TGI-2013.06.30-10Q
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
| |
ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2013
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From _________ to ________
Commission File Number: 1-12235
TRIUMPH GROUP, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 51-0347963 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
| | |
899 Cassatt Road, Suite 210, Berwyn, PA | | 19312 |
(Address of principal executive offices) | | (Zip Code) |
(610) 251-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and has posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one)
|
| | | | |
Large accelerated filer | ý | | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | | Smaller reporting company | ¨ |
(Do not check if a smaller reporting company) | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes £ No S
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, par value $0.001 per share, 52,013,582 shares outstanding as of August 1, 2013.
TRIUMPH GROUP, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements.
Triumph Group, Inc.
Consolidated Balance Sheets
(dollars in thousands, except per share data)
|
| | | | | | | |
| June 30,
2013 | | March 31,
2013 |
| (unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 18,529 |
| | $ | 32,037 |
|
Trade and other receivables, less allowance for doubtful accounts of $6,318 and $5,372 | 411,152 |
| | 433,927 |
|
Inventories, net of unliquidated progress payments of $134,261 and $124,128 | 1,086,753 |
| | 987,702 |
|
Rotable assets | 35,105 |
| | 34,853 |
|
Deferred income taxes | 58,886 |
| | 100,533 |
|
Prepaid and other current assets | 20,612 |
| | 23,582 |
|
Assets held for sale | — |
| | 14,747 |
|
Total current assets | 1,631,037 |
| | 1,627,381 |
|
Property and equipment, net | 885,183 |
| | 815,084 |
|
Goodwill | 1,724,067 |
| | 1,717,792 |
|
Intangible assets, net | 951,440 |
| | 958,359 |
|
Deferred income taxes, noncurrent | 804 |
| | 627 |
|
Other, net | 68,756 |
| | 66,165 |
|
Total assets | $ | 5,261,287 |
| | $ | 5,185,408 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 56,457 |
| | $ | 133,930 |
|
Accounts payable | 312,410 |
| | 327,426 |
|
Accrued expenses | 248,115 |
| | 276,849 |
|
Liabilities related to assets held for sale | — |
| | 2,621 |
|
Total current liabilities | 616,982 |
| | 740,826 |
|
Long-term debt, less current portion | 1,357,326 |
| | 1,195,933 |
|
Accrued pension and other postretirement benefits, noncurrent | 632,001 |
| | 671,175 |
|
Deferred income taxes, noncurrent | 325,873 |
| | 331,061 |
|
Other noncurrent liabilities | 194,919 |
| | 201,255 |
|
Stockholders’ equity: | | | |
Common stock, $.001 par value, 100,000,000 shares authorized, 52,013,534 and 50,123,035 shares issued; 52,013,534 and 50,123,035 shares outstanding | 52 |
| | 50 |
|
Capital in excess of par value | 860,081 |
| | 848,372 |
|
Accumulated other comprehensive loss | (60,629 | ) | | (60,972 | ) |
Retained earnings | 1,334,682 |
| | 1,257,708 |
|
Total stockholders’ equity | 2,134,186 |
| | 2,045,158 |
|
Total liabilities and stockholders’ equity | $ | 5,261,287 |
| | $ | 5,185,408 |
|
SEE ACCOMPANYING NOTES.
Triumph Group, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
|
| | | | | | | |
| Three Months Ended
June 30, |
| 2013 | | 2012 |
| | | |
Net sales | $ | 943,683 |
| | $ | 887,688 |
|
Operating costs and expenses: | | | |
Cost of sales (exclusive of depreciation and amortization shown separately below) | 696,471 |
| | 651,277 |
|
Selling, general and administrative | 66,717 |
| | 61,959 |
|
Depreciation and amortization | 37,934 |
| | 31,815 |
|
Relocation costs | 1,215 |
| | — |
|
Integration expenses | — |
| | 545 |
|
Early retirement incentive expense | — |
| | 1,150 |
|
| 802,337 |
| | 746,746 |
|
| | | |
Operating income | 141,346 |
| | 140,942 |
|
Interest expense and other | 19,710 |
| | 17,232 |
|
Income from continuing operations before income taxes | 121,636 |
| | 123,710 |
|
Income tax expense | 42,593 |
| | 47,378 |
|
Net income | $ | 79,043 |
| | $ | 76,332 |
|
| | | |
Earnings per share—basic: | $ | 1.56 |
| | $ | 1.54 |
|
| | | |
Weighted-average common shares outstanding—basic | 50,815 |
| | 49,416 |
|
| | | |
Earnings per share—diluted: | $ | 1.50 |
| | $ | 1.46 |
|
| | | |
Weighted-average common shares outstanding—diluted | 52,806 |
| | 52,271 |
|
| | | |
Dividends declared and paid per common share | $ | 0.04 |
| | $ | 0.04 |
|
SEE ACCOMPANYING NOTES.
Triumph Group, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)
|
| | | | | | | |
| Three Months Ended
June 30, |
| 2013 | | 2012 |
| | | |
Net income | $ | 79,043 |
| | $ | 76,332 |
|
Other comprehensive income (loss): | | | |
Foreign currency translation adjustment | (509 | ) | | (4,422 | ) |
Defined benefit pension plans and other postretirement benefits: | | | |
Reclassifications from accumulated other comprehensive income - (gains) losses, net of tax expense (benefits): | | | |
Amortization of net loss, net of taxes of ($1,700) and ($30) | 2,831 |
| | 49 |
|
Recognized prior service credits, net of taxes of $1,056 and $987 | (1,759 | ) | | (1,603 | ) |
Total defined benefit pension plans and other postretirement benefits, net of taxes | 1,072 |
| | (1,554 | ) |
Cash flow hedges | | | |
Unrealized loss arising during period, net of tax of $140 and $62 | (235 | ) | | (101 | ) |
Reclassification of (gain)/loss included in net earnings, net of tax of ($9) and $8 | 15 |
| | (12 | ) |
Net unrealized loss cash flow hedges, net of tax | (220 | ) | | (113 | ) |
Total other comprehensive income (loss) | 343 |
| | (6,089 | ) |
| | | |
Total comprehensive income | $ | 79,386 |
| | $ | 70,243 |
|
SEE ACCOMPANYING NOTES.
Triumph Group, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
|
| | | | | | | |
| Three Months Ended
June 30, |
| 2013 | | 2012 |
| | | |
Operating Activities | | | |
Net income | $ | 79,043 |
| | $ | 76,332 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 37,934 |
| | 31,815 |
|
Amortization of acquired contract liabilities | (11,150 | ) | | (6,993 | ) |
Accretion of debt discount | 145 |
| | 133 |
|
Other amortization included in interest expense | 1,064 |
| | 945 |
|
Provision for doubtful accounts receivable | 678 |
| | 1,014 |
|
Provision for deferred income taxes | 41,924 |
| | 44,460 |
|
Employee stock-based compensation | 1,328 |
| | 1,532 |
|
Changes in assets and liabilities, excluding the effects of acquisitions and dispositions of businesses: | | | |
Trade and other receivables | 42,082 |
| | 75,167 |
|
Rotable assets | 1,705 |
| | (865 | ) |
Inventories | (72,569 | ) | | (50,696 | ) |
Prepaid expenses and other current assets | 3,225 |
| | (242 | ) |
Accounts payable, accrued expenses and other current liabilities | (74,490 | ) | | (37,012 | ) |
Accrued pension and other postretirement benefits | (37,458 | ) | | (33,591 | ) |
Changes in discontinued operations | — |
| | — |
|
Other | (1,579 | ) | | 548 |
|
Net cash provided by operating activities | 11,882 |
| | 102,547 |
|
Investing Activities | | | |
Capital expenditures | (56,229 | ) | | (37,105 | ) |
Reimbursements of capital expenditures | 2,869 |
| | 7 |
|
Proceeds from sale of assets | 10,321 |
| | — |
|
Acquisitions, net of cash acquired | (31,329 | ) | | — |
|
Net cash used in investing activities | (74,368 | ) | | (37,098 | ) |
Financing Activities | | | |
Net increase (decrease) in revolving credit facility | 153,935 |
| | (75,326 | ) |
Proceeds from issuance of long-term debt and capital leases | 25,000 |
| | 59,599 |
|
Repayment of debt and capital lease obligations | (125,186 | ) | | (42,045 | ) |
Payment of deferred financing costs | (357 | ) | | (2,066 | ) |
Dividends paid | (2,069 | ) | | (1,997 | ) |
Proceeds from government grant | — |
| | 1,000 |
|
Repurchase of restricted shares for minimum tax obligation | (2,726 | ) | | (1,840 | ) |
Proceeds from exercise of stock options | 109 |
| | 253 |
|
Net cash provided by (used in) financing activities | 48,706 |
| | (62,422 | ) |
Effect of exchange rate changes on cash | 272 |
| | (693 | ) |
Net change in cash | (13,508 | ) | | 2,334 |
|
Cash and cash equivalents at beginning of period | 32,037 |
| | 29,662 |
|
Cash and cash equivalents at end of period | $ | 18,529 |
| | $ | 31,996 |
|
SEE ACCOMPANYING NOTES.
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 months ended June 30, 2013 are not necessarily indicative of results that may be expected for the year ending March 31, 2014. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2013 audited consolidated financial statements and notes thereto, included in the Company's Form 10-K for the year ended March 31, 2013 filed in May 2013.
The Company designs, engineers, manufactures, repairs and overhauls a broad portfolio of aerostructures, aircraft components, accessories, subassemblies and systems. The Company serves a broad, worldwide spectrum of the aviation industry, including original equipment manufacturers of commercial, regional, business and military aircraft and aircraft components, as well as commercial and regional airlines and air cargo carriers.
Effective April 1, 2013, the Company prospectively adopted accounting guidance requiring disclosure of items reclassified from other comprehensive income (loss) to net income by their respective income statement line item. For items not reclassified to net income in their entirety, the Company is required to reference other disclosures that provide greater detail about these reclassifications. Refer to "Note 12 Stockholders' Equity" of this Form 10-Q for further information. Other than the additional disclosures, the adoption of the guidance did not have an impact on the Company's financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues are generally recognized in accordance with the contract terms when products are shipped, delivery has occurred or services have been rendered, pricing is fixed and determinable, and collection is reasonably assured. A significant portion of the Company’s contracts are within the scope of the Revenue - Construction-Type and Production-Type Contracts topic of the Accounting Standards Codification (“ASC”) and revenue and costs on contracts are recognized using the percentage-of-completion method of accounting. Accounting for the revenue and profit on a contract requires estimates of (1) the contract value or total contract revenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract’s scope of work and (3) the measurement of progress towards completion. Depending on the contract, the Company measures progress toward completion using either the cost-to-cost method or the units-of-delivery method of accounting, with the great majority measured under the units-of-delivery method of accounting.
| |
• | Under the cost-to-cost method of accounting, progress toward completion is measured as the ratio of total costs incurred to estimated total costs at completion. Costs are recognized as incurred. Profit is determined based on estimated profit margin on the contract multiplied by the progress toward completion. Revenue represents the sum of costs and profit on the contract for the period. |
| |
• | Under the units-of-delivery method of accounting, revenue on a contract is recorded as the units are delivered and accepted during the period at an amount equal to the contractual selling price of those units. The costs recorded on a contract under the units-of-delivery method of accounting are equal to the total costs at completion divided by the total units to be delivered. As contracts can span multiple years, the Company often segments the contracts into production |
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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-Type and Production-Type Contracts topic. Revisions in contract estimates, if significant, can materially affect results of operations and cash flows, as well as valuation of inventory. Furthermore, certain contracts are combined or segmented for revenue recognition in accordance with the Construction-Type and Production-Type Contracts topic.
For the three months ended June 30, 2013, cumulative catch-up adjustments from changes in estimates decreased operating income, net income and earnings per share by approximately $(4,685), $(3,044) and $(0.06) net of tax, respectively. The cumulative catch-up adjustments to operating income for the three months ended June 30, 2013 included gross favorable adjustments of approximately $7,828 and gross unfavorable adjustments of approximately $(12,513). For the three months ended June 30, 2012, cumulative catch-up adjustments from changes in estimates decreased operating income, net income and earnings per share by approximately $(1,299), $(802) and $(0.02) net of tax, respectively.
Amounts representing contract change orders or claims are only included in revenue when such change orders or claims have been settled with the customer and to the extent that units have been delivered. Additionally, some contracts may contain provisions for revenue sharing, price re-determination, requests for equitable adjustments, change orders or cost and/or performance incentives. Such amounts or incentives are included in contract value when the amounts can be reliably estimated and their realization is reasonably assured.
Although fixed-price contracts, which extend several years into the future, generally permit the Company to keep unexpected profits if costs are less than projected, the Company also bears the risk that increased or unexpected costs may reduce profit or cause the Company to sustain losses on the contract. In a fixed-price contract, the Company must fully absorb cost overruns, notwithstanding the difficulty of estimating all of the costs the Company will incur in performing these contracts and in projecting the ultimate level of revenue that may otherwise be achieved.
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 provisional purchase accounting of the acquisition of Vought Aircraft Industries, Inc. ("Vought") on June 16, 2010. For the three months ended June 30, 2013 and 2012, the Company recognized $6,141 and $6,993, respectively, into net sales in the accompanying consolidated statements of income.
Included in net sales of the Aerospace Systems Group is the non-cash amortization of acquired contract liabilities recognized as fair value adjustments through provisional purchase accounting of the acquisition of Goodrich Corporation (Goodrich Pump & Engine Control Systems) ("GPECS") on March 18, 2013. For the three months ended June 30, 2013, the Company recognized $5,009 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 of accounting to recognize revenue under these contracts. Revenue is recognized over the contract period as units are delivered based on the relative value in proportion to the total estimated contract consideration. In estimating the total contract consideration, management evaluates the projected utilization of its customers’ fleet over the term of the contract, in connection with the
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
related estimated repair and overhaul servicing requirements to the fleet based on such utilization. Changes in utilization of the fleet by customers, among other factors, may have an impact on these estimates and require adjustments to estimates of revenue to be realized.
Concentration of Credit Risk
The Company’s trade accounts receivable are exposed to credit risk. However, the risk is limited due to the diversity of the customer base and the customer base’s wide geographical area. Trade accounts receivable from The Boeing Company (“Boeing”) (representing commercial, military and space) represented approximately 28% and 32% of total trade accounts receivable as of June 30, 2013 and March 31, 2013, respectively. The Company had no other concentrations of credit risk of more than 10%. Sales to Boeing for the three months ended June 30, 2013 were $425,114, or 45% of net sales, of which $397,314, $20,774 and $7,026 were from the Aerostructures segment, the Aerospace Systems segment and Aftermarket Services segment, respectively. Sales to Boeing for the three months ended June 30, 2012 were $426,881, or 48% of net sales, of which $402,000, $17,966 and $6,915 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 June 30, 2013 and 2012 was $1,328 and $1,532, respectively. The Company has classified share-based compensation within selling, general and administrative expenses to correspond with the same line item as the majority of the cash compensation paid to employees. Upon the exercise of stock options or vesting of restricted stock, the Company first transfers treasury stock, then issues new shares.
Intangible Assets
The components of intangible assets, net, are as follows: |
| | | | | | | | | | | | | |
| June 30, 2013 |
| Weighted- Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| | | | | | | |
Customer relationships | 16.5 | | $ | 592,917 |
| | $ | (108,086 | ) | | $ | 484,831 |
|
Product rights, technology and licenses | 11.3 | | 56,876 |
| | (29,146 | ) | | 27,730 |
|
Non-compete agreements and other | 9.9 | | 1,705 |
| | (1,226 | ) | | 479 |
|
Tradename | Indefinite-lived | | 438,400 |
| | — |
| | 438,400 |
|
Total intangibles, net | | | $ | 1,089,898 |
| | $ | (138,458 | ) | | $ | 951,440 |
|
|
| | | | | | | | | | | | | |
| March 31, 2013 |
| Weighted- Average Life | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| | | | | | | |
Customer relationships | 16.5 | | $ | 588,761 |
| | $ | (98,483 | ) | | $ | 490,278 |
|
Product rights and licenses | 11.3 | | 56,876 |
| | (27,775 | ) | | 29,101 |
|
Non-compete agreements and other | 8.8 | | 2,205 |
| | (1,625 | ) | | 580 |
|
Tradename | Indefinite-lived | | 438,400 |
| | — |
| | 438,400 |
|
Total intangibles, net | | | $ | 1,086,242 |
| | $ | (127,883 | ) | | $ | 958,359 |
|
Amortization expense for the three months ended June 30, 2013 and 2012 was $11,533 and $8,566, respectively.
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Warranty Reserves
A reserve has been established to provide for the estimated future cost of warranties on our delivered products. The Company periodically reviews the reserves and adjustments are made accordingly. A provision for warranty on products delivered is made on the basis of historical experience and identified warranty issues. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The majority of the Company's agreements include a three-year warranty, although certain programs have warranties up to 20 years.
The following is a rollforward of the warranty reserves for the three months ended June 30, 2013 and 2012, respectively:
|
| | | | | | | | |
| | |
| | 2013 | | 2012 |
Balance, March 31 | | $ | 21,775 |
| | $ | 14,473 |
|
Charges (credits) to costs and expenses | | 917 |
| | (323 | ) |
Write-offs, net of recoveries | | (630 | ) | | (491 | ) |
Exchange rate changes | | 4 |
| | (18 | ) |
Balance, June 30 | | $ | 22,066 |
| | $ | 13,641 |
|
Supplemental Cash Flow Information
The Company paid $672 and $2,408 for income taxes, net of refunds received, for the three months ended June 30, 2013 and 2012, respectively. The Company made interest payments of $11,589 and $13,125 for the three months ended June 30, 2013 and 2012, respectively.
During the three months ended June 30, 2013 and 2012, the Company financed $26 and $25 of property and equipment additions through capital leases, respectively. During the three months ended June 30, 2013 and 2012, the Company issued 1,849,548 and 310,629 shares, respectively, in connection with certain redemptions of convertible senior subordinated notes (see Note 6).
3. ACQUISITIONS
Acquisitions of Primus Composites
Effective May 6, 2013, the Company acquired four related entities collectively comprising the Primus Composites ("Primus") business from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, will operate as Triumph Structures - Farnborough and Triumph Structures - Thailand and be included in the Aerostructures Group. Together, Triumph Structures - Farnborough and Triumph Structures - Thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies. In addition to its composite operations, the Thailand operation also machines and processes metal components.
The purchase price for the Primus acquisition was $33,530 in cash and $30,000 in assumed debt settled at closing. Goodwill in the amount of $5,532 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is not deductible for tax purposes. The Company has also identified intangible assets related to customer relationships valued at approximately $4,168 with a weighted-average life of 16.0 years.
The accounting for a business combination is dependent upon obtaining valuations and other information for certain assets and liabilities which have not yet been completed or obtained to a point where definitive estimates can be made. The process for estimating the fair values of identified intangible assets, certain tangible assets and assumed liabilities require the use of judgment to determine the appropriate assumptions.
As the acquisition occurred during our fiscal quarter, substantially all of the purchase price allocation for Primus is provisional. As the Company finalizes estimates of the fair value of assets acquired and liabilities assumed, additional purchase
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
3. ACQUISITIONS (Continued)
price adjustments will be recorded during the measurement period not to exceed one year beyond the acquisition date. These adjustments may have a material impact on the Company's results of operations and financial position.
The table below presents the provisional estimated fair value of assets acquired and liabilities assumed on the acquisition date based on the best information it has received to date, in accordance with ASC 805. These estimates will be revised as the Company receives final appraisal of tangible and intangible assets, certain liabilities assumed and other information related to the Primus acquisition. Accordingly, the amounts below report the Company's best estimate of the fair value based on the information available at this time:
|
| | | |
| May 6, 2013 |
Cash | $ | 2,201 |
|
Accounts receivable | 17,349 |
|
Inventory | 19,102 |
|
Prepaid expenses and other | 883 |
|
Property and equipment | 47,244 |
|
Goodwill | 5,532 |
|
Intangibles assets | 4,168 |
|
Other noncurrent assets | 5,546 |
|
Total assets | $ | 102,025 |
|
| |
Accounts payable | $ | 10,027 |
|
Accrued expenses | 23,704 |
|
Deferred taxes | 4,764 |
|
Total liabilities | $ | 38,495 |
|
The provisional amounts recognized are based on the Company's best estimates using information that it has obtained as of the reporting date. The Company will finalize its estimates once it is able to determine that it has obtained all necessary information that existed as of the acquisition date related to these matters or one year following the acquisition of Primus, whichever is earlier.
The Primus acquisition has been accounted for under the acquisition method and, accordingly, is included in the consolidated financial statements from the effective date of acquisition. The Primus acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $1,386 in acquisition-related costs in connection with the Primus acquisition, which is recorded in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.
FISCAL 2013 ACQUISTIONS
Acquisition of Goodrich Corporation (Goodrich Pump & Engine Control Systems)
Effective March 18, 2013, a wholly-owned subsidiary of the Company, Triumph Engine Control Systems, LLC, acquired the assets of Goodrich Corporation (Goodrich Pump & Engine Control Systems) ("GPECS"), a leading independent aerospace fuel system supplier for the commercial, military, helicopter and business jet markets. The acquisition of GPECS provides new capabilities in a market where the Company does not currently participate and further diversifies its customer base in electronic engine controls, fuel metering units and main fuel pumps for both OE and aftermarket/spares end markets. The results for Triumph Engine Control Systems, LLC are included in the Aerospace Systems Group segment from the date of acquisition.
The purchase price for the GPECS acquisition was $208,650. Goodwill in the amount of $94,793 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
3. ACQUISITIONS (Continued)
assembled workforce. The goodwill is deductible for tax purposes. The Company has also identified intangible assets valued at approximately $109,100 with a weighted-average life of 18.2 years.
The accounting for a business combination is dependent upon obtaining valuations and other information for certain assets and liabilities which have not yet been completed or obtained to a point where definitive estimates can be made. The process for estimating the fair values of identified intangible assets, certain tangible assets and assumed liabilities require the use of judgment to determine the appropriate assumptions.
As the Company finalizes estimates of the fair value of assets acquired and liabilities assumed, substantially all of the purchase price allocation for GPECS is provisional. Additional purchase price adjustments will be recorded during the measurement period not to exceed one year beyond the acquisition date. These adjustments may have a material impact on the Company's results of operations and financial position.
The table below presents the provisional estimated fair value of assets acquired and liabilities assumed on the acquisition date based on the best information it has received to date, in accordance with ASC 805. The Company is awaiting final appraisal of tangible assets, intangible assets and certain contingent liabilities related to the GPECS acquisition. Accordingly, the Company has adjusted the value of intangible assets, property and equipment and contingent liabilities to draft appraisals. During the three months ended June 30, 2013, the Company recognized an increase of $29,511 in the provisional value of intangible assets as a result of the recognition of a definite-lived technology intangible asset and changes in the fair value of customer relationships acquired. Additionally, the Company recognized other immaterial adjustments to various assets acquired and liabilities assumed as of the acquisition date. These purchase price adjustments decreased the provisionally recognized goodwill by $27,963 and have been reflected retrospectively as of March 31, 2013 in the accompanying Consolidated Balance Sheet. The effect on net income for the period March 18, 2013 through March 31, 2013 was not material. Therefore, the allocation of the purchase price of the GPECS acquisition is not complete and the amounts below report the Company's best estimate of the fair value based on the information available at this time:
|
| | | |
| March 18, 2013 |
Accounts receivable | $ | 15,888 |
|
Inventory | 41,219 |
|
Prepaid expenses and other | 568 |
|
Property and equipment | 26,906 |
|
Goodwill | 94,793 |
|
Intangibles assets | 109,100 |
|
Deferred taxes | 34,936 |
|
Total assets | $ | 323,410 |
|
| |
Accounts payable | $ | 16,000 |
|
Accrued expenses | 15,771 |
|
Acquired contract liabilities, net | 80,000 |
|
Other noncurrent liabilities | 2,989 |
|
Total liabilities | $ | 114,760 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
3. ACQUISITIONS (Continued)
The following table is a summary of the fair value estimates of the identifiable intangible assets and their estimated useful lives:
|
| | | | |
| Estimated Useful Life | Estimated Fair Value |
Technology | 10 years | $ | 19,100 |
|
Customer relationships | 20 years | 90,000 |
|
| | $ | 109,100 |
|
Based on the information accumulated to date, the Company's current assessment of the probable outcome of environmental and legal contingencies, the Company has recognized provisional liabilities which resulted in an amount of $2,800. The provisional amounts recognized are based on the Company's best estimates using information that it has obtained as of the reporting date. The Company will finalize its estimates once it is able to determine that it has obtained all necessary information that existed as of the acquisition date related to these matters or one year following the acquisition of GPECS, whichever is earlier.
The GPECS acquisition has been accounted for under the acquisition method and, accordingly, is included in the consolidated financial statements from the effective date of acquisition. The GPECS acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $475 for the three months ended June 30, 2013 and $2,936 for the fiscal year ended March 31, 2013 in acquisition-related costs in connection with the GPECS acquisition, which is recorded in selling, general and administrative expenses in the respective Consolidated Statement of Income.
Acquisition of Embee, Inc.
Effective December 19, 2012, the Company acquired all of the outstanding shares of Embee, Inc. ("Embee"), renamed Triumph Processing — Embee Division, Inc., which is a leading commercial metal finishing provider offering more than seventy metal finishing, inspecting and testing processes primarily for the aerospace industry. The acquisition of Embee expands the Company's current capabilities to provide comprehensive processing services on precision engineered parts for hydraulics, landing gear, spare parts and electronic actuation systems. The results for Triumph Processing — Embee Division, Inc. are included in the Aerospace Systems Group segment.
The purchase price for the Embee acquisition was $141,863. Goodwill in the amount of $69,740 was recognized for this acquisition and is calculated as the excess of consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized such as assembled workforce. The goodwill is deductible for tax purposes. The Company has also identified intangible assets valued at $55,501 with a weighted-average life of 10.0 years. The Company has recorded its best estimate of the value of the assets and liabilities; however, the allocation of the purchase price for Embee is not complete. The purchase consideration will be finalized upon the settlement of working capital adjustments with the prior owners. The Company is also awaiting final appraisal of tangible assets, intangible assets and certain contingent liabilities related to the Embee acquisition. Accordingly, the Company has adjusted the value of intangible assets, property and equipment and contingent liabilities to draft appraisals. Therefore, the allocation of the purchase price of the Embee acquisition is not complete. The measurement period adjustments recorded during the three months ended June 30, 2013 were not material to the financial statements.
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
3. ACQUISITIONS (Continued)
The table below presents the provisional estimated fair value of assets acquired and liabilities assumed on the acquisition date based on the best information it has received to date, in accordance with ASC 805:
|
| | | |
| December 19, 2012 |
Cash | $ | 750 |
|
Accounts receivable | 6,956 |
|
Inventory | 411 |
|
Prepaid expenses and other | 507 |
|
Property and equipment | 14,360 |
|
Goodwill | 69,740 |
|
Intangible assets | 55,501 |
|
Deferred taxes | 509 |
|
Other assets | 6,738 |
|
Total assets | $ | 155,472 |
|
| |
Accounts payable | $ | 1,591 |
|
Accrued expenses | 2,458 |
|
Other noncurrent liabilities | 9,560 |
|
Total liabilities | $ | 13,609 |
|
Based on the information accumulated to date, and the Company's current assessment of the probable outcome of environmental contingencies, the Company has recognized a provisional liability and an estimated indemnification asset, which resulted in a net amount of $10,060. The provisional amounts recognized are based on the Company's best estimate using information that it has obtained as of the reporting date. The Company will finalize its estimate once it is able to determine that it has obtained all necessary information that existed as of the acquisition date related to this matter or one year following the acquisition of Embee, whichever is earlier.
The following table is a summary of the fair value estimates of the identifiable intangible assets and their estimated useful lives:
|
| | | | |
| Estimated Useful Life | Estimated Fair Value |
Tradename | Indefinite-lived | $ | 13,400 |
|
Customer relationships | 10 years | 42,101 |
|
| | $ | 55,501 |
|
The Embee acquisition has been accounted for under the acquisition method and, accordingly, is included in the consolidated financial statements from the effective date of acquisition. The Embee acquisition was funded by the Company's long-term borrowings in place at the date of acquisition. The Company incurred $80 for the three months ended June 30, 2013 and $805 for the fiscal year ended March 31, 2013 in acquisition-related costs in connection with the Embee acquisition, which is recorded in selling, general and administrative expenses in the respective Consolidated Statement of Income.
The acquisitions of GPECS and Embee are herein referred to as the "fiscal 2013 acquisitions."
The pro forma results presented below include the effects of the Primus acquisition and the fiscal 2013 acquisitions as if they had been consummated as of April 1, 2012. The pro forma results include the amortization associated with an estimate of acquired intangible assets and interest expense on debt to fund these acquisitions, as well as fair value adjustments for property and equipment and off-market contracts. To better reflect the combined operating results, nonrecurring charges directly attributable to the transaction have been excluded. In addition, the pro forma results do not include any expected benefits of the acquisitions. Accordingly, the pro forma results are not necessarily indicative of either future results of operations or results
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
3. ACQUISITIONS (Continued)
that might have been achieved had the acquisitions been consummated as of April 1, 2012 and have been included in the Company's results of operations for fiscal years 2014 and 2013.
|
| | | | | | | | |
| | Three Months Ended June 30, |
| | 2013 | | 2012 |
Net Sales | | $ | 948,879 |
| | $ | 957,289 |
|
Net income | | 79,199 |
| | 81,384 |
|
Earnings per share—basic | | $ | 1.56 |
| | $ | 1.65 |
|
Earnings per share—diluted | | $ | 1.50 |
| | $ | 1.56 |
|
4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
In April 2013, the Company sold the assets and liabilities of Triumph Instruments - Burbank and Triumph Instruments - Ft. Lauderdale ("Triumph Instruments") for total proceeds of $11,426 including cash received at closing of $9,676, a note of $1,500, and the remaining amount held in escrow, resulting in a loss of $1,462 recognized during the year ended March 31, 2013. The assets and liabilities of Triumph Instruments were classified as held for sale as of March 31, 2013. The loss on the sale of the assets and liabilities of Triumph Instruments is included in the Consolidated Statements of Income within selling, general and administrative expenses for the year ended March 31, 2013. The operating results of Triumph Instruments were included in the Aftermarket Services Group through the date of disposal. The Company expects to have significant continuing involvement in the business and markets of the disposed entities, as defined by ASC 205-20, Discontinued Operations; and, therefore, as a result, the disposal group does not meet the criteria to be classified as discontinued operations.
To measure the amount of impairment, the Company compared the fair value of assets and liabilities at the evaluation date to the carrying amount at the end of the month prior to the evaluation date. The sale of the Triumph Instruments assets and liabilities are categorized as Level 2 within the fair value hierarchy. The key assumption included the negotiated sales price of the assets and the assumptions of the liabilities (see Note 7 below for definition of levels).
Assets and liabilities held for sale are comprised of the following:
|
| | | |
| March 31, 2013 |
Assets held for sale: | |
Trade and other receivables, net | $ | 2,545 |
|
Inventories | 7,668 |
|
Rotable assets | 1,957 |
|
Property, plant and equipment | 2,431 |
|
Other | 146 |
|
Total assets held for sale | $ | 14,747 |
|
Liabilities related to assets held for sale: | |
Accounts payable | $ | 1,515 |
|
Accrued expenses | 945 |
|
Other noncurrent liabilities | 161 |
|
Total liabilities related to assets held for sale | $ | 2,621 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
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:
|
| | | | | | | |
| June 30, 2013 | | March 31, 2013 |
Raw materials | $ | 83,363 |
| | $ | 70,242 |
|
Work-in-process, including manufactured and purchased components | 1,051,086 |
| | 965,825 |
|
Finished goods | 86,565 |
| | 75,763 |
|
Less: unliquidated progress payments | (134,261 | ) | | (124,128 | ) |
Total inventories | $ | 1,086,753 |
| | $ | 987,702 |
|
Work-in-process inventory includes capitalized pre-production costs. Capitalized pre-production costs include nonrecurring engineering, planning and design, including applicable overhead, incurred before production is manufactured on a regular basis. Significant customer-directed work changes can also cause pre-production costs to be incurred. These costs are typically recovered over a contractually determined number of ship set deliveries and the Company believes these amounts will be fully recovered. The balance of capitalized pre-production costs at June 30, 2013 and March 31, 2013 was $86,088 and $71,167, respectively, related to the Company's contract with Bombardier for the Global 7000/8000 program.
The Company is still in the early-development stages for the Bombardier Global 7000/8000 program, as these aircrafts are not scheduled to enter service until 2014 or later. Transition of this program from development to recurring production levels is dependent upon the success of the program at achieving flight testing and certification, as well as the ability of the Bombardier Global 7000/8000 program to generate acceptable levels of aircraft sales. The failure to achieve these milestones and level of sales or significant cost overruns may result in an impairment of the capitalized pre-production costs.
6. LONG-TERM DEBT
Long-term debt consists of the following:
|
| | | | | | | |
| June 30, 2013 | | March 31, 2013 |
| | | |
Revolving credit facility | $ | 249,784 |
| | $ | 95,849 |
|
Receivable securitization facility | 160,900 |
| | 150,000 |
|
Equipment leasing facility and other capital leases | 57,650 |
| | 61,449 |
|
Secured promissory notes | 8,741 |
| | 8,741 |
|
Senior subordinated notes due 2017 | 173,418 |
| | 173,344 |
|
Senior notes due 2018 | 348,203 |
| | 348,133 |
|
Senor notes due 2021 | 375,000 |
| | 375,000 |
|
Convertible senior subordinated notes | 32,109 |
| | 109,369 |
|
Other debt | 7,978 |
| | 7,978 |
|
| 1,413,783 |
| | 1,329,863 |
|
Less current portion | 56,457 |
| | 133,930 |
|
| $ | 1,357,326 |
| | $ | 1,195,933 |
|
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 May 23, 2012, 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 $1,000,000, with a $50,000 accordion feature, from $850,000, (ii) extend the maturity date to May 23, 2017, and (iii) amend certain other terms and covenants. In connection with the amendment to the Credit Facility, the Company incurred $2,100 of financing costs. These costs, along with the $7,000 of unamortized financing costs prior to the closing, are being amortized over the remaining term of the Credit Facility.
On April 5, 2011, in connection with a prior amendment and restatement of the Credit Facility, the Company extinguished its then-outstanding term loan credit agreement (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 for the three months ended June 30, 2012.
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 1.50% and 2.75%; (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 June 30, 2013, there were $249,784 in borrowings and $36,246 in letters of credit outstanding under the Credit Facility primarily to support insurance policies. At March 31, 2013, there were $95,849 in borrowings and $31,415 in letters of credit outstanding under the Credit Facility primarily to support insurance policies. 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 June 30, 2013, the Company had borrowing capacity under this facility of $713,970 after reductions for borrowings and letters of credit outstanding under the facility.
Receivables Securitization Facility
In February 2013, the Company amended its $175,000 receivable securitization facility (the “Securitization Facility”) extending the term through February 2016. In connection with the Securitization Facility, the Company sells on a revolving basis certain trade accounts receivable to Triumph Receivables, LLC, a wholly-owned special-purpose entity, which in turn sells a percentage ownership interest in the receivables to commercial paper conduits sponsored by financial institutions. The Company is the servicer of the trade accounts receivable under the Securitization Facility. As of June 30, 2013, the maximum amount available under the Securitization Facility was $175,000. 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 0.43% on the amount outstanding under the Securitization Facility. Additionally, the commitment fee is 0.43% on 102.00% of the maximum amount available under the Securitization Facility. At June 30, 2013, there was $160,900 outstanding under the Securitization Facility. In connection
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6. LONG-TERM DEBT (Continued)
with amending the Securitization Facility, the Company incurred approximately $196 of financing costs. These costs, along with the $537 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 Accounting Standards Codification.
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.
Capital Leases
During the three months ended June 30, 2013 and 2012, the Company entered into new capital leases in the amount of $26 and $25, respectively, to finance a portion of the Company’s capital additions for the period. During the three months ended June 30, 2013 and 2012, the Company obtained financing for existing fixed assets in the amount of $0 and $11,199, respectively.
Senior Subordinated Notes Due 2017
On November 16, 2009, the Company issued $175,000 principal amount of 8.00% Senior Subordinated Notes due 2017 (the “2017 Notes”). The 2017 Notes were sold at 98.56% of principal amount and 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 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.
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,
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6. LONG-TERM DEBT (Continued)
(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.
Senior Notes Due 2021
On February 26, 2013, the Company issued $375,000 principal amount of 4.875% Senior Notes due 2021 (the "2021 Notes"). The 2021 Notes were sold at 100% of principal amount and have an effective interest yield of 4.875%. Interest on the Notes accrues at the rate of 4.875% per annum and is payable semiannually in cash in arrears on April 1 and October 1 of each year, commencing on October 1, 2013. In connection with the issuance of the 2021 Notes, the Company incurred approximately $6,327 of costs, which were deferred and are being amortized on the effective interest method over the term of the 2021 Notes.
The 2021 Notes are the Company's senior unsecured obligations and rank equally in right of payment with all of its other existing and future senior unsecured indebtedness and senior in right of payment to all of its existing and future subordinated indebtedness. The 2021 Notes are guaranteed on a full, joint and several basis by each of the Guarantor Subsidiaries.
The Company may redeem some or all of the 2021 Notes prior to April 1, 2017 by paying a "make-whole" premium. The Company may redeem some or all of the 2021 Notes on or after April 1, 2017 at specified redemption prices. In addition, prior to April 1, 2016, the Company may redeem up to 35% of the 2021 Notes with the net proceeds of certain equity offerings at a redemption price equal to 104.875% of the aggregate principal amount plus accrued and unpaid interest, if any, subject to certain limitations set forth in the indenture governing the 2021 Notes (the "2021 Indenture").
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6. LONG-TERM DEBT (Continued)
The Company is obligated to offer to repurchase the 2021 Notes at a price of (i) 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (ii) 100% of their principal amount plus accrued and unpaid interest, if any, in the event of certain asset sales. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The 2021 Indenture contains covenants that, among other things, limit the Company's ability and the ability of any of the Guarantor Subsidiaries to (i) grant liens on its assets, (ii) make dividend payments, other distributions or other restricted payments, (iii) incur restrictions on the ability of the Guarantor Subsidiaries to pay dividends or make other payments, (iv) enter into sale and leaseback transactions, (v) merge, consolidate, transfer or dispose of substantially all of their assets, (vi) incur additional indebtedness, (vii) use the proceeds from sales of assets, including capital stock of restricted subsidiaries, and (viii) enter into transactions with affiliates.
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 net proceeds from the sale were used for prepayment of the Company’s then-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 five consecutive trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals or exceeds 120% of the 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 continue to be payable on principal that remains outstanding. This contingent interest feature represents an embedded derivative. The value of the derivative was not deemed material at June 30, 2013 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, 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, 2016 and 2021, at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to, but not including, the date of repurchase. On September 2, 2011, the Company submitted a tender offer of repurchase to the holders of the Convertible Notes, expiring October 3, 2011, and no notes were tendered for repurchase. The Convertible Notes are convertible into the Company’s common stock at a rate equal to 36.8257 shares per $1 principal amount of the Convertible Notes (equal to an initial conversion price of approximately $27.15 per share), subject to adjustment as described in the
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
6. LONG-TERM DEBT (Continued)
indenture governing the Convertible Notes. Upon conversion, the Company will deliver to the holder surrendering the Convertible Notes for conversion, for each $1 principal amount of Convertible Notes, an amount consisting of cash equal to the lesser of $1 and the Company’s total conversion obligation and, to the extent that the Company’s total conversion obligation exceeds $1, at the Company’s election, cash or shares of the Company’s common stock in respect of the remainder.
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 June 30, 2013, the Convertible Notes were eligible for conversion. During the fiscal years ended March 31, 2013 and 2012, the Company settled the conversion of $19,286 and $50,395, respectively, 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 395,269 and 772,438 shares, respectively. During the three months ended June 30, 2013, the Company settled the conversion of $77,260 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 1,849,548 shares. In July 2013, 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 June 30, 2013, 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 September 30, 2013. 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 $27.16. The average price of the Company’s common stock for the three months ended June 30, 2013 and 2012 was $77.45 and $60.43, respectively. Therefore, for the three months ended June 30, 2013 and 2012, there were 1,692,709 and 2,455,080 additional shares, respectively, included in the calculation of diluted earnings per share. If the Company undergoes a fundamental change, holders of the Convertible Notes will have the right, subject to certain conditions, to require the Company to repurchase for cash all or a portion of their Convertible Notes 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.
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
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
7. FAIR VALUE MEASUREMENTS (Continued)
Recurring Measurements
The following table provides the assets (liabilities) reported at fair value and measured on a recurring basis as of June 30, 2013 and March 31, 2013:
|
| | | | | | | | | | |
Description | | Level | | June 30, 2013 | | March 31, 2013 |
Contingent consideration | | 3 | | $ | (2,689 | ) | | $ | (2,614 | ) |
Derivatives | | 2 | | (141 | ) | | 209 |
|
The fair value of the contingent consideration at the date of the acquisition of Aviation Network Services, LLC was $1,926, 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 were updated during the three months ended June 30, 2013, based on the underlying earnings projections exceeding initial assumptions. In July 2013, the Company paid the first installment of $1,100 related to this contingent consideration obligation.
Derivatives included in the table above relate to derivative financial instruments that the Company uses to manage its exposure to fluctuations in foreign currency exchange rates. Foreign currency exchange contracts are entered into to manage the exchange rate risk of forecasted foreign currency denominated cash payments. The foreign currency exchange contracts are designated as cash flow hedges. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resulting designation. Adjustments to reflect changes in fair values of derivatives attributable to the effective portion of hedges that are considered highly effective hedges are reflected net of income taxes in accumulated other comprehensive income (loss) until the hedged transaction is recognized in earnings. Changes in the fair value of the derivatives that are attributable to the ineffective portion of the hedges, or of derivatives that are not considered to be highly effective hedges, if any, are immediately recognized in earnings. The aggregate notional amount of our outstanding foreign currency exchange contracts at June 30, 2013 was $11,193, with open settlement dates up to June 30, 2014. The amount of ineffectiveness on derivatives is not significant. The Company estimates that approximately $90 of losses presently in accumulated other comprehensive income (loss) will be reclassified into earnings during the next twelve months.
The following table represents a rollforward of the balances of our liabilities recorded at fair value that are valued using Level 3 inputs:
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2013 Balance | | Net Purchases (Sales), Issues (Settlements) | | Net Realized Appreciation (Depreciation) | | Net Unrealized Appreciation (Depreciation) | | June 30, 2013 Balance |
Contingent consideration | $ | (2,614 | ) | | $ | — |
| | $ | (75 | ) | | $ | — |
| | $ | (2,689 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2012 Balance | | Net Purchases (Sales), Issues (Settlements) | | Net Realized Appreciation (Depreciation) | | Net Unrealized Appreciation (Depreciation) | | June 30, 2012 Balance |
Contingent consideration | $ | (2,019 | ) | | $ | — |
| | $ | (382 | ) | | $ | — |
| | $ | (2,401 | ) |
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
7. FAIR VALUE MEASUREMENTS (Continued)
The following table presents quantitative information for liabilities recorded at fair value using Level 3 inputs:
|
| | | | | | | | | |
| June 30, 2013 Balance | | Valuation Technique | | Unobservable input | | Range |
Contingent consideration | $ | (2,689 | ) | | Discounted cash flow | | Earnings of acquired company | | $0 - $3,000 |
The Financial Instruments topic of the ASC requires disclosure of the estimated fair value of certain financial instruments. These estimated fair values as of June 30, 2013 and March 31, 2013 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.
Nonrecurring Measurements
The sale of Triumph Instruments assets and liabilities is categorized as Level 2 within the fair value hierarchy (Note 4), as of March 31, 2013.
Financial Instruments Not Recorded at Fair Value
The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate fair value because of their short maturities (Level 1 inputs). Carrying amounts and the related estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements are as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | March 31, 2013 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | |
Long-term debt | $ | 1,413,783 |
| | $ | 1,506,278 |
| | $ | 1,329,863 |
| | $ | 1,594,800 |
|
The fair value of the long-term debt was calculated based on interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements, unless quoted market prices were available (Level 2 inputs).
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.
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
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 June 30, |
| (in thousands) |
| 2013 | | 2012 |
| | | |
Weighted-average common shares outstanding – basic | 50,815 |
| | 49,416 |
|
Net effect of dilutive stock options and nonvested stock | 298 |
| | 400 |
|
Potential common shares – convertible debt | 1,693 |
| | 2,455 |
|
Weighted-average common shares outstanding – diluted | 52,806 |
| | 52,271 |
|
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 June 30, 2013 and March 31, 2013, the total amount of accrued income tax-related interest and penalties was $153 and $236, respectively.
As of June 30, 2013 and March 31, 2013, the total amount of unrecognized tax benefits was $7,165 and $7,728, respectively, of which $5,381 and $5,945, respectively, would impact the effective rate, if recognized. The Company does not anticipate that total unrecognized tax benefits will be reduced in the next 12 months.
The effective income tax rate for the three months ended June 30, 2013 was 35.0% as compared to 38.3% for the three months ended June 30, 2012. For the three months ended June 30, 2013, the income tax provision was reduced to reflect the reversal of $704 of unrecognized tax benefits.
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 June 30, 2013, the Company was subject to examination in one state jurisdiction for fiscal years ended March 31, 2009 through March 31, 2011. The Company has filed appeals in a prior state examination related to fiscal years ended March 31, 1999 through March 31, 2005. The fiscal year ended March 31, 2011 is currently being examined by the Internal Revenue Service. 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.
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
10. GOODWILL
The following is a summary of the changes in the carrying value of goodwill by reportable segment, from March 31, 2013 through June 30, 2013:
|
| | | | | | | | | | | | | | | |
| Aerostructures | | Aerospace Systems | | Aftermarket
Services | | Total |
| | | | | | | |
Balance, March 31, 2013 | $ | 1,316,450 |
| | $ | 345,356 |
| | $ | 55,986 |
| | $ | 1,717,792 |
|
Goodwill recognized in connection with acquisitions | 5,532 |
| | — |
| | — |
| | 5,532 |
|
Effect of exchange rate changes | 475 |
| | 268 |
| | — |
| | 743 |
|
Balance, June 30, 2013 | $ | 1,322,457 |
| | $ | 345,624 |
| | $ | 55,986 |
| | $ | 1,724,067 |
|
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.
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
Net Periodic Benefit Plan Costs
The components of net periodic benefit costs for our postretirement benefit plans are shown in the following table:
|
| | | | | | | |
| Pension benefits |
| Three Months Ended June 30, |
| 2013 | | 2012 |
Components of net periodic benefit expense (income): | | | |
Service cost | $ | 3,293 |
| | $ | 4,626 |
|
Interest cost | 23,216 |
| | 24,587 |
|
Expected return on plan assets | (37,018 | ) | | (34,334 | ) |
Amortization of prior service costs | (1,683 | ) | | (1,457 | ) |
Amortization of net loss | 4,531 |
| | 80 |
|
Special termination benefits | — |
| | 1,150 |
|
Net periodic benefit income | $ | (7,661 | ) | | $ | (5,348 | ) |
|
| | | | | | | |
| Other postretirement benefits |
| Three Months Ended June 30, |
| 2013 | | 2012 |
Components of net periodic benefit expense: | | | |
Service cost | $ | 765 |
| | $ | 885 |
|
Interest cost | 3,138 |
| | 3,940 |
|
Amortization of prior service costs | (1,132 | ) | | (1,132 | ) |
Net periodic benefit expense | $ | 2,771 |
| | $ | 3,693 |
|
The Company periodically experiences events or makes changes to its benefit plans that result in special charges. Some require remeasurements. The following summarizes the key events whose effects on net periodic benefit costs are included in the tables above:
| |
• | In April 2012, the Company completed an early retirement incentive offer with a portion of its second largest union-represented group of production and maintenance employees. The early retirement incentive offer provided for an increase in the pension benefits payable to covered employees who retire no later than November 30, 2012. This early retirement incentive resulted in a special termination benefit expense of $1,150 and is presented on the accompanying Consolidated Statement of Income as "Early retirement incentive expense." |
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
12. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss (AOCI) by component for the three months ended June 30, 2013 were as follows:
|
| | | | | | | | | | | | | | |
| | Currency Translation Adjustment | Unrealized Gains and Losses on Derivative Instruments | Defined Benefit Pension Plans and Other Postretirement Benefits | | Total (1) |
Balance March 31, 2012 | | $ | 3,513 |
| $ | 131 |
| $ | (64,616 | ) | | $ | (60,972 | ) |
OCI before reclassifications | | (509 | ) | (235 | ) | — |
| | (744 | ) |
Amounts reclassified from AOCI | | — |
| 15 |
| 1,072 |
| (2) | 1,087 |
|
Net current period OCI | | (509 | ) | (220 | ) | 1,072 |
| | 343 |
|
Balance June 30, 2013 | | $ | 3,004 |
| $ | (89 | ) | $ | (63,544 | ) | | $ | (60,629 | ) |
(1) Net of Tax.
(2) Primarily relates to amortization of actuarial losses for the three months ended June 30, 2013 totaling $2,831 (net of tax of $1,700) which is included in the net periodic pension cost of which a portion is allocated to production as inventoried costs.
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
13. SEGMENTS
The Company has three reportable segments: the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group. The Company’s reportable segments are aligned with how the business is managed and the markets that the Company serves are viewed. The Chief Operating Decision Maker (the “CODM”) evaluates performance and allocates resources based upon review of segment information. The CODM utilizes earnings before interest, income taxes, depreciation and amortization (“Adjusted EBITDA”) as a primary measure of segment profitability to evaluate performance of its segments and allocate resources.
The Aerostructures segment consists of the Company’s operations that manufacture products primarily for the aerospace original equipment manufacturer ("OEM") market. The Aerostructures segment’s revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components, including aircraft wings, fuselage sections, tail assemblies, engine nacelles, flight control surfaces as well as helicopter cabins. Further, the segment’s operations also design and manufacture composite assemblies for floor panels and environmental control system ducts. These products are sold to various aerospace OEMs on a global basis.
The Aerospace Systems segment consists of the Company’s operations that also manufacture products primarily for the aerospace OEM market, as well as the related aftermarket. The segment’s operations design and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators, mechanical control cables and non-structural cockpit components. These products are sold primarily to various aerospace OEMs on a global basis.
The Aftermarket Services segment consists of the Company’s operations that provide maintenance, repair and overhaul services to both commercial and military markets on components and accessories manufactured by third parties. Maintenance, repair and overhaul revenues are derived from services on auxiliary power units, airframe and engine accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the segment’s operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The segment’s operations also perform repair and overhaul services and supply spare parts for various types of gauges for a broad range of commercial airlines on a worldwide basis.
Segment Adjusted EBITDA is total segment revenue reduced by operating expenses (less depreciation and amortization) identifiable with that segment. Corporate includes general corporate administrative costs and any other costs not identifiable with one of the Company’s segments, including early retirement incentives, such as $1,150 of special termination benefit expenses for the three months ended June 30, 2012.
The Company does not accumulate net sales information by product or service or groups of similar products and services and, therefore, the Company does not disclose net sales by product or service because to do so would be impracticable. Selected financial information for each reportable segment and the reconciliation of Adjusted EBITDA to operating income is as follows:
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
13. SEGMENTS (Continued)
|
| | | | | | | |
| Three Months Ended June 30, |
| 2013 | | 2012 |
Net sales: | | | |
Aerostructures | $ | 651,888 |
| | $ | 669,853 |
|
Aerospace systems | 219,526 |
| | 140,512 |
|
Aftermarket services | 74,353 |
| | 79,977 |
|
Elimination of inter-segment sales | (2,084 | ) | | (2,654 | ) |
| $ | 943,683 |
| | $ | 887,688 |
|
| | | |
Income from continuing operations before income taxes: | | | |
Operating income (expense): | | | |
Aerostructures | $ | 100,387 |
| | $ | 120,138 |
|
Aerospace systems | 42,643 |
| | 23,465 |
|
Aftermarket services | 11,279 |
| | 11,807 |
|
Corporate | (12,963 | ) | | (14,468 | ) |
| 141,346 |
| | 140,942 |
|
Interest expense and other | 19,710 |
| | 17,232 |
|
| $ | 121,636 |
| | $ | 123,710 |
|
| | | |
Depreciation and amortization: | | | |
Aerostructures | $ | 26,313 |
| | $ | 23,904 |
|
Aerospace systems | 8,539 |
| | 4,474 |
|
Aftermarket services | 1,877 |
| | 2,326 |
|
Corporate | 1,205 |
| | 1,111 |
|
| $ | 37,934 |
| | $ | 31,815 |
|
| | | |
Amortization of acquired contract liabilities, net: | | | |
Aerostructures | $ | 6,141 |
| | $ | 6,993 |
|
Aerospace systems | 5,009 |
| | — |
|
| 11,150 |
| | 6,993 |
|
| | | |
Adjusted EBITDA: | | | |
Aerostructures | $ | 120,559 |
| | $ | 137,049 |
|
Aerospace systems | 46,173 |
| | 27,939 |
|
Aftermarket services | 13,156 |
| | 14,133 |
|
Corporate | (11,758 | ) | | (12,207 | ) |
| $ | 168,130 |
| | $ | 166,914 |
|
| | | |
Capital expenditures: | | | |
Aerostructures | $ | 45,945 |
| | $ | 30,012 |
|
Aerospace systems | 4,432 |
| | 2,789 |
|
Aftermarket services | 4,152 |
| | 4,097 |
|
Corporate | 1,700 |
| | 207 |
|
| $ | 56,229 |
| | $ | 37,105 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
13. SEGMENTS (Continued)
|
| | | | | | | |
| June 30, 2013 | | March 31, 2013 |
Total Assets: | | | |
Aerostructures | $ | 3,793,775 |
| | $ | 3,707,527 |
|
Aerospace systems | 1,054,392 |
| | 1,041,935 |
|
Aftermarket services | 314,094 |
| | 327,609 |
|
Corporate | 99,026 |
| | 108,337 |
|
| $ | 5,261,287 |
| | $ | 5,185,408 |
|
During the three months ended June 30, 2013 and 2012, the Company had international sales of $145,091 and $127,111, respectively.
| |
14. | SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS |
The 2017 Notes, the 2018 Notes and the 2021 Notes are fully and unconditionally guaranteed on a joint and several basis by the Guarantor Subsidiaries. The total assets, stockholders' equity, revenue, earnings and cash flows from operating activities of the Guarantor Subsidiaries exceeded a majority of the consolidated total of such items as of and for the periods reported. The only consolidated subsidiaries of the Company that are not guarantors of the 2017 Notes, the 2018 Notes and the 2021 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 June 30, 2013 and March 31, 2013, condensed consolidating statements of comprehensive income for the three months ended June 30, 2013 and 2012, and condensed consolidating statements of cash flows for the three months ended June 30, 2013 and 2012.
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
| |
14. | SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued) |
SUMMARY CONSOLIDATING BALANCE SHEETS:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
| Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 3,112 |
| | $ | 1,858 |
| | $ | 13,559 |
| | $ | — |
| | $ | 18,529 |
|
Trade and other receivables, net | 1,374 |
| | 157,378 |
| | 252,400 |
| | — |
| | 411,152 |
|
Inventories | — |
| | 1,034,908 |
| | 51,845 |
| | — |
| | 1,086,753 |
|
Rotable assets | — |
| | 24,736 |
| | 10,369 |
| | — |
| | 35,105 |
|
Deferred income taxes | — |
| | 58,874 |
| | 12 |
| | — |
| | 58,886 |
|
Prepaid expenses and other | 4,460 |
| | 11,439 |
| | 4,713 |
| | — |
| | 20,612 |
|
Total current assets | 8,946 |
| | 1,289,193 |
| | 332,898 |
| | — |
| | 1,631,037 |
|
Property and equipment, net | 11,000 |
| | 776,520 |
| | 97,663 |
| | — |
| | 885,183 |
|
Goodwill and other intangible assets, net | 168 |
| | 2,619,874 |
| | 55,465 |
| | — |
| | 2,675,507 |
|
Other, net | 58,314 |
| | 8,908 |
| | 2,338 |
| | — |
| | 69,560 |
|
Intercompany investments and advances | 3,311,515 |
| | 163,071 |
| | 9,598 |
| | (3,484,184 | ) | | — |
|
Total assets | $ | 3,389,943 |
| | $ | 4,857,566 |
| | $ | 497,962 |
| | $ | (3,484,184 | ) | | $ | 5,261,287 |
|
| | | | |
Current liabilities: | | | | | | | | | |
Current portion of long-term debt | $ | 32,359 |
| | $ | 24,098 |
| | $ | — |
| | $ | — |
| | $ | 56,457 |
|
Accounts payable | 8,672 |
| | 287,940 |
| | 15,798 |
| | — |
| | 312,410 |
|
Accrued expenses | 47,854 |
| | 177,847 |
| | 22,414 |
| | — |
| | 248,115 |
|
Total current liabilities | 88,885 |
| | 489,885 |
| | 38,212 |
| | — |
| | 616,982 |
|
Long-term debt, less current portion | 1,152,216 |
| | 44,210 |
| | 160,900 |
| | — |
| | 1,357,326 |
|
Intercompany advances | — |
| | 2,126,246 |
| | 190,424 |
| | (2,316,670 | ) | | — |
|
Accrued pension and other postretirement benefits, noncurrent | 7,361 |
| | 624,640 |
| | — |
| | — |
| | 632,001 |
|
Deferred income taxes and other | 7,296 |
| | 506,390 |
| | 11,872 |
| | (4,766 | ) | | 520,792 |
|
Total stockholders’ equity | 2,134,185 |
| | 1,066,195 |
| | 96,554 |
| | (1,162,748 | ) | | 2,134,186 |
|
Total liabilities and stockholders’ equity | $ | 3,389,943 |
| | $ | 4,857,566 |
| | $ | 497,962 |
| | $ | (3,484,184 | ) | | $ | 5,261,287 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
| |
14. | SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued) |
SUMMARY CONSOLIDATING BALANCE SHEETS:
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2013 |
| Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 3,110 |
| | $ | 1,537 |
| | $ | 27,390 |
| | $ | — |
| | $ | 32,037 |
|
Trade and other receivables, net | 1,141 |
| | 171,129 |
| | 261,657 |
| | — |
| | 433,927 |
|
Inventories | — |
| | 956,880 |
| | 30,822 |
| | — |
| | 987,702 |
|
Rotable assets | — |
| | 24,903 |
| | 9,950 |
| | — |
| | 34,853 |
|
Deferred income taxes | — |
| | 100,533 |
| | — |
| | — |
| | 100,533 |
|
Prepaid expenses and other | 5,533 |
| | 15,159 |
| | 2,890 |
| | — |
| | 23,582 |
|
Assets held for sale | — |
| | 14,747 |
| | — |
| | — |
| | 14,747 |
|
Total current assets | 9,784 |
| | 1,284,888 |
| | 332,709 |
| | — |
| | 1,627,381 |
|
Property and equipment, net | 9,999 |
| | 753,510 |
| | 51,575 |
| | — |
| | 815,084 |
|
Goodwill and other intangible assets, net | 335 |
| | 2,630,300 |
| | 45,516 |
| | — |
| | 2,676,151 |
|
Other, net | 58,526 |
| | 7,873 |
| | 393 |
| | — |
| | 66,792 |
|
Intercompany investments and advances | 3,137,667 |
| | 325,786 |
| | 2,777 |
| | (3,466,230 | ) | | — |
|
Total assets | $ | 3,216,311 |
| | $ | 5,002,357 |
| | $ | 432,970 |
| | $ | (3,466,230 | ) | | $ | 5,185,408 |
|
| | | | | | | | | |
Current liabilities: | | | | | | | | | |
Current portion of long-term debt | $ | 109,648 |
| | $ | 24,282 |
| | $ | — |
| | $ | — |
| | $ | 133,930 |
|
Accounts payable | 9,400 |
| | 309,363 |
| | 8,663 |
| | — |
| | 327,426 |
|
Accrued expenses | 35,894 |
| | 231,441 |
| | 9,514 |
| | — |
| | 276,849 |
|
Liabilities related to assets held for sale | — |
| | 2,621 |
| | — |
| | — |
| | 2,621 |
|
Total current liabilities | 154,942 |
| | 567,707 |
| | 18,177 |
| | — |
| | 740,826 |
|
Long-term debt, less current portion | 998,200 |
| | 47,733 |
| | 150,000 |
| | — |
| | 1,195,933 |
|
Intercompany advances | — |
| | 2,193,874 |
| | 202,621 |
| | (2,396,495 | ) | | — |
|
Accrued pension and other postretirement benefits, noncurrent | 7,264 |
| | 663,911 |
| | — |
| | — |
| | 671,175 |
|
Deferred income taxes and other | 10,747 |
| | 522,818 |
| | — |
| | (1,249 | ) | | 532,316 |
|
Total stockholders’ equity | 2,045,158 |
| | 1,006,314 |
| | 62,172 |
| | (1,068,486 | ) | | 2,045,158 |
|
Total liabilities and stockholders’ equity | $ | 3,216,311 |
| | $ | 5,002,357 |
| | $ | 432,970 |
| | $ | (3,466,230 | ) | | $ | 5,185,408 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
| |
14. | SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued) |
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2013 |
| Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net sales | $ | — |
| | $ | 905,058 |
| | $ | 39,809 |
| | $ | (1,184 | ) | | $ | 943,683 |
|
| | | | | | | | | |
Operating costs and expenses: | | | | | | | | | |
Cost of sales | — |
| | 669,202 |
| | 28,453 |
| | (1,184 | ) | | 696,471 |
|
Selling, general and administrative | 10,593 |
| | 50,726 |
| | 5,398 |
| | — |
| | 66,717 |
|
Depreciation and amortization | 633 |
| | 35,667 |
| | 1,634 |
| | | | 37,934 |
|
Relocation costs | — |
| | 1,215 |
| | — |
| | — |
| | 1,215 |
|
| 11,226 |
| | 756,810 |
| | 35,485 |
| | (1,184 | ) | | 802,337 |
|
Operating (loss) income | (11,226 | ) | | 148,248 |
| | 4,324 |
| | — |
| | 141,346 |
|
Intercompany interest and charges | (57,390 | ) | | 56,430 |
| | 960 |
| | — |
| | — |
|
Interest expense and other | 18,649 |
| | 1,675 |
| | (614 | ) | | — |
| | 19,710 |
|
Income before income taxes | 27,515 |
| | 90,143 |
| | 3,978 |
| | — |
| | 121,636 |
|
Income tax expense | 8,390 |
| | 33,912 |
| | 291 |
| | — |
| | 42,593 |
|
Net income | 19,125 |
| | 56,231 |
| | 3,687 |
| | — |
| | 79,043 |
|
Other comprehensive income (loss) | — |
| | 823 |
| | (480 | ) | | — |
| | 343 |
|
Total comprehensive income | $ | 19,125 |
| | $ | 57,054 |
| | $ | 3,207 |
| | $ | — |
| | $ | 79,386 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
| |
14. | SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued) |
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2012 |
| Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net sales | $ | — |
| | $ | 862,475 |
| | $ | 26,902 |
| | $ | (1,689 | ) | | $ | 887,688 |
|
| | | | | | | | | |
Operating costs and expenses: | | | | | | | | | |
Cost of sales | — |
| | 635,345 |
| | 17,621 |
| | (1,689 | ) | | 651,277 |
|
Selling, general and administrative | 9,186 |
| | 47,633 |
| | 5,140 |
| | — |
| | 61,959 |
|
Depreciation and amortization | 601 |
| | 30,134 |
| | 1,080 |
| | — |
| | 31,815 |
|
Acquisition and integration expenses | 545 |
| | — |
| | — |
| | — |
| | 545 |
|
Early retirement incentives | 1,150 |
| | — |
| | — |
| | — |
| | 1,150 |
|
| 11,482 |
| | 713,112 |
| | 23,841 |
| | (1,689 | ) | | 746,746 |
|
Operating (loss) income | (11,482 | ) | | 149,363 |
| | 3,061 |
| | — |
| | 140,942 |
|
Intercompany interest and charges | (49,338 | ) | | 48,512 |
| | 826 |
| | — |
| | — |
|
Interest expense and other | 15,500 |
| | 2,429 |
| | (697 | ) | | — |
| | 17,232 |
|
Income before income taxes | 22,356 |
| | 98,422 |
| | 2,932 |
| | — |
| | 123,710 |
|
Income tax expense | 10,181 |
| | 36,844 |
| | 353 |
| | — |
| | 47,378 |
|
Net income | 12,175 |
| | 61,578 |
| | 2,579 |
| | — |
| | 76,332 |
|
Other comprehensive loss | — |
| | (1,667 | ) | | (4,422 | ) | | — |
| | (6,089 | ) |
Total comprehensive income (loss) | $ | 12,175 |
| | $ | 59,911 |
| | $ | (1,843 | ) | | $ | — |
| | $ | 70,243 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
| |
14. | SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued) |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2013 |
| Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net income | $ | 19,125 |
| | $ | 56,231 |
| | $ | 3,687 |
| | $ | — |
| | $ | 79,043 |
|
| | | | | | | | | |
Adjustments to reconcile net provided by operating activities | 15,244 |
| | (104,913 | ) | | 22,508 |
| | — |
| | (67,161 | ) |
Net cash provided by operating activities | 34,369 |
| | (48,682 | ) | | 26,195 |
| | — |
| | 11,882 |
|
Capital expenditures | (1,466 | ) | | (52,897 | ) | | (1,866 | ) | | — |
| | (56,229 | ) |
Reimbursed capital expenditures | — |
| | 2,869 |
| | — |
| | — |
| | 2,869 |
|
Proceeds from sale of assets | — |
| | 10,321 |
| | — |
| | — |
| | 10,321 |
|
Acquisitions, net of cash acquired | — |
| | (22,255 | ) | | (9,074 | ) | | — |
| | (31,329 | ) |
Net cash used in investing activities | (1,466 | ) | | (61,962 | ) | | (10,940 | ) | | — |
| | (74,368 | ) |
Net decrease in revolving credit facility | 153,935 |
| | — |
| | — |
| | — |
| | 153,935 |
|
Proceeds on issuance of debt | — |
| | — |
| | 25,000 |
| | — |
| | 25,000 |
|
Retirements and repayments of debt | (107,320 | ) | | (3,766 | ) | | (14,100 | ) | | — |
| | (125,186 | ) |
Payments of deferred financing costs | (357 | ) | | — |
| | — |
| | — |
| | (357 | ) |
Dividends paid | (2,069 | ) | | — |
| | — |
| | — |
| | (2,069 | ) |
Repurchase of restricted shares for minimum tax obligation | (2,726 | ) | | — |
| | — |
| | — |
| | (2,726 | ) |
Proceeds from exercise of stock options, including excess tax benefit | 109 |
| | — |
| | — |
| | — |
| | 109 |
|
Intercompany financing and advances | (74,473 | ) | | 114,731 |
| | (40,258 | ) | | — |
| | — |
|
Net cash (used in) provided by financing activities | (32,901 | ) | | 110,965 |
| | (29,358 | ) | | — |
| | 48,706 |
|
Effect of exchange rate changes on cash | — |
| | — |
| | 272 |
| | — |
| | 272 |
|
Net change in cash and cash equivalents | 2 |
| | 321 |
| | (13,831 | ) | | — |
| | (13,508 | ) |
Cash and cash equivalents at beginning of period | 3,110 |
| | 1,537 |
| | 27,390 |
| | — |
| | 32,037 |
|
Cash and cash equivalents at end of period | $ | 3,112 |
| | $ | 1,858 |
| | $ | 13,559 |
| | $ | — |
| | $ | 18,529 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
| |
14. | SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS (Continued) |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2012 |
| Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated Total |
Net income (loss) | $ | 12,175 |
| | $ | 61,578 |
| | $ | 2,579 |
| | $ | — |
| | $ | 76,332 |
|
| | | | | | | | | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | 5,783 |
| | (1,187 | ) | | 21,619 |
| | — |
| | 26,215 |
|
Net cash provided by operating activities | 17,958 |
| | 60,391 |
| | 24,198 |
| | — |
| | 102,547 |
|
Capital expenditures | (71 | ) | | (35,952 | ) | | (1,082 | ) | | — |
| | (37,105 | ) |
Reimbursements of capital expenditures | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Net cash used in investing activities | (71 | ) | | (35,945 | ) | | (1,082 | ) | | — |
| | (37,098 | ) |
Net increase in revolving credit facility | (75,326 | ) | | — |
| | — |
| | — |
| | (75,326 | ) |
Proceeds on issuance of debt | — |
| | 11,199 |
| | 48,400 |
| | — |
| | 59,599 |
|
Retirements and repayments of debt | (15,097 | ) | | (3,048 | ) | | (23,900 | ) | | — |
| | (42,045 | ) |
Payments of deferred financing costs | (2,066 | ) | | — |
| | — |
| | — |
| | (2,066 | ) |
Dividends paid | (1,997 | ) | | — |
| | — |
| | — |
| | (1,997 | ) |
Withholding of restricted shares for minimum tax obligation | (1,840 | ) | | — |
| | — |
| | — |
| | (1,840 | ) |
Proceeds from government grant | — |
| | 1,000 |
| | — |
| | — |
| | 1,000 |
|
Proceeds from exercise of stock options, including excess tax benefit | 253 |
| | — |
| | — |
| | — |
| | 253 |
|
Intercompany financing and advances | 77,691 |
| | (34,699 | ) | | (42,992 | ) | | — |
| | — |
|
Net cash used in financing activities | (18,382 | ) | | (25,548 | ) | | (18,492 | ) | | — |
| | (62,422 | ) |
Effect of exchange rate changes on cash | — |
| | — |
| | (693 | ) | | — |
| | (693 | ) |
Net change in cash | (495 | ) | | (1,102 | ) | | 3,931 |
| | — |
| | 2,334 |
|
Cash at beginning of period | 7,969 |
| | 2,237 |
| | 19,456 |
| | — |
| | 29,662 |
|
Cash at end of period | $ | 7,474 |
| | $ | 1,135 |
| | $ | 23,387 |
| | $ | — |
| | $ | 31,996 |
|
Triumph Group, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except per share data)
(unaudited)
15. COMMITMENTS AND CONTINGENCIES
Trade Secret Litigation over Claims of Eaton Corporation
On July 9, 2004, Eaton Corporation and several of its subsidiaries ("Eaton") sued the Company, a subsidiary and certain employees of the Company and the subsidiary on claims alleging misappropriation of trade secrets and intellectual property allegedly belonging to Eaton relating to the design and manufacture of hydraulic pumps and motors used in military and commercial aviation. The subsidiary and the individual engineer defendants answered Eaton's claims and filed counterclaims, while the Company and an officer of the Company moved to dismiss for lack of personal jurisdiction. In the course of discovery in the suit, the court began an investigation of allegations of wrongdoing by Eaton in its conduct of the litigation. Eaton denied, and continues to deny, these allegations. On December 22, 2010, however, the court dismissed all of Eaton's claims with prejudice based on the court's conclusion that a fraud had been perpetrated on the court by counsel for Eaton of which Eaton was aware or should have been aware. Meanwhile, the Company, several subsidiaries, and the employees sued by Eaton are now pursuing claims (including antitrust claims) and counterclaims against Eaton based on the Eaton misconduct that led to the dismissal of Eaton's claims. Given the court's dismissal of Eaton's claims, we cannot conclude that a loss arising from Eaton's claims is probable; however, given the unusual nature and complexity of the case, we also cannot conclude that the probability of loss is remote, nor can we reasonably estimate the possible loss, or range of loss, that could be incurred by the Company if Eaton were to prevail on appeal and in the litigation that would follow. Even if Eaton were to prevail on appeal, however, we believe we have substantial defenses and would expect to defend the claims vigorously.
Other
In the ordinary course of business, the Company is also involved in disputes, claims, lawsuits, and governmental and regulatory inquiries that it deems to be immaterial. Some may involve claims or potential claims of substantial damages, fines or penalties. While the Company cannot predict the outcome of any pending or future litigation or proceeding and no assurances can be given, the Company does not believe that any pending matter will have a material effect, individually or in the aggregate, on its financial position or results of operations.
16. RELOCATION COSTS
During the fiscal year ended March 31, 2013, the Company committed to relocate the operations of its largest facility in Dallas, Texas and to expand its Red Oak, Texas ("Red Oak") facility to accommodate this relocation. The Company incurred approximately $1,215 of expenses related to the relocation during three months ended June 30, 2013 and expects to incur approximately $28,000 to $40,000 in relocation and related disruption for the fiscal year end March 31, 2014. The relocation is expected to be completed in early fiscal 2015.
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 both build-to-print and proprietary 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 the related aftermarket; 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.
On May 6, 2013, the Company acquired four related entities collectively comprising the Primus Composites business from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, will operate as Triumph Structures - Farnborough and Triumph Structures - Thailand and will be included in the Aerostructures Group. Together, Triumph Structures - Farnborough and Triumph Structures - Thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies. In addition to its composite operations, the Thailand operation also machines and processes metal components. Primus Composites employs approximately 650 employees.
Highlights for the first quarter of the fiscal year ending March 31, 2014 included:
| |
• | Net sales for the first quarter of the fiscal year ending March 31, 2014 increased 6.3% over the prior year period to $943.7 million. |
| |
• | Operating income in the first quarter of fiscal 2014 increased 0.3% over the prior year period to $141.3 million. |
| |
• | Income from continuing operations for the first quarter of fiscal 2014 increased 3.6% over the prior year period to $79.0 million. |
| |
• | Backlog as of June 30, 2013 increased 8.6% year over year to $4.67 billion, and includes expected milestone payments on development contracts. Of our existing backlog of $4.67 billion, we estimate that approximately $1.80 billion will not be shipped by June 30, 2014. |
| |
• | Income from continuing operations for the first quarter of fiscal 2014 was $1.50 per diluted common share, as compared to $1.46 per diluted share in the prior year period. |
| |
• | We generated $11.9 million of cash flow from operating activities for the three months ended June 30, 2013, after $25.8 million in pension contributions, as compared to $102.5 million in the prior year period. |
Congress and the Administration failed to change or further delay the sequestration of appropriations in government fiscal year (GFY) 2013 imposed by the Budget Control Act of 2011 (Budget Act) and sequestration went into effect on March 1, 2013. Our customers' budgets will be reduced significantly and there may be a direct significant reduction in our customers' contract awards. While we understand customers have started to plan for sequestration, the specific effects of sequestration are not yet available and cannot be determined by us. The automatic across-the-board cuts from sequestration will approximately double the amount of the ten-year $487 billion reduction in defense spending that began in GFY 2012 already required by the Budget Act, including the budget for Overseas Contingencies Operations and any unobligated balances from prior years, and would have significant consequences to our business and industry. Non-DoD agencies could also have significantly reduced budgets. It is likely there will be some disruption of our ongoing programs, impacts to our supply chain and contractual actions (including partial or complete terminations). Consequently, we expect that sequestration, or other budgetary cuts in lieu of sequestration, will have a negative effect on our corporation.
In fiscal 2012, we began efforts to establish a new facility in Red Oak, Texas to expand our manufacturing capacity, particularly under the Bombardier Global 7000/8000 program. In fiscal 2013, we started construction on a second facility in Red Oak, Texas, in association with our relocation from our Jefferson Street facilities. As of June 30, 2013, we have incurred approximately $37.2 million in capital expenditures and $86.1 million in inventory costs associated with the Bombardier Global
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
7000/8000 program, for which we have not yet begun to deliver. As of June 30, 2013, we have incurred approximately $46.0 million in capital expenditures and $10.6 million in inventory buildup associated with our relocation from the Jefferson Street facilities.
Effective March 18, 2013, a wholly-owned subsidiary of the Company, Triumph Engine Control Systems, LLC, acquired the assets of Goodrich Corporation (Goodrich Pump & Engine Control Systems) ("GPECS"), a leading independent aerospace fuel system supplier for the commercial, military, helicopter and business jet markets. The acquisition of GPECS provides new capabilities in a market where we did not previously participate and further diversifies our customer base in electronic engine controls, fuel metering units and main fuel pumps for both OEM and aftermarket/spares end markets. The results for Triumph Engine Control Systems, LLC are included in the Aerospace Systems Group segment from the date of acquisition.
Effective December 19, 2012, the Company acquired all of the outstanding shares of Embee, Inc. ("Embee"), renamed Triumph Processing - Embee Division, Inc., which is a leading commercial metal finishing provider offering more than seventy metal finishing, inspecting and testing processes primarily for the aerospace industry. The acquisition of Embee expands our current capabilities to provide comprehensive processing services on precision engineered parts for hydraulics, landing gear, spare parts and electronic actuation systems. The results for Triumph Processing - Embee Division, Inc. are included in the Aerospace Systems Group segment from the date of acquisition. The acquisitions of GPECS and Embee are collectively referred to hereafter as the "fiscal 2013 acquisitions."
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 measure that we disclose is Adjusted EBITDA, which is our income from continuing operations before interest, income taxes, amortization of acquired contract liabilities, curtailments and early retirement incentives and depreciation and amortization. We disclose Adjusted EBITDA on a consolidated and a reportable 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 Adjusted 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 Adjusted 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. Adjusted EBITDA is not a measurement 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 Adjusted 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 Adjusted 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 Adjusted EBITDA.
Adjusted 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. Adjusted EBITDA excludes these charges and provides meaningful information about the operating performance
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
of our business, apart from charges for depreciation and amortization. We believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe Adjusted EBITDA is a measure of our ongoing operating performance because the isolation of non-cash charges, such as depreciation and amortization, and non-operating 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 Adjusted 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 Adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to income from continuing operations:
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• | Curtailments and early retirement incentives may be useful for investors to consider because it represents the current period impact of the change in the defined benefit obligation due to the reduction in future service costs as well as the incremental cost of retirement incentive benefits paid to participants. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations. |
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• | Amortization of acquired contract liabilities may be useful for investors to consider because it represents the non-cash earnings on the fair value of off-market contracts acquired through acquisitions. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations. |
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• | 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. |
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• | 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. |
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• | 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. |
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• | 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.
The following table shows our Adjusted EBITDA reconciled to our income from continuing operations for the indicated periods (in thousands):
|
| | | | | | | |
| Three Months Ended June 30, |
| 2013 | | 2012 |
Net income | $ | 79,043 |
| | $ | 76,332 |
|
Early retirement incentives | — |
| | 1,150 |
|
Amortization of acquired contract liabilities, net | (11,150 | ) | | (6,993 | ) |
Depreciation and amortization | 37,934 |
| | 31,815 |
|
Interest expense and other | 19,710 |
| | 17,232 |
|
Income tax expense | 42,593 |
| | 47,378 |
|
Adjusted EBITDA | $ | 168,130 |
| | $ | 166,914 |
|
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
The following tables show our Adjusted EBITDA by reportable segment reconciled to our operating income for the indicated periods (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2013 |
| Total | | Aerostructures | | Aerospace Systems | | Aftermarket Services | | Corporate/ Eliminations |
Operating income | $ | 141,346 |
| | $ | 100,387 |
| | $ | 42,643 |
| | $ | 11,279 |
| | $ | (12,963 | ) |
Amortization of acquired contract liability | (11,150 | ) | | (6,141 | ) | | (5,009 | ) | | — |
| | — |
|
Depreciation and amortization | 37,934 |
| | 26,313 |
| | 8,539 |
| | 1,877 |
| | 1,205 |
|
Adjusted EBITDA | $ | 168,130 |
| | $ | 120,559 |
| | $ | 46,173 |
| | $ | 13,156 |
| | $ | (11,758 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2012 |
| Total | | Aerostructures | | Aerospace Systems | | Aftermarket Services | | Corporate/ Eliminations |
Operating income | $ | 140,942 |
| | $ | 120,138 |
| | $ | 23,465 |
| | $ | 11,807 |
| | $ | (14,468 | ) |
Early retirement incentives | 1,150 |
| | — |
| | — |
| | — |
| | 1,150 |
|
Amortization of acquired contract liability | (6,993 | ) | | (6,993 | ) | | — |
| | — |
| | — |
|
Depreciation and amortization | 31,815 |
| | 23,904 |
| | 4,474 |
| | 2,326 |
| | 1,111 |
|
Adjusted EBITDA | $ | 166,914 |
| | $ | 137,049 |
| | $ | 27,939 |
| | $ | 14,133 |
| | $ | (12,207 | ) |
The fluctuations from period to period within the amounts of the components of the reconciliations above are discussed further below within Results of Operations.
Three months ended June 30, 2013 compared to three months ended June 30, 2012
|
| | | | | | | |
| Three Months Ended
June 30, |
| 2013 | | 2012 |
| (dollars in thousands) |
Net sales | $ | 943,683 |
| | $ | 887,688 |
|
Segment operating income | $ | 154,309 |
| | $ | 155,410 |
|
Corporate expenses | (12,963 | ) | | (14,468 | ) |
Total operating income | 141,346 |
| | 140,942 |
|
Interest expense and other | 19,710 |
| | 17,232 |
|
Income tax expense | 42,593 |
| | 47,378 |
|
Net Income | $ | 79,043 |
| | $ | 76,332 |
|
Net sales increased by $56.0 million, or 6.3%, to $943.7 million for the three months ended June 30, 2013 from $887.7 million for the three months ended June 30, 2012. Organic sales decreased $20.2 million, or 2.3%, due to decreased delivery rates to our customers primarily in military markets and the timing of shipments on existing programs. Net sales for the three months ended June 30, 2013 included $4.8 million in total non-recurring revenues, as compared to $25.5 million in non-recurring revenues (including a $20.0 million non-recurring termination claim settlement) for the three months ended June 30, 2012. The prior year period was positively impacted by our customers' increased production rates on existing programs and new product introductions.
Cost of sales increased $45.2 million, or 6.9%, to $696.5 million for the three months ended June 30, 2013 from $651.3 million for the three months ended June 30, 2012. This increase was due to increased sales. Gross margin for the three months ended June 30, 2013 was 26.2%, as compared to 26.6% for the prior year period. This change was impacted by price concessions ($4.0 million) and the prior year gross margin was favorably impacted by a non-recurring termination claim settlement ($7.0 million). Additionally, the gross margin included a net unfavorable cumulative catch-up adjustments on long-term contracts ($4.7 million). The cumulative catch-up adjustments to gross margin included gross favorable adjustments of
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
$7.8 million and gross unfavorable adjustments of $12.5 million. The cumulative catch-up adjustments for the three months ended June 30, 2013 were due primarily to increased costs from suppliers. Gross margin for the three months ended June 30, 2012 included net unfavorable cumulative catch-up adjustments of $1.3 million.
Segment operating income decreased by $1.1 million, or 0.7%, to $154.3 million for the three months ended June 30, 2013 from $155.4 million for the three months ended June 30, 2012. The organic segment operating income decreased $14.9 million, or 9.6%, and was a direct result of the decrease in gross margins, the decreased sales noted above, costs related to the relocation from our Jefferson Street facility ($4.0 million), legal fees ($1.2 million), offset by an insurance claim related to Hurricane Sandy ($2.0 million), lower pension and other postretirement benefit expenses ($3.2 million). Segment operating income for the three months ended June 30, 2012 was a direct result of the gross margin improvements, which included improved execution, the overall sales mix and increased realization from synergies from the acquisition of Vought.
Corporate expenses decreased by $1.5 million, or 10.4%, to $13.0 million for the three months ended June 30, 2013 from $14.5 million for the three months ended June 30, 2012. This decrease was due to a $1.2 million special termination benefit for an early retirement incentive offered to a portion of our second largest union-represented group of production and maintenance employees incurred during the three months ended June 30, 2012.
Interest expense and other increased by $2.5 million, or 14.4%, to $19.7 million for the three months ended June 30, 2013 compared to $17.2 million for the prior year period. Interest expense and other for the three months ended June 30, 2013 increased due to the issuance of the Senior Notes due 2021 resulting in higher average debt outstanding during the quarter as compared to the quarter ended June 30, 2012.
The effective income tax rate for the three months ended June 30, 2013 was 35.0% compared to 38.3% for the three months ended June 30, 2012. For the three months ended June 30, 2013, the effective income tax rate decreased due to research and development credits, which were reinstated in January 2013. For the three months ended June 30, 2012, the income tax provision included $2.2 million of tax expense due to the recapture of domestic production deductions taken in earlier years associated with a refund claim of $25.2 million filed in the second quarter of the fiscal year ended March 31, 2013. The refund claim receivable is included in "Other, net" in the consolidated balance sheet as of June 30, 2013. For the fiscal year ending March 31, 2014, the Company expects its effective tax rate to be approximately 35.6%, including the reinstatement of the research and development tax credit through December 2013.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Business Segment Performance – Three months ended June 30, 2013 compared to three months ended June 30, 2012
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.
|
| | | | | |
| Three Months Ended June 30, |
Aerostructures | 2013 | | 2012 |
Commercial aerospace | 41.9 | % | | 42.8 | % |
Military | 15.0 | % | | 19.7 | % |
Business Jets | 11.2 | % | | 11.8 | % |
Regional | 0.3 | % | | 0.4 | % |
Non-aviation | 0.6 | % | | 0.7 | % |
Total Aerostructures net sales | 69.0 | % | | 75.4 | % |
Aerospace Systems | | | |
Commercial aerospace | 8.1 | % | | 6.0 | % |
Military | 11.8 | % | | 7.5 | % |
Business Jets | 1.0 | % | | 0.8 | % |
Regional | 1.0 | % | | 0.4 | % |
Non-aviation | 1.2 | % | | 0.9 | % |
Total Aerospace Systems net sales | 23.1 | % | | 15.6 | % |
Aftermarket Services | | | |
Commercial aerospace | 6.6 | % | | 7.3 | % |
Military | 0.9 | % | | 1.0 | % |
Business Jets | 0.1 | % | | 0.3 | % |
Regional | 0.1 | % | | 0.2 | % |
Non-aviation | 0.2 | % | | 0.2 | % |
Total Aftermarket Services net sales | 7.9 | % | | 9.0 | % |
Total Consolidated net sales | 100.0 | % | | 100.0 | % |
We continue to experience a higher proportion of our sales mix in the commercial aerospace end market. We recently have experienced a slight decrease in our military end market. Due to our continued expected growth in the commercial aerospace end market and the planned reductions in defense spending under the Budget Act, we expect the declining trend in the military end market to continue.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | % of Total
Sales |
| 2013 | | 2012 | | % Change | | 2013 | | 2012 |
| (in thousands) | | | | | | |
NET SALES | | | | | | | | | |
Aerostructures | $ | 651,888 |
| | $ | 669,853 |
| | (2.7 | )% | | 69.1 | % | | 75.5 | % |
Aerospace Systems | 219,526 |
| | 140,512 |
| | 56.2 | % | | 23.2 | % | | 15.8 | % |
Aftermarket Services | 74,353 |
| | 79,977 |
| | (7.0 | )% | | 7.9 | % | | 9.0 | % |
Elimination of inter-segment sales | (2,084 | ) | | (2,654 | ) | | (21.5 | )% | | (0.2 | )% | | (0.3 | )% |
Total Net Sales | $ | 943,683 |
| | $ | 887,688 |
| | 6.3 | % | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | % of Segment
Sales |
| 2013 | | 2012 | | % Change | | 2013 | | 2012 |
| (in thousands) | | | | | | |
SEGMENT OPERATING INCOME | | | | | | | | | |
Aerostructures | $ | 100,387 |
| | $ | 120,138 |
| | (16.4 | )% | | 15.4 | % | | 17.9 | % |
Aerospace Systems | 42,643 |
| | 23,465 |
| | 81.7 | % | | 19.4 | % | | 16.7 | % |
Aftermarket Services | 11,279 |
| | 11,807 |
| | (4.5 | )% | | 15.2 | % | | 14.8 | % |
Corporate | (12,963 | ) | | (14,468 | ) | | (10.4 | )% | | n/a |
| | n/a |
|
Total Operating Income | $ | 141,346 |
| | $ | 140,942 |
| | 0.3 | % | | 15.0 | % | | 15.9 | % |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | % of Segment
Sales |
| 2013 | | 2012 | | % Change | | 2013 | | 2011 |
| (in thousands) | | | | | | |
Adjusted EBITDA | | | | | | | | | |
Aerostructures | $ | 120,559 |
| | $ | 137,049 |
| | (12.0 | )% | | 18.5 | % | | 20.5 | % |
Aerospace Systems | 46,173 |
| | 27,939 |
| | 65.3 | % | | 21.0 | % | | 19.9 | % |
Aftermarket Services | 13,156 |
| | 14,133 |
| | (6.9 | )% | | 17.7 | % | | 17.7 | % |
Corporate | (11,758 | ) | | (12,207 | ) | | (3.7 | )% | | n/a |
| | n/a |
|
| $ | 168,130 |
| | $ | 166,914 |
| | 0.7 | % | | 17.8 | % | | 18.8 | % |
Aerostructures: The Aerostructures segment net sales decreased by $18.0 million, or 2.7%, to $651.9 million for the three months ended June 30, 2013 from $669.9 million for the three months ended June 30, 2012. Organic sales decreased $29.3 million, or 4.4%, and the acquisition of Primus contributed $11.3 million in net sales. Organic sales decreased primarily due to decreased delivery rates to our customers and the timing of shipments on existing programs. Net sales for the three months ended June 30, 2013 included $4.8 million in total non-recurring revenues, as compared to $25.5 million in total non-recurring revenues, (including a $20.0 million non-recurring termination claim settlement) for the three months ended June 30, 2012.
Aerostructures cost of sales increased by $0.2 million, or 0.0%, to $501.8 million for the three months ended June 30, 2013 from $501.6 million for the three months ended June 30, 2012. Organic cost of sales decreased $9.8 million, or 2.0%, and the acquisition of Primus contributed $10.8 million to cost of sales. Organic cost of sales decrease resulted from the decrease in sales, as noted above. Organic gross margin for the three months ended June 30, 2013 was 23.3% compared with 25.1% for the three months ended June 30, 2012. The gross margin percent decreased during the three months ended June 30, 2013 as the result of a net unfavorable cumulative catch-up adjustments with gross favorable adjustments of $7.8 million and gross unfavorable adjustments of $(12.5) million, additionally the decrease was impacted by price concessions ($4.0 million). The prior year gross margin was favorably impacted by a non-recurring termination claim settlement ($7.0 million). Segment cost of sales for the three months ended June 30, 2013 included net unfavorable cumulative catch-up adjustments of ($4.7 million).
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Aerostructures segment operating income decreased by $19.8 million, or 16.4%, to $100.4 million for the three months ended June 30, 2013 from $120.1 million for the three months ended June 30, 2012. Operating income for the three months ended June 30, 2013 was directly affected by the decrease in organic sales mentioned and included a net unfavorable cumulative catch-up adjustments on long-term contracts ($4.7 million) as discussed above, offset by lower pension and other postretirement benefit expenses ($3.2 million). Segment operating income for the three months ended June 30, 2012 included net unfavorable cumulative catch-up adjustments of ($1.3 million) offset by a non-recurring termination claim settlement ($7.0 million). These same factors contributed to the decrease in Adjusted EBITDA year over year.
Aerostructures segment operating income as a percentage of segment sales decreased to 15.4% for the three months ended June 30, 2013 as compared to 17.9% for the three months ended June 30, 2012, due to the decrease in organic sales and other specific variances noted above.
Aerospace Systems: The Aerospace Systems segment net sales increased by $79.0 million, or 56.2%, to $219.5 million for the three months ended June 30, 2013 from $140.5 million for the three months ended June 30, 2012. Organic sales increased $8.3 million, or 5.9%, and the fiscal 2013 acquisitions contributed $70.7 million in net sales. Organic net sales increased primarily due to continued improvements in the broader market and the timing of shipments to our customers.
Aerospace Systems cost of sales increased by $47.4 million, or 50.4%, to $141.3 million for the three months ended June 30, 2013 from $93.9 million for the three months ended June 30, 2012. Organic cost of sales increased $6.8 million, or 7.3%, and the fiscal 2013 acquisitions contributed $40.2 million in cost of sales. Organic gross margin for the three months ended June 30, 2013 was 32.1% compared with 33.1% for the three months ended June 30, 2012. The decrease is due to the continued effects of Hurricane Sandy.
Aerospace Systems segment operating income increased by $19.2 million, or 81.7%, to $42.6 million for the three months ended June 30, 2013 from $23.5 million for the three months ended June 30, 2012. Operating income increased primarily due to the fiscal 2013 acquisitions ($15.9 million) and organic sales growth, partially offset by increased legal fees ($2.9 million) and development costs ($0.9 million). These same factors contributed to the increase in Adjusted EBITDA year over year.
Aerospace Systems segment operating income as a percentage of segment sales increased to 19.4% for the three months ended June 30, 2013 as compared to 16.7% for the three months ended June 30, 2012, due to the improvements in gross margin noted above, offset by the increased operating expenses such as, legal fees and development costs. These same factors contributed to the increase in Adjusted EBITDA margin year over year.
Aftermarket Services: The Aftermarket Services segment net sales decreased by $5.6 million, or 7.0%, to $74.4 million for the three months ended June 30, 2013 from $80.0 million for the three months ended June 30, 2012. Organic net sales increased $0.7 million, or 0.9%, and the divestiture of Triumph Instruments contributed $6.7 million in net sales for the three months ended June 30, 2012. Organic net sales increased primarily due to market share gains.
Aftermarket Services cost of sales decreased by $2.8 million, or 4.8%, to $54.6 million for the three months ended June 30, 2013 from $57.3 million for the three months ended June 30, 2012. The organic cost of sales increased $1.8 million, or 3.4%, and the divestiture of Triumph Instruments contributed $4.9 million to cost of sales for the three months ended June 30, 2012. Gross margin for the three months ended June 30, 2013 was 26.6% compared with 28.3% for the three months ended June 30, 2012. The decrease in gross margin was impacted by the changes in our sales mix and decreased sales volume.
Aftermarket Services segment operating income decreased by $0.5 million, or 4.5%, to $11.3 million for the three months ended June 30, 2013 from $11.8 million for the three months ended June 30, 2012. Operating income decreased primarily due to the decrease in gross margin as noted above. These same factors contributed to the increase in Adjusted EBITDA year over year.
Aftermarket Services segment operating income as a percentage of segment sales increased to 15.2% for the three months ended June 30, 2013 as compared with 14.8% for the three months ended June 30, 2012, due to the divestiture of Triumph Instruments, which also caused the improvements in Adjusted EBITDA margin.
Liquidity and Capital Resources
Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. During the three months ended June 30, 2013, we generated approximately $11.9 million of cash flows from operating activities, used approximately $74.4 million in investing activities and received approximately $48.7 million in financing activities.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
For the three months ended June 30, 2013, we had a net cash inflow of $11.8 million from operating activities, a decrease of $90.7 million, compared to a net cash inflow of $102.5 million from the three months ended June 30, 2012. During the three months ended June 30, 2013, net cash provided by operating activities was primarily due to increased receipts on accounts receivable of approximately $32.4 million resulting from increased sales from the acquisitions of Embee, GPECS and Primus.
We continue to invest in inventory for new programs and additional production costs for ramp-up activities in support of increasing build rates on several programs and build ahead in anticipation of our relocation from our largest facility. During the three months ended June 30, 2013, inventory build for capitalized pre-production costs on new programs, including the Bombardier Global 7000/8000 program, was $15.1 million. Additionally, inventory build ahead of programs impacted by our facility relocation was approximately $5.1 million and inventory build for mature programs, including costs associated with announced increasing build rates on several programs was approximately $42.3 million. Unliquidated progress payments netted against inventory increased $10.1 million, due to timing of receipts.
Cash flows used in investing activities for the three months ended June 30, 2013 increased $37.3 million from the three months ended June 30, 2012. Cash flows used in investing activities for the three months ended June 30, 2013, included the acquisition of Primus Composites ($31.3 million) and $29.8 million in capital expenditures associated with our new facilities in Red Oak, Texas. Cash flows provided by financing activities for the three months ended June 30, 2013 increased $111.1 million from the three months ended June 30, 2012 due to additional borrowings on our Credit Facility to fund the acquisition of Primus Composite and settlement of Convertible Notes redemptions. Cash flows used in financing activities for the three months ended June 30, 2013 included the redemption of certain Convertible Notes of $77.3 million, as compared to $15.0 million in the prior year period.
As of June 30, 2013, $714.0 million was available under our revolving credit facility (the “Credit Facility”). On June 30, 2013, an aggregate amount of approximately $249.8 million was outstanding under the Credit Facility, all of which was accruing interest at LIBOR plus applicable basis points totaling 2.0% per annum. Amounts repaid under the Credit Facility may be reborrowed.
On May 23, 2012, the Company amended the Credit Facility with its lenders to (i) increase the availability under the Credit Facility to $1.0 billion, with a $50.0 million accordion feature, from $850.0 million, (ii) extend the maturity date to May 23, 2017 and (iii) amend certain other terms and covenants.
At June 30, 2013, there was $160.9 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 February 2013, the Company issued the Senior Notes due 2021 (the "2021 Notes") for $375.0 million in principal amount. The 2021 Notes were sold at 100% of principal amount and have an effective yield of 4.875%. Interest on the 2021 Notes is payable semiannually in cash in arrears on April 1 and October 1 of each year. We used the net proceeds to repay borrowings under our Credit Facility and pay related fees and expenses, and for general corporate purposes. In connection with the issuance of the 2021 Notes, the Company incurred approximately $6.3 million of costs, which were deferred and are being amortized on the effective interest method over the term of the notes.
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.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
In September 2006, the Company issued 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. Prior to fiscal 2011, the Company paid $19.4 million to purchase $22.2 million in principal amounts of the Convertible Notes. During the fiscal years ended March 31, 2013 and 2012, the Company settled the conversion of $19.3 million and $50.4 million, respectively, 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 395,269 shares and 772,438 shares, respectively. During the three months ended June 30, 2013, the Company settled the conversion of $77.3 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 1,849,548 shares. In July 2013, the Company delivered a notice to holders of the Convertible Notes to the effect that, for at least P20D trading days during the 30 consecutive trading days preceding June 30, 2013, 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 September 30, 2013.
Capital expenditures were approximately $56.2 million for the three months ended June 30, 2013, including the construction of our facilities in Red Oak, Texas and manufacturing machinery and equipment. We funded these expenditures through cash generated from operations and borrowings under the Credit Facility. We expect capital expenditures and investments in new major programs of approximately $340.0 million to $360.0 million for our fiscal year ending March 31, 2014, of which $115.0 million will be reflected in inventory. 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:
|
| | | | | | | | | | | | | | | | | | | |
| 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) | $ | 1,417,162 |
| | $ | 56,457 |
| | $ | 189,674 |
| | $ | 437,525 |
| | $ | 733,506 |
|
Debt interest (2) | 349,913 |
| | 66,036 |
| | 129,401 |
| | 119,766 |
| | 34,710 |
|
Operating leases | 131,388 |
| | 23,224 |
| | 50,615 |
| | 11,421 |
| | 46,128 |
|
Contingent payments | 3,600 |
| | 1,600 |
| | 900 |
| | 1,100 |
| | — |
|
Purchase obligations | 1,712,210 |
| | 1,051,243 |
| | 636,231 |
| | 24,565 |
| | 171 |
|
Total | $ | 3,614,273 |
| | $ | 1,198,560 |
| | $ | 1,006,821 |
| | $ | 594,377 |
| | $ | 814,515 |
|
(1) Included in the Company’s balance sheet at June 30, 2013, plus discounts on the 2017 Notes and the 2018 Notes of $1.6 million and $1.8 million, respectively, being amortized to expense through November 2017 and July 2018, respectively.
(2) Includes fixed-rate interest only.
The above table excludes unrecognized tax benefits of $7.2 million as of June 30, 2013 since we cannot predict with reasonable certainty the timing of cash settlements with the respective taxing authorities.
The table also excludes our defined pension benefit obligations. We made contributions to our defined benefit pension plans of $109.8 million and $122.2 million in fiscal 2013 and 2012, respectively. We expect to make total pension and postretirement plan contributions of $119.6 million to our benefit plans during fiscal 2014. For the three months ended June 30, 2013, the Company made pension contributions of $25.8 million versus $25.1 million for the three months ended June 30, 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.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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, 2013. 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, 2013 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 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, 2013, filed with the Securities and Exchange Commision in May 2013.
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, 2013. 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 reports pursuant to the Securities Exchange Act of 1934 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 June 30, 2013, 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
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
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 June 30, 2013.
(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.
TRIUMPH GROUP, INC.
Part II. Other Information
Item 6. Exhibits.
|
| | | |
| Exhibit 31.1 | | Certification by President 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 President 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 June 30, 2013 formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2013 and March 31, 2013; (ii) Consolidated Statements of Income for the three months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income for the three months ended June 30, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the three months ended June 30, 2013 and 2012; and (1) Notes to Consolidated Financial Statements. |
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/ Jeffry D. Frisby | | August 2, 2013 | |
| Jeffry D. Frisby, President & CEO | | | |
| | (Principal Executive Officer) | | | | |
| | | | | | | |
| /s/ M. David Kornblatt | | August 2, 2013 | |
| M. David Kornblatt, Executive Vice President & CFO | | | |
| | (Principal Financial Officer) | | | | |
| | | | | | | |
| /s/ Thomas A. Quigley, III | | August 2, 2013 | |
| Thomas A. Quigley, III, Vice President and Controller | | | |
| | (Principal Accounting Officer) | | | | |
EXHIBIT INDEX
|
| |
Exhibit
Number | Description |
31.1 | Certification by President 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 President 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 June 30, 2013 formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2013 and March 31, 2013; (ii) Consolidated Statements of Income for the three months ended June 30, 2013 and 2012; (iii) Consolidated Statements of Comprehensive Income for the three months ended June 30, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the three months ended June 30, 2013 and 2012; and (v) Notes to Consolidated Financial Statements. |