10-Q 1 tgi-2012930x10q.htm 10-Q TGI-2012.9.30-10Q
United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q


S
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2012

or

£    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From _________ to ________

Commission File Number: 1-12235

TRIUMPH GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
51-0347963
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

899 Cassatt Road, Suite 210, Berwyn, PA
 
19312
(Address of principal executive offices)
 
(Zip Code)

(610) 251-1000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No£

Indicate by check mark whether the registrant has submitted electronically and has posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one)

Large accelerated filer
S
 
Accelerated filer
£
Non-accelerated filer
£
 
Smaller reporting company
£
(Do not check if a smaller reporting company)
 
 
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes £ No S

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, par value $0.001 per share, 50,003,434 shares outstanding as of November 2, 2012.



TRIUMPH GROUP, INC.
INDEX
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I. Financial Information

Item 1. Financial Statements.

Triumph Group, Inc.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
September 30,
2012
 
March 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
30,651

 
$
29,662

Trade and other receivables, less allowance for doubtful accounts of $5,350 and $3,900
397,262

 
440,608

Inventories, net of unliquidated progress payments of $138,940 and $164,450
891,353

 
817,956

Rotable assets
35,730

 
34,554

Deferred income taxes
51,448

 
72,259

Prepaid and other current assets
23,313

 
23,344

Total current assets
1,429,757

 
1,418,383

Property and equipment, net
744,748

 
733,380

Goodwill
1,546,259

 
1,546,374

Intangible assets, net
812,481

 
829,676

Other, net
57,848

 
26,944

Total assets
$
4,591,093

 
$
4,554,757

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
125,201

 
$
142,237

Accounts payable
281,089

 
266,124

Accrued expenses
231,813

 
311,620

Total current liabilities
638,103

 
719,981

Long-term debt, less current portion
967,489

 
1,016,625

Accrued pension and other postretirement benefits, noncurrent
626,162

 
700,125

Deferred income taxes, noncurrent
283,366

 
188,370

Other noncurrent liabilities
124,844

 
136,287

Stockholders’ equity:
 
 
 
Common stock, $.001 par value, 100,000,000 shares authorized, 50,078,428 and 49,590,273 shares issued; 50,002,434 and 49,531,740 shares outstanding
50

 
50

Capital in excess of par value
840,750

 
833,935

Treasury stock, at cost, 75,994 and 58,533 shares
(3,168
)
 
(1,716
)
Accumulated other comprehensive loss
(9,317
)
 
(9,306
)
Retained earnings
1,122,814

 
970,406

Total stockholders’ equity
1,951,129

 
1,793,369

Total liabilities and stockholders’ equity
$
4,591,093

 
$
4,554,757


SEE ACCOMPANYING NOTES.


1


Triumph Group, Inc.
Consolidated Statements of Income

(in thousands, except per share data)
(unaudited)

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Net sales
$
938,181

 
$
790,528

 
$
1,825,869

 
$
1,635,591

 
Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown separately below)
703,654

 
591,206

 
1,354,931

 
1,239,997

 
Selling, general and administrative
56,193

 
60,256

 
118,152

 
121,221

 
Depreciation and amortization
31,998

 
29,466

 
63,813

 
58,933

 
Acquisition and integration expenses
1,432

 
1,144

 
1,977

 
1,604

 
Early retirement incentive expense
1,957

 

 
3,107

 

 
 
795,234

 
682,072

 
1,541,980

 
1,421,755

 
 
 
 
 
 
 
 
 
 
Operating income
142,947

 
108,456

 
283,889

 
213,836

 
Interest expense and other
16,668

 
17,671

 
33,900

 
44,133

 
Income from continuing operations before income taxes
126,279

 
90,785

 
249,989

 
169,703

 
Income tax expense
46,088

 
32,221

 
93,466

 
60,235

 
Income from continuing operations
80,191

 
58,564

 
156,523

 
109,468

 
Loss from discontinued operations, net

 
(76
)
 

 
(765
)
 
Net income
$
80,191

 
$
58,488

 
$
156,523

 
$
108,703

 
 
 
 
 
 
 
 
 
 
Earnings per share—basic:
 
 
 
 
 
 
 
 
Income from continuing operations
$
1.61

 
$
1.20

 
$
3.16

 
$
2.25

 
Loss from discontinued operations, net

 

 

 
(0.02
)
 
Net income
$
1.61

 
$
1.20

 
$
3.16

 
$
2.24

*
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
49,657

 
48,697

 
49,536

 
48,582

 
Earnings per share—diluted:
 
 
 
 
 
 
 
 
Income from continuing operations
$
1.53

 
$
1.13

 
$
2.99

 
$
2.13

 
Loss from discontinued operations, net

 

 

 
(0.01
)
 
Net income
$
1.53

 
$
1.13

 
$
2.99

 
$
2.11

*
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding—diluted
52,288

 
51,646

 
52,280

 
51,478

 
 
 
 
 
 
 
 
 
 
Dividends declared and paid per common share
$
0.04

 
$
0.04

 
$
0.08

 
$
0.06

 

* Differences due to rounding.
SEE ACCOMPANYING NOTES.

2


Triumph Group, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income
$
80,191

 
$
58,488

 
$
156,523

 
$
108,703

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
4,093

 
(6,877
)
 
(329
)
 
(4,870
)
Pension and postretirement adjustments, net of income taxes of $(109), $427, $(218) and $854, respectively
178

 
(698
)
 
355

 
(1,396
)
Unrealized gain (loss) on cash flow hedge, net of tax of $(47), $0, $23 and $(88), respectively
76

 

 
(37
)
 
232

Total other comprehensive income (loss)
4,347

 
(7,575
)
 
(11
)
 
(6,034
)
 
 
 
 
 
 
 
 
Total comprehensive income
$
84,538

 
$
50,913

 
$
156,512

 
$
102,669


SEE ACCOMPANYING NOTES.

3


Triumph Group, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
Six Months Ended
September 30,
 
2012
 
2011
 
 
 
 
Operating Activities
 
 
 
Net income
$
156,523

 
$
108,703

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
63,813

 
58,933

Amortization of acquired contract liabilities
(13,555
)
 
(13,510
)
Accretion of debt discount
268

 
4,272

Other amortization included in interest expense
1,811

 
7,948

Provision for doubtful accounts receivable
1,605

 
601

Provision for deferred income taxes
91,071

 
59,665

Employee stock-based compensation
3,162

 
2,397

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
 
 
 
Trade and other receivables
41,642

 
(10,784
)
Rotable assets
(1,176
)
 
(5,874
)
Inventories
(73,489
)
 
(36,654
)
Prepaid expenses and other current assets
(4,982
)
 
(6,422
)
Accounts payable, accrued expenses and other current liabilities
(60,600
)
 
(24,521
)
Accrued pension and other postretirement benefits
(73,391
)
 
(85,766
)
Changes in discontinued operations

 
241

Other
213

 
1,881

Net cash provided by operating activities
132,915

 
61,110

Investing Activities
 
 
 
Capital expenditures
(61,193
)
 
(34,149
)
Reimbursements of capital expenditures
2,028

 
229

Proceeds from sale of assets
460

 
7,450

Acquisitions, net of cash acquired

 
19,205

Net cash used in investing activities
(58,705
)
 
(7,265
)
Financing Activities
 
 
 
Net (decrease) increase in revolving credit facility
(81,709
)
 
306,608

Proceeds from issuance of long-term debt and capital leases
71,099

 
59,800

Repayment of debt and capital lease obligations
(55,853
)
 
(417,701
)
Payment of deferred financing costs
(2,244
)
 
(3,903
)
Dividends paid
(3,997
)
 
(2,943
)
Proceeds on government grant
1,000

 

Repurchase of restricted shares for minimum tax obligation
(1,840
)
 
(608
)
Proceeds from exercise of stock options
270

 
674

Net cash used in financing activities
(73,274
)
 
(58,073
)
Effect of exchange rate changes on cash
53

 
(350
)
Net change in cash
989

 
(4,578
)
Cash and cash equivalents at beginning of period
29,662

 
39,328

 
 
 
 
Cash and cash equivalents at end of period
$
30,651

 
$
34,750

SEE ACCOMPANYING NOTES.

4


Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

1.     BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited consolidated financial statements of Triumph Group, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position and cash flows. The results of operations for the three and six months ended September 30, 2012 are not necessarily indicative of results that may be expected for the year ending March 31, 2013. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2012 audited consolidated financial statements and notes thereto, included in the Company's Form 10-K for the year ended March 31, 2012 filed in May 2012.

The Company designs, engineers, manufactures, repairs and overhauls a broad portfolio of aerostructures, aircraft components, accessories, subassemblies and systems. The Company serves a broad, worldwide spectrum of the aviation industry, including original equipment manufacturers of commercial, regional, business and military aircraft and aircraft components, as well as commercial and regional airlines and air cargo carriers.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

Revenues are generally recognized in accordance with the contract terms when products are shipped, delivery has occurred or services have been rendered, pricing is fixed and determinable, and collection is reasonably assured. A significant portion of the Company’s contracts are within the scope of the Revenue - Construction-Type and Production-Type Contracts topic of the Accounting Standards Codification (“ASC”) and revenue and costs on contracts are recognized using the percentage-of-completion method of accounting. Accounting for the revenue and profit on a contract requires estimates of (1) the contract value or total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s scope of work and (3) the measurement of progress towards completion. Depending on the contract, the Company measures progress toward completion using either the cost-to-cost method or the units-of-delivery method of accounting, with the great majority measured under the units-of-delivery method of accounting.

Under the cost-to-cost method of accounting, progress toward completion is measured as the ratio of total costs incurred to estimated total costs at completion. Costs are recognized as incurred. Profit is determined based on estimated profit margin on the contract multiplied by the progress toward completion. Revenue represents the sum of costs and profit on the contract for the period.
Under the units-of-delivery method of accounting, revenue on a contract is recorded as the units are delivered and accepted during the period at an amount equal to the contractual selling price of those units. The costs recorded on a contract under the units-of-delivery method of accounting are equal to the total costs at completion divided by the total units to be delivered. As contracts can span multiple years, the Company often segments the contracts into production lots for the purposes of accumulating and allocating cost. Profit is recognized as the difference between revenue for the units delivered and the estimated costs for the units delivered.

Adjustments to original estimates for a contract’s revenues, estimated costs at completion and estimated total profit are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. These estimates are also sensitive to the assumed rate of production. Generally, the longer it takes to complete the contract quantity, the more relative overhead that contract will absorb. The impact of revisions in cost estimates is recognized on a cumulative catch-up basis in the period in which the revisions are made. Provisions for anticipated losses on contracts are recorded in the period in which they become evident (‘‘forward losses’’) and are first offset against costs that are included in inventory, with any remaining amount reflected in accrued contract liabilities in accordance with the Construction-Type and Production-Type Contracts topic. Revisions in contract estimates, if significant, can materially affect results of operations and cash flows, as well as valuation of inventory. Furthermore, certain contracts are combined or segmented for revenue recognition in accordance with the Construction-Type and Production-Type Contracts topic.

For the three months ended September 30, 2012, cumulative catch-up adjustments from changes in estimates decreased operating income, net income and earnings per share by approximately $158, $100 and $0.00, respectively. The cumulative catch-up adjustments to operating income for the three months ended September 30, 2012 included gross favorable adjustments of approximately $15,115 and gross unfavorable adjustments of approximately $15,273. For the six months ended September 30, 2012, cumulative catch-up adjustments from changes in estimates decreased operating income, net income and earnings per share by approximately $(4,791), $(3,000) and $(0.06), respectively. The cumulative catch-up adjustments to operating income for the six months ended September 30, 2012 included gross favorable adjustments of approximately $14,989 and gross unfavorable adjustments of approximately $(19,780). For the three and six months ended September 30, 2011, cumulative catch-up adjustments from changes in estimates increased operating income, net income and earnings per share by approximately $7.3 million, $4.7 million and $0.09, respectively.

Amounts representing contract change orders or claims are only included in revenue when such change orders or claims have been settled with the customer and to the extent that units have been delivered. Additionally, some contracts may contain provisions for revenue sharing, price re-determination, requests for equitable adjustments, change orders or cost and/or performance incentives. Such amounts or incentives are included in contract value when the amounts can be reliably estimated and their realization is reasonably assured.

Although fixed-price contracts, which extend several years into the future, generally permit the Company to keep unexpected profits if costs are less than projected, the Company also bears the risk that increased or unexpected costs may reduce profit or cause the Company to sustain losses on the contract. In a fixed-price contract, the Company must fully absorb cost overruns, notwithstanding the difficulty of estimating all of the costs the Company will incur in performing these contracts and in projecting the ultimate level of revenue that may otherwise be achieved.

Failure to anticipate technical problems, estimate delivery reductions, estimate costs accurately or control costs during performance of a fixed-price contract may reduce the profitability of a fixed-price contract or cause a loss. The Company believes that it has recognized adequate provisions in the financial statements for losses on fixed-price contracts, but cannot be certain that the contract loss provisions will be adequate to cover all actual future losses.

Included in net sales of the Aerostructures Group is the non-cash amortization of acquired contract liabilities recognized as fair value adjustments through purchase accounting of the acquisition of Vought Aircraft Industries, Inc. ("Vought") on June 16, 2010. For the three months ended September 30, 2012 and 2011, the Company recognized $6,563 and $5,770, respectively, into net sales in the accompanying consolidated statements of income. For the six months ended September 30, 2012 and 2011, the Company recognized $13,555 and $13,510, respectively, into net sales in the accompanying consolidated statements of income.

The Aftermarket Services Group provides repair and overhaul services, a small portion of which services are provided under long-term power-by-the-hour contracts. The Company applies the proportional performance method of accounting to recognize revenue under these contracts. Revenue is recognized over the contract period as units are delivered based on the relative value in proportion to the total estimated contract consideration. In estimating the total contract consideration, management evaluates the projected utilization of its customers’ fleet over the term of the contract, in connection with the related estimated repair and overhaul servicing requirements to the fleet based on such utilization. Changes in utilization of the fleet by customers, among other factors, may have an impact on these estimates and require adjustments to estimates of revenue to be realized.

Concentration of Credit Risk

The Company’s trade accounts receivable are exposed to credit risk. However, the risk is limited due to the diversity of the customer base and the customer base’s wide geographical area. Trade accounts receivable from The Boeing Company (“Boeing”) (representing commercial, military and space) represented approximately 41.2% and 37.1% of total trade accounts receivable as of September 30, 2012 and March 31, 2012, respectively. The Company had no other concentrations of credit risk of more than 10%. Sales to Boeing for the six months ended September 30, 2012 were $899,302, or 49% of net sales, of which $847,982, $35,974 and $15,346 were from the Aerostructures segment, the Aerospace Systems segment and Aftermarket Services segment, respectively. Sales to Boeing for the six months ended September 30, 2011 were $745,957, or 46% of net sales, of which $702,331, $31,002 and $12,624 were from the Aerostructures segment, the Aerospace Systems segment and Aftermarket Services segment, respectively. No other single customer accounted for more than 10% of the Company’s net sales. However, the loss of any significant customer, including Boeing, could have a material adverse effect on the Company and its operating subsidiaries.

Stock-Based Compensation

The Company recognizes compensation expense for share-based awards based on the fair value of those awards at the date of grant. Stock-based compensation expense for the three months ended September 30, 2012 and 2011 was $1,631 and $1,199, respectively. Stock-based compensation expense for the six months ended September 30, 2012 and 2011 was $3,162 and $2,397, respectively. The Company has classified share-based compensation within selling, general and administrative expenses to correspond with the same line item as the majority of the cash compensation paid to employees. Upon the exercise of stock options or vesting of restricted stock, the Company first transfers treasury stock, then will issue new shares.

Intangible Assets

The components of intangible assets, net, are as follows:
 
September 30, 2012
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.3
 
$
460,001

 
$
(85,184
)
 
$
374,817

Product rights and licenses
12.0
 
37,776

 
(25,971
)
 
11,805

Non-compete agreements and other
13.0
 
7,327

 
(6,468
)
 
859

Tradename
Indefinite-lived
 
425,000

 

 
425,000

Total intangibles, net
 
 
$
930,104

 
$
(117,623
)
 
$
812,481


 
March 31, 2012
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.3
 
$
460,054

 
$
(70,169
)
 
$
389,885

Product rights and licenses
12.0
 
37,776

 
(24,208
)
 
13,568

Non-compete agreements and other
13.0
 
7,327

 
(6,104
)
 
1,223

Tradename
Indefinite-lived
 
425,000

 

 
425,000

Total intangibles, net
 
 
$
930,157

 
$
(100,481
)
 
$
829,676


Amortization expense for the three months ended September 30, 2012 and 2011 was $8,556 and $8,441, respectively. Amortization expense for the six months ended September 30, 2012 and 2011 was $17,123 and $16,893, respectively.

Warranty Reserves
A reserve has been established to provide for the estimated future cost of warranties on our delivered products. The Company periodically reviews the reserves and adjustments are made accordingly. A provision for warranty on products delivered is made on the basis of historical experience and identified warranty issues. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The majority of the Company's agreements include a three-year warranty, although certain programs have warranties up to 20 years.
The following is a rollforward of the warranty reserves for the six months ended September 30, 2012.
Balance, March 31, 2012
 
$
14,473

Charges to costs and expenses
 
50

Write-offs, net of recoveries
 
(1,276
)
Exchange rate changes
 
(9
)
Balance, September 30, 2012
 
$
13,238


Supplemental Cash Flow Information

The Company paid $2,840 and $1,273 for income taxes, net of refunds received, for the six months ended September 30, 2012 and 2011, respectively. The Company made interest payments of $31,755 and $39,181 for the six months ended September 30, 2012 and 2011, respectively.

During the six months ended September 30, 2012 and 2011, the Company financed $25 and $61 of property and equipment additions through capital leases, respectively. During the six months ended September 30, 2012 and 2011, the Company issued 386,936 and 379,838 shares, respectively, in connection with certain redemptions of convertible senior subordinated notes (see Note 6).

3.     ACQUISITIONS
Aviation Network Services, LLC
In October 2011, the Company's wholly-owned subsidiary, Triumph Interiors, LLC, acquired the assets of Aviation Network Services, LLC ("ANS"), a leading provider of repair and refurbishment of aircraft interiors primarily for commercial airlines. ANS provides Triumph Interiors, LLC with additional capacity and expanded product offerings, such as the repair and refurbishment of passenger service units and other interior products. The results of Triumph Interiors, LLC are included in the Company's Aftermarket Services segment.

The purchase price for ANS of $9,180 included cash paid at closing and the estimated acquisition-date fair value of contingent consideration. The estimated acquisition-date fair value of contingent consideration relates to an earnout note contingent upon the achievement of certain earnings levels during the earnout period. The maximum amounts payable in respect of fiscal 2013, 2014 and 2015 are $1,100, $900 and $1,000, respectively. The estimated fair value of the earnout note at the acquisition date was $1,926, classified as a Level 3 liability in the fair value hierarchy. The excess of the purchase price over the estimated fair value of the net assets acquired of $3,753 was recorded as goodwill. The Company has also identified intangible assets of $4,222 with a weighted-average life of 9.9 years. The Company finalized the allocation of the purchase price in the fourth quarter of fiscal 2012.

The following condensed balance sheet represents the amounts assigned to each major asset and liability caption in the aggregate for the acquisition of ANS:
 
October 31, 2011
Trade and other receivables
$
625

Inventory
545

Prepaid expenses and other
12

Property and equipment
264

Goodwill
3,753

Intangible assets
4,222

Total assets
$
9,421

 
 
Accounts payable
$
79

Accrued expenses
44

Deferred income taxes
118

Other noncurrent liabilities
1,926

Total liabilities
$
2,167


The ANS acquisition has been accounted for under the acquisition method of accounting and, accordingly, is included in the consolidated financial statements from the date of acquisition. The ANS acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $168 in acquisition-related costs in connection with the ANS acquisition.

4.     DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
In September 2007, the Company decided to sell Triumph Precision Castings Co., a casting facility in its Aftermarket Services segment that specializes in producing high-quality hot gas path components for aero and land-based gas turbines.

In July 2011, the Company completed the sale of Triumph Precision Castings Co. for proceeds of $3,902, plus contingent consideration, resulting in no gain or loss on the disposal.

Revenues of discontinued operations were $40 and $286 for the three and six months ended September 30, 2011. The loss from discontinued operations was $76 and $765, net of income tax benefit $42 and $412 for the three and six months ended September 30, 2011. Interest expense of $6 and $68 was allocated to discontinued operations for the three and six months ended September 30, 2011, based upon the actual borrowings of the operations, and such interest expense is included in the loss from discontinued operations.


5.    INVENTORIES
Inventories are stated at the lower of cost (average-cost or specific-identification methods) or market. The components of inventories are as follows:
 
September 30, 2012
 
March 31, 2012
Raw materials
$
64,271

 
$
53,103

Work-in-process, including manufactured and purchased components
920,467

 
887,686

Finished goods
45,555

 
41,617

Less: unliquidated progress payments
(138,940
)
 
(164,450
)
Total inventories
$
891,353

 
$
817,956

Work-in-process inventory includes capitalized pre-production costs. Capitalized pre-production costs include certain contract costs, including applicable overhead, incurred before a product is manufactured on a recurring basis. Significant customer-directed work changes can also cause pre-production costs to be incurred. These costs are typically recovered over a contractually determined number of ship set deliveries and the Company believes these amounts will be fully recovered. The balance of capitalized pre-production costs at September 30, 2012 and March 31, 2012 was $36,555 and $19,385, respectively, related to the Bombardier wing program.
6.    LONG-TERM DEBT
Long-term debt consists of the following:
 
September 30, 2012
 
March 31, 2012
 
 
 
 
Revolving credit facility
$
238,291

 
$
320,000

Receivable securitization facility
149,800

 
120,000

Equipment leasing facility and other capital leases
65,676

 
61,301

Senior subordinated notes due 2017
173,200

 
173,061

Senior notes due 2018
347,997

 
347,867

Convertible senior subordinated notes
109,748

 
128,655

Other debt
7,978

 
7,978

 
1,092,690

 
1,158,862

Less current portion
125,201

 
142,237

 
$
967,489

 
$
1,016,625


Revolving Credit Facility
On May 23, 2012, the Company amended and restated its existing credit agreement (the “Credit Facility”) with its lenders to (i) increase the availability under the Credit Facility to $1,000,000, with a $50,000 accordion feature, from $850,000, (ii) extend the maturity date to May 23, 2017, and (iii) amend certain other terms and covenants. In connection with the amendment to the Credit Facility, the Company incurred $2,066 of financing costs. These costs, along with the $6,955 of unamortized financing costs prior to the closing, are being amortized over the remaining term of the Credit Facility.
On April 5, 2011, in connection with a prior amendment and restatement of the Credit Facility, the Company extinguished its then-outstanding term loan credit agreement (the “Term Loan”) at face value of $350,000, plus accrued interest. As a result, the Company recognized a pre-tax loss on extinguishment of debt of $7,712 associated with the write-off of the remaining unamortized discount and deferred financing fees on the Term Loan included in Interest expense and other for the six months ended September 30, 2011.
The obligations under the Credit Facility and related documents are secured by liens on substantially all assets of the

5

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

6.    LONG-TERM DEBT (Continued)

Company and its domestic subsidiaries pursuant to a Guarantee and Collateral Agreement, dated as of June 16, 2010, among the Company, and the subsidiaries of the Company party thereto. Such liens are pari passu to the liens securing the Company’s obligations under the Term Loan described below pursuant to an intercreditor agreement dated June 16, 2010 among the agents under the Credit Facility and the Term Loan, the Company and its domestic subsidiaries that are borrowers and/or guarantors under the Credit Facility and the Term Loan (the “Intercreditor Agreement”).
The Credit Facility bears interest at either: (i) LIBOR plus between 1.50% and 2.75%; (ii) the prime rate; or (iii) an overnight rate at the option of the Company. The applicable interest rate is based upon the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. In addition, the Company is required to pay a commitment fee of between 0.30% and 0.50% on the unused portion of the Credit Facility. The Company’s obligations under the Credit Facility are guaranteed by the Company’s domestic subsidiaries.
At September 30, 2012, there were $238,291 in borrowings and $31,002 in letters of credit outstanding under the Credit Facility primarily to support insurance policies. At March 31, 2012, there were $320,000 in borrowings and $33,240 in letters of credit outstanding under the Credit Facility. The level of unused borrowing capacity under the Credit Facility varies from time to time depending in part upon its compliance with financial and other covenants set forth in the related agreement. The Credit Facility contains certain affirmative and negative covenants including limitations on specified levels of indebtedness to earnings before interest, taxes, depreciation and amortization, and interest coverage requirements, and includes limitations on, among other things, liens, mergers, consolidations, sales of assets, and incurrence of debt. If an event of default were to occur under the Credit Facility, the lenders would be entitled to declare all amounts borrowed under it immediately due and payable. The occurrence of an event of default under the Credit Facility could also cause the acceleration of obligations under certain other agreements. The Company is currently in compliance with all such covenants. As of September 30, 2012, the Company had borrowing capacity under this facility of $730,707 after reductions for borrowings and letters of credit outstanding under the facility.
Receivables Securitization Program
In June 2011, the Company amended its $175,000 receivable securitization facility (the “Securitization Facility”) extending the term through June 2014. In connection with the Securitization Facility, the Company sells on a revolving basis certain trade accounts receivable to Triumph Receivables, LLC, a wholly-owned special-purpose entity, which in turn sells a percentage ownership interest in the receivables to commercial paper conduits sponsored by financial institutions. The Company is the servicer of the trade accounts receivable under the Securitization Facility. As of September 30, 2012, the Company had no availability under the Securitization Facility above the amount outstanding due to the level of receivables. Interest rates are based on prevailing market rates for short-term commercial paper, plus a program fee and a commitment fee. The program fee is 0.55% on the amount outstanding under the Securitization Facility. Additionally, the commitment fee is 0.55% on 102.00% of the maximum amount available under the Securitization Facility. At September 30, 2012, there was $149,800 outstanding under the Securitization Facility. In connection with amending the Securitization Facility, the Company incurred approximately $351 of financing costs. These costs, along with the $831 of unamortized financing costs prior to the amendment, are being amortized over the life of the Securitization Facility. The Company securitizes its trade accounts receivable, which are generally non-interest bearing, in transactions that are accounted for as borrowings pursuant to the Transfers and Servicing topic of the Accounting Standards Codification.
The agreement governing the Securitization Facility contains restrictions and covenants which include limitations on the making of certain restricted payments, creation of certain liens, and certain corporate acts such as mergers, consolidations and the sale of substantially all assets.
Equipment Leasing Facility and Other Capital Leases
During March 2009, the Company entered into a 7-year Master Lease Agreement (the “Leasing Facility”) creating a capital lease of certain existing property and equipment. The Leasing Facility bears interest at a weighted-average fixed rate of 6.2% per annum.

During the six months ended September 30, 2012 and 2011, the Company entered into new capital leases in the amount of

6

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

6.    LONG-TERM DEBT (Continued)

$25 and $61, respectively, to finance a portion of the Company’s capital additions for the period. During the six months ended September 30, 2012, the Company obtained financing for existing fixed assets in the amount of $11,199.

Senior Subordinated Notes Due 2017

On November 16, 2009, the Company issued $175,000 principal amount of 8.00% Senior Subordinated Notes due 2017 (the “2017 Notes”).  The 2017 Notes were sold at 98.56% of principal amount and have an effective interest yield of 8.25%. Interest on the 2017 Notes is payable semiannually in cash in arrears on May 15 and November 15 of each year. In connection with the issuance of the 2017 Notes, the Company incurred approximately $4,390 of costs, which were deferred and are being amortized on the effective interest method over the term of the 2017 Notes.
The 2017 Notes are senior subordinated unsecured obligations of the Company and rank subordinate to all of the existing and future senior indebtedness of the Company and the Guarantor Subsidiaries (as defined below), including borrowings under the Credit Facility, and pari passu with the Company’s and the Guarantor Subsidiaries’ existing and future senior subordinated indebtedness. The 2017 Notes are guaranteed, on a full, joint and several basis, by each of the Company’s domestic restricted subsidiaries that guarantees any of the Company’s debt or that of any of the Company’s restricted subsidiaries under the Credit Facility, and in the future by any domestic restricted subsidiaries that guarantee any of the Company’s debt or that of any of the Company’s domestic restricted subsidiaries incurred under any credit facility (collectively, the “Guarantor Subsidiaries”), in each case on a senior subordinated basis.  If the Company is unable to make payments on the 2017 Notes when they are due, each of the Guarantor Subsidiaries would be obligated to make such payments.
The Company has the option to redeem all or a portion of the 2017 Notes at any time prior to November 15, 2013 at a redemption price equal to 100% of the principal amount of the 2017 Notes redeemed, plus an applicable premium set forth in the Indenture and accrued and unpaid interest, if any.  The 2017 Notes are also subject to redemption, in whole or in part, at any time on or after November 15, 2013, at redemption prices equal to (i) 104% of the principal amount of the 2017 Notes redeemed, if redeemed prior to November 15, 2014, (ii) 102% of the principal amount of the 2017 Notes redeemed, if redeemed prior to November 15, 2015, and (iii) 100% of the principal amount of the 2017 Notes redeemed, if redeemed thereafter, plus accrued and unpaid interest.  In addition, at any time prior to November 15, 2012, the Company may redeem up to 35% of the principal amount of the 2017 Notes with the net cash proceeds of qualified equity offerings at a redemption price equal to 108% of the aggregate principal amount plus accrued and unpaid interest, if any, subject to certain limitations set forth in the indenture governing the 2017 Notes (the “2017 Indenture”).
Upon the occurrence of a change-of-control, the Company must offer to purchase the 2017 Notes from holders at 101% of their principal amount plus accrued and unpaid interest, if any, to the date of purchase.
The 2017 Indenture contains covenants that, among other things, limit the Company’s ability, and the ability of any of the Guarantor Subsidiaries, to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of the Guarantor Subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (viii) enter into transactions with affiliates. The Company is currently in compliance with all such covenants.
Senior Notes Due 2018
On June 16, 2010, in connection with the acquisition of Vought, the Company issued $350,000 principal amount of 8.63% Senior Notes due 2018 (the “2018 Notes”). The 2018 Notes were sold at 99.27% of principal amount and have an effective interest yield of 8.75%. Interest on the 2018 Notes accrues at the rate of 8.63% per annum and is payable semiannually in cash in arrears on January 15 and July 15 of each year. In connection with the issuance of the 2018 Notes, the Company incurred approximately $7,307 of costs, which were deferred and are being amortized on the effective interest method over the term of the 2018 Notes.
The 2018 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated

7

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

6.    LONG-TERM DEBT (Continued)

indebtedness. The 2018 Notes are guaranteed on a full, joint and several basis by each of the Guarantor Subsidiaries.
The Company may redeem some or all of the 2018 Notes prior to July 15, 2014 by paying a “make-whole” premium. The Company may redeem some or all of the 2018 Notes on or after July 15, 2014 at specified redemption prices. In addition, prior to July 15, 2013, the Company may redeem up to 35% of the 2018 Notes with the net proceeds of certain equity offerings at a redemption price equal to 108.625% of the aggregate principal amount plus accrued and unpaid interest, if any, subject to certain limitations set forth in the indenture governing the 2018 Notes (the “2018 Indenture”).
The Company is obligated to offer to repurchase the 2018 Notes at a price of (a) 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change-of-control events and (b) 100% of their principal amount plus accrued and unpaid interest, if any, in the event of certain asset sales. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The 2018 Indenture contains covenants that, among other things, limit the Company’s ability and the ability of any of the Guarantor Subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of the Guarantor Subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (viii) enter into transactions with affiliates. The Company is currently in compliance with all such covenants.
Convertible Senior Subordinated Notes
On September 18, 2006, the Company issued $201,250 in convertible senior subordinated notes (the “Convertible Notes”). The Convertible Notes are direct, unsecured, senior subordinated obligations of the Company, and rank (i) junior in right of payment to all of the Company’s existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness.
The Company received net proceeds from the sale of the Convertible Notes of approximately $194,998 after deducting debt issuance expenses of approximately $6,252. The net proceeds from the sale were used for prepayment of the Company’s then outstanding senior notes, including a make-whole premium, fees and expenses in connection with the prepayment, and to repay a portion of the outstanding indebtedness under the Company’s then-existing credit facility. Debt issuance costs were fully amortized as of September 30, 2011.
The Convertible Notes bear interest at a fixed rate of 2.63% per annum, payable in cash semiannually in arrears on each April 1 and October 1. During the period commencing on October 6, 2011 and ending on, but excluding, April 1, 2012 and for each six-month period from October 1 to March 31 or from April 1 to September 30 thereafter, the Company will pay contingent interest during the applicable interest period if the average trading price of a note for the five consecutive trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals or exceeds 120% of the principal amount of the Convertible Notes. The contingent interest payable per note in respect of any six-month period will equal 0.25% per annum, calculated on the average trading price of a note for the relevant five trading day period. The Company expects that this contingent interest will be payable beginning April 1, 2012 on principal that remains outstanding. This contingent interest feature represents an embedded derivative. The value of the derivative was not deemed material at September 30, 2012 due to overall market volatility, recent conversions by holders of the Convertible Notes, as well as the Company's ability to call the Convertible Notes at any time after October 6, 2011.
Prior to fiscal 2011, the Company paid $19,414 to purchase $22,200 in principal amounts of the Convertible Notes.
The Convertible Notes mature on October 1, 2026, unless earlier redeemed, repurchased or converted. The Company may redeem the Convertible Notes for cash, in whole or in part, at any time on or after October 6, 2011 at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including the date of redemption. In addition, holders of the Convertible Notes will have the right to require the Company to repurchase for cash all or a portion of their Convertible Notes on October 1, 2016 and 2021, at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be

8

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

6.    LONG-TERM DEBT (Continued)

repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to, but not including, the date of repurchase. On September 2, 2011, the Company submitted a tender offer of repurchase to the holders of the Convertible Notes, expiring October 3, 2011, and no notes were tendered for repurchase. The Convertible Notes are convertible into the Company’s common stock at a rate equal to 36.7948 shares per $1 principal amount of the Convertible Notes (equal to an initial conversion price of approximately $27.17 per share), subject to adjustment as described in the indenture governing the Convertible Notes. Upon conversion, the Company will deliver to the holder surrendering the Convertible Notes for conversion, for each $1 principal amount of Convertible Notes, an amount consisting of cash equal to the lesser of $1 and the Company’s total conversion obligation and, to the extent that the Company’s total conversion obligation exceeds $1, at the Company’s election, cash or shares of the Company’s common stock in respect of the remainder.
The Convertible Notes are eligible for conversion upon meeting certain conditions as provided in the indenture governing the Convertible Notes. For the periods from January 1, 2011 through September 30, 2012, the Convertible Notes were eligible for conversion. During the fiscal year ended March 31, 2012, the Company settled the conversion of $50,395 in principal value of the Convertible Notes, as requested by the respective holders, with the principal settled in cash and the conversion benefit settled through the issuance of 772,438 shares. During the six months ended September 30, 2012, the Company settled the conversion of $18,907 in principal value of the Convertible Notes, as requested by the respective holders, with the principal settled in cash and the conversion benefit settled through the issuance of 386,936 shares. In October 2012, the Company received notice of conversion from holders of $10 in principal value of the Convertible Notes. These conversions were settled in the second quarter of fiscal 2013 with the principal settled in cash and the conversion benefit settled through the issuance of approximately 211 shares. In October 2012, the Company delivered a notice to holders of the Convertible Notes to the effect that, for at least 20 trading days during the 30 consecutive trading days preceding September 30, 2012, the closing price of the Company's common stock was greater than or equal to 130% of the conversion price of such notes on the last trading day. Under the terms of the Convertible Notes, the increase in the Company's stock price triggered a provision, which gave holders of the Convertible Notes a put option through December 31, 2012. Accordingly, the balance sheet classification of the Convertible Notes will be short term for as long as the put option remains in effect.
To be included in the calculation of diluted earnings per share, the average price of the Company’s common stock for the quarter must exceed the conversion price per share of $27.17. The average price of the Company's common stock for the three months ended September 30, 2012 and 2011 was $60.35 and $49.95, respectively. Therefore, as of the three months ended September 30, 2012 and 2011, there were 2,258,303 and 2,518,045 additional shares, respectively, included in the calculation of diluted earnings per share. The average price of the Company’s common stock for the six months ended September 30, 2012 and 2011 was $60.42 and $47.63, respectively. Therefore, as of the six months ended September 30, 2012 and 2011, there were 2,357,143 and 2,466,451 additional shares, respectively, included in the calculation of diluted earnings per share. If the Company undergoes a fundamental change, holders of the Convertible Notes will have the right, subject to certain conditions, to require the Company to repurchase for cash all or a portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any.
7.    FAIR VALUE MEASUREMENTS
The Company follows the Fair Value Measurements and Disclosures topic of the ASC, which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1    Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability

Level 3    Unobservable inputs for the asset or liability


9

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

7.    FAIR VALUE MEASUREMENTS (Continued)

The following table provides the assets (liabilities) reported at fair value and measured on a recurring basis as of September 30, 2012 and March 31, 2012:
Description
 
Level
 
September 30, 2012
 
March 31, 2012
Contingent consideration
 
3
 
$
(2,471
)
 
$
(2,019
)
Derivatives
 
2
 
152

 
212

The fair value of the contingent consideration at the date of the acquisition of ANS was $1,926, which was estimated using the income approach based on significant inputs that are not observable in the market. Key assumptions included a discount rate and probability assessments of each milestone payment being made. The assumptions used to develop the estimate were updated during the six months ended September 30, 2012, based on the underlying earnings projections exceeding initial assumptions.
Derivative liabilities included in the table above relate to derivative financial instruments that the Company uses to manage its exposure to fluctuations in foreign currency exchange rates. Foreign currency exchange contracts are entered into to manage the exchange rate risk of forecasted foreign currency denominated cash payments. The foreign currency exchange contracts are designated as cash flow hedges. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives attributable to the effective portion of hedges that are considered highly effective hedges are reflected net of income taxes in accumulated other comprehensive income (loss) until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are attributable to the ineffective portion of the hedges, or of derivatives that are not considered to be highly effective hedges, if any, are immediately recognized in earnings. The aggregate notional amount of our outstanding foreign currency exchange contracts at September 30, 2012 was $6,736, with open settlement dates up to September 30, 2013.
The effect of derivative instruments in the consolidated statements of income is as follows:
 
 
 
Amount of Gain (Loss) in OCI
(Effective Portion)
Period ended September 30,
 
Reclassification Adjustment
Gain (Loss) Amount
Period ended September 30,
 
Reclassification Adjustment
Gain (Loss) Location
(Effective Portion)
 
Cash Flow Hedges
2012
 
2011
 
2012
 
2011
Derivatives
Interest expense and other
 
$
(37
)
 
$
232

 
$
85

 
$
(232
)
The amount of ineffectiveness on derivatives is not significant. The Company estimates that approximately $94 of losses presently in accumulated other comprehensive income (loss) will be reclassified into earnings during the next twelve months.
The following table represents a rollforward of the balances of our liabilities recorded at fair value that are valued using Level 3 inputs:
 
March 31, 2012
Balance
 
Net Purchases
(Sales), Issues (Settlements)
 
Net Realized
Appreciation
(Depreciation)
 
Net Unrealized
Appreciation
(Depreciation)
 
September 30, 2012
Balance
Contingent consideration
$
(2,019
)
 
$

 
$
(452
)
 
$

 
$
(2,471
)
 
March 31, 2011
Balance
 
Net Purchases
(Sales), Issues (Settlements)
 
Net Realized
Appreciation
(Depreciation)
 
Net Unrealized
Appreciation
(Depreciation)
 
September 30, 2011
Balance
Contingent consideration
$
(2,870
)
 
$

 
$

 
$

 
$
(2,870
)

10

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

7.    FAIR VALUE MEASUREMENTS (Continued)

The following table presents quantitative information for liabilities recorded at fair value using Level 3 inputs:
 
September 30, 2012
Balance
 
Valuation Technique
 
Unobservable input
 
Range
Contingent consideration
$
(2,471
)
 
Discounted cash flow
 
Earnings of acquired company
 
$0 - $3,000
The Financial Instruments topic of the ASC requires disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of September 30, 2012 and March 31, 2012 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.
Carrying amounts and the related estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements are as follows:
 
September 30, 2012
 
March 31, 2012
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
 
 
 
 
Long-term debt
$
1,092,690

 
$
1,291,245

 
$
1,158,862

 
$
1,385,264

The fair value of the long-term debt was calculated based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements, unless quoted market prices were available (Level 2 inputs).
Except for long-term debt, the Company's financial instruments are highly liquid or have short-term maturities. Therefore, the recorded value is approximately equal to the fair value. The financial instruments held by the Company could potentially expose it to a concentration of credit risk. The Company invests its excess cash in money market funds and other deposit instruments placed with major banks and financial institutions. The Company has established guidelines related to diversification and maturities to maintain safety and liquidity.

8.    EARNINGS PER SHARE
The following is a reconciliation between the weighted-average outstanding shares used in the calculation of basic and diluted earnings per share:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
(in thousands)
 
(in thousands)
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding – basic
49,657

 
48,697

 
49,536

 
48,582

Net effect of dilutive stock options and nonvested stock
373

 
431

 
387

 
430

Potential common shares – convertible debt
2,258

 
2,518

 
2,357

 
2,466

Weighted-average common shares outstanding – diluted
52,288

 
51,646

 
52,280

 
51,478

 


11

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

9.    INCOME TAXES
The Company follows the Income Taxes topic of the ASC, which prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

The Company has classified uncertain tax positions as noncurrent income tax liabilities unless expected to be paid in one year. Penalties and tax-related interest expense are reported as a component of income tax expense. As of September 30, 2012 and March 31, 2012, the total amount of accrued income tax-related interest and penalties was $239.

As of September 30, 2012 and March 31, 2012, the total amount of unrecognized tax benefits was $7,199, of which $5,415, would impact the effective rate, if recognized. The Company does not anticipate that total unrecognized tax benefits will be reduced in the next 12 months.

The effective tax rate for the quarter ended September 30, 2012 was 36.5% as compared to 35.5% for the quarter ended September 30, 2011. The effective income tax rate for the six months ended September 30, 2012 was 37.4% as compared to 35.5% for the six months ended September 30, 2011. For the six months ended September 30, 2012, the income tax provision included $2,219 of tax expense due to the recapture of domestic production deductions taken in earlier years associated with a refund claim expected to be filed in the second quarter. The Company filed a refund claim during the second quarter of fiscal 2013 for approximately $25,158 as a result of carrying back tax losses to prior years.

With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for fiscal years ended before March 31, 2009, state or local examinations for fiscal years ended before March 31, 2007, or foreign income tax examinations by tax authorities for fiscal years ended before March 31, 2008.

As of September 30, 2012, the Company was subject to examination in two state jurisdictions for fiscal years ended March 31, 2007 through March 31, 2011. The Company has filed appeals in a prior state examination related to fiscal years ended March 31, 1999 through March 31, 2005. Because of net operating losses acquired as part of the acquisition of Vought, the Company is subject to U.S. federal income tax examinations and various state jurisdictions for the years ended December 31, 2004 and after related to previously filed Vought tax returns. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

10.    GOODWILL
The following is a summary of the changes in the carrying value of goodwill by reportable segment, from March 31, 2012 through September 30, 2012:
 
Aerostructures
 
Aerospace
 Systems
 
Aftermarket
Services
 
Total
 
 
 
 
 
 
 
 
Balance, March 31, 2012
$
1,307,709

 
$
182,443

 
$
56,222

 
$
1,546,374

Effect of exchange rate changes

 
(115
)
 

 
(115
)
Balance, September 30, 2012
$
1,307,709

 
$
182,328

 
$
56,222

 
$
1,546,259


11.     PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined benefit pension plans covering some of its employees. Certain employee groups are ineligible to participate in the plans or have ceased to accrue additional benefits under the plans based upon their service to the Company or years of service accrued under the defined benefit pension plans. Benefits under the defined benefit plans are based on years of service and, for most non-represented employees, on average compensation for certain years. It is the Company’s policy to fund at least the minimum amount required for all qualified plans, using actuarial cost methods and

12

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

11.     PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)

assumptions acceptable under U.S. Government regulations, by making payments into a separate trust.
In addition to the defined benefit pension plans, the Company provides certain healthcare and life insurance benefits for eligible retired employees. Such benefits are unfunded. Employees achieve eligibility to participate in these contributory plans upon retirement from active service if they meet specified age and years of service requirements. Election to participate for some employees must be made at the date of retirement. Qualifying dependents at the date of retirement are also eligible for medical coverage. Current plan documents reserve the right to amend or terminate the plans at any time, subject to applicable collective bargaining requirements for represented employees. From time to time, changes have been made to the benefits provided to various groups of plan participants. Premiums charged to most retirees for medical coverage prior to age 65 are based on years of service and are adjusted annually for changes in the cost of the plans as determined by an independent actuary. In addition to this medical inflation cost-sharing feature, the plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, schedules of reasonable fees, preferred provider networks, coordination of benefits with other plans and a Medicare carve-out.
In accordance with the Compensation – Retirement Benefits topic of the ASC, the Company has recognized the funded status of the benefit obligation as of the date of the last remeasurement, in the accompanying consolidated balance sheet. The funded status is measured as the difference between the fair value of the plan’s assets and the PBO or accumulated postretirement benefit obligation of the plan. In order to recognize the funded status, the Company determined the fair value of the plan assets. The majority of the plan assets are publicly traded investments which were valued based on the market price as of the date of remeasurement. Investments that are not publicly traded were valued based on the estimated fair value of those investments based on our evaluation of data from fund managers and comparable market data.
Net Periodic Benefit Plan Costs
The components of net periodic benefit costs for our postretirement benefit plans are shown in the following table:
 
Pension benefits
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit expense (income):
 
 
 
 
 
 
 
Service cost
$
4,626

 
$
4,114

 
$
9,252

 
$
8,228

Interest cost
24,587

 
27,014

 
49,174

 
54,029

Expected return on plan assets
(34,333
)
 
(31,900
)
 
(68,667
)
 
(63,801
)
Amortization of prior service costs
(1,458
)
 
(2,754
)
 
(2,915
)
 
(5,507
)
Amortization of net loss
79

 
28

 
159

 
57

Special termination benefits
1,957

 

 
3,107

 

Net periodic benefit income
$
(4,542
)
 
$
(3,498
)
 
$
(9,890
)
 
$
(6,994
)

 
Other postretirement benefits
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Components of net periodic benefit expense:
 
 
 
 
 
 
 
Service cost
$
884

 
$
849

 
$
1,769

 
$
1,697

Interest cost
3,941

 
4,619

 
7,881

 
9,237

Amortization of prior service costs
(1,133
)
 
(1,133
)
 
(2,265
)
 
(2,265
)
Net periodic benefit expense
$
3,692

 
$
4,335

 
$
7,385

 
$
8,669


13

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

11.     PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)


The Company periodically experiences events or makes changes to its benefit plans that result in special charges. Some require remeasurements. The following summarizes the key events whose effects on net periodic benefit costs are included in the tables above:
In April 2012, the Company completed an early retirement incentive offer with a portion of its second largest union-represented group of production and maintenance employees. The early retirement incentive offer provided for an increase in the pension benefits payable to covered employees who retire no later than November 30, 2012. This early retirement incentive resulted in a special termination benefit expense of $1,150 and is presented on the accompanying consolidated statement of income as "Early retirement incentive expense".
In July 2012, the Company completed a similar early retirement incentive offer to its non-represented employee participants. This early retirement incentive provided for an increase in the termination benefits payable through the pension plan to covered employees who retire no later than November 30, 2012. This early retirement incentive resulted in a special termination benefit expense of $1,957 and is presented on the accompanying consolidated statement of income as "Early retirement incentive expense", as well as severance charges of $1,182 included in "Acquisition and integration expenses" on the accompanying consolidated statement of income.

In October 2012, the Company completed an early retirement incentive offer with a portion of its largest union-represented group of production and maintenance employees. The early retirement offer provided for an increase in the pension benefits to covered employees who retire no later than March 31, 2013. This early retirement incentive is expected to result in a special termination benefit expense of approximately $2,000 during the three months ended December 31, 2012.

12.     SEGMENTS
The Company has three reportable segments: the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group. The Company’s reportable segments are aligned with how the business is managed and the markets that the Company serves are viewed. The Chief Operating Decision Maker (the “CODM”) evaluates performance and allocates resources based upon review of segment information. The CODM utilizes earnings before interest, income taxes, depreciation and amortization (“EBITDA”) as a primary measure of segment profitability to evaluate performance of its segments and allocate resources.
The Aerostructures segment consists of the Company’s operations that manufacture products primarily for the aerospace original equipment manufacturer ("OEM") market. The Aerostructures segment’s revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components, including aircraft wings, fuselage sections, tail assemblies, engine nacelles, flight control surfaces as well as helicopter cabins. Further, the segment’s operations also design and manufacture composite assemblies for floor panels and environmental control system ducts. These products are sold to various aerospace OEMs on a global basis.
The Aerospace Systems segment consists of the Company’s operations that also manufacture products primarily for the aerospace OEM market, as well as the related aftermarket. The segment’s operations design and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators, mechanical control cables and non-structural cockpit components. These products are sold primarily to various aerospace OEMs on a global basis.
The Aftermarket Services segment consists of the Company’s operations that provide maintenance, repair and overhaul services to both commercial and military markets on components and accessories manufactured by third parties. Maintenance, repair and overhaul revenues are derived from services on auxiliary power units, airframe and engine accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the segment’s operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The segment’s operations also perform repair and overhaul services and supply spare parts for various types of cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis.
Segment EBITDA is total segment revenue reduced by operating expenses (less depreciation and amortization) identifiable with that segment. Corporate includes general corporate administrative costs and any other costs not identifiable with one of the Company’s segments, including early retirement incentives, such as the $1,957 and $3,107 of special termination benefit expenses for the three and six months ended September 30, 2012, respectively.
The Company does not accumulate net sales information by product or service or groups of similar products and services and, therefore, the Company does not disclose net sales by product or service because to do so would be impracticable. Selected financial information for each reportable segment and the reconciliation of EBITDA to operating income is as follows:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Net sales:
 
 
 
 
 
 
 
Aerostructures
$
713,978

 
$
587,977

 
$
1,383,831

 
$
1,231,283

Aerospace systems
150,139

 
133,775

 
290,651

 
266,785

Aftermarket services
76,061

 
70,547

 
156,038

 
140,915

Elimination of inter-segment sales
(1,997
)
 
(1,771
)
 
(4,651
)
 
(3,392
)
 
$
938,181

 
$
790,528

 
$
1,825,869

 
$
1,635,591

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes:
 
 
 
 
 
 
 
Operating income (expense):
 
 
 
 
 
 
 
Aerostructures
$
121,385

 
$
92,489

 
$
241,523

 
$
180,463

Aerospace systems
25,712

 
22,644

 
49,177

 
45,061

Aftermarket services
10,767

 
7,015

 
22,574

 
13,976

Corporate
(14,917
)
 
(13,692
)
 
(29,385
)
 
(25,664
)
 
142,947

 
108,456

 
283,889

 
213,836

Interest expense and other
16,668

 
17,671

 
33,900

 
44,133

 
$
126,279

 
$
90,785

 
$
249,989

 
$
169,703

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Aerostructures
$
24,049

 
$
21,937

 
$
47,953

 
$
43,782

Aerospace systems
4,489

 
4,322

 
8,963

 
8,667

Aftermarket services
2,288

 
2,341

 
4,614

 
4,771

Corporate
1,172

 
866

 
2,283

 
1,713

 
$
31,998

 
$
29,466

 
$
63,813

 
$
58,933

 
 
 
 
 
 
 
 
Amortization of acquired contract liabilities, net:
 
 
 
 
 
 
 
Aerostructures
$
6,563

 
$
5,770

 
$
13,555

 
$
13,510

 
 
 
 
 
 
 
 
EBITDA:
 
 
 
 
 
 
 
Aerostructures
$
138,871

 
$
108,656

 
$
275,921

 
$
210,735

Aerospace systems
30,201

 
26,966

 
58,140

 
53,728

Aftermarket services
13,055

 
9,356

 
27,188

 
18,747

Corporate
(11,788
)
 
(12,826
)
 
(23,995
)
 
(23,951
)
 
$
170,339

 
$
132,152

 
$
337,254

 
$
259,259

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Aerostructures
$
16,413

 
$
12,590

 
$
46,425

 
$
21,725

Aerospace systems
3,810

 
3,009

 
6,599

 
6,514

Aftermarket services
3,378

 
1,571

 
7,475

 
3,333

Corporate
487

 
1,314

 
694

 
2,577

 
$
24,088

 
$
18,484

 
$
61,193

 
$
34,149

 
September 30, 2012
 
March 31, 2012
Total Assets:
 
 
 
Aerostructures
$
3,627,511

 
$
3,593,091

Aerospace systems
551,445

 
556,485

Aftermarket services
318,415

 
317,440

Corporate
93,722

 
87,741

 
$
4,591,093

 
$
4,554,757


During the three months ended September 30, 2012 and 2011, the Company had international sales of $113,468 and $111,760, respectively. During the six months ended September 30, 2012 and 2011, the Company had international sales of $240,579 and $224,848, respectively.

13.
SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS

The 2017 Notes and the 2018 Notes are fully and unconditionally guaranteed on a joint and several basis by the Guarantor Subsidiaries. The total assets, stockholders' equity, revenue, earnings and cash flows from operating activities of the Guarantor Subsidiaries exceeded a majority of the consolidated total of such items as of and for the periods reported. The only consolidated subsidiaries of the Company that are not guarantors of the 2017 Notes and the 2018 Notes (the “Non-Guarantor Subsidiaries”) are: (a) the receivables securitization special-purpose entity; and (b) the international operating subsidiaries. The following tables present condensed consolidating financial statements including the Company (the “Parent”), the Guarantor Subsidiaries, and the Non-Guarantor Subsidiaries. Such financial statements include summary consolidating balance sheets as of September 30, 2012 and March 31, 2012, condensed consolidating statements of comprehensive income for the three and six months ended September 30, 2012 and 2011, and condensed consolidating statements of cash flows for the six months ended September 30, 2012 and 2011.


14

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

13.
SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued)

SUMMARY CONSOLIDATING BALANCE SHEETS:

 
September 30, 2012
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3,483

 
$
514

 
$
26,654

 
$

 
$
30,651

Trade and other receivables, net
357

 
177,869

 
219,036

 

 
397,262

Inventories

 
865,082

 
26,271

 

 
891,353

Rotable assets

 
25,645

 
10,085

 

 
35,730

Deferred income taxes

 
51,448

 

 

 
51,448

Prepaid expenses and other
6,683

 
12,260

 
4,370

 

 
23,313

Total current assets
10,523

 
1,132,818

 
286,416

 

 
1,429,757

Property and equipment, net
9,844

 
685,301

 
49,603

 

 
744,748

Goodwill and other intangible assets, net
671

 
2,310,107

 
47,962

 

 
2,358,740

Other, net
56,691

 
727

 
430

 

 
57,848

Intercompany investments and advances
979,249

 
30,871

 
(3,143
)
 
(1,006,977
)
 

Total assets
$
1,056,978

 
$
4,159,824

 
$
381,268

 
$
(1,006,977
)
 
$
4,591,093

 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
110,059

 
$
15,142

 
$

 
$

 
$
125,201

Accounts payable
3,783

 
270,836

 
6,470

 

 
281,089

Accrued expenses
41,791

 
181,067

 
8,955

 

 
231,813

Total current liabilities
155,633

 
467,045

 
15,425

 

 
638,103

Long-term debt, less current portion
765,486

 
52,203

 
149,800

 

 
967,489

Intercompany debt
(1,830,852
)
 
1,677,020

 
153,832

 

 

Accrued pension and other postretirement benefits, noncurrent
7,317

 
618,845

 

 

 
626,162

Deferred income taxes and other
8,265

 
401,082

 
(1,137
)
 

 
408,210

Total stockholders’ equity
1,951,129

 
943,629

 
63,348

 
(1,006,977
)
 
1,951,129

Total liabilities and stockholders’ equity
$
1,056,978

 
$
4,159,824

 
$
381,268

 
$
(1,006,977
)
 
$
4,591,093


15

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

13.
SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued)

SUMMARY CONSOLIDATING BALANCE SHEETS:
 
March 31, 2012
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
7,969

 
$
2,237

 
$
19,456

 
$

 
$
29,662

Trade and other receivables, net
225

 
209,146

 
231,237

 

 
440,608

Inventories

 
789,913

 
28,043

 

 
817,956

Rotable assets

 
24,468

 
10,086

 

 
34,554

Deferred income taxes

 
72,259

 

 

 
72,259

Prepaid expenses and other
5,956

 
13,156

 
4,232

 

 
23,344

Total current assets
14,150

 
1,111,179

 
293,054

 

 
1,418,383

Property and equipment, net
10,444

 
674,036

 
48,900

 

 
733,380

Goodwill and other intangible assets, net
1,006

 
2,326,112

 
48,932

 

 
2,376,050

Other, net
25,060

 
1,488

 
396

 

 
26,944

Intercompany investments and advances
555,684

 
318,713

 
1,957

 
(876,354
)
 

Total assets
$
606,344

 
$
4,431,528

 
$
393,239

 
$
(876,354
)
 
$
4,554,757

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
128,996

 
$
13,241

 
$

 
$

 
$
142,237

Accounts payable
2,548

 
257,136

 
6,440

 

 
266,124

Accrued expenses
46,123

 
256,413

 
9,084

 

 
311,620

Total current liabilities
177,667

 
526,790

 
15,524

 

 
719,981

Long-term debt, less current portion
847,049

 
49,576

 
120,000

 

 
1,016,625

Intercompany debt
(2,227,499
)
 
2,032,973

 
194,526

 

 

Accrued pension and other postretirement benefits, noncurrent
7,119

 
693,006

 

 

 
700,125

Deferred income taxes and other
8,639

 
317,362

 
(1,344
)
 

 
324,657

Total stockholders’ equity
1,793,369

 
811,821

 
64,533

 
(876,354
)
 
1,793,369

Total liabilities and stockholders’ equity
$
606,344

 
$
4,431,528

 
$
393,239

 
$
(876,354
)
 
$
4,554,757



16

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

13.
SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:
 
Three Months Ended September 30, 2012
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$

 
$
914,943

 
$
24,274

 
$
(1,036
)
 
$
938,181

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 

Cost of sales

 
687,053

 
17,637

 
(1,036
)
 
703,654

Selling, general and administrative
10,189

 
41,412

 
4,592

 

 
56,193

Depreciation and amortization
610

 
30,282

 
1,106

 

 
31,998

Acquisition and integration expenses

 
1,432

 

 

 
1,432

Early retirement incentives
1,957

 

 

 

 
1,957

 
12,756

 
760,179

 
23,335

 
(1,036
)
 
795,234

Operating income (loss)
(12,756
)
 
154,764

 
939

 

 
142,947

Intercompany interest and charges
(49,217
)
 
48,441

 
776

 

 

Interest expense and other
15,143

 
2,062

 
(537
)
 

 
16,668

Income from continuing operations, before income taxes
21,318

 
104,261

 
700

 

 
126,279

Income tax expense
8,709

 
37,140

 
239

 

 
46,088

Net income
12,609

 
67,121

 
461

 

 
80,191

Other comprehensive income

 
254

 
4,093

 

 
4,347

Total comprehensive income
$
12,609

 
$
67,375

 
$
4,554

 
$

 
$
84,538



17

Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

13.
SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued)

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:
 
Three Months Ended September 30, 2011
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$

 
$
766,759

 
$
25,105

 
$
(1,336
)
 
$
790,528

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
572,740

 
19,802

 
(1,336
)
 
591,206

Selling, general and administrative
9,402

 
46,617

 
4,237

 

 
60,256

Acquisition and integration expenses
1,144

 

 

 

 
1,144

Depreciation and amortization
413

 
27,779

 
1,274

 

 
29,466

 
10,959

 
647,136

 
25,313

 
(1,336
)
 
682,072

Operating income (loss)
(10,959
)
 
119,623

 
(208
)