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TGI > SEC Filings for TGI > Form 10-Q on 2-Aug-2013All Recent SEC Filings

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

Form 10-Q for TRIUMPH GROUP INC


2-Aug-2013

Quarterly Report


Item 2. 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 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 both build-to-print and proprietary 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 the related aftermarket; 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.
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 will be included in the Aerostructures Group. Together, Triumph Structures - Farnborough 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.

Highlights for the first quarter of the fiscal year ending March 31, 2014 included:
Net sales for the first quarter of the fiscal year ending March 31, 2014 increased 6.3% over the prior year period to $943.7 million.

Operating income in the first quarter of fiscal 2014 increased 0.3% over the prior year period to $141.3 million.

Income from continuing operations for the first quarter of fiscal 2014 increased 3.6% over the prior year period to $79.0 million.

Backlog as of June 30, 2013 increased 8.6% year over year to $4.67 billion, and includes expected milestone payments on development contracts. Of our existing backlog of $4.67 billion, we estimate that approximately $1.80 billion will not be shipped by June 30, 2014.

Income from continuing operations for the first quarter of fiscal 2014 was $1.50 per diluted common share, as compared to $1.46 per diluted share in the prior year period.

We generated $11.9 million of cash flow from operating activities for the three months ended June 30, 2013, after $25.8 million in pension contributions, as compared to $102.5 million in the prior year period.

Congress and the Administration failed to change or further delay the sequestration of appropriations in government fiscal year (GFY) 2013 imposed by the 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 Red Oak, Texas, in association with our relocation from our Jefferson Street facilities. As of June 30, 2013, we have incurred approximately $37.2 million in capital expenditures and $86.1 million in inventory costs associated with the Bombardier Global


Table Of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)

7000/8000 program, for which we have not yet begun to deliver. As of June 30, 2013, we have incurred approximately $46.0 million in capital expenditures and $10.6 million in inventory buildup associated with our relocation from the Jefferson Street facilities.
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."

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.
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


Table Of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)

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

                                                       Three Months Ended June 30,
                                                         2013               2012
Net income                                         $      79,043       $      76,332
Early retirement incentives                                    -               1,150
Amortization of acquired contract liabilities, net       (11,150 )            (6,993 )
Depreciation and amortization                             37,934              31,815
Interest expense and other                                19,710              17,232
Income tax expense                                        42,593              47,378
Adjusted EBITDA                                    $     168,130       $     166,914


Table Of Contents
                    Management's Discussion and Analysis of
                 Financial Condition and Results of Operations
                                  (continued)

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

                                                         Three Months Ended June 30, 2013
                                                                   Aerospace       Aftermarket       Corporate/
                                    Total       Aerostructures       Systems         Services       Eliminations
Operating income                 $ 141,346     $      100,387     $   42,643     $      11,279     $     (12,963 )
Amortization of acquired
contract liability                 (11,150 )           (6,141 )       (5,009 )               -                 -
Depreciation and amortization       37,934             26,313          8,539             1,877             1,205
Adjusted EBITDA                  $ 168,130     $      120,559     $   46,173     $      13,156     $     (11,758 )



                                                          Three Months Ended June 30, 2012
                                                                    Aerospace       Aftermarket       Corporate/
                                    Total       Aerostructures       Systems          Services       Eliminations
Operating income                 $ 140,942     $      120,138     $    23,465     $      11,807     $     (14,468 )
Early retirement incentives          1,150                  -               -                 -             1,150
Amortization of acquired
contract liability                  (6,993 )           (6,993 )             -                 -                 -
Depreciation and amortization       31,815             23,904           4,474             2,326             1,111
Adjusted EBITDA                  $ 166,914     $      137,049     $    27,939     $      14,133     $     (12,207 )

The fluctuations from period to period within the amounts of the components of the reconciliations above are discussed further below within Results of Operations.

Three months ended June 30, 2013 compared to three months ended June 30, 2012

                                Three Months Ended
                                     June 30,
                                2013           2012
                              (dollars in thousands)
Net sales                  $    943,683     $ 887,688
Segment operating income   $    154,309     $ 155,410
Corporate expenses              (12,963 )     (14,468 )
Total operating income          141,346       140,942
Interest expense and other       19,710        17,232
Income tax expense               42,593        47,378
Net Income                 $     79,043     $  76,332

Net sales increased by $56.0 million, or 6.3%, to $943.7 million for the three months ended June 30, 2013 from $887.7 million for the three months ended June 30, 2012. Organic sales decreased $20.2 million, or 2.3%, due to decreased delivery rates to our customers primarily in military markets and the timing of shipments on existing programs. Net sales for the three months ended June 30, 2013 included $4.8 million in total non-recurring revenues, as compared to $25.5 million in non-recurring revenues (including a $20.0 million non-recurring termination claim settlement) for the three months ended June 30, 2012. The prior year period was positively impacted by our customers' increased production rates on existing programs and new product introductions.

Cost of sales increased $45.2 million, or 6.9%, to $696.5 million for the three months ended June 30, 2013 from $651.3 million for the three months ended June 30, 2012. This increase was due to increased sales. Gross margin for the three months ended June 30, 2013 was 26.2%, as compared to 26.6% for the prior year period. This change was impacted by price concessions ($4.0 million) and the prior year gross margin was favorably impacted by a non-recurring termination claim settlement ($7.0 million). Additionally, the gross margin included a net unfavorable cumulative catch-up adjustments on long-term contracts ($4.7 million). The cumulative catch-up adjustments to gross margin included gross favorable adjustments of


Table Of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)

$7.8 million and gross unfavorable adjustments of $12.5 million. The cumulative catch-up adjustments for the three months ended June 30, 2013 were due primarily to increased costs from suppliers. Gross margin for the three months ended June 30, 2012 included net unfavorable cumulative catch-up adjustments of $1.3 million.

Segment operating income decreased by $1.1 million, or 0.7%, to $154.3 million for the three months ended June 30, 2013 from $155.4 million for the three months ended June 30, 2012. The organic segment operating income decreased $14.9 million, or 9.6%, and was a direct result of the decrease in gross margins, the decreased sales noted above, costs related to the relocation from our Jefferson Street facility ($4.0 million), legal fees ($1.2 million), offset by an insurance claim related to Hurricane Sandy ($2.0 million), lower pension and other postretirement benefit expenses ($3.2 million). Segment operating income for the three months ended June 30, 2012 was a direct result of the gross margin improvements, which included improved execution, the overall sales mix and increased realization from synergies from the acquisition of Vought.

Corporate expenses decreased by $1.5 million, or 10.4%, to $13.0 million for the three months ended June 30, 2013 from $14.5 million for the three months ended June 30, 2012. This decrease was due to a $1.2 million special termination benefit for an early retirement incentive offered to a portion of our second largest union-represented group of production and maintenance employees incurred during the three months ended June 30, 2012.

Interest expense and other increased by $2.5 million, or 14.4%, to $19.7 million for the three months ended June 30, 2013 compared to $17.2 million for the prior year period. Interest expense and other for the three months ended June 30, 2013 increased due to the issuance of the Senior Notes due 2021 resulting in higher average debt outstanding during the quarter as compared to the quarter ended June 30, 2012.

The effective income tax rate for the three months ended June 30, 2013 was 35.0% compared to 38.3% for the three months ended June 30, 2012. For the three months ended June 30, 2013, the effective income tax rate decreased due to research and development credits, which were reinstated in January 2013. For the three months ended June 30, 2012, the income tax provision 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 of the fiscal year ended March 31, 2013. The refund claim receivable is included in "Other, net" in the consolidated balance sheet as of June 30, 2013. For the fiscal year ending March 31, 2014, the Company expects its effective tax rate to be approximately 35.6%, including the reinstatement of the research and development tax credit through December 2013.


Table Of Contents
Management's Discussion and Analysis of Financial Condition and Results of Operations
(continued)

Business Segment Performance - Three months ended June 30, 2013 compared to three months ended June 30, 2012

The following table summarizes our net sales by end market by business segment. The loss of one or more of our major customers or an economic downturn in the commercial airline or the military and defense markets could have a material adverse effect on our business.

                                        Three Months Ended June 30,
Aerostructures                            2013               2012
Commercial aerospace                        41.9 %              42.8 %
Military                                    15.0 %              19.7 %
Business Jets                               11.2 %              11.8 %
Regional                                     0.3 %               0.4 %
Non-aviation                                 0.6 %               0.7 %
Total Aerostructures net sales              69.0 %              75.4 %
Aerospace Systems
Commercial aerospace                         8.1 %               6.0 %
Military                                    11.8 %               7.5 %
Business Jets                                1.0 %               0.8 %
Regional                                     1.0 %               0.4 %
Non-aviation                                 1.2 %               0.9 %
Total Aerospace Systems net sales           23.1 %              15.6 %
Aftermarket Services
Commercial aerospace                         6.6 %               7.3 %
Military                                     0.9 %               1.0 %
Business Jets                                0.1 %               0.3 %
Regional                                     0.1 %               0.2 %
Non-aviation                                 0.2 %               0.2 %
Total Aftermarket Services net sales         7.9 %               9.0 %
Total Consolidated net sales               100.0 %             100.0 %

We continue to experience a higher proportion of our sales mix in the commercial aerospace end market. We recently have experienced a slight decrease in our military end market. Due to our continued expected growth in the commercial aerospace end market and the planned reductions in defense spending under the Budget Act, we expect the declining trend in the military end market to continue.


Table Of Contents
                    Management's Discussion and Analysis of
                 Financial Condition and Results of Operations
                                  (continued)

                                                                                              % of Total
                                          Three Months Ended June 30,                            Sales
                                            2013               2012         % Change       2013         2012
                                                (in thousands)
NET SALES
Aerostructures                        $     651,888       $     669,853       (2.7 )%      69.1  %      75.5  %
Aerospace Systems                           219,526             140,512       56.2  %      23.2  %      15.8  %
Aftermarket Services                         74,353              79,977       (7.0 )%       7.9  %       9.0  %
Elimination of inter-segment sales           (2,084 )            (2,654 )    (21.5 )%      (0.2 )%      (0.3 )%
Total Net Sales                       $     943,683       $     887,688        6.3  %     100.0  %     100.0  %



                                                                             % of Segment
                             Three Months Ended June 30,                        Sales
                               2013               2012         % Change     2013      2012
                                   (in thousands)
SEGMENT OPERATING INCOME
Aerostructures           $     100,387       $     120,138      (16.4 )%    15.4 %   17.9 %
Aerospace Systems               42,643              23,465       81.7  %    19.4 %   16.7 %
Aftermarket Services            11,279              11,807       (4.5 )%    15.2 %   14.8 %
Corporate                      (12,963 )           (14,468 )    (10.4 )%     n/a      n/a
Total Operating Income   $     141,346       $     140,942        0.3  %    15.0 %   15.9 %



                                                                         % of Segment
                         Three Months Ended June 30,                        Sales
                           2013               2012         % Change     2013      2011
                               (in thousands)
Adjusted EBITDA
Aerostructures       $     120,559       $     137,049      (12.0 )%    18.5 %   20.5 %
Aerospace Systems           46,173              27,939       65.3  %    21.0 %   19.9 %
Aftermarket Services        13,156              14,133       (6.9 )%    17.7 %   17.7 %
Corporate                  (11,758 )           (12,207 )     (3.7 )%     n/a      n/a
                     $     168,130       $     166,914        0.7  %    17.8 %   18.8 %

. . .

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