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TGI > SEC Filings for TGI > Form 10-Q on 3-Feb-2014All 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


3-Feb-2014

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 October 4, 2013, the Company acquired all of the issued and outstanding shares of General Donlee Canada, Inc. ("General Donlee"). 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. The acquired business now operates as Triumph Gear Systems-Toronto and its results are included in the Aerospace Systems Group.
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 third quarter of the fiscal year ending March 31, 2014 included:
Net sales for the third quarter of the fiscal year ending March 31, 2014 increased 2.8% over the prior year period to $915.8 million.

Operating income in the third quarter of fiscal 2014 decreased 36.9% over the prior year period to $84.8 million.

Income from continuing operations for the third quarter of fiscal 2014 decreased 52.9% over the prior year period to $35.4 million.

Included in income from continuing operations for the third quarter of fiscal 2014 are net unfavorable cumulative catch-up adjustments of $21.3 million.

Backlog as of December 31, 2013 increased 6.3% year over year to $4.75 billion, and includes expected milestone payments on development contracts. Of our existing backlog of $4.75 billion, we estimate that approximately $1.84 billion will not be shipped by December 31, 2014.

Income from continuing operations for the third quarter of fiscal 2014 was $0.67 per diluted common share, as compared to $1.43 per diluted share in the prior year period.

We generated $33.3 million of cash flow from operating activities for the nine months ended December 31, 2013, after $45.8 million in pension contributions, as compared to $230.6 million in the prior year period.

In August 2011, the Budget Control Act (the "Act") reduced the United States defense top-line budget by approximately $490 billion through 2021. The Act further reduced the defense top-line budget by an additional $500 billion through 2021 if Congress did not enact $1.2 trillion in further budget reductions by January 15, 2012. Should Congress in future years provide funding above the yearly spending limits of the Act, sequestration will automatically take effect and cancel any excess amount above the limits. The annual spending limits of the Act will remain unless and until the current law is changed. On March 1, 2013, sequestration was implemented for the U.S. government fiscal year 2013. The lack of agreement between Congress and the Administration to end sequestration, certain Office of Management and Budget reports and communications from the U.S. Department of Defense ("U.S. DoD") indicate that there are likely to be reductions to our military business. Reductions, cancellations or delays impacting existing contracts or programs could have a material effect on


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

our results of operations, financial position and/or cash flows. While the U.S. DoD would sustain the bulk of sequestration cuts affecting us, civil programs and agencies could be significantly impacted as well.
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 December 31, 2013, we have incurred approximately $40.1 million in capital expenditures and $115.8 million in inventory costs associated with the Bombardier Global 7000/8000 program, for which we have not yet begun to deliver. As of December 31, 2013, we have incurred approximately $94.5 million in capital expenditures and $26.5 million in inventory buildup associated with our relocation from the Jefferson Street facilities.
As disclosed during the second quarter of fiscal 2014, we expected to record additional program costs during fiscal 2014 of approximately $68.0 million, primarily related to the 747-8 program. During the third quarter of fiscal 2014, we have further revised our program cost estimates to include an additional $17.0 million, of which $11.9 million was reflected as a cumulative catch-up adjustment, due to production rate changes, continued inefficiency, rework, high overtime levels, increased costs from suppliers and expedited delivery charges. While we have experienced improvements in performance metrics during the third quarter, we have not yet recovered to the levels previously expected or as quickly as expected.
These amounts have resulted primarily from reductions to the profitability estimates of the our current 747-8 production lot, which was approximately 96% complete by the end of our third quarter of fiscal 2014 and was completed early in our fourth 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 have continued contractor support for the C-17 program.
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 Aerospace Systems Group segment from the date of acquisition. The acquisitions of GPECS and Embee are collectively referred in this report as the "fiscal 2013 acquisitions."


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

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, settlements 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:
Curtailments, settlements 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


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

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 December 31,           Nine Months Ended December 31,
                                            2013                 2012                 2013                 2012
Net income                           $        35,393       $        75,223     $       163,952       $       231,745
Settlements and early retirement
incentives                                     1,561                 2,030               1,561                 5,137
Amortization of acquired contract
liabilities, net                             (14,258 )              (6,219 )           (34,373 )             (19,774 )
Depreciation and amortization                 44,103                32,331             120,281                96,144
Interest expense and other                    30,115                16,768              70,146                50,668
Income tax expense                            19,271                42,369              84,998               135,834
Adjusted EBITDA                      $       116,185       $       162,502     $       406,565       $       499,754

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

                                                    Three Months Ended December 31, 2013
                                                                Aerospace       Aftermarket       Corporate/
                                 Total       Aerostructures       Systems         Services       Eliminations
Operating income              $  84,779     $       53,973     $   32,504     $       9,297     $     (10,995 )
Settlements                       1,561                  -              -                 -             1,561
Amortization of acquired
contract liability              (14,258 )           (8,380 )       (5,878 )               -                 -
Depreciation and amortization    44,103             30,207         10,823             1,862             1,211
Adjusted EBITDA               $ 116,185     $       75,800     $   37,449     $      11,159     $      (8,223 )


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

                                                    Three Months Ended December 31, 2012
                                                                Aerospace       Aftermarket       Corporate/
                                Total       Aerostructures       Systems          Services       Eliminations
Operating income             $ 134,360     $      117,450     $    20,562     $       9,856     $     (13,508 )
Early retirement incentive       2,030                  -               -                 -             2,030
Amortization of acquired
contract liability              (6,219 )           (6,219 )             -                 -                 -
Depreciation and
amortization                    32,331             24,180           4,707             2,282             1,162
Adjusted EBITDA              $ 162,502     $      135,411     $    25,269     $      12,138     $     (10,316 )



                                                   Nine Months Ended December 31, 2013
                                                               Aerospace      Aftermarket       Corporate/
                                Total       Aerostructures      Systems         Services       Eliminations
Operating income             $ 319,096     $      218,784     $ 106,887     $      30,678     $     (37,253 )
Settlements                      1,561                  -             -                 -             1,561
Amortization of acquired
contract liability             (34,373 )          (20,135 )     (14,238 )               -                 -
Depreciation and
amortization                   120,281             83,002        27,911             5,603             3,765
Adjusted EBITDA              $ 406,565     $      281,651     $ 120,560     $      36,281     $     (31,927 )



                                                     Nine Months Ended December 31, 2012
                                                                 Aerospace       Aftermarket       Corporate/
                                 Total       Aerostructures       Systems          Services       Eliminations
Operating income              $ 418,247     $      358,972     $    69,739     $      32,430     $     (42,894 )
Early retirement incentives       5,137                  -               -                 -             5,137
Amortization of acquired
contract liability              (19,774 )          (19,774 )             -                 -                 -
Depreciation and amortization    96,144             72,133          13,670             6,897             3,444
Adjusted EBITDA               $ 499,754     $      411,331     $    83,409     $      39,327     $     (34,313 )

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 December 31, 2013 compared to quarter ended December 31, 2012

                              Quarter Ended December 31,
                                 2013              2012
                                (dollars in thousands)
Net sales                  $     915,816       $  890,565
Segment operating income   $      95,774       $  147,868
Corporate expenses               (10,995 )        (13,508 )
Total operating income            84,779          134,360
Interest expense and other        30,115           16,768
Income tax expense                19,271           42,369
Net Income                 $      35,393       $   75,223

Net sales increased by $25.3 million, or 2.8%, to $915.8 million for the quarter ended December 31, 2013 from $890.6 million for the quarter ended December 31, 2012. The fiscal 2014 acquisitions and fiscal 2013 acquisitions, net of the prior year divestitures contributed $81.1 million in net sales. These increases were partially offset by, organic sales decreases of $55.8 million, or 6.3%, due to production rate cuts on the 767 and 747-8 programs, and a decrease in military sales. Net sales for the quarter ended December 31, 2013 included $46.4 million in total non-recurring revenues (largely related to the 767/Tanker), as compared to $9.2 million in non-recurring revenues for the quarter ended December 31, 2012. The prior year


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

period was positively impacted by our customers' increased production rates on existing programs and new product introductions.

Cost of sales increased by $55.9 million, or 8.4%, to $719.7 million for the quarter ended December 31, 2013 from $663.8 million for the quarter ended December 31, 2012. Gross margin for the quarter ended December 31, 2013 was 21.4%, as compared to 25.5% for the prior year period. This change was impacted by additional program costs on the 747-8 program and disruption and accelerated depreciation associated with the relocation from our Jefferson Street facilities. Gross margin included net unfavorable cumulative catch-up adjustments on long-term contracts ($21.3 million). The cumulative catch-up adjustments to gross margin included gross favorable adjustments of $2.3 million and gross unfavorable adjustments of $23.7 million, of which $11.9 million was related to additional 747-8 program costs from reductions to profitability estimates on the current 747-8 production lots. The cumulative catch-up adjustments for the quarter ended December 31, 2013 were due primarily to production rate changes, disruption related to the relocation from the Jefferson Street facilities, inefficiency, rework, high overtime levels, increased costs from suppliers and expedited delivery charges. Gross margin for the quarter ended December 31, 2012 included net unfavorable cumulative catch-up adjustments on long-term contracts ($5.5 million).

Segment operating income decreased by $52.1 million, or 35.2%, to $95.8 million for the quarter ended December 31, 2013 from $147.9 million for the quarter ended December 31, 2012. The organic segment operating income decreased $60.3 million, or 41.5%, 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 facilities ($13.3 million), legal fees ($1.5 million), partially offset by an insurance claim related to Hurricane Sandy ($2.8 million). Segment operating income for the quarter ended December 31, 2012 was a direct result of the sales volume increases and the realization from synergies from the acquisition of Vought, partially offset by net unfavorable cumulative catch-up adjustments on long-term contracts ($5.5 million), increased legal fees ($0.1 million) and production delays and related costs due to Hurricane Sandy ($0.9 million).

Corporate expenses decreased by $2.5 million, or 18.6%, to $11.0 million for the quarter ended December 31, 2013 from $13.5 million for the quarter ended December 31, 2012. This decrease was due to decreased compensation expense of . . .

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