TGI-2011.9.30-10Q
Table of Contents

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

FORM 10-Q


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

For the Quarterly Period Ended September 30, 2011

or

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

For the Transition Period From _________ to ________

Commission File Number: 1-12235

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

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

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

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

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

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

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

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

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

Common Stock, par value $0.001 per share, 49,073,389 shares outstanding as of November 1, 2011.
Table of Contents

TRIUMPH GROUP, INC.
INDEX
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

Part I. Financial Information

Item 1. Financial Statements.

Triumph Group, Inc.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
September 30,
2011
 
March 31,
2011
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
34,750

 
$
39,328

Trade and other receivables, less allowance for doubtful accounts of $3,365 and $3,196
364,590

 
374,491

Inventories, net of unliquidated progress payments of $121,389 and $138,206
818,126

 
781,714

Rotable assets
32,221

 
26,607

Prepaid and other current assets
24,958

 
18,141

Assets held for sale
—

 
4,574

Total current assets
1,274,645

 
1,244,855

Property and equipment, net
719,949

 
734,879

Goodwill
1,531,106

 
1,530,580

Intangible assets, net
842,502

 
859,620

Deferred income taxes, noncurrent
19,612

 
54,539

Other, net
33,105

 
38,764

Total assets
$
4,420,919

 
$
4,463,237

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
165,451

 
$
300,252

Accounts payable
264,762

 
262,716

Accrued expenses
284,002

 
313,354

Deferred income taxes
99,809

 
78,793

Liabilities related to assets held for sale
—

 
431

Total current liabilities
814,024

 
955,546

Long-term debt, less current portion
1,099,091

 
1,011,752

Accrued pension and other postretirement benefits, noncurrent
601,964

 
680,754

Other noncurrent liabilities
165,041

 
180,462

Temporary equity
—

 
2,506

Stockholders’ equity:
 
 
 
Common stock, $.001 par value, 100,000,000 shares authorized, 49,205,763 and 48,690,606 shares issued; 49,048,860 and 48,513,422 outstanding
49

 
49

Capital in excess of par value
827,999

 
819,197

Treasury stock, at cost, 156,903 and 177,184 shares
(4,711
)
 
(5,085
)
Accumulated other comprehensive income
114,439

 
120,471

Retained earnings
803,023

 
697,585

Total stockholders’ equity
1,740,799

 
1,632,217

Total liabilities and stockholders’ equity
$
4,420,919

 
$
4,463,237


SEE ACCOMPANYING NOTES.


1
Table of Contents

Triumph Group, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
Net sales
$
790,528

 
$
768,200

 
$
1,635,591

 
$
1,175,409

 
Operating costs and expenses:
 
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown separately below)
591,206

 
594,076

 
1,239,997

 
891,932

 
Selling, general and administrative
60,256

 
60,503

 
121,221

 
103,983

 
Acquisition and integration expenses
1,144

 
1,283

 
1,604

 
18,650

 
Depreciation and amortization
29,466

 
26,221

 
58,933

 
41,877

 
 
682,072

 
682,083

 
1,421,755

 
1,056,442

 
 
 
 
 
 
 
 
 
 
Operating income
108,456

 
86,117

 
213,836

 
118,967

 
Interest expense and other
17,671

 
23,459

 
44,133

 
35,250

 
Income from continuing operations before income taxes
90,785

 
62,658

 
169,703

 
83,717

 
Income tax expense
32,221

 
20,837

 
60,235

 
30,316

 
Income from continuing operations
58,564

 
41,821

 
109,468

 
53,401

 
Loss from discontinued operations, net
(76
)
 
(281
)
 
(765
)
 
(489
)
 
Net income
$
58,488

 
$
41,540

 
$
108,703

 
$
52,912

 
 
 
 
 
 
 
 
 
 
Earnings per share—basic:
 
 
 
 
 
 
 
 
Income from continuing operations
$
1.20

 
$
0.87

 
$
2.25

 
$
1.28

 
Loss from discontinued operations, net
—

 
(0.01
)
 
(0.02
)
 
(0.01
)
 
Net income
$
1.20

 
$
0.86

 
$
2.24

*
$
1.26

*
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
48,697

 
48,115

 
48,582

 
41,845

 
Earnings per share—diluted:
 
 
 
 
 
 
 
 
Income from continuing operations
$
1.13

 
$
0.84

 
$
2.13

 
$
1.22

 
Loss from discontinued operations, net
—

 
(0.01
)
 
(0.01
)
 
(0.01
)
 
Net income
$
1.13

 
$
0.83

 
$
2.11

*
$
1.21

 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—diluted
51,646

 
50,036

 
51,478

 
43,782

 
 
 
 
 
 
 
 
 
 
Dividends declared and paid per common share
$
0.04

 
$
0.02

 
$
0.06

 
$
0.04

 
* Difference due to rounding.
SEE ACCOMPANYING NOTES.

2
Table of Contents

Triumph Group, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
Six Months Ended
September 30,
 
2011
 
2010
 
 
 
 
Operating Activities
 
 
 
Net income
$
108,703

 
$
52,912

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
58,933

 
41,877

Amortization of acquired contract liabilities
(13,510
)
 
(9,581
)
Accretion of debt discount
4,272

 
3,463

Other amortization included in interest expense
7,948

 
1,927

Provision for doubtful accounts receivable
601

 
88

Provision for deferred income taxes
59,665

 
1,293

Employee stock-based compensation
2,397

 
1,482

Changes in other current assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
 
 
 
Trade and other receivables
(10,784
)
 
62,477

Rotable assets
(5,874
)
 
(315
)
Inventories
(36,654
)
 
(11,329
)
Prepaid expenses and other current assets
(6,422
)
 
(2,873
)
Accounts payable, accrued expenses and other current liabilities
(24,521
)
 
43,287

Accrued pension and other postretirement benefits
(85,766
)
 
(67,701
)
Changes in discontinued operations
241

 
148

Other
1,881

 
553

Net cash provided by operating activities
61,110

 
117,708

Investing Activities
 
 
 
Capital expenditures
(33,920
)
 
(41,228
)
Proceeds from sale of assets
7,450

 
1,132

Acquisitions, net of cash acquired
19,205

 
(333,228
)
Net cash used in investing activities
(7,265
)
 
(373,324
)
Financing Activities
 
 
 
Net increase in revolving credit facility
306,608

 
97,145

Proceeds from issuance of long-term debt
59,800

 
746,105

Repayment of debt and capital lease obligations
(417,701
)
 
(662,520
)
Payment of deferred financing costs
(3,903
)
 
(22,663
)
Dividends paid
(2,943
)
 
(1,636
)
Repurchase of restricted shares for minimum tax obligation
(608
)
 
(1,861
)
Proceeds from exercise of stock options, including excess tax benefit of $0 and $251 in fiscal 2012 and 2011
674

 
1,017

Net cash (used in) provided by financing activities
(58,073
)
 
155,587

Effect of exchange rate changes on cash
(350
)
 
222

 
 
 
 
Net change in cash
(4,578
)
 
(99,807
)
Cash at beginning of period
39,328

 
157,218

 
 
 
 
Cash at end of period
$
34,750

 
$
57,411

SEE ACCOMPANYING NOTES.

3
Table of Contents

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

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Net income
$
58,488

 
$
41,540

 
$
108,703

 
$
52,912

Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustment
(6,877
)
 
5,234

 
(4,870
)
 
1,910

  Pension and postretirement adjustments, net of income taxes of $427 and $854, respectively
(698
)
 
—

 
(1,396
)
 
—

  Unrealized (loss) gain on cash flow hedge, net of tax of $0, $136, $88 and $424, respectively
—

 
297

 
232

 
594

Total other comprehensive income (loss)
(7,575
)
 
5,531

 
(6,034
)
 
2,504

 
 
 
 
 
 
 
 
Total comprehensive income
$
50,913

 
$
47,071

 
$
102,669

 
$
55,416


SEE ACCOMPANYING NOTES.

4
Table of Contents

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

1. BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited consolidated financial statements of Triumph Group, Inc. (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position and cash flows. The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of results that may be expected for the year ending March 31, 2012. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2011 audited consolidated financial statements and notes thereto, included in the Form 10-K for the year ended March 31, 2011 filed in May 2011.

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.

On June 9, 2011, the Company’s Board of Directors approved a two-for-one split of the Company’s common stock. The stock split resulted in the issuance of one additional share for each share issued and outstanding. The stock split was effective on July 14, 2011, to stockholders of record at the close of business on June 22, 2011. Additionally, the Board of Directors approved a 100% increase in the quarterly cash dividend rate on the Company’s common stock to $0.04 per common share from $0.02 per common share on a post-split basis. All share and per share information included in this report has been retroactively adjusted to reflect the impact of the stock split.

Reclassifications have been made to prior-year amounts in order to conform to the current-year presentation related to the completion of the measurement period adjustments for the acquisition of Vought Aircraft Industries, Inc. (“Vought”) (Note 3), the effect of the two-for-one stock split announced by the Company in June 2011 and the cash flow presentation of the settlement of deferred and/or contingent payments on acquisitions as financing activities.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Revenue Recognition

Revenues are generally recognized in accordance with the contract terms when products are shipped, delivery has occurred or services have been rendered, pricing is fixed and determinable, and collection is reasonably assured. A significant portion of the Company’s contracts are within the scope of the Revenue - Construction-Type and Production-Type Contracts topic of the Accounting Standards Codification (“ASC”) and revenue and costs on contracts are recognized using 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, with the great majority measured under the units of delivery method.

•
Under the cost-to-cost method, 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 progress toward completion. Revenue represents the sum of costs and profit on the contract

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Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

for the period.
•
Under the units-of-delivery method, 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 are equal to the total costs at completion divided by the total units to be delivered. As contracts can span multiple years, the Company often segments the contracts into production lots for the purposes of accumulating and allocating cost. Profit is recognized as the difference between revenue for the units delivered and the estimated costs for the units delivered.

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

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

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

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

Included in net sales of the Aerostructures Group is the non-cash amortization of acquired contract liabilities recognized as fair value adjustments through purchase accounting of the acquisition of Vought. For the three months ended September 30, 2011 and 2010, the Company recognized $5,770 and $8,722, respectively, into net sales in the accompanying consolidated statements of income. For the six months ended September 30, 2011 and 2010, the Company recognized $13,510 and $9,581, respectively, into net sales in the accompanying consolidated statements of income.

The Aftermarket Services Group provides repair and overhaul services, a small portion of which services are provided under long-term power-by-the-hour contracts. The Company applies the proportional performance method 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
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentration of Credit Risk

The Company’s trade accounts receivable are exposed to credit risk. However, the risk is limited due to the diversity of the customer base and the customer base’s wide geographical area. Trade accounts receivable from The Boeing Company (“Boeing”) (representing commercial, military and space) represented approximately 33% and 32% of total trade accounts receivable as of September 30, 2011 and March 31, 2011, respectively. The Company had no other significant concentrations of credit risk. Sales to Boeing for the six months ended September 30, 2011 were $745,957, or 46% of net sales, of which $702,331, $31,002 and $12,624 were from the Aerostructures segment, the Aerospace Systems segment and Aftermarket Services segment, respectively. Sales to Boeing for the six months ended September 30, 2010 were $494,518, or 42% of net sales, of which $447,597, $29,216 and $17,705 were from the Aerostructures segment, the Aerospace Systems segment and Aftermarket Services segment, respectively. No other single customer accounted for more than 10% of the Company’s net sales. However, the loss of any significant customer, including Boeing, could have a material adverse effect on the Company and its operating subsidiaries.

Stock-Based Compensation

The Company recognizes compensation expense for share-based awards based on the fair value of those awards at the date of grant. Stock-based compensation expense for the three months ended September 30, 2011 and 2010 was $1,199 and $841, respectively. Stock-based compensation expense for the six months ended September 30, 2011 and 2010 was $2,397 and $1,482, respectively. The benefits of tax deductions in excess of recognized compensation expense were $0 and $251 for the six months ended September 30, 2011 and 2010, respectively. The Company has classified share-based compensation within selling, general and administrative expenses to correspond with the same line item as the majority of the cash compensation paid to employees. Upon the exercise of stock options or vesting of restricted stock, the Company first transfers treasury stock, then will issue new shares.

Intangible Assets

The components of intangible assets, net, are as follows:
 
September 30, 2011
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.4
 
$
455,944

 
$
(55,278
)
 
$
400,666

Product rights and licenses
12.0
 
73,739

 
(58,405
)
 
15,334

Non-compete agreements and other
12.7
 
13,239

 
(11,737
)
 
1,502

Tradename
Indefinite-lived
 
425,000

 
—

 
425,000

Total intangibles, net
 
 
$
967,922

 
$
(125,420
)
 
$
842,502


 
March 31, 2011
 
Weighted-
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
16.4
 
$
456,282

 
$
(40,657
)
 
$
415,625

Product rights and licenses
12.0
 
73,739

 
(56,640
)
 
17,099

Non-compete agreements and other
12.7
 
13,239

 
(11,343
)
 
1,896

Tradename
Indefinite-lived
 
425,000

 
—

 
425,000

Total intangibles, net
 
 
$
968,260

 
$
(108,640
)
 
$
859,620


Amortization expense for the three and six months ended September 30, 2011 and 2010 was $8,441 and $16,893 and $7,779 and $11,245, respectively.

7
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Supplemental Cash Flow Information

The Company paid $1,273 and $2,162 for income taxes, net of refunds received for the six months ended September 30, 2011 and 2010, respectively. The Company made interest payments of $39,181 and $31,407 for the six months ended September 30, 2011 and 2010, respectively, including $12,401 of interest on debt assumed in the acquisition of Vought (Note 3) during the six months ended September 30, 2010.

During the six months ended September 30, 2011 and 2010, the Company financed $61 and $6,845 of property and equipment additions through capital leases, respectively. During the six months ended September 30, 2011, the Company issued 379,838 shares in connection with certain redemptions of convertible senior subordinated notes (Note 6). During the six months ended September 30, 2010, the Company issued 14,992,330 shares valued at $504,867 as partial consideration for the acquisition of Vought (Note 3).

3. ACQUISITIONS
Vought Aircraft Industries, Inc.

On June 16, 2010, the Company acquired by merger all of the outstanding shares of Vought, now operating as Triumph Aerostructures-Vought Commercial Division, Triumph Aerostructures-Vought Integrated Programs Division, and Triumph Structures – Everett, for cash and stock consideration. The acquisition of Vought establishes the Company as a leading global manufacturer of aerostructures for commercial, military and business jet aircraft.

Recording of assets acquired and liabilities assumed: The following condensed balance sheet represents the amounts assigned to each major asset and liability caption in the aggregate for the acquisition of Vought:

 
June 16, 2010
Cash and cash equivalents
$
214,833

Trade and other receivables
165,789

Inventory
410,279

Prepaid expenses and other
4,850

Property and equipment
375,229

Goodwill
1,026,763

Intangible assets
807,000

Deferred tax assets
244,895

Other assets
384

Total assets
$
3,250,022

 
 
Accounts payable
$143,995
Accrued expenses
269,492

Deferred tax liabilities
4,674

Debt
590,710

Acquired contract liabilities, net
124,548

Accrued pension and other postretirement benefits, noncurrent
993,189

Other noncurrent liabilities
70,597

Total liabilities
$
2,197,205


The recorded amounts for assets and liabilities were completed as of June 15, 2011. The measurement period adjustments recorded in the first quarter of fiscal 2012 did not have a significant impact on the Company’s consolidated balance sheet, statements of income, or statements of cash flows.

Pro forma impact of the acquisition: The unaudited pro forma results presented below include the effects of the acquisition of Vought as if it had been consummated as of April 1, 2010. The pro forma results include the amortization associated with acquired intangible assets and interest expense associated with debt used to fund the acquisition, as well as fair value adjustments for property and equipment, off-market contracts and favorable leases. To better reflect the combined operating results, material nonrecurring charges directly attributable to the transaction have been excluded. In addition, the pro forma results do not include any anticipated synergies or other expected benefits of the acquisition. Accordingly, the unaudited pro forma results are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisition been consummated as of April 1, 2010.

 
Six Months Ended
September 30,
 
2010
Net sales
$
1,539,474

Income from continuing operations
55,989

 
 
Income from continuing operations – basic
$
1.16

Income from continuing operations – diluted
$
1.12


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

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

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

Revenues of discontinued operations were $40 and $286, and $478 and $958 for the three and six months ended September 30, 2011 and 2010, respectively. The loss from discontinued operations was $76 and $765, and $281 and $489, net of income tax benefit of $42 and $412, and $152 and $263 for the three and six ended September 30, 2011 and 2010, respectively. Interest expense of $6 and $68, and $64 and $127 was allocated to discontinued operations for the three and six months ended September 30, 2011 and 2010, respectively, based upon the actual borrowings of the operations, and such interest expense is included in the loss from discontinued operations.


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Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE (Continued)

Assets and liabilities held for sale are comprised of the following:
 
 
March 31,
2011
Assets held for sale:
 
 
Trade and other receivables, net
 
$
1,314

Inventories
 
237

Property, plant and equipment
 
3,000

Other
 
23

Total assets held for sale
 
$
4,574

Liabilities related to assets held for sale:
 
 
Accounts payable
 
$
99

Accrued expenses
 
154

Other noncurrent liabilities
 
178

Total liabilities related to assets held for sale
 
$
431


5.    INVENTORIES
Inventories are stated at the lower of cost (average cost or specific identification methods) or market. The components of inventories are as follows:
 
September 30, 2011
 
March 31, 2011
Raw materials
$
51,068

 
$
72,174

Work-in-process, including manufactured and purchased components
847,704

 
805,642

Finished goods
40,743

 
42,104

Less: unliquidated progress payments
(121,389
)
 
(138,206
)
Total inventories
$
818,126

 
$
781,714


6.    LONG-TERM DEBT
Long-term debt consists of the following:

 
September 30, 2011
 
March 31, 2011
 
 
 
 
Revolving credit facility
$
391,608

 
$
85,000

Receivable securitization facility
130,000

 
100,000

Equipment leasing facility and other capital leases
61,653

 
67,822

Term loan credit agreement
—

 
346,731

Secured promissory notes
2,344

 
7,505

Senior subordinated notes due 2017
172,929

 
172,801

Senior notes due 2018
347,743

 
347,623

Convertible senior subordinated notes
150,287

 
176,544

Other debt
7,978

 
7,978

 
1,264,542

 
1,312,004

Less current portion
165,451

 
300,252

 
$
1,099,091

 
$
1,011,752



9
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6.    LONG-TERM DEBT (Continued)

Revolving Credit Facility

On April 5, 2011, the Company amended and restated its existing credit agreement (the “Credit Facility”) with its lenders to (i) increase the availability under the Credit Facility to $850,000, with a $50,000 accordion feature, from $535,000, (ii) extend the maturity date to April 5, 2016, and (iii) amend certain other terms and covenants. Using availability under the Credit Facility, the Company immediately extinguished its term loan credit agreement (the “Term Loan”) at face value of $350,000, plus accrued interest. In connection with the amendment to the Credit Facility, the Company incurred approximately $3,552 of financing costs. These costs, along with the $5,282 of unamortized financing costs prior to the closing, are being amortized over the remaining term of the Credit Facility.

On May 10, 2010, the Company entered into the Credit Facility, which became available on June 16, 2010 in connection with the consummation of the acquisition of Vought. The Credit Facility replaced and refinanced the Company’s Amended and Restated Credit Agreement dated as of August 14, 2009 (the “2009 Credit Agreement”), which agreement was terminated and all obligations thereunder paid in full upon the consummation of the acquisition of Vought. 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 Guarantee and Collateral Agreement, dated as of June 16, 2010, among the Company, and the subsidiaries of the Company party thereto. Such liens are pari passu to the liens securing the Company’s obligations under the Term Loan described below pursuant to an intercreditor agreement dated June 16, 2010 among the agents under the Credit Facility and the Term Loan, the Company and its domestic subsidiaries that are borrowers and/or guarantors under the Credit Facility and the Term Loan (the “Intercreditor Agreement”).

The Credit Facility bears interest at either: (i) LIBOR plus between 1.75% and 3.00%; (ii) the prime rate; or (iii) an overnight rate at the option of the Company. The applicable interest rate is based upon the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. In addition, the Company is required to pay a commitment fee of between 0.30% and 0.50% on the unused portion of the Credit Facility. The Company’s obligations under the Credit Facility are guaranteed by the Company’s domestic subsidiaries.

At September 30, 2011, there were $391,608 in borrowings and $34,334 in letters of credit outstanding under the Credit Facility. At March 31, 2011, there were $85,000 in borrowings and $40,135 in letters of credit outstanding under the Credit Facility. The level of unused borrowing capacity under the Credit Facility varies from time to time depending in part upon its compliance with financial and other covenants set forth in the related agreement. The Credit Facility contains certain affirmative and negative covenants including limitations on specified levels of indebtedness to earnings before interest, taxes, depreciation and amortization, and interest coverage requirements, and includes limitations on, among other things, liens, mergers, consolidations, sales of assets, and incurrence of debt. If an event of default were to occur under the Credit Facility, the lenders would be entitled to declare all amounts borrowed under it immediately due and payable. The occurrence of an event of default under the Credit Facility could also cause the acceleration of obligations under certain other agreements. The Company is currently in compliance with all such covenants. As of September 30, 2011, the Company had borrowing capacity under this facility of $424,433 after reductions for borrowings and letters of credit outstanding under the facility.

Receivables Securitization Program

In June 2011, the Company amended its $175,000 receivable securitization facility (the “Securitization Facility”) extending the term through June 2014. In connection with the Securitization Facility, the Company sells on a revolving basis certain trade accounts receivable to Triumph Receivables, LLC, a wholly-owned special-purpose entity, which in turn sells a percentage ownership interest in the receivables to commercial paper conduits sponsored by financial institutions. The Company is the servicer of the trade accounts receivable under the Securitization Facility. As of September 30, 2011, the maximum amount available under the Securitization Facility was $142,500. Interest rates are based on prevailing market rates for short-term commercial paper plus a program fee and a commitment fee. The program fee is 0.55% on the amount outstanding under the Securitization Facility. Additionally, the commitment fee is 0.55% on 102.00% of the maximum amount available under the Securitization Facility. At September 30, 2011, there was $130,000 outstanding under the Securitization Facility. In connection with amending the Securitization Facility, the Company incurred approximately $325 of financing costs. These costs, along with the $831 of unamortized financing costs prior to the amendment, are being amortized over the life of the Securitization Facility. The Company securitizes its trade accounts receivable, which are generally non-interest bearing, in transactions that are accounted for as borrowings pursuant to the Transfers and Servicing topic of the ASC.

10
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6.    LONG-TERM DEBT (Continued)


The agreement governing the Securitization Facility contains restrictions and covenants which include limitations on the making of certain restricted payments, creation of certain liens, and certain corporate acts such as mergers, consolidations and the sale of substantially all assets.

Equipment Leasing Facility and Other Capital Leases

During March 2009, the Company entered into a 7-year Master Lease Agreement (the “Leasing Facility”) creating a capital lease of certain existing property and equipment. The Leasing Facility bears interest at a weighted-average fixed rate of 6.2% per annum.

During the six months ended September 30, 2011 and 2010, the Company entered into new capital leases in the amount of $61 and $6,845, respectively, to finance a portion of the Company’s capital additions for the period.

Term Loan Credit Agreement
The Company entered into the Term Loan dated as of June 16, 2010, which proceeds were used to partially finance the acquisition of Vought. The Term Loan provided for a 6-year term loan in a principal amount of $350,000, repayable in equal quarterly installments at a rate of 1.0% of the original principal amount per year, with the balance payable on the final maturity date. The proceeds of the loans under the Term Loan, which were 99.5% of the principal amount, were used to consummate the acquisition of Vought. In connection with the closing on the Term Loan, the Company incurred approximately $7,133 of costs, which were deferred and were being amortized into expense over the term of the Term Loan.

The obligations under the Term Loan were guaranteed by substantially all of the Company’s domestic subsidiaries and secured by liens on substantially all of the Company’s and the guarantors’ assets pursuant to a Guarantee and Collateral Agreement (the “Term Loan Guarantee and Collateral Agreement”) and certain other collateral agreements, in each case subject to the Intercreditor Agreement. Borrowings under the Term Loan bore interest, at the Company’s option, at either the base rate (subject to a 2.50% floor), plus a margin between 1.75% and 2.00%, or at the Eurodollar Rate (subject to a 1.50% floor), plus a margin driven by net leverage between 2.75% and 3.00%.

On April 5, 2011, in connection with the amendment and restatement of the Credit Facility, the Company extinguished the Term Loan at face value of $350,000, plus accrued interest. As a result, the Company recognized a pre-tax loss on extinguishment of debt of $7,712 associated with the write-off of the remaining unamortized discount and deferred financing fees on the Term Loan included in Interest expense and other.

Senior Subordinated Notes Due 2017

On November 16, 2009, the Company issued $175,000 principal amount of 8.00% Senior Subordinated Notes due 2017 (the “2017 Notes”).  The 2017 Notes were sold at 98.56% of principal amount and have an effective interest yield of 8.25%. Interest on the 2017 Notes is payable semiannually in cash in arrears on May 15 and November 15 of each year. In connection with the issuance of the 2017 Notes, the Company incurred approximately $4,390 of costs, which were deferred and are being amortized on the effective interest method over the term of the 2017 Notes.
The 2017 Notes are senior subordinated unsecured obligations of the Company and rank subordinate to all of the existing and future senior indebtedness of the Company and the Guarantor Subsidiaries (as defined below), including borrowings under the Company’s existing Credit Facility, and pari passu with the Company’s and the Guarantor Subsidiaries’ existing and future senior subordinated indebtedness. The 2017 Notes are guaranteed, on a full, joint and several basis, by each of the Company’s domestic restricted subsidiaries that guarantees any of the Company’s debt or that of any of the Company’s restricted subsidiaries under the Credit Facility, and in the future by any domestic restricted subsidiaries that guarantee any of the Company’s debt or that of any of the Company’s domestic restricted subsidiaries incurred under any credit facility (collectively, the “Guarantor Subsidiaries”), in each case on a senior subordinated basis.  If the Company is unable to make payments on the 2017 Notes when they are due, each of the Guarantor Subsidiaries would be obligated to make such payments.

11
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6.    LONG-TERM DEBT (Continued)

The Company has the option to redeem all or a portion of the 2017 Notes at any time prior to November 15, 2013 at a redemption price equal to 100% of the principal amount of the 2017 Notes redeemed, plus an applicable premium set forth in the Indenture and accrued and unpaid interest, if any.  The 2017 Notes are also subject to redemption, in whole or in part, at any time on or after November 15, 2013, at redemption prices equal to (i) 104% of the principal amount of the 2017 Notes redeemed, if redeemed prior to November 15, 2014, (ii) 102% of the principal amount of the 2017 Notes redeemed, if redeemed prior to November 15, 2015, and (iii) 100% of the principal amount of the 2017 Notes redeemed, if redeemed thereafter, plus accrued and unpaid interest.  In addition, at any time prior to November 15, 2012, the Company may redeem up to 35% of the principal amount of the 2017 Notes with the net cash proceeds of qualified equity offerings at a redemption price equal to 108% of the aggregate principal amount plus accrued and unpaid interest, if any, subject to certain limitations set forth in the indenture governing the 2017 Notes (the “2017 Indenture”).
Upon the occurrence of a change-of-control, the Company must offer to purchase the 2017 Notes from holders at 101% of their principal amount plus accrued and unpaid interest, if any, to the date of purchase.
The 2017 Indenture contains covenants that, among other things, limit the Company’s ability, and the ability of any of the Guarantor Subsidiaries, to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of the Guarantor Subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (viii) enter into transactions with affiliates. The Company is currently in compliance with all such covenants.
Senior Notes due 2018

On June 16, 2010, in connection with the acquisition of Vought, the Company issued $350,000 principal amount of 8.63% Senior Notes due 2018 (the “2018 Notes”). The 2018 Notes were sold at 99.27% of principal amount and have an effective interest yield of 8.75%. Interest on the 2018 Notes accrues at the rate of 8.63% per annum and is payable semiannually in cash in arrears on January 15 and July 15 of each year. In connection with the issuance of the 2018 Notes, the Company incurred approximately $7,307 of costs, which were deferred and are being amortized on the effective interest method over the term of the 2018 Notes.

The 2018 Notes are the Company’s senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The 2018 Notes are guaranteed on a full, joint and several basis by each of the Guarantor Subsidiaries.

The Company may redeem some or all of the 2018 Notes prior to July 15, 2014 by paying a “make-whole” premium. The Company may redeem some or all of the 2018 Notes on or after July 15, 2014 at specified redemption prices. In addition, prior to July 15, 2013, the Company may redeem up to 35% of the 2018 Notes with the net proceeds of certain equity offerings at a redemption price equal to 108.625% of the aggregate principal amount plus accrued and unpaid interest, if any, subject to certain limitations set forth in the indenture governing the 2018 Notes (the “2018 Indenture”).
The Company is obligated to offer to repurchase the 2018 Notes at a price of (a) 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change-of-control events and (b) 100% of their principal amount plus accrued and unpaid interest, if any, in the event of certain asset sales. These restrictions and prohibitions are subject to certain qualifications and exceptions.

The 2018 Indenture contains covenants that, among other things, limit the Company’s ability and the ability of any of the Guarantor Subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of the Guarantor Subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (viii) enter into transactions with affiliates. The Company is currently in compliance with all such covenants.


12
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6.    LONG-TERM DEBT (Continued)

Convertible Senior Subordinated Notes
On September 18, 2006, the Company issued $201,250 in convertible senior subordinated notes (the “Convertible Notes”). The Convertible Notes are direct, unsecured, senior subordinated obligations of the Company, and rank (i) junior in right of payment to all of the Company’s existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness.
The Company received net proceeds from the sale of the Convertible Notes of approximately $194,998 after deducting debt issuance expenses of approximately $6,252. The use of the net proceeds from the sale was for prepayment of the Company’s outstanding senior notes, including a make-whole premium, fees and expenses in connection with the prepayment, and to repay a portion of the outstanding indebtedness under the Company’s then-existing credit facility. Debt issuance costs were fully amortized as of September 30, 2011.
The Convertible Notes bear interest at a fixed rate of 2.63% per annum, payable in cash semiannually in arrears on each April 1 and October 1. During the period commencing on October 6, 2011 and ending on, but excluding, April 1, 2012 and for each six-month period from October 1 to March 31 or from April 1 to September 30 thereafter, the Company will pay contingent interest during the applicable interest period if the average trading price of a note for the 5 consecutive trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals or exceeds 120% of the principal amount of the Convertible Notes. The contingent interest payable per note in respect of any six-month period will equal 0.25% per annum, calculated on the average trading price of a note for the relevant five trading day period. The Company expects that this contingent interest will be payable beginning April 1, 2012 on principal that remains outstanding. This contingent interest feature represents an embedded derivative. The value of the derivative was not deemed material at September 30, 2011 due to overall market volatility, recent conversions by holders of the Convertible Notes, as well as the Company's ability to call the Convertible Notes at any time after October 6, 2011.
Prior to fiscal 2011, the Company paid $19,414 to purchase $22,200 in principal amounts of the Convertible Notes.
The Convertible Notes mature on October 1, 2026, unless earlier redeemed, repurchased or converted. The Company may redeem the Convertible Notes for cash, either in whole or in part, at any time on or after October 6, 2011 at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including the date of redemption. In addition, holders of the Convertible Notes will have the right to require the Company to repurchase for cash all or a portion of their Convertible Notes on October 1, 2011, 2016 and 2021, at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to, but not including, the date of repurchase. On September 2, 2011, the Company submitted a tender offer of repurchase to the holders of the Convertible Notes, expiring October 3, 2011, and no notes were returned for repurchase. The Convertible Notes are convertible into the Company’s common stock at a rate equal to 36.743 shares per $1 principal amount of the Convertible Notes (equal to an initial conversion price of approximately $27.22 per share), subject to adjustment as described in the Indenture. Upon conversion, the Company will deliver to the holder surrendering the Convertible Notes for conversion, for each $1 principal amount of Notes, an amount consisting of cash equal to the lesser of $1 and the Company’s total conversion obligation and, to the extent that the Company’s total conversion obligation exceeds $1, at the Company’s election, cash or shares of the Company’s common stock in respect of the remainder.
The Convertible Notes are eligible for conversion upon meeting certain conditions as provided in the indenture governing the Convertible Notes. For the periods from January 1, 2011 through September 30, 2011, the Convertible Notes were eligible for conversion. During the six months ended September 30, 2011, the Company settled the conversion of $28,763 in principal value of the Convertible Notes, as requested by the respective holders, with the principal settled in cash and the conversion benefit settled through the issuance of 379,838 shares. In September 2011, the Company received notice of conversion from holders of $21,610 in principal value of the Convertible Notes. These conversions were settled in the third quarter of fiscal 2012 with the principal settled in cash and the conversion benefit settled through the issuance of approximately 387,000 shares. In October 2011, the Company delivered a notice to holders of the Convertible Notes to the effect that, for at least 20 trading days during the 30 consecutive trading days preceding September 30, 2011, the closing price of the Company's common stock was greater than or equal to 130% of the conversion price of such notes on the last trading day. Under the terms of the Convertible Notes, the increase in the Company's stock price triggered a provision, which gave holders of the Convertible

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Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6.    LONG-TERM DEBT (Continued)

Notes a put option through December 31, 2011. Accordingly, the balance sheet classification of the Convertible Notes will be short term for as long as the put option remains in effect.
To be included in the calculation of diluted earnings per share, the average price of the Company’s common stock for the quarter must exceed the conversion price per share of $27.22. The average price of the Company’s common stock for the fiscal quarters ended September 30, 2011 and 2010 was $49.95 and $35.38, respectively. Therefore, 2,518,045 and 1,515,194 additional shares were included in the diluted earnings per share calculation as of the fiscal quarters ended September 30, 2011 and 2010, respectively. The average price of the Company’s common stock for the six months ended September 30, 2011 and 2010 was $47.63 and $35.28, respectively. Therefore, as of the six months ended September 30, 2011 and 2010, there were 2,466,451 and 1,501,564 additional shares, respectively, included in the diluted earnings per share. If the Company undergoes a fundamental change, holders of the Notes will have the right, subject to certain conditions, to require the Company to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any.
The amount of interest expense recognized and the effective rate for the Convertible Notes were as follows:

 
Three months ended
 September 30,
 
Six months ended
 September 30,
 
2011
 
2010
 
2011
 
2010
Contractual coupon interest
$
986

 
$
1,175

 
$
1,973

 
$
2,350

Amortization of discount on convertible notes
1,079

 
1,611

 
2,506

 
3,196

Interest expense
$
2,065

 
$
2,786

 
$
4,479

 
$
5,546

 
 
 
 
 
 
 
 
Effective interest rate
6.5
%
 
6.5
%
 
6.5
%
 
6.5
%

7.    FAIR VALUE MEASUREMENTS
The Company follows the Fair Value Measurements and Disclosures topic of the ASC, which requires additional disclosures about the Company’s assets and liabilities that are measured at fair value and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

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

Level 3    Unobservable inputs for the asset or liability

The following table provides the liabilities reported at fair value and measured on a recurring
basis as of September 30, 2011:

 
 
 
 
Fair Value Measurements Using:
Description
 
Total
 
Quoted Prices in
 Active Markets for
 Identical Assets
(Level 1)
 
Significant Other
 Observable
 Inputs
(Level 2)
 
Significant
 Unobservable
 Inputs
(Level 3)
 
 
 
 
 
 
 
 
 
Contingent consideration
 
$
(2,870
)
 
$
—

 
$
—

 
$
(2,870
)

The fair value of the contingent consideration at the date of acquisition was $2,545 which was estimated using the income approach based on significant inputs that are not observable in the market. Key assumptions included a discount rate and probability assessments of each milestone payment being made. The assumptions used to develop the estimate have not changed since the date of acquisition, with the exception of the present value factor.

The Financial Instruments topic of the ASC requires disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of September 30, 2011 and March 31, 2011 have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop estimates of fair value. The estimates presented are not necessarily indicative of amounts the Company could realize in a current market exchange. The use of alternative market assumptions and estimation methodologies could have had a material effect on these estimates of fair value.

Carrying amounts and the related estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements are as follows:

 
September 30, 2011
 
March 31, 2011
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
 
 
 
 
 
 
 
Long-term debt
$
1,264,542

 
$
1,409,707

 
$
1,312,004

 
$
1,483,796


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.

Except for long-term debt, the Company's financial instruments are highly liquid or have short-term maturities. Therefore, the recorded value is approximately equal to the fair value. The financial instruments held by the Company could potentially expose it to a concentration of credit risk. The Company invests its excess cash in money market funds and other deposit instruments placed with major banks and financial institutions. The Company has established guidelines related to diversification and maturities to maintain safety and liquidity.

8.    EARNINGS PER SHARE
The following is a reconciliation between the weighted-average outstanding shares used in the calculation of basic and diluted earnings per share:

 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
(in thousands)
 
(in thousands)
 
2011
 
2010
 
2011
 
2010
 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
48,697

 
48,115

 
48,582

 
41,845

Net effect of dilutive stock options
431

 
406

 
430

 
435

Potential common shares - convertible debt
2,518

 
1,515

 
2,466

 
1,502

Weighted average common shares outstanding – diluted
51,646

 
50,036

 
51,478

 
43,782


The weighted-average common shares outstanding – basic for the six months ended September 30, 2010 includes the 14,992,330 shares issued as partial consideration in the acquisition of Vought for the pro-rata portion of the quarter ended June 30, 2010 (see Note 3).



14
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)


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

The Company has classified uncertain tax positions as noncurrent income tax liabilities unless expected to be paid in one year. Penalties and tax-related interest expense are reported as a component of income tax expense. As of September 30, 2011 and March 31, 2011, the total amount of accrued income tax-related interest and penalties was $196 and $156, respectively.

As of September 30, 2011 and March 31, 2011, the total amount of unrecognized tax benefits was $7,131 and $6,934, respectively, of which $5,348 and $5,151, respectively, would impact the effective rate, if recognized. The Company does not anticipate that total unrecognized tax benefits will be reduced in the next 12 months.

The effective income tax rate for the six months ended September 30, 2011 was 35.5% as compared to 36.2% for the six months ended September 30, 2010 reflecting the non-deductibility of certain acquisition-related expenses in the prior year period, as well as the absence of the Domestic Production Deduction due to the Company's net operating loss position and the Research and Development tax credit, which had expired December 31, 2009.

The Company has filed appeals in a prior state tax examination jurisdiction related to fiscal years ended March 31, 1999 through March 31, 2005. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

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

As of September 30, 2011, the Company was subject to examination in one state jurisdiction for fiscal years ended March 31, 2007 through March 31, 2009. The Company has filed appeals in a prior state examination related to fiscal years ended March 31, 1999 through March 31, 2005. Because of net operating losses acquired as part of the acquisition of Vought, the Company is subject to U.S. federal income tax examinations and various state jurisdictions for the years ended December 31, 2004 and after related to previously filed Vought tax returns. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

10.    GOODWILL
The following is a summary of the changes in the carrying value of goodwill by reportable segment, from March 31, 2011 through September 30, 2011:
 
Aerostructures
 
Aerospace
 Systems
 
Aftermarket
Services
 
Total
 
 
 
 
 
 
 
 
Balance, March 31, 2011
$
1,294,478

 
$
183,633

 
$
52,469

 
$
1,530,580

Goodwill recognized in connection with acquisitions
1,949

 
—

 
—

 
1,949

Purchase price adjustments
(216
)
 
—

 
—

 
(216
)
Effect of exchange rate changes and other
—

 
(1,207
)
 
—

 
(1,207
)
Balance, September 30, 2011
$
1,296,211

 
$
182,426

 
$
52,469

 
$
1,531,106


11.     PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company sponsors several defined benefit pension plans covering some of its employees. Certain employee groups are ineligible to participate in the plans or have ceased to accrue additional benefits under the plans based upon their service to the Company or years of service accrued under the defined benefit pension plans. Benefits under the defined benefit plans are based on years of service and, for most non-represented employees, on average compensation for certain years. It is the Company’s policy to fund at least the minimum amount required for all qualified plans, using actuarial cost methods and assumptions acceptable under U.S. Government regulations, by making payments into a separate trust.
In addition to the defined benefit pension plans, the Company provides certain healthcare and life insurance benefits for eligible retired employees. Such benefits are unfunded. Employees achieve eligibility to participate in these contributory plans upon retirement from active service if they meet specified age and years of service requirements. Election to participate for some employees must be made at the date of retirement. Qualifying dependents at the date of retirement are also eligible for medical coverage. Current plan documents reserve the right to amend or terminate the plans at any time, subject to applicable collective bargaining requirements for represented employees. From time to time, changes have been made to the benefits provided to various groups of plan participants. Premiums charged to most retirees for medical coverage prior to age 65 are based on years of service and are adjusted annually for changes in the cost of the plans as determined by an independent actuary. In addition to this medical inflation cost-sharing feature, the plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, schedules of reasonable fees, preferred provider networks, coordination of benefits with other plans and a Medicare carve-out.
In accordance with the Compensation – Retirement Benefits topic of the ASC, the Company has recognized the funded status of the benefit obligation as of the date of the last remeasurement, in the accompanying consolidated balance sheet. The funded status is measured as the difference between the fair value of the plan’s assets and the PBO or accumulated postretirement benefit obligation of the plan. In order to recognize the funded status, the Company determined the fair value of the plan assets. The majority of the plan assets are publicly traded investments which were valued based on the market price as of the date of remeasurement. Investments that are not publicly traded were valued based on the estimated fair value of those investments based on our evaluation of data from fund managers and comparable market data.

Net Periodic Benefit Plan Costs

The components of net periodic benefit costs for our postretirement benefit plans are shown in the following table:

 
Pension benefits
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Components of net periodic benefit expense (income):
 
 
 
 
 
 
 
Service cost
$
4,114

 
$
5,151

 
$
8,228

 
$
6,026

Interest cost
27,014

 
29,237

 
54,029

 
34,260

Expected return on plan assets
(31,900
)
 
(29,281
)
 
(63,801
)
 
(34,283
)
Amortization of prior service costs
(2,754
)
 
18

 
(5,507
)
 
36

Amortization of net loss
28

 
46

 
57

 
92

Net periodic benefit expense (income)
$
(3,498
)
 
$
5,171

 
$
(6,994
)
 
$
6,131


 
Other post-retirement benefits
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Components of net periodic benefit expense:
 
 
 
 
 
 
 
Service cost
$
849

 
$
990

 
$
1,697

 
$
1,155

Interest cost
4,619

 
5,326

 
9,237

 
6,214

Amortization of prior service costs
(1,133
)
 
—

 
(2,265
)
 
—

Net periodic benefit expense
$
4,335

 
$
6,316

 
$
8,669

 
$
7,369


12.     SEGMENTS
The Company has three reportable segments: the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group. The Company’s reportable segments are aligned with how the business is managed and the markets that the Company serves are viewed. The Chief Operating Decision Maker (the “CODM”) evaluates performance and allocates resources based upon review of segment information. The CODM utilizes earnings before interest, income taxes, depreciation and amortization (“EBITDA”) as a primary measure of segment profitability to evaluate performance of its segments and allocate resources.
The Aerostructures segment consists of the Company’s operations that manufacture products primarily for the aerospace OEM market. The Aerostructures segment’s revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components, including aircraft wings, fuselage sections, tail assemblies, engine nacelles, flight control surfaces as well as helicopter cabins. Further, the segment’s operations also design and manufacture composite assemblies for floor panels and environmental control system ducts. These products are sold to various aerospace OEMs on a global basis.
The Aerospace Systems segment consists of the Company’s operations that also manufacture products primarily for the aerospace OEM market. The segment’s operations design and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators, mechanical control cables and non-structural cockpit components. These products are sold to various aerospace OEMs on a global basis.
The Aftermarket Services segment consists of the Company’s operations that provide maintenance, repair and overhaul services to both commercial and military markets on components and accessories manufactured by third parties. Maintenance, repair and overhaul revenues are derived from services on auxiliary power units, airframe and engine accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the segment’s operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The segment’s operations also perform repair and overhaul services and supply spare parts for various types of cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis.
Segment EBITDA is total segment revenue reduced by operating expenses (less depreciation and amortization) identifiable with that segment. Corporate includes general corporate administrative costs and any other costs not identifiable with one of the Company’s segments. 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.

15
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
12.    SEGMENTS (Continued)

Selected financial information for each reportable segment and the reconciliation of EBITDA to operating income is as follows:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2011
 
2010
 
2011
 
2010
Net sales:
 
 
 
 
 
 
 
Aerostructures
$
587,977

 
$
577,700

 
$
1,231,283

 
$
809,035

Aerospace systems
133,775

 
123,500

 
266,785

 
240,933

Aftermarket services
70,547

 
68,686

 
140,915

 
128,483

Elimination of inter-segment sales
(1,771
)
 
(1,686
)
 
(3,392
)
 
(3,042
)
 
$
790,528

 
$
768,200

 
$
1,635,591

 
$
1,175,409

 
 
 
 
 
 
 
 
Income from continuing operations before income taxes:
 
 
 
 
 
 
 
Operating income (expense):
 
 
 
 
 
 
 
Aerostructures
$
92,489

 
$
69,964

 
$
180,463

 
$
106,030

Aerospace systems
22,644

 
17,149

 
45,061

 
35,497

Aftermarket services
7,015

 
8,163

 
13,976

 
12,284

Corporate
(13,692
)
 
(9,159
)
 
(25,664
)
 
(34,844
)
 
108,456

 
86,117

 
213,836

 
118,967

Interest expense and other
17,671

 
23,459

 
44,133

 
35,250

 
$
90,785

 
$
62,658

 
$
169,703

 
$
83,717

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Aerostructures
$
21,937

 
$
18,774

 
$
43,782

 
$
26,818

Aerospace systems
4,322

 
4,214

 
8,667

 
8,403

Aftermarket services
2,341

 
3,043

 
4,771

 
6,086

Corporate
866

 
190

 
1,713

 
570

 
$
29,466

 
$
26,221

 
$
58,933

 
$
41,877

 
 
 
 
 
 
 
 
Amortization of acquired contract liabilities, net:
 
 
 
 
 
 
 
Aerostructures
$
5,770

 
$
8,722

 
$
13,510

 
$
9,581

 
 
 
 
 
 
 
 
EBITDA:
 
 
 
 
 
 
 
Aerostructures
$
108,656

 
$
80,016

 
$
210,735

 
$
123,267

Aerospace systems
26,966

 
21,363

 
53,728

 
43,900

Aftermarket services
9,356

 
11,206

 
18,747

 
18,370

Corporate
(12,826
)
 
(8,969
)
 
(23,951
)
 
(34,274
)
 
$
132,152

 
$
103,616

 
$
259,259

 
$
151,263

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Aerostructures
$
12,590

 
$
17,263

 
$
21,725

 
$
22,560

Aerospace systems
3,009

 
3,758

 
6,514

 
6,262

Aftermarket services
1,342

 
1,454

 
3,104

 
2,348

Corporate
1,314

 
1,813

 
2,577

 
10,058

 
$
18,255

 
$
24,288

 
$
33,920

 
$
41,228



16
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
12.    SEGMENTS (Continued)

 
September 30, 2011
 
March 31, 2011
Total Assets:
 
 
 
Aerostructures
$
3,561,345

 
$
3,577,294

Aerospace systems
537,948

 
554,235

Aftermarket services
304,931

 
307,413

Corporate
16,695

 
19,721

Discontinued operations
—

 
4,574

 
$
4,420,919

 
$
4,463,237


During the three months ended September 30, 2011 and 2010, the Company had international sales of $111,760 and $99,346, respectively. During the six month period ended September 30, 2011 and 2010, the Company had international sales of $224,848 and $169,867, respectively.

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

The 2017 Notes and the 2018 Notes are fully and unconditionally guaranteed on a joint and several basis by Guarantor Subsidiaries. The total assets, stockholder’s equity, revenue, earnings and cash flows from operating activities of the Guarantor Subsidiaries exceeded a majority of the consolidated total of such items as of and for the periods reported. The only consolidated subsidiaries of the Company that are not guarantors of the 2017 Notes and the 2018 Notes (the “Non-Guarantor Subsidiaries”) are: (a) the receivables securitization special purpose entity and (b) the international operating subsidiaries. The following tables present condensed consolidating financial statements including the Company (the “Parent”), the Guarantor Subsidiaries, and the Non-Guarantor Subsidiaries. Such financial statements include summary consolidating balance sheets as of September 30, 2011 and March 31, 2011, condensed consolidating statements of income for the three and six months ended September 30, 2011 and 2010, and condensed consolidating statements of cash flows for the six months ended September 30, 2011 and 2010.


17
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


SUMMARY CONSOLIDATING BALANCE SHEETS:

 
September 30, 2011
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
12,970

 
$
526

 
$
21,254

 
$
—

 
$
34,750

Trade and other receivables, net
663

 
164,345

 
199,582

 
—

 
364,590

Inventories
—

 
791,952

 
26,174

 
—

 
818,126

Rotable assets
—

 
23,578

 
8,643

 
—

 
32,221

Prepaid expenses and other
12,144

 
12,481

 
333

 
—

 
24,958

Assets held for sale
—

 
—

 
—

 
—

 
—

Total current assets
25,777

 
992,882

 
255,986

 
—

 
1,274,645

Property and equipment, net
10,077

 
664,648

 
45,224

 
—

 
719,949

Goodwill and other intangible assets, net
1,341

 
2,322,634

 
49,633

 
—

 
2,373,608

Other, net
26,658

 
20,473

 
5,586

 
—

 
52,717

Intercompany investments and advances
965,380

 
(107,176
)
 
(2,493
)
 
(855,711
)
 
—

Total assets
$
1,029,233

 
$
3,893,461

 
$
353,936

 
$
(855,711
)
 
$
4,420,919

 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
150,657

 
$
12,450

 
$
2,344

 
$
—

 
$
165,451

Accounts payable
5,993

 
251,257

 
7,512

 
—

 
264,762

Accrued expenses
18,062

 
257,859

 
8,081

 
—

 
284,002

Deferred income taxes
—

 
99,809

 
—

 
—

 
99,809

Liabilities related to assets held for sale
—

 
—

 
—

 
—

 
—

Total current liabilities
174,712

 
621,375

 
17,937

 
—

 
814,024

Long-term debt, less current portion
918,518

 
50,573

 
130,000

 
—

 
1,099,091

Intercompany debt
(1,824,160
)
 
1,683,525

 
140,635

 
—

 
—

Accrued pension and other postretirement benefits, noncurrent
—

 
601,964

 
—

 
—

 
601,964

Deferred income taxes and other
19,364

 
146,996

 
(1,319
)
 
—

 
165,041

Total stockholders’ equity
1,740,799

 
789,028

 
66,683

 
(855,711
)
 
1,740,799

Total liabilities and stockholders’ equity
$
1,029,233

 
$
3,893,461

 
$
353,936

 
$
(855,711
)
 
$
4,420,919


18
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


SUMMARY CONSOLIDATING BALANCE SHEETS:
 
March 31, 2011
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
17,270

 
$
1,753

 
$
20,305

 
$
—

 
$
39,328

Trade and other receivables, net
—

 
155,126

 
219,365

 
—

 
374,491

Inventories
—

 
750,311

 
31,403

 
—

 
781,714

Rotable assets
—

 
22,032

 
4,575

 
—

 
26,607

Prepaid expenses and other
7,514

 
9,967

 
660

 
—

 
18,141

Assets held for sale
—

 
4,574

 
—

 
—

 
4,574

Total current assets
24,784

 
943,763

 
276,308

 
—

 
1,244,855

Property and equipment, net
38,028

 
680,929

 
15,922

 
—

 
734,879

Goodwill and other intangible assets, net
1,677

 
2,336,735

 
51,788

 
—

 
2,390,200

Other, net
36,767

 
56,291

 
245

 
—

 
93,303

Intercompany investments and advances
673,212

 
65,510

 
4,199

 
(742,921
)
 
—

Total assets
$
774,468

 
$
4,083,228

 
$
348,462

 
$
(742,921
)
 
$
4,463,237

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
180,669

 
$
17,177

 
$
102,406

 
$
—

 
$
300,252

Accounts payable
4,259

 
247,002

 
11,455

 
—

 
262,716

Accrued expenses
44,887

 
257,518

 
10,949

 
—

 
313,354

Deferred income taxes
—

 
78,793

 
—

 
—

 
78,793

Liabilities related to assets held for sale
—

 
431

 
—

 
—

 
431

Total current liabilities
229,815

 
600,921

 
124,810

 
—

 
955,546

Long-term debt, less current portion
955,009

 
56,743

 
—

 
—

 
1,011,752

Intercompany debt
(2,060,150
)
 
1,916,421

 
143,729

 
—

 
—

Accrued pension and other postretirement benefits, noncurrent
—

 
680,754

 
—

 
—

 
680,754

Deferred income taxes and other
17,577

 
166,807

 
(1,416
)
 
—

 
182,968

Total stockholders’ equity
1,632,217

 
661,582

 
81,339

 
(742,921
)
 
1,632,217

Total liabilities and stockholders’ equity
$
774,468

 
$
4,083,228

 
$
348,462

 
$
(742,921
)
 
$
4,463,237



19
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


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

 
$
766,759

 
$
25,105

 
$
(1,336
)
 
$
790,528

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
—

Cost of sales
—

 
572,740

 
19,802

 
(1,336
)
 
591,206

Selling, general and administrative
9,402

 
46,617

 
4,237

 
—

 
60,256

Acquisition and integration expenses
1,144

 
—

 
—

 
—

 
1,144

Depreciation and amortization
413

 
27,779

 
1,274

 
—

 
29,466

 
10,959

 
647,136

 
25,313

 
(1,336
)
 
682,072

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

 
(208
)
 
—

 
108,456

Intercompany interest and charges
(46,440
)
 
45,636

 
804

 
—

 
—

Interest expense and other
17,225

 
2,183

 
(1,737
)
 
—

 
17,671

Income (loss) from continuing operations, before income taxes
18,256

 
71,804

 
725

 
—

 
90,785

Income tax expense (benefit)
6,588

 
25,535

 
98

 
—

 
32,221

Income (loss) from continuing operations
11,668

 
46,269

 
627

 
—

 
58,564

Loss on discontinued operations, net
—

 
(76
)
 
—

 
—

 
(76
)
Net income (loss)
$
11,668

 
$
46,193

 
$
627

 
$
—

 
$
58,488



20
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


CONDENSED CONSOLIDATING STATEMENTS OF INCOME:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2010
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$
—

 
$
745,533

 
$
23,898

 
$
(1,231
)
 
$
768,200

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
578,077

 
17,230

 
(1,231
)
 
594,076

Selling, general and administrative
7,686

 
49,395

 
3,422

 
—

 
60,503

Acquisition and integration expenses
1,283

 
—

 
—

 
—

 
1,283

Depreciation and amortization
190

 
25,244

 
787

 
—

 
26,221

 
9,159

 
652,716

 
21,439

 
(1,231
)
 
682,083

Operating income (loss)
(9,159
)
 
92,817

 
2,459

 
—

 
86,117

Intercompany interest and charges
(31,929
)
 
31,160

 
769

 
—

 
—

Interest expense and other
21,526

 
2,403

 
(470
)
 
—

 
23,459

Income from continuing operations, before income taxes
1,244

 
59,254

 
2,160

 
—

 
62,658

Income tax expense (benefit)
(630
)
 
21,316

 
151

 
—

 
20,837

Income from continuing operations
1,874

 
37,938

 
2,009

 
—

 
41,821

Loss on discontinued operations, net
—

 
(281
)
 
—

 
—

 
(281
)
Net income
$
1,874

 
$
37,657

 
$
2,009

 
$
—

 
$
41,540



21
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


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

 
$
1,586,904

 
$
53,045

 
$
(4,358
)
 
$
1,635,591

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
1,201,781

 
42,574

 
(4,358
)
 
1,239,997

Selling, general and administrative
18,040

 
94,647

 
8,534

 
—

 
121,221

Acquisition and integration expenses
1,604

 
—

 
—

 
—

 
1,604

Depreciation and amortization
847

 
55,445

 
2,641

 
—

 
58,933

 
20,491

 
1,351,873

 
53,749

 
(4,358
)
 
1,421,755

Operating income(loss)
(20,491
)
 
235,031

 
(704
)
 
—

 
213,836

Intercompany interest and charges
(98,184
)
 
96,228

 
1,956

 
—

 
—

Interest expense and other
43,564

 
2,645

 
(2,076
)
 
—

 
44,133

Income (loss) from continuing operations, before income taxes
34,129

 
136,158

 
(584
)
 
—

 
169,703

Income tax expense (benefit)
11,820

 
48,539

 
(124
)
 
—

 
60,235

Income from continuing operations
22,309

 
87,619

 
(460
)
 
—

 
109,468

Loss on discontinued operations, net
—

 
(765
)
 
—

 
—

 
(765
)
Net income
$
22,309

 
$
86,854

 
$
(460
)
 
$
—

 
$
108,703



22
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


CONDENSED CONSOLIDATING STATEMENTS OF INCOME:
 
Six Months Ended September 30, 2010
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$
—

 
$
1,132,400

 
$
45,695

 
$
(2,686
)
 
$
1,175,409

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
861,797

 
32,821

 
(2,686
)
 
891,932

Selling, general and administrative
15,625

 
81,964

 
6,394

 
—

 
103,983

Acquisition and integration expenses
18,650

 
—

 
—

 
—

 
18,650

Depreciation and amortization
570

 
39,750

 
1,557

 
—

 
41,877

 
34,845

 
983,511

 
40,772

 
(2,686
)
 
1,056,442

Operating income(loss)
(34,845
)
 
148,889

 
4,923

 
—

 
118,967

Intercompany interest and charges
(54,192
)
 
52,601

 
1,591

 
—

 
—

Interest expense and other
31,806

 
5,019

 
(1,575
)
 
—

 
35,250

Income (loss) from continuing operations, before income taxes
(12,459
)
 
91,269

 
4,907

 
—

 
83,717

Income tax expense (benefit)
(3,125
)
 
33,008

 
433

 
—

 
30,316

Income from continuing operations
(9,334
)
 
58,261

 
4,474

 
—

 
53,401

Loss on discontinued operations, net
—

 
(489
)
 
—

 
—

 
(489
)
Net income
$
(9,334
)
 
$
57,772

 
$
4,474

 
$
—

 
$
52,912



23
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
 
Six Months Ended September 30, 2011
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net income (loss)
$
22,309

 
$
86,854

 
$
(460
)
 
$
—

 
$
108,703

 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities
(14,071
)
 
(48,482
)
 
14,960

 
—

 
(47,593
)
Net cash provided by operating activities
8,238

 
38,372

 
14,500

 
—

 
61,110

Capital expenditures
(1,759
)
 
(30,161
)
 
(2,000
)
 
—

 
(33,920
)
Proceeds from sale of assets
4,335

 
3,000

 
115

 
—

 
7,450

Acquisitions, net of cash acquired
—

 
19,205

 
—

 
—

 
19,205

Net cash used in investing activities
2,576

 
(7,956
)
 
(1,885
)
 
—

 
(7,265
)
Net decrease in revolving credit facility
306,608

 
—

 
—

 
—

 
306,608

Proceeds on issuance of debt
—

 
—

 
59,800

 
—

 
59,800

Retirements and repayments of debt
(377,163
)
 
(10,738
)
 
(29,800
)
 
—

 
(417,701
)
Payments of deferred financing costs
(3,903
)
 
—

 
—

 
—

 
(3,903
)
Dividends paid
(2,943
)
 
—

 
—

 
—

 
(2,943
)
Repurchase of restricted shares for minimum tax obligation
(608
)
 
—

 
—

 
—

 
(608
)
Proceeds from exercise of stock options, including excess tax benefit
674

 
—

 
—

 
—

 
674

Intercompany financing and advances
62,221

 
(20,905
)
 
(41,316
)
 
—

 
—

Net cash used in financing activities
(15,114
)
 
(31,643
)
 
(11,316
)
 
—

 
(58,073
)
Effect of exchange rate changes on cash
—

 
—

 
(350
)
 
—

 
(350
)
Net change in cash and cash equivalents
(4,300
)
 
(1,227
)
 
949

 
—

 
(4,578
)
Cash and cash equivalents at beginning of period
17,270

 
1,753

 
20,305

 
—

 
39,328

Cash and cash equivalents at end of period
$
12,970

 
$
526

 
$
21,254

 
$
—

 
$
34,750



24
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)

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


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
 
Six Months Ended September 30, 2010
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net income (loss)
$
(9,334
)
 
$
57,772

 
$
4,474

 
$
—

 
$
52,912

 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities
7,256

 
58,635

 
(1,095
)
 
—

 
64,796

Net cash (used in) provided by operating activities
(2,078
)
 
116,407

 
3,379

 
—

 
117,708

Capital expenditures
(10,058
)
 
(30,498
)
 
(672
)
 
—

 
(41,228
)
Proceeds from sale of assets and businesses
—

 
1,110

 
22

 
—

 
1,132

Acquisitions, net of cash acquired
—

 
(333,228
)
 
—

 
—

 
(333,228
)
Net cash used in investing activities
(10,058
)
 
(362,616
)
 
(650
)
 
—

 
(373,324
)
Net increase in revolving credit facility
97,145

 
—

 
—

 
—

 
97,145

Proceeds on issuance of debt
695,695

 
10

 
50,400

 
—

 
746,105

Retirements and repayments of debt
(591,012
)
 
(19,536
)
 
(51,972
)
 
—

 
(662,520
)
Payments of deferred financing costs
(22,663
)
 
—

 
—

 
—

 
(22,663
)
Dividends paid
(1,636
)
 
—

 
—

 
—

 
(1,636
)
Withholding of restricted shares for minimum tax obligation
(1,861
)
 
—

 
—

 
—

 
(1,861
)
Proceeds from exercise of stock options, including excess tax benefit
1,017

 
—

 
—

 
—

 
1,017

Intercompany financing and advances
(270,673
)
 
265,343

 
5,330

 
—

 
—

Net cash (used in) provided by financing activities
(93,988
)
 
245,817

 
3,758

 
—

 
155,587

Effect of exchange rate changes on cash
—

 
—

 
222

 
—

 
222

Net change in cash
(106,124
)
 
(392
)
 
6,709

 
—

 
(99,807
)
Cash at beginning of period
148,437

 
1,712

 
7,069

 
—

 
157,218

Cash at end of period
$
42,313

 
$
1,320

 
$
13,778

 
$
—

 
$
57,411



14.    RELATED PARTIES

The Company has commercial relationships with Wesco Aircraft Hardware Corp (“Wesco”) and Sequa Corporation (“Sequa”). Wesco is a distributor of aerospace hardware and provider of inventory management services under which Wesco provides aerospace hardware to the Company pursuant to long-term contracts. Sequa is a diversified aerospace and industrial company comprised of three businesses with leading positions in niche markets. The Carlyle Group owns a majority stake in

25
Table of Contents
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
14. RELATED PARTIES (Continued)

both Wesco and Sequa and is the Company’s largest stockholder since the acquisition of Vought. The Carlyle Group may indirectly benefit from its economic interests in Wesco and Sequa from its contractual relationships with the Company.

The total amounts paid pursuant to the Company’s contracts for the six months ended September 30, 2011 and 2010 was approximately $21,802 and $12,339, respectively, to Wesco and approximately $3,297 and $0, respectively, to Sequa. The Company also had net sales to Sequa of $3,382 for the six months ended September 30, 2011. As of September 30, 2011, the Company had accounts payable to Wesco and Sequa of $131 and $91, respectively, as well as accounts receivable of $1,195 from Sequa.

15. SUBSEQUENT EVENTS

In October 2011, the Company's wholly-owned subsidiary Triumph Interiors, LLC acquired the assets of Aviation Network Services, LLC ("ANS"), a leading provider of repair and refurbishment of aircraft interiors primarily for commercial airlines. ANS provides Triumph Interiors, LLC with additional capacity and expanded product offerings, such as the repair and refurbishment of Passenger Service Units. and other interior products. The purchase price for ANS includes $7,500 in cash paid at closing and a contingent earnout of up to $3,000. The results of Triumph Interiors, LLC will continue to be included in the Company's Aftermarket Services segment.

26
Table Of Contents


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

(The following discussion should be read in conjunction with the Consolidated Financial Statements contained elsewhere herein.)

OVERVIEW

We are a major supplier to the aerospace industry and have three operating segments: (i) Triumph Aerostructures Group, whose companies’ revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components for the global aerospace original equipment manufacturers, or OEM, market; (ii) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build-to-print components, assemblies and systems also for the OEM market; and (iii) Triumph Aftermarket Services Group, whose companies serve aircraft fleets, notably commercial airlines, the U.S. military and cargo carriers, through the maintenance, repair and overhaul of aircraft components and accessories manufactured by third parties.
•
Net sales for the second quarter of the fiscal year ending March 31, 2012 increased 2.9% to $790.5 million.
•
Operating income in the second quarter of fiscal 2012 increased 25.9% to $108.5 million.
•
Income from continuing operations for the second quarter of fiscal 2012 increased 40.0% to $58.6 million.
•
Backlog as of September 30, 2011 decreased to $3.76 billion or 0.5% from the prior year, but was flat sequentially from the prior quarter.
•
Income from continuing operations for the second quarter of fiscal 2012 was $1.13 per diluted common share, as compared to $0.84 per diluted share in the prior year period.
•
We generated $61.1 million of cash flow from operating activities for the six months ended September 30, 2011, after $61.0 million in pension contributions, as compared to $117.7 million in the prior year period.

RESULTS OF OPERATIONS

The following includes a discussion of our consolidated and business segment results of operations. The Company’s diverse structure and customer base do not provide for precise comparisons of the impact of price and volume changes to our results. However, we have disclosed the significant variances between the respective periods.

Non-GAAP Financial Measures

We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. In accordance with Securities and Exchange Commission (the “SEC”) guidance on Compliance and Disclosure Interpretations, we also disclose and discuss certain non-GAAP financial measures in our public releases. Currently, the non-GAAP financial measures that we disclose are EBITDA, which is our income from continuing operations before interest, income taxes, amortization of acquired contract liabilities, depreciation and amortization, and Adjusted EBITDA, which is EBITDA adjusted for acquisition-related costs associated with the acquisition of Vought. We disclose EBITDA and Adjusted EBITDA on a consolidated and an operating segment basis in our earnings releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.

We view EBITDA as an operating performance measure and as such we believe that the GAAP financial measure most directly comparable to it is income from continuing operations. In calculating EBITDA, we exclude from income from continuing operations the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. EBITDA is not a measure of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income (loss), income from continuing operations, or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on EBITDA as a substitute for any GAAP financial measure, including net income (loss) or income from continuing operations. In addition, we urge investors and potential investors in our securities to carefully review the reconciliation of EBITDA to income from continuing operations set forth below, in our earnings releases and in other filings with the SEC and to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed with the SEC, as well as our quarterly earnings releases, and compare the GAAP financial information with our EBITDA.


27
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We have spent more than 15 years expanding our product and service capabilities partially through acquisitions of complementary businesses. Due to the expansion of our operations, which included acquisitions, our income from continuing operations has included significant charges for depreciation and amortization. EBITDA excludes these charges and provides meaningful information about the operating performance of our business, apart from charges for depreciation and amortization. We believe the disclosure of EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe EBITDA is a measure of our ongoing operating performance because the isolation of noncash income and expenses, such as amortization of acquired contract liabilities, depreciation and amortization, and nonoperating items, such as interest and income taxes, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on EBITDA to provide a financial measure by which to compare our operating performance against that of other companies in our industry.

Set forth below are descriptions of the financial items that have been excluded from our income from continuing operations to calculate EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to income from continuing operations:
 
•
Amortization of acquired contract liabilities may be useful for investors to consider because it represents the noncash earnings on the fair value of below-market contracts acquired through the acquisition of Vought. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.
•
Amortization expense may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights and licenses. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•
Depreciation may be useful for investors to consider because it generally represents the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•
The amount of interest expense and other we incur may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of interest expense and other to be a representative component of the day-to-day operating performance of our business.
•
Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business.  However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.

Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to gain an understanding of the factors and trends affecting our business.
 

28
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

The following table shows our EBITDA and Adjusted EBITDA reconciled to our income from continuing operations for the indicated periods (in thousands):

 
Three Months Ended
September 30,
 
Six Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Income from continuing operations
$
58,564

 
$
41,821

 
$
109,468

 
$
53,401

Amortization of acquired contract liabilities
(5,770
)
 
(8,722
)
 
(13,510
)
 
(9,581
)
Depreciation and amortization
29,466

 
26,221

 
58,933

 
41,877

Interest expense and other
17,671

 
23,459

 
44,133

 
35,250

Income tax expense
32,221

 
20,837

 
60,235

 
30,316

EBITDA
132,152

 
103,616

 
259,259

 
151,263

Acquisition-related expenses
1,144

 
1,283

 
1,604

 
18,650

Adjusted EBITDA
$
133,296

 
$
104,899

 
$
260,863

 
$
169,913


The following tables show our EBITDA by reportable segment reconciled to our operating income for the indicated periods (in thousands):

 
Three Months Ended September 30, 2011
 
Total
 
Aerostructures
 
Aerospace
 Systems
 
Aftermarket
 Services
 
Corporate/
 Eliminations
Operating income
$
108,456

 
$
92,489

 
$
22,644

 
$
7,015

 
$
(13,692
)
Amortization of acquired contract liability
(5,770
)
 
(5,770
)
 
—

 
—

 
—

Depreciation and amortization
29,466

 
21,937

 
4,322

 
2,341

 
866

EBITDA
$
132,152

 
$
108,656

 
$
26,966

 
$
9,356

 
$
(12,826
)

 
Three Months Ended September 30, 2010
 
Total
 
Aerostructures
 
Aerospace
 Systems
 
Aftermarket
 Services
 
Corporate/
Eliminations
Operating income
$
86,117

 
$
69,964

 
$
17,149

 
$
8,163

 
$
(9,159
)
Amortization of acquired contract liability
(8,722
)
 
(8,722
)
 
—

 
—

 
—

Depreciation and amortization
26,221

 
18,774

 
4,214

 
3,043

 
190

EBITDA
$
103,616

 
$
80,016

 
$
21,363

 
$
11,206

 
$
(8,969
)

 
Six Months Ended September 30, 2011
 
Total
 
Aerostructures
 
Aerospace
 Systems
 
Aftermarket
 Services
 
Corporate/
Eliminations
Operating income
$
213,836

 
$
180,463

 
$
45,061

 
$
13,976

 
$
(25,664
)
Amortization of acquired contract liability
(13,510
)
 
(13,510
)
 
—

 
—

 
—

Depreciation and amortization
58,933

 
43,782

 
8,667

 
4,771

 
1,713

EBITDA
$
259,259

 
$
210,735

 
$
53,728

 
$
18,747

 
$
(23,951
)


29
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Six Months Ended September 30, 2010
 
Total
 
Aerostructures
 
Aerospace
 Systems
 
Aftermarket
 Services
 
Corporate/
Eliminations
Operating income
$
118,967

 
$
106,030

 
$
35,497

 
$
12,284

 
$
(34,844
)
Amortization of acquired contract liability
(9,581
)
 
(9,581
)
 
—

 
—

 
—

Depreciation and amortization
41,877

 
26,818

 
8,403

 
6,086

 
570

EBITDA
$
151,263

 
$
123,267

 
$
43,900

 
$
18,370

 
$
(34,274
)

The fluctuations from period to period within the amounts of the components of the reconciliations above are discussed further below within Results of Operations.

Quarter ended September 30, 2011 compared to quarter ended September 30, 2010

 
Quarter Ended September 30,
 
2011
 
2010
 
(dollars in thousands)
Net sales
$
790,528

 
$
768,200

Segment operating income
$
122,148

 
$
95,276

Corporate expenses
(13,692
)
 
(9,159
)
Total operating income
108,456

 
86,117

Interest expense and other
17,671

 
23,459

Income tax expense
32,221

 
20,837

Income from continuing operations
58,564

 
41,821

Loss from discontinued operations, net
(76
)
 
(281
)
Net income
$
58,488

 
$
41,540


Net sales increased by $22.3 million or 2.9% to $790.5 million for the quarter ended September 30, 2011 from $768.2 million for the quarter ended September 30, 2010. Despite the increase during the period, net sales were negatively impacted by Boeing's previously announced pause in production with the 747, along with declines in non-recurring work related to the 747 program. Excluding the impact of both of these items, net sale would have increased in excess of 10% for the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010.

Cost of sales decreased by $2.9 million, or 0.5%, to $591.2 million for the quarter ended September 30, 2011 from $594.1 million for the quarter ended September 30, 2010. This decrease was due in part to synergies related to the acquisition of Vought. Gross margin for the quarter ended September 30, 2011 was 25.2% as compared to 22.7% for the quarter ended September 30, 2010. This change was impacted by the change in the overall sales mix, primarily the decline in non-recurring work related to the 747 program

Segment operating income increased by $26.9 million, or 28.2%, to $122.1 million for the quarter ended September 30, 2011 from $95.3 million for the quarter ended September 30, 2010. The segment operating income increase was a direct result of the gross margin improvement, which included cumulative catch-up adjustments on long-term construction contracts ($7.3 million), net of system implementation expenses and lower pension and other postretirement benefit expenses ($10.7 million). Segment operating income also improved due to decreases in overall head count resulting in lower compensation and benefits primarily as a result of the continued integration of Vought ($7.0 million).

Corporate expenses increased by $4.5 million, or 49.5%, to $13.7 million for the quarter ended September 30, 2011 from $9.2 million for the quarter ended September 30, 2010. This increase was due to $2.1 million of additional costs related to the Mexican facility compared to the prior year period and $1.8 million in additional compensation and benefits. The costs of our Mexican facility are expected to continue to increase versus the prior year as it is in early stages of production.

Interest expense and other decreased by $5.8 million, or 24.7%, to $17.7 million for the quarter ended September 30, 2011 compared to $23.5 million for the prior year period. Interest expense and other decreased due to lower average debt

30
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

outstanding during the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010.

The effective income tax rate for the quarter ended September 30, 2011 was 35.5% compared to 33.3% for the quarter ended September 30, 2010. The effective income tax rate for the quarter ended September 30, 2010 was benefited by reductions to unrecognized tax benefits as a result of the resolution of prior years' tax examinations. For the fiscal year ending March 31, 2012, the Company expects its effective tax rate to be approximately 35.5%, reflecting the expiration of the research and development tax credit as of December 31, 2011 and the absence of the Domestic Production Deduction due to the Company's net operating loss position.

Loss from discontinued operations before income taxes was $0.1 million for the quarter ended September 30, 2011 compared with a loss from discontinued operations before income taxes of $0.4 million, for the quarter ended September 30, 2010. The benefit for income taxes was less than $0.1 million for the quarter ended September 30, 2011 compared to a benefit of $0.2 million in the prior year period. In July 2011, the Company completed the sale of Triumph Precision Castings Co. for proceeds of $3.9 million, resulting in no gain or loss on the disposition.

Business Segment Performance

We report our financial performance based on the following three reportable segments: the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group. The results of operations among our operating segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. For example, our Aerostructures segment generally includes long-term sole-source or preferred supplier contracts and the success of these programs provides a strong foundation for our business and positions us well for future growth on new programs and new derivatives. This compares to our Aerospace Systems segment which generally includes proprietary products and/or arrangements where we become the primary source or one of a few primary sources to our customers, where our unique manufacturing capabilities command a higher margin. Also, OEMs are increasingly focusing on assembly activities while outsourcing more manufacturing and repair to third parties, and as a result, are less of a competitive force than in previous years. In contrast, our Aftermarket Services segment provides MRO services on components and accessories manufactured by third parties, with more diverse competition, including airlines, OEMs and other third-party service providers. In addition, variability in the timing and extent of customer requests performed in the Aftermarket Services segment can provide for greater volatility and less predictability in revenue and earnings than that experienced in the Aerostructures and Aerospace Systems segments.
The Aerostructures segment consists of the Company’s operations that manufacture products primarily for the aerospace OEM market. The Aerostructures segment’s revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components, including aircraft wings, fuselage sections, tail assemblies, engine nacelles, flight control surfaces as well as helicopter cabins. Further, the segment’s operations also design and manufacture composite assemblies for floor panels and environmental control system ducts. These products are sold to various aerospace OEMs on a global basis.
The Aerospace Systems segment consists of the Company’s operations that also manufacture products primarily for the aerospace OEM market. The segment’s operations design and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators, mechanical control cables and non-structural cockpit components. These products are sold to various aerospace OEMs on a global basis.
The Aftermarket Services segment consists of the Company’s operations that provide maintenance, repair and overhaul services to both commercial and military markets on components and accessories manufactured by third parties. Maintenance, repair and overhaul revenues are derived from services on auxiliary power units, airframe and engine accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the segment’s operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The segment’s operations also perform repair and overhaul services and supply spare parts for various types of cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis.

We currently generate a majority of our revenue from clients in the commercial aerospace industry, the military, the business jet industry and the regional airline industry. Our growth and financial results are largely dependent on continued demand for our products and services from clients in these industries. If any of these industries experiences a downturn, our clients in these sectors may conduct less business with us. The following table summarizes our net sales by end market by

31
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

business segment. The loss of one or more of our major customers or an economic downturn in the commercial airline or the military and defense markets could have a material adverse effect on our business.
 
Three Months Ended September 30,
 
2011
 
2010
Aerostructures
 
 
 
Commercial aerospace
36.4
%
 
33.9
%
Military
24.6
%
 
29.3
%
Business Jets
11.9
%
 
10.3
%
Regional
0.6
%
 
0.6
%
Non-aviation
0.9
%
 
1.1
%
Total Aerostructures net sales
74.4
%
 
75.2
%
Aerospace Systems
 
 
 
Commercial aerospace
6.2
%
 
5.1
%
Military
8.0
%
 
8.3
%
Business Jets
0.8
%
 
0.8
%
Regional
0.6
%
 
0.6
%
Non-aviation
1.1
%
 
1.1
%
Total Aerospace Systems net sales
16.7
%
 
15.9
%
Aftermarket Services
 
 
 
Commercial aerospace
7.1
%
 
6.4
%
Military
0.6
%
 
1.3
%
Business Jets
0.4
%
 
0.3
%
Regional
0.2
%
 
0.3
%
Non-aviation
0.6
%
 
0.6
%
Total Aftermarket Services net sales
8.9
%
 
8.9
%
Total Consolidated net sales
100
%
 
100
%

We continue to experience a higher proportion of our sales mix in the commercial aerospace and military end-markets, with a slight increase in allocation from the business jets end-market.

 
Quarter Ended September 30,
 
 
 
% of Total
Sales
 
2011
 
2010
 
%
Change
 
2011
 
2010
 
(in thousands)
 
 
 
 
 
 
NET SALES
 
 
 
 
 
 
 
 
 
Aerostructures
$
587,977

 
$
577,700

 
1.8
%
 
74.4
 %
 
75.2
 %
Aerospace Systems
133,775

 
123,500

 
8.3
%
 
16.9
 %
 
16.1
 %
Aftermarket Services
70,547

 
68,686

 
2.7
%
 
8.9
 %
 
8.9
 %
Elimination of inter-segment sales
(1,771
)
 
(1,686
)
 
5.0
%
 
(0.2
)%
 
(0.2
)%
 
$
790,528

 
$
768,200

 
2.9
%
 
100.0
 %
 
100.0
 %


32
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Quarter Ended September 30,
 
 
 
% of Segment
Sales
 
2011
 
2010
 
%
Change
 
2011
 
2010
 
(in thousands)
 
 
 
 
 
SEGMENT OPERATING INCOME
 
 
 
 
 
 
 
 
 
Aerostructures
$
92,489

 
$
69,964

 
32.2
 %
 
15.7
%
 
12.1
%
Aerospace Systems
22,644

 
17,149

 
32.0
 %
 
16.9
%
 
13.9
%
Aftermarket Services
7,015

 
8,163

 
(14.1
)%
 
9.9
%
 
11.9
%
Corporate
(13,692
)
 
(9,159
)
 
49.5
 %
 
n/a

 
n/a

 
$
108,456

 
$
86,117

 
25.9
 %
 
13.7
%
 
11.2
%

 
Quarter Ended September 30,
 
 
 
% of Segment
Sales
 
2011
 
2010
 
%
Change
 
2011
 
2010
 
(in thousands)
 
 
 
 
 
EBITDA
 
 
 
 
 
 
 
 
 
Aerostructures
$
108,656

 
$
80,016

 
35.8
 %
 
18.5
%
 
13.9
%
Aerospace Systems
26,966

 
21,363

 
26.2
 %
 
20.2
%
 
17.3
%
Aftermarket Services
9,356

 
11,206

 
(16.5
)%
 
13.3
%
 
16.3
%
Corporate
(12,826
)
 
(8,969
)
 
43.0
 %
 
n/a

 
n/a

 
$
132,152

 
$
103,616

 
27.5
 %
 
16.7
%
 
13.5
%

Aerostructures: The Aerostructures segment net sales increased by $10.3 million, or 1.8%, to $588.0 million for the quarter ended September 30, 2011 from $577.7 million for the quarter ended September 30, 2010. The increase was entirely organic. Despite the increase during the period, net sales were negatively impacted by Boeing's previously announced pause in production with the 747, along with declines in non-recurring work related to the 747 program. Excluding the impact of both of these items, net sale would have increased in excess of 10% for the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010. The prior year period was negatively impacted by commercial production rate reductions (particularly in the 777 program).

Aerostructures segment operating income increased by $22.5 million, or 32.2%, to $92.5 million for the quarter ended September 30, 2011 from $70.0 million for the quarter ended September 30, 2010. Operating income for the quarter ended September 30, 2011 included cumulative catch-up adjustments on long-term construction contracts ($7.3 million) net of ERP system implementation expenses and lower pension and other postretirement benefit expenses ($10.7 million). Segment operating income also improved due to decreases in overall head count resulting in lower compensation and benefits primarily as a result of the continued integration of Vought ($6.8 million). These same factors contributed to the increase in EBITDA year over year. The increase in EBITDA was greater than the increase in operating income, due to the increase in depreciation and amortization, which is not included in EBITDA. The increase in depreciation and amortization was due principally to the Vought acquisition.

Aerostructures segment operating income as a percentage of segment sales increased to 15.7% for the quarter ended September 30, 2011 as compared to 12.1% for the quarter ended September 30, 2010, due to the impact of cumulative catch-up adjustments on long-term construction contracts and lower pension and other postretirement benefit expenses discussed above, which also caused the improvements in EBITDA margin.

Aerospace Systems: The Aerospace Systems segment net sales increased by $10.3 million, or 8.3%, to $133.8 million for the quarter ended September 30, 2011 from $123.5 million for the quarter ended September 30, 2010. Net sales increased due to continued improvements in the broader market and benefits from large outsourcing programs.

Aerospace Systems segment operating income increased by $5.5 million, or 32.0%, to $22.6 million for the quarter ended September 30, 2011 from $17.1 million for the quarter ended September 30, 2010. Operating income increased primarily due to

33
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

increased sales as well as improved gross margin, due to sales mix and increased efficiencies in production associated with higher volume of work ($3.9 million). These same factors contributed to the increase in EBITDA year over year.

Aerospace Systems segment operating income as a percentage of segment sales increased to 16.9% for the quarter ended September 30, 2011 as compared to 13.9% for the quarter ended September 30, 2010, due to the improvements in gross margin noted above. These same factors contributed to the increase in EBITDA margin year over year.
 
Aftermarket Services: The Aftermarket Services segment net sales increased by $1.9 million, or 2.7%, to $70.5 million for the quarter ended September 30, 2011 from $68.7 million for the quarter ended September 30, 2010. Net sales increased due to continued improvement in global commercial air traffic and decreases in airline inventory de-stocking.

Aftermarket Services segment operating income decreased by $1.1 million, or 14.1%, to $7.0 million for the quarter ended September 30, 2011 from $8.2 million for the quarter ended September 30, 2010. Operating income decreased primarily due to increased reserves on specific slow moving inventory ($1.3 million). These same factors contributed to the decrease in EBITDA year over year.

Aftermarket Services segment operating income as a percentage of segment sales decreased to 9.9% for the quarter ended September 30, 2011 as compared with 11.9% for the quarter ended September 30, 2010, due to the increased reserves on specific slow moving inventory noted above, which also caused the decline in EBITDA margin.

Six months ended September 30, 2011 compared to six months ended September 30, 2010.

 
Six Months Ended September 30,
 
2011
 
2010
 
(dollars in thousands)
Net sales
$
1,635,591

 
$
1,175,409

Segment operating income
$
239,500

 
$
153,811

Corporate expenses
(25,664
)
 
(34,844
)
Total operating income
213,836

 
118,967

Interest expense and other
44,133

 
35,250

Income tax expense
60,235

 
30,316

Income from continuing operations
109,468

 
53,401

Loss from discontinued operations, net
(765
)
 
(489
)
Net income
$
108,703

 
$
52,912


Net sales increased by $460.2 million, or 39.2%, to $1.64 billion for the six months ended September 30, 2011 from $1.18 billion for the six months ended September 30, 2010. The acquisition of Vought contributed an increase of $400.5 million to net sales. Excluding the effects of the acquisition of Vought, organic sales increased $59.7 million, or 9.0%. The prior year period was negatively impacted by the decreased demand for business jets and regional jets as well as commercial rate reductions (particularly in the 777 program).

Cost of sales increased $348.1 million, or 39.0%, to $1.24 billion for the six months ended September 30, 2011 from $891.9 million for the six months ended September 30, 2010. This increase includes the impact of the acquisition of Vought noted above, which contributed $304.5 million. Gross margin for the six months ended September 30, 2011 was 24.2%, as compared to 24.1% for the prior year period. Excluding the effects of the acquisition of Vought, gross margin was 29.1% for the six months ended September 30, 2011, compared with 29.3% for the six months ended September 30, 2010.

Segment operating income increased by $85.7 million, or 55.7%, to $239.5 million for the six months ended September 30, 2011 from $153.8 million for the six months ended September 30, 2010. The operating income increase was due to the contribution from the acquisition of Vought ($70.3 million) and increased organic sales ($9.7 million).

Corporate expenses decreased by $9.2 million, or 26.3%, to $25.7 million for the six months ended September 30, 2011

34
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

from $34.8 million for the six months ended September 30, 2010. Corporate expenses for fiscal 2011 included $18.7 million of non-recurring acquisition and integration expenses associated with the acquisition of Vought, as compared to $1.6 million in integration expenses for the six months ended September 30, 2011. This decrease in corporate expenses was partially offset by increased compensation and benefits ($2.8 million) due to increased corporate head count as compared to the prior year period and an increase of $3.5 million of start up costs related to the Mexican facility compared to the prior year period. The costs of our Mexican facility are expected to continue to increase versus the prior year as it is in the early stages of production.

Interest expense and other increased by $8.9 million, or 25.2%, to $44.1 million for the six months ended September 30, 2011 compared to $35.3 million for the prior year period. Interest expense and other increased due to the write-off of $7.7 million of unamortized discounts and deferred financing fees associated with the extinguishment of the term loan credit agreement (the “Term Loan”) in April 2011, as well as higher average debt outstanding during the six months ended September 30, 2011 as compared to the six months ended September 30, 2010, including the Senior Notes due 2018 (the “2018 Notes”), along with higher interest rates on our revolving credit facility.

The effective income tax rate for the six months ended September 30, 2011 was 35.5% compared to 36.2% for the six months ended September 30, 2010. The fiscal 2011 effective income tax rate is impacted by the $18.7 million in acquisition-related expenses, which were only partially deductible for tax purposes, as well as the absence of the Research and Development tax credit, which expired December 31, 2009. For the fiscal year ending March 31, 2012, the Company expects its effective tax rate to be approximately 35.5%, reflecting the expiration of the research and development tax credit as of December 31, 2011 and the absence of the Domestic Production Deduction due to the Company's net operating loss position.
Loss from discontinued operations before income taxes was $1.2 million for the six months ended September 30, 2011 compared with a loss from discontinued operations before income taxes of $0.8 million for the six months ended September 30, 2010. The benefit for income taxes was $0.4 million for the six months ended September 30, 2011 compared to a benefit of $0.3 million in the prior year period. In July 2011, the Company completed the sale of Triumph Precision Castings Co. for proceeds of $3.9 million, resulting in no gain or loss on the disposition.

Business Segment Performance – Six months ended September 30, 2011 compared to six months ended September 30, 2010.

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

35
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Six Months Ended September 30,
Aerostructures
2011
 
2010
Commercial aerospace
38.5
%
 
32.2
%
Military
23.7
%
 
26.0
%
Business Jets
11.6
%
 
8.8
%
Regional
0.6
%
 
0.7
%
Non-aviation
0.8
%
 
1.2
%
Total Aerostructures net sales
75.2
%
 
68.9
%
Aerospace Systems
 
 
 
Commercial aerospace
5.9
%
 
6.6
%
Military
7.8
%
 
10.4
%
Business Jets
0.8
%
 
0.9
%
Regional
0.6
%
 
0.7
%
Non-aviation
1.1
%
 
1.5
%
Total Aerospace Systems net sales
16.2
%
 
20.1
%
Aftermarket Services
 
 
 
Commercial aerospace
6.8
%
 
8.0
%
Military
0.7
%
 
1.5
%
Business Jets
0.4
%
 
0.5
%
Regional
0.2
%
 
0.3
%
Non-aviation
0.5
%
 
0.7
%
Total Aftermarket Services net sales
8.6
%
 
11.0
%
Total Consolidated net sales
100.0
%
 
100.0
%

The increase in our percentage of net sales of commercial aerospace and business jets was attributable to the acquisition of Vought, while the regional jet end-market continues to decline in the current economy. We continue to experience an increase in the mix of the commercial aerospace end-market. We recently have experienced slight growth in the business jet end-market.

 
Six Months Ended September 30,
 
 
 
% of Total
Sales
 
2011
 
2010
 
% Change
 
2011
 
2010
 
(in thousands)
 
 
 
 
 
 
NET SALES
 
 
 
 
 
 
 
 
 
Aerostructures
$
1,231,283

 
$
809,035

 
52.2
%
 
75.3
 %
 
68.8
 %
Aerospace Systems
266,785

 
240,933

 
10.7
%
 
16.3
 %
 
20.5
 %
Aftermarket Services
140,915

 
128,483

 
9.7
%
 
8.6
 %
 
10.9
 %
Elimination of inter-segment sales
(3,392
)
 
(3,042
)
 
11.5
%
 
(0.2
)%
 
(0.2
)%
Total Net Sales
$
1,635,591

 
$
1,175,409

 
39.2
%
 
100.0
 %
 
100.0
 %


36
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Six Months Ended September 30,
 
 
 
% of Segment
Sales
 
2011
 
2010
 
% Change
 
2011
 
2010
 
(in thousands)
 
 
 
 
 
 
SEGMENT OPERATING INCOME
 
 
 
 
 
 
 
 
 
Aerostructures
$
180,463

 
$
106,030

 
70.2
 %
 
14.7
%
 
13.1
%
Aerospace Systems
45,061

 
35,497

 
26.9
 %
 
16.9
%
 
14.7
%
Aftermarket Services
13,976

 
12,284

 
13.8
 %
 
9.9
%
 
9.6
%
Corporate
(25,664
)
 
(34,844
)
 
(26.3
)%
 
n/a

 
n/a

Total Operating Income
$
213,836

 
$
118,967

 
79.7
 %
 
13.1
%
 
10.1
%

 
Six Months Ended September 30,
 
 
 
% of Segment
Sales
 
2011
 
2010
 
% Change
 
2011
 
2010
 
(in thousands)
 
 
 
 
 
 
EBITDA
 
 
 
 
 
 
 
 
 
Aerostructures
$
210,735

 
$
123,267

 
71.0
 %
 
17.1
%
 
15.2
%
Aerospace Systems
53,728

 
43,900

 
22.4
 %
 
20.1
%
 
18.2
%
Aftermarket Services
18,747

 
18,370

 
2.1
 %
 
13.3
%
 
14.3
%
Corporate
(23,951
)
 
(34,274
)
 
(30.1
)%
 
n/a

 
n/a

 
$
259,259

 
$
151,263

 
71.4
 %
 
15.9
%
 
12.9
%

Aerostructures: The Aerostructures segment net sales increased by $422.2 million, or 52.2%, to $1.23 billion for the six months ended September 30, 2011 from $809.0 million for the six months ended September 30, 2010. The increase was primarily due to the acquisition of Vought ($400.5 million), in addition to an increase in organic sales of $21.7 million. The current year period was negatively impacted by Boeing's delay with the 747, along with declines in non-recurring work related to the 747 program. The prior year period was negatively impacted by the decreased demand for business jets and regional jets as well as commercial rate reductions (particularly in the 777 program).

Aerostructures segment operating income increased by $74.4 million, or 70.2%, to $180.5 million for the six months ended September 30, 2011 from $106.0 million for the six months ended September 30, 2010. Operating income increased due in part to the increase in organic sales, contributions from the acquisition of Vought ($70.3 million) and improved gross margins on organic sales ($1.5 million).

Aerostructures segment operating income as a percentage of segment sales increased to 14.7% for the six months ended September 30, 2011 as compared to 13.1% for the six months ended September 30, 2010, due to the impact of cumulative catch-up adjustments on long-term construction contracts and lower pension and other postretirement benefit expenses discussed above, which also caused the improvements in EBITDA margin.

Aerospace Systems: The Aerospace Systems segment net sales increased by $25.9 million, or 10.7%, to $266.8 million for the six months ended September 30, 2011 from $240.9 million for the six months ended September 30, 2010. Net sales increased due to continued improvements in the broader market and benefits from large outsourcing programs.
 
Aerospace Systems segment operating income increased by $9.6 million, or 26.9%, to $45.1 million for the six months ended September 30, 2011 from $35.5 million for the six months ended September 30, 2010. Operating income increased due to increases in gross margin ($5.0 million) due to sales mix and increased efficiencies in production associated with higher volume of work and increased sales ($8.3 million), offset by increased legal fees ($1.9 million) and compensation and benefits ($0.6 million). These same factors contributed to the increase in EBITDA year over year.

Aerospace Systems segment operating income as a percentage of segment sales increased to 16.9% for the six months ended September 30, 2011 as compared to 14.7% for the six months ended September 30, 2010, due to the improvements in gross margin noted above. These same factors contributed to the increase in EBITDA margin year over year.


37
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

Aftermarket Services: The Aftermarket Services segment net sales increased by $12.4 million, or 9.7%, to $140.9 million for the six months ended September 30, 2011 from $128.5 million for the six months ended September 30, 2010. Net sales increased due to continued improvement in global commercial air traffic and decreases in airline inventory de-stocking. We do not expect segment net sales to continue to experience growth at the recent growth rates.

Aftermarket Services segment operating income increased by $1.7 million, or 13.8%, to $14.0 million for the six months ended September 30, 2011 from $12.3 million for the six months ended September 30, 2010. Operating income increased primarily due to increased sales volume as described above, as well as a slight increase in gross margin as a result of increased efficiencies in production associated with the higher volume of work. These same factors contributed to the increase in EBITDA year over year; however, the growth in EBITDA was less than the growth in operating income, as depreciation and amortization was lower for the six months ended September 30, 2011 versus the six months ended September 30, 2010.

Aftermarket Services segment operating income as a percentage of segment sales increased to 9.9% for the six months ended September 30, 2011 as compared with 9.6% for the six months ended September 30, 2010, due to the increase in sales volume and related efficiencies noted above. Despite the operating margin improvement, EBITDA margin declined due to lower depreciation and amortization expenses in the current year, as certain intangibles became fully amortized in a prior period.

Liquidity and Capital Resources

Our working capital needs are generally funded through cash flows from operations and borrowings under our credit and leasing arrangements. During the six months ended September 30, 2011, we generated approximately $61.1 million of cash flows in operating activities, used approximately $7.3 million in investing activities and used approximately $58.1 million in financing activities.

Cash flows from operations for the six months ended September 30, 2011 decreased $56.6 million, or 48.1%, from the six months ended September 30, 2010. Our cash flows from operations decreased due to a decrease of $193.6 million in working capital changes, including increased trade and other receivables of $73.3 million due primarily to a $51.0 million contractual payment not being received until October 2011, and increases in inventories of $25.3 million due to increased supply as well as declines in unliquidated progress payments, excess funding above expense of our pension and other postretirement benefits plans of $18.1 million.

These decreases were offset by increases in net income of $55.8 million and an increase of $79.8 million in noncash charges such as depreciation and amortization associated with the acquisition of Vought, the write-off of unamortized discounts and deferred financing fees on the extinguishment of the Term Loan and the reduction in income taxes paid due to the utilization of the net operating loss carryforward acquired in the acquisition of Vought.

Cash flows used in investing activities for the six months ended September 30, 2011 decreased $366.1 million from the six months ended September 30, 2010. Our cash flows used in investing activities decreased as the prior year period included the acquisition of Vought ($333.1 million). Cash flows used in investing activties for the six months ended September 30, 2011, included $20.0 million in funds received from escrow on the acquisition of Vought for the settlement of opening balance sheet liabilities. Cash flows from financing activities for the six months ended September 30, 2011 decreased $213.7 million from the six months ended September 30, 2010, as the prior year period included the proceeds obtained in order to finance the acquisition of Vought. Cash flows from financing activities for the six months ended September 30, 2011 included the extinguishment of the term loan credit agreement (the "Term Loan") ($350.0 million), the redemption of certain Convertible Notes ($28.8 million), and the payment of contingent earnouts ($4.8 million).

As of September 30, 2011, $424.4 million was available under our revolving credit facility (the “Credit Facility”).  On September 30, 2011, an aggregate amount of approximately $391.6 million was outstanding under the Credit Facility, all of which was accruing interest at LIBOR plus applicable basis points totaling 2.25% per annum. Amounts repaid under the Credit Facility may be reborrowed.

On April 5, 2011, the Company amended the Credit Facility with its lenders to (i) increase the availability under the Credit Facility to $850.0 million, with a $50.0 million accordion feature, from $535.0 million, (ii) extend the maturity date to April 5, 2016 and (iii) amend certain other terms and covenants. The amendment results in a more favorable pricing grid and a more streamlined package of covenants and restrictions. Using the availability under the Credit Facility, the Company immediately extinguished its Term Loan at face value of $350.0 million, plus accrued interest. The Company recorded a pretax loss of

38
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

approximately $7.7 million associated with these transactions during the first quarter of fiscal 2012 due to the write-off of unamortized discounts and deferred financing fees on the Term Loan.

At September 30, 2011, there was $130.0 million outstanding under our receivable securitization facility (the “Securitization Facility”). Interest rates on the Securitization Facility are based on prevailing market rates for short-term commercial paper, plus a program fee and a commitment fee.

In June 2010, the Company issued the Senior Notes due 2018 (the "2018 Notes") for $350.0 million in principal amount.  The 2018 Notes were sold at 99.27% of principal amount for net proceeds of $347.5 million, and have an effective interest yield of 8.75%. Interest on the 2018 Notes is payable semiannually in cash in arrears on January 15 and May 15 of each year. We used the net proceeds as partial consideration of the acquisition of Vought. In connection with the issuance of the 2018 Notes, the Company incurred approximately $7.3 million of costs, which were deferred and are being amortized on the effective interest method over the term of the notes.

In November 2009, the Company issued the Senior Subordinated Notes Due 2017 (the "2017 Notes") for $175.0 million in principal amount.  The 2017 Notes were sold at 98.56% of principal amount for net proceeds of $172.5 million, and have an effective interest yield of 8.25%. Interest on the 2017 Notes is payable semiannually in cash in arrears on May 15 and November 15 of each year. We used the net proceeds for general corporate purposes, which included debt reduction, including repayment of amounts outstanding under the Credit Facility, without any permanent reduction of the commitments thereunder. In connection with the issuance of the 2017 Notes, the Company incurred approximately $4.4 million of costs, which were deferred and are being amortized on the effective interest method over the term of the notes.

In September 2006, the Company issued convertible senior subordinated notes (the “Convertible Notes”). The Convertible Notes are direct, unsecured, senior subordinated obligations of the Company, and rank (i) junior in right of payment to all of the Company’s existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness. The Convertible Notes mature on October 1, 2026, unless earlier redeemed, repurchased or converted. The Company may redeem the Convertible Notes for cash, either in whole or in part, at any time on or after October 6, 2011 at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including the date of redemption. During the six months ended September 30, 2011, the Company settled the conversion of $28.8 million in principal value of the Convertible Notes, as requested by the respective holders, with the principal settled in cash and the conversion benefit settled through the issuance of 379,838 shares. In September 2011, the Company received notice of conversion from holders of $21.6 million in principal value of the Convertible Notes. These conversions were settled in the third quarter of fiscal 2012 with the principal settled in cash and the conversion benefit settled through the issuance of approximately 387,000 shares. In October 2011, the Company delivered a notice to holders of the Convertible Notes to the effect that, for at least 20 trading days during the 30 consecutive trading days preceding September 30, 2011, the closing price of the Company's common stock was greater than or equal to 130% of the conversion price of such notes on the last trading day. Under the terms of the Convertible Notes, the increase in the Company's stock price triggered a provision, which gave holders of the Convertible Notes a put option through December 31, 2011.
Capital expenditures were approximately $33.9 million for the six months ended September 30, 2011, primarily for manufacturing machinery and equipment. We funded these expenditures through cash generated from operations. We expect capital expenditures and investments of approximately $120.0 million to $135.0 million for our fiscal year ending March 31, 2012. The expenditures are expected to be used mainly to expand capacity or replace old equipment at several facilities.

The expected future cash flows for the next five years for long-term debt, leases and other obligations are as follows:


39
Table Of Contents
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Payments Due by Period
(dollars in thousands)
Contractual Obligations
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
More than 5
years
Debt principal (1)
$
1,268,871

 
$
165,452

 
$
154,624

 
$
409,496

 
$
539,299

Debt interest (2)
306,420

 
51,899

 
93,610

 
90,769

 
70,142

Operating leases
96,162

 
23,377

 
41,587

 
11,432

 
19,766

Contingent payments (3)
29,125

 
18,771

 
10,354

 
—

 
—

Purchase obligations
810,165

 
696,571

 
113,425

 
166

 
3

Total
$
2,510,743

 
$
956,070

 
$
413,600

 
$
511,863

 
$
629,210

_________________________________________
(1) Included in the Company’s balance sheet at September 30, 2011, plus discounts on the 2017 Notes and the 2018 Notes of $2.1 million and $2.3 million, respectively, being amortized to expense through November 2017 and July 2018, respectively.
(2) Includes fixed-rate interest only.
(3) Includes unrecorded contingent payments in connection with the fiscal 2009 acquisitions.

The above table excludes unrecognized tax benefits of $7.1 million as of September 30, 2011 since we cannot predict with reasonable certainty the timing of cash settlements with the respective taxing authorities.

The table also excludes our pension benefit obligations. We made contributions to our defined benefit pension plans of $135.1 million and $1.7 million in fiscal 2011 and 2010, respectively. We expect to make total pension and postretirement plan contributions of $154.3 million to our defined benefit plans during fiscal 2012. The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974, the Pension Funding Equity Act of 2004 and the Pension Protection Act of 2006. On June 25, 2010, the Preservation of Access to Care for Medical Beneficiaries and Pension Relief Act of 2010 (the “Relief Act”), was signed into law. The Relief Act provides for temporary, targeted funding relief (subject to certain terms and conditions) for single employer and multiemployer pension plans that suffered significant losses in asset value due to the steep market slide in 2008. The Relief Act could have a significant impact on plan contributions beyond fiscal 2012.

We believe that cash generated by operations and borrowings under the Credit Facility will be sufficient to meet anticipated cash requirements for our current operations for the foreseeable future. However, we have a stated policy to grow through acquisitions and are continuously evaluating various acquisition opportunities. As a result, we currently are pursuing the potential purchase of a number of candidates. In the event that more than one of these transactions are successfully consummated, the availability under the Credit Facility might be fully utilized and additional funding sources may be needed. There can be no assurance that such funding sources will be available to us on terms favorable to us, if at all.

Critical Accounting Policies

The Company's critical accounting policies are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and notes accompanying the consolidated financial statements that appear in the Annual Report on Form 10-K for the fiscal year ended March 31, 2011. Except as otherwise disclosed in the financial statements and accompanying notes included in this report, there were no material changes subsequent to the filing of the Annual Report on Form 10-K for the fiscal year ended March 31, 2011 in the Company's critical accounting policies or in the assumptions or estimates used to prepare the financial information appearing in this report.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to our future operations and prospects, including statements that are based on current projections and expectations about the markets in which we operate, and our beliefs concerning future performance and capital requirements based upon current available information. Such statements are based on our beliefs as well as assumptions made by and information currently available to us. When used in this document, words like “may,” “might,” “will,” “expect,” “anticipate,” “believe,” “potential,” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from our current expectations. For example, there can be no assurance that additional capital will not be required or that additional capital, if required, will be available on reasonable terms, if at all, at such times and in such amounts as may be

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Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

needed by us. In addition to these factors, among other factors that could cause actual results to differ materially are uncertainties relating to the integration of acquired businesses, general economic conditions affecting our business, dependence of certain of our businesses on certain key customers as well as competitive factors relating to the aviation industry. For a more detailed discussion of these and other factors affecting us, see the risk factors described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, filed with the SEC in May 2011.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

For information regarding our exposure to certain market risks, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011. There has been no material change in this information during the period covered by this report.


Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2011, we completed an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2011.

(b) Changes in internal control over financial reporting.

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


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TRIUMPH GROUP, INC.

Part II. Other Information


Item 6. Exhibits.

 
Exhibit 31.1
 
Certification by Chairman and CEO Pursuant to Rule 13a-14(a)/15d-14(a). *
 
Exhibit 31.2
 
Certification by Executive Vice President, CFO and Treasurer Pursuant to Rule 13a-14(a)/15d-14(a). *
 
Exhibit 32.1
 
Certification of Periodic Report by Chairman and CEO Furnished Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 Sarbanes-Oxley Act of 2002.*
 
Exhibit 32.2
 
Certification of Periodic Report by Executive Vice President, CFO and Treasurer Furnished Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 Sarbanes-Oxley Act of 2002.*
 
Exhibit 101
 
The following financial information from Triumph Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2011 and March 31, 2011; (ii) Consolidated Statements of Income for the three and six months ended September 30, 2011 and 2010; (iii) Consolidated Statements of Cash Flows for the six months ended September 30, 2011 and 2010; (iv) Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2011 and 2010; and (v) Notes to the Consolidated Financial Statements.*
__________________________    
*
Filed herewith.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Triumph Group, Inc.
 
 
 
 
 
(Registrant)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ Richard C. Ill
 
November 4, 2011
 
 
Richard C. Ill, Chairman & CEO
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ M. David Kornblatt
 
November 4, 2011
 
 
M. David Kornblatt, Executive Vice President & CFO
 
 
 
 
 
(Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ Kevin E. Kindig
 
November 4, 2011
 
 
Kevin E. Kindig, Vice President and Controller
 
 
 
 
 
(Principal Accounting Officer)
 
 
 
 


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EXHIBIT INDEX
Exhibit
Number
Description
31.1
Certification by Chairman and Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). *
31.2
Certification by Executive Vice President, Chief Financial Officer and Treasurer Pursuant to Rule 13a-14(a)/15d-14(a). *
32.1
Certification of Periodic Report by Chairman and Chief Executive Officer Furnished Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 Sarbanes-Oxley Act of 2002. *
32.2
Certification of Periodic Report by Executive Vice President, Chief Financial Officer and Treasurer Furnished Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 Sarbanes-Oxley Act of 2002. *
101
The following financial information from Triumph Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2011 and March 31, 2011; (ii) Consolidated Statements of Income for the three and six months ended September 30, 2011 and 2010; (iii) Consolidated Statements of Cash Flows for the six months ended September 20, 2011 and 2010; (iv) Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2011 and 2010; and (v) Notes to the Consolidated Financial Statements. *
__________________________________
*
Filed herewith.