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EX-32.2 - EXHIBIT 32.2 - CERTIFICATION BY SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICE - TRIUMPH GROUP INCexhibit-322q1fy2018.htm
EX-32.1 - EXHIBIT 32.1 - CERTIFICATION BY PRESIDENT AND CHIEF EXECUTIVE OFFICER - TRIUMPH GROUP INCexhibit-321q1fy2018.htm
EX-31.2 - EXHIBIT 31.2 - CERTIFICATION BY SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICE - TRIUMPH GROUP INCexhibit-312q1fy2018.htm
EX-31.1 - EXHIBIT 31.1 - CERTIFICATION BY PRESIDENT AND CHIEF EXECUTIVE OFFICER - TRIUMPH GROUP INCexhibit-311q1fy2018.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, 2017

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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one)
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o    No x
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, 49,623,221 shares outstanding as of July 27, 2017.



TRIUMPH GROUP, INC.
INDEX
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2017 and March 31, 2017
 
 
 
 
 
Condensed Consolidated Statements of Operations
Three months ended June 30, 2017 and 2016
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income
Three
 months ended June 30, 2017 and 2016
 
 
 
 
 
Three months ended June 30, 2017 and 2016
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 




Part I. Financial Information

Item 1. Financial Statements.

Triumph Group, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
June 30,
2017
 
March 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
36,968

 
$
69,633

Trade and other receivables, less allowance for doubtful accounts of $4,120 and $4,559
343,962

 
311,792

Inventories, net of unliquidated progress payments of $432,760 and $222,485
1,248,656

 
1,340,175

Prepaid and other current assets
34,213

 
30,064

Assets held for sale

 
21,255

Total current assets
1,663,799

 
1,772,919

Property and equipment, net
794,770

 
805,030

Goodwill
1,147,676

 
1,142,605

Intangible assets, net
578,525

 
592,364

Other, net
91,274

 
101,682

Total assets
$
4,276,044

 
$
4,414,600

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
140,869

 
$
160,630

Accounts payable
420,260

 
481,243

Accrued expenses
600,478

 
674,379

Liabilities related to assets held for sale

 
18,008

Total current liabilities
1,161,607

 
1,334,260

Long-term debt, less current portion
1,140,165

 
1,035,670

Accrued pension and other postretirement benefits
572,501

 
592,134

Deferred income taxes
67,052

 
68,107

Other noncurrent liabilities
481,829

 
537,956

Stockholders’ equity:
 
 
 
Common stock, $.001 par value, 100,000,000 shares authorized, 52,460,920 and 52,460,920 shares issued; 49,609,065 and 49,573,029 shares outstanding
51

 
51

Capital in excess of par value
845,451

 
846,807

Treasury stock, at cost, 2,851,855 and 2,887,891 shares
(182,264
)
 
(183,696
)
Accumulated other comprehensive loss
(385,921
)
 
(396,178
)
Retained earnings
575,573

 
579,489

Total stockholders’ equity
852,890

 
846,473

Total liabilities and stockholders’ equity
$
4,276,044

 
$
4,414,600


SEE ACCOMPANYING NOTES.

1



Triumph Group, Inc.
Condensed Consolidated Statements of Operations

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

 
Three Months Ended June 30,
 
2017
 
2016
 
 
 
 
Net sales
$
781,689

 
$
893,253

Operating costs and expenses:
 
 
 
Cost of sales (exclusive of depreciation and amortization shown separately below)
627,346

 
726,388

Selling, general and administrative
79,303

 
68,026

Depreciation and amortization
39,131

 
45,462

Restructuring costs
17,500

 
6,651

 
763,280

 
846,527

Operating income
18,409

 
46,726

Interest expense and other
21,018

 
18,126

(Loss) income before income taxes
(2,609
)
 
28,600

Income tax (benefit) expense
(678
)
 
8,866

Net (loss) income
$
(1,931
)
 
$
19,734

 
 
 
 
(Loss) earnings per share—basic:
$
(0.04
)
 
$
0.40

 
 
 
 
Weighted-average common shares outstanding—basic
49,341

 
49,271

 
 
 
 
(Loss) earnings per share—diluted:
$
(0.04
)
 
$
0.40

 
 
 
 
Weighted-average common shares outstanding—diluted
49,341

 
49,413

 
 
 
 
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,
 
 
2017
 
2016
 
 
 
 
 
Net (loss) income
 
$
(1,931
)
 
$
19,734

Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustment
 
11,421

 
(14,797
)
Defined benefit pension plans and other postretirement benefits:
 
 
 
 
Reclassifications from accumulated other comprehensive income - (gains) losses, net of tax expense (benefits):
 
 
 
 
Amortization of net loss, net of taxes of $0 and ($489)
 
1,695

 
836

Recognized prior service credits, net of taxes of $0 and $1,408
 
(3,042
)
 
(2,408
)
Total defined benefit pension plans and other postretirement benefits, net of taxes
 
(1,347
)
 
(1,572
)
Cash flow hedges:
 
 
 
 
Unrealized gain (loss) arising during period, net of tax of $0 and $339
 
552

 
(553
)
Reclassification of loss included in net earnings, net of tax of $0 and $2
 
(369
)
 
(13
)
Net unrealized gain (loss) on cash flow hedges, net of tax
 
183

 
(566
)
Total other comprehensive income (loss)
 
10,257

 
(16,935
)
Total comprehensive income
 
$
8,326

 
$
2,799


SEE ACCOMPANYING NOTES.

3



Triumph Group, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands) (unaudited)
 
Three Months Ended June 30,
 
2017
 
2016
 
 
 
 
Operating Activities
 
 
 
Net (loss) income
$
(1,931
)
 
$
19,734

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
Depreciation and amortization
39,131

 
45,462

Amortization of acquired contract liabilities
(29,473
)
 
(29,349
)
Other amortization included in interest expense
3,263

 
1,284

Provision for doubtful accounts receivable
(363
)
 
(207
)
Provision for deferred income taxes
(1,060
)
 
4,996

Employee stock-based compensation
(41
)
 
1,956

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
 
 
 
Trade and other receivables
(30,310
)
 
55,413

Inventories
118,243

 
(123,589
)
Prepaid expenses and other current assets
751

 
15,096

Accounts payable and accrued expenses
(172,918
)
 
(47,419
)
Accrued pension and other postretirement benefits
(21,207
)
 
(24,558
)
Other
(3,133
)
 
(2,854
)
Net cash used in operating activities
(99,048
)
 
(84,035
)
Investing Activities
 
 
 
Capital expenditures
(12,085
)
 
(12,723
)
Proceeds from sale of assets
1,351

 
948

Acquisitions, net of cash acquired

 
9

Net cash used in investing activities
(10,734
)
 
(11,766
)
Financing Activities
 
 
 
Net increase in revolving credit facility
118,961

 
174,091

Repayment of debt and capital lease obligations
(33,268
)
 
(46,989
)
Payment of deferred financing costs
(7,160
)
 
(10,689
)
Dividends paid
(1,984
)
 
(1,981
)
Repayment of government grant

 
(7,285
)
Repurchase of restricted shares for minimum tax obligation
(296
)
 
(171
)
Net cash provided by financing activities
76,253

 
106,976

Effect of exchange rate changes on cash
864

 
(860
)
Net change in cash
(32,665
)
 
10,315

Cash and cash equivalents at beginning of period
69,633

 
20,984

Cash and cash equivalents at end of period
$
36,968

 
$
31,299


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, 2017 are not necessarily indicative of results that may be expected for the year ending March 31, 2018. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2017 audited condensed consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended March 31, 2017 filed with the Securities and Exchange Commission (the "SEC") on May 24, 2017.

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 March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company adopted ASU 2016-15 effective April 1, 2017. The adoption of ASU 2016-15 did not have a material impact on the Company's consolidated financial statements.
Standards Issued Not Yet Implemented
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”, “ASC 606”), which requires recognition of revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to ASU 2014-09 which must be adopted concurrently with ASU 2014-09.
Under ASC 606, revenue is recognized when control of promised goods or services transfers to a customer and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The major provisions include determining enforceable rights and obligation between parties, defining performance obligations as the units of accounting under contract, accounting for variable consideration, and determining whether performance obligations are satisfied over time or at a point of time. Additionally, ASC 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
ASC 606 will be effective for the Company beginning April 1, 2018. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (the “full retrospective method”), or retrospectively with the cumulative effect of initially applying ASC 606 recognized at the date of initial application (the "modified retrospective method”). The Company is adopting ASC 606 effective April 1, 2018 and the Company expects to do so using the modified retrospective method.
During the fiscal year ended March 31, 2016, we established a cross-functional team to assess and prepare for implementation of the new standard. We are analyzing the impact of the new standard on the Company’s revenue contracts, comparing our current accounting policies and practices to the requirements of the new standard, and identifying potential differences that would result from applying the new standard to our contracts.
While further analysis of ASC 606 and a review of all material contracts is underway, the adoption of ASC 606 may impact the amount and timing of revenue recognition and the accounting treatment of deferred production costs for certain of our contracts. Under ASC 606, the units-of-delivery method is no longer viable and some performance obligations may be satisfied over time which may change the timing of recognition of revenue and associated production costs for certain contracts.

5


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

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). ASU 2017-07 amends ASC 715, Compensation — Retirement Benefits, to require employers that present a measure of operating income in their statement of income to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses (together with other employee compensation costs). The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. Employers that do not present a measure of operating income are required to include the service cost component in the same line item as other employee compensation costs. Employers are required to include all other components of net benefit cost in a separate line item(s). The line item(s) in which the components of net benefit cost other than the service cost are included need to be identified as such on the income statement or in the disclosures. ASU 2017-07 also stipulates that only the service cost component of net benefit cost is eligible for capitalization. ASU 2017-07 is effective for -reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently performing its assessment of the impact of adopting the guidance; however based on its expectations for the fiscal year ended March 31, 2018, the Company believes the it will likely have a material impact due to the reclassification of pension and OPEB income from capitalized costs (Operating Income) to Other Income. Excluding the service costs, the net periodic pension benefit for the fiscal year ended March 31, 2018 is expected to be $67,000.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). This update requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim reporting periods within those years. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the new guidance to determine the impact it may have to the Company's consolidated financial statements.

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 Accounting Standards Codification ("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 toward 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.


6


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, 2017, 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 $(5,289), $(3,915) and $(0.08), net of tax, respectively. For the three months ended June 30, 2016, cumulative catch-up adjustments from changes in estimates decreased operating income, net income and earnings per share by approximately $(27,968), $(19,298) and $(0.39), 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 previously disclosed, 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 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, 2017 and 2016, the Company recognized $29,473 and $29,349, respectively, into net sales on the accompanying Condensed Consolidated Statements of Income.
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.
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 11% and 5% of total trade accounts receivable as of June 30, 2017 and March 31, 2017, respectively. Trade accounts receivable from Gulfstream (representing commercial, military and space)

7


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

represented approximately 21% and 3% of total trade accounts receivable as of June 30, 2017 and March 31, 2017, respectively. The Company had no other concentrations of credit risk of more than 10%.
Sales to Boeing for the three months ended June 30, 2017, were $257,311, or 33% of net sales, of which $53,530, $102,396, $99,292 and $2,093 were from the Integrated Systems, Aerospace Structures, Precision Components and Product Support, respectively. 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 Gulfstream for the three months ended June 30, 2017, were $116,026, or 15% of net sales, of which $306, $113,346, $2,364 and $10 were from the Integrated Systems, Aerospace Structures, Precision Components and Product Support, respectively. Sales to Gulfstream 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.
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, 2017 and 2016, was $(41) and $1,956, 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, 2017
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.6
 
$
659,179

 
$
(246,773
)
 
$
412,406

Product rights, technology and licenses
11.4
 
54,470

 
(40,074
)
 
14,396

Non-compete agreements and other
16.3
 
2,756

 
(830
)
 
1,926

Tradenames
10.3
 
163,000

 
(13,203
)
 
149,797

Total intangibles, net
 
 
$
879,405

 
$
(300,880
)
 
$
578,525


 
March 31, 2017
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.6
 
$
663,165

 
$
(241,124
)
 
$
422,041

Product rights, technology and licenses
11.4
 
54,347

 
(39,486
)
 
14,861

Non-compete agreements and other
16.3
 
2,756

 
(786
)
 
1,970

Tradenames
10.3
 
163,000

 
(9,508
)
 
153,492

Total intangibles, net
 
 
$
883,268

 
$
(290,904
)
 
$
592,364

Amortization expense for the three months ended June 30, 2017 and 2016, was $14,847 and $13,631, respectively.



8


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



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 divestitures and interest rate swap (see Note 3 and 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, 2017 and March 31, 2017, were $83,810 and $107,088, respectively. The decrease in warranty reserves during the first quarter of the fiscal year ended March 31 2018, was offset by a corresponding decrease to the related indemnification asset, which is included in other assets on the accompanying Condensed Consolidated Balance Sheets.
Supplemental Cash Flow Information
The Company paid $2,749 and $1,198 for income taxes, net of refunds, for the three months ended June 30, 2017 and 2016, respectively.
The Company made interest payments of $24,007 and $25,751 for the three months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017, 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's lenders that prevent any repurchases at this time.
3.     DIVESTED OPERATIONS
In September 2016, the Company sold all of the shares of Triumph Aerospace Systems-Newport News, Inc. ("TAS-Newport News") for total cash proceeds of $9,000. As a result of the sale of TAS-Newport News, the Company recognized a loss of $4,774 which is presented on the accompanying Condensed Consolidated Statements of Income as "Loss on divestiture and assets held for sale." The operating results of TAS-Newport News were included in Integrated Systems through the date of disposal.
In December 2016, the Company entered into a definitive agreement to divest Triumph Air Repair, the Auxiliary Power Unit Overhaul Operations of Triumph Aviations Services - Asia, Ltd. and Triumph Engines - Tempe ("Engines and APU"). As a result, the Company recognized a loss of $14,263 on the sale. The operating results of Engines and APU were included in Product Support through the date of disposal. The transaction closed during the quarter ended June 30, 2017.
The disposal of these entities does not represent a strategic shift and is not expected to have a major effect on the Company's operations or financial results, as defined by ASC 205-20, Discontinued Operations; as a result, the disposals do not meet the criteria to be classified as discontinued operations.
To measure the amount of impairment, the Company compared the fair values of assets and liabilities at the evaluation dates to the carrying amounts at the end of the month prior to the respective evaluation dates. The sale of TAS-Newport News

9


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

and Engines and APU assets and liabilities are categorized as Level 2 within the fair value hierarchy. The key assumption included the negotiated sales price of the assets and the assumptions of the liabilities (see Note 2 above for definition of levels).


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, 2017
 
March 31, 2017
Raw materials
$
95,095

 
$
89,069

Work-in-process, including manufactured and purchased components
1,403,460

 
1,297,989

Finished goods
127,258

 
118,265

Rotable assets
55,603

 
57,337

Less: unliquidated progress payments
(432,760
)
 
(222,485
)
Total inventories
$
1,248,656

 
$
1,340,175

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 program ("Embraer") are as follows:
 
June 30, 2017
 
Inventory
 
Capitalized Pre-Production
 
Forward Loss Provision
 
Total Inventory, net
Bombardier
$
140,809

 
$
618,070

 
$
(390,758
)
 
$
368,121

Embraer
17,490

 
176,607

 
(5,800
)
 
188,297

Total
$
158,299

 
$
794,677

 
$
(396,558
)
 
$
556,418

 
 
 
 
 
 
 
 
 
March 31, 2017
 
Inventory
 
Capitalized Pre-Production
 
Forward Loss Provision
 
Total Inventory, net
Bombardier
$
89,650

 
$
589,449

 
$
(399,758
)
 
$
279,341

Embraer
14,987

 
173,169

 
(5,800
)
 
182,356

Total
$
104,637

 
$
762,618

 
$
(405,558
)
 
$
461,697

Under our contract for the Bombardier Global 7000/8000 wing program ("Global 7000"), the Company has the right to design, develop and manufacture wing components for the Global 7000 program. The Global 7000 contract provides for fixed pricing and requires the Company to fund certain up-front development expenses, with certain milestone payments made by Bombardier.
The Global 7000 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.

10


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

The Global 7000 program has continued to incur costs since March 2016 in support of the development and transition to production.
In May 2017, Triumph Aerostructures and Bombardier entered into a comprehensive settlement agreement that resolves all outstanding commercial disputes between them, including all pending litigation, related to the design, manufacture and supply of wing components for the Global 7000 business aircraft. The settlement resets the commercial relationship between the companies and allows each company to better achieve its business objectives going forward.
Further cost increases or an inability to meet revised recurring cost forecasts on the Global 7000 program will likely 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 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, 2017
 
March 31, 2017
 
 
 
 
Revolving line of credit
$
148,961

 
$
29,999

Term loan
302,344

 
309,375

Receivable securitization facility
95,900

 
112,900

Capital leases
63,561

 
72,800

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
(12,710
)
 
(11,752
)
 
1,281,034

 
1,196,300

Less: Current portion
140,869

 
160,630

 
$
1,140,165

 
$
1,035,670

Revolving Credit Facility
In May 2017, the Company entered into an Eighth Amendment to the Third Amended and Restated Credit Agreement (the “Eighth Amendment Effective Date”), among the Company and its lenders to, among other things, (i) eliminate the total leverage ratio financial covenant, (ii) increase the maximum permitted senior secured leverage ratio financial covenant applicable to each fiscal quarter, commencing with the fiscal quarter ended March 31, 2017, and to revise the step-downs applicable to such financial covenant, (iii) reduce the aggregate principal amount of commitments under the revolving line of credit to $850,000 from $1,000,000, (iv) modify the maturity date of the term loans so that all of the term loans will mature on March 31, 2019, and (v) establish a new higher pricing tier for the interest rate, commitment fee and letter of credit fee pricing provisions and provide that the highest pricing tier will apply until the maximum senior secured leverage ratio financial covenant is 2.50 to 1.00 and the Company delivers a compliance certificate demonstrating compliance with such financial covenant. In connection with the amendment to the Credit Facility, the Company incurred $6,780 of financing costs. These costs, along with the $10,532 of unamortized financing costs subsequent to the amendment, are being amortized over the remaining term of the Credit Facility. In accordance with the reduction of the Credit Facility, the Company impaired a proportional amount of unamortized financing fees prior to the amendment.

11


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

The Eighth Amendment also provided the Company’s Vought Aircraft Division (Triumph Aerostructures, LLC) and certain affiliated entities (collectively, the “Vought entities”) with the option, if necessary, to commence voluntary insolvency proceedings within 90 days of the Eighth Amendment Effective Date, subject to certain conditions set forth in the Credit Agreement. Upon the commencement of such proceedings, the Vought entities would no longer be Subsidiary Co-Borrowers under the Credit Agreement, and transactions between any of the Vought entities, on the one hand, and the Company and any of the Subsidiary Co-Borrowers, on the other hand, would have been restricted.
The Company entered into the Eighth Amendment, among other reasons, in order to provide the Vought entities with greater financial flexibility to address their significant cash utilization relative to certain contracts. The Company expected that any action it may have taken regarding the Vought entities would have improved the Company’s credit profile and equity value.
The Company does not intend to exercise its option to commence voluntary insolvency for the Vought entities, which expires on July 31, 2017.
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 $850,000 outstanding at any time. The Credit Facility bears interest at either: (i) LIBOR plus between 1.50% and 3.50%; (ii) the prime rate; or (iii) an overnight rate at the option of the Company. The applicable interest rate is based upon the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. In addition, the Company is required to pay a commitment fee of between 0.25% and 0.50% on the unused portion of the Credit Facility. The Company’s obligations under the Credit Facility are guaranteed by the Company’s domestic subsidiaries.
At June 30, 2017, there were $148,961 in borrowings and $60,978 in letters of credit outstanding under the Revolving Line of Credit provisions of the Credit Facility, primarily to support insurance policies. At March 31, 2017, there were $29,999 in borrowings and $27,240 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, 2017, the Company had borrowing capacity under this facility of $587,604 after reductions for borrowings, letters of credit outstanding under the facility and consideration of covenant limitations.
The Credit Facility also provides for a variable rate term loan (the "2013 Term Loan"). The Company repays the outstanding principal amount of the 2013 Term Loan in quarterly installments, on the first business day of each January, April, July and October.
The Company maintains an interest rate swap agreement through November 2018 to reduce its exposure to interest on the variable rate portion of its long-term debt. As of June 30, 2017 and March 31, 2017, the interest rate swap agreement had a notional amount of $302,344 and $309,375, respectively. As of June 30, 2017 and March 31, 2017, the interest rate swap agreement had a fair value of $475 and $309, 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.


12


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

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, 2017, 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. 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 Securitization Facility is classified within the current portion of long term debt on the accompanying Condensed Consolidated Balance Sheet at June 30, 2017.
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.
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.
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.
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 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, 2017 and March 31, 2017, the Company sold $0 and $78,006, 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, 2017
 
March 31, 2017
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt
$
1,281,034

 
$
1,289,639

 
$
1,196,300

 
$
1,178,968

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).

13


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


6.    (LOSS) 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)
 
 
2017
 
2016
Weighted-average common shares outstanding – basic
 
49,341

 
49,271

Net effect of dilutive stock options and nonvested stock
 

 
142

Weighted-average common shares outstanding – diluted
 
49,341

 
49,413

 

7.    INCOME TAXES
The Company follows the Income Taxes topic of 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 derecognition, 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, 2017 and March 31, 2017, the total amount of accrued income tax-related interest and penalties was $293 and $282, respectively.

As of June 30, 2017 and March 31, 2017, the total amount of unrecognized tax benefits was $10,398 and $10,266, respectively, of which $10,398 and $10,266, 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, 2017, the Company has a valuation allowance against principally all of its net deferred tax assets given 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.  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 2018 as well as the Company's projected income in future periods.
The effective income tax rate for the three months ended June 30, 2017, was 26.0% as compared to 31.0% for the three months ended June 30, 2016.
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, 2013, or foreign income tax examinations by tax authorities for fiscal years ended before March 31, 2011.

As of June 30, 2017, 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.



14


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

8.    GOODWILL
The following is a summary of the changes in the carrying value of goodwill by reportable segment, from March 31, 2017 through June 30, 2017:
 
Integrated Systems
 
Precision Components
 
Product Support
 
Total
Balance, March 31, 2017
$
541,155

 
$
532,418

 
$
69,032

 
$
1,142,605

Effect of exchange rate changes
3,610

 
1,512

 
(51
)
 
5,071

Balance, June 30, 2017
$
544,765

 
$
533,930

 
$
68,981

 
$
1,147,676


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.
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, on 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.








15


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

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,
 
2017
 
2016
Components of net periodic benefit costs:
 
 
 
Service cost
$
1,120

 
$
1,649

Interest cost
18,788

 
18,189

Expected return on plan assets
(38,048
)
 
(39,058
)
Amortization of prior service credits
(710
)
 
(446
)
Amortization of net loss
3,477

 
3,031

Net periodic benefit income
$
(15,373
)
 
$
(16,635
)

 
Other postretirement benefits
 
Three Months Ended June 30,
 
2017
 
2016
Components of net periodic benefit costs:
 
 
 
Service cost
$
102

 
$
179

Interest cost
1,219

 
1,247

Amortization of prior service credits
(2,328
)
 
(3,366
)
Amortization of gain
(1,775
)
 
(1,647
)
Net periodic benefit income
$
(2,782
)
 
$
(3,587
)

10.     STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) ("AOCI") by component for the three months ended June 30, 2017 and 2016, 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, 2017
 
$
(87,212
)
 
$
2,153

 
$
(311,119
)
 
$
(396,178
)
   AOCI before reclassifications
 
11,421

 
552

 

 
11,973

   Amounts reclassified from AOCI
 

 
(369
)
 
(1,347
)
(2
)
(1,716
)
 Net current period AOCI
 
11,421

 
183

 
(1,347
)
 
10,257

Balance June 30, 2017
 
$
(75,791
)
 
$
2,336

 
$
(312,466
)
 
$
(385,921
)
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
)
(1) Net of tax.

16


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

(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 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.

11.     SEGMENTS
The Company has four reportable segments: Integrated Systems, Aerospace Structures, Precision Components and Product Support. 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.
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.
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.
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.
Product Support consists of the Company’s operations that provide 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, 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 restructuring of $10,548 for the three months ended June 30, 2017.
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.

17


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

Selected financial information for each reportable segment and the reconciliation of Adjusted EBITDA to operating income is as follows:
 
Three Months Ended June 30,
 
2017
 
2016
Net sales:
 
 
 
Integrated Systems
$
238,136

 
$
257,356

Aerospace Structures
275,976

 
331,596

Precision Components
236,870

 
254,561

Product Support
66,433

 
84,199

Elimination of inter-segment sales
(35,726
)
 
(34,459
)
 
$
781,689

 
$
893,253

 
 
 
 
(Loss) income before income taxes:
 
 
 
Operating income (expense):
 
 
 
Integrated Systems
$
47,417

 
$
47,986

Aerospace Structures
(281
)
 
9,163

Precision Components
(3,265
)
 
(7,782
)
Product Support
8,437

 
14,059

Corporate
(33,899
)
 
(16,700
)
 
18,409

 
46,726

Interest expense and other
21,018

 
18,126

 
$
(2,609
)
 
$
28,600

 
 
 
 
Depreciation and amortization:
 
 
 
Integrated Systems
$
9,951

 
$
10,303

Aerospace Structures
19,391

 
17,962

Precision Components
7,749

 
14,330

Product Support
1,738

 
2,484

Corporate
302

 
383

 
$
39,131

 
$
45,462

 
 
 
 
Amortization of acquired contract liabilities, net:
 
 
 
Integrated Systems
$
7,303

 
$
10,337

Aerospace Structures
21,293

 
18,438

Precision Components
877

 
574

 
$
29,473

 
$
29,349

 
 
 
 

18


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

 
Three Months Ended June 30,
 
2017
 
2016
Adjusted EBITDA:
 
 
 
Integrated Systems
$
50,065

 
$
47,952

Aerospace Structures
(2,183
)
 
8,687

Precision Components
3,607

 
5,974

Product Support
10,175

 
16,543

Corporate
(33,597
)
 
(16,317
)
 
$
28,067

 
$
62,839

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
Integrated Systems
$
2,565

 
$
3,228

Aerospace Structures
4,417

 
3,833

Precision Components
4,062

 
4,902

Product Support
261

 
630

Corporate
780

 
130

 
$
12,085

 
$
12,723

 
June 30, 2017
 
March 31, 2017
Total Assets:
 
 
 
Integrated Systems
$
1,296,558

 
$
1,281,828

Aerospace Structures
1,433,739

 
1,548,239

Precision Components
1,256,392

 
1,262,691

Product Support
266,142

 
284,231

Corporate
23,213

 
37,611

 
$
4,276,044

 
$
4,414,600

During the three months ended June 30, 2017 and 2016, the Company had international sales of $178,407 and $180,419, 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, 2017 and March 31, 2017, Condensed Consolidating Statements of Comprehensive Income for the three months ended June 30, 2017 and 2016, and Condensed Consolidating Statements of Cash Flows for the three months ended June 30, 2017 and 2016.





19


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


SUMMARY CONDENSED CONSOLIDATING BALANCE SHEETS:

 
June 30, 2017
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
654

 
$
82

 
$
36,232

 
$

 
$
36,968

Trade and other receivables, net
222

 
91,504

 
252,236

 

 
343,962

Inventories

 
1,141,422

 
107,234

 

 
1,248,656

Prepaid expenses and other
8,361

 
13,830

 
12,022

 

 
34,213

Total current assets
9,237

 
1,246,838

 
407,724

 

 
1,663,799

Property and equipment, net
8,794

 
661,987

 
123,989

 

 
794,770

Goodwill and other intangible assets, net

 
1,546,059

 
180,142

 

 
1,726,201

Other, net
20,984

 
52,986

 
17,304

 

 
91,274

Intercompany investments and advances
2,206,150

 
81,541

 
74,065

 
(2,361,756
)
 

Total assets
$
2,245,165

 
$
3,589,411

 
$
803,224

 
$
(2,361,756
)
 
$
4,276,044

 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
30,592

 
$
14,377

 
$
95,900

 
$

 
$
140,869

Accounts payable
10,082

 
371,450

 
38,728

 

 
420,260

Accrued expenses
40,378

 
514,863

 
45,237

 

 
600,478

Total current liabilities
81,052

 
900,690

 
179,865

 

 
1,161,607

Long-term debt, less current portion
1,083,263

 
56,902

 

 


 
1,140,165

Intercompany advances
219,690

 
1,839,709

 
380,279

 
(2,439,678
)
 

Accrued pension and other postretirement benefits, noncurrent
6,784

 
565,717

 

 

 
572,501

Deferred income taxes and other
1,485

 
506,840

 
40,556

 

 
548,881

Total stockholders’ equity
852,891

 
(280,447
)
 
202,524

 
77,922

 
852,890

Total liabilities and stockholders’ equity
$
2,245,165

 
$
3,589,411

 
$
803,224

 
$
(2,361,756
)
 
$
4,276,044








20


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



SUMMARY CONDENSED CONSOLIDATING BALANCE SHEETS:
 
March 31, 2017
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19,942

 
$
24,137

 
$
25,554

 
$

 
$
69,633

Trade and other receivables, net
546

 
34,874

 
276,372

 

 
311,792

Inventories

 
1,243,461

 
96,714

 

 
1,340,175

Prepaid expenses and other
7,763

 
11,678

 
10,623

 

 
30,064

Assets held for sale

 
3,250

 
18,005

 

 
21,255

Total current assets
28,251

 
1,317,400

 
427,268

 

 
1,772,919

Property and equipment, net
8,315

 
673,153

 
123,562

 

 
805,030

Goodwill and other intangible assets, net

 
1,560,050

 
174,919

 

 
1,734,969

Other, net
17,902

 
67,955

 
15,825

 

 
101,682

Intercompany investments and advances
2,057,534

 
81,541

 
77,090

 
(2,216,165
)
 

Total assets
$
2,112,002

 
$
3,700,099

 
$
818,664

 
$
(2,216,165
)
 
$
4,414,600

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
33,298

 
$
14,432

 
$
112,900

 
$

 
$
160,630

Accounts payable
17,291

 
426,646

 
37,306

 

 
481,243

Accrued expenses
53,829

 
578,457

 
42,093

 

 
674,379

Liabilities related to assets held for sale

 

 
18,008

 

 
18,008

Total current liabilities
104,418

 
1,019,535

 
210,307

 

 
1,334,260

Long-term debt, less current portion
974,693

 
60,977

 

 

 
1,035,670

Intercompany advances
178,381

 
1,754,529

 
370,907

 
(2,303,817
)
 

Accrued pension and other postretirement benefits, noncurrent
6,633

 
585,501

 

 

 
592,134

Deferred income taxes and other
1,403

 
564,358

 
40,302

 

 
606,063

Total stockholders’ equity
846,474

 
(284,801
)
 
197,148

 
87,652

 
846,473

Total liabilities and stockholders’ equity
$
2,112,002

 
$
3,700,099

 
$
818,664

 
$
(2,216,165
)
 
$
4,414,600






21


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, 2017
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$

 
$
715,090

 
$
87,911

 
$
(21,312
)
 
$
781,689

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
575,404

 
73,254

 
(21,312
)
 
627,346

Selling, general and administrative
22,989

 
44,853

 
11,461

 

 
79,303

Depreciation and amortization
302

 
34,773

 
4,056

 

 
39,131

Restructuring
10,547

 
6,446

 
507

 

 
17,500

 
33,838

 
661,476

 
89,278

 
(21,312
)
 
763,280

Operating (loss) income
(33,838
)
 
53,614

 
(1,367
)
 

 
18,409

Intercompany interest and charges
(43,242
)
 
41,022

 
2,220

 

 

Interest expense and other
17,042

 
2,781

 
1,195

 

 
21,018

(Loss) income before income taxes
(7,638
)
 
9,811

 
(4,782
)
 

 
(2,609
)
Income tax (benefit) expense
(7,074
)
 
5,763

 
633

 

 
(678
)
Net (loss) income
(564
)
 
4,048

 
(5,415
)
 

 
(1,931
)
Other comprehensive income (loss)
183

 
(1,347
)
 
11,421

 

 
10,257

Total comprehensive (loss) income
$
(381
)
 
$
2,701

 
$
6,006

 
$

 
$
8,326

























22


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























23


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, 2017
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net (loss) income
$
(564
)
 
$
4,048

 
$
(5,415
)
 
$

 
$
(1,931
)
 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net income to net cash (used in) operating activities provided by
(24,495
)
 
(101,363
)
 
28,086

 
655

 
(97,117
)
Net cash (used in) provided by operating activities
(25,059
)
 
(97,315
)
 
22,671

 
655

 
(99,048
)
Capital expenditures
(780
)
 
(10,375
)
 
(930
)
 

 
(12,085
)
Proceeds from sale of assets

 
1,183

 
168

 

 
1,351

Net cash used in investing activities
(780
)
 
(9,192
)
 
(762
)
 

 
(10,734
)
Net increase in revolving credit facility
118,961

 

 

 

 
118,961

Retirements and repayments of debt
(12,139
)
 
(4,129
)
 
(17,000
)
 

 
(33,268
)
Payments of deferred financing costs
(7,160
)
 

 

 

 
(7,160
)
Dividends paid
(1,984
)
 

 

 

 
(1,984
)
Repurchase of restricted shares for minimum tax obligation
(296
)
 

 

 

 
(296
)
Intercompany financing and advances
(90,831
)
 
86,581

 
4,905

 
(655
)
 

Net cash provided by (used in)financing activities
6,551

 
82,452

 
(12,095
)
 
(655
)
 
76,253

Effect of exchange rate changes on cash

 

 
864

 

 
864

Net change in cash and cash equivalents
(19,288
)
 
(24,055
)
 
10,678

 

 
(32,665
)
Cash and cash equivalents at beginning of period
19,942

 
24,137

 
25,554

 

 
69,633

Cash and cash equivalents at end of period
$
654

 
$
82

 
$
36,232

 
$

 
$
36,968













24


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