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EX-32.2 - EXHIBIT 32.2 - TRIUMPH GROUP INCexhibit-322q1fy2017.htm
EX-32.1 - EXHIBIT 32.1 - TRIUMPH GROUP INCexhibit-321q1fy2017.htm
EX-31.2 - EXHIBIT 31.2 - TRIUMPH GROUP INCexhibit-312q1fy2017.htm
EX-31.1 - EXHIBIT 31.1 - TRIUMPH GROUP INCexhibit-311q1fy2017.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 June 30, 2016

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, 49,529,579 shares outstanding as of August 1, 2016.



TRIUMPH GROUP, INC.
INDEX
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2016 and March 31, 2016
 
 
 
 
 
Condensed Consolidated Statements of Income
Three
 months ended June 30, 2016 and 2015
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
Three
months ended June 30, 2016 and 2015
 
 
 
 
 
Three months ended June 30, 2016 and 2015
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I. Financial Information

Item 1. Financial Statements.

Triumph Group, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
June 30,
2016
 
March 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
31,299

 
$
20,984

Trade and other receivables, less allowance for doubtful accounts of $6,727 and $6,492
388,119

 
444,208

Inventories, net of unliquidated progress payments of $99,403 and $123,155
1,355,154

 
1,236,190

Prepaid and other current assets
25,640

 
41,259

Total current assets
1,800,212

 
1,742,641

Property and equipment, net
867,729

 
889,734

Goodwill
1,435,653

 
1,444,254

Intangible assets, net
634,690

 
649,612

Other, net
108,123

 
108,852

Total assets
$
4,846,407

 
$
4,835,093

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
47,087

 
$
42,441

Accounts payable
431,063

 
410,225

Accrued expenses
606,368

 
683,208

Total current liabilities
1,084,518

 
1,135,874

Long-term debt, less current portion
1,492,325

 
1,374,879

Accrued pension and other postretirement benefits
642,454

 
664,664

Deferred income taxes
68,540

 
62,453

Other noncurrent liabilities
620,636

 
662,279

Stockholders’ equity:
 
 
 
Common stock, $.001 par value, 100,000,000 shares authorized, 52,460,920 and 52,460,920 shares issued; 49,516,612 and 49,328,999 shares outstanding
51

 
51

Capital in excess of par value
841,181

 
851,102

Treasury stock, at cost, 2,944,308 and 3,131,921 shares
(187,322
)
 
(199,415
)
Accumulated other comprehensive loss
(364,097
)
 
(347,162
)
Retained earnings
648,121

 
630,368

Total stockholders’ equity
937,934

 
934,944

Total liabilities and stockholders’ equity
$
4,846,407

 
$
4,835,093


SEE ACCOMPANYING NOTES.

1



Triumph Group, Inc.
Condensed Consolidated Statements of Income

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

 
 
Three Months Ended June 30,
 
 
2016
 
2015
 
 
 
 
 
Net sales
 
$
893,253

 
$
959,638

Operating costs and expenses:
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown separately below)
 
726,388

 
732,094

Selling, general and administrative
 
68,026

 
73,281

Depreciation and amortization
 
45,462

 
43,534

Restructuring costs
 
6,651

 

Curtailment charge
 

 
2,863

 
 
846,527

 
851,772

Operating income
 
46,726

 
107,866

Interest expense and other
 
18,126

 
18,116

Income before income taxes
 
28,600

 
89,750

Income tax expense
 
8,866

 
27,018

Net income
 
$
19,734

 
$
62,732

 
 
 
 
 
Earnings per share—basic:
 
$
0.40

 
$
1.28

 
 
 
 
 
Weighted-average common shares outstanding—basic
 
49,271

 
49,198

 
 
 
 
 
Earnings per share—diluted:
 
$
0.40

 
$
1.27

 
 
 
 
 
Weighted-average common shares outstanding—diluted
 
49,413

 
49,314

 
 
 
 
 
Dividends declared and paid per common share
 
$
0.04

 
$
0.04



SEE ACCOMPANYING NOTES.

2



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

 
 
Three Months Ended June 30,
 
 
2016
 
2015
 
 
 
 
 
Net income
 
$
19,734

 
$
62,732

Other comprehensive (loss) income:
 
 
 
 
Foreign currency translation adjustment
 
(14,797
)
 
10,933

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 ($211)
 

 
360

Actuarial gain, net of taxes ($3,110)
 

 
5,306

Reclassifications from accumulated other comprehensive income - (gains) losses, net of tax expense (benefits):
 
 
 
 
Amortization of net loss, net of taxes of ($489) and ($548), respectively
 
836

 
935

Recognized prior service credits, net of taxes of $1,408 and ($138), respectively
 
(2,408
)
 
235

Total defined benefit pension plans and other postretirement benefits, net of taxes
 
(1,572
)
 
6,836

Cash flow hedges:
 
 
 
 
Unrealized (loss) gain arising during period, net of tax of $339 and ($534), respectively
 
(553
)
 
1,012

Reclassification of (loss) gain included in net earnings, net of tax of $2 and ($3), respectively
 
(13
)
 
7

Net unrealized (loss) gain cash flow hedges, net of tax
 
(566
)
 
1,019

Total other comprehensive (loss) income
 
(16,935
)
 
18,788

Total comprehensive income
 
$
2,799

 
$
81,520


SEE ACCOMPANYING NOTES.

3



Triumph Group, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands) (unaudited)
 
Three Months Ended June 30,
 
2016
 
2015
 
 
 
 
Operating Activities
 
 
 
Net income
$
19,734

 
$
62,732

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
45,462

 
43,534

Amortization of acquired contract liabilities
(29,349
)
 
(35,098
)
Curtailment charge

 
2,863

Other amortization included in interest expense
1,284

 
969

Provision for doubtful accounts receivable
(207
)
 
(294
)
Provision for deferred income taxes
4,996

 
20,463

Employee stock-based compensation
1,956

 
792

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
 
 
 
Trade and other receivables
55,413

 
(33,592
)
Inventories
(123,589
)
 
(166,590
)
Prepaid expenses and other current assets
15,096

 
4,573

Accounts payable, accrued expenses
(47,419
)
 
(24,384
)
Accrued pension and other postretirement benefits
(24,558
)
 
(19,991
)
Other
(2,854
)
 
(4,367
)
Net cash used in operating activities
(84,035
)
 
(148,390
)
Investing Activities
 
 
 
Capital expenditures
(12,723
)
 
(18,016
)
Proceeds from sale of assets
948

 
554

Acquisitions, net of cash acquired
9

 
(5,986
)
Net cash used in investing activities
(11,766
)
 
(23,448
)
Financing Activities
 
 
 
Net increase in revolving credit facility
174,091

 
96,541

Proceeds from issuance of long-term debt and capital leases

 
98,932

Repayment of debt and capital lease obligations
(46,989
)
 
(16,026
)
Payment of deferred financing costs
(10,689
)
 
(71
)
Dividends paid
(1,981
)
 
(1,971
)
Repayment of government grant
(7,285
)
 
(82
)
Repurchase of restricted shares for minimum tax obligation
(171
)
 
(96
)
Net cash provided by financing activities
106,976

 
177,227

Effect of exchange rate changes on cash
(860
)
 
1,665

Net change in cash
10,315

 
7,054

Cash and cash equivalents at beginning of period
20,984

 
32,617

Cash and cash equivalents at end of period
$
31,299

 
$
39,671

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 months ended June 30, 2016 are not necessarily indicative of results that may be expected for the year ending March 31, 2017. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2016 audited condensed consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended March 31, 2016 filed with the Securities and Exchange Commission (the "SEC") on May 27, 2016.

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.
Effective April 1, 2016, the Company realigned into four reportable segments: Integrated Systems, Aerospace Structures, Precision Components and Product Support segments (see Note 11).

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.
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.


5


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

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 June 30, 2016, cumulative catch-up adjustments from changes in estimates, inclusive of changes in forward loss estimates, decreased operating income, net income and earnings per share by approximately $(27,968), $(19,298) and $(0.39), net of tax, respectively. The cumulative catch-up adjustments to operating income for the three months ended June 30, 2016, included gross favorable adjustments of approximately $9,698 and gross unfavorable adjustments of approximately $(37,666). For the three months ended June 30, 2015, cumulative catch-up adjustments from changes in estimates increased operating income, net income and earnings per share by approximately $1,307, $863 and $0.02, 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.
As disclosed during fiscal 2016, the Company recognized a provision for forward losses associated with our long-term contract on the 747-8 and Bombardier programs. There is still risk similar to what the Company has experienced on the 747-8 and Bombardier programs. Particularly, 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, potential need to negotiate facility lease extensions or alternatively relocate work and many other risks, will determine the ultimate performance of these programs.
Included in net sales of the Integrated Systems, Aerospace Structures and Precision Components is the non-cash amortization of acquired contract liabilities that were recognized as fair value adjustments through purchase accounting from various acquisitions. For the three months ended June 30, 2016 and 2015, the Company recognized $29,349 and $35,098, respectively, into net sales in the accompanying Condensed Consolidated Statements of Income.
The Product Support provides repair and overhaul services, of which a small portion of 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.



6


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

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 15% and 18% of total trade accounts receivable as of June 30, 2016 and March 31, 2016, respectively. The Company had no other concentrations of credit risk of more than 10%.
Sales to Boeing for the three months ended June 30, 2016, were $337,988, or 38% of net sales, of which $53,760, $162,935, $112,823 and $8,470 were from the Integrated Systems, Aerospace Structures, Precision Components and Product Support, respectively. Sales to Boeing for the three months ended June 30, 2015, were $374,704, or 39% of net sales, of which $48,683, $229,556, $86,787 and $9,678 were from the Integrated Systems, Aerospace Structures, Precision Components and Product Support, respectively.
Sales to Gulfstream Aerospace Corporation for the three months ended June 30, 2016, were $107,627, or 12% of net sales, of which $558, $104,795, $2,254 and $20 were from the Integrated Systems, Aerospace Structures, Precision Components and Product Support,respectively. Sales to Gulfstream for the three months ended June 30, 2015, were $125,135, or 13% of net sales, of which $737, $122,647, $1,749 and $2 were from the Integrated Systems, Aerospace Structures, Precision Components and Product Support, 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 and Gulfstream, 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 June 30, 2016 and 2015, was $1,956 and $792, respectively. The Company has classified share-based compensation within selling, general and administrative expenses to correspond with the same line item as the majority of the cash compensation paid to employees. Upon the exercise of stock options or vesting of restricted stock, the Company first transfers treasury stock, then issues new shares.

Intangible Assets
The components of intangible assets, net, are as follows:
 
June 30, 2016
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.4
 
$
679,503

 
$
(223,804
)
 
$
455,699

Product rights, technology and licenses
11.7
 
55,501

 
(38,229
)
 
17,272

Non-compete agreements and other
16.1
 
2,881

 
(767
)
 
2,114

Tradenames
20.0
 
163,000

 
(3,395
)
 
159,605

Total intangibles, net
 
 
$
900,885

 
$
(266,195
)
 
$
634,690



7


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

 
March 31, 2016
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.4
 
$
683,309

 
$
(215,546
)
 
$
467,763

Product rights, technology and licenses
11.7
 
55,739

 
(37,695
)
 
18,044

Non-compete agreements and other
16.1
 
2,881

 
(718
)
 
2,163

Tradenames
20.0
 
163,000

 
(1,358
)
 
161,642

Total intangibles, net
 
 
$
904,929

 
$
(255,317
)
 
$
649,612

During the fiscal year ended March 31, 2016, the Company performed interim and annual assessments of the fair value of indefinite-lived intangible assets. The Company concluded the fair value of the Vought and Embee tradenames did not exceed their carrying value. Accordingly, the Company recorded non-cash impairment charges during the fiscal year ended March 31, 2016. Additionally, the Company determined that the tradenames will be amortized over their remaining useful life of 20 years.
Amortization expense for the three months ended June 30, 2016 and 2015, was $13,631 and $15,964, 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 5).
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 June 30, 2016 and March 31, 2016, were $110,476 and $112,937, respectively.
Supplemental Cash Flow Information
The Company paid $1,198 and $620 for income taxes, net of refunds, for the three months ended June 30, 2016 and 2015, respectively. The Company made interest payments of $25,751 and $23,336 for the three months ended June 30, 2016 and 2015.
During the three months ended June 30, 2016 and 2015, the Company did not finance any property or equipment additions through capital leases.
As of June 30, 2016, the Company remains able to purchase an additional 2,277,789 shares under the existing stock repurchase program. However, there are certain restrictions placed on the repurchase program by the Company lenders that prevent any repurchases at this time.



8


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


3.     ACQUISITIONS
Acquisition of Fairchild Controls Corporation
Effective October 21, 2015, the Company acquired all of the outstanding shares of Fairchild Controls Corporation ("Fairchild"). Fairchild is a leading provider of proprietary thermal management systems, auxiliary power generation systems and related aftermarket spares and repairs. The acquired business operates as Triumph Thermal Systems-Maryland, Inc. and its results are included in Integrated Systems from the date of acquisition.
The purchase price for Fairchild was $57,130, including a working capital adjustment paid in January 2016. Goodwill in the amount of $14,695 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 Company has also identified an intangible asset related to customer relationships valued at $18,000 with a weighted-average life of 12.0 years.
The accounting for the business combination is provisional and dependent upon 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, the purchase price allocation for Fairchild 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 finalizes valuations of tangible and intangible assets, certain liabilities assumed and other information related to the Fairchild acquisition. Accordingly, the amounts below report the Company's best estimate of fair value based on the information available at this time:
 
October 21, 2015
Cash
$
9,075

Accounts receivable
8,841

Inventory
15,069

Prepaid expenses
263

Property and equipment
6,632

Goodwill
14,695

Intangible assets
18,000

Deferred taxes
5,889

  Total assets
$
78,464

 
 
Accounts payable
$
1,284

Accrued expenses
12,183

Other noncurrent liabilities
7,867

  Total liabilities
$
21,334


9


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

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 Fairchild, whichever is earlier.
The Fairchild 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 $569 in acquisition-related costs in connection with the Fairchild acquisition.

4.    INVENTORIES
Inventories are stated at the lower of cost (average-cost or specific-identification methods) or market. The components of inventories are as follows:
 
June 30, 2016
 
March 31, 2016
Raw materials
$
99,233

 
$
81,989

Work-in-process, including manufactured and purchased components
1,166,602

 
1,100,660

Finished goods
133,035

 
124,744

Rotable assets
55,687

 
51,952

Less: unliquidated progress payments
(99,403
)
 
(123,155
)
Total inventories
$
1,355,154

 
$
1,236,190

Work-in-process inventory includes capitalized pre-production costs on newer development programs. 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. The balance of development program inventory, comprised principally of capitalized pre-production costs, excluding progress payments related to the Company's contracts with Bombardier for the Global 7000/8000 program ("Bombardier") and Embraer for the second generation E-Jet ("Embraer") are as follows:
 
June 30, 2016
 
Inventory
 
Capitalized Pre-Production
 
Forward Loss Provision
 
Total Inventory, net
Bombardier
$
13,848

 
$
450,429

 
$
(399,758
)
 
$
64,519

Embraer
8,745

 
156,796

 

 
165,541

Total
$
22,593

 
$
607,225

 
$
(399,758
)
 
$
230,060

 
 
 
 
 
 
 
 
 
March 31, 2016
 
Inventory
 
Capitalized Pre-Production
 
Forward Loss Provision
 
Total Inventory, net
Bombardier
$
6,662

 
$
406,147

 
$
(399,758
)
 
$
13,051

Embraer
5,139

 
146,765

 

 
151,904

Total
$
11,801

 
$
552,912

 
$
(399,758
)
 
$
164,955

During the fiscal year ended March 31, 2016, the Company recorded a $399,758 forward loss charge for the Bombardier Global 7000/8000 wing program. Under our contract for this program, the Company has the right to design, develop and manufacture wing components over the initial 300 ship sets. The Global 7000/8000 contract provides for fixed pricing and requires the Company to fund certain up-front development expenses, with certain milestone payments made by Bombardier.

10


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

The Global 7000/8000 program charge resulted in the impairment of previously capitalized pre-production costs due to the combination of cost recovery uncertainty, higher than anticipated non-recurring costs and increased forecasted costs on recurring production. The increases in costs were driven by several factors, including: changing technical requirements, increased spending on the design and engineering phase of the program and uncertainty regarding cost reduction and cost recovery initiatives with our customer and suppliers. Further cost increases or an inability to meet revised recurring cost forecasts on the Global 7000/8000 program may result in additional forward loss reserves in future periods, while improvements in future costs compared to current estimates may result in favorable adjustments if forward loss reserves are no longer required.
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 2018, or later. Transition of these programs from development to recurring production levels is dependent upon the success of the programs at 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 additional forward losses.

5.    LONG-TERM DEBT
Long-term debt consists of the following:
 
June 30, 2016
 
March 31, 2016
 
 
 
 
Revolving line of credit
$
314,091

 
$
140,000

Term loan
330,469

 
337,500

Receivable securitization facility
155,100

 
191,300

Capital leases
70,697

 
74,513

Senior notes due 2021
375,000

 
375,000

Senior notes due 2022
300,000

 
300,000

Other debt
7,978

 
7,978

Less: Debt issuance costs
(13,923
)
 
(8,971
)
 
1,539,412

 
1,417,320

Less: Current portion
47,087

 
42,441

 
$
1,492,325

 
$
1,374,879

Revolving Credit Facility
In May 2016, the Company entered into a Sixth Amendment to the Third Amended and Restated Credit Agreement, among the Company, the Subsidiary Co-Borrowers, the lenders party thereto and the Administrative Agent (the “Sixth Amendment” and the Credit Facility, as amended by the Sixth Amendment, the “Credit Facility”), pursuant to which those lenders electing to enter into the Sixth Amendment extended the expiration date for the revolving line of credit and the maturity date for the term loan by five years to May 3, 2021. Lenders holding revolving credit commitments aggregating $940,000 elected to extend the expiration date for the revolving line of credit, and Lenders holding approximately $324,500 of term loans (out of an aggregate outstanding term loan balance of approximately $330,000) elected to extend the term loan maturity date. In connection with the amendment to the Credit Facility, the Company incurred $5,126 of financing costs. These costs, along with the $4,626 of unamortized financing costs prior to the amendment, are being amortized over the remaining term of the Credit Facility.
In addition, the Sixth Amendment amended the Credit Facility to, among other things, (i) modify certain financial covenants to allow for the add-back of certain cash and non-cash charges, (ii) amend the total leverage ratio financial covenant to provide for a gradual reduction in the maximum permitted total leverage ratio commencing with the fiscal year ending March 31, 2018, (iii) increase the interest rate, commitment fee and letter of credit fee pricing provisions for the highest pricing tier, (iv) establish the interest rate, commitment fee and letter of credit fee pricing at the highest pricing tier until the Company delivers its compliance certificate for its fiscal year ending March 31, 2017, (v) increase the minimum revolver availability

11


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

threshold test in connection with the Company making certain permitted investments, certain additional permitted dividends, permitted acquisitions and permitted payments of certain types of indebtedness, and (vi) decrease the maximum senior secured leverage ratio threshold test in connection with the Company making certain permitted investments, certain permitted dividends, permitted acquisitions and permitted payments of certain types of indebtedness during the period from the date of the Sixth Amendment until the Company delivers its compliance certificate for the fiscal year ending March 31, 2017.
In May 2014, the Company amended 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 existing 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.
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 June 30, 2016, there were $314,091 in borrowings and $27,313 in letters of credit outstanding under the Revolving Line of Credit provisions of the Credit Facility, primarily to support insurance policies. At March 31, 2016, there were $140,000 in borrowings and $25,709 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. Although the Company does not anticipate any violations of the financial covenants, its ability to comply with these covenants is dependent upon achieving earnings and cash flow projections. As of June 30, 2016, the Company had borrowing capacity under this facility of $658,596 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

12


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

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 June 30, 2016 and March 31, 2016, the interest rate swap agreement had a notional amount of $330,469 and $337,500, respectively. As of June 30, 2016 and March 31, 2016, the interest rate swap agreement had a fair value of $5,187 and $4,526, respectively, which is recorded in other noncurrent liabilities with an offset to other comprehensive income, 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 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 June 30, 2016, 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 June 30, 2016, there was $155,100 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 secures 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, including 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 three months ended June 30, 2016 and 2015, the Company did not finance any property and equipment additions through capital leases. During the three months ended June 30, 2015, the Company obtained financing for existing fixed assets in the amount of $2,632.
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 are a direct deduction to the face amount of the note and are being amortized on the effective interest method over the term of the 2021 Notes.
During the quarter ended June 30, 2016, to ensure that the Company had full access to our Revolving Credit Facility (the "Credit Facility") during fiscal 2017, the Company obtained approval from the holders of the 2021 Notes to amend the terms of the indenture to conform with the 2022 Notes (as defined below) which allows for a higher level of secured debt. Absent this consent, the Company would have been restricted as to the level of new borrowings under the Credit Facility during fiscal 2017. As part of obtaining the consent, the Company paid the holders of the 2021 Notes $5,466, which is being amortized on the effective interest method over the remaining term of the 2021 Notes.
Further, to mitigate the risk of failing to obtain the consent and to ensure the Company had adequate liquidity through fiscal 2017, the Company chose to make a significant draw on the Credit Facility in early April 2016, taking the outstanding balance to approximately $800,000. The Company paid down substantially all of the draw to the Credit Facility upon receiving consent from the holders of the 2021 Notes in May 2016.

13


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

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 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 are a direct deduction to the face amount of the note 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.
Receivables Purchase Agreement
On March 28, 2016, the Company entered into a Purchase Agreement ("Receivables Purchase Agreement") to sell certain accounts receivables to a financial institution without recourse. The Company is the servicer of the accounts receivable under

14


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

the Receivables Purchase Agreement. As of March 31, 2016, the maximum amount available under the Receivables Purchase Agreement was $90,000. Interest rates are based on LIBOR plus 0.65% - 0.70%. As of June 30, 2016 and March 31, 2016, the Company sold $78,513 and $89,900, respectively, worth of eligible accounts receivable.
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:
 
June 30, 2016
 
March 31, 2016
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt
$
1,539,412

 
$
1,505,767

 
$
1,417,320

 
$
1,354,961

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).
6.    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 June 30,
 
(in thousands)
 
2016
 
2015
Weighted-average common shares outstanding – basic
49,271

 
49,198

Net effect of dilutive stock options and nonvested stock
142

 
116

Weighted-average common shares outstanding – diluted
49,413

 
49,314

 

7.    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 June 30, 2016 and March 31, 2016, the total amount of accrued income tax-related interest and penalties was $249 and $239, respectively.

As of June 30, 2016 and March 31, 2016, the total amount of unrecognized tax benefits was $9,219 and $9,212, respectively, of which $9,219 and $9,212, 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.
As of June 30, 2016, the Company is in a three year cumulative book loss position and has recorded a valuation allowance against substantially all of our net deferred tax assets given this evidence and the insufficient positive evidence to support the realization of the Company’s deferred tax assets.  The Company intends to continue maintaining a valuation allowance on its deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of these allowances. 

15


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

A reduction in the valuation allowance could result in a significant decrease in income tax expense in the period that the release is recorded.  However, the exact timing and amount of the reduction in its valuation allowance is unknown at this time and will be subject to the earnings level the Company achieves during fiscal 2017 as well as the Company's projected income in future periods.
The effective income tax rate for the three months ended June 30, 2016, was 31.0% as compared to 30.1% for the three months ended June 30, 2015. For the three months ended June 30, 2015, the income tax provision was reduced to reflect the benefit of $4,213 from the decrease to the state deferred tax rates,
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 June 30, 2016, the Company is subject to examination in one 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.

8.    GOODWILL
The following is a summary of the changes in the carrying value of goodwill by reportable segment, from March 31, 2016 through June 30, 2016:
 
Integrated Systems
 
Aerospace Structures
 
Precision Components
 
Product Support
 
Total
Balance, March 31, 2016
$
560,696

 
$
266,298

 
$
535,804

 
$
81,456

 
$
1,444,254

Goodwill recognized in connection with acquisitions
(1,835
)
 

 

 

 
(1,835
)
Effect of exchange rate changes
(5,629
)
 

 
(1,263
)
 
126

 
(6,766
)
Balance, June 30, 2016
$
553,232

 
$
266,298

 
$
534,541

 
$
81,582

 
$
1,435,653


9.     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.

16


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

In accordance with the Compensation – Retirement Benefits topic of 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 pension benefit obligation or accumulated postretirement benefit obligation, of the plan. In order to recognize the funded status, the Company determined the fair value of the plan assets. The majority of the plan assets are publicly traded investments which were valued based on the market price as of the date of remeasurement. Investments that are not publicly traded were valued based on the estimated fair value of those investments based on our evaluation of data from fund managers and comparable market data.
Net Periodic Benefit Plan Costs
The components of net periodic benefit costs (income) for our postretirement benefit plans are shown in the following table:
 
Pension benefits
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Components of net periodic benefit costs:
 
 
 
 
Service cost
 
$
1,649

 
$
2,767

Interest cost
 
18,189

 
22,677

Expected return on plan assets
 
(39,058
)
 
(40,853
)
Amortization of prior service credits
 
(446
)
 
(1,146
)
Amortization of net loss
 
3,031

 
2,522

Curtailment charge
 

 
2,863

Net periodic benefit income
 
$
(16,635
)
 
$
(11,170
)

 
Other postretirement benefits
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Components of net periodic benefit costs:
 
 
 
 
Service cost
 
$
179

 
$
326

Interest cost
 
1,247

 
2,070

Amortization of prior service credits
 
(3,366
)
 
(1,345
)
Amortization of gain
 
(1,647
)
 
(1,643
)
Net periodic benefit income
 
$
(3,587
)
 
$
(592
)
The Company periodically experiences events or makes changes to its benefit plans that result in special charges. Some require remeasurements. The following summarizes the key events whose effects on net periodic benefit costs are included in the tables above:
In April 2015, the Company's largest union-represented group of employees ratified a new collective bargaining agreement. The agreement includes an amendment to the retirement plan, for which actively employed participants will no longer continue to accrue a benefit after 30 years of service. This change resulted in a curtailment charge of approximately $2,863 and is presented on the accompanying Condensed Consolidated Statements of Income as "Curtailment charge."



17


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

10.     STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) ("AOCI") by component for the three months ended June 30, 2016 and 2015, 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 March 31, 2016
 
$
(58,816
)
 
$
(2,920
)
 
$
(285,426
)
 
$
(347,162
)
   AOCI before reclassifications
 
(14,797
)
 
(553
)
 

 
(15,350
)
   Amounts reclassified from AOCI
 

 
(13
)
 
(1,572
)
(2
)
(1,585
)
 Net current period AOCI
 
(14,797
)
 
(566
)
 
(1,572
)
 
(16,935
)
Balance June 30, 2016
 
$
(73,613
)
 
$
(3,486
)
 
$
(286,998
)
 
$
(364,097
)
Balance March 31, 2015
 
$
(46,751
)
 
$
(2,757
)
 
$
(149,402
)
 
$
(198,910
)
   AOCI before reclassifications
 
10,933

 
1,012

 
5,666

 
17,611

   Amounts reclassified from AOCI
 

 
7

 
1,170

(2
)
1,177

 Net current period AOCI
 
10,933

 
1,019

 
6,836

 
18,788

Balance June 30, 2015
 
$
(35,818
)
 
$
(1,738
)
 
$
(142,566
)
 
$
(180,122
)
(1) Net of tax.
(2) Includes 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.


Issuance of Restricted Stock Awards and Stock Options
Included in the employment agreement for the Company's new CEO were restricted stock awards totaling 179,134 shares. The awards generally vest in full after four to seven years. The fair value of the awards is determined by the product of the number of shares granted, the grant date market price of the Company's stock and adjusted for the market conditions necessary to achieve the awards. Certain of these awards contain performance conditions, in addition to service conditions. The fair value of the awards is expensed over a graded vesting period of the requisite service period of four to seven years.
In addition the employment agreement included 150,000 stock options with an exercise price of $30.86, a contractual term of 10 years and vesting over a 4 year period.


18


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

11.     SEGMENTS
Effective April 2016, the Company realigned into four reportable segments: the Integrated Systems, the Aerospace Structures, the Precision Components and the Product Support segments. The Company’s reportable segments are aligned with how the business is managed and views the markets that the Company serves. 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 Integrated Systems consists of the Company’s operations that provides integrated solutions including design, development and support of proprietary components, subsystems and systems, as well as production of complex assemblies using external designs.  Capabilities include hydraulic, mechanical and electro-mechanical actuation, power and control; a complete suite of aerospace gearbox solutions including engine accessory gearboxes and helicopter transmissions; active and passive heat exchange technology; fuel pumps, fuel metering units and Full Authority Digital Electronic Control fuel systems; hydro-mechanical and electromechanical primary and secondary flight controls; and a broad spectrum of surface treatment options.
The Aerospace Structures consists of the Company’s operations that supply commercial, business, regional and military manufacturers with large metallic and composite structures. Products include wings, wing boxes, fuselage panels, horizontal and vertical tails and sub-assemblies such as floor grids. Inclusive of most of the former Vought Aircraft Division, Aerospace Structures also has the capability to engineer detailed structural designs in metal and composites.
The Precision Components consists of the Company’s operations that produce close-tolerance parts primarily to customer designs and model-based definition, including a wide range of aluminum, hard metal and composite structure capabilities. Capabilities include complex machining, gear manufacturing, sheet metal fabrication, forming, advanced composite and interior structures, joining processes such as welding, autoclave bonding and conventional mechanical fasteners and a variety of special processes including: super plastic titanium forming, aluminum and titanium chemical milling and surface treatments.
The Product Support consists of the Company’s operations that provides full life cycle solutions for commercial, regional and military aircraft. The Company’s extensive product and service offerings include full post-delivery value chain services that simplify the MRO supply chain. Through its line maintenance, component MRO and postproduction supply chain activities, The Company’s Product Support is positioned to provide integrated planeside repair solutions globally. Capabilities include fuel tank repair, metallic and composite aircraft structures, nacelles, thrust reversers, interiors, auxiliary power units and a wide variety of pneumatic, hydraulic, fuel and mechanical accessories.
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 curtailment charge of $2,863 for the three months ended June 30, 2015.

19


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

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:
 
 
Three Months Ended June 30,
 
 
2016
 
2015
Net sales:
 
 
 
 
Integrated Systems
 
$
257,356

 
$
258,571

Aerospace Structures
 
331,596

 
395,119

Precision Components
 
254,561

 
265,141

Product Support
 
84,199

 
74,745

Elimination of inter-segment sales
 
(34,459
)
 
(33,938
)
 
 
$
893,253

 
$
959,638

 
 
 
 
 
Income before income taxes:
 
 
 
 
Operating income (expense):
 
 
 
 
Integrated Systems
 
$
47,986

 
$
50,557

Aerospace Structures
 
9,163

 
41,797

Precision Components
 
(7,782
)
 
24,906

Product Support
 
14,059

 
9,987

Corporate
 
(16,700
)
 
(19,381
)
 
 
46,726

 
107,866

Interest expense and other
 
18,126

 
18,116

 
 
$
28,600

 
$
89,750

 
 
 
 
 
Depreciation and amortization:
 
 
 
 
Integrated Systems
 
$
10,303

 
$
10,518

Aerospace Structures
 
17,962

 
15,933

Precision Components
 
14,330

 
14,221

Product Support
 
2,484

 
2,462

Corporate
 
383

 
400

 
 
$
45,462

 
$
43,534

 
 
 
 
 
Amortization of acquired contract liabilities, net:
 
 
 
 
Integrated Systems
 
$
10,337

 
$
10,501

Aerospace Structures
 
18,438

 
23,778

Precision Components
 
574

 
819

 
 
$
29,349

 
$
35,098

 
 
 
 
 
Adjusted EBITDA:
 
 
 
 
Integrated Systems
 
$
47,952

 
$
50,574

Aerospace Structures
 
8,687

 
33,952

Precision Components
 
5,974

 
38,308

Product Support
 
16,543

 
12,449

Corporate
 
(16,317
)
 
(16,118
)
 
 
$
62,839

 
$
119,165

 
 
 
 
 

20


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

 
 
Three Months Ended June 30,
 
 
2016
 
2015
 
 
 
 
 
Capital expenditures:
 
 
 
 
Integrated Systems
 
$
3,228

 
$
3,853

Aerospace Structures
 
3,833

 
7,163

Precision Components
 
4,902

 
6,121

Product Support
 
630

 
622

Corporate
 
130

 
257

 
 
$
12,723

 
$
18,016

 
June 30, 2016
 
March 31, 2016
Total Assets:
 
 
 
Integrated Systems
$
1,345,521

 
$
1,371,178

Aerospace Structures
1,840,505

 
1,792,397

Precision Components
1,282,977

 
1,298,294

Product Support
352,413

 
350,674

Corporate
24,991

 
22,550

 
$
4,846,407

 
$
4,835,093


During the three months ended June 30, 2016 and 2015, the Company had international sales of $180,419 and $191,318, respectively.


12.
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 foreign 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 June 30, 2016 and March 31, 2016, Condensed Consolidating Statements of Comprehensive Income for the three months ended June 30, 2016 and 2015, and Condensed Consolidating Statements of Cash Flows for the three months ended June 30, 2016 and 2015.


21


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

12.
SELECTED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued)

SUMMARY CONDENSED CONSOLIDATING BALANCE SHEETS:

 
June 30, 2016
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
617

 
$
806

 
$
29,876

 
$

 
$
31,299

Trade and other receivables, net
2,801

 
114,446

 
270,872

 

 
388,119

Inventories

 
1,232,020

 
123,134

 

 
1,355,154

Prepaid expenses and other
5,173

 
11,487

 
8,980

 

 
25,640

Total current assets
8,591

 
1,358,759

 
432,862

 

 
1,800,212

Property and equipment, net
7,029

 
730,404

 
130,296

 

 
867,729

Goodwill and other intangible assets, net

 
1,883,835

 
186,508

 

 
2,070,343

Other, net
16,348

 
71,135

 
20,640

 

 
108,123

Intercompany investments and advances
2,484,939

 
81,540

 
82,432

 
(2,648,911
)
 

Total assets
$
2,516,907

 
$
4,125,673

 
$
852,738

 
$
(2,648,911
)
 
$
4,846,407

 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
33,393

 
$
13,694

 
$

 
$

 
$
47,087

Accounts payable
7,647

 
374,596

 
48,820

 

 
431,063

Accrued expenses
40,538

 
530,910

 
34,920

 

 
606,368

Total current liabilities
81,578

 
919,200

 
83,740

 

 
1,084,518

Long-term debt, less current portion
1,277,630

 
59,595

 
155,100

 

 
1,492,325

Intercompany advances
200,845

 
2,111,492

 
357,239

 
(2,669,576
)
 

Accrued pension and other postretirement benefits, noncurrent
7,564

 
632,402

 
2,488

 

 
642,454

Deferred income taxes and other
11,356

 
628,440

 
49,380

 

 
689,176

Total stockholders’ equity
937,934

 
(225,456
)
 
204,791

 
20,665

 
937,934

Total liabilities and stockholders’ equity
$
2,516,907

 
$
4,125,673

 
$
852,738

 
$
(2,648,911
)
 
$
4,846,407











22


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

SUMMARY CONDENSED CONSOLIDATING BALANCE SHEETS:
 
March 31, 2016
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,544

 
$
201

 
$
19,239

 
$

 
$
20,984

Trade and other receivables, net
2,057

 
127,968

 
314,183

 

 
444,208

Inventories

 
1,127,275

 
108,915

 

 
1,236,190

Prepaid expenses and other
6,524

 
26,433

 
8,302

 

 
41,259

Total current assets
10,125

 
1,281,877

 
450,639

 

 
1,742,641

Property and equipment, net
7,324

 
746,455

 
135,955

 

 
889,734

Goodwill and other intangible assets, net

 
1,898,401

 
195,465

 

 
2,093,866

Other, net
11,878

 
76,262

 
20,712

 

 
108,852

Intercompany investments and advances
2,301,054

 
81,540

 
82,930

 
(2,465,524
)
 

Total assets
$
2,330,381

 
$
4,084,535

 
$
885,701

 
$
(2,465,524
)
 
$
4,835,093

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
28,473

 
$
13,968

 
$

 
$

 
$
42,441

Accounts payable
11,154

 
346,602

 
52,469

 

 
410,225

Accrued expenses
44,856

 
599,921

 
38,431

 

 
683,208

Total current liabilities
84,483

 
960,491

 
90,900

 

 
1,135,874

Long-term debt, less current portion
1,120,570

 
63,009

 
191,300

 

 
1,374,879

Intercompany advances
171,480

 
1,972,729

 
330,176

 
(2,474,385
)
 

Accrued pension and other postretirement benefits, noncurrent
7,315

 
654,201

 
3,148

 

 
664,664

Deferred income taxes and other
11,589

 
658,873

 
54,270

 

 
724,732

Total stockholders’ equity
934,944

 
(224,768
)
 
215,907

 
8,861

 
934,944

Total liabilities and stockholders’ equity
$
2,330,381

 
$
4,084,535

 
$
885,701

 
$
(2,465,524
)
 
$
4,835,093














23


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

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:
 
For the Three Months Ended June 30, 2016
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$

 
$
817,345

 
$
94,651

 
$
(18,743
)
 
$
893,253

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
668,539

 
76,592

 
(18,743
)
 
726,388

Selling, general and administrative
14,444

 
45,907

 
7,675

 

 
68,026

Depreciation and amortization
383

 
40,766

 
4,313

 

 
45,462

Restructuring
1,860

 
4,791

 

 

 
6,651

 
16,687

 
760,003

 
88,580

 
(18,743
)
 
846,527

Operating (loss) income
(16,687
)
 
57,342

 
6,071

 

 
46,726

Intercompany interest and charges
(51,564
)
 
49,173

 
2,391

 

 

Interest expense and other
17,375

 
2,282

 
(1,531
)
 

 
18,126

Income before income taxes
17,502

 
5,887

 
5,211

 

 
28,600

Income tax expense
2,050

 
5,289

 
1,527

 

 
8,866

Net income
15,452

 
598

 
3,684

 

 
19,734

Other comprehensive loss
(566
)
 
(1,572
)
 
(14,797
)
 

 
(16,935
)
Total comprehensive income (loss)
$
14,886

 
$
(974
)
 
$
(11,113
)
 
$

 
$
2,799






























24


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

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:
 
For the Three Months Ended June 30, 2015
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$

 
$
885,443

 
$
86,137

 
$
(11,942
)
 
$
959,638

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
672,310

 
71,726

 
(11,942
)
 
732,094

Selling, general and administrative
13,151

 
52,439

 
7,691

 

 
73,281

Depreciation and amortization
399

 
35,042

 
8,093

 

 
43,534

Curtailment charge
2,863

 

 

 

 
2,863

 
16,413

 
759,791

 
87,510

 
(11,942
)
 
851,772

Operating (loss) income
(16,413
)
 
125,652

 
(1,373
)
 

 
107,866

Intercompany interest and charges
(53,590
)
 
51,511

 
2,079

 

 

Interest expense and other
14,517

 
2,890

 
709

 

 
18,116

Income before income taxes
22,660

 
71,251

 
(4,161
)
 

 
89,750

Income tax (benefit) expense
(13
)
 
26,395

 
636

 

 
27,018

Net income (loss)
22,673

 
44,856

 
(4,797
)
 

 
62,732

Other comprehensive income
1,019

 
6,836

 
10,933

 

 
18,788

Total comprehensive income
$
23,692

 
$
51,692

 
$
6,136

 
$

 
$
81,520





























25


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


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
 
For the Three Months Ended June 30, 2016
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net income
$
15,452

 
$
598

 
$
3,684

 
$

 
$
19,734

 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities
(2,131
)
 
(121,953
)
 
19,688

 
627

 
(103,769
)
Net cash provided by (used in) operating activities
13,321

 
(121,355
)
 
23,372

 
627

 
(84,035
)
Capital expenditures
(130
)
 
(8,961
)
 
(3,632
)
 

 
(12,723
)
Proceeds from sale of assets

 
108

 
840

 

 
948

Acquisitions, net of cash acquired

 
9

 

 

 
9

Net cash used in investing activities
(130
)
 
(8,844
)
 
(2,792
)
 

 
(11,766
)
Net increase in revolving credit facility
174,091

 

 

 

 
174,091

Retirements and repayments of debt
(7,102
)
 
(3,687
)
 
(36,200
)
 

 
(46,989
)
Payments of deferred financing costs
(10,689
)
 

 

 

 
(10,689
)
Dividends paid
(1,981
)