United States

Securities and Exchange Commission

Washington, D.C.  20549

 

FORM 10-Q

 

 

Commission File Number: 1-12235

 

TRIUMPH GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o Accelerated filer  x Non-accelerated filer o

 

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

 

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

 

Common Stock, par value $0.001 per share, 16,731,224 shares outstanding as of December 31, 2007.

 

 

TRIUMPH GROUP, INC.

INDEX

 

			Page Number
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
Consolidated Balance Sheets
December 31, 2007 and March 31, 2007			1
Consolidated Statements of Income
Three months ended December 31, 2007 and 2006
Nine months ended December 31, 2007 and 2006			2
Consolidated Statements of Cash Flows
Nine months ended December 31, 2007 and 2006			3
Consolidated Statements of Comprehensive Income
Three months ended December 31, 2007 and 2006
Nine months ended December 31, 2007 and 2006			5
Notes to Consolidated Financial Statements			6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21
Part II. Other Information
Item 1.	Legal Proceedings		22
Item 6.	Exhibits		23
Signatures			23

 

 

Part I.  Financial Information

 

Item 1.  Financial Statements.

 

Triumph Group, Inc.

Consolidated Balance Sheets

(dollars in thousands, except per share data)

 

		DECEMBER 31,			MARCH 31,
		2007			2007
		(unaudited)
ASSETS
Current assets:
Cash		$	10,615		$	7,243
Accounts receivable, net		165,233			168,372
Inventories		344,739			296,080
Assets held for sale		23,875			28,643
Deferred income taxes		11,794			11,316
Prepaid expenses and other		5,187			6,713
Total current assets		561,443			518,367
Property and equipment, net		298,972			283,681
Goodwill		338,762			339,930
Intangible assets, net		61,208			69,919
Other, net		14,155			17,261
Total assets		$	1,274,540		$	1,229,158
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	97,395		$	101,332
Accrued expenses		64,921			75,582
Liabilities related to assets held for sale		3,756			7,545
Income taxes payable		196			1,484
Current portion of long-term debt		201,473			5,702
Total current liabilities		367,741			191,645
Long-term debt, less current portion		120,815			310,481
Deferred income taxes and other		102,419			99,669
Stockholders’ equity:
Common stock, $.001 par value, 50,000,000 shares authorized, 16,731,224 and 16,469,617 shares issued and outstanding		16			16
Capital in excess of par value		287,439			278,177
Treasury stock, at cost		—			—
Accumulated other comprehensive income (loss)		1,248			(120		)
Retained earnings		394,862			349,290
Total stockholders’ equity		683,565			627,363
Total liabilities and stockholders’ equity		$	1,274,540		$	1,229,158

 

SEE ACCOMPANYING NOTES.

 

1

 

Triumph Group, Inc.

Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

		THREE MONTHS ENDED DECEMBER 31,						NINE MONTHS ENDED DECEMBER 31,
		2007			2006			2007			2006
Net sales		$	275,099		$	237,756		$	829,875		$	677,561
Operating costs and expenses:
Cost of products sold		198,637			170,392			592,252			487,243
Selling, general, and administrative		36,983			33,957			115,067			97,176
Depreciation and amortization		10,753			8,894			31,733			25,809
		246,373			213,243			739,052			610,228
Operating income		28,726			24,513			90,823			67,333
Interest expense and other		3,310			2,534			10,083			8,694
Charge for early extinguishment of debt		—			5,088			—			5,088
Income from continuing operations before income taxes		25,416			16,891			80,740			53,551
Income tax expense		7,493			5,161			26,304			18,083
Income from continuing operations		17,923			11,730			54,436			35,468
Loss from discontinued operations, net		(1,206		)	(929		)	(6,572		)	(2,623		)
Net income		$	16,717		$	10,801		$	47,864		$	32,845
Earnings per share – basic:
Income from continuing operations		$	1.08		$	0.72		$	3.30		$	2.19
Loss from discontinued operations		(0.07		)	(0.06		)	(0.40		)	(0.16		)
Net income		$	1.01		$	0.66		$	2.90		$	2.03
Weighted average common shares outstanding – basic		16,563			16,262			16,515			16,168
Earnings per share – diluted:
Income from continuing operations		$	1.00		$	0.71		$	3.07		$	2.17
Loss from discontinued operations		(0.07		)	(0.06		)	(0.37		)	(0.16		)
Net income		$	0.93		$	0.66	*	$	2.70		$	2.01
Weighted average common shares outstanding – Diluted		18,002			16,459			17,706			16,353
Dividends declared and paid per common share		$	0.04		$	0.04		$	0.12		$	0.08

 

* Difference due to rounding.

 

SEE ACCOMPANYING NOTES.

 

2

 

Triumph Group, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

		NINE MONTHS ENDED DECEMBER 31,
		2007			2006
OPERATING ACTIVITIES
Net income		$	47,864		$	32,845
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		31,733			25,809
Other amortization included in interest expense		1,208			1,429
Provision for doubtful accounts receivable		808			680
Provision for deferred income taxes		6,432			2,573
Employee stock compensation		2,021			1,764
Changes in other current assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
Accounts receivable		2,626			290
Inventories		(48,340		)	(39,348		)
Prepaid expenses and other		1,122			(567		)
Accounts payable, accrued expenses and accrued income taxes payable		(15,334		)	460
Changes in discontinued operations		(3,856		)	(3,236		)
Other		(116		)	(2,445		)
Net cash provided by operating activities		26,168			20,254
INVESTING ACTIVITIES
Capital expenditures		(38,253		)	(39,664		)
Proceeds from sale of assets and business		5,280			338
Cash used for businesses and intangible assets acquired		(1,527		)	(94,552		)
Net cash used in investing activities		(34,500		)	(133,878		)

 

3

 

Triumph Group, Inc.

Consolidated Statements of Cash Flows (continued)

(dollars in thousands)

(unaudited)

 

		NINE MONTHS ENDED DECEMBER 31,
		2007			2006
FINANCING ACTIVITIES
Net increase (decrease) in revolving credit facility borrowings		$	11,600		$	35,259
Proceeds from issuance of long term debt		161			201,991
Repayment of debt and capital lease obligations		(5,656		)	(53		)
Retirement of long-term debt		—			(124,424		)
Payment of deferred financing costs		(72		)	(6,102		)
Proceeds from exercise of stock options, including excess tax benefit of $1,709 and $886 in 2008 and 2007		7,241			11,718
Cash dividends on common stock		(2,001		)	(1,303		)
Net cash provided by financing activities		11,273			117,086
Effect of exchange rate changes on cash		431			223
Net change in cash		3,372			3,685
Cash at beginning of period		7,243			5,643
Cash at end of period		$	10,615		$	9,328
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes, net of refunds		$	17,790		$	12,561
Cash paid for interest		$	12,500		$	15,015

 

SEE ACCOMPANYING NOTES.

 

4

 

Triumph Group, Inc.

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)

 

		THREE MONTHS ENDED						NINE MONTHS ENDED
		DECEMBER 31,						DECEMBER 31,
		2007			2006			2007			2006
Net income		$	16,717		$	10,801		$	47,864		$	32,845
Other comprehensive income
Foreign currency translation adjustment		433			512			1,368			994
Total comprehensive income		$	17,150		$	11,313		$	49,232		$	33,839

 

SEE ACCOMPANYING NOTES.

 

5

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

1.  BASIS OF PRESENTATION

 

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 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2008.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

ORGANIZATION

 

The Company designs, engineers, manufactures, repairs and overhauls aircraft components and accessories. 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.

 

USE OF ESTIMATES

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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.

 

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109 (“FIN 48”).  FIN 48 creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  In connection with its adoption of FIN 48 on April 1, 2007, the Company recognized a charge of approximately $291 to retained earnings.  See Note 8 of “Notes to Consolidated Financial Statements” for additional information regarding the Company’s uncertain tax positions.

 

In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (“EITF 06-10”), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements.  EITF 06-10 provides guidance for determining a liability for the post-retirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement.  EITF 06-10 is effective for fiscal years beginning after December 15, 2007.  The Company has determined the impact of adopting EITF 06-10 will not be material to the Company’s results of operations or financial condition.

 

INTANGIBLE ASSETS

 

Intangible assets cost and accumulated amortization at December 31, 2007 were $111,720 and $50,512, respectively.  Intangible assets cost and accumulated amortization at March 31, 2007 were $112,710 and $42,791, respectively.  Intangible assets consist of two major classes: (i) product rights and licenses, which

 

6

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

(Unaudited)

 

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

at December 31, 2007 had a weighted-average life of 11.3 years, and (ii) non-compete agreements, customer relationships and other, which at December 31, 2007 had a weighted-average life of 10.6 years.  Gross cost and accumulated amortization of product rights and licenses at December 31, 2007 were $74,082 and $36,333, respectively, and at March 31, 2007 were $73,957 and $31,070, respectively.  Gross cost and accumulated amortization of noncompete agreements, customer relationships and other at December 31, 2007 were $37,638 and $14,179, respectively, and at March 31, 2007 were $38,753 and $11,721, respectively.  Amortization expense for the three and nine months ended December 31, 2007 and 2006 was $2,518 and $7,721 and $2,269 and $6,243, respectively.  Amortization expense for the fiscal year ended March 31, 2008 and the succeeding five fiscal years by year is expected to be as follows: 2008: $10,279; 2009: $10,049; 2010: $9,799; 2011: $8,051; 2012: $6,502; and 2013: $6,321.

 

RECLASSIFICATIONS

 

Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation for discontinued operations.

 

3.   FISCAL 2007 ACQUISITIONS

 

Acquisition of Allied Aerospace Industries, Inc.

 

Effective November 1, 2006, the Company acquired Allied Aerospace Industries, Inc. (“Allied”) through the merger of a newly organized, wholly-owned subsidiary of the Company, with and into Allied. The acquired business has since been consolidated into a single subsidiary of the Company, Triumph Aerospace Systems – Newport News, Inc.  Triumph Aerospace Systems – Newport News, Inc. specializes in engineering design and manufacturing solutions for complex aerospace and defense programs.  The results for Triumph Aerospace Systems – Newport News, Inc. are included in the Company’s Aerospace Systems Segment.

 

During the first half of fiscal 2008, the Company finalized the purchase price allocation for the Allied acquisition as a result of receiving the final appraisal of tangible and intangible assets, finalizing the deferred tax accounting and recording the final purchase price adjustment as per the purchase agreement.  Based on the revised allocation, an additional $100 was allocated to intangible assets while the amount allocated to tangible assets was reduced by $232.  The purchase price was reduced by $1,055 related to the final negotiation of the values on the closing balance sheet.

 

Acquisition of Grand Prairie Accessory Services, LLC

 

Effective January 1, 2007, the Company acquired the assets and business of Grand Prairie Accessory Services, LLC (“Grand Prairie”) through a newly organized, wholly-owned subsidiary of the Company, Triumph Accessory Services – Grand Prairie, Inc.  Triumph Accessory Services – Grand Prairie, Inc. provides comprehensive maintenance solutions for engine accessories related to the CF34, CFM56, CF6, CT7 and V2500 family of engines.  Capabilities include fuel, oil, pneumatic, hydraulic and mechanical engine accessories for those and other aero and aero-derivative gas turbine engines.  The results for Triumph Accessory Services – Grand Prairie are included in the Company’s Aftermarket Services Segment.

 

During the third quarter of fiscal 2008, the Company finalized the purchase price allocation for the Grand Prairie acquisition as a result of receiving the final appraisal of tangible and intangible assets and finalizing the deferred tax accounting.  Based on the revised allocation, an additional $1,532 was allocated to tangible assets; intangible assets and goodwill were reduced by $1,215 and $561, respectively; a deferred tax asset of $169 was established, and other liabilities were reduced by $75.

 

7

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements (continued)

(dollars in thousands, except per share data)

(Unaudited)

 

3.   FISCAL 2007 ACQUISITIONS (Continued)

 

The following unaudited pro forma information for the three and nine months ended December 31, 2006 has been prepared assuming these acquisitions had occurred on April 1, 2006. The pro forma information for the three and nine months ended December 31, 2006 is as follows: Net sales: $246,094 and $718,539; Income from continuing operations: $10,649 and $36,356; Income per share from continuing operations-basic: $0.65 and $2.25; and Income per share from continuing operations-diluted: $0.65 and $2.22.

 

4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

 

In September 2007, the Company sold the assets of Triumph Precision, Inc., a build to specification manufacturer and supplier of ultra-precision machined components and assemblies in its Aerospace Systems Segment.  The effective date of the sale was July 1, 2007.  The Company recognized a pre-tax loss of $650 on the sale of the business, which included costs to sell of $150.  The Company has also decided to sell Triumph Precision Castings Co., a casting facility in its Aftermarket Services Segment that specializes in producing high quality hot gas path components for aero and land based gas turbines.  The Company recognized a pre-tax loss of $3,500 in the first quarter of fiscal 2008 based upon a write-down of the carrying value of the business to estimated fair value less costs to sell.  The write-down was applied to inventory and long-lived assets, consisting primarily of property, plant and equipment.  For financial statement purposes, the assets, liabilities, results of operations and cash flows of these businesses have been segregated from those of the continuing operations and are presented in the Company’s consolidated financial statements as discontinued operations and assets and liabilities held for sale.

 

Revenues of discontinued operations were $2,748 and $9,383 for the three and nine months ended December 31, 2007 and $4,585 and $13,724 for the three and nine months ended December 31, 2006, respectively.  The loss from discontinued operations was $1,206 and $6,572, net of income tax benefit of $650 and $3,539 for the three and nine months ended December 31, 2007 and $929 and $2,623, net of income tax benefit of $500 and $1,412 for the three and nine months ended December 31, 2006, respectively.  Interest expense of $590 and $2,115 was allocated to discontinued operations for the three and nine months ended December 31, 2007, respectively, and interest expense of $693 and $2,060 was allocated to discontinued operations for the three and nine months ended December 31, 2006, respectively, based upon the actual borrowings of the operations, and such interest expense is included in the loss from discontinued operations.

 

Assets and liabilities held for sale are comprised of the following:

 

		DECEMBER 31, 2007			MARCH 31, 2007
Assets held for sale:
Accounts receivable, net		$	7,184		$	6,154
Inventories		10,804			11,585
Property, plant and equipment		5,711			10,798
Other		176			106
Total assets held for sale		$	23,875		$	28,643
Liabilities held for sale:
Accounts payable		$	1,564		$	1,832
Accrued expenses		460			2,610
Deferred tax liabilities and other		1,732			3,103
Total liabilities held for sale		$	3,756		$	7,545

 

8

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements (continued)

(dollars in thousands, except per share data)

(Unaudited)

 

5.  INVENTORIES

 

The components of inventories are as follows:

 

		DECEMBER 31,			MARCH 31,
		2007			2007
Raw materials		$	32,259		$	30,357
Manufactured and purchased components		123,029			100,512
Work-in-process		108,970			99,660
Finished goods		80,481			65,551
Total inventories		$	344,739		$	296,080

 

6.  LONG-TERM DEBT

 

In September 2006, the Company issued $201,250 of convertible senior subordinated notes due October 1, 2026 bearing interest at a fixed rate of 2.625% (“Convertible Notes”).  In January 2008, the Company delivered a notice to holders of its Convertible Notes to the effect that, for at least 20 trading days during the 30 consecutive trading days preceding December 31, 2007, 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 notes a put option through March 31, 2008.  Accordingly, the balance sheet classification of the notes will be short term for as long as the put option remains in effect.

 

On October 15, 2007, the Company amended its existing amended and restated credit agreement with its lenders to add a sublimit of $200,000 for foreign currency borrowings and amend and eliminate certain other terms and covenants.

 

Long-term debt consists of the following:

 

		DECEMBER 31,			MARCH 31,
		2007			2007
Convertible senior subordinated notes		$	201,250		$	201,250
Revolving credit facility		112,400			100,800
Subordinated promissory notes		—			5,500
Other debt		8,638			8,633
		322,288			316,183
Less current portion		201,473			5,702
		$	120,815		$	310,481

 

7.  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				NINE MONTHS ENDED
		DECEMBER 31,				DECEMBER 31,
		(in thousands)				(in thousands)
		2007		2006		2007		2006
Weighted average common shares outstanding - basic		16,563		16,262		16,515		16,168
Net effect of dilutive stock options		283		197		278		185
Potential common shares - convertible debt		1,156		—		913		—
Weighted average common shares outstanding – diluted		18,002		16,459		17,706		16,353

 

9

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements (continued)

(dollars in thousands, except per share data)

(Unaudited)

 

8.  INCOME TAXES

 

Effective April 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes.  The cumulative effect of adoption of FIN 48 has been recorded as a charge of $291 to retained earnings, an increase of $66 to net deferred income tax liabilities and an increase of $225 to income taxes payable as of April 1, 2007.

 

In conjunction with the adoption of FIN 48, the Company has classified uncertain tax positions as non-current 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 December 31, 2007 and April 1, 2007, the total amount of accrued income tax-related interest and penalties included in the Consolidated Balance Sheets was $392 and $254, respectively.

 

As of December 31, 2007 and April 1, 2007, the Company was subject to examination in state jurisdictions for the fiscal years ended March 31, 2004 through March 31, 2006, none of which we believe is individually material.  The Company has filed appeals in a state jurisdiction related to fiscal years ended March 31, 1999 through March 31, 2003.   The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

 

As of December 31, 2007 and April 1, 2007, the total amount of unrecognized tax benefits was $2,726 and $2,534, of which $2,474 and $2,181 would impact the effective tax rate, if recognized.

 

With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for fiscal years ended before March 31, 2005, state or local examinations for fiscal years ended before March 31, 2004, or foreign income tax examinations by tax authorities for fiscal years ended before March 31, 2006.

 

9.  GOODWILL

 

The following is a summary of the changes in the carrying value of goodwill from March 31, 2007 through December 31, 2007:

 

		Aerospace Systems			Aftermarket Services			Total
Balance, March 31, 2007		$	285,797		$	54,133		$	339,930
Purchase price adjustments		(1,055		)	—			(1,055		)
Purchase price allocation		(48		)	(568		)	(616		)
Effect of exchange rate changes		503			—			503
Balance, December 31, 2007		$	285,197		$	53,565		$	338,762

 

10

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements (continued)

(dollars in thousands, except per share data)

(Unaudited)

 

10.  SEGMENTS

 

The Company is organized based on the products and services that it provides.  Under this organizational structure, the Company has two reportable segments:  the Aerospace Systems Group and the Aftermarket Services Group.  The Company evaluates performance and allocates resources based on operating income of each reportable segment.  The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies (see Note 2).  Each segment has a president and controller who manage their respective segment.  The segment president reports directly to the President and CEO of the Company, the Chief Operating Decision Maker (“CODM”), as defined in SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information.  The segment presidents maintain regular contact with the CODM to discuss operating activities, financial results, forecasts and plans for the segment.   The segment controllers have dual reporting responsibilities, reporting to both their segment president as well as to the Corporate Controller.  The Company’s CODM evaluates performance and allocates resources based upon review of segment information.  The CODM utilizes operating income as a primary measure of profitability.

 

At December 31, 2007, the Aerospace Systems segment consisted of 33 operating locations, and the Aftermarket Services segment consisted of 17 operating locations.

 

The Aerospace Systems segment consists of the Company’s operations which manufacture products primarily for the aerospace OEM market. The Aerospace Systems’ operations design and engineer mechanical and electromechanical controls, such as hydraulic systems and components, main engine gearbox assemblies, accumulators and mechanical control cables. The Aerospace Systems’ revenues are also derived from stretch forming, die forming, milling, bonding, machining, welding and assembly and fabrication of various structural components used in aircraft wings, fuselages and other significant assemblies. Further, the segment’s operations also design and manufacture composite assemblies for floor panels, environmental control system ducts and non-structural cockpit components.  These products are primarily sold to various aerospace OEMs on a global basis.

 

The Aftermarket Services segment consists of the Company’s operations that provide maintenance, repair and overhaul services to both commercial and military markets on components and accessories manufactured by third parties. Maintenance, repair and overhaul revenues are derived from services on auxiliary power units, airframe and engine accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the Aftermarket Services’ operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The Aftermarket Services’ operations also perform repair and overhaul services, and supply spare parts for various types of cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis.

 

Segment operating income is total segment revenue reduced by operating expenses identifiable with that segment. Corporate includes general corporate administrative costs and any other costs not identifiable with one of the Company’s segments.

 

The Company does not accumulate net sales information by product or service or groups of similar products and services, and therefore the Company does not disclose net sales by product or service because to do so would be impracticable.

 

11

 

Triumph Group, Inc.

Notes to Consolidated Financial Statements (continued)

(dollars in thousands, except per share data)

(Unaudited)

 

10.  SEGMENTS (Continued)

 

Selected financial information for each reportable segment is as follows:

 

		THREE MONTHS ENDED DECEMBER 31,						NINE MONTHS ENDED DECEMBER 31,
		2007			2006			2007			2006
Net sales:
Aerospace systems		$	213,025		$	187,846		$	650,816		$	538,939
Aftermarket services		62,728			50,459			181,095			140,941
Elimination of inter-segment sales		(654		)	(549		)	(2,036		)	(2,319		)
		$	275,099		$	237,756		$	829,875		$	677,561
Income from continuing operations before income taxes:
Operating income (expense):
Aerospace systems		$	26,095		$	26,064		$	87,559		$	71,737
Aftermarket services		6,519			3,229			17,072			8,434
Corporate		(3,888		)	(4,780		)	(13,808		)	(12,838		)
		28,726			24,513			90,823			67,333
Interest expense and other		3,310			2,534			10,083			8,694
Charge for early extinguishment of debt		—			5,088			—			5,088
		$	25,416		$	16,891		$	80,740		$	53,551
Depreciation and amortization:
Aerospace systems		$	7,423		$	6,509		$	22,034		$	19,158
Aftermarket services		3,266			2,328			9,502			6,483
Corporate		64			57			197			168
		$	10,753		$	8,894		$	31,733		$	25,809
Capital expenditures:
Aerospace systems		$	12,219		$	10,431		$	25,876		$	25,229
Aftermarket services		4,339			3,344			11,670			14,247
Corporate		162			43			707			188
		$	16,720		$	13,818		$	38,253		$	39,664

 

		DECEMBER 31,			MARCH 31,
		2007			2007
Total Assets:
Aerospace systems		$	905,166		$	883,890
Aftermarket services		303,227			272,972
Corporate		42,272			43,653
Discontinued Operations		23,875			28,643
		$	1,274,540		$	1,229,158

 

During the three months ended December 31, 2007 and 2006, the Company had international sales of $57,194 and $52,784, respectively.  During the nine month period ended December 31, 2007 and 2006, the Company had international sales of $171,541 and $152,693, respectively.

 

12

 

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

 

Financial highlights for the third quarter of fiscal 2008 include:

 

·                  Net sales for the third quarter of fiscal 2008 increased 15.7% to $275.1 million

 

·                  Operating income in the third quarter of fiscal 2008 increased 17.2% to $28.7 million

 

·                  Net income for the third quarter of fiscal 2008 increased 54.8% to $16.7 million

 

·                  Backlog increased 14% over the third quarter of the prior year to $1.2 billion

 

For the quarter ended December 31, 2007, net sales totaled $275.1 million, a 15.7% increase from last year’s third quarter net sales of $237.8 million.  Income from continuing operations for the third quarter of fiscal 2008 increased 52.8% to $17.9 million, or $1.00 per diluted common share, versus $11.7 million, or $0.71 per diluted common share, for the third quarter of the prior year.  During the quarter, we generated $21.9 million of cash flow from operating activities.

 

RESULTS OF OPERATIONS

 

Quarter ended December 31, 2007 compared to quarter ended December 31, 2006

 

		Quarter Ended December 31,
		2007			2006
		(dollars in thousands)
Net Sales		$	275,099		$	237,756
Segment Operating Income		$	32,614		$	29,293
Corporate Expenses		(3,888		)	(4,780		)
Total Operating Income		28,726			24,513
Interest Expense and Other		3,310			2,534
Charge for early extinguishment of debt		—			5,088
Income Tax Expense		7,493			5,161
Income from continuing operations		$	17,923		$	11,730
Loss from discontinued operations, net		(1,206		)	(929		)
Net Income		$	16,717		$	10,801

 

13

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Net sales increased by $37.3 million, or 15.7%, to $275.1 million for the quarter ended December 31, 2007 from $237.8 million for the quarter ended December 31, 2006.  The acquisitions of the assets and businesses of Allied Aerospace Industries, Inc. and Grand Prairie Accessory Services, LLC, herein referred to as the “2007 Acquisitions,” contributed $7.5 million of the net sales increase.  Excluding the effects of the 2007 Acquisitions, organic sales growth was $29.8 million, or 12.9%.

 

The Aerospace Systems segment benefited primarily from increased sales to our OEM customers driven by increased aircraft build rates, while the increase in sales for our Aftermarket Services segment was the result of increased demand for our services as a result of growth in global air traffic, the age of existing aircraft and enhanced capabilities.

 

Segment operating income increased by $3.3 million, or 11.3%, to $32.6 million for the quarter ended December 31, 2007 from $29.3 million for the quarter ended December 31, 2006.  Operating income growth was a direct result of margins attained on increased sales volume as described above, improved margins in the Aftermarket Services segment and the contribution of $0.5 million from the 2007 Acquisitions, partially offset by increased costs in litigation, research and development, payroll and healthcare, and amortization associated with the 2007 Acquisitions.

 

Corporate general and administrative expenses decreased by $0.9 million, or 18.7%, to $3.9 million for the quarter ended December 31, 2007 from $4.8 million for the quarter ended December 31, 2006, primarily due to decreased bonus accruals for the quarter ended December 31, 2007 and the non-recurrence of other expenses totaling $0.4 million which arose in the quarter ended December 31, 2006.

 

Interest expense and other increased by $0.8 million, or 30.6%, to $3.3 million for the quarter ended December 31, 2007 compared to $2.5 million for the prior year period.  This increase was due to higher average borrowings outstanding and amortization of debt issuance costs.

 

During the third quarter of fiscal 2007 we recorded a charge for early extinguishment of debt totaling $5.1 million related to the prepayment of the Company’s outstanding Class A Senior Notes and Class B Senior Notes (collectively, the “Senior Notes”) on October 4, 2006, which included a “make-whole” premium of approximately $4.4 million and the write-off of unamortized debt issuance costs related to the Senior Notes of $0.7 million.

 

The effective income tax rate for the quarter ended December 31, 2007 was 29.0% compared to 30.1% for the quarter ended December 31, 2006.  The decrease in the tax rate was primarily due to final return to provision adjustments.  Additionally, both rates vary from the Federal statutory tax rate of 35% primarily due to benefits realized from the research and development tax credit and the domestic production activities deduction.

 

Loss from discontinued operations before income taxes was $1.9 million for the quarter ended December 31, 2007, compared with a loss from discontinued operations before income taxes of $1.4 million for the quarter ended December 31, 2006.  The benefit for income taxes was $0.7 million for the quarter ended December 31, 2007 compared to a benefit of $0.5 million in the prior year period.

 

Business Segment Performance

 

The Aerospace Systems segment consists of the Company’s operations which manufacture products primarily for the aerospace OEM market. The Aerospace Systems operations design and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators and mechanical control cables. The Aerospace Systems revenues are also derived from stretch forming, die forming, milling, bonding, machining, welding and assembly and fabrication of various structural components used in aircraft wings, fuselages and other significant assemblies. Further, the segment’s operations manufacture composite assemblies for floor panels, environmental control system ducts and non-structural cockpit components.  These products are sold to various aerospace OEMs on a global basis.

 

14

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

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 Aftermarket Services operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The Aftermarket Services operations also perform repair and overhaul services, and supply spare parts, for various types of cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis.

 

Business Segment Performance – Three months ended December 31, 2007 compared to three months ended December 31, 2006

 

		Quarter Ended December 31,						%		% of Total Sales
		2007			2006			Change		2007		2006
		(dollars in thousands)
NET SALES
Aerospace Systems		$	213,025		$	187,846		13.4	%	77.4	%	79.0	%
Aftermarket Services		62,728			50,459			24.3	%	22.8	%	21.2	%
Elimination of inter-segment sales		(654		)	(549		)	(19.1	)%	(0.2	)%	(0.2	)%
Total Net Sales		$	275,099		$	237,756		15.7	%	100.0	%	100.0	%

 

		Quarter Ended December 31,						%		% of Segment Sales
		2007			2006			Change		2007		2006
		(dollars in thousands)
OPERATING INCOME
Aerospace Systems		$	26,095		$	26,064		0.1	%	12.2	%	13.9	%
Aftermarket Services		6,519			3,229			101.9	%	10.4	%	6.4	%
Corporate		(3,888		)	(4,780		)	(18.7	)%	n/a		n/a
Total Operating Income		$	28,726		$	24,513		17.2	%	10.4	%	10.3	%

 

Aerospace Systems: The Aerospace Systems segment net sales increased by $25.2 million, or 13.4%, to $213.0 million for the quarter ended December 31, 2007 from $187.8 million for the quarter ended December 31, 2006. The increase was due to organic sales growth to our OEM customers driven by increased aircraft build rates.  Additionally, adding to the Aerospace Systems segment increase in sales was its expansion into new product lines to further serve customer needs.

 

Aerospace Systems segment operating income for the quarter ended December 31, 2007 was in line with operating income for the quarter ended December 31, 2006.  Margins attained on the increased sales volume mentioned above have been entirely offset by $3.2 million of increased litigation and additional increases in payroll costs.

 

Aftermarket Services: The Aftermarket Services segment net sales increased by $12.3 million, or 24.3%, to $62.7 million for the quarter ended December 31, 2007 from $50.5 million for the quarter ended December 31, 2006. This increase was due to the sales increase associated with the acquisition of the assets and business of Grand Prairie Accessory Services, LLC (now Triumph Accessory Services – Grand Prairie, Inc.), and an increase in same store sales of $4.2 million due to new customers and products, growth in global commercial air traffic and U.S. military maintenance requirements resulting in increased demand for repair and overhaul of auxiliary power units, thrust reversers and other aerostructures.

 

15

 

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

 

Aftermarket Services segment operating income increased by $3.3 million, or 101.9%, to $6.5 million for the quarter ended December 31, 2007 from $3.2 million for the quarter ended December 31, 2006.  Operating income increased primarily due to margins attained on increased sales volume, improvements in our operating margins at our Thailand facility as a result of increased utilization and the contribution from the acquisition of Triumph Accessory Services – Grand Prairie, Inc. partially offset by increases in payroll and depreciation and amortization expenses.

 

Nine months ended December 31, 2007 compared to nine months ended December 31, 2006

 

		Nine Months Ended December 31,
		2007			2006
		(dollars in thousands)
Net Sales		$	829,875		$	677,561
Segment Operating Income		$	104,631		$	80,171
Corporate Expenses		(13,808		)	(12,838		)
Total Operating Income		90,823			67,333
Interest Expense and Other		10,083			8,694
Charge for early extinguishment of debt		—			5,088
Income Tax Expense		26,304			18,083
Income from continuing operations		$	54,436		$	35,468
Loss from discontinued operations, net		(6,572		)	(2,623		)
Net Income		$	47,864		$	32,845

 

Net sales increased by $152.3 million, or 22.5%, to $829.9 million for the nine months ended December 31, 2007 from $677.6 million for the nine months ended December 31, 2006.  The 2007 Acquisitions contributed $36.7 million.  Excluding the effects of the 2007 Acquisitions, organic sales growth was $115.6 million, or 17.2%.

 

The Aerospace Systems segment benefited primarily from increased sales to our OEM customers driven by increased aircraft build rates, while the increase in sales for our Aftermarket Services segment was the result of increased demand for our services as a result of growth in global air traffic.

 

Segment operating income increased by $24.5 million, or 30.5%, to $104.6 million for the nine months ended December 31, 2007 from $80.2 million for the nine months ended December 31, 2006.  Operating income growth was a direct result of margins attained on increased sales volume as described above, and the contribution of $2.9 million from the 2007 Acquisitions, partially offset by increases in litigation costs, payroll, healthcare, and depreciation and amortization expenses associated with the 2007 Acquisitions.

 

Corporate expenses increased by $1.0 million, or 7.6%, to $13.8 million for the nine months ended December 31, 2007 from $12.8 million for the nine months ended December 31, 2006, primarily due to increased litigation, workers compensation and stock compensation costs, partially offset by an insurance reimbursement related to product liability claims.

 

Interest expense and other increased by $1.4 million, or 16.0%, to $10.1 million for the nine months ended December 31, 2007 compared to $8.7 million for the prior year period.  This increase was due to higher average borrowings outstanding and amortization of debt issuance costs, partially offset by lower interest on our convertible notes issued in September 2006 as compared to the previously outstanding Class A Senior Notes and Class B Senior Notes.

 

16