluding advanced repayments.

Is that still a good way to kind of think about how this year might shape out?.

Yes. Hi, Ben. This is Jim. So as we said, we're not prepared to give a guidance range right now, but we are saying that we expect meaningful improvement over the usage we had this year, $331 million I mean the variables include elements working capital, which everything from production inventory to advance rates.

And when we get better clarity, we'll be happy to give you an update on that. But our targets have not changed..

Okay. And then maybe on the working capital, you've talked about I mean like $100 million to $200 million of improvement this year.

How much of that is Global 7000?.

So, we tracked working capital last year. Month-over-month, we saw the balance of physical inventory. I'm not counting the engineering development that's carried on the balance sheet. And it was trending up throughout fiscal year 2018.

In about November, we're able to arrest that growth and by the end of the fiscal year, we pulled it down about $145 million, and that's all a result of our Inventory Attack Team. And as we look at what we accomplished in the first four or five months of that effort and planning for FY 2019, it comes from all three business units and all functions.

Certainly, Global 7000 is part of that because we're priming the pump in production and production deliveries are going to be coming off. But it's also going to come from past due backlog and our Integrated Systems business.

It will come from better material planning across all of our Structures programs, making sure we align our customers' schedules with our MRP, ERP schedules in the factory. And it'll come from smarter buying.

So what I'm excited about on this inventory project is not only will it provide improvements in cash flow, but it's going to make us a tighter better run company because we'll plan and execute programs better..

Okay. Thank you..

Our next question comes from Noah Poponak with Goldman Sachs..

Hey. Good morning, everyone. This is Gavin on for Noah..

Good morning..

On the $300 million cost reduction initiative, I think you're in year three now on track to hit the $300 million. But it looks like margins are coming down again this year in the guidance.

So if you strip out kind of the headwind from declining pension income and amortization, can you help us understand what's offsetting the reductions? If there's more you can do beyond this plan? Yeah. Thanks..

Yeah. Okay. Great, Gavin. So, I'll start and, Jim, you can join in..

Sure..

So, Triumph's margins reflect the mix of programs that we have today and some of our larger programs like Boeing 747 and Global 7000 and in past G650, we're not generating margin. And so, overall, company margins have been temporarily depressed.

Now, as we fulfill our contract obligations on Boeing 747 and as we convert Global 7000 from development spending and early production losses to crossover, breakeven and profitability and now with our new contract settlement on G650 all of those headwinds either abate or reverse. So it's really a phasing issue as it relates to margins.

And Triumph is looking forward to the upside of having invested so much in development programs and also continuing to see strong margins out of systems and aftermarket.

Jim?.

Hey, Gavin. The two things you pointed out are very significant to this, so I'll just remind you this, the amortization of contract liabilities which rose about $125 million of non-cash income this year and – this year of being FY 2018 is going down to $65 million to $75 million next year, so that's part of it.

And the other part is pension, and not only – on slide 16, I have the pension listed, it's going from $72 million down to $61 million. But the margins are reduced because pension is now being reported below operating income. So it's coming out completely. So it's not just that decline. The whole $72 million is coming out.

So those are two big key non-cash drivers to keep an eye on..

Got it. And then on the divestiture strategy, when you took on the Tulsa Gulfstream ops, you were actually giving cash to takeover that business.

So now I appreciate that kind of divesting in the underperforming businesses will have a meaningful impact on your margin and cash, but I'm just curious if it's now harder to divest those businesses that are either cash losing or have pension liabilities attached. Thanks..

So we've seen a strong response to all of the properties that we put up sale, and they often come from strategic buyers that know how to run those operations, that are prepared to make larger capital investments in those businesses than Triumph has been able to do in the last four or five years.

And there's not that many properties out there, so we have not seen an issue in that regard. And we expect that the new owners of these businesses to build on the backlog that exists here and the strong relationships we have with the OEMs. And there's also international interest in getting a U.S.

footprint in markets, so that really hasn't been a challenge. And the capabilities of these operations are quite good in terms of machine assets and talent, so I'm not concerned about that..

Great. Thank you..

Our next question comes from Cai von Rumohr with Cowen and Company..

Yes. Thank you very much. So you mentioned you're working on contract settlements, obviously Global 7000, G650 are high among them.

Could you give us a little color of the key ones and you said it's going to be a contract plus, but is this because they gave you a little bit money and then you sign up for an onerous – potentially onerous future obligation or is this because you spent all this money and therefore it's clearly going to be a plus? Give us a little color on that if you could..

Sure.

Probably the best example, Cai, is the one that I covered related to Boeing 767, and I went a little deeper on that on this call because after the last call, people made the assumption that when we do these negotiations with customers that it's an exchange of cash advances for margin give up, but in the case of Boeing 767, we had two plants that were generally underutilized that used to produce at higher rates and the cash advance funded the transition and then time – closure of the one of the two plants are shutting down those lines.

That gives more base to the receiving plant. Marginal rates go down, fixed costs go down, and the business case improves and a portion of that we pledge back to the customer, as I said partnering for success. But our business case also went up.

So it's those creative deals that we do with each customer and our negotiation with Gulfstream was different but also mutually beneficial.

And with Global 7000, we've come a long way with Bombardier and we've put a lot of investment into the program, on development, and facilities, now production ramp up, and we're looking forward to getting to a rate of production where the cash flows is now reversed and we're in discussions with them and other customers about the fastest way to get there and what are the cash needs of the program between here and there, can't go into any further detail on it.

But I think our track record of settlements with Spirit, Northrop Grumman, Boeing Commercial, and now Gulfstream give us some credibility when we say we're going to work through these issues in FY 2019..

Thank you.

And are there any of these that would require, I mean, are all of them settlements in which you get some cash up front and maybe you spend some money later and you get a net benefit later, or are any of these contractual settlements where you have to pay something back so that they would be – so they're all positive near-term as well as positive longer term?.

That has been our track record and that will be our goal for FY 2019 as well. Just some color, all of the OEMs are trying to derisk their production ramps, so they are using – deploying their cash to their supply chain to make sure that deliveries remain on track. We're seeing that across the board.

You cover the OEMs; you know their cash positions and you know their ramp rates. So it's about risk management, and while each deal is different, what we try to seek is what are the needs of the customer in the program versus what are the needs to Triumph and see if there's an overlap, and so far, we've been able to find those..

Thank you. And just the last one, on divestitures, maybe give us a little color on what you sold in the fourth quarter. And more importantly, you've increased the target from 10% to 20% of sales, so that's, what, $340 million, something like that in terms of revenues.

Can you give us some color on what you're selling? Are these profitable businesses where you get money, but you're giving some seed corn away, or are these businesses that are struggling, not making money, so to get anything for them is a net positive to the cash flow?.

So rewinding the clock, our first divestiture was Newport News, which is an engineering services company, non-core, the buyer was an engineering services firm, so it was a perfect fit for them. And because it was non-core, we had a pickup. Then we sold our engine APU overhaul business. That used to be a struggling business. The team turned it around.

We got a good price for it from Gores, and now they're looking at ways to expand the business. We sold in the fourth quarter a small machine shop that used to be family-owned and we sold it back to the family-owned.

We viewed it as something that is a lower cost structure business that is highly price sensitive and really non-core and more build-to-print. We have other transactions that are similar to that that are very close to being completed. And then we're going to continue to look at core, non-core.

Yes, some of the businesses will be cash users, others are cash generators, but we'll use a very strict criteria in terms of its strategic fit and its contribution to the company's economic value. And our goal is to clean up the portfolio. As you know, Triumph started with 47 companies two years ago. Through consolidation, we got it down to 20.

Now, we've sold three. And I think when we're all done, that number will be closer to 10 to 12 operating companies, a better span of control for management, and a clear strategic focus..

Thank you..

Thank you..

Our next question comes from Sam Pearlstein with Wells Fargo..

Good morning..

Good morning..

Jim, can you talk a little bit about the revenue recognition change and how that's going to impact things for contract accounting and capitalized costs? I mean, what does it mean for the E2 and the Global 7000 revenues and margins? Are they at zero, or can they be negative now in the new rules? And any non-recurring kind of one-time impacts we should be expecting?.

Well, without getting into the program detail, the overall impact of revenue recognition on us this coming year is not material, on revenue or an operating income basis. It's an acceleration of revenues which is – but also acceleration from the future years, so the net impact is not negative or positive.

The real impact is going to be on the balance sheet, and that's where we take inventory, primarily NRE (00:39:51), and write that down to retained earnings. And we'll be providing an estimated amount in – it happens in the first quarter. We'll provide an estimate in our 10-K that will be filed in a few weeks.

But revenue recognition is now based on cost as opposed to units, and that's the big change. As you incur costs, you recognize revenue, and it's meant to match up better with the efforts that are being expended the revenue that's generated.

So I don't see a material impact this coming year and we'll have the balance sheet change disclosed in a couple weeks..

Okay. And is there any change in terms of the reporting for your accounts receivable sales in terms of the cash flow, because I know there are other companies with the new rules that it moves out of operations into I think an investing activity..

I'm not aware of that. I will look into that, but there shouldn't be any change in the cash flow as a result of this. Firstly, the overall cash does not change. The presentation does not change to my knowledge. But we haven't reported yet in that format..

Okay. And then just going back to just the overall cash outlook for this year, I mean, I'm trying to just understand what you don't know at this point. It sounds like it would be the advances and then the timing on divestitures.

What else really would be the driver, and is there any way you can put, other than an improvement on next year, any sort of bounds or a range or a magnitude of improvement?.

I think we have put a bound on it to say that we expect meaningful improvement over what's happened in FY 2018. And if you look back at FY 2018, the cash used for the year was in the low end of our use range that we gave you last quarter, and it's much lower than the guidance we gave you at the beginning of the year.

So we've over-performed, and yes, it's working capital which includes advances. But it's all the elements of working capital that are variable. We do work – we work on settlements. It can have big impacts on terms, on advances, on inventory, who owns the inventory, and development programs and the ramp rates. Those are all the variables.

We are still in a transition, and I think we're more cautious about wanting to provide – only provide guidance when we have better information..

Thank you. Our next question comes from Peter Arment with Baird..

Yes. Good morning, Dan and Jim..

Good morning..

Jim, a question on kind of expectations for debt levels this year. I mean your interest expense you kind of commented that it's mainly tied to higher – just higher interest costs.

Are you expecting the debt levels to be relatively stable this year? Could you help us out there?.

Yeah. So the debt level has a couple of components that change it. Divestitures are one of the ones that's variable. So as you know, we've done some divestures. We said we have a higher divesture target.

And so I can't speak to exactly what the debt level would be because that would imply how much cash we're going to use as well as how many divestitures we're going to do, and that's still up in the air at the moment. But our interest is based on a forecast, which has debt not increasing dramatically..

Okay. And then just as a follow-up. Dan, you mentioned you've had a big effort on reducing the number of Triumph sites from 75 down to 52.

How much does that dramatically change after what this increase amount of divestitures you're doing?.

So the 52 number includes a transaction that we expect to close in the first quarter. And it's all part of the goal of getting Triumph focused on more value-added companies that have greater intellectual property and more design content and less built to print.

As a leader, I try to get out to all the sites as often as I can, but with that many it's not always possible and you learn so much from walking the floor.

Recently at our Macomb, Michigan gearbox business which is a critical supplier to GE and Rolls-Royce and others and having been there, it just really informed my views of things we need to do on information technology systems and shop floor process controls and automation investments.

Now I have P&L leaders for the three businesses, but Triumph, we're a mid-cap company, but we operate and think as a smaller company, and the number of layers between me and frontline supervision is really low.

And so I want to have a number of companies that we can really keep our hands on and some of these companies as I mentioned are better positioned with firms where that's their core business and they've got a very low cost structure. And that's the business they're in. Maybe Triumph has been tried to be too many things to too many people.

And I think that works to a limit. And today's specialized world with global competitors, today you're not competing just with other companies and let's say the Southern California area, it's Korea, it's Taiwan. And it's the ability to focus and invest in the right areas. Triumph can afford to invest in what was 47 companies equally.

So it's really rationalizing the portfolio, both the program portfolio and the operating companies and I think that's ultimately going to generate value for the shareholders..

Thank you. Our next question comes from Ken Herbert with Canaccord..

Hi. Good morning..

Good morning..

Good morning..

Dan, I wanted to follow up on the comments you made regarding the sort of what you classified as a much more higher quality backlog, and I don't know if this is appropriate or not.

But following on that prior comment, can you maybe just give some examples of that or maybe specifically how much of the backlog today would you consider build-to-print versus what it might have been in the past as compared to more design engineering work or if that's not the right way to look at it, how else would you sort of really characterize the quality of the backlog and what's driving the better push there?.

Sure. So our backlog is about $4.5 billion. It's up 13% this year. If you look at Integrated Systems, which had the highest book-to-bill at 1.26, they're about 80% designed and 20% build-to-print, and they have an aftermarket component as well. Our aftermarket business is largely build-to-print.

We don't do design, but this build degree (00:46:46) and service is where the value is and we do a great job for FedEx and UPS and Delta and the other carriers. In Structures, it's a mix of the two. I don't have the number at my fingertips. We designed the Global 7000 wing.

We're involved in the design of the T-X wing with Boeing, should they be selected. But we're a build-to-print provider for the Global Hawk wing and the G550 and the G650, which was designed by Spirit. So it's a mix of the two, and our focus is going to be on more critical structures.

The fuselage work that can be done more cost efficiently by partners like ASTK, won't be in our portfolio. So, even within build-to-print, we're going to be more discriminating on the work that we can do.

I made a comment at a recent investor conference that just as water finds its own level, all of this work eventually finds its way to the place where it's most cost efficiently produced.

And we've got some companies within our portfolio that are better positioned with other firms and we've got some programs where the works in the wrong location either due to high cost or just labor efficiency.

So that's been a big chunk of our investment the last two years, and there's no doubt it's degraded margins as we spend money on restructuring. The good news is we're getting towards the end of that restructuring effort. So we're not ready to return to M&A yet, but when we do, we'll be in areas of design content and IP..

Thanks.

Just as a follow on that, specifically within the Structures business, as you obviously taken a lot of cost out and you become more competitive in the marketplace, where would you say you are relative to sort of the peers or the industry from a cost standpoint within Structures or maybe how much further do you have to go to feel like you're – where you want to be whether at best-in-class or however you view sort of the goal or the benchmark there?.

Sure. When I talk to our customers, the Vice President of the Supply Chain and we asked them, should Triumph be in the Structures business, and they said, we want you in the business. You're better than a number of other providers.

And I can't tell you, which ones they named, but we're targeting takeaways from those customers or we're getting RFPs because of non-performance.

Recently, I went over and met with the GKN leadership before the Melrose transaction closed, and they were very interested in Triumph's journey because we are two years ahead of where they were about to go and maybe where Melrose will go, and their question was how did you fix your relationship with Boeing, how did you get those settlements? And it was very clear.

It started with fixing performance and then it went to finding mutually acceptable contract terms because they ultimately do need their Structures. But there'll be a shakeout in this market over time. I would say the Triumph right now is sort of mid-pack in terms of Structures. Some areas were better.

Obviously, Northrop Grumman, they're happy with our performance in Global Hawk. We did a good job on G450 and G550. Ultimately on G650, we concluded it's cheaper for Gulfstream to do that. So it's a case-by-case basis.

But in the end, Triumph's going to get down to Structures where we can add the most value and customers who want to buy from us whether it's design, build or just supply chain. And I'm not married to any one program. We'll continue to perform for our customers during any transitions.

But I want to get to potentially a smaller footprint, but more profitable one out of Structures..

Thank you. Our next question comes from Mike Ciarmoli with SunTrust..

Good morning, guys. Thanks for taking the questions. Jim, maybe just a little bit more to follow on on the Global 7000. You kind of mentioned minimal impact from the accounting changes. But I mean, presumably that's still going to be running at an operating loss this year considering everything has got to be expensed through the P&L.

And I mean, is that the right way to think about it and calibrate our expectations and so you at least get to – I don't know where the learning curve really kicks in and you get to above cash breakeven, maybe unit 50 or so, but what should we expect that to be a drag on overall operating income in that sector – or in that segment this year?.

Mike, you're right. When you're moving into production, there isn't much income to book and that's not going to change for us this year on that program. So it is a bit of a drag until we get into full production.

And when we do with the revenue recognition in out years not in FY 2019, but in the out years could have a positive impact on margins because that NRE that we otherwise would have amortized in as expense will be written off the retained earnings on the initial adoption.

So yeah, there will be a bit of a drag, but it's less of a drag than it was in the past as we continue to improve the program. And we'll talk about improving our mix – improving backlog, we talk about improving mix and improving price..

Okay. But presumably if we were on the old accounting method, you'd still be building up a deferred pre-production inventory and that's all flowing through the P&L right now under the new.

So is it fair to say it's going to be running at a negative operating income level?.

So, you're right that we now to expense some of those pre-production costs otherwise we would have capitalized, but they're not as significant as they were in the past and that's why I said it's not a material impact..

Since there are no further questions, this concludes Triumph Group's fourth quarter fiscal year 2018 earnings conference call. There is a replay of the conference that starts today at 11:30 AM Eastern Standard time until the 16 at 11:59 PM Eastern Standard time.

You can access the replay by dialing 1-800-585-8367 and entering access code 4373459 or you can also access the replay by dialing 1-855-859-2056 and entering the same passcode. You may all disconnect and have a wonderful day..