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TGI > SEC Filings for TGI > Form 10-K on 30-May-2013All Recent SEC Filings

Show all filings for TRIUMPH GROUP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for TRIUMPH GROUP INC


30-May-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained elsewhere herein.

OVERVIEW
We are a major supplier to the aerospace industry and have three operating segments: (i) Triumph Aerostructures Group, whose companies' revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components for the global aerospace original equipment manufacturers, or OEM, market; (ii) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build-to-print components, assemblies and systems also for the OEM market; and (iii) Triumph Aftermarket Services Group, whose companies serve aircraft fleets, notably commercial airlines, the U.S. military and cargo carriers, through the maintenance, repair and overhaul of aircraft components and accessories manufactured by third parties.
Effective March 18, 2013, a wholly-owned subsidiary of the Company, Triumph Engine Control Systems, LLC, acquired the assets of Goodrich Corporation (Goodrich Pump & Engine Control Systems) ("GPECS"), a leading independent aerospace fuel system supplier for the commercial, military, helicopter and business jet markets. The acquisition of GPECS provides new capabilities in a market where we did not previously participate and further diversifies our customer base in electronic engine controls, fuel metering units and main fuel pumps for both OEM and aftermarket/spares end markets. The results for Triumph Engine Control Systems, LLC are included in the Aerospace Systems Group segment from the date of acquisition.
Effective December 19, 2012, the Company acquired all of the outstanding shares of Embee, Inc. ("Embee"), renamed Triumph Processing - Embee Division, Inc., which is a leading commercial metal finishing provider offering more than seventy metal finishing, inspecting and testing processes primarily for the aerospace industry. The acquisition of Embee expands our current capabilities to provide comprehensive processing services on precision engineered parts for hydraulics, landing gear, spare parts and electronic actuation systems. The results for Triumph Processing - Embee Division, Inc. are included in the Aerospace Systems Group segment from the date of acquisition. The acquisitions of GPECS and Embee are collectively referred to hereafter as the "fiscal 2013 acquisitions."
Financial highlights for the fiscal year ended March 31, 2013 include:
Net sales for fiscal 2013 increased 8.6% to $3.70 billion, including an 8.0% increase due to organic growth.

Operating income in fiscal 2013 increased 3.2% to $531.2 million.

Non-GAAP operating income excluding curtailments and early retirement incentives for fiscal 2013 was $565.7 million compared to $474.3 million for fiscal 2012, increase of $91.4 million, or 19.2%.

Net income for fiscal 2013 increased 5.9% to $297.3 million.

Backlog increased 5.2% over the prior year to $4.53 billion. For the fiscal year ended March 31, 2012, backlog increased substantially from what we had previously reported. During our fiscal fourth quarter, we detected an inadvertent error in how one portion of our 24-month backlog was being reported.

For the fiscal year ended March 31, 2013, net sales totaled $3.70 billion, an 8.6% increase from fiscal year 2012 net sales of $3.41 billion. Net income for fiscal year 2013 increased 5.9% to $297.3 million, or $5.67 per diluted common share, versus $280.9 million, or $5.41 per diluted common share, for fiscal year 2012. As discussed in further detail below under "Results of Operations," the increase in net income is attributable to the increase in sales offset by the curtailments and early retirement incentives of $34.5 million. Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. For the fiscal year ended March 31, 2013, we generated $320.9 million of cash flows from operating activities, used $467.4 million in investing activities and received $148.6 million from financing activities. Cash flows from operating activities in fiscal year 2013 included $109.8 million in pension contributions versus $122.2 million in fiscal year 2012.
We continue to remain focused on growing our core businesses as well as growing through strategic acquisitions. Our organic sales increased in fiscal 2013 due to continuing improvement to the overall economy, increased build rates by Boeing and Airbus, increased passenger traffic from previously depressed levels and MRO market share gain. Our Company has an aggressive but selective acquisition approach that adds capabilities and increases our capacity for strong and consistent internal growth.


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Congress and the Administration failed to change or further delay the sequestration of appropriations in government fiscal year (GFY) 2013 imposed by Budget Control Act of 2011 (Budget Act) and sequestration went into effect on March 1, 2013. Our customers' budgets will be reduced significantly and there may be a direct significant reduction in our customers' contract awards. While we understand customers have started to plan for sequestration, the specific effects of sequestration are not yet available and cannot be determined by us. The automatic across-the-board cuts from sequestration will approximately double the amount of the ten-year $487 billion reduction in defense spending that began in GFY 2012 already required by the Budget Act, including the budget for Overseas Contingencies Operations and any unobligated balances from prior years, and would have significant consequences to our business and industry. Non-DoD agencies could also have significantly reduced budgets. It is likely there will be some disruption of our ongoing programs, impacts to our supply chain and contractual actions (including partial or complete terminations). Consequently, we expect that sequestration, or other budgetary cuts in lieu of sequestration, will have a negative effect on our corporation.
In fiscal 2012, we began efforts to establish a new facility in Red Oak, Texas to expand our manufacturing capacity, particularly under the Bombardier Global 7000/8000 program. In fiscal 2013, we started construction on a second facility in association with our relocation from our Jefferson Street facilities. As of March 31, 2013, we have incurred approximately $53.5 million in capital expenditures and $71.2 million in inventory costs associated with the Bombardier Global 7000/8000 program, for which we have not yet begun to deliver. On May 6, 2013, the Company acquired four related entities collectively comprising the Primus Composites business from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, will operate as Triumph Structures - Farnborough and Triumph Structures - Thailand and be included in the Aerostructures Group. Together, Triumph Structures - Farnsborough and Triumph Structures - Thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies. In addition to its composite operations, the Thailand operation also machines and processes metal components. Primus Composites employs approximately 650 employees.

RESULTS OF OPERATIONS
The following includes a discussion of our consolidated and business segment results of operations. The Company's diverse structure and customer base do not provide for precise comparisons of the impact of price and volume changes to our results. However, we have disclosed the significant variances between the respective periods.
Non-GAAP Financial Measures
We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. In accordance with Securities and Exchange Commission (the "SEC") guidance on Compliance and Disclosure Interpretations, we also disclose and discuss certain non-GAAP financial measures in our public releases. Currently, the non-GAAP financial measure that we disclose is Adjusted EBITDA, which is our income from continuing operations before interest, income taxes, amortization of acquired contract liabilities, curtailments and early retirement incentives and depreciation and amortization. We disclose Adjusted EBITDA on a consolidated and a reportable segment basis in our earnings releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.
We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is income from continuing operations. In calculating Adjusted EBITDA, we exclude from income from continuing operations the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income (loss), income from continuing operations, or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on Adjusted EBITDA as a substitute for any GAAP financial measure, including net income (loss) or income from continuing operations. In addition, we urge investors and potential investors in our securities to carefully review the reconciliation of Adjusted EBITDA to income from continuing operations set forth below, in our earnings releases and in other filings with the SEC and to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed with the SEC, as well as our quarterly earnings releases, and compare the GAAP financial information with our Adjusted EBITDA.


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Adjusted EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We have spent more than 15 years expanding our product and service capabilities partially through acquisitions of complementary businesses. Due to the expansion of our operations, which included acquisitions, our income from continuing operations has included significant charges for depreciation and amortization. Adjusted EBITDA excludes these charges and provides meaningful information about the operating performance of our business, apart from charges for depreciation and amortization. We believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe Adjusted EBITDA is a measure of our ongoing operating performance because the isolation of non-cash charges, such as depreciation and amortization, and non-operating items, such as interest and income taxes, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on Adjusted EBITDA to provide a financial measure by which to compare our operating performance against that of other companies in our industry.
Set forth below are descriptions of the financial items that have been excluded from our income from continuing operations to calculate Adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to income from continuing operations:
Curtailments and early retirement incentives may be useful for investors to consider because it represents the current period impact of the change in the defined benefit obligation due to the reduction in future service costs as well as the incremental cost of retirement incentive benefits paid to participants. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.

Amortization of acquired contract liabilities may be useful for investors to consider because it represents the non-cash earnings on the fair value of off-market contracts acquired through acquisitions. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.

Amortization expense may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights and licenses. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

Depreciation may be useful for investors to consider because it generally represents the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.

The amount of interest expense and other we incur may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of interest expense and other to be a representative component of the day-to-day operating performance of our business.

Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.

Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to gain an understanding of the factors and trends affecting our business.


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The following table shows our Adjusted EBITDA reconciled to our income from continuing operations for the indicated periods (in thousands):

                                                    Fiscal year ended March 31,
                                                 2013          2012          2011
Income from continuing operations             $ 297,347     $ 281,622     $ 152,411
Amortization of acquired contract liabilities   (25,644 )     (26,684 )     (29,214 )
Depreciation and amortization                   129,506       119,724        99,657
Curtailments and early retirement incentives     34,481       (40,400 )           -
Interest expense and other                       68,156        77,138        79,559
Income tax expense                              165,710       155,955        82,066
Adjusted EBITDA                               $ 669,556     $ 567,355     $ 384,479

The following tables show our Adjusted EBITDA by reportable segment reconciled to our operating income for the indicated periods (in thousands):

                                                     Fiscal year ended March 31, 2013
                                                               Aerospace       Aftermarket       Corporate/
                               Total        Aerostructures      Systems         Services        Eliminations
Operating income            $  531,213     $      469,873     $  103,179     $      45,380     $     (87,219 )
Curtailments and early
retirement incentives           34,481                  -              -                 -            34,481
Amortization of acquired
contract liabilities           (25,644 )          (25,457 )         (187 )               -                 -
Depreciation and
amortization                   129,506             95,884         19,870             9,118             4,634
Adjusted EBITDA             $  669,556     $      540,300     $  122,862     $      54,498     $     (48,104 )



                                                     Fiscal year ended March 31, 2012
                                                                Aerospace       Aftermarket       Corporate/
                               Total        Aerostructures       Systems         Services        Eliminations
Operating income            $  514,715     $      403,414     $    90,035     $      31,859     $     (10,593 )
Curtailments and early
retirement incentives          (40,400 )                -               -                 -           (40,400 )
Amortization of acquired
contract liabilities           (26,684 )          (26,684 )             -                 -                 -
Depreciation and
amortization                   119,724             89,113          17,363             9,487             3,761
Adjusted EBITDA             $  567,355     $      465,843     $   107,398     $      41,346     $     (47,232 )



                                                     Fiscal year ended March 31, 2011
                                                                Aerospace       Aftermarket       Corporate/
                               Total        Aerostructures       Systems         Services        Eliminations
Operating income            $  314,036     $      267,783     $    75,292     $      28,774     $     (57,813 )
Amortization of acquired
contract liabilities           (29,214 )          (29,214 )             -                 -                 -
Depreciation and
amortization                    99,657             69,451          17,183            11,101             1,922
Adjusted EBITDA             $  384,479     $      308,020     $    92,475     $      39,875     $     (55,891 )


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The fluctuations from period to period within the amounts of the components of the reconciliations above are discussed further below within Results of Operations.
Fiscal year ended March 31, 2013 compared to fiscal year ended March 31, 2012

                                                  Year Ended March 31,
                                                  2013            2012
                                                     (in thousands)
Net sales                                     $ 3,702,702     $ 3,407,929
Segment operating income                      $   618,432     $   525,308
Corporate general and administrative expenses     (87,219 )       (10,593 )
Total operating income                            531,213         514,715
Interest expense and other                         68,156          77,138
Income tax expense                                165,710         155,955
Income from continuing operations                 297,347         281,622
Loss from discontinued operations, net                  -            (765 )
Net income                                    $   297,347     $   280,857

Net sales increased by $294.8 million, or 8.6%, to $3.7 billion for the fiscal year ended March 31, 2013 from $3.4 billion for the fiscal year ended March 31, 2012. The results for fiscal 2013 included an increase in organic sales of $272.6 million, or 8.0%, due to the expected increase in commercial production rates of various customer programs. The fiscal 2013 acquisitions contributed $22.2 million in increased net sales.
Cost of sales increased by $198.5 million, or 7.7%, to $2.8 billion for the fiscal year ended March 31, 2013 from $2.6 billion for the fiscal year ended March 31, 2012. This increase in cost of sales resulted from the increase in sales. Gross margin for the fiscal year ended March 31, 2013 was 25.4% compared with 24.7% for the fiscal year ended March 31, 2012. Gross margin was favorably impacted by decreased pension and other postretirement benefit expense ($14.6 million), changes in the overall sales mix, as well as the margin on nonrecurring customer settlements ($9.5 million). These favorable items were partially offset by the net unfavorable cumulative catch-up adjustments on long-term contracts discussed further below.
Segment operating income increased by $93.1 million, or 17.7%, to $618.4 million for the fiscal year ended March 31, 2013 from $525.3 million for the fiscal year ended March 31, 2012. The segment operating income increase was a direct result of the sales volume increases and contribution from the fiscal 2013 acquisitions ($5.0 million). These improvements were partially offset by net unfavorable cumulative catch-up adjustments ($14.6 million), increased legal fees ($1.5 million) and production delay and related costs due to Hurricane Sandy ($1.6 million). The unfavorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $15.9 million and gross unfavorable adjustments of $30.5 million. The cumulative catch-up adjustments were principally due to provisions for technical problems on production lots on early-stage programs and revisions in our mix of various material and labor costs related to our efforts to gain efficiencies through expansion of our in-sourcing capabilities. Segment operating income for the fiscal year ended March 31, 2012 included net favorable cumulative catch-up adjustments of $18.3 million.
Corporate expenses increased by $76.6 million, or 723.4% (almost entirely attributed to net curtailment increases of $74.9 million) to $87.2 million for the fiscal year ended March 31, 2013 from $10.6 million for the fiscal year ended March 31, 2012. Corporate expenses increased primarily due to pension curtailment losses and early retirement incentives ($34.5 million) for the fiscal year ended March 31, 2013, as compared to a curtailment gain, net of special termination benefits associated with amendments made to certain defined benefit plans of $40.4 million for the fiscal year ended March 31, 2012. Corporate expenses also included $4.1 million in acquisition-related transaction costs associated with the fiscal 2013 acquisitions.
Interest expense and other decreased by $9.0 million, or 11.6%, to $68.2 million for the fiscal year ended March 31, 2013 compared to $77.1 million for the prior year. This decrease was due to lower average debt outstanding during the fiscal year ended March 31, 2013 due to the net decrease of the Credit Facility, along with lower interest rates. During the fiscal year ended March 31, 2012, interest expense and other included the write-off of $7.7 million of unamortized discounts and deferred financing fees associated with the extinguishment of the Term Loan and an additional $2.5 million amortization of discount on the Convertible Notes offset by a $2.9 million favorable fair value adjustment due to the reduction of the fair value of a contingent earnout liability associated with a prior acquisition due to reductions in the projected earnings over the respective earnout periods. The discount on the Convertible Notes was fully amortized as of September 30, 2011.


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The effective income tax rate was 35.8% for the fiscal year ended March 31, 2013 and 35.6% for the fiscal year ended March 31, 2012. The effective income tax rate for the fiscal year ended March 31, 2013 reflects the retroactive reinstatement of the research and development tax credit back to January 2012. The income tax provision for the fiscal year ended March 31, 2013 included $2.2 million of tax expense due to the recapture of domestic production deductions taken in earlier years associated with a refund claim of $25.2 million filed in the second quarter. The refund claim receivable is included in "Other, net" in the consolidated balance sheet as of March 31, 2013. The income tax provision for the fiscal year ended March 31, 2012 included $1.6 million of tax expense due to the recapture of domestic production deductions taken in prior carryback periods, offset by a $1.2 million net tax benefit related to provision to return adjustments upon filing our fiscal 2011 tax return. The effective income tax rate for fiscal 2012 was impacted by the expiration of the research and development tax credit as of December 31, 2011 and the absence of the domestic production deduction due to the Company's net operating loss position for the fiscal year ended March 31, 2012.
In July 2011, the Company completed the sale of Triumph Precision Castings Co. for proceeds of $3.9 million, resulting in no gain or loss on the disposition. For the fiscal year ended March 31, 2013, there was no gain or loss from discontinued operations.
Fiscal year ended March 31, 2012 compared to fiscal year ended March 31, 2011

                                                  Year Ended March 31,
                                                  2012            2011
                                                     (in thousands)
Net sales                                     $ 3,407,929     $ 2,905,348
Segment operating income                      $   525,308     $   371,849
Corporate general and administrative expenses     (10,593 )       (57,813 )
Total operating income                            514,715         314,036
Interest expense and other                         77,138          79,559
Income tax expense                                155,955          82,066
Income from continuing operations                 281,622         152,411
Loss from discontinued operations, net               (765 )        (2,512 )
Net income                                    $   280,857     $   149,899

Net sales increased by $502.6 million, or 17.3%, to $3.4 billion for the fiscal year ended March 31, 2012 from $2.9 billion for the fiscal year ended March 31, 2011. The results for fiscal 2012 include full-year contribution from the acquisition of Vought, as compared to results from June 16, 2010 through March 31, 2011 in fiscal 2011. The acquisitions of Vought and ANS contributed $1.9 billion in net sales in fiscal 2012, as compared to $1.5 billion in net sales in fiscal 2011. Excluding the effects of the acquisitions of Vought and ANS, organic sales increased $90.9 million, or 6.6%, due to the expected increase in commercial production rates of various customer programs. The fiscal year ended March 31, 2011 was negatively impacted by challenges such as the decreased demand for business jets and regional jets as well as commercial rate reductions (particularly in the 777 program).
Cost of sales increased by $333.1 million, or 14.9%, to $2.6 billion for the fiscal year ended March 31, 2012 from $2.2 billion for the fiscal year ended March 31, 2011. This increase resulted from the acquisitions noted above, which contributed an additional $264.9 million. Gross margin for the fiscal year ended March 31, 2012 was 24.7% compared with 23.2% for the fiscal year ended March 31, 2011. The improvement in gross margin was due to synergies related to acquisition of Vought, lower pension and other postretirement benefit expenses and favorable cumulative catch-up adjustments on long-term contracts discussed further below. . . .

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