Triumph Group revealed an unexpectedly large forward loss related to the ailing Boeing 747-8 program on its fiscal third quarter financial results last week.
The forward loss was triggered by Boeing’s decision in December to reduce the production rate from 1.5/mo to 1.3/mo from September this year.
Investment bank Canaccord had this to say in its note following Triumph’s earnings call:
Triumph Group announced Q3/15 results of $1.42 [earnings per share], excluding one-time charges. The most significant was a $1.94 charge associated with the 747-8, which we believe significantly reduces the risk of future 747-8 program charges. However, the cash flow recovery is now looking like a fiscal 2017-2018 story, and top-line pressure will persist as other programs sunset.
The focus on the conference was call was the 747-8 charge and the evolving 2016 free cash flow. The company indicated that it expects $300m in FY15 FCF (excluding the $160m for the Tulsa operations). However, it now looks like the baseline heading into 2016 is likely closer to $225M, with headwinds from the 747-8 (~$25M)….
With the 747-8 now at zero margin over the life of the contract, we do not expect additional downside surprises associated with this program. However, note that the company has still ~55 units under contract with Boeing (~$20M per ship set) that will ship at zero margin, so as long as this program is in production, it will be a margin headwind for the Aerostructures segment. Of this contract amount, there are approximately 30 that Boeing has not sold yet. Any early termination of the contract by Boeing would be a net positive for TGI. The majority of the cash flow impact from the 747-8 will be in the 2017-2018 period.
Note that the Triumph contract with Boeing is for about 55 more 747-8s but 30 of these within the contract haven’t been sold by Boeing. At the end of the year, Boeing had a backlog of just 36 747-8s (the January 31 backlog should be revealed this week).
Wells Fargo’s aerospace analyst wrote the following in its research note:
Following the recent 747-8 rate cut, TGI reported a $152m (-$1.94) pretax forward loss charge to reflect lower rates through the duration of the contract, or 2019. This is higher than the previously discussed $30-60m because (1) production rate change, (2) mortality table pension impact, (3) revised labor & cost estimates, and (4) incremental overhead absorption. We suspect the charge assumes a production rate as low as 1/month during the contract period, well below Boeing guidance.
Note that Wells Fargo reports the Triumph contract duration is 2019, but it’s unclear from the note if this is “to,” “into” or “through” 2019. Regardless, this date gives more-or-less a firm indication of how low one might expect the 747-8 program to live. We reported last week that with the US Air Force finally placing its order for the 747-8 to replace the two 747-200s used for Air Force One, with delivery of the first in 2018, that this signals the end of the program.
Wells Fargo’s note above also projects a further production rate reduction to 1/mo. Boeing has a production gap this year and next, even at the reduced rates, absent new orders or conversions of options of LOIs. The backlog falls off to single digits in 2017, absent new orders.
Triumph has keen exposure to the 747-8 program because of its acquisition of Vought, which had facilities in Texas and California solely dedicated to the aging queen of the skies.