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Table of Contents

 

 

 

United States

Securities and Exchange Commission

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2009.

 

or

 

o              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.)

 

1550 Liberty Ridge, Suite 100, Wayne, PA

 

19087

(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 x No o

 

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 o No o

 

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 Securities Exchange Act of 1934. (Check one)

 

Large accelerated filer x

Accelerated filer  o

 

 

Non-accelerated filero
(
Do not check if a smaller reporting company)

Smaller reporting company o

 

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

 

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

 

Common Stock, par value $0.001 per share, 16,662,096 shares outstanding as of September 30, 2009.

 

 

 



Table of Contents

 

TRIUMPH GROUP, INC.

INDEX

 

 

 

Page
Number

 

 

 

Part I. Financial Information

 

 

 

 

 

Item 1.    Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets
September 30, 2009 and March 31, 2009

 

1

 

 

 

Consolidated Statements of Income
Three months ended September 30, 2009 and 2008
Six months ended September 30, 2009 and 2008

 

2

 

 

 

Consolidated Statements of Cash Flows
Six months ended September 30, 2009 and 2008

 

3

 

 

 

Consolidated Statements of Comprehensive Income
Three months ended September 30, 2009 and 2008
Six months ended September 30, 2009 and 2008

 

4

 

 

 

Notes to Consolidated Financial Statements September 30, 2009

 

5

 

 

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

20

 

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

30

 

 

 

Item 4.    Controls and Procedures

 

30

 

 

 

Part II. Other Information

 

 

 

 

 

Item 1.    Legal Proceedings

 

31

 

 

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

32

 

 

 

Item 6.    Exhibits

 

33

 

 

 

Signatures

 

33

 



Table of Contents

 

Part I.  Financial Information

 

Item 1.  Financial Statements.

 

Triumph Group, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share data)

 

 

 

SEPTEMBER 30,

 

MARCH 31,

 

 

 

2009

 

2009

 

 

 

(unaudited)

 

(as adjusted,

 

 

 

 

 

see Note 2)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

26,973

 

$

14,478

 

Accounts receivable, less allowance for doubtful accounts of $5,819 and $5,641

 

182,011

 

209,463

 

Inventories

 

394,089

 

389,348

 

Rotable assets

 

26,393

 

25,652

 

Assets held for sale

 

23,436

 

27,695

 

Deferred income taxes

 

1,628

 

1,727

 

Prepaid income taxes

 

2,650

 

4,434

 

Prepaid expenses and other

 

8,852

 

6,021

 

Total current assets

 

666,032

 

678,818

 

Property and equipment, net

 

326,320

 

332,467

 

Goodwill

 

465,211

 

459,541

 

Intangible assets, net

 

101,877

 

108,350

 

Other, net

 

15,118

 

12,031

 

Total assets

 

$

1,574,558

 

$

1,591,207

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

89,632

 

$

103,711

 

Accrued expenses

 

96,174

 

109,580

 

Liabilities related to assets held for sale

 

2,758

 

4,283

 

Current portion of long-term debt

 

92,504

 

89,085

 

Total current liabilities

 

281,068

 

306,659

 

 

 

 

 

 

 

Long-term debt, less current portion

 

330,094

 

370,311

 

Income taxes payable, non-current

 

2,962

 

2,917

 

Deferred income taxes and other

 

126,277

 

121,935

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $.001 par value, 100,000,000 shares authorized, 16,821,134 and 16,763,984 shares issued; 16,662,096 and 16,589,567 outstanding

 

16

 

16

 

Capital in excess of par value

 

314,059

 

312,256

 

Treasury stock, at cost, 159,038 and 174,417 shares

 

(8,727

)

(9,785

)

Accumulated other comprehensive income (loss)

 

4,425

 

(2,233

)

Retained earnings

 

524,384

 

489,131

 

Total stockholders’ equity

 

834,157

 

789,385

 

Total liabilities and stockholders’ equity

 

$

1,574,558

 

$

1,591,207

 

 

SEE ACCOMPANYING NOTES.

 

1



Table of Contents

 

Triumph Group, Inc.

Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

 

 

THREE MONTHS
ENDED

 

SIX MONTHS  ENDED

 

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

(as adjusted,
See note 2)

 

 

 

(as adjusted,
See note 2)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

313,139

 

$

323,391

 

$

629,269

 

$

643,947

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation shown separately below)

 

223,501

 

228,139

 

447,849

 

451,959

 

Selling, general and administrative

 

38,213

 

40,153

 

78,049

 

81,388

 

Depreciation and amortization

 

14,297

 

12,385

 

28,373

 

24,558

 

 

 

276,011

 

280,677

 

554,271

 

557,905

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

37,128

 

42,714

 

74,998

 

86,042

 

Interest expense and other

 

5,501

 

4,611

 

10,827

 

9,579

 

Gain on extinguishment of debt

 

(39

)

 

(39

)

 

Income from continuing operations before income taxes

 

31,666

 

38,103

 

64,210

 

76,463

 

Income tax expense

 

10,948

 

13,027

 

21,971

 

26,352

 

Income from continuing operations

 

20,718

 

25,076

 

42,239

 

50,111

 

Loss from discontinued operations, net

 

(1,267

)

(1,093

)

(4,749

)

(2,296

)

Net income

 

$

19,451

 

$

23,983

 

$

37,490

 

$

47,815

 

 

 

 

 

 

 

 

 

 

 

Earnings per share—basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.26

 

$

1.53

 

$

2.57

 

$

3.06

 

Loss from discontinued operations, net

 

(0.08

)

(0.07

)

(0.29

)

(0.14

)

Net income

 

$

1.18

 

$

1.46

 

$

2.28

 

$

2.92

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic

 

16,464

 

16,386

 

16,448

 

16,379

 

 

 

 

 

 

 

 

 

 

 

Earnings per share—diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.25

 

$

1.51

 

$

2.54

 

$

3.02

 

Loss from discontinued operations, net

 

(0.08

)

(0.07

)

(0.29

)

(0.14

)

Net income

 

$

1.17

 

$

1.44

 

$

2.26

 

$

2.88

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—diluted

 

16,637

 

16,607

 

16,618

 

16,619

 

 

 

 

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.04

 

$

0.04

 

$

0.08

 

$

0.08

 

 

SEE ACCOMPANYING NOTES.

 

2



Table of Contents

 

Triumph Group, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

 

 

SIX MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

 

 

2009

 

2008

 

 

 

 

 

(as adjusted,
See note 2)

 

Operating Activities

 

 

 

 

 

Net income

 

$

37,490

 

$

47,815

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

28,373

 

24,558

 

Gain on early extinguishment of debt

 

(39

)

 

Accretion of discount on convertible notes

 

2,994

 

3,141

 

Other amortization included in interest expense

 

840

 

791

 

Provision for doubtful accounts receivable

 

317

 

933

 

Provision for deferred income taxes

 

4,421

 

5,826

 

Employee stock compensation

 

1,694

 

1,617

 

Changes in other current assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:

 

 

 

 

 

Accounts receivable

 

27,147

 

15,798

 

Rotable assets

 

(741

)

(3,731

)

Inventories

 

(4,411

)

(18,890

)

Prepaid expenses and other current assets

 

(2,972

)

117

 

Accounts payable, accrued expenses and income taxes payable

 

(26,726

)

(28,282

)

Changes in discontinued operations

 

5,421

 

(1,688

)

Other

 

(550

)

(517

)

Net cash provided by operating activities

 

73,258

 

47,488

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(14,045

)

(21,372

)

Proceeds from sale of assets and businesses

 

513

 

322

 

Cash used for businesses and intangible assets acquired

 

(5,825

)

 

Net cash used in investing activities

 

(19,357

)

(21,050

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net decrease in revolving credit facility

 

(42,729

)

(26,814

)

Proceeds from issuance of long-term debt

 

401

 

1,257

 

Proceeds from equipment leasing facility and other capital leases

 

13,942

 

 

Retirement of convertible debt and repayment of capital lease obligations

 

(8,788

)

(504

)

Payment of deferred financing cost

 

(3,925

)

(723

)

Dividends paid

 

(1,333

)

(1,326

)

Withholding of restricted shares for minimum tax obligation

 

(470

)

 

Proceeds from exercise of stock options, including excess tax benefit of $98 and $196 in fiscal 2010 and 2009

 

819

 

1,121

 

Net cash used in financing activities

 

(42,083

)

(26,989

)

Effect of exchange rate changes on cash

 

677

 

(122

)

 

 

 

 

 

 

Net change in cash

 

12,495

 

(673

)

Cash at beginning of period

 

14,478

 

13,738

 

 

 

 

 

 

 

Cash at end of period

 

$

26,973

 

$

13,065

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes, net of refunds

 

$

13,204

 

$

19,659

 

Cash paid for interest

 

$

7,971

 

$

7,017

 

 

SEE ACCOMPANYING NOTES.

 

3



Table of Contents

 

Triumph Group, Inc.

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

(as adjusted,
See note 2)

 

 

 

(as adjusted,
See note 2)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,451

 

$

23,983

 

$

37,490

 

$

47,815

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

167

 

(1,759

)

6,330

 

(1,808

)

Unrealized (loss) gain on cash flow hedge, net of tax of $(55), $(226), $193 and $673, respectively

 

(93

)

(384

)

328

 

1,147

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

19,525

 

$

21,840

 

$

44,148

 

$

47,154

 

 

SEE ACCOMPANYING NOTES.

 

4



Table of Contents

 

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 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2010.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

 

The Company designs, engineers, manufactures, repairs and overhauls aircraft components and accessories. 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

 

Subsequent Events

 

The Company has evaluated all subsequent events through October 28, 2009, which represents the filing date of this Form 10-Q with the Securities and Exchange Commission, to ensure that this Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of September 30, 2009, and events which occurred subsequent to September 30, 2009 but were not recognized in the financial statements. As of October 28, 2009, there were no subsequent events which required recognition or disclosure.

 

Use of Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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.

 

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”) represented approximately 22% and 16% of total accounts receivable as of September 30, 2009 and March 31, 2009, respectively. The Company had no other significant concentrations of credit risk. Sales to Boeing for the six months ended September 30, 2009 were $184,217, or 29% of net sales, of which $164,027 and $20,190 were from the Aerospace Systems segment and Aftermarket Services segment, respectively. Sales to Boeing for the six months ended September 30, 2008 were $154,969 or 24% of net sales, of which $132,296 and $22,673 were from 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.

 

Recently Issued Accounting Pronouncements

 

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion

 

5



Table of Contents

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

2.               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(Including Partial Cash Settlement) (“FSP APB 14-1”), which was primarily codified into Topic 470, Debt in the Accounting Standard Codification (“ASC”)FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants.  Additionally, this FSP specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.

 

The Company recognized a cumulative-effect adjustment of $1,953 reducing the April 1, 2007 balance of retained earnings and reducing the carrying amount of our convertible debt to the discounted value with the discount recorded through capital in excess of par. The retroactive application of FSP APB 14-1 resulted in the recognition of additional pre-tax non-cash interest expense for the six months ended September 30, 2008 of $3,085, or $0.12 per diluted share.

 

The following table sets forth the effect of the retrospective application of FSP APB 14-1 on certain reported line items:

 

 

 

Three months ended September 30, 2008

 

Consolidated Statement of Income

 

As previously
reported

 

Adjustment

 

As adjusted

 

Interest expense and other

 

$

3,067

 

$

1,544

 

$

4,611

 

Income tax expense

 

13,578

 

(550

)

13,027

 

Net income

 

24,976

 

(994

)

23,983

 

 

 

 

Six months ended September 30, 2008

 

Consolidated Statement of Income

 

As previously
reported

 

Adjustment

 

As adjusted

 

Interest expense and other

 

$

6,494

 

$

3,085

 

$

9,579

 

Income tax expense

 

27,445

 

(1,093

)

26,352

 

Net income

 

49,807

 

(1,992

)

47,815

 

 

 

 

March 31, 2009

 

Consolidated Balance Sheet

 

As previously
reported

 

Adjustment

 

As adjusted

 

Other assets, net

 

$

13,731

 

$

(1,700

)

$

12,031

 

Long-term debt, less current portion

 

386,219

 

(15,908

)

370,311

 

Deferred income taxes other

 

117,462

 

4,473

 

121,935

 

Capital in excess of par

 

291,304

 

20,952

 

312,256

 

Retained earnings

 

500,348

 

(11,217

)

489,131

 

 

The debt and equity components recognized for the Company’s convertible notes as of March 31, 2009 were as follows:

 

Principal amount of convertible notes

 

$

183,250

 

Unamortized discount (1)

 

15,908

 

Net carrying amount

 

167,342

 

 


(1)          Remaining recognition period of 2.5 years as of March 31, 2009.

 

6



Table of Contents

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The amount of interest expense recognized and the effective rate for the Company’s convertible notes were as follows:

 

 

 

Three months ended
September 30,

 

Six months ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Contractual coupon interest

 

$

1,181

 

$

1,321

 

$

2,410

 

$

2,641

 

Amortization of discount on convertible notes

 

1,525

 

1,583

 

3,019

 

3,141

 

Interest expense

 

2,706

 

2,904

 

5,429

 

5,782

 

 

 

 

 

 

 

 

 

 

 

Effective interest rate

 

6.5

%

6.5

%

6.5

%

6.5

%

 

In February 2008 the FASB issued FSP No. 157-1, which amends SFAS No. 157, Fair Value Measurements (“SFAS 157”) to exclude SFAS No. 13, Accounting for Leases, and other accounting pronouncements that address fair value measurements for lease transactions, and FSP No. 157-2, which primarily were codified into Topic 820, Fair Value Measurements and Disclosures in the ASC and delayed the effective date of SFAS 157 as it relates to nonfinancial assets and nonfinancial liabilities until April 1, 2009 for the Company, except for items that are recognized or disclosed at fair value in the Company’s financial statements on a recurring basis.  The nonfinancial assets and nonfinancial liabilities for which the Company had previously not applied the fair value provisions of SFAS 157 include: goodwill; intangible and other long-lived asset impairment testing; asset retirement obligations; liabilities for exit or disposal activities; and business combinations.  The adoption had no impact on the Company’s financial position, results of operations and cash flows as the Company did not have any non-financial assets and non-financial liabilities that were recognized or disclosed at fair value on a recurring basis at March 31, 2009.

 

In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which primarily was codified into Topic 820, Fair Value Measurements and Disclosures, in the ASC.  The FSP requires entities to evaluate the significance and relevance of market factors for fair value inputs to determine if, due to reduced volume and market activity, the factors are still relevant and substantive measures of fair value.  The FSP is effective for interim and annual reporting periods ending after June 15, 2009, and the adoption did not have a material effect on our financial position or results of operations.

 

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which primarily was codified into Topic 715, Compensation and Benefits, in the ASC. This FSP amends SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan on investment policies and strategies, major categories of plan assets, inputs and valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. This FSP shall be effective for fiscal years ending after December 15, 2009, with earlier application permitted. Upon initial application, the provisions of this FSP are not required for earlier periods that are presented for comparative purposes. We are currently evaluating the disclosure requirements of this new FSP.

 

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, which was primarily codified into Topic 825, Financial Instruments, in the ASC. This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP shall be effective for interim

 

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Table of Contents

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this FSP in the quarter ended September 30, 2009 and the adoption of this FSP did not have a material effect on its disclosures.

 

Effective April 1, 2009, the Company adopted SFAS No. 141(R), Business Combinations (“SFAS 141(R)”) which was primarily codified into Topic 805, Business Combinations, in the ASC, and SFAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160), which was primarily codified into Topic 810, Consolidations in the ASC. SFAS 141(R) and SFAS 160 significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests. The adoption of SFAS 141(R) and SFAS 160 did not have a material impact on the Company’s consolidated financial statements.

 

Stock-Based Compensation

 

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which primarily was codified into Topic 718, Compensation — Stock Compensation, in the ASC and requires companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. The Company adopted SFAS 123R, using the modified-prospective transition method, beginning on April 1, 2006, and therefore began to expense the fair value of all outstanding options over their remaining vesting periods to the extent the options were not fully vested as of the adoption date and began to expense the fair value of all options granted subsequent to March 31, 2006 over their requisite service periods. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow ($98 and $196 for the six months ended September 30, 2009 and September 30, 2008, respectively), rather than an operating cash flow.  Stock-based compensation expense related to employee stock options and restricted stock awards recognized under SFAS 123R for the three months ended September 30, 2009 and September 30, 2008 was $ 814 and $812, respectively, and for the six months ended September 30, 2009 and September 30, 2008 was $1,694 and $1,617, respectively, and, in accordance with Staff Accounting Bulletin (“SAB”) 107, 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.

 

Intangible Assets

 

Intangible assets cost and accumulated amortization at September 30, 2009 were $173,649 and $71,772, respectively.  Intangible assets cost and accumulated amortizations at March 31, 2009 were $171,558 and $63,208, respectively.  Intangible assets consist of two major classes: (i) product rights and licenses, which at September 30, 2009 had a weighted-average life of 11.3 years and (ii) non-compete agreements, customer relationships and other, which at September 30, 2009 had a weighted-average life of 9.9 years.  Gross cost and accumulated amortization of product rights and licenses at September 30, 2009 were $74,082 and $48,516, respectively, and at March 31, 2009 were $74,082 and $45,079, respectively.  Gross cost and accumulated amortization of noncompete agreements, customer relationships and other at September 30, 2009 were $99,567 and $23,256, respectively, and at March 31, 2009 were $97,476 and $18,129, respectively.  Amortization expense for the three and six months ended September 30, 2009 and 2008 was $4,286 and $8,544 and $3,013 and $6,008, respectively.  Amortization expense for the fiscal year ended March 31, 2010 and the succeeding five fiscal years by year is expected to be as follows: 2010: $16,612; 2011: $14,827; 2012: $13,330; 2013: $13,145; 2014: $12,139; and thereafter: $38,327.

 

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Table of Contents

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

3.  ACQUISITIONS

 

FISCAL 2009 ACQUISITIONS

 

Acquisition of Merritt Tool Company

 

Effective March 13, 2009, the Company acquired all of the outstanding shares of Merritt Tool Company, Inc. (“Merritt”), renamed Triumph Structures — East Texas, Inc. Triumph Structures — East Texas, Inc. is a manufacturer of aircraft structural components specializing in complex precision machining primarily for commercial and military aerospace programs.  Merritt provides the Company with expanded capacity and increased market share in structural components. The results for Triumph Structures — East Texas, Inc. are included in the Company’s Aerospace Systems segment.

 

Acquisition of Saygrove Defence & Aerospace Group Limited

 

Effective March 13, 2009, the Company acquired all of the outstanding shares of Saygrove Defence & Aerospace Group Limited (“Saygrove”), renamed Triumph Actuation & Motion Control Systems-UK, Ltd. Triumph Actuation & Motion Control Systems-UK, Ltd. is a provider of motion control and actuation products for the aerospace and defense industry.  Saygrove provides the Company with added advanced control products for flight actuation and motor control applications in all-electric aircraft and Unmanned Aerial Vehicles. The results for Triumph Actuation & Motion Control Systems-UK, Ltd. are included in the Company’s Aerospace Systems segment.

 

Acquisition of Aviation Segment of Kongsberg Automotive Holdings ASA

 

Effective March 31, 2009, the Company acquired the assets of the aviation segment of Kongsberg Automotive Holdings ASA (“KA”) through two newly organized wholly-owned subsidiaries, Triumph Controls —  UK, Ltd. and Triumph Controls — Germany, GmbH. The acquired business, which is located in Basildon, U.K. and Heiligenhaus, Germany, provides cable control systems for commercial and military aircraft to Europe’s leading aerospace manufacturers.  KA provides the Company with expanded capacity and increased market share in cable control systems. The results for Triumph Controls — UK, Ltd. and Triumph Controls — Germany, GmbH will be included in the Company’s Aerospace Systems segment.

 

Acquisition of The Mexmil Company, LLC

 

Effective March 31, 2009, the Company acquired all of the equity interests of The Mexmil Company, LLC, and all of the equity interests of several affiliates (“Mexmil”), renamed Triumph Insulation Systems, LLC. Triumph Insulation Systems, LLC and its affiliates primarily provide insulation systems to original equipment manufacturers, or OEMs, airlines, maintenance, repair and overhaul organizations and air cargo carriers.  Mexmil provides the Company with an enhanced ability to provide a more comprehensive interiors solution to current and future customers.  The results for Triumph Insulation Systems, LLC and its affiliates will be included in the Company’s Aerospace Systems segment.

 

The acquisitions of Merritt, Saygrove, KA and Mexmil are herein referred to as the “fiscal 2009 acquisitions.”  The combined purchase price of the fiscal 2009 acquisitions of $152,161 includes cash paid at closing, estimated deferred payments and direct costs of the transactions.  Included in the deferred payments are delayed payments of $2,132 and $1,421 payable in March 2010 and September 2010, respectively. The fiscal 2009 acquisitions also provide for contingent payments, certain of which are contingent upon the achievement of specified earnings levels during the earnout period. The maximum amounts payable in respect of earnouts on the fiscal 2009 acquisitions for fiscal 2010, 2011, 2012 and 2013, respectively, are $2,322, $4,598, $5,426 and $2,629. In addition to the earnouts, there is another $10,000 that is contingent upon entering into a specific customer contract. The contingent amounts have not been recorded as the contingencies have not

 

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Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

3.  ACQUISITIONS (Continued)

 

been resolved and the consideration has not been paid.  The excess of the combined purchase price over the preliminary estimated fair value of the net assets acquired of $78,846 was recorded as goodwill, $60,944 of which is tax-deductible.  The Company has also identified intangible assets valued at approximately $45,466 comprised of noncompete agreements, customer relationships, and product rights and licenses with a weighted-average life of 9.3 years.  The Company is awaiting final appraisals of tangible and intangible assets and assumed liabilities related to the fiscal 2009 acquisitions.  Accordingly, the Company has recorded its best estimate of the intangibles and property and equipment subject to obtaining final appraisals.  Therefore, the allocation of purchase price for the fiscal 2009 acquisitions is not complete and is subject to change.

 

The following condensed balance sheet represents the amounts assigned to each major asset and liability caption in the aggregate for fiscal 2009 acquisitions:

 

Cash

 

$

5,182

 

Accounts receivable

 

14,070

 

Inventory

 

27,720

 

Prepaid expenses and other

 

1,952

 

Deferred tax asset

 

1,185

 

Property and equipment

 

16,036

 

Goodwill

 

78,846

 

Intangible assets

 

45,456

 

Total assets

 

$

190,447

 

Accounts payable

 

$

9,678

 

Accrued expenses

 

23,486

 

Other current liabilities

 

108

 

Other long-term liabilities

 

3,971

 

Total liabilities

 

$

37,243

 

 

The fiscal 2009 acquisitions have been accounted for under the purchase method of accounting and, accordingly, are included in the consolidated financial statements from the effective dates of acquisition. The fiscal 2009 acquisitions were funded by the Company’s long-term borrowings in place on the dates of acquisition.

 

The following unaudited pro forma information for the three and six months ended September 30, 2008 has been prepared assuming the fiscal 2009 acquisitions had occurred on April 1, 2008. The pro forma information for the three and six months ended September 30, 2008 is as follows: Net sales: $349,724 and $696,114; Income from continuing operations: $25,055 and $49,981; Income per share from continuing operations - basic: $1.53 and $3.05; Income per share from continuing operations — diluted:  $1.51 and $3.01.

 

The unaudited pro forma information includes adjustments for interest expense that would have been incurred to finance the purchase, additional depreciation based on the estimated fair market value of the property and equipment acquired, and the amortization of the intangible assets arising from the transactions.  The unaudited pro forma financial information is not necessarily indicative of the results of operations of the Company as it would have been had the transaction been effected on the assumed date.

 

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.   The Company recognized a pre-tax loss of $3,500 in the first quarter of fiscal 2008 based upon a write-down of the carrying value of the business to estimated fair value less costs to sell.  The write-down was applied to inventory and long-lived assets, consisting primarily of property, plant and equipment.

 

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Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

4.  DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (Continued)

 

As of September 30, 2009, the Company continued in discussions with several interested parties in acquiring the assets and liabilities held for sale. While the Company believes that these discussions will result in the recovery of the net assets held for sale, the final outcome of these negotiations could differ from current expectations, which may impact the recoverability of the net assets held for sale.

 

For financial statement purposes, the assets, liabilities, results of operations and cash flows of these businesses have been segregated from those of the continuing operations and are presented in the Company’s consolidated financial statements as discontinued operations and assets and liabilities held for sale.

 

Revenues of discontinued operations were $508 and $1,494, and $2,729 and $4,828 for the three and six months ended September 30, 2009 and September 30, 2008, respectively.  The loss from discontinued operations was $1,267 and $4,749, and $1,093 and $2,296 net of income tax benefit of $682 and $2,557 and $588 and $1,236 for the three months and six months ended September 30, 2009 and September 30, 2008, respectively.  Included in the loss from discontinued operations for the six months ended September 30, 2009 is an impairment charge of $2,512 million. Interest expense of $800 and $1,605, and $711 and $1,392 was allocated to discontinued operations for the three and six months ended September 30, 2009 and September 30, 2008, respectively, based upon the actual borrowings of the operations, and such interest expense is included in the loss from discontinued operations.

 

Assets and liabilities held for sale are comprised of the following:

 

 

 

SEPTEMBER 30,

 

MARCH 31,

 

 

 

2009

 

2009

 

Assets held for sale:

 

 

 

 

 

Accounts receivable, net

 

$

3,436

 

$

6,838

 

Inventories

 

10,870

 

11,763

 

Property, plant and equipment

 

9,084

 

9,062

 

Other

 

46

 

32

 

Total assets held for sale

 

$

23,436

 

$

27,695

 

Liabilities held for sale:

 

 

 

 

 

Accounts payable

 

$

217

 

$

1,630

 

Accrued expenses

 

292

 

475

 

Deferred tax liabilities and other

 

2,249

 

2,178

 

Total liabilities held for sale

 

$

2,758

 

$

4,283

 

 

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,

 

MARCH 31,

 

 

 

2009

 

2009

 

Raw materials

 

$

61,117

 

$

51,856

 

Manufactured and purchased components

 

166,918

 

142,833

 

Work-in-process

 

119,819

 

113,641

 

Finished goods

 

46,235

 

81,018

 

Total inventories

 

$

394,089

 

$

389,348

 

 

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Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

6.  LONG-TERM DEBT

 

Long-term debt consists of the following:

 

 

 

SEPTEMBER 30,

 

MARCH 31,

 

 

 

2009

 

2009

 

 

 

 

 

 

 

Convertible senior subordinated notes

 

$

166,467

 

$

167,342

 

Revolving credit facility

 

85,000

 

127,730

 

Receivable securitization facility

 

75,000

 

75,000

 

Equipment leasing facility and other capital leases

 

74,772

 

65,232

 

Subordinated promissory notes

 

13,481

 

16,575

 

Other debt

 

7,878

 

7,517

 

 

 

422,598

 

459,396

 

Less current portion

 

92,504

 

89,085

 

 

 

$

330,094

 

$

370,311

 

 

Credit Facility

 

On August 17, 2009, the Company amended its existing amended and restated credit agreement (the “Credit Facility”) with its lenders to (i) increase the availability under the Credit Facility to $485,000 from $370,000, (ii) extend the maturity date to January 31, 2013 and (iii) amend certain other terms and covenants. The Credit Facility bears interest at either: (i) LIBOR plus between 2.25% and 3.50%; (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, as defined in the Credit Facility. 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. In connection with the amendment, we incurred $3,946 of bank-related fees. These fees, along with $934 of unamortized debt issuance costs prior to the amendment, are being amortized into expense over the remaining term of the agreement.

 

At September 30, 2009, there were $85,000 in borrowings and $5,721 in letters of credit outstanding under the facility.  At March 31, 2009 there were $127,730 in borrowings and $5,600 in letters of credit outstanding under the facility.  The level of unused borrowing capacity under the Company’s revolving 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 Company is currently in compliance with all such covenants.  As of September 30, 2009, the Company had borrowing capacity under this facility of $394,279 after reductions for borrowings and letters of credit outstanding under the facility.

 

Convertible Senior Subordinated Notes

 

On September 18, 2006, the Company issued $201,250 in convertible senior subordinated notes (the “Notes”). The 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.  During the six months ended September 30, 2009, the Company paid $3,994 to purchase $4,200 in principal amount of the Notes, resulting in a reduction in the carrying amount of the Notes of $3,830 and a gain on extinguishment of $39. During fiscal 2009, the Company paid $15,420 to purchase $18,000 in principal amount of the Notes, resulting in a reduction in the carrying amount of the Notes of $16,283 and a gain on extinguishment of $880.

 

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Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

6.  LONG-TERM DEBT (Continued)

 

The Company received net proceeds from the sale of the Notes of approximately $194,998 after deducting debt issuance expenses of approximately $5,942. The use of the net proceeds from the sale was for prepayment of the Company’s 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 Credit Facility. Debt issuance costs have been recorded as other assets in the accompanying consolidated balance sheets and are being amortized over a period of five years.

 

The Notes bear interest at a fixed rate of 2.625% per annum, payable in cash semi-annually in arrears on each April 1 and October 1 beginning April 1, 2007. During the period commencing on October 6, 2011 and ending on, but excluding, April 1, 2012 and 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 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. This contingent interest feature represents an embedded derivative. Since the ability to call the Notes at any time after October 6, 2011 is within the control of the Company, the value of the derivative was determined to be de minimis. Accordingly, no value has been assigned at issuance or at September 30, 2009.

 

The Notes mature on October 1, 2026 unless earlier redeemed, repurchased or converted. The Company may redeem the Notes for cash, either in whole or in part, anytime on or after October 6, 2011 at a redemption price equal to 100% of the principal amount of the 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 Notes will have the right to require the Company to repurchase for cash all or a portion of their Notes on October 1, 2011, 2016 and 2021, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to, but not including, the date of repurchase. The Notes are convertible into the Company’s common stock at a rate equal to 18.3655 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $54.45 per share), subject to adjustment as described in the Indenture. Upon conversion, the Company will deliver to the holder surrendering the Notes for conversion, for each $1,000 principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 and the Company’s total conversion obligation and, to the extent that the Company’s total conversion obligation exceeds $1,000, at the Company’s election, cash or shares of the Company’s common stock in respect of the remainder.

 

The Notes are eligible for conversion upon meeting certain conditions as provided in the indenture governing the Notes. For the fiscal quarter ended September 30, 2009 and September 30, 2008, respectively, the Notes were not eligible for conversion.  Accordingly, the Company has classified the Notes as long-term as of September 30, 2009 and September 30, 2008, respectively.

 

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 $54.45. The average price of the Company’s common stock for the fiscal quarter ended September 30, 2009 and September 30, 2008 was $42.20 and $50.36, respectively.  Therefore, no additional shares were included in the diluted earnings per share calculation as of the fiscal quarter ended September 30, 2009 or September 30, 2008.  The average price of the Company’s common stock for the six months ended September 30, 2009 and September 30, 2008 was $41.56 and $54.65, respectively. Therefore, as of the six months ended September 30, 2009 and September 30, 2008, there were zero and 13,425 additional shares, respectively, included in the diluted earnings per share.  If the Company undergoes a fundamental change, holders of the Notes will have the right, subject to certain conditions, to require the Company to repurchase for cash all or a portion of their Notes at a

 

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Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

6.  LONG-TERM DEBT (Continued)

 

repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any.

 

Effective April 1, 2009, the Company adopted FSP APB 14-1, resulting in the reduction of the carrying amount of our convertible debt to the discounted value with the discount recorded through capital in excess of par. As of September 30, 2009, the remaining discount of $12,558 will be amortized on the effective interest method through October 1, 2011.

 

Receivables Securitization Program

 

In August 2008, the Company entered into a receivable securitization facility (the “Securitization Facility”) with a purchase limit of $125,000.  In connection with the Securitization Facility, the Company sells on a revolving basis certain 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 accounts receivable under the Securitization Facility.  As of September 30, 2009, the maximum amount available under the Securitization Facility was $104,483. The Securitization Facility is due to expire in August 2010 and is subject to annual renewal through August 2013.  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 0.85% on the amount outstanding under the Securitization Facility.  Additionally, the commitment fee is 0.65% on 102% of the maximum amount available under the Securitization Facility.  At September 30, 2009, there was $75,000 outstanding under the Securitization Facility.  In connection with entering into the Securitization Facility, the Company incurred approximately $823 of costs, which were deferred and are being amortized over the life of the Securitization Facility.  The Company securitizes its accounts receivable, which are generally non-interest bearing, in transactions that are accounted for as borrowings the Transfers and Servicing topic of the ASC.

 

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, resulting in net proceeds of $58,546 after deducting debt issuance costs of approximately $188. During the six months ended September 30, 2009, the Company originated additional capital lease financing resulting in proceeds of $13,942.  The net proceeds from the Leasing Facility were used to repay a portion of the outstanding indebtedness under the Company’s Credit Facility. The debt issuance costs have been recorded as other assets in the accompanying consolidated balance sheets and are being amortized over the term of the Leasing Facility. The Leasing Facility bears interest at a weighted-average fixed rate of 6.2% per annum.

 

7.  DERIVATIVES

 

Interest Rate Swap

 

The Company uses interest rate swaps, a derivative financial instrument, to manage interest costs and minimize the effects of interest rate fluctuations on cash flows associated with its Credit Facility.  The Company does not use derivative financial instruments for trading or speculative purposes.  While interest rate swaps are subject to fluctuations in value, these fluctuations are generally offset by the estimated fair value of the underlying exposures being hedged.

 

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Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

7.  DERIVATIVES (Continued)

 

The Company follows the Derivatives and Hedging topic of ASC to account for its interest rate swaps, which requires that all derivatives be recorded on the consolidated balance sheet at fair value.  The standards also require that changes in the fair value be recorded each period in current earnings or other comprehensive income, depending on the effectiveness of hedge transaction.  Interest rate swaps are designated as cash flow hedges.  Changes in the fair value of a cash flow hedge, to the extent the hedge is effective, are recorded, net of tax, in other comprehensive income (loss), a component of stockholders’ equity, until earnings are affected by the variability of the hedged cash flows.  Cash flow hedge ineffectiveness, defined as the extent that the changes in the fair value of the derivative exceed the variability of cash flows of the forecasted transaction, is recorded currently in earnings.

 

In March 2008, the Company entered into an interest rate swap agreement (the “Swap”), maturing June 2011 involving the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement, without exchange of the underlying principal amount.  Under the Swap, the Company receives interest equivalent to the one-month LIBOR and pays a fixed rate of interest of 2.925 percent with settlements occurring monthly.  The objective of the hedge is to eliminate the variability of cash flows in interest payments for $85,000 of floating rate debt.  To maintain hedge accounting for the Swap, the Company is committed to maintaining at least $85,000 in borrowings at an interest rate based on one-month LIBOR, plus an applicable margin, through June 2011.

 

As of September 30, 2009, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swap was $85,000.  For the six months ended September 30, 2009, $1,104 of losses were reclassified into earnings from accumulated other comprehensive income.

 

The fair value of the interest rate swap of $2,908 and $3,429 as of September 30, 2009 and March 31, 2009, respectively, were included in Deferred income taxes and other.

 

The effect of derivative instruments in the consolidated statements of income is as follows:

 

 

 

 

 

Amount of Gain in OCI

 

Reclassification Adjustment

 

 

 

Reclassification Adjustment

 

(Effective Portion)

 

Gain (Loss) Amount

 

 

 

Gain (Loss) Location

 

Period ended September 30,

 

Period ended September 30,

 

Cash Flow Hedges

 

(Effective Portion)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Interest expense and other

 

$

328

 

$

1,147

 

$

(1,104

)

$

(131

)

 

The amount of ineffectiveness on the interest rate swap is not significant. The Company estimates that approximately $1,129 of losses presently in accumulated other comprehensive income (loss) will be reclassified into earnings during the remainder of fiscal 2010.

 

8.  FAIR VALUE MEASUREMENTS

 

The Company follows the Fair Value Measurement 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:

 

15



Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

8.  FAIR VALUE MEASUREMENTS (Continued)

 

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.

 

The following table provides the assets reported at fair value and measured on a recurring basis as of September 30, 2009:

 

 

 

 

 

Fair Value Measurements Using:

 

 

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

Significant Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap, net of tax of $(1,076)

 

$

1,832

 

$

 

$

1,832

 

$

 

 

The fair value of the interest rate swap contract is determined using observable current market information as of the reporting date such as the prevailing LIBOR-based interest rate.

 

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, 2009 and March 31, 2009 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, 2009

 

March 31, 2009

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

422,598

 

$

453,298

 

$

459,396

 

$

469,221

 

 

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.

 

16



Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

9.  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

 

SIX MONTHS
ENDED

 

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

 

(in thousands)

 

(in thousands)

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

16,464

 

16,386

 

16,448

 

16,379

 

Net effect of dilutive stock options

 

173

 

221

 

170

 

227

 

Potential common shares - convertible debt

 

 

 

 

13

 

Weighted average common shares outstanding — diluted

 

16,637

 

16,607

 

16,618

 

16,619

 

 

10.  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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

 

The Company has classified uncertain tax positions as non-current 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, 2009 and March 31, 2009, the total amount of accrued income tax-related interest and penalties was $412 and $357, respectively.

 

As of September 30, 2009 and March 31, 2009, the total amount of unrecognized tax benefits was $3,274 and $3,211, respectively, of which $3,223 and $3,188, respectively, would impact the effective rate, if recognized.  The Company anticipates that total unrecognized tax benefits may be reduced by $693 due to the expiration of statutes of limitation for various federal tax issues in the next 12 months.

 

As of September 30, 2009, the Company was subject to examination in state jurisdictions for fiscal years ended March 31, 2005 through March 31, 2008, none of which we believe is individually material.  The Company has filed appeals in a state jurisdiction related to fiscal years ended March 31, 1999 through March 31, 2005.  The fiscal year ended March 31, 2008 is currently being examined by the Internal Revenue Service.

 

The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

 

With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for fiscal years ended before March 31, 2006, state or local examinations for fiscal years ended before March 31, 2005, or foreign income tax examinations by tax authorities for fiscal years ended before March 31, 2007.

 

17



Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

11.  GOODWILL

 

The following is a summary of the changes in the carrying value of goodwill by reportable segment, from March 31, 2009 through September 30, 2009:

 

 

 

Aerospace
Systems

 

Aftermarket
Services

 

Total

 

 

 

 

 

 

 

 

 

Balance, March 31, 2009

 

$

405,982

 

$

53,559

 

$

459,541

 

Purchase price allocation adjustments

 

5,477

 

 

5,477

 

Effect of exchange rate changes and other

 

1,903

 

(1,710

)

193

 

Balance, September 30, 2009

 

$

413,362

 

$

51,849

 

$

465,211

 

 

12.  SEGMENTS

 

The Company has two reportable segments: the Aerospace Systems Group and the Aftermarket Services Group.  Our Aerospace Systems segment consists of 39 operating locations, and the Aftermarket Services segment consists of 19 operating locations at September 30, 2009.

 

The Aerospace Systems segment consists of the Company’s operations that manufacture products primarily for the aerospace OEM market. The segment’s operations design and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators and mechanical control cables. The segment’s revenues are also derived from stretch forming, die forming, milling, bonding, machining, welding and assembly and fabrication of various structural components used in aircraft wings, fuselages and other significant assemblies. Further, the segment’s operations also design and manufacture composite assemblies for floor panels, environmental control system ducts, thermal acoustic insulation systems and non-structural cockpit components.  These products are sold 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 operating income is total segment revenue reduced by operating expenses identifiable with that segment. Corporate includes general corporate administrative costs and any other costs not identifiable with one of the Company’s segments.

 

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.

 

18



Table of Contents

 

Triumph Group, Inc.

Notes To Consolidated Financial Statements

(dollars in thousands, except per share data)

(unaudited)

 

12.  SEGMENTS (Continued)

 

Selected financial information for each reportable segment is as follows:

 

 

 

THREE MONTHS ENDED

 

SIX MONTHS ENDED

 

 

 

SEPTEMBER 30,

 

SEPTEMBER 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net sales:

 

 

 

 

 

 

 

 

 

Aerospace systems

 

$

256,421

 

$

257,569

 

$

516,394

 

$

515,801

 

Aftermarket services

 

57,313

 

66,481

 

115,097

 

129,449

 

Elimination of inter-segment sales

 

(595

)

(659

)

(2,222

)

(1,303

)

 

 

$

313,139

 

$

323,391

 

$

629,269

 

$

643,947

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes:

 

 

 

 

 

 

 

 

 

Operating income (expense):

 

 

 

 

 

 

 

 

 

Aerospace systems

 

$

39,086

 

$

46,515

 

$

80,931

 

$

92,585

 

Aftermarket services

 

3,481

 

2,896

 

5,904

 

6,783

 

Corporate

 

(5,439

)

(6,697

)

(11,837

)

(13,326

)

 

 

37,128

 

42,714

 

74,998

 

86,042

 

Interest expense and other

 

5,462

 

4,611

 

10,788

 

9,579

 

 

 

$

31,666

 

$

38,103

 

$

64,210

 

$

76,463

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

Aerospace systems

 

$

10,888

 

$

8,787

 

$

21,590

 

$

17,390

 

Aftermarket services

 

3,182

 

3,532

 

6,439

 

7,035

 

Corporate

 

227

 

66

 

344

 

133

 

 

 

$

14,297

 

$

12,385

 

$

28,373

 

$

24,558

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

Aerospace systems

 

$

5,959

 

$

8,757

 

$

11,471

 

$

17,911

 

Aftermarket services

 

730

 

827

 

1,760

 

2,974

 

Corporate

 

283

 

425

 

814

 

487

 

 

 

$

6,972

 

$

10,009

 

$

14,045

 

$

21,372

 

 

 

 

SEPTEMBER 30,

 

MARCH 31,

 

 

 

2009

 

2009

 

Total Assets:

 

 

 

 

 

Aerospace systems

 

$

1,197,626

 

$

1,213,142

 

Aftermarket services

 

311,137

 

318,596

 

Corporate

 

42,359

 

31,774

 

Discontinued Operations

 

23,436

 

27,695

 

 

 

$

1,574,558

 

$

1,591,207

 

 

During the three months ended September 30, 2009 and 2008, the Company had foreign sales of $60,995 and $68,031, respectively.  During the six month period ended September 30, 2009 and 2008, the Company had international sales of $125,525 and $139,173, respectively.

 

19



Table of Contents

 

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 two operating segments: (i) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build-to-print components, assemblies and systems for the global aerospace original equipment manufacturers, or OEM, market; and (ii) 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.

 

Financial highlights for the three and six months ended September 30, 2009 include:

 

·                  Net sales for the second quarter of the fiscal year ending March 31, 2010 decreased 3.2% to $313.1 million.

 

·                  Operating income in the second quarter of fiscal 2010 decreased 13.1% to $37.1 million.

 

·                  Income from continuing operations for the second quarter of fiscal 2010 decreased 20.5% to $20.7 million.

 

·                  Backlog decreased 2% from the second quarter of the prior year to $1.2 billion.

 

·                  Income from continuing operations was $1.25 per diluted common share for the second quarter, a 21% decrease versus prior year.

 

·                  For the six months ended September 30, 2009, we generated $73.3 million of cash flow from operating activities.

 

OUTLOOK

 

Based upon the market assumptions included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and current production rates, we are reaffirming our guidance on revenue and full year earnings per share from continuing operations.  While we have experienced challenges in our business jet and regional jet end markets, our commercial and military sales continue to grow. In addition, our backlog remains very strong despite production cuts, particularly on the Boeing 777, business jets, and regional jets.

 

While our assessment of the foregoing trends leads us presently to expect to maintain earnings per share for fiscal year 2010 noted above based on current share count, there can be no assurance that our assessment of these trends will prove to be correct, nor any assurance that other events or trends will cause our actual results to differ from those expected.

 

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.

 

20



Table of Contents

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Quarter ended September 30, 2009 compared to quarter ended September 30, 2008

 

 

 

QUARTER ENDED
SEPTEMBER 30,

 

 

 

2009

 

2008

 

 

 

(dollars in thousands)

 

 

 

 

 

Net sales

 

$

313,139

 

$

323,391

 

Segment operating income

 

$

42,567

 

$

49,411

 

Corporate expenses

 

(5,439

)

(6,697

)

Total operating income

 

37,128

 

42,714

 

Interest expense and other

 

5,501

 

4,611

 

(Gain) loss on early extinguishment of debt

 

(39

)

 

Income tax expense

 

10,948

 

13,027

 

Income from continuing operations

 

$

20,718

 

$

25,076

 

Loss from discontinued operations, net

 

(1,267

)

(1,093

)

Net income

 

$

19,451

 

$

23,983

 

 

Net sales decreased by $10.3 million, or 3.2%, to $313.1 million for the quarter ended September 30, 2009 from $323.4 million for the quarter ended September 30, 2008. The acquisitions of Merritt Tool Company, Inc. (now Triumph Structures — East Texas), Saygrove Defence & Aerospace Group Limited (now Triumph Actuation & Motion Control Systems-UK), the aviation segment of Kongsberg Automotive Holdings ASA (now Triumph Controls-U.K and Triumph Controls-Germany) and The Mexmil Company, LLC (now Triumph Insulation Systems), collectively the “fiscal 2009 acquisitions,” contributed $25.0 million in net sales for the quarter ended September 30, 2009.  Excluding the effects of the fiscal 2009 acquisitions, organic sales declined $35.2 million, or 10.9%, primarily as a result of the reduction in demand for business jets, major program delays (particularly in the 747-8 and 787 programs), the decline in the regional jet market due to the overall economy, lower passenger and freight traffic and airline inventory de-stocking.

 

Cost of sales decreased by $4.6 million, or 2.0%, to $223.5 million for the quarter ended September 30, 2009 from $228.1 million for the quarter ended September 30, 2008. This decrease includes the impact of the fiscal 2009 acquisitions noted above, which contributed $18.8 million. Gross margin for the quarter ended September 30, 2009 was 28.6%, as compared to 29.5% for the prior year period. Excluding the effects of the fiscal 2009 acquisitions, gross margin was 29.0% for the quarter ended September 30, 2009, compared with 29.5% for the quarter ended September 30, 2008.

 

Segment operating income decreased by $6.8 million, or 13.9%, to $42.6 million for the quarter ended September 30, 2009 from $49.4 million for the quarter ended September 30, 2008.  The decrease was a direct result of the decline in gross margin ($5.6 million) due to lower sales volume as described above and increases in depreciation and amortization ($2.0 million) due to the fiscal 2009 acquisitions.

 

Corporate expenses decreased by $1.3 million, or 18.8%, to $5.4 million for the quarter ended September 30, 2009 from $6.7 million for the quarter ended September 30, 2008.  Corporate expenses decreased primarily due to a decline in workers compensation ($0.6 million). In addition, we have charged to expense approximately $1.0 million start up costs related to the Mexican facility, predominately recorded within corporate expenses.

 

Interest expense and other increased by $0.9 million, or 19.3%, to $5.5 million for the quarter ended September 30, 2009 compared to $4.6 million for the prior year period.  This increase was due to higher average debt outstanding during the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008, partially offset by lower interest rates on our revolving credit facility. Effective April 1, 2009, the Company adopted FASB Staff Position (“FSP”) No. APB 14-1, Accounting for Convertible Debt

 

21



Table of Contents

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”), which was primarily codified into Topic 470, Debt in the Accounting Standard Codification (“ASC”). The retroactive application of FSP APB 14-1 resulted in the recognition of additional pre-tax non-cash interest expense for the three months ended September 30, 2008 of $1.5 million, or $0.06 per diluted share. The results of operations for the three months ended September 30, 2009 also include $1.2 million of non-cash interest expense.

 

The effective income tax rate for the quarter ended September 30, 2009 was 34.6% compared to 34.2% for the quarter ended September 30, 2008.  For the fiscal year ending March 31, 2010, the Company expects its effective tax rate to be approximately 34%.

 

Loss from discontinued operations before income taxes was $1.9 million for the quarter ended September 30, 2009, compared with a loss from discontinued operations before income taxes of $1.7 million, for the quarter ended September 30, 2008.  The benefit for income taxes was $0.7 million for the quarter ended September 30, 2009 compared to a benefit of $0.6 million in the prior year period.

 

Business Segment Performance

 

The Aerospace Systems segment consists of the Company’s operations that manufacture products primarily for the aerospace OEM market. The Aerospace Systems segment’s operations design and engineer mechanical and electromechanical controls, such as hydraulic systems and components, main engine gearbox assemblies, accumulators and mechanical control cables. The Aerospace Systems segment’s revenues are also derived from stretch forming, die forming, milling, bonding, machining, welding and assembly and fabrication of various structural components used in aircraft wings, fuselages and other significant assemblies. Further, the segment’s operations also design and manufacture composite assemblies for floor panels, environmental control system ducts, thermal acoustic insulation systems and non-structural cockpit components.  These products are sold 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 Aftermarket Services segment’s operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The Aftermarket Services 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.

 

We currently generate a majority of our revenue from clients in the commercial aerospace industry, the military, and the regional airline industry. Our growth and financial results are largely dependent on continued demand for our products and services from clients in these industries. If any of these industries experiences a downturn, our clients in these sectors may conduct less business with us. The following table summarizes our net sales by end market by business segment. The loss of one or more of our major customers or an economic downturn in the commercial airline or the military and defense markets could have a material adverse effect on our business.

 

22



Table of Contents

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

 

 

Three months ended September 30,

 

 

 

2009

 

2008

 

Aerospace Systems

 

 

 

 

 

Commercial aerospace

 

33.7

%

30.1

%

Military

 

35.4

%

30.4

%

Regional

 

3.5

%

5.5

%

Business Jets

 

4.1

%

8.2

%

Non-aviation and other

 

5.0

%

5.3

%

Total Aerospace Systems net sales

 

81.7

%

79.5

%

Aftermarket Systems

 

 

 

 

 

Commercial aerospace

 

13.0

%

14.4

%

Military

 

3.2

%

3.4

%

Regional

 

0.6

%

0.5

%

Business Jets

 

0.8

%

0.9

%

Non-aviation and other

 

0.7

%

1.3

%

Total Aftermarket Services net sales

 

18.3

%

20.5

%

Total Consolidated net sales

 

100.0

%

100.0

%

 

The decline in our percentage of net sales of business jets and regional jets was attributable to the decline in that particular market in the current economy.  Despite major program delays (particularly in the 747-8 and 787 programs) within the Commercial aerospace market we have experienced an increase in the mix of that market due in part to the fiscal 2009 acquisitions. We also continue to experience growth in the Military market.

 

 

 

QUARTER ENDED
SEPTEMBER 30,

 

%

 

% OF TOTAL SALES

 

 

 

2009

 

2008

 

Change

 

2009

 

2008

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

 

 

 

 

 

 

 

 

 

 

Aerospace Systems

 

$

256,421

 

$

257,569

 

(0.4

)%

81.9

%

79.6

%

Aftermarket Services

 

57,313

 

66,481

 

(13.8

)%

18.3

%

20.6

%

Elimination of inter-segment sales

 

(595

)

(659

)

(9.7

)%

(0.2

)%

(0.2

)%

Total Net Sales

 

$

313,139

 

$

323,391

 

(3.2

)%

100.0

%

100.0

%

 

 

 

QUARTER ENDED
SEPTEMBER 30,

 

%

 

% OF SEGMENT SALES

 

 

 

2009

 

2008

 

Change

 

2009

 

2008

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

SEGMENT OPERATING INCOME

 

 

 

 

 

 

 

 

 

 

 

Aerospace Systems

 

$

39,086

 

$

46,515

 

(16.0

)%

15.2

%

18.1

%

Aftermarket Services

 

3,481

 

2,896

 

20.2

%

6.1

%

4.4

%

Corporate

 

(5,439

)

(6,697

)

(18.8

)%

n/a

 

n/a

 

Total Segment Operating Income

 

$

37,128

 

$

42,714

 

(13.1

)%

11.9

%

13.2

%

 

Aerospace Systems: The Aerospace Systems segment net sales decreased by $1.2 million, or 0.4%, to $256.4 million for the quarter ended September 30, 2009 from $257.6 million for the quarter ended September 30, 2008. The decrease was primarily due to declines in organic sales of $26.1 million resulting from reductions in the business jet and regional jet markets due to the overall economic conditions and major program delays (particularly in the 787 and 747-8 programs), offset by the additional sales associated with the fiscal 2009 acquisitions of $25.0 million.

 

23



Table of Contents

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Aerospace Systems segment operating income decreased by $7.4 million, or 16.0%, to $39.1 million for the quarter ended September 30, 2009 from $46.5 million for the quarter ended September 30, 2008. Operating income decreased due to declines in gross margin primarily resulting from lower sales volume of business jet and regional jet products, as described above, and the increased depreciation and amortization expense ($2.0 million) primarily as a result of the fiscal 2009 acquisitions, increased incentive compensation ($1.0 million), partially offset by gross margins from the fiscal 2009 acquisitions.

 

Aerospace Systems segment operating income as a percentage of segment sales decreased to 15.2% for the quarter ended September 30, 2009 as compared to 18.1% for the quarter ended September 30, 2008, due to the decrease in operating income as a result of lower sales volume and lower margins contributed by the fiscal 2009 acquisitions.

 

Aftermarket Services: The Aftermarket Services segment net sales decreased by $9.2 million, or 13.8%, to $57.3 million for the quarter ended September 30, 2009 from $66.5 million for the quarter ended September 30, 2008. This decrease was due to a decline in global commercial air traffic and airline inventory de-stocking resulting in lower demand for the repair and overhaul of auxiliary power units and the brokering of similar units.

 

Aftermarket Services segment operating income increased by $0.6 million, or 20.2%, to $3.5 million for the quarter ended September 30, 2009 from $2.9 million for the quarter ended September 30, 2008.  Operating income increased primarily due to improved results at our Phoenix APU operations, as the prior year period included cost overruns, excess overhead and higher than expected warranty expenses. The quarter ended September 30, 2008 included charges for changes in estimates under certain power-by-the-hour contracts ($3.1 million) and additional provision for bad debts ($0.5 million). While the results of our Phoenix APU operations continue to improve, operating margins continued to be dilutive to the segment’s results.

 

Aftermarket Services segment operating income as a percentage of segment sales increased to 6.1% for the quarter ended September 30, 2009 as compared with 4.4% for the quarter ended September 30, 2008, due to improved results at the Phoenix APU operations due to the excess costs incurred in the prior year period as discussed above.

 

Six months ended September 30, 2009 compared to six months ended September 30, 2008.

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2009

 

2008

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Net sales

 

$

629,269

 

$

643,947

 

 

 

 

 

 

 

Segment operating income

 

$

86,835

 

$

99,368

 

Corporate expenses

 

(11,837

)

(13,326

)

Total operating income

 

74,998

 

86,042

 

Interest expense and other

 

10,827

 

9,579

 

(Gain) loss on early extinguishment of debt

 

(39

)

 

Income tax expense

 

21,971

 

26,352

 

Income from continuing operations

 

$

42,239

 

$

50,111

 

Loss from discontinued operations, net

 

(4,749

)

(2,296

)

Net income

 

$

37,490

 

$

47,815

 

 

Net sales decreased by $14.7 million, or 2.3%, to $629.3 million for the six months ended September 30, 2009 from $643.9 million for the six months ended September 30, 2008.  The fiscal 2009 acquisitions

 

24



Table of Contents

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

contributed an increase of $50.9 million to net sales. Excluding the effects of the fiscal 2009 acquisitions organic sales declined $65.6 million, or 10.2%, primarily as a result of the reduction in demand for business jets, the decline in the regional jet market due to the overall economy, major program delays (particularly in the 747-8 and 787 programs), lower passenger and freight traffic and airline inventory de-stocking.

 

Cost of sales decreased $4.1 million or 0.9% to $447.8 million for the six months ended September 30, 2009, from $451.9 million for the six months ended September 31, 2008. This decrease includes the impact of the fiscal 2009 acquisitions noted above, which contributed $37.9 million. Gross margin for the six months ended September 30, 2009 was 28.8%, as compared to 29.8% for the prior year period. Excluding the effects of the fiscal 2009 acquisitions, gross margin was 29.1% for the six months ended September 30, 2009, compared with 29.8% for the six months ended September 30, 2008.

 

Segment operating income decreased by $12.5 million, or 12.6%, to $86.8 million for the six months ended September 30, 2009 from $99.3 million for the six months ended September 30, 2008.  Operating income decrease was a direct result of the decline in gross margin ($10.6 million) due to lower sales volume as described above and increases in depreciation and amortization ($3.9 million) due to the fiscal 2009 acquisitions, offset by decreases in legal expenses ($0.5 million).

 

Corporate expenses decreased by $1.5 million, or 11.2%, to $11.8 million for the six months ended September 30, 2009 from $13.3 million for the six months ended September 30, 2008.  Corporate expenses decreased primarily due to a decline in incentive compensation and benefits ($0.4 million) and workers compensation ($0.6 million). In addition, we have incurred approximately $2.0 million of start up costs related to the Mexican facility, predominately recognized within corporate expenses.

 

Interest expense and other increased by $1.2 million, or 13.0%, to $10.8 million for the six months ended September 30, 2009 compared to $9.6 million for the prior year period.  This increase was due to higher average debt outstanding during the six months ended September 30, 2009 as compared to the six months ended September 30, 2008, partially offset by lower interest rates on our revolving credit facility. Effective April 1, 2009, the Company adopted FSP APB 14-1. The retroactive application of FSP APB 14-1 resulted in the recognition of additional pre-tax non-cash interest expense for the six months ended September 30, 2008 of $3.1 million, or $0.12 per diluted share. The results of operations for the six months ended September 30, 2009 also include $3.0 million of non-cash interest expense.

 

The effective income tax rate for the six months ended September 30, 2009 was 34.2% compared to 34.5% for the six months ended September 30, 2008.  For the fiscal year ending March 31, 2010, the Company expects its effective tax rate to be approximately 34.0%.

 

Loss from discontinued operations before income taxes was $4.7 million for the six months ended September 30, 2009, which includes an impairment charge of $2.5 million from the first quarter ended June 30, 2009, compared with a loss from discontinued operations before income taxes of $2.3 million for the six months ended September 30, 2008.  The benefit for income taxes was $2.6 million for the six months ended September 30, 2009 compared to a benefit of $1.2 million in the prior year period.

 

Business Segment Performance — Six months ended September 30, 2009 compared to six months ended September 30, 2008.

 

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

 

25



Table of Contents

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

 

 

Six months ended September 30,

 

 

 

2009

 

2008

 

Aerospace Systems

 

 

 

 

 

Commercial aerospace

 

33.4

%

30.7

%

Military

 

35.1

%

30.6

%

Regional

 

3.6

%

5.4

%

Business Jets

 

4.4

%

8.3

%

Non-aviation and other

 

5.2

%

5.1

%

Total Aerospace Systems net sales

 

81.7

%

80.1

%

Aftermarket Systems

 

 

 

 

 

Commercial aerospace

 

13.2

%

14.2

%

Military

 

3.0

%

3.1

%

Regional

 

0.6

%

0.5

%

Business Jets

 

0.8

%

0.9

%

Non-aviation and other

 

0.7

%

1.2

%

Total Aftermarket Services net sales

 

18.3

%

19.9

%

Total Consolidated net sales

 

100.0

%

100.0

%

 

The decline in our percentage of net sales of business jets and regional jets was attributable to the decline in that particular market in the current economy.  Despite major program delays (particularly in the 747-8 and 787 programs) within the Commercial aerospace market we have experienced an increase in the mix of that market due in part to the fiscal 2009 acquisitions. As these program delays pertain to aircraft that have not yet reached full production, we are unable to determine whether program delays have ended. We also continue to experience growth in the Military market.

 

 

 

SIX MONTHS ENDED
SEPTEMBER 30,

 

%

 

% OF TOTAL SALES

 

 

 

2009

 

2008

 

Change

 

2009

 

2008

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET SALES

 

 

 

 

 

 

 

 

 

 

 

Aerospace Systems

 

$

516,394

 

$

515,801

 

0.1

%

82.1

%

80.1

%

Aftermarket Services

 

115,097

 

129,449

 

(11.1

)%

18.3

%

20.1

%

Elimination of inter-segment sales

 

(2,222

)

(1,303

)

70.5

%

(0.4

)%

(0.2

)%

Total Net Sales

 

$

629,269

 

$

643,947

 

(2.3

)%

100.0

%

100.0

%

 

26



Table of Contents

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

 

 

SIX MONTHS ENDED
SEPTEMBER 30,

 

%

 

% OF SEGMENT SALES

 

 

 

2009

 

2008

 

Change

 

2009

 

2008

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

SEGMENT OPERATING INCOME

 

 

 

 

 

 

 

 

 

 

 

Aerospace Systems

 

$

80,931

 

$

92,585

 

(12.6

)%

15.7

%

17.9

%

Aftermarket Services

 

5,904

 

6,783

 

(13.0

)%

5.1

%

5.2

%

Corporate