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TGI > SEC Filings for TGI > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for TRIUMPH GROUP INC

Form 10-Q for TRIUMPH GROUP INC


4-Nov-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.
Effective May 6, 2013, the Company acquired four related entities collectively comprising the Primus Composites business ("Primus") from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, operates as Triumph Structures - Farnborough and Triumph Structures - Thailand and is included in the Aerostructures segement for the date of acquisition. 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.

Highlights for the second quarter of the fiscal year ending March 31, 2014 included:
Net sales for the second quarter of the fiscal year ending March 31, 2014 increased 3.1% over the prior year period to $967.3 million.

Operating income in the second quarter of fiscal 2014 decreased (35.0)% over the prior year period to $93.0 million.

Income from continuing operations for the second quarter of fiscal 2014 decreased 38.3% over the prior year period to $49.5 million.

Included in income from continuing operations for the second quarter of fiscal 2014 are additional program costs related to the 747-8 program of $44.0 million.

Backlog as of September 30, 2013 increased 9.2% year over year to $4.85 billion, and includes expected milestone payments on development contracts. Of our existing backlog of $4.85 billion, we estimate that approximately $2.05 billion will not be shipped by September 30, 2014.

Income from continuing operations for the second quarter of fiscal 2014 was $0.94 per diluted common share, as compared to $1.53 per diluted share in the prior year period.

We generated $43.6 million of cash flow from operating activities for the six months ended September 30, 2013, after $45.8 million in pension contributions, as compared to $132.9 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 (the "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.


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

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 September 30, 2013, we have incurred approximately $38.8 million in capital expenditures and $104.1 million in inventory costs associated with the Bombardier Global 7000/8000 program, for which we have not yet begun to deliver. As of September 30, 2013, we have incurred approximately $78.2 million in capital expenditures and $24.2 million in inventory buildup associated with our relocation from the Jefferson Street facilities.
As previously announced, we expect to record additional program costs during fiscal 2014 totaling approximately $68.0 million, primarily related to the 747-8 program. We recorded incremental costs of $43.7 million in our second quarter of fiscal 2014 of which $26.2 million was reflected as a cumulative catch-up adjustment and expect to record approximately $11.0 million and $13.0 million in our third and fourth quarters of fiscal 2014, respectively, as additional units are delivered.
These amounts have resulted primarily from reductions to the profitability estimates of the our current 747-8 production lot, which was approximately 80% complete by the end of our second quarter of fiscal 2014 and is expected to be completed by the end of our third quarter of fiscal 2014. As a result of the current cost levels, the expected profitability on the next production lot, which will begin delivery in the fourth quarter of fiscal 2014, was also decreased. Both the current and future production lots are expected to be profitable and not result in loss reserves.

While we are currently projecting the recurring production contracts to be profitable, there is still a substantial amount of risk similar to what we have experienced on these programs. Particularly, our ability to manage risks related to supplier performance, execution of cost reduction strategies, hiring and retaining skilled production and management personnel, quality and manufacturing execution, program schedule delays and many other risks, will determine the ultimate performance of these programs.
The next twelve months will be a critical time for these programs as we attempt to return to baseline performance for the recurring cost structure. Recognition of forward-losses in the future periods continues to be a significant risk and will depend upon several factors including our market forecast, possible airplane program delays, our ability to successfully perform under revised design and manufacturing plans, achievement of forecasted cost reductions as we continue production and our ability to successfully resolve claims and assertions with our customers and suppliers.
Our union contract with Local 848 of the United Auto Workers with employees at our Dallas and Grand Prairie, Texas, facilities expired in October 2013. The employees are currently working without a contract. If we are unable to negotiate a new contract with that workforce, our operations may be disrupted and we may be prevented from completing production and delivery of products from those facilities, which would negatively impact our results. A contingency plan has been developed that would allow production to continue in the event of a strike.
As previously announced by Boeing in September 2013, the decision has been made to cease production of the C-17 during calendar year 2015. Major production related to this program is expected to cease during the first quarter of fiscal 2016. We have received inquiries regarding proposal for spares which could extend production through the end of fiscal 2016, as we believe the United States Air Force will want to be adequately supported for the long term. Effective October 4, 2013, the Company acquired all of the issued and outstanding shares of General Donlee Canada, Inc. ("General Donlee"). The acquired business will operate as Triumph Gear Systems-Toronto and will be included in the Aerospace Systems Group. General Donlee is based in Toronto, Canada and is a leading manufacturer of precision machined products for the aerospace, nuclear and oil and gas industries.
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 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


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

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 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:


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

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 net income for the indicated periods (in thousands):

                                        Three Months Ended September 30,           Six Months Ended September 30,
                                            2013                 2012                 2013                 2012
Net income                           $        49,516       $        80,191     $       128,559       $       156,523
Early retirement incentives                        -                 1,957                   -                 3,107
Amortization of acquired contract
liabilities, net                              (8,965 )              (6,563 )           (20,115 )             (13,555 )
Depreciation and amortization                 38,244                31,998              76,178                63,813
Interest expense and other                    20,321                16,668              40,031                33,900
Income tax expense                            23,134                46,088              65,727                93,466
Adjusted EBITDA                      $       122,250       $       170,339     $       290,380       $       337,254

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

                                                       Three Months Ended September 30, 2013
                                                                   Aerospace       Aftermarket       Corporate/
                                    Total       Aerostructures       Systems         Services       Eliminations
Operating income                 $  92,971     $       64,425     $   31,740     $      10,102     $     (13,296 )
Amortization of acquired
contract liability                  (8,965 )           (5,614 )       (3,351 )               -                 -
Depreciation and amortization       38,244             26,483          8,549             1,864             1,348
Adjusted EBITDA                  $ 122,250     $       85,294     $   36,938     $      11,966     $     (11,948 )


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

                                                       Three Months Ended September 30, 2012
                                                                   Aerospace       Aftermarket         Corporate/
                                   Total       Aerostructures       Systems          Services         Eliminations
Operating income                $ 142,947     $      121,385     $    25,712     $      10,767       $     (14,917 )
Early retirement incentive          1,957                  -               -                 -   -           1,957
Amortization of acquired
contract liability                 (6,563 )           (6,563 )             -                 -                   -
Depreciation and amortization      31,998             24,049           4,489             2,288               1,172
Adjusted EBITDA                 $ 170,339     $      138,871     $    30,201     $      13,055       $     (11,788 )



                                                        Six Months Ended September 30, 2013
                                                                   Aerospace       Aftermarket       Corporate/
                                    Total       Aerostructures       Systems         Services       Eliminations
Operating income                 $ 234,317     $      164,812     $   74,383     $      21,381     $     (26,259 )
Amortization of acquired
contract liability                 (20,115 )          (11,755 )       (8,360 )               -                 -
Depreciation and amortization       76,178             52,796         17,088             3,741             2,553
Adjusted EBITDA                  $ 290,380     $      205,853     $   83,111     $      25,122     $     (23,706 )



                                                        Six Months Ended September 30, 2012
                                                                    Aerospace       Aftermarket       Corporate/
                                    Total       Aerostructures       Systems          Services       Eliminations
Operating income                 $ 283,889     $      241,523     $    49,177     $      22,574     $     (29,385 )
Early retirement incentives          3,107                  -               -                 -             3,107
Amortization of acquired
contract liability                 (13,555 )          (13,555 )             -                 -                 -
Depreciation and amortization       63,813             47,953           8,963             4,614             2,283
Adjusted EBITDA                  $ 337,254     $      275,921     $    58,140     $      27,188     $     (23,995 )

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

Quarter ended September 30, 2013 compared to quarter ended September 30, 2012

                               Quarter Ended September 30,
                                 2013               2012
                                 (dollars in thousands)
Net sales                  $     967,345       $     938,181
Segment operating income   $     106,267       $     157,864
Corporate expenses               (13,296 )           (14,917 )
Total operating income            92,971             142,947
Interest expense and other        20,321              16,668
Income tax expense                23,134              46,088
Net Income                 $      49,516       $      80,191

Net sales increased by $29.2 million, or 3.1%, to $967.3 million for the quarter ended September 30, 2013 from $938.2 million for the quarter ended September 30, 2012. Organic sales decreased $40.3 million, or 4.3%, due to production rate cuts on the 767 and 747-8 programs, a decrease in military sales and a decline in non-recurring revenue. The acquisition of Primus, fiscal 2013 acquisitions and the prior year divestitures contributed $69.3 million in net sales. Net sales for the quarter ended September 30, 2013 included $5.3 million in total non-recurring revenues, as compared to $15.0 million in non-recurring revenues for the quarter ended September 30, 2012. The prior year period was positively impacted by our customers' increased production rates on existing programs and new product introductions.


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

Cost of sales increased by $67.7 million, or 9.6%, to $771.3 million for the quarter ended September 30, 2013 from $703.7 million for the quarter ended September 30, 2012. This increase was due to additional program costs of $43.7 million primarily from reductions to profitability estimates of the current 747-8 production lot as well as increased sales. Gross margin for the quarter ended September 30, 2013 was 20.3% as compared to 25.0% for the prior year period. This change was impacted by additional program costs as noted above and disruption and accelerated depreciation associated with the relocation from our Jefferson Street facilities. Additionally, the gross margin included net unfavorable cumulative catch-up adjustments on long-term contracts ($25.4 million). The cumulative catch-up adjustments to gross margin included gross favorable adjustments of $9.8 million and gross unfavorable adjustments of $35.1 million, of which $26.2 million was related to the additional 747-8 program costs as mentioned above. The cumulative catch-up adjustments for the quarter ended September 30, 2013 were due primarily to inefficiency, rework, high overtime levels, increased costs from suppliers and expedited delivery charges. Gross margin for the quarter ended September 30, 2012 included net unfavorable cumulative catch-up adjustments of $0.2 million.

Segment operating income decreased by $51.6 million, or 32.7%, to $106.3 million for the quarter ended September 30, 2013 from $157.9 million for the quarter ended September 30, 2012. The organic segment operating income decreased $55.0 million, or 35.7%, 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 ($5.8 million), additional depreciation and amortization expense associated with fiscal 2013 acquisitions and Primus ($9.6 million), legal fees ($2.2 million), offset by an insurance claim related to Hurricane Sandy ($2.0 million). Segment operating income for the quarter ended September 30, 2012 was a direct result of the sales volume increases and continued realization from synergies from the acquisition of Vought, offset by net unfavorable cumulative catch-up adjustments on long-term contracts ($0.2 million), forward loss provisions on initial production lots of early-stage programs ($2.0 million) and increased legal fees ($0.8 million).

Corporate expenses decreased by $1.6 million, or 10.9%, to $13.3 million for the quarter ended September 30, 2013 from $14.9 million for the quarter ended September 30, 2012. This decrease was due to decreased compensation expense of $3.2 million offset by increased legal fees of $1.8 million during the three months ended September 30, 2013. Included in the three months ended September 30, 2012 was a $2.0 million special termination benefit for an early retirement incentive offered to non-represented employee benefit plan participants.

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