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EX-10.1 - THIRD AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT - TRIUMPH GROUP INCexhibit-101thirdamendmentt.htm
EXCEL - IDEA: XBRL DOCUMENT - TRIUMPH GROUP INCFinancial_Report.xls
EX-32.1 - CERTIFICATION OF PERIODIC REPORT BY PRESIDENT AND CEO FURNISHED PURSUANT TO 18 - TRIUMPH GROUP INCexhibit-321q3fy15.htm
EX-32.2 - CERTIFICATION OF PERIODIC REPORT BY SVP AND CFO FURNISHED PURSUANT TO 18 USC - TRIUMPH GROUP INCexhibit-322q3fy15.htm
EX-31.2 - CERTIFICATION BY SVP AND CFO PURSUANT TO RULE 13A-14A/15D-14A - TRIUMPH GROUP INCexhibit-312q3fy15.htm
EX-31.1 - CERTIFICATION BY PRESIDENT AND CEO PURSUANT TO RULE 13A-14A/15D-14A - TRIUMPH GROUP INCexhibit-311q3fy15.htm

United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended December 31, 2014

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
ý
 
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, 50,451,397 shares outstanding as of February 5, 2015.



TRIUMPH GROUP, INC.
INDEX
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets at December 31, 2014 and March 31, 2014
 
 
 
 
 
Condensed Consolidated Statements of Income
Three
and nine months ended December 31, 2014 and 2013
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
Three
and nine months ended December 31, 2014 and 2013
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows                                                                                            Nine months ended December 31, 2014 and 2013
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 
 
 
 




Part I. Financial Information

Item 1. Financial Statements.

Triumph Group, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
December 31,
2014
 
March 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34,181

 
$
28,998

Trade and other receivables, less allowance for doubtful accounts of $7,480 and $6,535
452,327

 
517,304

Inventories, net of unliquidated progress payments of $174,855 and $165,019
1,288,564

 
1,111,767

Rotable assets
43,825

 
41,666

Deferred income taxes
53,446

 
57,308

Prepaid and other current assets
22,789

 
24,897

Total current assets
1,895,132

 
1,781,940

Property and equipment, net
982,666

 
931,430

Goodwill
2,063,508

 
1,791,891

Intangible assets, net
974,028

 
978,171

Other, net
59,739

 
69,954

Total assets
$
5,975,073

 
$
5,553,386

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
40,877

 
$
49,575

Accounts payable
308,398

 
317,334

Accrued expenses
359,871

 
273,290

Total current liabilities
709,146

 
640,199

Long-term debt, less current portion
1,401,803

 
1,500,808

Accrued pension and other postretirement benefits, noncurrent
410,168

 
508,524

Deferred income taxes, noncurrent
356,510

 
385,188

Other noncurrent liabilities
826,994

 
234,756

Stockholders’ equity:
 
 
 
Common stock, $.001 par value, 100,000,000 shares authorized, 52,460,920 and 52,459,020 shares issued; 50,451,397 and 52,159,020 shares outstanding
51

 
52

Capital in excess of par value
850,542

 
866,281

Treasury stock, at cost, 2,009,523 and 300,000 shares
(133,767
)
 
(19,134
)
Accumulated other comprehensive loss
(51,730
)
 
(18,908
)
Retained earnings
1,605,356

 
1,455,620

Total stockholders’ equity
2,270,452

 
2,283,911

Total liabilities and stockholders’ equity
$
5,975,073

 
$
5,553,386


SEE ACCOMPANYING NOTES.

1



Triumph Group, Inc.
Condensed Consolidated Statements of Income

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

 
Three Months Ended
December 31,
 
Nine Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net sales
$
917,417

 
$
915,816

 
$
2,808,444

 
$
2,826,844

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown separately below)
867,970

 
719,703

 
2,324,231

 
2,187,492

Selling, general and administrative
70,905

 
60,829

 
205,384

 
191,129

Depreciation and amortization
39,808

 
44,103

 
116,373

 
120,281

Relocation costs

 
4,841

 
3,193

 
7,285

Gain on legal settlement, net of expenses

 

 
(134,693
)
 

Settlements and early retirement incentive expense

 
1,561

 

 
1,561

 
978,683

 
831,037

 
2,514,488

 
2,507,748

Operating (loss) income
(61,266
)
 
84,779

 
293,956

 
319,096

Interest expense and other
13,573

 
30,115

 
71,320

 
70,146

(Loss) income before income taxes
(74,839
)
 
54,664

 
222,636

 
248,950

Income tax (benefit) expense
(35,007
)
 
19,271

 
66,778

 
84,998

Net (loss) income
$
(39,832
)
 
$
35,393

 
$
155,858

 
$
163,952

 
 
 
 
 
 
 
 
(Loss) earnings per share—basic:
$
(0.79
)
 
$
0.68

 
$
3.05

 
$
3.18

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding—basic
50,643

 
52,024

 
51,114

 
51,548

 
 
 
 
 
 
 
 
(Loss) earnings per share—diluted:
$
(0.79
)
 
$
0.67

 
$
3.04

 
$
3.11

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding—diluted
50,643

 
52,806

 
51,343

 
52,798

 
 
 
 
 
 
 
 
Dividends declared and paid per common share
$
0.04

 
$
0.04

 
$
0.12

 
$
0.12



SEE ACCOMPANYING NOTES.

2



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

 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(39,832
)
 
$
35,393

 
$
155,858

 
$
163,952

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(16,331
)
 
(2,392
)
 
(25,954
)
 
378

Defined benefit pension plans and other postretirement benefits:
 
 
 
 
 
 
 
 
Amounts arising during the period - gains (losses), net of tax expense (benefit):
 
 
 
 
 
 
 
 
Prior service credit, net of taxes of $0 and ($7,023) for the three months ended and $0 and ($7,023) for the nine months ended
 

 
(11,695
)
 

 
(11,695
)
Actuarial (loss) gain, net of taxes $0 and $51,824 for the three months ended and $0 and $51,824 for the nine months ended
 

 
86,296

 

 
86,296

Reclassifications from accumulated other comprehensive income - (gains) losses, net of tax expense (benefits):
 
 
 
 
 
 
 
 
Amortization of net loss, net of taxes of $0 and ($1,700) for the three months ended and $0 and ($5,100) for the nine months ended, respectively
 

 
2,831

 

 
8,493

Recognized prior service credits, net of taxes of $921 and $1,056 for the three months ended and $2,762 and $3,169 for the nine months ended, respectively
 
(1,533
)
 
(1,759
)
 
(4,599
)
 
(5,277
)
Total defined benefit pension plans and other postretirement benefits, net of taxes
 
(1,533
)
 
75,673

 
(4,599
)
 
77,817

Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gain (loss) arising during period, net of tax of $1,079 and ($1,247) for the three months ended and $1,298 and ($1,107) for the nine months ended, respectively
 
(1,732
)
 
1,961

 
(2,182
)
 
1,726

Reclassification of (gain) loss included in net earnings, net of tax of ($7) and $2 for the three months ended and $22 and $22 for the nine months ended, respectively
 
(20
)
 
(3
)
 
(87
)
 
(39
)
Net unrealized gain (loss) cash flow hedges, net of tax
 
(1,752
)
 
1,958

 
(2,269
)
 
1,687

Total other comprehensive (loss) income
 
(19,616
)
 
75,239

 
(32,822
)
 
79,882

 
 
 
 
 
 
 
 
 
Total comprehensive (loss) income
 
$
(59,448
)
 
$
110,632

 
$
123,036

 
$
243,834


SEE ACCOMPANYING NOTES.

3



Triumph Group, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
Nine Months Ended December 31,
 
2014
 
2013
 
 
 
 
Operating Activities
 
 
 
Net income
$
155,858

 
$
163,952

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
116,373

 
120,281

Amortization of acquired contract liabilities
(39,332
)
 
(34,373
)
Pension settlement charge

 
1,561

Accretion of debt discount
1,577

 
1,871

Other amortization included in interest expense
7,182

 
5,732

Provision for doubtful accounts receivable
153

 
1,592

Provision for deferred income taxes
69,093

 
81,604

Employee stock-based compensation
1,208

 
3,695

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
 
 
 
Trade and other receivables
130,431

 
(10,414
)
Rotable assets
(2,159
)
 
(4,714
)
Inventories
41,516

 
(108,176
)
Prepaid expenses and other current assets
3,504

 
1,944

Accounts payable, accrued expenses and other current liabilities
(69,216
)
 
(102,206
)
Accrued pension and other postretirement benefits
(108,060
)
 
(83,445
)
Other
1,836

 
(5,560
)
Net cash provided by operating activities
309,964

 
33,344

Investing Activities
 
 
 
Capital expenditures
(85,170
)
 
(161,797
)
Reimbursements of capital expenditures
553

 
9,086

Proceeds from sale of assets
1,867

 
11,773

Acquisitions, net of cash acquired
38,082

 
(94,456
)
Net cash used in investing activities
(44,668
)
 
(235,394
)
Financing Activities
 
 
 
Net increase in revolving credit facility
17,607

 
178,460

Proceeds from issuance of long-term debt and capital leases
394,512

 
435,845

Repayment of debt and capital lease obligations
(541,884
)
 
(410,169
)
Purchase of common stock
(114,634
)
 

Payment of deferred financing costs
(5,859
)
 
(3,287
)
Dividends paid
(6,122
)
 
(6,246
)
Repayment of government grant
(3,198
)
 
256

Repurchase of restricted shares for minimum tax obligation
(673
)
 
(2,726
)
Proceeds from exercise of stock options
388

 
329

Net cash (used in) provided by financing activities
(259,863
)
 
192,462

Effect of exchange rate changes on cash
(250
)
 
2,966

Net change in cash
5,183

 
(6,622
)
Cash and cash equivalents at beginning of period
28,998

 
32,037

Cash and cash equivalents at end of period
$
34,181

 
$
25,415

SEE ACCOMPANYING NOTES.

4



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

1.     BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed 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 nine months ended December 31, 2014 are not necessarily indicative of results that may be expected for the year ending March 31, 2015. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2014 audited condensed consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended March 31, 2014 filed in May 2014.

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.
In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance codified in Accounting Standards Codification ("ASC") 606, Revenue Recognition - Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. The objective of ASC 606 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance. The principle of ASC 606 is that an entity will recognize revenue at the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled. ASC 606 is effective for interim and annual reporting periods beginning after December 15, 2016 and can be adopted by the Company using either a full retrospective or modified retrospective approach, with early adoption prohibited. The Company is currently evaluating ASC 606 and has not determined the impact it may have on the Company’s consolidated results of operations, financial position or cash flows nor decided on the method of adoption.
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 Recognition - Construction-Type and Production-Type Contracts topic of the ASC 605-35 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.


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

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 Revenue Recognition - 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 Revenue Recognition - Construction-Type and Production-Type Contracts topic.

For the three months ended December 31, 2014, cumulative catch-up adjustments from changes in estimates, inclusive of a provision for forward losses as discussed below, decreased operating income, net income and earnings per share by approximately $(154,268), $(82,107) and $(1.62) net of tax, respectively. The cumulative catch-up adjustments to operating income for the three months ended December 31, 2014 included gross favorable adjustments of approximately $5,325 and gross unfavorable adjustments of approximately $(159,593). For the nine months ended December 31, 2014, cumulative catch-up adjustments from changes in estimates, inclusive of a provision for forward losses as discussed below, decreased operating income, net income and earnings per share by approximately $(158,169), $(110,727) and $(2.16) net of tax, respectively. The cumulative catch-up adjustments to operating income for the nine months ended December 31, 2014 included gross favorable adjustments of approximately $4,769 and gross unfavorable adjustments of approximately $(162,938). For the three months ended December 31, 2013, cumulative catch-up adjustments from changes in estimates decreased operating income, net income and earnings per share by approximately $(21,339), $(13,816) and $(0.26) net of tax, respectively. For the nine months ended December 31, 2013, cumulative catch-up adjustments from changes in estimates decreased operating income, net income and earnings per share by approximately $(36,961), $(24,342) and $(0.46) net of tax, 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.

During the quarter ended December 31, 2014, the Company recognized a provision for forward losses of $151,992 associated with the Company's long-term contract on the 747-8 program. These forward losses are largely due to changes in future estimated production rates, labor and overhead costs, pension income and expedited delivery charges.
In December 2014, our customer, The Boeing Company (“Boeing”), announced a future production rate reduction for the 747-8 program from 1.5 shipsets per month to 1.3 shipsets per month. This production rate cut will result in additional future disruption and overhead cost absorption across our related production facilities.

6


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

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

While the Company has experienced improvements in labor performance metrics on our work associated with the 747-8 program in recent quarters, the Company has not recovered to the levels previously experienced or as quickly as expected, and no longer believes that the Company can recover to the level required to avoid future losses. The Company's increased labor assumptions will also result in increased overhead cost absorption to the 747-8 program.
In October 2014, the Society of Actuaries released updated mortality tables to reflect recent improvements in longevity. The mortality tables are a key assumption in the valuation of our defined benefit obligations and related net period pension benefit income. These new mortality tables will lower estimated future pension benefit income amounts, thereby negatively impacting our future cost estimates associated with the 747-8 program.
Although the Company has made significant improvements on the quality and timeliness of deliveries as compared to the prior year, the Company continues to incur charges related to expedited delivery and have included estimates for additional costs in the future.
While the Company has recently recognized a provision for forward losses, there is still risk similar to what the Company has experienced on the 747-8 program. In particular, the Company's ability to manage risks related to supplier performance, execution of cost reduction strategies, hiring and retaining skilled production and management personnel, quality and manufacturing execution, program schedule delays and many other risks, will determine the ultimate performance of these programs.
Included in net sales of the Aerostructures and Aerospace Systems group is the non-cash amortization of acquired contract liabilities recognized as fair value adjustments through purchase accounting from various acquisitions. For the three months ended December 31, 2014 and 2013, the Company recognized $15,501 and $14,258, respectively, into net sales in the accompanying Condensed Consolidated Statements of Income. For the nine months ended December 31, 2014 and 2013, the Company recognized $39,332 and $34,373, respectively, into net sales in the accompanying Condensed 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 Boeing (representing commercial, military and space) represented approximately 25% and 32% of total trade accounts receivable as of December 31, 2014 and March 31, 2014, respectively. The Company had no other concentrations of credit risk of more than 10%. Sales to Boeing for the nine months ended December 31, 2014 were $1,219,324, or 43% of net sales, of which $1,084,777, $111,173 and $23,374 were from the Aerostructures segment, the Aerospace Systems segment and Aftermarket Services segment, respectively. Sales to Boeing for the nine months ended December 31, 2013 were $1,289,201, or 46% of net sales, of which $1,205,887, $64,202 and $19,112 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 December 31, 2014 and 2013 was $403 and $1,432, respectively. Stock-based compensation expense for the nine months ended December 31, 2014 and 2013 was $1,208 and $3,695, respectively. The Company has classified share-based compensation within selling, general and administrative

7


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

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 issues new shares.

Intangible Assets
The components of intangible assets, net, are as follows:
 
December 31, 2014
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.2
 
$
681,292

 
$
(168,474
)
 
$
512,818

Product rights, technology and licenses
11.7
 
52,405

 
(32,015
)
 
20,390

Non-compete agreements and other
15.9
 
2,929

 
(509
)
 
2,420

Tradenames
Indefinite-lived
 
438,400

 

 
438,400

Total intangibles, net
 
 
$
1,175,026

 
$
(200,998
)
 
$
974,028


 
March 31, 2014
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.7
 
$
650,199

 
$
(136,970
)
 
$
513,229

Product rights, technology and licenses
11.7
 
52,405

 
(28,437
)
 
23,968

Non-compete agreements and other
13.6
 
3,679

 
(1,105
)
 
2,574

Tradenames
Indefinite-lived
 
438,400

 

 
438,400

Total intangibles, net
 
 
$
1,144,683

 
$
(166,512
)
 
$
978,171

Amortization expense for the three months ended December 31, 2014 and 2013 was $12,158 and $12,402, respectively. Amortization expense for the nine months ended December 31, 2014 and 2013 was $35,638 and $34,552, respectively.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing an asset or liability. The fair value hierarchy has 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; and Level 3—Unobservable inputs for the asset or liability. The Company has applied fair value measurements to its interest rate swap (see Note 6).
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 warranty reserves as of December 31, 2014 and March 31, 2014, were $32,402 and $25,651, respectively.


8


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

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)



Supplemental Cash Flow Information
The Company received $23,666 for income tax refunds, net of payments, for the nine months ended December 31, 2014. The Company paid $2,329 for income taxes, net of refunds received, for the nine months ended December 31, 2013. The Company made interest payments of $76,188 and $60,202 for the nine months ended December 31, 2014 and 2013, respectively.
During the nine months ended December 31, 2014 and 2013, the Company financed $52 and $36, respectively, of property and equipment additions through capital leases. During the nine months ended December 31, 2013, the Company issued 2,272,019 shares, in connection with certain conversions of convertible senior subordinated notes (see Note 6).
During the nine months ended December 31, 2014, under the existing stock repurchase program, the Company repurchased 1,723,011 shares for $114,634. As a result, as of December 31, 2014, the Company remains able to purchase an additional 3,477,789 shares under the existing stock repurchase program.

3.     ACQUISITIONS
FISCAL 2015 ACQUISITIONS
Acquisition of Spirit AeroSystems Holdings, Inc. - Gulfstream G650 and G280 Wing Programs
Effective December 30, 2014, a wholly-owned subsidiary of the Company, Triumph Aerostructures - Tulsa LLC, doing business as Triumph Aerostructures-Vought Aircraft Division-Tulsa, completed the acquisition of the Gulfstream G650 and G280 wing programs (the "Tulsa Programs") located in Tulsa, Oklahoma, from Spirit AeroSystems, Inc. The acquisition of the Tulsa Programs establishes the Company as a leader in fully integrated wing design, engineering and production and advances its standing as a strategic Tier One Capable aerostructures supplier. The acquired business will operate as Triumph Aerostructures-Vought Aircraft Division-Tulsa and its results will be included in the Aerostructures Group from the date of acquisition.
The Company received $160,000 in cash plus assets required to run the business from Spirit-Tulsa to cover the anticipated future cash flow needs of the programs. Goodwill in the amount of $80,636 was provisionally recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is not deductible for tax purposes.
The accounting for the business combination is provisional and dependent upon obtaining valuations and other information for certain assets and liabilities which have not yet been identified, completed or obtained to a point where definitive estimates can be made. The process for estimating the fair values of identified intangible assets, certain tangible assets and assumed liabilities requires the use of judgment to determine the appropriate assumptions.
As the Company finalizes estimates of the fair value of assets acquired and liabilities assumed, substantially all of the purchase price allocation for the Tulsa Programs is provisional. Additional purchase price adjustments will be recorded during the measurement period not to exceed one year beyond the acquisition date. These adjustments may have a material impact on the Company's results of operations and financial position.
The table below presents the provisional estimated fair value of assets acquired and liabilities assumed on the acquisition date based on the best information the Company has received to date, in accordance with Accounting Standards Codification Topic 805, Business Combinations ("ASC 805"). These estimates will be revised as the Company receives final appraisal of tangible and intangible assets, certain liabilities assumed and other information related to the Tulsa Programs acquisition. Accordingly, the amounts below report the Company's best estimate of fair value based on the information available at this time:

9


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

3.     ACQUISITIONS (Continued)

 
December 30, 2014
Inventory
$
72,364

Property and equipment
28,500

Goodwill
80,636

Deferred taxes
64,686

  Total assets
$
246,186

 
 
Accrued expenses
$
11,186

Acquired contract liabilities
395,000

  Total liabilities
$
406,186

The provisional amounts recognized are based on the Company's best estimate using information that it has obtained as of the reporting date. The Company will finalize its estimate once it is able to determine that it has obtained all necessary information that existed as of the acquisition date related to this matter or one year following the acquisition of the Tulsa Programs whichever is earlier.
The Tulsa Programs acquisition has been accounted for under the acquisition method and, accordingly, is included in the condensed consolidated financial statements from the effective date of acquisition. The Company incurred $4,606 in acquisition-related costs in connection with the Tulsa Programs acquisition, which is recorded in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
Acquisition of North American Aircraft Services, Inc.
Effective October 17, 2014, the Company acquired the ownership of all of the outstanding shares of North American Aircraft Services, Inc. and its affiliates ("NAAS"). NAAS is based in San Antonio, Texas, with fixed-based operator units throughout the United States as well as international locations and delivers line maintenance and repair, fuel leak detection and fuel bladder cell repair services. The acquired business will operate as Triumph Aviation Services - NAAS Division and its results are included in Aftermarket Services Group from the date of acquisition.
The purchase price for the NAAS acquisition was $44,687. Goodwill in the amount of $24,686 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is not deductible for tax purposes. The Company has also identified an intangible asset related to customer relationships valued at $17,000 with a weighted-average life of 11.0 years.
The accounting for the business combination is dependent upon valuations and other information for certain assets and liabilities which have not yet been completed or obtained to a point where definitive estimates can be made. The process for estimating the fair values of identified intangible assets, certain tangible assets and assumed liabilities requires the use of judgment to determine the appropriate assumptions.
As the Company finalizes estimates of the fair value of assets acquired and liabilities assumed, substantially all of the purchase price allocation for NAAS is provisional. Additional purchase price adjustments will be recorded during the measurement period not to exceed one year beyond the acquisition date. These adjustments may have a material impact on the Company's results of operations and financial position.
The table below presents the provisional estimated fair value of assets acquired and liabilities assumed on the acquisition date based on the best information the Company has received to date, in accordance with ASC 805. These estimates will be revised as the Company revises final appraisal of tangible and intangible assets, certain liabilities assumed and other information related to the NAAS acquisition. Accordingly, the amounts below report the Company's best estimate of fair value based on the information available at this time:

10


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

3.     ACQUISITIONS (Continued)

 
October 17, 2014
Cash
$
803

Accounts receivable
5,487

Inventory
866

Property and equipment
197

Goodwill
24,686

Intangible assets
17,000

Other assets
363

  Total assets
$
49,402

 
 
Accounts payable
$
232

Accrued expenses
935

Other noncurrent liabilities
3,548

  Total liabilities
$
4,715

The provisional amounts recognized are based on the Company's best estimate using information that it has obtained as of the reporting date. The Company will finalize its estimate once it is able to determine that it has obtained all necessary information that existed as of the acquisition date related to this matter or one year following the acquisition of NAAS, whichever is earlier.
The NAAS acquisition has been accounted for under the acquisition method and, accordingly, is included in the condensed consolidated financial statements from the effective date of acquisition. The NAAS acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $585 in acquisition-related costs in connection with the NAAS acquisition, which is recorded in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
Acquisition of GE Aviation - Hydraulic Actuation
Effective June 27, 2014, the Company acquired the hydraulic actuation business of GE Aviation ("GE"). GE's hydraulic actuation business consists of three facilities located in Yakima, Washington, Cheltenham, England and the Isle of Man and is a technology leader in actuation systems. GE's key product offerings include complete landing gear actuation systems, door actuation, nose-wheel steerings, hydraulic fuses, manifolds flight control actuation and locking mechanisms for the commercial, military and business jet markets. The acquired business will operate as Triumph Actuation Systems-Yakima and Triumph Actuation Systems-UK & IOM and its results are included in Aerospace Systems Group from the date of acquisition.
The purchase price for the GE acquisition was $71,509, which includes cash paid at closing and deferred payments. Goodwill in the amount of $177,892 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is deductible for tax purposes. The Company has also identified an intangible asset related to technology valued at $17,494 with a weighted-average life of 11.0 years.
The accounting for the business combination is dependent upon obtaining valuations and other information for certain assets and liabilities which have not yet been completed or obtained to a point where definitive estimates can be made. The process for estimating the fair values of identified intangible assets, certain tangible assets and assumed liabilities requires the use of judgment to determine the appropriate assumptions.
As the Company finalizes estimates of the fair value of assets acquired and liabilities assumed, substantially all of the purchase price allocation for GE is provisional. Additional purchase price adjustments will be recorded during the measurement period not to exceed one year beyond the acquisition date. These adjustments may have a material impact on the Company's results of operations and financial position.

11


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

3.     ACQUISITIONS (Continued)

The table below presents the provisional estimated fair value of assets acquired and liabilities assumed on the acquisition date based on the best information the Company has received to date, in accordance with ASC 805. These estimates will be revised as the Company receives final appraisal of tangible and intangible assets, certain liabilities assumed and other information related to the GE acquisition. Accordingly, the amounts below report the Company's best estimate of fair value based on the information available at this time:
 
June 27, 2014
Cash
$
4,608

Accounts receivable
35,579

Inventory
48,560

Property and equipment
33,965

Goodwill
177,892

Intangible assets
17,494

Deferred taxes
45,378

Other assets
2,022

  Total assets
$
365,498

 
 
Accounts payable
$
17,644

Accrued expenses
26,483

Acquired contract liabilities
249,862

  Total liabilities
$
293,989

The provisional amounts recognized are based on the Company's best estimate using information that it has obtained as of the reporting date. The Company will finalize its estimate once it is able to determine that it has obtained all necessary information that existed as of the acquisition date related to this matter or one year following the acquisition of GE, whichever is earlier.
The GE acquisition has been accounted for under the acquisition method and, accordingly, is included in the condensed consolidated financial statements from the effective date of acquisition. The GE acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $1,839 in acquisition-related costs in connection with the GE acquisition, which is recorded in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income.
The acquisitions of the Tulsa Programs, NAAS and GE are referred to in this report as the "fiscal 2015 acquisitions."
As a result of the fiscal 2015 acquisitions, acquired contract liabilities, net, which are included in other noncurrent liabilities on the Condensed Consolidated Balance Sheets, increased to $738,414 at December 31, 2014 from $141,505 at March 31, 2014.
The following table presents information for the fiscal 2015 acquisitions which are included in the Company's Condensed Consolidated Statements of Income from their respective dates of acquisition through the three and nine months ended December 31, 2014:
 
For the Three Months Ended December 31, 2014
 
For the Nine Months Ended December 31, 2014
Net Sales
$
69,644

 
$
137,860

Operating Income
7,895

 
15,115


12


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

3.     ACQUISITIONS (Continued)



FISCAL 2014 ACQUISITIONS
Acquisition of Insulfab Product Line (Chase Corporation)
Effective October 7, 2013, the Company's wholly-owned subsidiary, Triumph Insulation Systems, LLC, acquired substantially all of the assets comprising the Insulfab product line from Chase Corporation ("Insulfab"). Insulfab primarily focuses on manufacturing high-quality, engineered barrier laminates used in aerospace applications. The results for Triumph Insulation Systems, LLC will continue to be included in the Aerostructures group from the date of acquisition.
The Company paid $7,394 in cash at closing for Insulfab, and in January 2014, paid $2,516 in cash after the working capital was finalized. Goodwill in the amount of $4,660 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is deductible for tax purposes.
Acquisition of General Donlee Canada, Inc.
Effective October 4, 2013, the Company acquired all of the issued and outstanding shares of General Donlee Canada Inc. ("General Donlee"). General Donlee is based in Toronto, Canada and is a leading manufacturer of precision machined products for the aerospace, nuclear and oil and gas industries. The acquired business now operates as Triumph Gear Systems-Toronto ULC and its results are included in the Aerospace Systems Group from the date of acquisition.
The purchase price for the General Donlee acquisition was $56,622 plus assumed debt of $32,382, which was settled at closing. Additionally, on October 7, 2013, the Company, at its option, called General Donlee's Convertible Notes for $26,000, which were paid on November 12, 2013. Goodwill in the amount of $46,528 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is not deductible for tax purposes. The Company has also identified intangible assets related to customer relationships valued at approximately $24,596 with a weighted-average life of 15.0 years. Prior to the anniversary of the acquisition date, the Company finalized the purchase price allocation. The finalization of the Company's purchase accounting assessment did not result in significant measurement period adjustments and did not have a material impact on the Company's Consolidated Balance Sheet, Statement of Income, or Statement of Cash Flows.
The following condensed balance sheet represents the amounts assigned to each major asset and liability caption in the aggregate from the acquisition of General Donlee, in accordance with ASC 805:

13


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

3.     ACQUISITIONS (Continued)

 
October 4, 2013
Accounts receivable
$
10,573

Inventory
15,645

Prepaid expenses and other
184

Property and equipment
31,952

Goodwill
46,528

Intangibles assets
24,596

  Total assets
$
129,478

 
 
Accounts payable
$
2,841

Accrued expenses
3,620

Deferred taxes
11,439

Debt
54,956

  Total liabilities
$
72,856

The Company finalized its estimate after it was able to to determine that it had obtained all necessary information that existed as of the acquisition date related to these amounts.
The General Donlee acquisition has been accounted for under the acquisition method and, accordingly, is included in the condensed consolidated financial statements from the effective date of the acquisition. The General Donlee acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $766 in acquisition-related costs in connection with the General Donlee acquisition, which were recorded in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Income for the fiscal year ended March 31, 2014.
Acquisition of Primus Composites
Effective May 6, 2013, the Company acquired four related entities collectively comprising the Primus Composites ("Primus") business from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, will operate as Triumph Structures - Farnborough and Triumph Structures - Thailand and be included in the Aerostructures Group from the date of acquisition. Together, Triumph Structures - Farnborough and Triumph Structures - Thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies. In addition to its composite operations, the Thailand operation also machines and processes metal components.
The purchase price for the Primus acquisition was $33,530 in cash and $30,000 in assumed debt settled at closing. Goodwill in the amount of $29,138 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is not deductible for tax purposes. The Company has also identified intangible assets related to customer relationships valued at approximately $3,514 with a weighted-average life of 16.0 years. Prior to the anniversary of the acquisition date, the Company finalized the purchase price allocation.
The following condensed balance sheet represents the amounts assigned to each major asset and liability caption in the aggregate from the acquisition of Primus, in accordance with ASC 805:

14


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

3.     ACQUISITIONS (Continued)

 
May 6, 2013
Cash
$
2,201

Accounts receivable
17,392

Inventory
21,053

Prepaid expenses and other
883

Property and equipment
28,457

Goodwill
29,138

Intangibles assets
3,514

Other noncurrent assets
13,138

  Total assets
$
115,776

 
 
Accounts payable
$
10,027

Accrued expenses
15,939

Other noncurrent liabilities
26,280

  Total liabilities
$
52,246

The Company finalized its estimates after it was able to determine that it had obtained all necessary information that existed as of the acquisition date related to these matters.
The Primus acquisition has been accounted for under the acquisition method and, accordingly, is included in the condensed consolidated financial statements from the effective date of the acquisition. The Primus acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $743 in acquisition-related costs in connection with the Primus acquisition, which is recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Income for the fiscal year ended March 31, 2014.
The acquisitions of Insulfab, General Donlee and Primus are referred to in this report as the "fiscal 2014 acquisitions."
The pro forma results presented below include the effects of the GE and 2014 acquisitions of as if they had been consummated as of April 1, 2013. The pro forma results include the amortization associated with an estimate of acquired intangible assets and interest expense on debt to fund these acquisitions, as well as fair value adjustments for property and equipment and off-market contracts. To better reflect the combined operating results, nonrecurring charges directly attributable to the transaction have been excluded. In addition, the pro forma results do not include any expected benefits of the acquisitions. Accordingly, the pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of April 1, 2013 and have been included in the Company's results of operations for fiscal years 2015 and 2014.
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net Sales
$
917,417

 
$
969,733

 
$
2,859,381

 
$
3,008,865

Net (loss) income
(39,832
)
 
35,839

 
157,880

 
166,290

(Loss) earnings per share—basic
$
(0.79
)
 
$
0.69

 
$
3.09

 
$
3.23

(Loss) earnings per share—diluted
$
(0.79
)
 
$
0.68

 
$
3.08

 
$
3.15





15



4.     DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Sale of Triumph Aerospace Systems - Wichita
In January 2014, the Company sold all of the shares of Triumph Aerospace Systems-Wichita, Inc. ("TAS-Wichita") for total cash proceeds of $23,000. As a result of the sale of TAS-Wichita, the Company recognized no gain or loss. The operating results of TAS-Wichita were included in the Aerostructures Group through the date of disposal.
Sale of Triumph Instruments - Burbank and Triumph Instruments - Ft. Lauderdale
In April 2013, the Company sold the assets and liabilities of Triumph Instruments - Burbank and Triumph Instruments - Ft. Lauderdale (collectively, "Triumph Instruments") for total proceeds of $11,200 including cash received at closing of $9,676, a note of $1,500, and the remaining amount which was held in escrow and received in the second quarter of fiscal 2014, resulting in a loss of $1,462 recognized during the year ended March 31, 2013. The assets and liabilities of Triumph Instruments were classified as held for sale as of March 31, 2013. The loss on the sale of the assets and liabilities of Triumph Instruments is included in the Condensed Consolidated Statements of Income within selling, general and administrative expenses for the year ended March 31, 2013. The operating results of Triumph Instruments were included in the Aftermarket Services Group through the date of disposal.
The Company expects to have significant continuing involvement in the businesses and markets of the disposed entities, as defined by ASC 205-20, Discontinued Operations, and, therefore, as a result, the disposal groups do not meet the criteria to be classified as 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:
 
December 31, 2014
 
March 31, 2014
Raw materials
$
85,192

 
$
106,552

Work-in-process, including manufactured and purchased components
1,254,134

 
1,102,626

Finished goods
124,093

 
67,608

Less: unliquidated progress payments
(174,855
)
 
(165,019
)
Total inventories
$
1,288,564

 
$
1,111,767

Work-in-process inventory includes capitalized pre-production costs. Capitalized pre-production costs include nonrecurring engineering, planning and design, including applicable overhead, incurred before production is manufactured on a regular 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 related to the Company's contracts with Bombardier for the Global 7000/8000 program ("Bombardier") and Embraer for the second generation E-Jet ("Embraer") as of December 31, 2014 is $245,241. The balance of capitalized pre-production costs related to the Company's contracts with Bombardier and Embraer as of March 31, 2014 was $131,358.
The Company is still in the pre-production stages for the Bombardier and Embraer programs, as these aircrafts are not scheduled to enter service until 2016 and 2018, respectively, or later. Transition of these programs from development to recurring production levels is dependent upon the success of the programs achieving flight testing and certification, as well as the ability of the Bombardier and Embraer programs to generate acceptable levels of aircraft sales. The failure to achieve these milestones and level of sales or significant cost overruns may result in an impairment of the capitalized pre-production costs.




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

6.    LONG-TERM DEBT
Long-term debt consists of the following:
 
December 31, 2014
 
March 31, 2014
 
 
 
 
Revolving line of credit
$
212,013

 
$
194,406

Term loan
360,938

 
375,000

Receivable securitization facility
98,100

 
162,400

Equipment leasing facility and other capital leases
88,651

 
74,342

Senior notes due 2018

 
348,423

Senior notes due 2021
375,000

 
375,000

Senior notes due 2022
300,000

 

Convertible senior subordinated notes

 
12,834

Other debt
7,978

 
7,978

 
1,442,680

 
1,550,383

Less current portion
40,877

 
49,575

 
$
1,401,803

 
$
1,500,808


Revolving Credit Facility
In May 2014, the Company amended its existing credit agreement (the “Credit Facility”) with its lenders to (i) increase the maximum amount allowed for the receivable securitization facility (the “Securitization Facility”) and (ii) amend certain other terms and covenants.
In November 2013, the Company amended and restated its Credit Facility with its lenders to (i) provide for a $375,000 Term Loan with a maturity date of May 14, 2019 (the "2013 Term Loan"), (ii) maintain a Revolving Line of Credit under the Credit Facility of $1,000,000 with a $250,000 accordion feature, (iii) extend the maturity date to November 19, 2018, and (iv) amend certain other terms and covenants. In connection with the amendment to the Credit Facility, the Company incurred $2,795 of financing costs. These costs, along with the $6,507 of unamortized financing costs prior to the amendment, are being amortized over the remaining term of the Credit Facility.
The Company will repay the outstanding principal amount of the 2013 Term Loan in quarterly installments, on the first business day of each January, April, July and October, commencing April 2014.
The obligations under the Credit Facility and related documents are secured by liens on substantially all assets of the Company and its domestic subsidiaries pursuant to a Second Amended and Restated Guarantee and Collateral Agreement, dated as of November 19, 2013, among the administrative agent, the Company and the subsidiaries of the Company party thereto.
Pursuant to the Credit Facility, the Company can borrow, repay and re-borrow revolving credit loans, and cause to be issued letters of credit, in an aggregate principal amount not to exceed $1,000,000 outstanding at any time. The Credit Facility bears interest at either: (i) LIBOR plus between 1.38% and 2.50%; (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. In addition, the Company is required to pay a commitment fee of between 0.25% and 0.45% 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 December 31, 2014, there were $212,013 in borrowings and $35,514 in letters of credit outstanding under the Revolving Line of Credit provisions of the Credit Facility primarily to support insurance policies. At March 31, 2014, there

17


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

6. LONG-TERM DEBT (Continued)
were $194,406 in borrowings and $36,445 in letters of credit outstanding under the Revolving Line of Credit provisions of the Credit Facility primarily to support insurance policies. The level of unused borrowing capacity under the Revolving Line of Credit provisions of 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 December 31, 2014, the Company had borrowing capacity under this facility of $752,473 after reductions for borrowings and letters of credit outstanding under the facility.
In connection with the Company amending and restating the Credit Facility to add the 2013 Term Loan, the Company also entered into an interest rate swap agreement through November 2018 to reduce its exposure to interest on the variable rate portion of its long-term debt. On the date of inception, the Company designated the interest rate swap as a cash flow hedge in accordance with FASB guidance on accounting for derivatives and hedges and linked the interest rate swap to the 2013 Term Loan. The Company formally documented the hedging relationship between 2013 Term Loan and the interest rate swap, as well as its risk-management objective and strategy for undertaking the hedge, the nature of the risk being hedged, how the hedging instrument's effectiveness will be assessed and a description of the method of measuring the ineffectiveness. The Company also formally assesses, both at the hedge's inception and on a quarterly basis, whether the derivative item is highly effective offsetting changes in cash flows.
As of December 31, 2014 and March 31, 2014, the interest rate swap agreement had a notional amount of $360,938 and $375,000, respectively. As of December 31, 2014 and March 31, 2014, the interest rate swap agreement had a fair value of $141 and $2,426, respectively, which is recorded in other assets, net of applicable taxes (Level 2). The interest rate swap settles on a monthly basis when interest payments are made. These settlements occur through the maturity date.
Receivables Securitization Facility
In November 2014, the Company amended its $225,000 Securitization Facility, increasing the purchase limit from $175,000 to $225,000 and extending the term through November 2017. 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 December 31, 2014, the maximum amount available under the Securitization Facility was $225,000. Interest rates are based on LIBOR plus a program fee and a commitment fee. The program fee is 0.40% on the amount outstanding under the Securitization Facility. Additionally, the commitment fee is 0.40% on 100.00% of the maximum amount available under the Securitization Facility. At December 31, 2014, there was $98,100 outstanding under the Securitization Facility. In connection with amending the Securitization Facility, the Company incurred approximately $252 of financing costs. These costs, along with the $341 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 ASC 860.
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 all or substantially all of the Company's assets.
Capital Leases
During the nine months ended December 31, 2014 and 2013, the Company entered into new capital leases in the amount of $52 and $36, respectively, to finance a portion of the Company’s capital additions for the period. During the nine months


18


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

6. LONG-TERM DEBT (Continued)
ended December 31, 2014 and 2013, the Company obtained financing for existing fixed assets in the amount of $28,860 and $27,145, respectively.

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 had 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 were being amortized on the effective interest method over the term of the 2017 Notes.
On November 15, 2013, the Company completed the redemption of the 2017 Notes. The principal amount of $175,000 was redeemed at a price of 104% plus accrued and unpaid interest. As a result of the redemption, the Company recognized a pre-tax loss on redemption of $11,069, consisting of early termination premium, write-off of unamortized discount and deferred financing fees and was recorded on the Consolidated Statements of Income as a component of "Interest expense and other".
Senior Notes Due 2018
On June 16, 2010, in connection with the acquisition of Vought Aircraft Industries. ("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 had an effective interest yield of 8.75%. Interest on the 2018 Notes accrued at the rate of 8.63% per annum and was 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 were amortized on the effective interest method over the term of the 2018 Notes.
On June 23, 2014, the Company completed the redemption of the 2018 Notes. The principal amount of $350,000 was redeemed at a price of 104.79% plus accrued and unpaid interest. As a result of the redemption, the Company recognized a pre-tax loss on redemption of $22,615, consisting of early termination premium, write-off of unamortized discount and deferred financing fees and was recorded on the Condensed Consolidated Statements of Income as a component of "Interest expense and other" for the nine months ended December 31, 2014.
Senior Notes Due 2021
On February 26, 2013, the Company issued $375,000 principal amount of 4.875% Senior Notes due 2021 (the "2021 Notes"). The 2021 Notes were sold at 100% of principal amount and have an effective interest yield of 4.875%. Interest on the 2021 Notes accrues at the rate of 4.875% per annum and is payable semiannually in cash in arrears on April 1 and October 1 of each year, commencing on October 1, 2013. In connection with the issuance of the 2021 Notes, the Company incurred approximately $6,327 of costs, which were deferred and are being amortized on the effective interest method over the term of the 2021 Notes.
The 2021 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 indebtedness. The 2021 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 2021 Notes prior to April 1, 2017 by paying a "make-whole" premium. The Company may redeem some or all of the 2021 Notes on or after April 1, 2017 at specified redemption prices. In addition, prior to April 1, 2016, the Company may redeem up to 35% of the 2021 Notes with the net proceeds of certain equity offerings at a redemption price equal to 104.875% of the aggregate principal amount plus accrued and unpaid interest, if any, subject to certain limitations set forth in the indenture governing the 2021 Notes (the "2021 Indenture").
The Company is obligated to offer to repurchase the 2021 Notes at a price of (i) 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change-of-control events and (ii) 100% of their principal amount plus


19


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

6. LONG-TERM DEBT (Continued)
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 2021 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.
Senior Notes Due 2022
On June 3, 2014, the Company issued $300,000 principal amount of 5.250% Senior Notes due 2022 (the "2022 Notes"). The 2022 Notes were sold at 100% of principal amount and have an effective interest yield of 5.250%. Interest on the 2022 Notes accrues at the rate of 5.250% per annum and is payable semiannually in cash in arrears on June 1 and December 1 of each year, commencing on December 1, 2014. In connection with the issuance of the 2022 Notes, the Company incurred approximately $4,990 of costs, which were deferred and are being amortized on the effective interest method over the term of the 2022 Notes.
The 2022 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 indebtedness. The 2022 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 2022 Notes prior to June 1, 2017 by paying a "make-whole" premium. The Company may redeem some or all of the 2022 Notes on or after June 1, 2017 at specified redemption prices. In addition, prior to June 1, 2017, the Company may redeem up to 35% of the 2022 Notes with the net proceeds of certain equity offerings at a redemption price equal to 105.250% of the aggregate principal amount plus accrued and unpaid interest, if any, subject to certain limitations set forth in the indenture governing the 2022 Notes (the "2022 Indenture").
The Company is obligated to offer to repurchase the 2022 Notes at a price of (i) 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change-of-control events and (ii) 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 2022 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.
Convertible Senior Subordinated Notes
On September 18, 2006, the Company issued $201,250 in convertible senior subordinated notes (the “Convertible Notes”). The Convertible Notes were 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 Convertible Notes bore 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 paid 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

20


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

6. LONG-TERM DEBT (Continued)
principal amount of the Convertible Notes. The contingent interest paid per note in respect of any six-month period equaled 0.25% per annum, calculated on the average trading price of a note for the relevant five trading day period.
The Convertible Notes would have matured on October 1, 2026, unless earlier redeemed, repurchased or converted. The Company was able to 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 had 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 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 were convertible into the Company’s common stock at a rate equal to 36.8679 shares per $1 principal amount of the Convertible Notes (equal to an initial conversion price of approximately $27.12 per share), subject to adjustment as described in the indenture governing the Convertible Notes. Upon conversion, the Company delivered 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.
On May 22, 2014, the Company announced the redemption of the Convertible Notes. The redemption price for the Convertible Notes was equal to the sum of 100% of the principal amount of the Convertible Notes outstanding, plus accrued and unpaid interest on the Convertible Notes up to, but not including, the redemption date of June 23, 2014. The Convertible Notes were able to be converted at the option of the holder.
The Convertible Notes were eligible for conversion upon meeting certain conditions as provided in the indenture governing the Convertible Notes. For the periods from January 1, 2011 through June 23, 2014, the Convertible Notes were eligible for conversion. During the nine months ended December 31, 2014, the Company settled the conversion of $12,834 in principal value of the Convertible Notes, with the principal and the conversion benefit settled in cash. During the nine months ended December 31, 2013, the Company settled the conversion of $95,732 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 2,272,019 shares.
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 $27.12. The average price of the Company's common stock for the three months ended December 31, 2013, was $72.52. Therefore, for the three months ended December 31, 2013, there were 525,635 additional shares included in the calculation of diluted earnings per share. The average price of the Company’s common stock for the nine months ended December 31, 2014 and 2013 was $66.71 and $75.69, respectively. Therefore, for the nine months ended December 31, 2014 and 2013, there were 56,692 and 982,600 additional shares, respectively, included in the calculation of diluted earnings per share.







21


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

6. LONG-TERM DEBT (Continued)
Financial Instruments Not Recorded at Fair Value
The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of their short maturities (Level 1 inputs). 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:
 
December 31, 2014
 
March 31, 2014
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt
$
1,442,680

 
$
1,434,621

 
$
1,550,383

 
$
1,580,447

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).
7.    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 December 31,
 
Nine Months Ended December 31,
 
(in thousands)
 
(in thousands)
 
2014
 
2013
 
2014
 
2013
Weighted-average common shares outstanding – basic
50,643

 
52,024

 
51,114

 
51,548

Net effect of dilutive stock options and nonvested stock

 
256

 
172

 
267

Potential common shares – convertible debt

 
526

 
57

 
983

Weighted-average common shares outstanding – diluted
50,643

 
52,806

 
51,343

 
52,798

 



22


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

8.    INCOME TAXES
The Company follows the Income Taxes topic of the ASC 740, 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 December 31, 2014 and March 31, 2014, the total amount of accrued income tax-related interest and penalties was $200 and $204, respectively.

As of December 31, 2014 and March 31, 2014, the total amount of unrecognized tax benefits was $8,438 and $8,865, respectively, of which $6,655 and $7,082, respectively, 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 income tax rate for the three months ended December 31, 2014 was a benefit of (46.8)% as compared to 35.3% for the three months ended December 31, 2013. For the three months ended December 31, 2014, the income tax benefit increased to reflect the benefit of $5,970 from the retroactive reinstatement of the R&D tax credit. The effective income tax rate for the nine months ended December 31, 2014 was 30.0% as compared to 34.1% for the nine months ended December 31, 2013. For the nine months ended December 31, 2014, the income tax provision was reduced to reflect unrecognized tax benefits of $1,051, an additional tax benefit related to the a net operating loss carryback claim of $367, the benefit of $1,999 from a decrease to the state deferred tax rates and the benefit of $5,970 from the retroactive reinstatement of the R&D tax credit.

With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for fiscal years ended before March 31, 2011, state or local examinations for fiscal years ended before March 31, 2011, or foreign income tax examinations by tax authorities for fiscal years ended before March 31, 2009.

As of December 31, 2014, the Company was not subject to examination in any state jurisdiction. 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, 2001 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.

During the nine months ended December 31, 2014, the Company received refund claims of $26,001, which had previously been filed for in the second quarter of the fiscal year ended March 31, 2013.

9.    GOODWILL
The following is a summary of the changes in the carrying value of goodwill by reportable segment, from March 31, 2014 through December 31, 2014:
 
Aerostructures
 
Aerospace
 Systems
 
Aftermarket
Services
 
Total
Balance, March 31, 2014
$
1,339,993

 
$
395,912

 
$
55,986

 
$
1,791,891

Goodwill recognized in connection with acquisitions
80,636

 
177,892

 
24,686

 
283,214

Effect of exchange rate changes
1,790

 
(13,440
)
 
53

 
(11,597
)
Balance, December 31, 2014
$
1,422,419

 
$
560,364

 
$
80,725

 
$
2,063,508






23




10.     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 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 715, the Company has recognized the funded status of the benefit obligation as of the date of the last remeasurement, in the accompanying Condensed Consolidated Balance Sheets. 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.






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


10.     PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
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 December 31,
 
Nine Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit expense (income):
 
 
 
 
 
 
 
Service cost
$
3,251

 
$
3,293

 
$
9,764

 
$
9,880

Interest cost
21,961

 
23,369

 
65,863

 
69,801

Expected return on plan assets
(36,913
)
 
(37,271
)
 
(110,740
)
 
(111,309
)
Amortization of prior service credits
(1,322
)
 
(1,683
)
 
(3,966
)
 
(5,048
)
Amortization of net loss

 
4,531

 

 
13,593

Settlements

 
1,561

 

 
1,561

Net periodic benefit income
$
(13,023
)
 
$
(6,200
)
 
$
(39,079
)
 
$
(21,522
)

 
Other postretirement benefits
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
Components of net periodic benefit expense:
 
 
 
 
 
 
 
Service cost
$
717

 
$
765

 
$
2,151

 
$
2,295

Interest cost
3,083

 
3,138

 
9,249

 
9,414

Amortization of prior service credits
(1,132
)
 
(1,132
)
 
(3,397
)
 
(3,397
)
Net periodic benefit expense
$
2,668

 
$
2,771

 
$
8,003

 
$
8,312

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 December 2013, the Company completed an incentive offer in the form of lump-sum payments to non-represented deferred vested employees who were not of retirement age in lieu of any future benefits. In addition, cumulative lump-sum payments to union-represented plan participants for previously offered early retirement incentives exceeded the service and interest costs of the respective plan. The aforementioned changes led to a remeasurement of the affected plan's assets and obligations as of December 2013, which resulted in a $118,391 decrease in projected benefit obligation. Additionally, these distributions resulted in settlement charges of $1,561 and are presented on the accompanying Condensed Consolidated Statements of Income as "Early retirement incentive expense."





25


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

11.     STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) ("AOCI") by component for the three and nine months ended December 31, 2014 and 2013, respectively, were as follows:
 
 
Currency Translation Adjustment
 
Unrealized Gains and Losses on Derivative Instruments
 
Defined Benefit Pension Plans and Other Postretirement Benefits
 
Total (1)
Balance September 30, 2014
 
$
(9,425
)
 
$
979

 
$
(23,668
)
 
$
(32,114
)
   AOCI before reclassifications
 
(16,331
)
 
(1,732
)
 

 
(18,063
)
   Amounts reclassified from AOCI
 

 
(20
)
 
(1,533
)
(2
)
(1,553
)
 Net current period AOCI
 
(16,331
)
 
(1,752
)
 
(1,533
)
 
(19,616
)
Balance December 31, 2014
 
$
(25,756
)
 
$
(773
)
 
$
(25,201
)
 
$
(51,730
)
Balance September 30, 2013
 
$
6,283

 
$
(140
)
 
$
(62,472
)
 
$
(56,329
)
   AOCI before reclassifications
 
(2,392
)
 
1,961

 
74,601

 
74,170

   Amounts reclassified from AOCI
 

 
(3
)
 
1,072

(2
)
1,069

 Net current period AOCI
 
(2,392
)
 
1,958

 
75,673

 
75,239

Balance December 31, 2013
 
$
3,891

 
$
1,818

 
$
13,201

 
$
18,910

Balance March 31, 2014
 
$
198

 
$
1,496

 
$
(20,602
)
 
$
(18,908
)
   AOCI before reclassifications
 
(25,954
)
 
(2,182
)
 

 
(28,136
)
   Amounts reclassified from AOCI
 

 
(87
)
 
(4,599
)
(2
)
(4,686
)
 Net current period AOCI
 
(25,954
)
 
(2,269
)
 
(4,599
)
 
(32,822
)
Balance December 31, 2014
 
$
(25,756
)
 
$
(773
)
 
$
(25,201
)
 
$
(51,730
)
Balance March 31, 2013
 
$
3,513

 
$
131

 
$
(64,616
)
 
$
(60,972
)
   AOCI before reclassifications
 
378

 
1,726

 
74,601

 
76,705

   Amounts reclassified from AOCI
 

 
(39
)
 
3,216

(2
)
3,177

 Net current period AOCI
 
378

 
1,687

 
77,817

 
79,882

Balance December 31, 2013
 
$
3,891

 
$
1,818

 
$
13,201

 
$
18,910

(1) Net of tax.
(2) Primarily relates to amortization of actuarial losses and recognized prior service (credits) costs, which are included in the net periodic pension cost of which a portion is allocated to production as inventoried costs.



26


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

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 (“Adjusted 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 gauges for a broad range of commercial airlines on a worldwide basis.
Segment Adjusted 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 a gain on legal settlement, net of expenses, of $134,693 for the nine months ended December 31, 2014.
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 Adjusted EBITDA to operating income is as follows:

27


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

12.     SEGMENTS (Continued)
 
Three Months Ended
December 31,
 
Nine Months Ended December 31,
 
2014
 
2013
 
2014
 
2013
Net sales:
 
 
 
 
 
 
 
Aerostructures
$
559,465

 
$
637,202

 
$
1,803,400

 
$
1,979,839

Aerospace systems
279,198

 
211,402

 
787,951

 
636,411

Aftermarket services
80,690

 
69,556

 
222,641

 
216,880

Elimination of inter-segment sales
(1,936
)
 
(2,344
)
 
(5,548
)
 
(6,286
)
 
$
917,417

 
$
915,816

 
$
2,808,444

 
$
2,826,844

 
 
 
 
 
 
 
 
(Loss) income before income taxes:
 
 
 
 
 
 
 
Operating income (expense):
 
 
 
 
 
 
 
Aerostructures
$
(102,461
)
 
$
53,973

 
$
40,634

 
$
218,784

Aerospace systems
41,863

 
32,504

 
125,430

 
106,887

Aftermarket services
12,490

 
9,297

 
34,614

 
30,678

Corporate
(13,158
)
 
(10,995
)
 
93,278

 
(37,253
)
 
(61,266
)
 
84,779

 
293,956

 
319,096

Interest expense and other
13,573

 
30,115

 
71,320

 
70,146

 
$
(74,839
)
 
$
54,664

 
$
222,636

 
$
248,950

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Aerostructures
$
24,947

 
$
30,207

 
$
74,692

 
$
83,002

Aerospace systems
11,363

 
10,823

 
32,027

 
27,911

Aftermarket services
2,334

 
1,862

 
6,137

 
5,603

Corporate
1,164

 
1,211

 
3,517

 
3,765

 
$
39,808

 
$
44,103

 
$
116,373

 
$
120,281

 
 
 
 
 
 
 
 
Amortization of acquired contract liabilities, net:
 
 
 
 
 
 
 
Aerostructures
$
4,411

 
$
8,380

 
$
14,311

 
$
20,135

Aerospace systems
11,090

 
5,878

 
25,021

 
14,238

 
$
15,501

 
$
14,258

 
$
39,332

 
$
34,373

 
 
 
 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
 
 
 
Aerostructures
$
(81,925
)
 
$
75,800

 
$
101,015

 
$
281,651

Aerospace systems
42,136

 
37,449

 
132,436

 
120,560

Aftermarket services
14,824

 
11,159

 
40,751

 
36,281

Corporate
(11,994
)
 
(8,223
)
 
(37,898
)
 
(31,927
)
 
$
(36,959
)
 
$
116,185

 
$
236,304

 
$
406,565

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Aerostructures
$
15,589

 
$
33,662

 
$
53,965

 
$
132,205

Aerospace systems
8,301

 
5,714

 
24,552

 
15,989

Aftermarket services
1,392

 
2,728

 
5,425

 
10,795

Corporate
814

 
429

 
1,228

 
2,808

 
$
26,096

 
$
42,533

 
$
85,170

 
$
161,797


28


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

12.     SEGMENTS (Continued)
 
December 31, 2014
 
March 31, 2014
Total Assets:
 
 
 
Aerostructures
$
4,059,117

 
$
3,880,645

Aerospace systems
1,476,827

 
1,255,136

 Aftermarket services
377,710

 
316,643

 Corporate
61,419

 
100,962

 
$
5,975,073

 
$
5,553,386


During the three months ended December 31, 2014 and 2013, the Company had international sales of $183,009 and $160,812, respectively. During the nine months ended December 31, 2014 and 2013, the Company had international sales of $534,641 and $457,049, respectively.


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

The 2021 Notes and the 2022 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 2021 Notes and the 2022 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 Condensed Consolidating Balance Sheets as of December 31, 2014 and March 31, 2014, Condensed Consolidating Statements of Comprehensive Income for the three and nine months ended December 31, 2014 and 2013, and Condensed Consolidating Statements of Cash Flows for the nine months ended December 31, 2014 and 2013.


29


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

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

SUMMARY CONDENSED CONSOLIDATING BALANCE SHEETS:

 
December 31, 2014
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
621

 
$
1,414

 
$
32,146

 
$

 
$
34,181

Trade and other receivables, net
5,588

 
163,506

 
283,233

 

 
452,327

Inventories

 
1,206,168

 
82,396

 

 
1,288,564

Rotable assets

 
30,253

 
13,572

 

 
43,825

Deferred income taxes

 
53,442

 
4

 

 
53,446

Prepaid expenses and other
7,353

 
8,504

 
6,932

 

 
22,789

Total current assets
13,562

 
1,463,287

 
418,283

 

 
1,895,132

Property and equipment, net
8,919

 
830,345

 
143,402

 


 
982,666

Goodwill and other intangible assets, net

 
2,809,200

 
228,336

 


 
3,037,536

Other, net
25,081

 
7,953

 
26,705

 


 
59,739

Intercompany investments and advances
4,334,263

 
64,554

 
11,677

 
(4,410,494
)
 

Total assets
$
4,381,825

 
$
5,175,339

 
$
828,403

 
$
(4,410,494
)
 
$
5,975,073

 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
19,021

 
$
21,856

 
$

 
$

 
$
40,877

Accounts payable
6,187

 
268,372

 
33,839

 

 
308,398

Accrued expenses
26,249

 
296,903

 
36,719

 

 
359,871

Total current liabilities
51,457

 
587,131

 
70,558

 

 
709,146

Long-term debt, less current portion
1,234,609

 
69,094

 
98,100

 


 
1,401,803

Intercompany advances
810,167

 
1,827,169

 
318,348

 
(2,955,684
)
 

Accrued pension and other postretirement benefits, noncurrent
6,939

 
403,229

 

 


 
410,168

Deferred income taxes and other
8,201

 
1,080,939

 
94,364

 


 
1,183,504

Total stockholders’ equity
2,270,452

 
1,207,777

 
247,033