UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended March 31, 2006
		or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                      to

Commission File No. 1-12235

Triumph Group, Inc.

(Exact name of registrant as specified in its charter)

 

1550 Liberty Ridge Drive, Suite 100, Wayne, Pennsylvania  19087

(Address of principal executive offices, including zip code)

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

Securities registered pursuant to Section 12(b) of the Act:

 

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x   No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes  o   No  x 

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one) Large accelerated filer o Accelerated filer  x  Non-accelerated filer o.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes  o  No  x 

As of September 30, 2005, the aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $572,071,153. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the New York Stock Exchange on September 30, 2005. For purposes of making this calculation only, the Registrant has defined affiliates as including all directors and executive officers.

The number of outstanding shares of the Registrant’s Common Stock, par value $.001 per share, on May 31, 2006 was 16,129,905.

Documents Incorporated by Reference

Portions of the following document are incorporated herein by reference:

The Proxy Statement of Triumph Group, Inc. in connection with our 2006 Annual Meeting of Stockholders is incorporated in part in Part III hereof, as specified herein.

Table of Contents

 

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PART I

Item 1.                 Business

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 management’s beliefs concerning future performance and capital requirements based upon current available information. Actual results could differ materially from management’s current expectations. Additional capital may be required and, if so, may not be available on reasonable terms, if at all, at the times and in the amounts we need. In addition to these factors and others described elsewhere in this report, other factors that could cause actual results to differ materially include competitive factors relating to the aerospace industry, dependence of some of our businesses on key customers, requirements of capital, product liabilities in excess of insurance, uncertainties relating to the integration of acquired businesses, general economic conditions affecting our business segment, technological developments, limited availability of raw materials or skilled personnel, changes in governmental regulation and oversight and the continuing impact of the September 11, 2001 attacks and international hostilities and terrorism. For a more detailed discussion of these and other factors affecting us, see the Risk Factors described in Item 1 of this Annual Report on Form 10-K. We do not undertake any obligation to revise these forward-looking statements to reflect future events.

General

Triumph Group, Inc. was incorporated in 1993 in Delaware. Our companies design, engineer, manufacture, repair, overhaul and distribute aircraft components, such as hydraulic, mechanical and electromechanical control systems, aircraft and engine accessories, structural components and assemblies, non-structural composite components, auxiliary power units, or APUs, avionics and aircraft instruments. We serve a broad spectrum of the aerospace industry, including original equipment manufacturers, or OEMs, of commercial, regional, business and military aircraft and components, as well as commercial regional airlines and air cargo carriers.

Products and Services

We offer a variety of products and services to the aerospace industry through two groups of operating businesses.

Our Aerospace Systems Group consists of companies that service the full spectrum of aerospace customers, which include aerospace OEMs and the top-tier manufacturers who supply them and airlines, air cargo carriers, and domestic and foreign militaries. This group utilizes its capabilities to design, engineer and build complete mechanical, electromechanical and hydraulic systems, while continuing to broaden the scope of detailed parts and assemblies that we supply to the aerospace market. Most of our companies’ designs are proprietary. Customers typically return such systems to us for repairs and overhauls and spare parts. The systems that companies within this group design, engineer, build and repair include:

·       Main engine gear box assemblies

·       High lift actuation

·       Hydraulic systems

·       Landing gear actuation systems

·       Primary and secondary flight control systems

·       Thermal management systems

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This group also includes companies performing complex manufacturing, machining and forming processes for a full range of structural components, as well as complete assemblies and subassemblies such as:

·       Wing spars and stringers

·       Stretch-formed leading edges and fuselage skins

·       Formed structural sheet metal components

·       Monolithic floors, bulkheads and frames

·       Floor beams

·       Landing gear components and assemblies

·       Composite floor panels, environmental control system ducting and non-structural composite flight deck and other interior components

·       Bonded components

Our Aftermarket Services Group serves a diverse group of customers which includes airlines, air cargo carriers, domestic and foreign militaries and third-party repair and overhaul providers. This group operates the world’s largest independent APU repair and overhaul business and endeavors to be the vendor of choice for airborne structures and component repair and overhaul to our customers as they continue to consolidate vendors. We will also continue to develop Federal Aviation Administration, or FAA, approved Designated Engineering Representative, or DER, and Special Federal Aviation Regulation 36, or SFAR 36, proprietary repair procedures for the components we repair and overhaul. Companies in our aftermarket services group repair and overhaul various instruments and components for the aviation industry including:

·       APUs

·       Nacelles, thrust reversers and flight control surfaces

·       Constant speed drives, integrated drive generators and air-cycle machines

·       Cockpit instrumentation

·       Interior sidewalls, ceiling panels and overhead bins

·       Ground support equipment

This group also specializes in the manufacturing of precision investment castings of super alloys, titanium and aluminum alloys utilizing Equiax, single crystal and directionally solidified casting processes primarily for aerospace engine OEMs and third-party engine repair and overhaul providers. In addition this group provides a full range of services including hot isostatic pressing, heat treating, machining and thermal coating.

The components that these companies manufacture, process, repair and overhaul for the aerospace gas turbine industry include:

·       Airfoil castings

·       Hot section components

·        Gas turbine engine stators

·        Blades and vanes

·        Engine seals

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Proprietary Rights

We benefit from our proprietary rights relating to designs, engineering, manufacturing processes and repair and overhaul procedures. For some products, our unique manufacturing capabilities are required by the customer’s specifications or designs, thereby necessitating reliance on us for the production of such specially designed products. We also hold two SFAR 36 certifications that permit us to develop proprietary repair procedures to be used in some repair and overhaul processes.

We view our name and mark as significant to our business as a whole. Our products are protected by a portfolio of patents, trademarks, licenses or other forms of intellectual property that expire at various dates in the future. We develop and acquire new intellectual property on an ongoing basis and consider all of our intellectual property to be valuable. However, based on the broad scope of our product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operation or our financial position or our business segments. Our policy is to file applications and obtain patents for our new products as appropriate, including product modifications and improvements. While patents generally expire 20 years after the patent application filing date, new patents are issued to us on a regular basis.

In our overhaul and repair businesses, OEMs of equipment that we maintain for our customers are increasingly including language in repair manuals relating to their equipment asserting broad claims of proprietary rights to the contents of the manuals used in our operations. There can be no assurance that OEMs will not try to enforce such claims including the possible use of legal proceedings. In that event, there can be no assurance that such actions will not be successful. We believe that our use of manufacture and repair manuals is lawful.

Raw Materials and Replacement Parts

We purchase raw materials, primarily consisting of extrusions, forgings, castings, aluminum and titanium sheets and shapes, from various vendors. We also purchase replacement parts which are utilized in our various repair and overhaul operations. We believe that the availability of raw materials to us is adequate to support our operations.

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Operating Locations

We conduct our business through operating companies and divisions. The following chart describes the operations, customer base and certain other information with respect to our principal operating locations at June 1, 2006:

Operation

Subsidiary

Operating Location

Business

Type of Customers

Number of Employees

TRIUMPH AEROSPACE SYSTEMS GROUP

Construction Brevetees d’Alfortville

Construction Brevetees d’Alfortville SAS

Alfortville, France

Manufactures mechanical ball bearing control assemblies for the aerospace, ground transportation, defense and marine industries.

Commercial and Military OEMs, Ground Transportation and Marine OEMs.

56

Triumph Actuation Systems—Clemmons (1) Triumph Actuation Systems—Freeport (1)

Triumph Actuation Systems, LLC (formerly Frisby Aerospace, LLC)

Clemmons, NC Freeport, NY

Designs, manufactures and repairs complex hydraulic and hydromechanical aircraft components and systems, such as variable displacement pumps and motors, linear actuators and valves.

Commercial, General Aviation, and Military OEMs; Commercial Airlines, General Aviation and Military Aftermarket.

217

Triumph Actuation Systems— Bloomfield (1) Triumph Actuation Systems—East Lyme Triumph Actuation Systems—Bethel

Triumph Actuation Systems—Connecticut, LLC (formerly HTD Aerospace, LLC)

Bloomfield, CT  East Lyme, CT Bethel, CT

Designs, manufactures and repairs complex hydraulic, hydromechanical and mechanical aircraft components and systems, such as nose wheel steering motors, helicopter blade lag dampers, mechanical hold open rods, coupling and latching devices, as well as mechanical and electromechanical actuation products.

Commercial, General Aviation, and Military OEMs; Military Aftermarket.

132

Triumph Actuation Systems— Valencia (1)

Triumph Actuation Systems—Valencia, Inc. (formerly EFS Aerospace, Inc.)

Valencia, CA

Designs, manufactures and repairs complex hydraulic and hydromechanical aircraft components and systems, such as accumulators, actuators and complex valve packages.

Commercial, General Aviation, and Military OEMs.

164

Triumph Aerospace Systems—Seattle (formerly Triumph-Seattle)

Triumph Actuation Systems—Connecticut, LLC

Seattle, WA

System engineering and integration for landing gear, hydraulic, deployment, cargo door and electro-mechanical type systems. Capabilities include design, analysis and testing to support these types of systems and components.

Commercial, General Aviation and Military OEMs.

17

 

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Operation

Subsidiary

Operating Location

Business

Type of Customers

Number of Employees

Triumph Aerospace Systems—Wichita (1)

Triumph Aerospace Systems—Wichita, Inc. (formerly Lee Aerospace, Inc.)

Wichita, KS

Manufactures, repairs and installs aircraft windshields, side cockpit windows and cabin windows and manufactures control wheels, wings and fuselage sub-assemblies for the general aviation and business jet markets.

Commercial and General Aviation OEMs; General Aviation Aftermarket.

109

Triumph Composite Systems

Triumph Composite Systems, Inc.

Spokane, WA

Manufactures interior non-structural composites for the aviation industry, including air control system ducting, floor panels, aisle stands and glareshields.

Commercial, General Aviation, and Military OEMs; Commercial Aftermarket.

383

Triumph Controls—North Wales (1) Triumph Controls—Shelbyville

Triumph Controls, LLC

North Wales, PA Shelbyville, IN

Designs and manufactures mechanical and electromechanical control systems.

Commercial, General Aviation and Military OEMs and Aftermarket.

164

Triumph Fabrications—Fort Worth (1)

Triumph Fabrication—Fort Worth, Inc. (formerly Aerospace Technologies, Inc.)

Fort Worth, TX

Manufactures and repairs metallic/composite bonded components and assemblies.

Commercial and Military OEMs and Aftermarket.

124

Triumph Fabrications—Hot Springs

Triumph Fabrications—Hot Springs, Inc. (formerly Chem-Fab Corporation)

Hot Springs, AR

Produces complex sheet metal parts and sub-assemblies and performs chem-milling and other metal finishing processes.

Commercial, General Aviation, and Military OEMs.

343

Triumph Fabrications— Shelbyville (formerly K-T Corporation)

The Triumph Group Operations, Inc.

Shelbyville, IN

Produces aircraft fuselage skins, leading edges and web assemblies through the stretch forming of sheet, extrusion, rolled shape and light plate metals.

Commercial, General Aviation and Military OEMs.

132

 

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Operation		Subsidiary		Operating Location		Business		Type of Customers		Number of Employees
Triumph Fabrications—San Diego(1) Triumph Fabrications—Phoenix (3)		Triumph Fabrications— San Diego, Inc. (formerly Triumph Components—San Diego, Inc.) Triumph Engineered Solutions, Inc.		El Cajon, CA Chandler, AZ		Produces complex welded and riveted sheet metal assemblies for aerospace applications. Components include exhaust systems, ducting, doors, panels, control surfaces, and engine components.		Commercial, General Aviation and Military OEMs.		227
Triumph Gear Systems—Park City  (1) Triumph Gear Systems—Macomb (1)		Triumph Gear Systems, Inc. Triumph Gear Systems—Macomb, Inc.		Park City, UT Macomb, MI		Manufactures complex geared assemblies, highlift actuation systems, gears and other components, servicing the aerospace industry.		Commercial and Military OEMs and Aftermarket.		368
Triumph Northwest (formerly Northwest Industries)		The Triumph Group Operations, Inc.		Albany, OR		Machines and fabricates refractory, reactive, heat and corrosion-resistant precision products.		Military, Medical and Electronic OEMs.		33
Triumph Precision (formerly LA Gauge)		The Triumph Group Operations, Inc.		Sun Valley, CA		Manufactures ultra-precision machined components and assemblies to the aviation, defense, space and commercial industries.		Military and Medical OEMs.		41
Triumph Processing		Triumph Processing, Inc. (formerly DV Industries)		Lynwood, CA		Provides high-quality finishing services to the aerospace, military and commercial industries.		Commercial, General Aviation, and Military OEMs.		106
Triumph Structures—Kansas City		Triumph Structures—Kansas City, Inc. (formerly Nu-Tech Industries)		Grandview, MO		Manufactures precision machined parts and mechanical assemblies for the aviation, aerospace and defense industries.		Commercial and Military OEMs.		128
Triumph Structures—Los Angeles		Triumph Structures—Los Angeles, Inc.		Chatsworth, CA City of Industry, CA Walnut, CA		Manufactures long structural components, such as stringers, cords, floor beams and spars for the aviation industry. Machines, welds and assembles large complex precision structural components.		Commercial, General Aviation and Military OEMs.		336
Triumph Structures—Wichita		Triumph Structures—Wichita, Inc.		Wichita, KS		Specializing in complex, high speed monolithic precision machining, turning, sub-assemblies, and sheet metal fabrication, serving domestic and international aerospace customers.		Commercial and Military OEMs.		141
Triumph Thermal Systems (1)		Triumph Thermal Systems, Inc.		Forest, OH		Designs, manufactures and repairs aircraft thermal transfer components and systems.		Commercial, General Aviation and Military OEMs.		146

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Operation		Subsidiary		Operating Location		Business		Type of Customers		Number of Employees
TRIUMPH AFTERMARKET SERVICES GROUP
Triumph Accessory Services (1)(2)		The Triumph Group Operations, Inc.		Wellington, KS		Provides maintenance services for aircraft heavy accessories and airborne electrical power generation devices, including constant speed drives, integrated drive generators, air cycle machines and electrical generators.		Commercial, General Aviation and Military Aftermarket.		92
Triumph Air Repair (1)(2)		The Triumph Group Operations, Inc.		Phoenix, AZ		Repairs and overhauls APUs and related accessories.		Commercial, General Aviation and Military Aftermarket.		219
Triumph Airborne Structures (1)		Triumph Airborne Structures, Inc.		Hot Springs, AR		Repairs and overhauls thrust reversers, nacelle components, flight control surfaces and other aerostructures.		Commercial Aftermarket.		124
Triumph Aviation Services—Asia		Triumph Aviation Services Asia Ltd.		Bangkok, Thailand		Designs, engineers, manufactures, repairs and overhauls complex aircraft operational components, such as auxiliary power units (APU), nacelles, constant speed drives, thrust reversers and related accessories.		Commercial Aftermarket.		3
Triumph Engines—Tempe (1) (formerly AMTI)		Triumph Engineered Solutions, Inc.		Tempe, AZ Chandler, AZ		Designs, engineers, manufactures, repairs and overhauls aftermarket aerospace gas turbine engine components and provides repair services and aftermarket parts and services to aircraft operators, maintenance providers, and third party overhaul facilities.		Commercial, General Aviation and Military Aftermarket.		124
Triumph Instruments—Burbank (1) (formerly Triumph Instruments & Avionics) Triumph Instruments—Teterboro (1) Triumph Instruments—Ft. Lauderdale (1) Triumph Instruments—Austin (1)		The Triumph Group Operations, Inc. Triumph Instruments—Tetterboro, Inc. (formerly Furst Aircraft, Inc.) Triumph Instruments, Inc. (formerly JDC Company)		Glendale, CA Tetterboro, NJ Ft. Lauderdale, FL Austin, TX		Repairs and overhauls aircraft instruments and avionics and serves as an authorized stocking distributor for a variety of aircraft components.		Commercial, General Aviation and Military Aftermarket.		153

 

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Operation		Subsidiary		Operating Location		Business		Type of Customers		Number of Employees
Triumph Interiors—Pittsburgh (1) Triumph Interiors—Dallas (1) Triumph Interiors—Portland (1) Triumph Interiors—Ireland (1)		Triumph Interiors, LLC Triumph Interiors Limited		Pittsburgh, PA Dallas, TX Portland, OR Shannon, Ireland		Refurbishes and repairs aircraft interiors such as sidewalls, ceiling panels and overhead storage bins and manufactures a full line of PMA interior parts.		Commercial Aftermarket.		122
Triumph Logistics—Phoenix (formerly Triumph Aftermarket Services Division)		The Triumph Group Operations, Inc.		Phoenix, AZ		Provides distribution, exchange and lease programs for APUs, APU components and components supported by Triumph Group Companies.		Commercial, General Aviation and Military Aftermarket.		22
Triumph Logistics—UK		Triumph Logistic (UK) Ltd. (formerly Triumph Aftermarket Services (Europe) Ltd.)		Hampshire, England		Provides distribution, exchange and lease programs for APUs, APU components and components supported by Triumph Group Companies.		Commercial Aftermarket.		3
Triumph Precision Castings		Triumph Precision Castings Co.		Chandler, AZ		Applies advanced directionally solidified (polycrystal or single crystal) and Equiax investment casting processes to produce products for the commercial and defense gas turbine market.		Commercial and Military Aftermarket.		77
Triumph San Antonio Support Center		The Triumph Group Operations, Inc.		San Antonio, TX		Repairs and overhauls aircraft ground support equipment used to support maintenance of U.S. military aircraft performed in Texas.		Military Aftermarket.		29

(1)             Designates FAA-certified repair station.

(2)             Designates SFAR 36 certification.

(3)             Triumph Fabrications—Phoenix was formerly part of AMTI (Triumph Engineered Solutions, Inc) and has become part of Triumph Fabrications—San Diego

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Metals Processing and Distribution

Effective as of March 31, 2003, we designated our metals group as a discontinued operation in connection with a realignment of our operating structure. On December 31, 2004, we completed the sale of the metals group assets.

Sales and Marketing

While each of our operating companies maintain responsibility for company specific selling efforts through direct selling, Triumph Group, Inc. has developed two group marketing teams focused on cross-selling our broad capabilities. The focus of these two marketing organizations, one for the Aerospace Systems Group and one for the Aftermarket Services Group, is to sell systems, integrated assemblies and bundled repair and overhaul services, reaching across our operating companies, to our OEM, military, airline and air cargo customers. We also consolidated our selling activities in the Wichita, Kansas area through Triumph Wichita Support Center, which is staffed by sales professionals focused on Boeing IDS, Spirit AeroSystems, Cessna, Bombardier/Learjet and Raytheon. In certain limited cases, we use independent, commission-based representatives to facilitate responsiveness to each customer’s changing needs and current trends in each market/geographic region in which we operate.

All three of these marketing organizations operate as the front-end of the selling process, establishing/maintaining relationships, identifying opportunities to leverage our brand, and providing a certain level of customer service for our customers. Each individual operating company is responsible for its own engineering and technical support, pricing, manufacturing and product support.

A significant portion of our government and defense contracts are awarded on a competitive bidding basis. We generally do not bid or act as the primary contractor, but will typically bid and act as a subcontractor on contracts on a fixed fee basis. We generally sell to our other customers on a fixed fee, negotiated contract or purchase order basis.

Backlog

We have a number of long-term agreements with several of our customers. These agreements generally describe the terms under which the customer may issue purchase orders to buy our products and services during the term of the agreement. These terms typically include a list of the products or repair services customers may purchase, initial pricing, anticipated quantities and, to the extent known, delivery dates. Backlog only includes amounts for which we have actual purchase orders with firm delivery dates or contract requirements generally within the next 24 months, primarily for our OEM customer base. Purchase orders issued by our aftermarket customers are usually completed within a short period of time. As a result, our backlog data relates primarily to the OEM customers. The backlog information set forth below does not include the sales that we expect to generate from long-term agreements associated with long-term aircraft production programs but for which we do not have actual purchase orders with firm delivery dates or for which contract  requirements extend beyond the next 24 months.

Our continuing operations had outstanding purchase orders representing an aggregate invoice price of approximately $888 million, of which $827 million and $61 million relate to the Aerospace Systems group and the Aftermarket Services group, respectively, as of March 31, 2006 and $598 million, of which $569 million and $29 million relate to the Aerospace Systems group, and the Aftermarket Services group, respectively, as of March 31, 2005. We believe that purchase orders totaling approximately $272 million will not be shipped by March 31, 2007.

For the year ended March 31, 2006, the Boeing Company, or Boeing represented approximately 21.7% of the net sales. The loss of such customer could have material adverse impact on us.

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United States and Foreign Operations

Our revenues from our continuing operations to customers in the United States for fiscal years 2006, 2005 and 2004 were approximately $592 million, $531 million and $473 million, respectively. Our revenues from our continuing operations to customers in all foreign countries for fiscal years 2006, 2005 and 2004 were approximately $168 million, $158 million and $135 million, respectively.

As of March 31, 2006, 2005 and 2004, our long-lived assets for our continuing operations located in the United States were approximately $566 million, $569 million and $547 million, respectively. As of March 31, 2006, 2005 and 2004, our long-lived assets for our continuing operations located in the European Union were approximately $7 million, $9 million and $10 million, respectively.

Competition

We compete primarily with the top-tier systems integrators and manufacturers that supply them, some of which are divisions or subsidiaries of other large companies, in the manufacture of aircraft systems components and subassemblies. OEMs are increasingly focusing on assembly activities while outsourcing more manufacturing and repair to third parties, therefore are less of a competitive force than before.

Competition for the repair and overhaul of aviation components comes from three primary sources, some with greater financial and other resources than us:  OEMs, major commercial airlines and other independent repair and overhaul companies. Some major commercial airlines continue to own and operate their own service centers, while others have begun to sell or outsource their repair and overhaul services to other aircraft operators or third parties. Large domestic and foreign airlines that provide repair and overhaul services typically provide these services not only for their own aircraft but for other airlines as well. Most low-cost carriers outsource their overhaul and repair activity to other aircraft operators as third parties. OEMs also maintain service centers which provide repair and overhaul services for the components they manufacture. Other independent service organizations also compete for the repair and overhaul business of other users of aircraft components.

Participants in the aerospace industry compete primarily on the basis of price, breadth of technical capabilities, quality, turnaround time and volume capacity.

Government Regulation and Industry Oversight

The aerospace industry is highly regulated in the United States by the FAA and in other countries by similar agencies. We must be certified by the FAA and, in some cases, by individual OEMs, in order to engineer and service parts and components used in specific aircraft models. If material authorizations or approvals were revoked or suspended, our operations would be adversely affected. New and more stringent government regulations may be adopted, or industry oversight heightened, in the future and these new regulations, if enacted, or any industry oversight, if heightened, may have an adverse impact on us.

We must also satisfy the requirements of our customers, including OEMs, that are subject to FAA regulations, and provide these customers with products and repair services that comply with the government regulations applicable to aircraft components used in commercial flight operations. The FAA regulates commercial flight operations and requires that aircraft components meet its stringent standards. In addition, the FAA requires that various maintenance routines be performed on aircraft components, and we currently satisfy these maintenance standards in our repair and overhaul services. Several of our operating locations are FAA-approved repair stations.

Generally, the FAA currently only grants licenses for the manufacture or repair of a specific aircraft component, rather than the broader licenses that have been granted in the past. The FAA licensing process may be costly and time-consuming. In order to obtain an FAA license, an applicant must satisfy all applicable regulations of the FAA governing repair stations. These regulations require that an applicant have experienced personnel, inspection systems, suitable facilities and equipment. In addition, the

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applicant must demonstrate a need for the license. Because an applicant must procure manufacturing and repair manuals from third parties relating to each particular aircraft component in order to obtain a license with respect to that component, the application process may involve substantial cost.

The license approval processes for the European Aviation Safety Agency (EASA was formed in 2002 and is handling most of the responsibilities of the national aviation authorities, such as the United Kingdom Civil Aviation Authority), which regulates this industry in the European Union, the Civil Aviation Administration of China, and other comparable foreign regulatory authorities are similarly stringent, involving potentially lengthy audits.

Our operations are also subject to a variety of worker and community safety laws. The Occupational Safety and Health Act of 1970, or OSHA, mandates general requirements for safe workplaces for all employees. In addition, OSHA provides special procedures and measures for the handling of hazardous and toxic substances. Specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with OSHA’s health and safety requirements.

Environmental Matters

Our business, operations and facilities are subject to numerous stringent federal, state, local and foreign environmental laws and regulation by government agencies, including the Environmental Protection Agency, or the EPA. Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transportation and disposal of hazardous materials, pollutants and contaminants, govern public and private response actions to hazardous or regulated substances which may be or have been released to the environment, and require us to obtain and maintain licenses and permits in connection with our operations. This extensive regulatory framework imposes significant compliance burdens and risks on us. Although management believes that our operations and our facilities are in material compliance with such laws and regulations, future changes in these laws, regulations or interpretations thereof or the nature of our operations or regulatory enforcement actions which may arise, may require us to make significant additional capital expenditures to ensure compliance in the future.

Certain of our facilities have been or are currently the subject of environmental remediation activities, the cost of which is subject to indemnification provided by IKON Office Solutions, Inc. (“IKON”) in connection with the acquisition by us of these facilities in 1993 from IKON. One of these facilities is connected with a site included on the National Priorities List of Superfund sites maintained by the EPA. Another of these facilities is located on a site included in the EPA’s database of potential Superfund sites. IKON’s indemnification covers us for losses we might suffer in connection with liabilities and obligations arising under environmental, health and safety laws with respect to operations or use of those facilities prior to their acquisition by us. Some other facilities acquired and operated by us or one of our subsidiaries, including a leased facility located on an EPA National Priorities List site, were under active investigation for environmental contamination by federal or state agencies when acquired, and at least in some cases, continue to be under investigation. We are generally indemnified by prior owners or operators and/or present owners of the facilities for liabilities which we incur as a result of these investigations and the environmental contamination found which pre-dates our acquisition of these facilities, subject to certain limitations. We also maintain a pollution liability policy that provides coverage for material liabilities associated with the clean-up of on-site pollution conditions, as well as defense and indemnity for certain third party suits (including Superfund liabilities at third party sites), in each case, to the extent not otherwise indemnified. This policy applies to all of our manufacturing and assembly operations worldwide. However, if we were required to pay the expenses related to environmental liabilities for which neither indemnification nor insurance coverage is available, these expenses could have a material adverse effect on us.

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Employees

As of March 31, 2006, we employed 4,152 persons, of whom 403 were management employees, 99 were sales and marketing personnel, 489 were technical personnel, 522 were administrative personnel and 2,639 were production workers.

Several of our subsidiaries are parties to collective bargaining agreements with labor unions. Under those agreements, we currently employ approximately 593 full-time employees. Currently, approximately 14.3% of our permanent employees are represented by labor unions and approximately 22.3% of net sales are derived from the facilities at which at least some employees are unionized. Three collective bargaining agreements will expire in the next 18 months. No work stoppage is expected at these locations. One of our subsidiaries is currently involved in administrative proceedings regarding a collective bargaining agreement that expired on February 28, 2001. Our inability to negotiate acceptable contracts with this or other labor unions could result in strikes by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike or other work stoppage, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have an adverse effect on our business and results of operations.

We have not experienced any material labor-related work stoppage and consider our relations with our employees to be good.

Available Information

For more information about us, visit our website at www.triumphgroup.com. The contents of the website are not part of this Form 10-K. Our electronic filings with the Securities and Exchange Commission (including all Forms 10-K, 10-Q and 8-K, and any amendments to these reports) are available free of charge through our website immediately after we electronically file with or furnish them to the Securities and Exchange Commission. These filings may also be read and copied at the SEC’s Public Reference Room which is located at 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers who file electronically with the SEC at www.sec.gov.

Item 1A.     Risk Factors

Statements in this Annual Report on Form 10-K, including those concerning our expectations regarding the effect of industry trends on us, competitive advantages, strategies, future sales, gross profits, capital expenditures, selling, general and administrative expenses and cash requirements, include forward-looking statements. Actual results may vary materially from these expectations. Factors which could cause actual results to differ from expectations include competitive factors relating to the aerospace industry, dependence of some of our businesses on key customers, requirements of capital, product liabilities in excess of insurance, uncertainties relating to the integration of acquired businesses, general economic conditions affecting our business segment, technological developments, limited availability of raw materials or skilled personnel, changes in governmental regulation and oversight and the continuing impact of the September 11, 2001 attacks and international hostilities and terrorism. For a description of these and additional risks, see the discussion below. Our results of operations may be adversely affected by one or more of these factors.

Factors that have an adverse impact on the aerospace industry may adversely affect our results of operations. A substantial percentage of our gross profit and operating income was derived from commercial aviation for fiscal year 2006. Our operations are focused on designing, engineering and manufacturing aircraft components for new aircraft, selling spare parts and performing repair and overhaul services on existing aircraft and aircraft components. Therefore, our business is directly affected by economic factors and other trends that affect our customers in the aerospace industry, including a possible decrease in outsourcing by aircraft operators and OEMs or projected market growth that may not

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materialize or be sustainable. When these economic and other factors adversely affect the aerospace industry, they tend to reduce the overall customer demand for our products and services, which decreases our operating income. Economic and other factors that might affect the aerospace industry may have an adverse impact on our results of operations.

There has been a recovery in the commercial air travel to levels above those prior to the terrorist attacks of September 11, 2001 resulting in recovery of demand for commercial aerospace products and services. Nevertheless, as a result of market conditions since September 11, 2001, the financial condition of our airline customers has deteriorated and thereby introduced credit risk with some of our significant airline customers, as well as introducing negative implications for their ability to fund the acquisition of new aircraft for their fleet. The recent rise in energy costs has significantly increased the price of fuel to the airlines resulting in additional pressure on operating costs. These or other events may lead to further declines in the worldwide aerospace industry that could further adversely affect our business and financial condition.

Competitive pressures may adversely affect us. We have numerous competitors in the aerospace industry. We compete primarily with the top-tier systems integrators and the manufacturers that supply them, some of which are divisions or subsidiaries of OEMs and other large companies that manufacture aircraft components and subassemblies. Competition for the repair and overhaul of aviation components comes from three primary sources:  OEMs, major commercial airlines and other independent repair and overhaul companies. Some of our competitors have substantially greater financial and other resources than we have. Competitive pressures may materially adversely affect our operating revenues and, in turn, our business and financial condition.

We may need to expend significant capital to keep pace with technological developments in our industry. The aerospace industry is constantly undergoing development and change and it is likely that new products, equipment and methods of repair and overhaul service will be introduced in the future. In order to keep pace with any new developments, we may need to expend significant capital to purchase new equipment and machines or to train our employees in the new methods of production and service. We may not be successful in developing new products and these capital expenditures may have a material adverse effect on us.

We may incur significant expenses to comply with new or more stringent governmental regulation. The aerospace industry is highly regulated in the United States by the FAA and in other countries by similar agencies. We must be certified by the FAA and, in some cases, by individual OEMs in order to engineer and service parts and components used in specific aircraft models. If any of our material authorizations or approvals were revoked or suspended, our operations would be adversely affected. New or more stringent governmental regulations may be adopted, or industry oversight heightened in the future, and we may incur significant expenses to comply with any new regulations or any heightened industry oversight.

The loss of our key customer could have a material adverse effect on us. For the year ended March 31, 2006, The Boeing Company, or Boeing, represented approximately 21.7% of net sales. For fiscal 2005, Boeing represented approximately 21.2% of net sales. The loss of this customer could have a material adverse impact on us. In addition, some of our operating locations have significant customers, the loss of whom could have an adverse effect on those businesses.

We may be unable to successfully achieve “tier one” supplier status with OEMs, and we may be required to risk our capital to achieve “tier one” supplier status. Many OEMs are moving toward developing strategic partnerships with their larger suppliers, frequently called “tier one” suppliers. Each tier one supplier provides an array of integrated services including research and development, engineering purchasing, warehousing and assembly for OEM customers. We have been designated as a tier one supplier by some OEMs and are striving to achieve tier one status with other OEMs. In order to maintain or achieve tier one status, we may need to expand our existing capacities or capabilities, and there is no assurance that we will be able to do so. As we expand into the tier one supplier status, we are exposed to adverse litigation action by competitors whose market share is being diminished.

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Many new aircraft programs require that major suppliers become risk-sharing partners, meaning that the cost of design, development and engineering work associated with the development of the aircraft is borne by the supplier, usually in exchange for a long-term agreement to supply critical parts once the aircraft is in production. Boeing’s 787 and Airbus’ A380 are examples of two new aircraft programs in which our companies are competing in a product development process in order to obtain eventual long term production agreements. In the event that the aircraft fails to reach the full production stage, the investment that we have made in research and development and other start-up costs may not produce the anticipated return on investment.

We may not realize our anticipated return on capital commitments made to expand our capabilities. From time to time, we make significant capital expenditures to implement new processes and to increase both efficiency and capacity. Some of these projects require additional training for our employees and not all projects may be implemented as anticipated. If any of these projects do not achieve the anticipated increase in efficiency or capacity, our returns on these capital expenditures may not be as expected.

Our expansion into international markets may increase credit and other risks. As we pursue customers in Asia, South America and other less developed aerospace markets throughout the world, our inability to ensure the creditworthiness of our customers in these areas could adversely impact our overall profitability. In addition, capital investments in these business opportunities may entail additional currency risks, different legal and regulatory requirements and political considerations not associated with domestic markets.

We may need additional financing for acquisitions and capital expenditures and additional financing may not be available on terms acceptable to us. A key element of our strategy has been, and continues to be, internal growth supplemented by growth through the acquisition of additional companies and product lines engaged in the aerospace industry. In order to grow internally, we may need to make significant capital expenditures, such as investing in facilities in low cost countries, and may need additional capital to do so. Our ability to grow is dependent upon, and may be limited by, among other things, availability under our revolving credit facility and by particular restrictions contained in our revolving credit facility and our other financing arrangements. In that case, additional funding sources may be needed, and we may not be able to obtain the additional capital necessary to pursue our internal growth and acquisition strategy or, if we can obtain additional financing, the additional financing may not be on financial terms that are satisfactory to us.

Cancellations, reductions or delays in customer orders may adversely affect our results of operations. Our overall operating results are affected by many factors, including the timing of orders from large customers and the timing of expenditures to manufacture parts and purchase inventory in anticipation of future sales of products and services. A large portion of our operating expenses are relatively fixed. Because several of our operating locations typically do not obtain long-term purchase orders or commitments from our customers, they must anticipate the future volume of orders based upon the historic purchasing patterns of customers and upon our discussions with customers as to their anticipated future requirements. These historic patterns may be disrupted by many factors, including changing economic conditions, inventory adjustments, or work stoppages or labor disruptions at our customers. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on our business, financial condition and results of operations.

Our acquisition strategy exposes us to risks, including the risk that we may not be able to successfully integrate acquired businesses. We have a consistent strategy to grow, in part, by the acquisition of additional businesses in the aerospace industry and are continuously evaluating various acquisition opportunities. Our ability to grow by acquisition is dependent upon, among other factors, the availability of suitable acquisition candidates. Growth by acquisition involves risks that could adversely affect our operating results, including difficulties in integrating the operations and personnel of acquired companies, the potential amortization of acquired intangible assets, the potential impairment of goodwill and the potential

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loss of key employees of acquired companies. We may not be able to consummate acquisitions on satisfactory terms or, if any acquisitions are consummated, satisfactorily integrate these acquired businesses.

We may not be successful in expanding our casting activities in the aerospace market.   This year, the casting business continued to transition its target market away from industrial gas turbine products and shifted its focus to the production of aerospace products. Such expansion will require additional capital expenditures. In addition, several OEMs are already operating with such newer materials and processes and, in certain cases, hold proprietary technology and patents. There can be no assurance that we will be able to successfully expand into the aerospace market.

Any product liability claims in excess of insurance may adversely affect our financial condition. Our operations expose us to potential liability for personal injury or death as a result of the failure of an aircraft component that has been serviced by us, the failure of an aircraft component designed or manufactured by us or the irregularity of metal products processed or distributed by us. While we believe that our liability insurance is adequate to protect us from these liabilities, our insurance may not cover all liabilities. Additionally, insurance coverage may not be available in the future at a cost acceptable to us. Any material liability not covered by insurance or for which third party indemnification is not available could have a material adverse effect on our financial condition.

The lack of  available skilled personnel may have an adverse effect on our operations. From time to time, some of our operating locations have experienced difficulties in attracting and retaining skilled personnel to design, engineer, manufacture, repair and overhaul sophisticated aircraft components. Our ability to operate successfully could be jeopardized if we are unable to attract and retain a sufficient number of skilled personnel to conduct our business.

Any exposure to environmental liabilities may adversely affect us. Our business, operations and facilities are subject to numerous stringent federal, state, local and foreign environmental laws and regulations. Although management believes that our operations and facilities are in material compliance with such laws and regulations, future changes in such laws, regulations or interpretations thereof or the nature of our operations or regulatory enforcement actions which may arise, may require us to make significant additional capital expenditures to ensure compliance in the future. Some of our facilities have been or are currently the subject of environmental remediation activities, the cost of which is subject to indemnification provided by IKON Office Solutions, Inc. (“IKON”). One of these facilities is connected with a site included in the National Priorities List of Superfund sites maintained by the EPA. Another of these facilities is located on a site included in the EPA’s database of potential Superfund sites. The IKON indemnification covers the cost of liabilities that arise from environmental conditions or activities existing at facilities prior to our acquisition from IKON in July 1993, including the costs and claims associated with the environmental remediation activities and liabilities discussed above. Some other facilities acquired and operated by us or one of our subsidiaries, including a leased facility located on an EPA National Priorities List site, were under active investigation for environmental contamination by federal or state agencies when acquired and, at least in some cases, continue to be under investigation or subject to remediation. We are often indemnified by prior owners or operators and/or present owners of the facilities for liabilities which we might otherwise incur as a result of these investigations and the environmental contamination found which pre-dates our acquisition of these facilities, subject to certain limitations, including but not limited to limitations on the survival period of the indemnity. We also maintain a pollution liability policy that provides coverage for material liabilities associated with the clean-up of on-site pollution conditions, as well as defense and indemnity for certain third party suits (including Superfund liabilities at third party sites), in each case, to the extent not otherwise indemnified. This policy applies to all of our manufacturing and assembly operations worldwide. However, if we were required to pay the expenses related to environmental liabilities for which neither indemnification nor insurance coverage is available, these expenses could have a material adverse effect on us.

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Item 2.                 Properties

Our executive offices are located in Wayne, Pennsylvania, where we lease 9,139 square feet of space. In addition, as of April 1, 2006, we owned or leased the following facilities in which our operating locations are located:

 

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We believe that our properties are adequate to support our operations for the foreseeable future.

Item 3.              Legal Proceedings

On July 9, 2004, Eaton Corporation and several Eaton subsidiaries filed a complaint against us, our subsidiary, Frisby Aerospace, LLC, certain related subsidiaries and certain employees of ours and our subsidiaries. The complaint was filed in the Circuit Court of the First Judicial District of Hinds County, Mississippi and alleged nineteen causes of action under Mississippi law. In particular, the complaint alleges the misappropriation of trade secrets and intellectual property allegedly belonging to Eaton relating to hydraulic pumps and motors used in military and commercial aviation.

On September 30, 2004, Frisby and the individual defendants filed separate responses to Eaton’s claims. Frisby filed counterclaims against Eaton alleging common law unfair competition, interference with existing and prospective contracts, abuse of process, defamation, violation of North Carolina’s Unfair and Deceptive Trade Practices Act, and violation of the false advertising provisions of the Lanham Act. We and Jeff Frisby moved to dismiss for lack of personal jurisdiction. A Special Master was appointed by the Court and discovery has begun, which has included written discovery responses, exchange of documents, and depositions.

On January 4, 2006, we, Frisby and Jeff Frisby filed a “Motion to Dismiss and for Sanctions Against Plaintiffs for Unlawfully Compensating [a] Fact Witness.”  Plaintiffs opposed this motion and filed their brief on January 31, 2006. Oral Argument was held before the Court on March 31, 2006. On March 31, 2006, the Court stayed the case pending the resolution of the issues relating to defendants’ motion to dismiss.

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It is too early to determine what, if any, exposure to liability we and/or Frisby faces as a result of this lawsuit. We will continue to vigorously defend the allegations contained in Eaton’s complaint and to vigorously prosecute Frisby’s counterclaims.

The above allegations also relate to alleged conduct that is the subject of an investigation by the office of the U.S. Attorney in Jackson, Mississippi. On January 22, 2004, a search warrant was executed on the offices of Frisby, in connection with this investigation. Frisby is cooperating with the investigation, which is continuing. We understand that neither we nor Frisby is currently the subject of this investigation.

One of our subsidiaries, Triumph Controls, LLC (“TCI”), has been a party to administrative proceedings before the National Labor Relations Board (the “NLRB”). In these proceedings, TCI’s Union has alleged certain unfair labor practices. During the pendency of the Union’s charges before the NLRB in Washington and the NLRB Regional Office in Philadelphia, TCI and the Union, with Regional Office participation, have engaged in discussion in an effort to resolve all pending NLRB matters. Any tentative resolution of pending NLRB matters by the parties is contingent upon a finalization of material documentation, formal motion, approval by the NLRB in Washington, and the Regional Office’s formal approval of the Union’s withdrawal of all pending unfair labor practice charges.

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

None.

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PART II

Item 5.        Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Range of Market Price

Our Common Stock is traded on the New York Stock Exchange under the symbol “TGI.”  The following table sets forth the range of high and low prices for our Common Stock for the periods indicated:

 

On May 31, 2006, the reported closing price for our Common Stock was $47.23. As of May 31, 2006, there were approximately 35 holders of record of our Common Stock and we believe that our Common Stock was beneficially owned by approximately 11,524 persons.

Dividend Policy

We have never declared or paid cash dividends on any class of our Common Stock. We currently intend to retain our earnings, if any, and reinvest them in the development of our business. Certain of our debt arrangements, including our revolving credit facility, prohibit us from paying dividends or making any distributions on our capital stock, except for the payment of stock dividends and redemptions of an employee’s shares of capital stock upon termination of employment. See note 7 of “Notes to Consolidated Financial Statements.”

Equity Compensation Plan Information

The information required regarding equity compensation plan information is included in our Proxy Statement in connection with our 2006 Annual Meeting of Stockholders to be held on July 27, 2006, under the heading “Equity Compensation Plan Information” and is incorporated herein by reference.

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Item 6.           Selected Financial Data

The following selected historical financial data should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

 

 

(1)   Results include $3.1 million of restructuring costs associated with ceasing the operations of the Company’s Phoenix Manufacturing Division of the Company’s Triumph Engineered Solutions subsidiary and the divestitures of the Company’s IGT repair division and the Wisconsin Manufacturing division of the Company’s Triumph Engineered Solutions subsidiary.  See Note 4 to the Consolidated Financial Statements.

(2)   Results include the acquisitions of Parker Hannifin’s United Aircraft Products Division and Rolls-Royce Gear Systems, Inc. from the date of each respective acquisition.  See Note 3 to the Consolidated Financial Statements.

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(3)   Results include the acquisitions of the Ozone Assets, the Aerocell Assets, Furst and the assets of The Boeing Company’s Spokane Fabrication Operation from the date of each respective acquisition. 

(4)   Results include the acquisition of EFS Aerospace, Inc. from the date of acquisition.  Results also include the $5.0 million write-off of design and development costs related to a new aircraft program, which did not go into production.

Item 7.                        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 and notes thereto contained elsewhere herein.)

OVERVIEW

We are a major supplier to the aerospace industry and have two operating segments:  (i) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build to print components, assemblies and systems for the global aerospace OEM market; and (ii) Triumph Aftermarket Services Group, whose companies serve aircraft fleets, notably commercial airlines, the U.S. military and cargo carriers, through the maintenance, repair and overhaul services of aircraft components and accessories manufactured by third parties. Financial highlights for fiscal 2006:

·       Net sales for fiscal year 2006 increased 10% to $760.4 million

·       Operating income in fiscal year 2006 increased 68% to $56.1 million

·       Income from continuing operations for fiscal year 2006 increased 118% to $34.5 million

·       Year end backlog reached a new record high of $887.8 million, up 48% over prior year.

For fiscal year 2006, net sales totaled $760.4 million, a 10% increase from fiscal year 2005 net sales of $688.5 million. Income from continuing operations for fiscal year 2006 increased 118% to $34.5 million, or $2.15 per diluted common share, versus $15.8 million, or $0.99 per diluted common share, for fiscal year 2005.

Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. For the fiscal year ended March 31, 2006, we generated approximately $40.4 million of cash flows from operating activities, used approximately $44.0 million in investing activities and generated approximately $4.6 million in financing activities.

We have recently received several important new contract awards including:

·       Our subsidiary, Triumph Actuation Systems, LLC (formerly Frisby Aerospace, LLC), has been awarded a contract by Saab Aerostructures to provide the Boeing 787 Large Cargo Door Actuation System (“LCDAS”).  The 787 LCDAS is a collaborative effort of multiple Triumph Group companies working to provide a system solution for the 787 program. The agreement has an estimated value of up to $300 million over the life of the program, however our year end backlog at March 31, 2006 does not include any value associated with this 787 program, as we do not currently have firm delivery dates.

·       Our subsidiary, Triumph Composite Systems, Inc., has been awarded a multi-year supply agreement with Vought Aircraft Industries, Inc., a structural integration partner in the Boeing 787 program. This agreement involves providing a wide variety of aerospace products, including composite ducting, machined metal parts and fittings, window assemblies, hydraulic tubing insulation and other section components in support of Vought’s workshare on the Boeing 787 aircraft. This award has an estimated value in excess of $200 million over the life of the 787 program, however our year

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end backlog at March 31, 2006 does not include any value associated with this 787 program, as we do not currently have firm delivery dates.

·       Our subsidiary, Triumph Structures-Los Angeles, Inc., has been awarded a Full Rate Production contract by BAE Systems, Inc. to supply 495 M777 155mm Lightweight Howitzer Gun Body units. This award has an estimated value of $54 million over the next four years. The M777 155mm Lightweight Howitzer is a towed artillery weapon, designed to provide fire support for light and medium U.S. Forces. Triumph Structures-Los Angeles has been providing the gun body units to BAE Systems under a Low Rate Initial Production contract for 94 guns.

OUTLOOK

Sales for fiscal 2007 are expected to grow to be in the range of $875 million to $925 million, and earnings per share for fiscal 2007 are expected to be between $2.40 to $2.70.

Our fiscal 2007 outlook is based on the following market assumptions:

·       The commercial jet aircraft market and the airline industry remain extremely competitive. Market liberalization in Europe and Asia has continued to enable low-cost airlines to gain market share, and traditional airlines continue to improve their competitive position by lowering their cost structure through merger (USAirways/America West), bankruptcy (Delta Airlines) and restructuring (American Airlines). Some of the airline restructurings have led to increased outsourcing opportunies, benefiting our Aftermarket Services segment.

·       Aircraft seat miles, a key indicator of airline health, continued to improve, up 5% in calendar 2005, positively affecting our business. Finally, recent upward movement in airline ticket prices, which are being sustained, should help stabilize airlines’ financial position.

·       Air cargo continues to exhibit strong growth and financial stability, a key market segment for us given our product penetration with these carriers.

·       The major trends that shape the current military/defense environment include:  significant but relatively flat U.S. Government defense and space budgets; rapid expansion of information and communication technologies; and the need for low cost, assured access to space. The 2006 U.S. Department of Defense (“DoD”) authorization was approved in the fourth quarter of 2005 at a total level of $400 billion (excluding supplementals). Although under pressure, the DoD budget remains strong and focused on transformation. With this continued pressure on the budget the DoD will continue to focus on affordability strategies emphasizing network-centric operations, joint interoperability, long-range strike, unmanned air combat and reconnaissance vehicles, precision guided weapons and continued privatization of logistics and support activities as a means to improve overall effectiveness while maintaining control over costs.

·       Deliveries of Airbus and Boeing large commercial aircraft are expected to be significantly higher in calendar 2006, compared to calendar 2005. Airbus and Boeing reported actual deliveries for calendar 2005 of 668 aircraft. Their deliveries for calendar 2006 are expected to increase by approximately 21%, to about 810 aircraft. Capacity in the global airline system, as measured by available seat miles (“ASMs”), is expected to continue to grow. We expect global ASM growth of about 3% in calendar 2006, compared to calendar 2005. Our sales to airlines for large commercial and regional aircraft aftermarket parts and service are expected to grow approximately proportionately with increases in capacity.

·       Total regional and business aircraft production is expected to be relatively flat in fiscal 2007, compared to fiscal 2006, as deliveries of business jets are expected to increase, offsetting the expected decrease in regional aircraft deliveries. In the regional aircraft market we expect to see growth in the 70-90 seat segment offset by continued weakness in the 50 seat products.

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·       Military sales (OEM and aftermarket) are expected to increase roughly in line with global military budgets, which are expected to be flat or grow in the low single digit range for calendar 2006, compared to calendar 2005.

RESULTS OF OPERATIONS

Fiscal year ended March 31, 2006 compared to fiscal year ended March 31, 2005

 

Changes in net sales and segment operating income are discussed within the “Business Segment Performance” section below.

Corporate general and administrative expenses increased by $1.3 million, or 9.5%, to $14.5 million for fiscal 2006 from $13.3 million for fiscal 2005, primarily due to rent expense and other costs associated with idle facilities as well as increased staffing, incentive compensation expense and costs associated with acquisitions that we pursued but did not complete, partially offset by decreased regulatory costs.

Interest expense and other decreased by $0.5 million, or 3.9%, to $12.5 million for fiscal 2006 from $13.0 million for fiscal 2005. This decrease was primarily due to a reduction in average borrowings outstanding and less foreign exchange losses, partially offset by increased interest rates on our Credit Facility and industrial revenue bonds, and higher imputed interest on our liability related to our purchase of the revenue sharing program position on the CFM56.

The effective tax rate was 20.8% for fiscal 2006 and 22.5% for fiscal 2005. The fiscal 2006 and 2005 effective tax rates vary from the federal statutory tax rate of 35% primarily due to benefits realized from the research and development tax credit and the Extraterritorial Income (ETI) Exclusion. Fiscal 2006 also includes a $2.0 million reduction of income tax expense resulting from adjusting the income tax rate at which reversals of temporary differences will be taxed and a $2.2 million reduction of income tax expense resulting from completion of income tax audits.

Loss from discontinued operations before income taxes was $7.1 million for fiscal 2005. The benefit for income taxes from discontinued operations was $2.7 million in fiscal 2005. During fiscal 2005, we sold substantially all of the assets and certain liabilities of our metals businesses (“Metals”) for cash proceeds of $17.1 million and recorded a $10.0 million loss on the sale of these businesses. The businesses that comprise the discontinued operations manufacture, machine, process and distribute metal products to customers in the computer, container and office furniture industries, primarily within North America, in addition to providing structural steel erection services.

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Fiscal year ended March 31, 2005 compared to fiscal year ended March 31, 2004

 

Changes in net sales and segment operating income are discussed within the “Business Segment Performance” section below.

Corporate general and administrative expenses increased by $3.6 million, or 37.7%, to $13.3 million for fiscal 2005 from $9.6 million for fiscal 2004, primarily due to increased audit and other expenses to comply with the Sarbanes-Oxley Act of 2002.

Interest expense and other increased by $0.8 million, or 6.7%, to $13.0 million for fiscal 2005 from $12.2 million for the prior year period. This increase was primarily due to increased interest rates partially offset by lower average borrowings outstanding.

The effective tax rate was 22.5% for fiscal 2005 and 20.5% for fiscal 2004. The fiscal 2005 and 2004 effective tax rates vary from the federal statutory tax rate of 35% primarily due to benefits realized from the research and development tax credit and the Extraterritorial Income (ETI) Exclusion.

Loss from discontinued operations before income taxes was $7.1 million for fiscal 2005 compared with a loss from discontinued operations before income taxes of $1.8 million for fiscal 2004, resulting in a change of $5.2 million, due to a loss on the sale of the assets of $10.0 million partially offset by operating profits primarily resulting from higher selling prices due to the increased global demand for steel. The benefit for income taxes from discontinued operations was $2.7 million in fiscal 2005 compared to a benefit of $0.7 million in fiscal 2004.

Business Segment Performance

We are a major supplier to the aerospace industry and have two operating segments:  (i) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build to print components, assemblies and systems for the global aerospace OEM market; and (ii) Triumph Aftermarket Services Group, whose companies serve aircraft fleets, notably commercial airlines, the U.S. military and cargo carriers, through the maintenance, repair and overhaul services of aircraft components and accessories manufactured by third parties. Our Aerospace Systems segment consists of 25 operating locations, and the Aftermarket Services segment consists of 16 operating locations at March 31, 2006. Prior to its elimination on March 31, 2005, due to the shutdown, sale or transfer of assets to our other operating segments, we had a third operating segment, known as the Other segment, which consisted of 4 operating locations.

The Aerospace Systems segment consists of the Company’s operations which manufacture products primarily for the aerospace OEM market. The Aerospace Systems operations design and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators and mechanical control cables. The Aerospace Systems revenues are also derived from

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stretch forming, die forming, milling, bonding, machining, welding and assembly and fabrication of various structural components used in aircraft wings, fuselages and other significant assemblies. Further, the segment’s operations also manufacture metallic and composite bonded honeycomb assemblies for floor panels, fuselage, wings and flight control surface parts. 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, aircraft accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the Aftermarket Services operations repair and overhaul thrust reversers, nacelle components and other aerostructures. The Aftermarket Services operations also perform repair and overhaul services, and supply spare parts, for various types of cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis.

The Other segment’s operations and assets, primarily comprised of the Industrial Gas Turbine (“IGT”) businesses, manufactured or repaired and overhauled IGT components, primarily for OEMs and power generation equipment operators, and applied high temperature coatings for both internal and external customers. These operations and assets have been sold, liquidated, or re-deployed to the other two remaining segments, and were not a reportable segment after March 31, 2005.

Business Segment Performance—
Fiscal year ended March 31, 2006 compared to fiscal year ended March 31, 2005

 

 

Aerospace Systems:   The Aerospace Systems segment net sales increased by $82.9 million, or 16.7%, to $578.3 million for fiscal 2006 from $495.4 million for fiscal 2005. The increase was due to the increased sales of large structural precision components and assemblies for the aerospace and defense markets and cabin windows for the general aviation and corporate jet markets resulting from increased production of both commercial and military aircraft.

Aerospace Systems segment operating income increased by $18.7 million, or 34.6%, to $72.8 million for fiscal 2006 from $54.0 million for fiscal 2005. Operating income increased due to higher sales volume as described above and improved sales mix, primarily for structural precision components partially offset by an increase in staffing, depreciation and amortization expenses, incentive compensation expense and increased investments in research and development costs.

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Aftermarket Services:   The Aftermarket Services segment net sales increased by $12.0 million, or 6.9%, to $185.0 million for fiscal 2006 from $173.0 million for fiscal 2005. This increase was primarily due to growth in global commercial air traffic and U.S. military maintenance demand resulting in increased demands for our repair and overhaul services.

Aftermarket Services segment operating income decreased by $9.8 million, or 128.5%, to a loss of $2.2 million for fiscal 2006 from income of $7.6 million for fiscal 2005. Operating income decreased primarily due to an increase in staffing, depreciation expense, losses associated with customer bankruptcies, compensation expense, costs incurred in developing products associated with new aerospace programs and costs associated with the construction of our new Thailand maintenance and repair facility.

Other Segment:   Effective March 31, 2005, we no longer have “Other” as a reportable segment. As of March 31, 2005 the Other segment operations had ceased and any residual assets were transferred to other Company facilities. During the year ended March 31, 2005, the Other segment had sales primarily related to its IGT operations of $26.6 million. During the year ended March 31, 2005, the Other segment incurred an operating loss of $15.0 million primarily as a result from falling sales to both OEMs and power generation equipment operators in the IGT market.

Fiscal year ended March 31, 2005 compared to fiscal year ended March 31, 2004

 

 

Aerospace Systems:   The Aerospace Systems segment net sales increased by $76.8 million, or 18.4%, to $495.4 million for fiscal 2005 from $418.6 million for fiscal 2004. The increase was due to the sales increase of $45.4 million associated with the acquisitions of Parker Hannifin’s United Aircraft Products Division, renamed Triumph Thermal Systems, in May 2003 and Rolls-Royce Gear Systems, Inc., renamed Triumph Gear Systems, Inc., from Rolls-Royce North America Venture I Inc. in January 2004 (collectively, the “2004 Acquisitions”) completed in fiscal 2004; and an increase in same store sales of $31.4 million due to the increased manufacturing of large structural precision components and assemblies for the aerospace and ground defense markets and cabin windows for the general aviation and corporate jet market as a result of customer demand related to increased production of both commercial and military aircraft.

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Aerospace Systems segment operating income increased by $1.4 million, or 2.7%, to $54.0 million for fiscal 2005 from $52.6 million for fiscal 2004. Operating income increased due to the 2004 Acquisitions as discussed above, which showed a year over year increase of approximately $6.3 million, partially offset by increases in healthcare costs, research and development and depreciation and amortization expenses and legal expenses associated with the trade secret litigation totaling approximately $2.8 million.

Aftermarket Services:   The Aftermarket Services segment net sales increased by $25.4 million, or 17.2%, to $173.0 million for fiscal 2005 from $147.5 million for fiscal 2004. This increase was primarily due to growth in global commercial air traffic and U.S. military maintenance demand which created increased demand for the repair and overhaul of auxiliary power units as well as the brokering of similar units; and the inclusion of the net sales of the casting business (formerly a part of the Other segment) in this segment. Since we made a decision to exit the IGT market, the casting business has transitioned its target market away from IGT products and shifted its focus to the production of aerospace products in fiscal 2005. Accordingly, the fiscal 2005 results of the casting business are included in the Aftermarket Services segment. The fiscal 2004 results of the casting business are included in the Other segment. These actions are collectively referred to in this discussion as the “Casting Business Realignment”.

Aftermarket Services segment operating income decreased by $5.1 million, or 40.1%, to $7.6 million for fiscal 2005 from $12.7 million for fiscal 2004. This decrease was due to the $3.9 million operating loss of the casting business in fiscal 2005 as a result of the Casting Business Realignment; and an increase in staffing, healthcare and other costs associated with the increase in business activity.

Other Segment:   The Other segment net sales decreased by $19.8 million, or 42.7%, to $26.6 million for fiscal 2005 from $46.4 million for fiscal 2004. This was a result of our decision to exit the IGT business and stop taking sales orders relative to this particular market.

The Other segment incurred an operating loss of $15.0 million for fiscal 2005 compared to an operating loss of $19.1 million for fiscal 2004. This improvement was primarily due to the effect of the Casting Business Realignment, which included a $6.1 million operating loss of the casting business in fiscal 2004. Significant charges and costs of $3.1 million associated with the restructuring steps taken to exit the IGT business were incurred in fiscal 2005.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. For the year ended March 31, 2006, we generated approximately $40.4 million of cash flows from operating activities, used approximately $44.0 million in investing activities and generated approximately $4.6 million in financing activities.

During fiscal 2006, we amended and restated our existing credit agreement (as amended and restated, the “Credit Facility”) with its lenders to reduce the Credit Facility to $250.0 million from $265.0 million, extend the maturity date to July 27, 2010 and amend certain other terms and covenants. The Credit Facility bears interest at either (i) LIBOR plus between 0.75% and 1.75% or (ii) the prime rate (or the Federal Funds rate plus 0.5% if greater) plus between 0.00% and 0.25% or (iii) an overnight rate at our option. The applicable interest rate is based upon our ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. In addition, we are required to pay a commitment fee of between 0.175% and 0.375% on the unused portion of the Credit Facility. We may allocate up to $30.0 million of the available Credit Facility for the issuance of letters of credit. Our obligations under the Credit Facility are guaranteed by our subsidiaries. As of March 31, 2006, $211.9 million was available under our Credit Facility. On March 31, 2006, an aggregate amount of approximately $31.8 million was outstanding under the Credit Facility, $20.0 million of which was accruing interest at LIBOR plus applicable basis points totaling 6.0% per annum, and $11.8 million of which was accruing interest at the overnight interest rate of 6.2% per annum. Amounts repaid under the Credit Facility may be reborrowed.

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During fiscal 2006, we entered into a loan agreement with the City of Shelbyville, Indiana related to the City of Shelbyville, Indiana Economic Development Revenue Bonds, Series 2005 (the “2005 Bonds”). The proceeds of the 2005 Bonds of up to $6.3 million are being used to fund the expansion of one of our subsidiary’s facilities and to retire the remaining outstanding bonds from the loan agreement dated May 5, 1997 with the City of Shelbyville, Indiana relating to the City of Shelbyville, Indiana Adjustable Rate Economic Development Revenue Bonds, Series 1997. The 2005 Bonds are due to mature on October 1, 2020 and bear interest at a variable rate equal to approximately ninety percent of the three-month LIBOR rate (the effective rate was 4.1% at March 31, 2006).

Capital expenditures were approximately $28.8 million for the fiscal year ended March 31, 2006 primarily for manufacturing machinery and equipment. We funded these expenditures through borrowings under our Credit Facility. We expect capital expenditures to be $45.0 to $50.0 million for our fiscal year ending March 31, 2007. The expenditures are expected to be used mainly to expand capacity or replace old equipment at several facilities.

During fiscal 2006, we prepaid $2.8 million of principal of the Senior Notes as a result of cash proceeds from the sale of TriWestern Metals as prescribed by the amended note purchase agreement. See note 18 of “Notes to Consolidated Financial Statements”.

During fiscal 2006, we paid $14.2 million related to a contract signed with General Electric to provide the inlet gearbox as well as specific related spare parts for the CFM56 engine program for the life of the program. We expect to pay approximately $12.7 million in additional consideration through April 2007 related to the contract. The cash paid was funded by borrowings under our Credit Facility. See note 3 of “Notes to Consolidated Financial Statements”.

On December 15, 1998, we announced a program to repurchase up to 500,000 shares of our common stock. From the inception of the program through March 31, 2006, we have repurchased a total of 279,200 shares for a total purchase price of $6.9 million.

In April 2006, we acquired all of the assets of Excel Manufacturing, Inc., renamed Triumph Structures—Wichita, which is located in Wichita, Kansas. In May 2006, we acquired substantially all of the assets of Air Excellence International, Inc., renamed Triumph Interiors, which is headquartered in Pittsburgh, Pennsylvania. The combined purchase price for these assets, which was paid in cash at the closings of approximately $39.5 million, was funded by borrowings under our Credit Facility.

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

(1)          Included in our balance sheet at March 31, 2006.

(2)          Includes interest component.

(3)          Includes fixed-rate interest only.

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