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TRIUMPH GROUP INC - Quarter Report: 2019 December (Form 10-Q)

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

FORM 10-Q

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

For the Quarterly Period Ended December 31, 2019

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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.001 per share
TGI
New York Stock Exchange
Purchase Rights
 
New York Stock Exchange
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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one)
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer 
☐
Smaller reporting company
☐
Emerging growth company
☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐    No ☒
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, 51,849,181 shares outstanding as of February 4, 2020.


TRIUMPH GROUP, INC.
TABLE OF CONTENTS
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
 
 
 
 
 
 



Part I. Financial Information

Item 1. Financial Statements.

Triumph Group, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
December 31,
2019
 
March 31,
2019
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
53,594

 
$
92,807

Trade and other receivables, less allowance for doubtful accounts of $3,822 and $3,646
300,730

 
373,590

Contract assets
241,875

 
326,667

Inventory, net
473,863

 
413,560

Prepaid expenses and other current assets
26,133

 
34,446

Total current assets
1,096,195

 
1,241,070

Property and equipment, net
433,475

 
543,710

Goodwill
583,699

 
583,225

Intangible assets, net
394,782

 
430,954

Other, net
117,235

 
55,615

Total assets
$
2,625,386

 
$
2,854,574

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
7,795

 
$
8,201

Accounts payable
379,989

 
433,783

Contract liabilities
264,463

 
293,719

Accrued expenses
231,065

 
239,572

Total current liabilities
883,312

 
975,275

Long-term debt, less current portion
1,400,893

 
1,480,620

Accrued pension and other postretirement benefits
496,284

 
540,479

Deferred income taxes
16,709

 
6,964

Other noncurrent liabilities
361,085

 
424,549

Stockholders’ deficit:
 
 
 
Common stock, $.001 par value, 100,000,000 shares authorized, 52,460,920 and 52,460,920 shares issued; 51,829,774 and 49,887,268 shares outstanding
52

 
52

Capital in excess of par value
804,133

 
867,545

Treasury stock, at cost, 631,146 and 2,573,652 shares
(38,424
)
 
(159,154
)
Accumulated other comprehensive loss
(545,299
)
 
(487,684
)
Accumulated deficit
(753,359
)
 
(794,072
)
Total stockholders’ deficit
(532,897
)
 
(573,313
)
Total liabilities and stockholders’ deficit
$
2,625,386

 
$
2,854,574


SEE ACCOMPANYING NOTES.

1



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

 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net sales
$
704,666

 
$
807,895

 
$
2,207,007

 
$
2,495,903

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation presented separately below)
546,282

 
713,274

 
1,750,751

 
2,207,962

Selling, general and administrative
65,974

 
71,823

 
194,512

 
223,031

Depreciation and amortization
29,843

 
37,404

 
104,112

 
114,349

Restructuring costs
4,744

 
2,327

 
13,490

 
18,206

Legal judgment gain, net of expenses
(3,857
)
 
—

 
(9,257
)
 
—

Loss on sale of assets and businesses, net
60,019

 
—

 
55,190

 
17,837

 
703,005

 
824,828

 
2,108,798

 
2,581,385

Operating income (loss)
1,661

 
(16,933
)
 
98,209

 
(85,482
)
Non-service defined benefit income
(13,989
)
 
(16,520
)
 
(57,280
)
 
(49,581
)
Interest expense and other, net
33,178

 
29,309

 
96,069

 
83,515

(Loss) income before income taxes
(17,528
)
 
(29,722
)
 
59,420

 
(119,416
)
Income tax (benefit) expense
(3,682
)
 
1,223

 
12,477

 
2,739

Net (loss) income
$
(13,846
)
 
$
(30,945
)
 
$
46,943

 
$
(122,155
)
 
 
 
 
 
 
 
 
(Loss) earnings per share—basic:
$
(0.27
)
 
$
(0.62
)
 
$
0.94

 
$
(2.46
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
50,395

 
49,668

 
50,074

 
49,616

 
 
 
 
 
 
 
 
(Loss) earnings per share—diluted:
$
(0.27
)
 
$
(0.62
)
 
$
0.93

 
$
(2.46
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—diluted
50,395

 
49,668

 
50,591

 
49,616

 
 
 
 
 
 
 
 
Dividends declared and paid per common share
$
0.04

 
$
0.04

 
$
0.12

 
$
0.12


SEE ACCOMPANYING NOTES.

2


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

 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(13,846
)
 
$
(30,945
)
 
$
46,943

 
$
(122,155
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
11,074

 
(7,725
)
 
2,164

 
(21,211
)
Defined benefit pension plans and other postretirement benefits:
 
 
 
 
 
 
 
 
Amounts arising during the period - gains (losses), net of tax (expense) benefit:
 
 
 
 
 
 
 
 
Prior service gain, net of taxes of $0
 
—

 
—

 
(4,898
)
 
—

Actuarial loss, net of taxes of $0
 
—

 
—

 
(118,073
)
 
—

Reclassifications from accumulated other comprehensive income - losses (gains), net of tax expense (benefits):
 
 
 
 
 
 
 
 
Amortization of net loss, net of taxes of $0 and $0 for the three months ended and $0 and $0 for the nine months ended, respectively
 
6,486

 
1,676

 
14,044

 
5,028

Recognized prior service credits, net of taxes of $0 and $0 for the three months ended and $0 and $0 for the nine months ended, respectively
 
(1,459
)
 
(2,075
)
 
46,044

 
(6,225
)
Total defined benefit pension plans and other postretirement expense (benefit), net of taxes
 
5,027

 
(399
)
 
(62,883
)
 
(1,197
)
Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gain arising during period, net of tax of $0 and $(72) for the three months ended and $0 and $(136) for the nine months ended, respectively
 
4,581

 
47

 
4,921

 
787

Reclassification of loss included in net earnings, net of tax of $0 and $67 for the three months ended and $0 and $190 for the nine months ended, respectively
 
(80
)
 
(327
)
 
(1,817
)
 
(1,138
)
Net unrealized gain (loss) on cash flow hedges, net of tax
 
4,501

 
(280
)
 
3,104

 
(351
)
Total other comprehensive income (loss)
 
20,602

 
(8,404
)
 
(57,615
)
 
(22,759
)
Total comprehensive income (loss)
 
$
6,756

 
$
(39,349
)
 
$
(10,672
)
 
$
(144,914
)

SEE ACCOMPANYING NOTES.

3


Triumph Group, Inc.
Condensed Consolidated Statements of Stockholders' (Deficit) Equity
For the three and nine months ended December 31, 2019
(dollars in thousands)
(unaudited)

 
Outstanding
Shares
 
Common
Stock
All Classes
 
Capital in
Excess of
Par Value
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated Deficit
 
Total
Balance, March 31, 2019
49,887,268

 
$
52

 
$
867,545

 
$
(159,154
)
 
$
(487,684
)
 
$
(794,072
)
 
$
(573,313
)
Net income
—

 
—

 
—

 
—

 
—

 
18,088

 
18,088

Adoption of ASC 842
—

 
—

 
—

 
—

 
—

 
(225
)
 
(225
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(2,683
)
 
—

 
(2,683
)
Pension liability adjustment, net of income taxes of $0
—

 
—

 
—

 
—

 
1,409

 
—

 
1,409

Change in fair value of foreign currency hedges, net of income taxes of $0
—

 
—

 
—

 
—

 
(319
)
 
—

 
(319
)
Cash dividends ($0.04 per share)
—

 
—

 
—

 
—

 
—

 
(1,998
)
 
(1,998
)
Share-based compensation
154,802

 
—

 
(7,631
)
 
9,534

 
—

 
—

 
1,903

Repurchase of restricted shares for minimum tax obligation
(51,406
)
 
—

 
—

 
(1,043
)
 
—

 
—

 
(1,043
)
Employee stock purchase plan
14,489

 
—

 
(634
)
 
896

 
—

 
—

 
262

Balance, June 30, 2019
50,005,153

 
$
52

 
$
859,280

 
$
(149,767
)
 
$
(489,277
)
 
$
(778,207
)
 
$
(557,919
)
Net income
—

 
—

 
—

 
—

 
—

 
42,701

 
42,701

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(6,227
)
 
—

 
(6,227
)
Pension liability adjustment, net of income taxes of $0
—

 
—

 
—

 
—

 
(69,319
)
 
—

 
(69,319
)
Change in fair value of foreign currency hedges, net of income taxes of $0
—

 
—

 
—

 
—

 
(1,078
)
 
—

 
(1,078
)
Cash dividends ($0.04 per share)
—

 
—

 
—

 
—

 
—

 
(2,003
)
 
(2,003
)
Share-based compensation
59,938

 
—

 
(850
)
 
3,654

 
—

 
—

 
2,804

Repurchase of restricted shares for minimum tax obligation
(764
)
 
—

 
—

 
(5
)
 
—

 
—

 
(5
)
Employee stock purchase plan
10,196

 
—

 
(400
)
 
622

 
—

 
—

 
222

Balance, September 30, 2019
50,074,523

 
$
52

 
$
858,030

 
$
(145,496
)
 
$
(565,901
)
 
$
(737,509
)
 
$
(590,824
)
Net loss
—

 
—

 
—

 
—

 
—

 
(13,846
)
 
(13,846
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
11,074

 
—

 
11,074

Pension liability adjustment, net of income taxes of $0
—

 
—

 
—

 
—

 
5,027

 
—

 
5,027

Change in fair value of foreign currency hedges, net of income taxes of $0
—

 
—

 
—

 
—

 
4,501

 
—

 
4,501

Cash dividends ($0.04 per share)
—

 
—

 
—

 
—

 
—

 
(2,004
)
 
(2,004
)
Share-based compensation
18,723

 
—

 
1,927

 
1,141

 
—

 
—

 
3,068

Repurchase of restricted shares for minimum tax obligation
(5,092
)
 
—

 
—

 
(131
)
 
—

 
—

 
(131
)
Employee stock purchase plan
10,917

 
—

 
(428
)
 
666

 
—

 
—

 
238

Contribution of treasury shares to pension plan
1,730,703

 
—

 
(55,396
)
 
105,396

 
—

 
—

 
50,000

Balance, December 31, 2019
51,829,774

 
$
52

 
$
804,133

 
$
(38,424
)
 
$
(545,299
)
 
$
(753,359
)
 
$
(532,897
)

4


Triumph Group, Inc.
Condensed Consolidated Statements of Stockholders' (Deficit) Equity
For the three and nine months ended December 31, 2018
(dollars in thousands)
(unaudited)

 
Outstanding
Shares
 
Common
Stock
All Classes
 
Capital in
Excess of
Par Value
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings (Accumulated Deficit)
 
Total
Balance, March 31, 2018
49,669,848

 
$
51

 
$
851,280

 
$
(179,082
)
 
$
(367,870
)
 
$
146,155

 
$
450,534

Net loss
—

 
—

 
—

 
—

 
—

 
(76,534
)
 
(76,534
)
Adoption of ASC 606
—

 
—

 
—

 
—

 
—

 
(584,951
)
 
(584,951
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(14,524
)
 
—

 
(14,524
)
Pension liability adjustment, net of income taxes of $0
—

 
—

 
—

 
—

 
(399
)
 
—

 
(399
)
Change in fair value of foreign currency hedges, net of income taxes of $160
—

 
—

 
—

 
—

 
(1,035
)
 
—

 
(1,035
)
Cash dividends ($0.04 per share)
—

 
—

 
—

 
—

 
—

 
(1,988
)
 
(1,988
)
Share-based compensation
102,248

 
—

 
(84
)
 
2,548

 
—

 
—

 
2,464

Repurchase of restricted shares for minimum tax obligation
(23,756
)
 
—

 
—

 
(532
)
 
—

 
—

 
(532
)
Employee stock purchase plan
16,020

 
—

 
(644
)
 
1,028

 
—

 
—

 
384

Balance, June 30, 2018
49,764,360

 
$
51

 
$
850,552

 
$
(176,038
)
 
$
(383,828
)
 
$
(517,318
)
 
$
(226,581
)
Net loss
—

 
—

 
—

 
—

 
—

 
(14,676
)
 
(14,676
)
Other
—

 
—

 
—

 
—

 
—

 
19

 
19

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
1,038

 
—

 
1,038

Pension liability adjustment, net of income taxes of $0
—

 
—

 
—

 
—

 
(399
)
 
—

 
(399
)
Change in fair value of foreign currency hedges, net of income taxes of $(101)
—

 
—

 
—

 
—

 
964

 
—

 
964

Cash dividends ($0.04 per share)
—

 
—

 
—

 
—

 
—

 
(1,993
)
 
(1,993
)
Share-based compensation
31,596

 
—

 
2,671

 
595

 
—

 
—

 
3,266

Repurchase of restricted shares for minimum tax obligation
(857
)
 
—

 
—

 
(16
)
 
—

 
—

 
(16
)
Employee stock purchase plan
17,618

 
—

 
(821
)
 
1,148

 
—

 
—

 
327

Balance, September 30, 2018
49,812,717

 
$
51

 
$
852,402

 
$
(174,311
)
 
$
(382,225
)
 
$
(533,968
)
 
$
(238,051
)
Net loss
—

 
—

 
—

 
—

 
—

 
(30,945
)
 
(30,945
)
Other
—

 
—

 
—

 
—

 
—

 
(84
)
 
(84
)
Foreign currency translation adjustment
—

 
—

 
—

 
—

 
(7,725
)
 
—

 
(7,725
)
Pension liability adjustment, net of income taxes of $0
—

 
—

 
—

 
—

 
(399
)
 
—

 
(399
)
Change in fair value of foreign currency hedges, net of income taxes of $(5)
—

 
—

 
—

 
—

 
(280
)
 
—

 
(280
)
Cash dividends ($0.04 per share)
—

 
—

 
—

 
—

 
—

 
(1,994
)
 
(1,994
)
Share-based compensation
25,524

 
—

 
1,077

 
1,680

 
—

 
—

 
2,757

Repurchase of restricted shares for minimum tax obligation
(4,735
)
 
—

 
—

 
(97
)
 
—

 
—

 
(97
)
Employee stock purchase plan
14,567

 
—

 
(636
)
 
957

 
—

 
—

 
321

Balance, December 31, 2018
49,848,073

 
$
51

 
$
852,843

 
$
(171,771
)
 
$
(390,629
)
 
$
(566,991
)
 
$
(276,497
)

5




Triumph Group, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
Nine Months Ended December 31,
 
2019
 
2018
 
 
 
 
Operating Activities
 
 
 
Net income (loss)
$
46,943

 
$
(122,155
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
104,112

 
114,349

Amortization of acquired contract liabilities
(56,153
)
 
(48,769
)
Loss on sale of assets and businesses, net
55,190

 
17,837

Curtailment and special termination benefits gain, net
(14,373
)
 
—

Other amortization included in interest expense
9,114

 
6,811

Provision for doubtful accounts receivable
632

 
622

Provision for deferred income taxes
8,108

 
—

Employee stock-based compensation
8,245

 
8,509

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
 
 
 
Trade and other receivables
72,278

 
8,669

Contract assets
53,047

 
6,240

Inventories
(67,764
)
 
(61,563
)
Prepaid expenses and other current assets
11,315

 
1,615

Accounts payable, accrued expenses and contract liabilities
(143,718
)
 
(72,639
)
Accrued pension and other postretirement benefits
(46,693
)
 
(55,150
)
Other
(995
)
 
2,508

Net cash provided by (used in) operating activities
39,288

 
(193,116
)
Investing Activities
 
 
 
Capital expenditures
(27,250
)
 
(34,824
)
Proceeds from sale of assets
49,956

 
41,417

Net cash provided by investing activities
22,706

 
6,593

Financing Activities
 
 
 
Net (decrease) increase in revolving credit facility
(215,000
)
 
218,066

Proceeds from issuance of long-term debt and finance leases
570,980

 
45,000

Repayment of debt and finance lease obligations
(433,197
)
 
(73,011
)
Payment of deferred financing costs
(17,545
)
 
(1,941
)
Dividends paid
(6,005
)
 
(5,975
)
Repurchase of restricted shares for minimum tax obligation
(1,179
)
 
(645
)
Net cash (used in) provided by financing activities
(101,946
)
 
181,494

Effect of exchange rate changes on cash
739

 
(2,126
)
Net change in cash
(39,213
)
 
(7,155
)
Cash and cash equivalents at beginning of period
92,807

 
35,819

Cash and cash equivalents at end of period
$
53,594

 
$
28,664


SEE ACCOMPANYING NOTES.

6


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

1.     BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed consolidated financial statements of Triumph Group, Inc. (the "Company") have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position and cash flows. The results of operations for the three and nine months ended December 31, 2019, are not necessarily indicative of results that may be expected for the year ending March 31, 2020. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2019 audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended March 31, 2019, filed with the Securities and Exchange Commission (the "SEC") on May 23, 2019.

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. The Company and its subsidiaries are organized based on the products and services that they provide. Under this organizational structure, the Company has three reportable segments: Integrated Systems, Aerospace Structures, and Product Support.
Integrated Systems consists of the Company’s operations that provide integrated solutions, including design, development, and support of proprietary components, subsystems and systems, as well as production of complex assemblies using external designs.  Capabilities include hydraulic, mechanical and electromechanical actuation, power and control; a complete suite of aerospace gearbox solutions, including engine accessory gearboxes and helicopter transmissions; active and passive heat exchange technology; fuel pumps, fuel metering units and Full Authority Digital Electronic Control fuel systems; and hydromechanical and electromechanical primary and secondary flight controls.
Aerospace Structures consists of the Company’s operations that supply commercial, business, regional and military manufacturers with large metallic and composite structures and aircraft interior systems, including air ducting and thermal acoustic insulations systems. Products include wings; wing boxes; fuselage panels; horizontal and vertical tails; subassemblies such as floor grids; and aircraft interior systems, including air ducting and thermal acoustic insulations systems. Aerospace Structures also has the capability to engineer detailed structural designs in metal and composites. Capabilities include advanced composite and interior structures, joining processes such as welding, autoclave bonding and conventional mechanical fasteners and a variety of special processes, including super plastic titanium forming, aluminum and titanium chemical milling, surface treatments, and integrated testing and certification services.
Product Support consists of the Company’s operations that provide full life cycle solutions for commercial, regional and military aircraft. The Company’s extensive product and service offerings include full post-delivery value chain services that simplify the maintenance, repair, and overhaul ("MRO") supply chain. Through its ground support equipment maintenance, component MRO and post-production supply chain activities, Product Support is positioned to provide integrated planeside repair solutions globally. Capabilities include metallic and composite aircraft structures; nacelles; thrust reversers; interiors; auxiliary power units; and a wide variety of pneumatic, hydraulic, fuel and mechanical accessories.
Repair services generally involve the replacement and/or remanufacturing of parts, which is similar to the original manufacture of the part. The processes that the Company performs related to repair and overhaul services are essentially the repair of wear parts or replacement of parts that are beyond economic repair. The repair service generally involves remanufacturing a complete part or a component of a part.
Standards Recently Implemented
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). This ASU requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use ("ROU") assets.  The Company adopted the standard as of April 1, 2019, using the modified retrospective approach and applying the standard’s transition provisions at the adoption date. Reporting periods beginning on

7

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

or after April 1, 2019, are presented in accordance with Accounting Standards Codification ("ASC") 842, Leases. Prior periods have not been adjusted and continue to be reported in accordance with previous accounting standards. The Company elected the package of practical expedients permitted under the transition guidance, which among other things, allows the Company to not reassess the historical lease classification.
Adoption of the new standard resulted in the recognition of operating lease ROU assets and lease liabilities of $76,444 and $84,663, respectively, with the difference due to prepaid and deferred rent that were reclassified to the ROU asset value. An adjustment to opening retained earnings of $225 was also recognized. The standard did not materially affect the Company's consolidated statements of operations or cash flows. See Note 5 for further details.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a company to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act (“U.S. tax reform”) on items within AOCI to retained earnings. The Company adopted the provisions of this ASU in the first quarter of 2019 and elected not to reclassify the income tax effects of U.S. tax reform from items in accumulated other comprehensive income. The Company's policy is to release the tax effects from accumulated other comprehensive income when the related portfolio is derecognized.
Standards Issued Not Yet Implemented
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. The Company is currently evaluating the impact of adopting ASU 2016-13 and does not expect the adoption to have a significant impact on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the effect that ASU 2018-13 will have on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to all periods presented. The Company is currently evaluating the effect that ASU 2018-14 will have on its consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company currently expects to adopt the standard prospectively and does not expect adoption to have a significant impact on its consolidated financial statements and related disclosures.


8

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

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 condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenue is principally from contracts with customers to provide design, development, manufacturing, and support services associated with specific customer programs. The Company regularly enters into long-term master supply agreements that establish general terms and conditions and may define specific program requirements. Many agreements include clauses that provide sole supplier status to the Company for the duration of the program’s life. Purchase orders (or authorizations to proceed) are issued pursuant to the master supply agreements. Additionally, a majority of the Company’s agreements with customers include options for future purchases. Such options primarily reduce the administrative effort of issuing subsequent purchase orders and do not represent material rights granted to customers. The Company generally enters into agreements directly with its customers and is the principal in all current contracts.
The identification of a contract with a customer for purposes of accounting and financial reporting requires an evaluation of the terms and conditions of agreements to determine whether presently enforceable rights and obligations exist. Management considers a number of factors when making this evaluation that include, but are not limited to, the nature and substance of the business exchange, the specific contractual terms and conditions, the promised products and services, the termination provisions in the contract, as well as the nature and execution of the customer’s ordering process and how the Company is authorized to perform work. Generally, presently enforceable rights and obligations are not created until a purchase order is issued by a customer for a specified number of units of product or services. Therefore, the issuance of a purchase order is generally the point at which a contract is identified for accounting and financial reporting purposes.
Management identifies the promises to the customer. Promises are generally explicitly stated in each contract, but management also evaluates whether any promises are implied based on the terms of the agreement, past business practice, or other facts and circumstances. Each promise is evaluated to determine if it is a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service. The Company considers a number of factors when determining whether a promise is a performance obligation, including whether the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer, whether the Company provides a significant service of integrating goods or services to deliver a combined output to the customer, or whether the goods or services are highly interdependent. The Company’s performance obligations consist of a wide range of engineering design services and manufactured components, as well as spare parts and repairs for original equipment manufacturers ("OEMs").
The transaction price for a contract reflects the consideration the Company expects to receive for fully satisfying the performance obligations in the contract. Typically, the transaction price consists solely of fixed consideration but may include variable consideration for contractual provisions such as unpriced contract modifications, cost-sharing provisions, and other receipts or payments to customers. The Company identifies and estimates variable consideration, typically at the most likely amount the Company expects to receive from its customers. Variable consideration is only included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized for the contract will not occur, or when the uncertainty associated with the variable consideration is resolved. The Company's contracts with customers generally require payment under normal commercial terms after delivery with payment typically required within 30 to 120 days of delivery. However, a subset of the Company’s current contracts includes significant financing components because the timing of the transfer of the underlying products and services under contract are at the customers’ discretion. For these contracts, the Company adjusts the transaction price to reflect the effects of the time value of money.
The Company generally is not subject to collecting sales tax and has made an accounting policy election to exclude from the transaction price any sales and other similar taxes collected from customers. As a result, any such collections are accounted for on a net basis.
The total transaction price is allocated to each of the identified performance obligations using the relative stand-alone selling price. The objective of the allocation is to reflect the consideration that the Company expects to receive in exchange for the products or services associated with each performance obligation. Stand-alone selling price is the price at which the

9

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

Company would sell a promised good or service separately to a customer. Stand-alone selling prices are established at contract inception, and subsequent changes in transaction price are allocated on the same basis as at contract inception. When stand-alone selling prices for the Company’s products and services are not observable, the Company uses either the “Expected Cost Plus a Margin” or "Adjusted Market Assessment" approaches to estimate stand-alone selling price. Expected costs are typically derived from the available periodic forecast information.
Revenue is recognized when or as control of promised products or services transfers to a customer and is recognized at the amount allocated to each performance obligation associated with the transferred products or services. Service sales, principally representing repair, maintenance, and engineering activities are recognized over the contractual period or as services are rendered. Sales under long-term contracts with performance obligations satisfied over time are recognized using either an input or output method. The Company recognizes revenue over time as it performs on these contracts because of the continuous transfer of control to the customer as represented by work that is performed on a customer-owned asset or by contractual terms that entitle the Company to the reimbursement of costs plus a reasonable profit for work performed to manufacture products for which the Company has no alternate use.
With control transferring over time, revenue is recognized based on the extent of progress toward completion of the performance obligation. The Company generally uses the cost-to-cost input method of progress for our contracts because it best depicts the transfer of control to the customer that occurs as work progresses. Under the cost-to-cost method, the extent of progress toward completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. The Company reviews its cost estimates on significant contracts on a periodic basis, or when circumstances change and warrant a modification to a previous estimate. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.
Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Impacts from changes in estimates of net sales and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. Forward loss reserves for anticipated losses on long-term contracts are recorded in full when such losses become evident, to the extent required, and are included in contract liabilities on the accompanying consolidated balance sheets.
For the three months ended December 31, 2019, cumulative catch-up adjustments from changes in estimates, including changes in forward loss estimates, increased net sales by approximately $4,722 and decreased operating income, net income, and earnings per share by approximately $(210), $(166) and $0.00, net of tax, respectively. For the three months ended December 31, 2018, cumulative catch-up adjustments from changes in estimates increased net sales by approximately $674 and increased operating loss, net loss, and loss per share by approximately $(47,028), $(47,028) and $(0.95), net of tax, respectively.
For the nine months ended December 31, 2019, cumulative catch-up adjustments from changes in estimates, including changes in forward loss estimates, increased net sales by approximately $2,347 and decreased operating income, net income, and earnings per share by approximately $(16,393), $(12,950) and $(0.26), net of tax, respectively. For the nine months ended December 31, 2018, cumulative catch-up adjustments from changes in estimates decreased net sales by approximately $(5,632) and increased operating loss, net loss, and loss per share by approximately $(59,407), $(59,407) and $(1.20), net of tax, respectively. The fiscal year 2019 cumulative catch-up adjustments do not include a non-cash charge the Company recorded as a result of the adoption of ASU 2017-07 of $87,241 due to a change in estimate inseparable from a change in accounting principles, which is presented on the accompanying consolidated statements of operations within cost of sales.
Revenues for performance obligations that are not recognized over time are recognized at the point in time when control transfers to the customer. For performance obligations that are satisfied at a point in time, the Company evaluates the point in time when the customer can direct the use of and obtain the benefits from the products and services. Generally, the shipping terms determine the point in time when control transfers to customers. Shipping and handling activities are not considered performance obligations and related costs are included in cost of sales as incurred.
Differences in the timing of revenue recognition and contractual billing and payment terms result in the recognition contract assets and liabilities. Refer to Note 4 for further discussion.
The portion of the Company's revenue resulting from transactions other than contracts with customers pertains to the non-cash amortization of acquired contract liabilities that were recognized as fair value adjustments through purchase accounting from various acquisitions.

10

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

Leases
The Company leases office space, manufacturing facilities, land, vehicles, and equipment. The Company determines if an agreement is or contains a lease at the lease inception date and recognizes right-of-use assets and lease liabilities at the lease commencement date. A ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term leases).
ROU assets represent the Company's right to use an underlying asset during the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The determination of the length of lease terms is affected by options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The existence of significant economic incentive is the primary consideration when assessing whether the Company is reasonably certain of exercising an option in a lease. Both finance and operating lease ROU assets and liabilities are recognized at commencement date and measured as the present value of lease payments to be made over the lease term. As the interest rate implicit in the lease is not readily available for most of the Company's leases, the Company uses its estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date. The lease ROU asset recognized at commencement is adjusted for any lease payments related to initial direct costs, prepayments, and lease incentives.
For operating leases, lease expense is recognized on a straight-line basis over the lease term. For finance leases, lease expense comprises the amortization of the ROU assets recognized on a straight-line basis generally over the shorter of the lease term or the estimated useful life of the underlying asset and interest on the lease liability. Variable lease payments not dependent on a rate or index are recognized when the event, activity, or circumstance in the lease agreement upon which those payments are contingent is probable of occurring and are presented in the same line of the consolidated balance sheet as the rent expense arising from fixed payments. The Company has lease agreements with lease and non-lease components. Non-lease components are combined with the related lease components and accounted for as lease components for all classes of underlying assets.
Concentration of Credit Risk
The Company’s trade and other 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 15% and 18% of total trade accounts receivable as of December 31, 2019 and March 31, 2019, respectively. Trade accounts receivable from Gulfstream Aerospace Corporation ("Gulfstream") represented approximately 4% and 11% of total trade accounts receivable as of December 31, 2019 and March 31, 2019, respectively. Trade and other accounts receivable from Bombardier Inc. ("Bombardier") include receivables from transition services and represented approximately 12% and 13% as of December 31, 2019 and March 31, 2019, respectively. The Company had no other concentrations of credit risk of more than 10%.
Sales to Boeing for the nine months ended December 31, 2019, were $742,495, or 34% of net sales, of which $172,438, $552,641, and $17,416 were from the Integrated Systems, Aerospace Structures and Product Support, respectively. Sales to Boeing for the nine months ended December 31, 2018, were $761,952, or 31% of net sales, of which $167,870, $583,971 and $10,111 were from the Integrated Systems, Aerospace Structures and Product Support, respectively.
Sales to Gulfstream for the nine months ended December 31, 2019, were $268,917, or 12% of net sales, of which $1,658, $266,421, and $838 were from the Integrated Systems, Aerospace Structures and Product Support, respectively. Sales to Gulfstream for the nine months ended December 31, 2018, were $261,880, or 10% of net sales, of which $1,585, $259,812, and $483 were from the Integrated Systems, Aerospace Structures and Product Support, respectively.
No other single customer accounted for more than 10% of the Company’s net sales. However, the loss of any significant customer, including Boeing and Gulfstream, could have a material adverse effect on the Company and its operating subsidiaries.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing an asset or liability. The fair value hierarchy has three levels of inputs that may be used to

11

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

measure fair value: Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and Level 3—Unobservable inputs for the asset or liability.
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 3-year warranty, although certain programs have warranties up to twenty years. The warranty reserves as of December 31, 2019 and March 31, 2019, were $59,577 and $58,395, respectively.
Supplemental Cash Flow Information
The Company made income tax payments, net of refunds of $4,370 during the nine months ended December 31, 2019. The Company received income tax refunds, net of payments of $6,243 during the nine months ended December 31, 2018.
As of December 31, 2019, the Company remains able to purchase an additional 2,277,789 shares under the existing stock repurchase program. However, there are certain restrictions placed on the repurchase program by the Company's lenders that prevent any repurchases at this time.
3.     DIVESTED OPERATIONS
In December 2019, the Company completed the sale of its manufacturing operations at its Nashville, TN, facility for cash proceeds net of transaction costs of approximately $60,000, including approximately $7,000 allocated as a premium paid by the buyer in exchange for a specified performance guarantee. Upon closing, the Company recognized a loss of approximately $64,000, which is presented on the accompanying consolidated statements of operations within loss on sale of assets and businesses. The operating results of the Nashville manufacturing operations are included in Aerospace Structures through the date of divestiture. Additionally, as part of the transaction, the Company agreed to transfer to the buyer, within 120 days from the date of closing, certain defined benefit pension assets and obligations of approximately $50,000 associated with the Nashville manufacturing operations.  In accordance with applicable defined benefit pension plan accounting guidance, the transfer will be treated as a settlement for purposes of the Company’s financial statements and will result in accelerated recognition of previously unrecognized actuarial losses.  As a result, the Company expects to recognize a one-time settlement loss of approximately $20,000 when the transfer occurs.

In September 2019, the Company completed the assignment of its E-2 Jets contract with Embraer for the manufacture of structural components for their program to AeroSpace Technologies of Korea Inc. ("ASTK"). As part of this transaction, the Company transferred certain assets and liabilities to ASTK and recognized a gain of approximately $10,000, which is presented on the accompanying consolidated statements of operations within loss on sale of assets and businesses. 
In March 2019, the Company sold all of the shares of Triumph Structures – Kansas City, Inc.; Triumph Structures – Wichita, Inc.; Triumph Gear Systems – Toronto; ULC; and Triumph Northwest (The Triumph Group Operations, Inc.) (together, "Machining"). Total cash proceeds net of transaction costs for the sale of Machining was approximately $43,000. A portion of the proceeds associated with the sale of Machining included consideration in the form of a note receivable of $10,000. Upon closing, the Company recognized a loss of approximately $116,000. An additional loss of approximately $3,000 was recognized during the nine months ended December 31, 2019, as a result of working capital adjustments and additional transaction costs and is presented within loss on sale of assets and businesses on the accompanying condensed consolidated statements of operations.
In March 2019, the Company sold all of the shares of (i) Triumph Fabrications - San Diego, Inc. and Triumph Fabrications - Ft. Worth, Inc. (together, "Fabrications"), and (ii) Triumph Aviation Services - NAAS Division, Inc. ("NAAS"). Total cash proceeds net of transaction costs for the sales of Fabrications and NAAS were approximately $133,000 and $18,000, respectively. As a result of the sales of Fabrications, the Company recognized a gain of approximately $54,000. The sale of NAAS resulted in an immaterial gain.
In February 2019, the Company transitioned responsibility for the Global 7500 wing program manufacturing operations of Aerospace Structures to Bombardier at which point Bombardier assumed the program’s assets and obligations. As a result of

12

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

this transfer, the Company recognized a loss of approximately $169,000. The Company continues to provide transition services related to infrastructure support reducing in scope over the next several months, as well as a lease of the building in Red Oak, Texas, dedicated to the manufacturer of the Global 7500 wing to Bombardier.

In July 2018 and August 2018, respectively, the Company sold all of the shares of Triumph Structures - East Texas, Inc. as well as all of the shares of Triumph Structures - Los Angeles, Inc., and Triumph Processing, Inc. for combined cash proceeds net of transactions costs of approximately $43,000 and a note receivable of $7,000. The note receivable was collected in October 2018. As a result of these sales, the Company recognized losses of approximately $17,000, which are presented on the accompanying consolidated statements of operations within loss on sale of assets and businesses.
4.    REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS
Disaggregation of Revenue
The Company disaggregates revenue based on the method of measuring satisfaction of the performance obligation either over time or at a point in time. Additionally, the Company disaggregates revenue based upon the end market where products and services are transferred to the customer. The Company’s principal operating segments and related revenue are discussed in Note 13, Segments.
The following table shows disaggregated net sales satisfied overtime and at a point in time (excluding intercompany sales) for the three and nine months ended December 31, 2019 and 2018:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Integrated Systems
 
 
 
 
 
 
 
Satisfied over time
$
76,267

 
$
66,208

 
$
224,442

 
$
205,379

Satisfied at a point in time
188,739

 
175,370

 
558,015

 
515,547

          Revenue from contracts with customers
265,006

 
241,578

 
782,457

 
720,926

     Amortization of acquired contract liabilities
8,377

 
8,172

 
26,126

 
25,789

          Total revenue
273,383

 
249,750

 
808,583

 
746,715

 
 
 
 
 
 
 
 
Aerospace Structures
 
 
 
 
 
 
 
Satisfied over time
$
330,657

 
$
434,870

 
$
1,075,141

 
$
1,385,368

Satisfied at a point in time
28,582

 
47,547

 
100,455

 
137,390

          Revenue from contracts with customers
359,239

 
482,417

 
1,175,596

 
1,522,758

     Amortization of acquired contract liabilities
8,220

 
6,559

 
30,027

 
22,980

          Total revenue
367,459

 
488,976

 
1,205,623

 
1,545,738

 
 
 
 
 
 
 
 
Product Support
 
 
 
 
 
 
 
Satisfied over time
$
58,962

 
$
64,942

 
$
179,383

 
$
189,174

Satisfied at a point in time
4,862

 
4,227

 
13,418

 
14,276

          Total revenue from contracts with customers
63,824

 
69,169

 
192,801

 
203,450

 
$
704,666

 
$
807,895

 
$
2,207,007

 
$
2,495,903



13

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

The following table shows disaggregated net sales by end market (excluding intercompany sales) for the three and nine months ended December 31, 2019 and 2018:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Integrated Systems
 
 
 
 
 
 
 
Commercial aerospace
$
145,026

 
$
124,453

 
$
413,263

 
$
378,117

Military
93,405

 
87,486

 
277,009

 
258,488

Business jets
10,358

 
16,369

 
43,897

 
43,939

Regional
8,166

 
7,048

 
24,026

 
21,004

Non-aviation
8,051

 
6,222

 
24,262

 
19,378

          Revenue from contracts with customers
265,006

 
241,578

 
782,457

 
720,926

     Amortization of acquired contract liabilities
8,377

 
8,172

 
26,126

 
25,789

          Total revenue
$
273,383

 
$
249,750

 
$
808,583

 
$
746,715

 
 
 
 
 
 
 
 
Aerospace Structures
 
 
 
 
 
 
 
Commercial aerospace
$
208,943

 
$
230,556

 
$
681,471

 
$
756,661

Military
27,394

 
54,275

 
83,773

 
178,679

Business jets
98,370

 
181,511

 
330,178

 
541,520

Regional
24,523

 
7,807

 
80,155

 
24,342

Non-aviation
9

 
8,268

 
19

 
21,556

          Revenue from contracts with customers
359,239

 
482,417

 
1,175,596

 
1,522,758

     Amortization of acquired contract liabilities
8,220

 
6,559

 
30,027

 
22,980

          Total revenue
$
367,459

 
$
488,976

 
$
1,205,623

 
$
1,545,738

 
 
 
 
 
 
 
 
Product Support
 
 
 
 
 
 
 
Commercial aerospace
$
47,206

 
$
53,596

 
$
148,552

 
$
158,158

Military
12,455

 
11,383

 
32,726

 
32,637

Business jets
418

 
350

 
1,383

 
2,143

Regional
3,144

 
3,840

 
9,408

 
10,512

Non-aviation
601

 
—

 
732

 
—

          Total revenue from contracts with customers
63,824

 
69,169

 
192,801

 
203,450

 
$
704,666

 
$
807,895

 
$
2,207,007

 
$
2,495,903


Contract Assets and Liabilities
Contract assets primarily represent revenues recognized for performance obligations that have been satisfied or partially satisfied but for which amounts have not been billed. This typically occurs when revenue is recognized over time but the Company's contractual right to bill the customer and receive payment is conditional upon the satisfaction of additional performance obligations in the contract, such as final delivery of the product. Contract assets are recognized when the revenue associated with the contract is recognized prior to billing and derecognized when billed in accordance with the terms of the contract. The Company performs ongoing evaluations of the potential impairment of its contract assets based on prior experience and specific matters when they arise. No impairments to contract assets were recorded for the period ended December 31, 2019.
Contract liabilities are recorded when customers remit contractual cash payments in advance of the Company satisfying performance obligations under contractual arrangements, including those with performance obligations to be satisfied over a

14

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

period of time. Contract liabilities other than those pertaining to forward loss reserves are derecognized when or as revenue is recognized.
Contract modifications can also impact contract asset and liability balances. When contracts are modified to account for changes in contract specifications and requirements, the Company considers whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original good or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification to an existing contract on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct and at relative stand-alone selling price, they are accounted for as a new contract and performance obligation, which are recognized prospectively.
Contract balances are classified as assets or liabilities on a contract-by-contract basis at the end of each reporting period. The following table summarizes our contract assets and liabilities balances:
 
December 31, 2019
 
March 31, 2019
 
Change
Contract assets
$
265,190

 
$
326,667

 
$
(61,477
)
Contract liabilities
(376,522
)
 
(450,051
)
 
73,529

Net contract liability
$
(111,332
)
 
$
(123,384
)
 
$
12,052


The Company recognized revenue due to changes in estimates associated with performance obligations satisfied or partially satisfied in previous periods of $2,347. The decrease in contract assets is the result of $76,667 in contract assets liquidated as part of the assignment of the E2-Jets contract to ASTK partially offset by revenue recognized in excess of amounts billed during the period ended December 31, 2019. The decrease in contract liabilities is the result of revenue recognized in excess of the receipt of additional customer advances during the period as well as $12,641 in contract liabilities liquidated as part of the assignment of the E2-Jets contract to ASTK. For the period ended December 31, 2019, the Company recognized $72,293 of revenue that was included in the contract liability balance at the beginning of the period. Noncurrent contract assets presented in other, net on the accompanying consolidated balance sheets as of December 31, 2019 and March 31, 2019, were $23,315 and $34,185, respectively. Noncurrent contract liabilities presented in other noncurrent liabilities on the accompanying consolidated balance sheets as of December 31, 2019 and March 31, 2019, were $112,059 and $156,332, respectively.
Performance Obligations
Customers generally contract with the Company for requirements in a segment relating to a specific program. A single contract may contain multiple performance obligations consisting of both recurring and nonrecurring elements.
As of December 31, 2019, the Company has the following unsatisfied, or partially unsatisfied, performance obligations that are expected to be recognized in the future as noted in the table below. The Company expects options to be exercised in addition to the amounts presented below.
 
Total
 
Less than
1 year
 
1-3 years
 
4-5 years
 
More than 5
years
Unsatisfied performance obligations
$
4,142,321

 
$
1,798,557

 
$
1,320,852

 
$
519,786

 
$
503,126





15

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

5.    LEASES
The components of lease expense for the nine months ended December 31, 2019, are disclosed in the table below.
Lease Cost
Financial Statement Classification
Nine Months Ended December 31, 2019
Operating lease cost
Cost of sales or
Selling, general and administrative expense
$
17,829

Variable lease cost
Cost of sales or
Selling, general and administrative expense
5,892

 
 
 
Financing Lease Cost:
 
 
     Amortization of right-of-use assets
Depreciation and amortization
4,224

     Interest on lease liability
Interest expense and other
1,579

Total lease cost (1)
 
$
29,524


(1) Total lease cost does not include short-term leases or sublease income, both of which are immaterial.

Supplemental cash flow information for the nine months ended December 31, 2019, is disclosed in the table below.
 
Nine Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
     Operating cash flows used in operating leases
$
14,046

     Operating cash flows used in finance leases
1,600

     Financing cash flows used in finance leases
6,516

 
 
ROU assets obtained in exchange for lease liabilities
 
     Operating leases
$
2,569

     Finance leases
811



16

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

Supplemental balance sheet information related to leases as of December 31, 2019, is disclosed in the table below.
Leases
Classification
December 31, 2019
Assets
 
 
     Operating lease ROU assets
Other, net
$
66,578

     
 
 
     Finance lease ROU assets, cost
Property and equipment, net
39,364

     Accumulated amortization
Property and equipment, net
(17,557
)
     Finance lease ROU assets, net
 
21,807

Total lease assets
 
$
88,385

 
 
 
Liabilities
 
 
     Current
 
 
          Operating
Accrued expenses
$
14,028

          Finance
Current portion of long-term debt
7,795

     Noncurrent
 
 
          Operating
Other noncurrent liabilities
58,152

          Finance
Long-term debt, less current portion
18,172

Total lease liabilities
 
$
98,147


Information related to lease terms and discount rates as of December 31, 2019, is disclosed in the table below:
 
December 31, 2019
Weighted average remaining lease term (years)
 
     Operating leases
7.2

     Finance leases
6.7

 
 
Weighted average discount rate
 
     Operating leases
6.4
%
     Finance leases
5.8
%


17

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

The maturity of the Company's lease liabilities as of December 31, 2019, is disclosed in the table below.
 
Operating leases
 
Finance leases
 
Total
FY2020 (remaining of year)
$
7,359

 
$
2,348

 
$
9,707

FY2021
16,753

 
8,786

 
25,539

FY2022
14,451

 
5,751

 
20,202

FY2023
11,021

 
2,873

 
13,894

FY2024
8,322

 
2,112

 
10,434

Thereafter
35,810

 
11,263

 
47,073

     Total lease payments
93,716

 
33,133

 
126,849

Less: Imputed interest
(21,536
)
 
(7,166
)
 
(28,702
)
     Total lease liabilities
$
72,180

 
$
25,967

 
$
98,147



6.    INVENTORIES
Inventories are stated at the lower of cost (average-cost or specific-identification methods) or market. The components of inventories are as follows:
 
December 31, 2019
 
March 31, 2019
Raw materials
$
39,036

 
$
35,883

Work-in-process, including manufactured and purchased components
322,336

 
277,996

Finished goods
57,061

 
42,399

Rotable assets
55,430

 
57,282

Total inventories
$
473,863

 
$
413,560



7.    LONG-TERM DEBT
Long-term debt consists of the following:
 
December 31, 2019
 
March 31, 2019
 
 
 
 
Revolving line of credit
$
—

 
$
215,000

Receivable securitization facility
75,000

 
80,700

Finance leases
25,967

 
31,292

Senior secured notes due 2024
525,000

 
—

Senior notes due 2021
—

 
375,000

Senior notes due 2022
300,000

 
300,000

Senior notes due 2025
500,000

 
500,000

Less: Debt issuance costs
(17,279
)
 
(13,171
)
 
1,408,688

 
1,488,821

Less: Current portion
7,795

 
8,201

 
$
1,400,893

 
$
1,480,620



18

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

Revolving Credit Facility
On September 23, 2019, the Company and its subsidiary co-borrowers and guarantors entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment” and the existing Credit Agreement as amended by the Eleventh Amendment, the “Credit Agreement”) with the Administrative Agent and the Lenders party thereto. Among other things, the Eleventh Amendment:

(i) permits the Company to incur indebtedness in respect of the Senior Secured Notes due 2024 (the "2024 Notes") in an aggregate principal amount of up to $525,000, subject to the terms and conditions of the Intercreditor Agreement;

(ii) lowers the aggregate amount of revolving credit commitments from $700,000 to $600,000 upon the earlier of (a) the completion by the Company of $100,000 in certain asset sales or divestitures or (b) March 31, 2020;

(iii) extends, with respect to extending banks representing approximately $406,500 of $600,000 total commitments outstanding as of March 31, 2020, the expiration date for the revolving line of credit available to the Company pursuant to the Credit Agreement to March 15, 2024; and retains an accordion feature that permits the Company to request an increase to the revolving credit commitments by up to $200,000;

(iv) adds an additional mandatory prepayment provision requiring that the Company prepay any outstanding revolving credit loans in an amount equal to (a) with respect to an Identified Asset Sale (as defined in the Credit Agreement) the greater of (x) $50,000 and (y) 100% of the net asset sale proceeds received in connection therewith, and (b) with respect to other Specified Asset Sales (as defined in the Credit Agreement), 100% of the net asset proceeds received from such other Specified Asset Sales; and

(v) modifies certain financial covenants and other terms.
In connection with the Eleventh Amendment to the Credit Agreement, the Company incurred $6,944 of financing costs. These costs, along with the $6,222 of unamortized financing costs subsequent to the Tenth Amendment, are being amortized over the remaining term of the Credit Agreement on a lender-by-lender basis. In accordance with the reduction in the capacity of the Credit Agreement, the Company wrote off a proportional amount of unamortized financing fees existing prior to the Eleventh Amendment. The divestiture of the Company's manufacturing operations in Nashville resulted in a reduction of the revolving credit commitments to $640,000.
The obligations under the Credit Agreement and related documents are secured by liens on substantially all assets of the Company and its domestic subsidiaries pursuant to a Second Amended and Restated Guarantee and Collateral Agreement, dated as of November 19, 2013, among the administrative agent, the Company and the subsidiaries of the Company party thereto.
Pursuant to the Credit Agreement, the Company can borrow, repay and re-borrow revolving credit loans, and cause to be issued letters of credit, in an aggregate principal amount not to exceed $700,000 outstanding at any time as such revolving credit commitments are reduced as discussed above. The Credit Agreement bears interest at either: (i) London Interbank Offered Rate ("LIBOR") plus between 1.50% and 3.50%; (ii) the prime rate; or (iii) an overnight rate at the option of the Company. The applicable interest rate is based upon the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization provided, however, that during the Pricing Restriction Period (as defined in the Credit Agreement), the loans will bear interest at the highest rate above LIBOR. In addition, the Company is required to pay a commitment fee of 0.50% on the unused portion of the Credit Agreement. The Company’s obligations under the Credit Agreement are guaranteed by the Company’s domestic subsidiaries.
At December 31, 2019, there were $0 in borrowings and $22,338 in letters of credit outstanding under the Revolving Line of Credit provisions of the Credit Agreement, primarily to support insurance policies. At March 31, 2019, there were $215,000 in outstanding borrowings and $30,773 in letters of credit outstanding under the Revolving Line of Credit provisions of the Credit Agreement, primarily to support insurance policies. The level of unused borrowing capacity under the Revolving Line of Credit provisions of the Credit Agreement varies from time to time depending in part upon its compliance with financial and other covenants set forth in the related agreement. The Credit Agreement 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,

19

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

and incurrence of debt. If an event of default were to occur under the Credit Agreement, 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 Agreement could also cause the acceleration of obligations under certain other agreements. The Company is currently in compliance with all such covenants. As of December 31, 2019, the Company had borrowing capacity under this agreement of $581,329 after reductions for borrowings, letters of credit outstanding under the facility and consideration of covenant limitations.
Receivables Securitization Facility
In December 2019, the Company amended its receivable securitization facility (the "Securitization Facility") decreasing the purchase limit from $125,000 to $75,000 and extending the term through December 2022. In connection with the Securitization Facility, the Company sells on a revolving basis certain eligible 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 December 31, 2019, the maximum amount available under the Securitization Facility was $75,000. Interest rates are based on LIBOR plus a program fee and a commitment fee. The program fee is 0.13% on the amount outstanding under the Securitization Facility. Additionally, the commitment fee is 0.50% on 100.00% of the maximum amount available under the Securitization Facility. The Company secures its trade accounts receivable, which are generally non-interest-bearing, in transactions that are accounted for as borrowings pursuant to ASC 860, Transfers and Servicing.
The agreement governing the Securitization Facility contains restrictions and covenants, including limitations on the making of certain restricted payments; creation of certain liens; and certain corporate acts such as mergers, consolidations and the sale of all or substantially all of the Company's assets.
Senior Secured Notes Due 2024
On September 23, 2019, the Company issued $525,000 principal amount of 6.250% Senior Secured Notes due 2024. The 2024 Notes were sold at 100% of principal amount and have an effective interest yield of 6.250%. Interest on the 2024 Notes accrues at the rate of 6.250% per annum and is payable semiannually in cash in arrears on March 15 and September 15 of each year, commencing on March 15, 2020. In connection with the issuance of the 2024 Notes, the Company incurred approximately $9,300 of costs, which were deferred and are being amortized over the term of the 2024 Notes.
The 2024 Notes are second lien secured obligations of the Company and its subsidiary guarantors. The 2024 Notes:
•
rank equal in right of payment to existing and future senior indebtedness of the Company and its subsidiary guarantors, including the obligations of the Company and its subsidiary guarantors under the Company’s credit facility;
•
are effectively subordinated to all obligations of the Company and its subsidiary guarantors that are either (A) secured by a lien on the Collateral (as defined below) that is senior or prior to the second-priority liens securing the 2024 Notes, including the first-priority liens securing borrowings under the Company’s credit facility and certain cash management and hedging obligations, or (B) secured by assets that do not constitute the Collateral, in each case to the extent of the value of the assets securing such obligations;
•
are senior in right of payment to existing and future subordinated indebtedness of the Company and its subsidiary guarantors;
•
are effectively senior to all existing and future unsecured debt of the Company and its subsidiary guarantors, but only to the extent of the value of the Collateral (after giving effect to any senior liens on the Collateral); and
•
are structurally subordinated in right of payment to all indebtedness and other liabilities of the Company’s existing and future subsidiaries that do not guarantee the 2024 Notes.
The 2024 Notes are guaranteed on a full, senior secured, joint and several basis by each of the Company’s domestic restricted subsidiaries that is a borrower under the Company’s credit facility or that guarantees any of the Company’s debt or that of any of the Company’s domestic restricted subsidiaries under the Company’s credit facility and in the future by any of the Company’s domestic restricted subsidiaries that are borrowers under any credit facility or that guarantee any debt of the Company or any of its domestic restricted subsidiaries incurred under any credit facility (the "Guarantor Subsidiaries").

The Company may redeem the 2024 Notes, in whole or in part, at any time or from time to time on or after September 15, 2020, at specified redemption prices, plus accrued and unpaid interest, if any, to the redemption date. At any time or from time to time prior to September 15, 2020, the Company may redeem the 2024 Notes, in whole or in part, at a redemption price equal

20

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

to 100% of their principal amount plus a make whole premium, together with accrued and unpaid interest, if any, to the redemption date. In addition, the Company may redeem up to 40% of the aggregate principal amount of the outstanding 2024 Notes prior to September 15, 2020, with the net cash proceeds from certain equity offerings at a redemption price equal to 106.250% of their principal amount, together with accrued and unpaid interest, if any, to the redemption date.

If the Company experiences specific kinds of changes of control, the Company is required to offer to purchase all of the 2024 Notes at a purchase price of 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The 2024 Notes were issued pursuant to an indenture dated as of September 23, 2019 (the “Indenture”). The Indenture contains covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to: (i) incur additional indebtedness; (ii) pay dividends or make other distributions; (iii) make other restricted payments and investments; (iv) create liens; (v) incur restrictions on the ability of restricted subsidiaries to pay dividends or make certain other payments; (vi) sell assets, including capital stock of restricted subsidiaries; (vii) enter into sale and leaseback transactions; (viii) merge or consolidate with other entities; and (ix) enter into transactions with affiliates.
Senior Notes Due 2021
On September 23, 2019, the Company called all outstanding 4.875% Senior Notes due 2021 (the "2021 Notes") Notes and discharged the 2021 Notes by irrevocably depositing with the 2021 Notes trustee sufficient funds to pay all principal and accrued interest through October 23, 2019. On October 23, 2019, the Company redeemed $375,000 principal amount of the 2021 Notes with the proceeds of the 2024 Notes.
Senior Notes Due 2022
On June 3, 2014, the Company issued $300,000 principal amount of 5.250% Senior Notes due 2022 (the "2022 Notes"). The 2022 Notes were sold at 100% of principal amount and have an effective interest yield of 5.250%. Interest on the 2022 Notes accrues at the rate of 5.250% per annum and is payable semiannually in cash in arrears on June 1 and December 1 of each year, commencing on December 1, 2014.
Senior Notes Due 2025
On August 17, 2017, the Company issued $500,000 principal amount of 7.750% Senior Notes due 2025 (the "2025 Notes"). The 2025 Notes were sold at 100% of principal amount and have an effective interest yield of 7.750%. Interest on the 2025 Notes accrues at the rate of 7.750% per annum and is payable semiannually in cash in arrears on February 15 and August 15 of each year, commencing on February 15, 2018.
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 condensed consolidated financial statements are as follows:
 
December 31, 2019
 
March 31, 2019
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
Long-term debt
$
1,408,688

 
$
1,467,892

 
$
1,488,821

 
$
1,568,037


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 (Level 2 inputs), unless quoted market prices were available.
The Company made interest payments of $60,885 and $63,261 for the nine months ended December 31, 2019 and 2018, respectively.

21

Triumph Group, Inc.
Notes to Condensed 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 December 31,
 
Nine Months Ended December 31,
 
(in thousands)
 
(in thousands)
 
2019
 
2018
 
2019
 
2018
Weighted average common shares outstanding – basic
50,395

 
49,668

 
50,074

 
49,616

Net effect of dilutive stock options and non-vested stock(1)
—

 
—

 
517

 
—

Weighted average common shares outstanding – diluted
50,395

 
49,668

 
50,591

 
49,616


(1)    For the three and nine months ended December 31, 2019 and 2018, the shares that could potentially dilute earnings per share in the future but were not included in diluted weighted average common shares outstanding because to do so would have been anti-dilutive were immaterial.

9.    INCOME TAXES
The Company follows the Income Taxes topic of ASC 740, which prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, as well as guidance on 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 and are not significant.

As of December 31, 2019 and March 31, 2019, the total amount of unrecognized tax benefits was $20,105 and $19,152, respectively, most of which would impact the effective rate, if recognized. The Company does not anticipate that total unrecognized tax benefits will be reduced in the next 12 months.
As of December 31, 2019, the Company has a valuation allowance against principally all of its net deferred tax assets given insufficient positive evidence to support the realization of the Company’s deferred tax assets.  The Company intends to continue maintaining a valuation allowance on its deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of these allowances.  A reduction in the valuation allowance could result in a significant decrease in income tax expense in the period that the release is recorded.  However, the exact timing and amount of the reduction in its valuation allowance is unknown at this time and will be subject to the earnings level the Company achieves during future years.
The effective income tax rate for the three months ended December 31, 2019, was 21.0% as compared with (4.1)% for the three months ended December 31, 2018. For the three months ended December 31, 2018, the effective tax rate reflected a limitation on the recognition of tax benefits due to the full valuation allowance. The effective income tax rate for the nine months ended December 31, 2019, was 21.0% as compared with (2.3)% for the nine months ended December 31, 2018. For the nine months ended December 31, 2018, the effective tax rate reflected a limitation on the recognition of tax benefits due to the full valuation allowance.
With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for fiscal years ended before March 31, 2014, or foreign income tax examinations by tax authorities for fiscal years ended before March 31, 2013.

As of December 31, 2019, the Company is subject to examination in one state jurisdiction. The Company has filed appeals in a prior state examination related to fiscal years ended March 31, 1999 through March 31, 2005.


22

Triumph Group, Inc.
Notes to Condensed 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, 2019 through December 31, 2019:
 
Integrated Systems
 
Product Support
 
Total
Balance, March 31, 2019
$
517,104

 
$
66,121

 
$
583,225

Effect of exchange rate changes
474

 
—

 
474

Balance, December 31, 2019
$
517,578

 
$
66,121

 
$
583,699



As of December 31, 2019 and March 31, 2019, Aerospace Structures had goodwill of $1,246,454, which was fully impaired.

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 (and for non-U.S. plans, acceptable under local regulations), by making payments into a separate trust. The Company contributed 1,730,703 shares of common stock to this separate trust with an aggregate contribution value of approximately $50,000 on the contribution date. As a result of the contribution, the Company does not expect that it will have any required contribution to the Trust for the fiscal year ending March 31, 2021. 
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 may also be eligible for medical coverage. Current plan documents reserve the right to amend or terminate the plans at any time, subject to applicable collective bargaining requirements for represented employees. From time to time, changes have been made to the benefits provided to various groups of plan participants. Premiums charged to most retirees for medical coverage prior to age 65 are based on years of service and are adjusted annually for changes in the cost of the plans as determined by an independent actuary. In addition to this medical inflation cost-sharing feature, the plans also have provisions for deductibles, co-payments, coinsurance percentages, out-of-pocket limits, schedules of reasonable fees, preferred provider networks, coordination of benefits with other plans and a Medicare carve-out.
In accordance with the Compensation – Retirement Benefits topic of ASC 715, the Company has recognized the funded status of the benefit obligation as of the date of the last re-measurement, on the accompanying condensed consolidated balance sheets. The funded status is measured as the difference between the fair value of the plan’s assets and the pension benefit obligation or accumulated postretirement benefit obligation, of the plan. In order to recognize the funded status, the Company determined the fair value of the plan assets. The majority of the plan assets are publicly traded investments, which were valued based on the market price as of the date of re-measurement. 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.

23

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

Net Periodic Benefit Plan Costs
The components of net periodic benefit costs (income) for our postretirement benefit plans are shown in the following table:
 
Pension Benefits
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
577

 
$
822

 
$
1,758

 
$
2,476

Interest cost
16,073

 
19,905

 
52,162

 
59,736

Expected return on plan assets
(35,210
)
 
(37,065
)
 
(106,566
)
 
(111,246
)
Amortization of prior service credits
(183
)
 
(907
)
 
(695
)
 
(2,722
)
Amortization of net loss
7,752

 
4,179

 
19,444

 
12,538

Curtailment loss
—

 
—

 
23,476

 
—

Special termination benefits
—

 
—

 
11,642

 
—

Net periodic benefit (income) expense
$
(10,991
)
 
$
(13,066
)
 
$
1,221

 
$
(39,218
)

 
Other Postretirement Benefits
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
—

 
$
57

 
$
62

 
$
170

Interest cost
41

 
1,010

 
1,519

 
3,029

Amortization of prior service credits
(1,276
)
 
(1,164
)
 
(3,596
)
 
(3,491
)
Amortization of gain
(1,186
)
 
(2,463
)
 
(5,175
)
 
(7,389
)
Curtailment gain
—

 
—

 
(49,491
)
 
—

Net periodic benefit income
$
(2,421
)
 
$
(2,560
)
 
$
(56,681
)
 
$
(7,681
)

The following summarizes the key events whose effects on net periodic benefit cost and obligations are included in the tables above:
•
In September 2019, the Company ratified amendments to its pension and retiree welfare plans with a group of union-represented employees at the Company’s Grand Prairie, TX, facility in conjunction with an announced shutdown of this facility. Effective April 1, 2020, all current retiree welfare benefits for the union-represented retirees and active employees will cease. A new benefit consisting of a one-time credit to Heath Reimbursement Accounts for the current retirees will be provided. The Company and the union also agreed to increased pension benefits which are effective with the ratification of the agreement. This agreement resulted in a decrease of the projected other post-employment benefits ("OPEB") benefit obligation of $61,766. It also resulted in a one-time OPEB curtailment gain of $41,128. As a result of the planned shutdown, subsidized early retirement provisions within the retirement plan and the agreed-to pension benefit increases, a pension curtailment loss of $23,476 was recognized, along with a one-time charge of $11,642 for special termination benefits. The net curtailment gain and charge for special termination benefits are included in "Non-service defined benefit income" on the condensed consolidated statement of operations for the nine months ended December 31, 2019.
•
In August 2019, the Company ratified amendments to its pension and retiree welfare plans with a group of union-represented employees at the Company’s Nashville, TN, facility. Effective January 1, 2020, all current retiree welfare benefits for the union-represented retirees and active employees will cease. A new benefit consisting of a one-time credit to Heath Reimbursement Accounts for the current retirees will be provided. The Company and the union also agreed to increased pension benefits which are effective on February 1, 2020, and the union also agreed to increased pension benefits which are effective with the ratification of the agreement. This agreement resulted in a decrease of the

24

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

projected OPEB benefit obligation of $34,731. It also resulted in a one-time OPEB curtailment gain of $8,363. The agreed-to pension benefit increases resulted in an increase of the projected pension benefit obligation of $4,898. The curtailment gain is included in "Non-service defined benefit income" on the condensed consolidated statement of operations for the nine months ended December 31, 2019.

12.     STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) ("AOCI") by component for the three and nine months ended December 31, 2019 and 2018, respectively, were as follows:

 
 
Currency Translation Adjustment
 
Unrealized Gains and Losses on Derivative Instruments
 
Defined Benefit Pension Plans and Other Postretirement Benefits
 
Total(1)
Balance, September 30, 2019
 
$
(57,516
)
 
$
(2,527
)
 
$
(505,858
)
 
$
(565,901
)
   AOCI before reclassifications
 
11,074

 
4,581

 
—

 
15,655

   Amounts reclassified from AOCI
 
—

 
(80
)
 
5,027

 
4,947

 Net current period AOCI
 
$
11,074

 
$
4,501

 
$
5,027

 
$
20,602

Balance, December 31, 2019
 
$
(46,442
)
 
$
1,974

 
$
(500,831
)
 
$
(545,299
)
Balance, September 30, 2018
 
(72,169
)
 
51

 
(310,107
)
 
(382,225
)
   AOCI before reclassifications
 
(7,725
)
 
47

 
(399
)
 
(8,077
)
   Amounts reclassified from AOCI
 
—

 
(327
)
 
—

 
(327
)
 Net current period AOCI
 
$
(7,725
)
 
$
(280
)
 
$
(399
)
 
$
(8,404
)
Balance, December 31, 2018
 
$
(79,894
)
 
$
(229
)
 
$
(310,506
)
 
$
(390,629
)

Balance, March 31, 2019
 
(48,606
)
 
(1,130
)
 
(437,948
)
 
(487,684
)
   AOCI before reclassifications
 
2,164

 
4,921

 
(122,971
)
 
(115,886
)
   Amounts reclassified from AOCI
 
—

 
(1,817
)
 
60,088

 
58,271

 Net current period AOCI
 
$
2,164

 
$
3,104

 
$
(62,883
)
 
$
(57,615
)
Balance, December 31, 2019
 
$
(46,442
)
 
$
1,974

 
$
(500,831
)
 
$
(545,299
)

Balance, March 31, 2018
 
$
(58,683
)
 
$
122

 
$
(309,309
)
 
$
(367,870
)
   AOCI before reclassifications
 
(21,211
)
 
787

 
(1,197
)
 
(21,621
)
   Amounts reclassified from AOCI
 
—

 
(1,138
)
 
—

 
(1,138
)
 Net current period AOCI
 
(21,211
)
 
(351
)
 
(1,197
)
 
(22,759
)
Balance, December 31, 2018
 
$
(79,894
)
 
$
(229
)
 
$
(310,506
)
 
$
(390,629
)
(1) Net of tax.




25

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

13.     SEGMENTS
The Company reports financial performance based on the following three reportable segments: Integrated Systems, Aerospace Structures and Product Support. The Company’s reportable segments are aligned with how the business is managed, and the Company's views of the markets it serves. The Chief Operating Decision Maker (the “CODM”) evaluates performance and allocates resources based upon review of segment information. The CODM utilizes earnings before interest, income taxes, depreciation and amortization, and pension (“Adjusted EBITDAP”) as a primary measure of segment profitability to evaluate performance of its segments and allocate resources.
Segment Adjusted EBITDAP is total segment revenue reduced by revenue from the amortization of contract liabilities, operating expenses (less depreciation and amortization, gains and losses on the sale of assets, and certain nonrecurring transactions such as gains and losses associated with pension curtailments and related transactions) identifiable with that segment. Corporate includes general corporate administrative costs, and any other costs not identifiable with one of the Company’s segments, adjusted for gains and losses on the sale of businesses and certain nonrecurring transactions such as gains and losses from legal contingencies.
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.

26

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

Selected financial information for each reportable segment is as follows:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Net sales:
 
 
 
 
 
 
 
Integrated Systems
$
275,248

 
$
252,437

 
$
813,454

 
$
754,193

Aerospace Structures
368,972

 
490,337

 
1,210,729

 
1,551,090

Product Support
63,978

 
71,446

 
193,127

 
209,860

Elimination of inter-segment sales
(3,532
)
 
(6,325
)
 
(10,303
)
 
(19,240
)
 
$
704,666

 
$
807,895

 
$
2,207,007

 
$
2,495,903

 
 
 
 
 
 
 
 
Income (loss) before income taxes:
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Integrated Systems
$
47,896

 
$
39,947

 
$
134,140

 
$
115,221

Aerospace Structures
18,039

 
(49,813
)
 
43,930

 
(152,143
)
Product Support
9,538

 
11,421

 
29,680

 
30,604

Corporate
(70,857
)
 
(15,222
)
 
(101,296
)
 
(70,655
)
     Share-based compensation expense
(2,955
)
 
(3,266
)
 
(8,245
)
 
(8,509
)
 
1,661

 
(16,933
)
 
98,209

 
(85,482
)
Non-service defined benefit income
(13,989
)
 
(16,520
)
 
(57,280
)
 
(49,581
)
Interest expense and other
33,178

 
29,309

 
96,069

 
83,515

 
$
(17,528
)
 
$
(29,722
)
 
$
59,420

 
$
(119,416
)
 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Integrated Systems
$
6,992

 
$
7,376

 
$
21,042

 
$
22,316

Aerospace Structures
20,921

 
27,673

 
77,265

 
84,888

Product Support
1,083

 
1,611

 
3,272

 
4,944

Corporate
847

 
744

 
2,533

 
2,201

 
$
29,843

 
$
37,404

 
$
104,112

 
$
114,349

 
 
 
 
 
 
 
 
Amortization of acquired contract liabilities, net:
 
 
 
 
 
 
 
Integrated Systems
$
8,377

 
$
8,172

 
$
26,126

 
$
25,789

Aerospace Structures
8,220

 
6,559

 
30,027

 
22,980

 
$
16,597

 
$
14,731

 
$
56,153

 
$
48,769

 
 
 
 
 
 
 
 
Adjusted EBITDAP:
 
 
 
 
 
 
 
Integrated Systems
$
46,511

 
$
39,151

 
$
129,056

 
$
111,748

Aerospace Structures
32,140

 
(28,699
)
 
88,118

 
(2,994
)
Product Support
10,621

 
13,032

 
32,952

 
35,548

Corporate and share-based compensation
(16,803
)
 
(17,744
)
 
(50,954
)
 
(59,126
)
 
$
72,469

 
$
5,740

 
$
199,172

 
$
85,176

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Integrated Systems
$
2,974

 
$
3,951

 
$
9,734

 
$
9,388

Aerospace Structures
5,910

 
5,722

 
13,915

 
22,937

Product Support
955

 
852

 
2,621

 
1,871

Corporate
416

 
45

 
980

 
628

 
$
10,255

 
$
10,570

 
$
27,250

 
$
34,824



27

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

 
December 31, 2019
 
March 31, 2019
Total Assets:
 
 
 
Integrated Systems
$
1,277,654

 
$
1,215,350

Aerospace Structures
1,005,460

 
1,257,039

Product Support
276,717

 
271,813

Corporate
65,555

 
110,372

 
$
2,625,386

 
$
2,854,574

During the three months ended December 31, 2019 and 2018, the Company had international sales of $164,832 and $245,505, respectively.
During the nine months ended December 31, 2019 and 2018, the Company had international sales of $526,130 and $736,501, respectively.

14.
SELECTED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND NON-GUARANTORS

The 2022 Notes, the 2024 Notes, and the 2025 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 2022 Notes, the 2024 Notes, and the 2025 Notes (the “Non-Guarantor Subsidiaries”) are (a) the receivables securitization special-purpose entity and (b) the foreign operating subsidiaries. The following tables present condensed consolidating financial statements, including the Company (the “Parent”), the Guarantor Subsidiaries, and the Non-Guarantor Subsidiaries. Such financial statements include summary condensed consolidating balance sheets as of December 31, 2019 and March 31, 2019, condensed consolidating statements of comprehensive income for the three and nine months ended December 31, 2019 and 2018, and condensed consolidating statements of cash flows for the nine months ended December 31, 2019 and 2018.





28

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


SUMMARY CONDENSED CONSOLIDATING BALANCE SHEETS:

 
December 31, 2019
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
19,319

 
$
—

 
$
34,275

 
$
—

 
$
53,594

Trade and other receivables, net
8,391

 
85,193

 
207,146

 
—

 
300,730

Contract assets
—

 
237,383

 
4,492

 
—

 
241,875

Inventory, net
—

 
393,159

 
80,704

 
—

 
473,863

Prepaid expenses and other
12,031

 
7,330

 
6,772

 
—

 
26,133

Total current assets
39,741

 
723,065

 
333,389

 
—

 
1,096,195

Property and equipment, net
10,227

 
343,902

 
79,346

 
—

 
433,475

Goodwill and other intangible assets, net
—

 
877,509

 
100,972

 
—

 
978,481

Other, net
27,536

 
59,031

 
30,668

 
—

 
117,235

Intercompany investments and advances
1,353,361

 
44,362

 
89,687

 
(1,487,410
)
 
—

Total assets
$
1,430,865

 
$
2,047,869

 
$
634,062

 
$
(1,487,410
)
 
$
2,625,386

 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
1,900

 
$
5,888

 
$
7

 
$
—

 
$
7,795

Accounts payable
5,301

 
343,977

 
30,711

 
—

 
379,989

Accrued expenses
52,940

 
411,624

 
30,964

 
—

 
495,528

Total current liabilities
60,141

 
761,489

 
61,682

 
—

 
883,312

Long-term debt, less current portion
1,319,259

 
6,616

 
75,018

 
—

 
1,400,893

Intercompany advances
562,434

 
1,827,108

 
262,188

 
(2,651,730
)
 
—

Accrued pension and other postretirement benefits, noncurrent
5,889

 
490,395

 
—

 
—

 
496,284

Deferred income taxes and other
16,039

 
331,845

 
29,910

 
—

 
377,794

Total stockholders’ (deficit) equity
(532,897
)
 
(1,369,584
)
 
205,264

 
1,164,320

 
(532,897
)
Total liabilities and stockholders’ (deficit) equity
$
1,430,865

 
$
2,047,869

 
$
634,062

 
$
(1,487,410
)
 
$
2,625,386








29

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



SUMMARY CONDENSED CONSOLIDATING BALANCE SHEETS:
 
March 31, 2019
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
70,192

 
$
429

 
$
22,186

 
$
—

 
$
92,807

Trade and other receivables, net
10,150

 
123,153

 
240,287

 
—

 
373,590

Contract assets
—

 
322,698

 
3,969

 
—

 
326,667

Inventory, net
—

 
339,038

 
74,522

 
—

 
413,560

Prepaid expenses and other
22,152

 
7,611

 
4,683

 
—

 
34,446

Total current assets
102,494

 
792,929

 
345,647

 
—

 
1,241,070

Property and equipment, net
11,276

 
449,489

 
82,945

 
—

 
543,710

Goodwill and other intangible assets, net
—

 
912,279

 
101,900

 
—

 
1,014,179

Other, net
14,630

 
34,664

 
6,321

 
—

 
55,615

Intercompany investments and advances
1,112,100

 
230,437

 
88,697

 
(1,431,234
)
 
—

Total assets
$
1,240,500

 
$
2,419,798

 
$
625,510

 
$
(1,431,234
)
 
$
2,854,574

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
1,904

 
$
6,297

 
$
—

 
$
—

 
$
8,201

Accounts payable
6,571

 
396,542

 
30,670

 
—

 
433,783

Accrued expenses
58,301

 
445,542

 
29,448

 
—

 
533,291

Total current liabilities
66,776

 
848,381

 
60,118

 
—

 
975,275

Long-term debt, less current portion
1,469,543

 
11,077

 
—

 
—

 
1,480,620

Intercompany advances
262,718

 
2,017,003

 
372,888

 
(2,652,609
)
 
—

Accrued pension and other postretirement benefits, noncurrent
6,067

 
534,412

 
—

 
—

 
540,479

Deferred income taxes and other
8,709

 
408,838

 
13,966

 
—

 
431,513

Total stockholders’ (deficit) equity
(573,313
)
 
(1,399,913
)
 
178,538

 
1,221,375

 
(573,313
)
Total liabilities and stockholders’ (deficit) equity
$
1,240,500

 
$
2,419,798

 
$
625,510

 
$
(1,431,234
)
 
$
2,854,574







30

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


CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:

 
For the Three Months Ended December 31, 2019
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$
—

 
$
646,198

 
$
79,869

 
$
(21,401
)
 
$
704,666

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
505,420

 
62,263

 
(21,401
)
 
546,282

Selling, general and administrative
16,785

 
42,854

 
6,335

 
—

 
65,974

Depreciation and amortization
847

 
26,089

 
2,907

 
—

 
29,843

Restructuring costs
—

 
4,744

 
—

 
—

 
4,744

Loss on sale of assets and businesses, net
60,019

 
—

 
—

 
—

 
60,019

Legal judgment gain, net
(3,857
)
 
—

 
—

 
—

 
(3,857
)
 
73,794

 
579,107

 
71,505

 
(21,401
)
 
703,005

Operating (loss) income
(73,794
)
 
67,091

 
8,364

 
—

 
1,661

Intercompany interest and charges
(33,662
)
 
32,005

 
1,657

 
—

 
—

Non-service defined benefit income
—

 
(13,485
)
 
(504
)
 
—

 
(13,989
)
Interest expense and other, net
26,362

 
5,871

 
945

 
—

 
33,178

(Loss) income before income taxes
(66,494
)
 
42,700

 
6,266

 
—

 
(17,528
)
Income tax (benefit) expense
(15,067
)
 
10,319

 
1,066

 
—

 
(3,682
)
Net (loss) income
(51,427
)
 
32,381

 
5,200

 
—

 
(13,846
)
Other comprehensive loss
4,501

 
4,617

 
11,484

 
—

 
20,602

Total comprehensive (loss) income
$
(46,926
)
 
$
36,998

 
$
16,684

 
$
—

 
$
6,756









31

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

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:

 
For the Three Months Ended December 31, 2018
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$
—

 
$
735,753

 
$
91,528

 
$
(19,386
)
 
$
807,895

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
660,002

 
72,658

 
(19,386
)
 
713,274

Selling, general and administrative
17,720

 
46,033

 
8,070

 
—

 
71,823

Depreciation and amortization
744

 
32,640

 
4,020

 
—

 
37,404

Restructuring costs
—

 
2,327

 
—

 
—

 
2,327

 
18,464

 
741,002

 
84,748

 
(19,386
)
 
824,828

Operating (loss) income
(18,464
)
 
(5,249
)
 
6,780

 
—

 
(16,933
)
Intercompany interest and charges
(39,513
)
 
37,484

 
2,029

 
—

 
—

Non-service defined benefit income
—

 
(16,188
)
 
(332
)
 
—

 
(16,520
)
Interest expense and other, net
25,476

 
4,007

 
(174
)
 
—

 
29,309

(Loss) income before income taxes
(4,427
)
 
(30,552
)
 
5,257

 
—

 
(29,722
)
Income tax (benefit) expense
(14,248
)
 
14,325

 
1,146

 
—

 
1,223

Net income (loss)
9,821

 
(44,877
)
 
4,111

 
—

 
(30,945
)
Other comprehensive loss
(279
)
 
(174
)
 
(7,951
)
 
—

 
(8,404
)
Total comprehensive income (loss)
$
9,542

 
$
(45,051
)
 
$
(3,840
)
 
$
—

 
$
(39,349
)

32

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

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:

 
For the Nine Months Ended December 31, 2019
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$
—

 
$
2,027,649

 
$
243,361

 
$
(64,003
)
 
$
2,207,007

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
1,625,567

 
189,187

 
(64,003
)
 
1,750,751

Selling, general and administrative
50,340

 
123,664

 
20,508

 
—

 
194,512

Depreciation and amortization
2,532

 
93,109

 
8,471

 
—

 
104,112

Restructuring costs
540

 
12,950

 
—

 
—

 
13,490

Legal judgment gain, net of expenses
(9,257
)
 
—

 
—

 
—

 
(9,257
)
Loss (gain) on sale of assets and businesses, net
65,311

 
(10,121
)
 
—

 
—

 
55,190

 
109,466

 
1,845,169

 
218,166

 
(64,003
)
 
2,108,798

Operating (loss) income
(109,466
)
 
182,480

 
25,195

 
—

 
98,209

Intercompany interest and charges
(103,245
)
 
98,297

 
4,948

 
—

 
—

Non-service defined benefit income
—

 
(55,788
)
 
(1,492
)
 
—

 
(57,280
)
Interest expense and other, net
80,016

 
17,423

 
(1,370
)
 
—

 
96,069

(Loss) income before income taxes
(86,237
)
 
122,548

 
23,109

 
—

 
59,420

Income tax (benefit) expense
(20,635
)
 
30,398

 
2,714

 
—

 
12,477

Net (loss) income
(65,602
)
 
92,150

 
20,395

 
—

 
46,943

Other comprehensive income (loss)
3,105

 
(62,995
)
 
2,275

 
—

 
(57,615
)
Total comprehensive (loss) income
$
(62,497
)
 
$
29,155

 
$
22,670

 
$
—

 
$
(10,672
)


33

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

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME:

 
For the Nine Months Ended December 31, 2018
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net sales
$
—

 
$
2,286,932

 
$
268,808

 
$
(59,837
)
 
$
2,495,903

 
 
 
 
 
 
 
 
 
 
Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
2,052,427

 
215,372

 
(59,837
)
 
2,207,962

Selling, general and administrative
57,210

 
140,892

 
24,929

 
—

 
223,031

Depreciation and amortization
2,200

 
99,302

 
12,847

 
—

 
114,349

Restructuring costs
2,766

 
15,440

 
—

 
—

 
18,206

Loss on sale of assets and businesses, net
16,890

 
947

 
—

 
—

 
17,837

 
79,066

 
2,309,008

 
253,148

 
(59,837
)
 
2,581,385

Operating (loss) income
(79,066
)
 
(22,076
)
 
15,660

 
—

 
(85,482
)
Intercompany interest and charges
(118,352
)
 
112,281

 
6,071

 
—

 
—

Non-service defined benefit income
—

 
(48,562
)
 
(1,019
)
 
—

 
(49,581
)
Interest expense and other, net
73,855

 
13,334

 
(3,674
)
 
—

 
83,515

(Loss) income before income taxes
(34,569
)
 
(99,129
)
 
14,282

 
—

 
(119,416
)
Income tax expense (benefit)
16,297

 
(15,761
)
 
2,203

 
—

 
2,739

Net (loss) income
(50,866
)
 
(83,368
)
 
12,079

 
—

 
(122,155
)
Other comprehensive loss
(349
)
 
(609
)
 
(21,801
)
 
—

 
(22,759
)
Total comprehensive loss
$
(51,215
)
 
$
(83,977
)
 
$
(9,722
)
 
$
—

 
$
(144,914
)










34

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


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
 
For the Nine Months Ended December 31, 2019
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net (loss) income
$
(65,602
)
 
$
92,150

 
$
20,395

 
$
—

 
$
46,943

 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities
(35,640
)
 
(2,285
)
 
30,270

 
—

 
(7,655
)
Net cash (used in) provided by operating activities
(101,242
)
 
89,865

 
50,665

 
—

 
39,288

Capital expenditures
(980
)
 
(22,874
)
 
(3,396
)
 
—

 
(27,250
)
Proceeds from sale of assets
44,414

 
5,155

 
387

 
—

 
49,956

Net cash used in investing activities
43,434

 
(17,719
)
 
(3,009
)
 
—

 
22,706

Net increase in revolving credit facility
(215,000
)
 
—

 
—

 
—

 
(215,000
)
Proceeds on issuance of debt
525,000

 
—

 
45,980

 
—

 
570,980

Retirements and repayments of debt
(376,665
)
 
(4,852
)
 
(51,680
)
 
—

 
(433,197
)
Payments of deferred financing costs
(17,545
)
 
—

 
—

 
—

 
(17,545
)
Dividends paid
(6,005
)
 
—

 
—

 
—

 
(6,005
)
Repurchase of restricted shares for minimum tax obligation
(1,179
)
 
—

 
—

 
—

 
(1,179
)
Intercompany financing and advances
98,329

 
(67,723
)
 
(30,606
)
 
—

 
—

Net cash provided by (used in) financing activities
6,935

 
(72,575
)
 
(36,306
)
 
—

 
(101,946
)
Effect of exchange rate changes on cash
—

 
—

 
739

 
—

 
739

Net change in cash and cash equivalents
(50,873
)
 
(429
)
 
12,089

 
—

 
(39,213
)
Cash and cash equivalents at beginning of period
70,192

 
429

 
22,186

 
—

 
92,807

Cash and cash equivalents at end of period
$
19,319

 
$
—

 
$
34,275

 
$
—

 
$
53,594














35

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



CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
 
For the Nine Months Ended December 31, 2018
 
Parent
 
Guarantor
 Subsidiaries
 
Non-Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
 Total
Net (loss) income
$
(50,866
)
 
$
(83,368
)
 
$
12,079

 
$
—

 
$
(122,155
)
 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities
38,356

 
(154,793
)
 
27,597

 
17,879

 
(70,961
)
Net cash (used in) provided by operating activities
(12,510
)
 
(238,161
)
 
39,676

 
17,879

 
(193,116
)
Capital expenditures
(628
)
 
(30,398
)
 
(3,798
)
 
—

 
(34,824
)
Proceeds from sale of assets
—

 
40,235

 
1,182

 
—

 
41,417

Net cash (used in) provided by investing activities
(628
)
 
9,837

 
(2,616
)
 
—

 
6,593

Net increase in revolving credit facility
218,066

 
—

 
—

 
—

 
218,066

Proceeds on issuance of debt
—

 
—

 
45,000

 
—

 
45,000

Retirements and repayments of debt
(1,091
)
 
(15,120
)
 
(56,800
)
 
—

 
(73,011
)
Payments of deferred financing costs
(1,941
)
 
—

 
—

 
—

 
(1,941
)
Dividends paid
(5,975
)
 
—

 
—

 
—

 
(5,975
)
Repurchase of restricted shares for minimum tax obligations
(645
)
 
—

 
—

 
—

 
(645
)
Intercompany financing and advances
(195,320
)
 
243,505

 
(30,306
)
 
(17,879
)
 
—

Net cash provided by (used in) financing activities
13,094

 
228,385

 
(42,106
)
 
(17,879
)
 
181,494

Effect of exchange rate changes on cash
—

 
—

 
(2,126
)
 
—

 
(2,126
)
Net change in cash and cash equivalents
(44
)
 
61

 
(7,172
)
 
—

 
(7,155
)
Cash and cash equivalents at beginning of period
44

 
—

 
35,775

 
—

 
35,819

Cash and cash equivalents at end of period
$
—

 
$
61

 
$
28,603

 
$
—

 
$
28,664




36

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


 
15.    COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is involved in disputes, claims and lawsuits with employees, suppliers and customers, as well as governmental and regulatory inquiries, that it deems to be immaterial. Some may involve claims or potential claims of substantial damages, fines, penalties or injunctive relief. 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. In the nine months ended December 31, 2019, the Company was awarded $9,257 in a legal judgment associated with a longstanding litigation matter arising from a prior acquisition.
As the Company completes its restructuring plans as disclosed in Note 16, including the disposal of certain facilities, the Company may be exposed to additional costs such as environmental remediation obligations, lease termination costs, or supplier claims which may have a material effect on its financial position or results of operations when such matters arise and a reasonable estimate of the costs can be made.

16.    RESTRUCTURING COSTS
As disclosed in the Company's Form 10-K for the year ended March 31, 2019, during the fiscal years ended March 31, 2017 and 2016, the Company committed to restructuring plans involving certain of its businesses, as well as the consolidation of certain of its facilities. With the exception of certain consolidations to be completed in future years, these plans were substantially complete as of March 31, 2019. The Company incurred costs of $13,490 associated with new restructuring plans during the nine months ended December 31, 2019. These costs, which are being incurred primarily within the Integrated Systems segment, pertain to third-party consulting costs and are estimated to be approximately $15,000 to $17,000 for the year ended March 31, 2020.


37

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations



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

(The following discussion should be read in conjunction with the condensed consolidated financial statements contained elsewhere herein.)

OVERVIEW
We are a major supplier to the aerospace industry and have three operating segments: (i) Integrated Systems, whose companies’ revenues are derived from integrated solutions, including design, development and support of proprietary components, subsystems and systems, as well as production of complex assemblies using external designs; (ii) Aerospace Structures, whose companies supply commercial, business, regional, and military manufacturers with large metallic and composite structures and produce close-tolerance parts primarily to customer designs and model-based definition, including a wide range of aluminum, hard metal and composite structure capabilities; and (iii) Product Support, whose companies provide full life cycle solutions for commercial, regional and military aircraft.
During the fiscal year ended March 31, 2019, the Company divested of a number of its assets and operations, including (i) selling all of the shares of Triumph Structures - East Texas, Inc. and all of the shares of Triumph Structures - Los Angeles, Inc. and Triumph Processing, Inc. (collectively, the "Long & Large"), (ii) transitioning the responsibility for the Bombardier Global 7500 ("Global 7500") wing program manufacturing operations of Aerospace Structures to Bombardier, (iii) selling all of the shares of Triumph Fabrications - San Diego, Inc. and Triumph Fabrications - Ft. Worth, Inc. (together, "Fabrications"), (iv) selling all of the shares of Triumph Structures – Kansas City, Inc., Triumph Structures – Wichita, Inc., Triumph Gear Systems – Toronto, ULC and Triumph Northwest (The Triumph Group Operations, Inc.) (together, "Machining"), and (v) selling all of the shares of Triumph Aviation Services - NAAS Division, Inc. ("NAAS"). Collectively, these transactions are referred to as the "fiscal 2019 divestitures." The Company recognized combined net losses of $235.3 million associated with the fiscal 2019 divestitures, which are presented on the accompanying consolidated statements of operations within loss on divestitures. With the exception of NAAS, the operating results for the fiscal 2019 divestitures are included in Aerospace Structures ("fiscal 2019 Aerospace Structures Divestitures") through the respective dates of divestiture. The operating results for NAAS are included in Product Support through the date of divestiture.
Highlights for the third quarter of the fiscal year ending March 31, 2020, included:
•
Net sales for the third quarter of the fiscal year ending March 31, 2020, were $704.7 million, compared with $807.9 million for the prior year period.
•
Operating income in the third quarter of fiscal 2020 was $1.7 million, compared with an operating loss of $16.9 million for the third quarter of fiscal 2019.
•
Net loss for the third quarter of fiscal 2020 was $13.8 million, compared with a net loss of $30.9 million for the third quarter of fiscal 2019.
•
Backlog as of December 31, 2019, was $3.34 billion. Of our existing backlog of $3.34 billion, we estimate that approximately $1.49 billion will not be shipped by December 31, 2020.
•
Net loss for the third quarter of fiscal 2020 was $0.27 per common share, as compared with a net loss of $0.62 per common share in the prior year period.
•
We generated $39.3 million of cash flow from operating activities for the nine months ended December 31, 2019, as compared with cash used in operations of $193.1 million in the comparable prior year period.
The Company has committed to several plans (which were initiated in fiscal 2016) that incorporated the restructuring of certain of its businesses as well as the consolidation of certain of its facilities. With the exception of certain consolidations and related shutdowns to be completed in future years, these plans were substantially complete as of March 31, 2019. For the nine months ended December 31, 2019 and 2018, the Company incurred $13.5 million and $18.2 million in new, short-term restructuring costs, respectively. As disclosed in Note 15, the Company may be exposed to additional costs that are not yet known or reasonably estimable which may have a material effect on its financial position or results of operations when such matters are identified and become reasonably estimable.

38

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

From fiscal 2014 through fiscal 2019, our Aerospace Structures business unit had been performing design, development and initial manufacturing on several programs, including the Embraer second generation E-Jet ("E2-Jets") and more recently, the Gulfstream G500/G600 programs. Historically, low-rate production commences during flight testing, followed by an increase to full-rate production, assuming that successful testing and certification are achieved. While work progressed on these development programs, we have experienced difficulties in achieving estimated cost targets particularly in the areas of engineering and estimated recurring costs which resulted in forward losses. Additionally, from fiscal 2015 to fiscal 2019, our Aerospace Structures business unit experienced operating and forward losses on its production of the Boeing 747-8 fuselage for Boeing, Gulfstream G280 wing for Israel Aerospace Industries, Ltd ("IAI") and Gulfstream G650 wing for Gulfstream. Further discussion is included below regarding each program's impact on operations over the past three fiscal years.
E2-Jets
Under our contract with Embraer, we had the exclusive right to design, develop and manufacture the center fuselage section III, rear fuselage section and various tail section components (rudder and elevator) for the E2-Jets over the initial 600 ship sets. The contract provided for funding on a fixed amount of nonrecurring costs, to be paid over a specified number of production units. Higher than expected spending on the E2-Jets program resulted in a near break-even estimated profit margin percentage, with additional potential future cost pressures as well as opportunities for improved performance. Risks related to additional engineering as well as the recurring cost profile remain on this program.
During the fiscal year ended March 31, 2018, the Company reached an agreement with AeroSpace Technologies of Korea Inc. ("ASTK") to optimize the supply chain under our portion of the E2 program. Under this agreement, ASTK will build and transport fuselage shipsets to Embraer and establish a facility in Brazil to manage stock and repairs locally. At the time, the Company maintained its role as the supply chain integrator on the program.
In April 2019, we announced an agreement to assign our contract with Embraer for the manufacture of structural components for their program to ASTK. Under this agreement, we will remain a supplier to ASTK for the rudder and elevator components. We completed the assignment of our contract during the three months ended September 30, 2019, and recognized a gain of approximately $10.0 million included in our Aerospace Structures operating income.
G600
We have completed the final development stages for the Gulfstream G600 program, as these aircraft entered service in fiscal 2020. Achieving sufficient recurring production levels is dependent upon the OEM generating acceptable levels of aircraft sales and demand.
Further cost increases or an inability to meet revised recurring cost forecasts on the G600 program may result in additional forward loss reserves in future periods, while improvements in future costs compared with current estimates or additional cost recovery may result in favorable adjustments if forward loss reserves are no longer required.
Boeing 747-8
As disclosed during fiscal 2016, Boeing announced a rate reduction to the 747-8 program, which lowered production to one plane every two months. The impact of the rate reduction resulted in additional forward loss during the fiscal year ended March 31, 2016.
In March 2017, the Company settled several outstanding change orders and open pricing on a number of its programs with Boeing. The agreement included pricing settlements, advanced payments, delivery schedule adjustments and the opportunity to extend the mutual relationship on future programs. The agreement also provided for continued build ahead on the 747-8 program through the end of the existing contract, resulting in a reduction to the previously recognized forward losses on the 747-8 program.
This program has stabilized with no additional forward losses being recognized and is anticipated to complete production by mid-fiscal 2021.
G280
We acquired both the G280 and G650 wing programs in fiscal 2015 and received proceeds for $160.0 million as both contracts were operating at a loss. While operations have improved on the G650 since acquisition as noted further below,

39

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

the cost profile of the G280 wing program has continued to result in forward loss charges, including $29.1 million in the fiscal year ended March 31, 2019.
In April 2019, the Company and IAI reached an agreement to transition the manufacture of the G280 wing to IAI. The two companies have developed detailed transition plans to enable a seamless transition of work. Our contract with IAI will terminate upon completion of the transition of work. Our forward loss recognized in the fiscal year ended March 31, 2019, noted above includes the cost to transition, which is estimated to be completed in mid-fiscal 2021.
G650
In the first quarter of fiscal 2019, the Company reached an agreement with Gulfstream to optimize the supply chain on the Company's G650 work scope. The G650 wing box and wing completion work, which had been co-produced across three facilities at both companies, are being consolidated into Gulfstream’s facilities in Savannah, Georgia. The Company completed the manufacturing of its final wing box in July 2019. The Company maintains its role as the supply chain integrator on the program and has since returned this contract to modest profitability.
737 MAX
Boeing and Triumph have agreed that advance repayments will be deferred from Triumph’s fourth quarter of fiscal 2020 and have reached agreement to a planned rate at which Triumph will continue to manufacture content for the 737 MAX program in the near term to protect continuity of supply to Boeing. The parties have also agreed to engage further to find a balanced solution to address certain advance repayments currently expected to be repaid in fiscal 2021.
In September 2017, the Company reached an agreement with Boeing to supply the wing, vertical tail and horizontal tail structures for the new Advanced Pilot Training program for the U.S. Air Force. In September 2018, the U.S. Air Force awarded the contract to Boeing. In fiscal 2019, the Company initiated supply chain analysis in support of Boeing's preliminary design. Risks related to development and recurring productions costs are possible and could result in future forward losses.
Although none of the development or production programs noted above individually are expected to have a material impact on our net revenues, they do have the potential, either individually or in the aggregate, to materially and negatively impact our consolidated results of operations if future changes in estimates result in the need for a forward loss provision. Absent any such loss provisions, we do not anticipate that any of these programs will significantly dilute our future consolidated margins.

In December 2019, the Company completed the sale of its manufacturing operations at its Nashville, TN, facility for cash proceeds net of transaction costs of approximately $60.0 million. Upon closing, the Company recognized a loss of approximately $64.0 million. The Nashville based operations offered build-to-print, higher-level assembly capability, including structural aircraft assembly, as well as long and large part machining, processing, forming, and painting. The contract related to the G500 program and the related manufacturing operations, which was located at the Nashville facility and included in the divestiture.

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 allow 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 annual audited and quarterly unaudited financial statements prepared in accordance with U.S. GAAP. In accordance with the rules of the Securities and Exchange Commission (the "SEC"), we also disclose and discuss certain non-GAAP financial measures in our public filings and earning releases. Currently, the non-GAAP financial measures that we disclose are Adjusted EBITDA, which is our net income (loss) before interest, income taxes, amortization of acquired contract liabilities, legal settlements/judgments, net, loss on divestitures, depreciation and amortization; and Adjusted EBITDAP, which is Adjusted EBITDA, before pension expense or benefit, including the effects of curtailments, settlements, and other early retirement incentives. We disclose Adjusted EBITDA on a consolidated and Adjusted EBITDAP on a consolidated and a reportable segment basis in our earnings releases, investor conference calls and filings with the SEC. The

40

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

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 with our previously reported results of operations.
We view Adjusted EBITDA and Adjusted EBITDAP as operating performance measures and, as such, we believe that the U.S. GAAP financial measure most directly comparable to such measures is net income (loss). In calculating Adjusted EBITDA and Adjusted EBITDAP, we exclude from net loss 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 and Adjusted EBITDAP are not measurements of financial performance under U.S. GAAP and should not be considered as a measure of liquidity, as an alternative to net income (loss), or as an indicator of any other measure of performance derived in accordance with U.S. GAAP. Investors and potential investors in our securities should not rely on Adjusted EBITDA or Adjusted EBITDAP as a substitute for any U.S. GAAP financial measure, including net income (loss). In addition, we urge investors and potential investors in our securities to carefully review the reconciliation of Adjusted EBITDA and Adjusted EBITDAP to net income (loss) set forth below, in our earnings releases and in other filings with the SEC and to carefully review the U.S. 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 U.S. GAAP financial information with our Adjusted EBITDA and Adjusted EBITDAP.
Adjusted EBITDA and Adjusted EBITDAP are 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 U.S. 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 20 years expanding our product and service capabilities, partially through acquisitions of complementary businesses. Due to the expansion of our operations, which included acquisitions, our net income (loss) has included significant charges for depreciation and amortization. Adjusted EBITDA and Adjusted EBITDAP exclude these charges and provide meaningful information about the operating performance of our business, apart from charges for depreciation and amortization. We believe the disclosure of Adjusted EBITDA and Adjusted EBITDAP helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe Adjusted EBITDA and Adjusted EBITDAP are measures of our ongoing operating performance because the isolation of non-cash charges, such as depreciation and amortization, and non-operating items, such as interest, income taxes, pension and other postretirement benefits, 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 and Adjusted EBITDAP to provide financial measures 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 net income (loss) to calculate Adjusted EBITDA and Adjusted EBITDAP and the material limitations associated with using these non-GAAP financial measures as compared with net income (loss) or income from continuing operations:
•
Gains or losses from divestitures may be useful for investors to consider because they reflect gains or losses from sale of operating units. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.
•
Legal settlements/judgments, net, when applicable, may be useful for investors to consider because it reflects gains or losses from disputes with third parties. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.
•
Non-service defined benefit income or expense from our pension and other postretirement benefit plans (inclusive of the adoption of ASU 2017-07 and certain pension related transactions such as curtailments, settlements, and early retirement incentives) may be useful for investors to consider because they represent the cost of postretirement benefits to plan participants, net of the assumption of returns on the plan's assets and are not indicative of the cash paid for such benefits. We do not believe these earnings (expenses) necessarily reflect the current and ongoing cash earnings related to our operations.
•
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.

41

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

•
Amortization expense (including intangible asset impairments) may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights and licenses. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•
Depreciation may be useful for investors to consider because it generally represents the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure.
•
The amount of interest expense and other we incur may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of interest expense and other to be a representative component of the day-to-day operating performance of our business.
•
Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business.
Management compensates for the above-described limitations of using non-GAAP measures only to supplement our U.S. 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 and Adjusted EBITDAP reconciled to our net income (loss) for the indicated periods (in thousands):
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Net (loss) income
$
(13,846
)
 
$
(30,945
)
 
$
46,943

 
$
(122,155
)
Legal judgment gain, net of expenses
(3,857
)
 
—

 
(9,257
)
 
—

Loss on sale of assets and businesses, net
60,019

 
—

 
55,190

 
17,837

Adoption of ASU 2017-07
—

 
—

 
—

 
87,241

Amortization of acquired contract liabilities, net
(16,597
)
 
(14,731
)
 
(56,153
)
 
(48,769
)
Depreciation and amortization
29,843

 
37,404

 
104,112

 
114,349

Interest expense and other, net
33,178

 
29,309

 
96,069

 
83,515

Curtailment gain and special termination benefits charges, net
—

 
—

 
(14,373
)
 
—

Union represented employee incentives
1,400

 
—

 
7,071

 
—

Income tax (benefit) expense
(3,682
)
 
1,223

 
12,477

 
2,739

Adjusted EBITDA
86,458

 
22,260

 
242,079

 
134,757

Non-service defined benefit income (excluding curtailment and special termination benefits)
(13,989
)
 
(16,520
)
 
(42,907
)
 
(49,581
)
Adjusted EBITDAP
$
72,469

 
$
5,740

 
$
199,172

 
$
85,176


42

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

The following tables show our Adjusted EBITDAP by reportable segment reconciled to our operating income for the indicated periods (in thousands):
 
Three Months Ended December 31, 2019
 
Total
 
Integrated Systems
 
Aerospace Structures
 
Product Support
 
Corporate/
Eliminations
Operating income (loss)
$
1,661

 
$
47,896

 
$
18,039

 
$
9,538

 
$
(73,812
)
Legal judgment gain, net of expenses
(3,857
)
 
—

 
—

 
—

 
(3,857
)
Loss (gain) on sale of assets and businesses
60,019

 
—

 
—

 
—

 
60,019

Amortization of acquired contract liabilities, net
(16,597
)
 
(8,377
)
 
(8,220
)
 
—

 
—

Depreciation and amortization
29,843

 
6,992

 
20,921

 
1,083

 
847

Union represented employee incentives
1,400

 
—

 
1,400

 
—

 
—

Adjusted EBITDAP
$
72,469

 
$
46,511

 
$
32,140

 
$
10,621

 
$
(16,803
)
 
Three Months Ended December 31, 2018
 
Total
 
Integrated Systems
 
Aerospace Structures
 
Product Support
 
Corporate/
Eliminations
Operating (loss) income
$
(16,933
)
 
$
39,947

 
$
(49,813
)
 
$
11,421

 
$
(18,488
)
Amortization of acquired contract liabilities, net
(14,731
)
 
(8,172
)
 
(6,559
)
 
—

 
—

Depreciation and amortization
37,404

 
7,376

 
27,673

 
1,611

 
744

Adjusted EBITDAP
$
5,740

 
$
39,151

 
$
(28,699
)
 
$
13,032

 
$
(17,744
)
 
Nine Months Ended December 31, 2019
 
Total
 
Integrated Systems
 
Aerospace Structures
 
Product Support
 
Corporate/
Eliminations
Operating income (loss)
$
98,209

 
$
134,140

 
$
43,930

 
$
29,680

 
$
(109,541
)
Legal judgment gain, net of expenses
(9,257
)
 
—

 
—

 
—

 
(9,257
)
Loss (gain) on sale of assets and businesses
55,190

 
—

 
(10,121
)
 
—

 
65,311

Amortization of acquired contract liabilities, net
(56,153
)
 
(26,126
)
 
(30,027
)
 
—

 
—

Depreciation and amortization
104,112

 
21,042

 
77,265

 
3,272

 
2,533

Union represented employee incentives
7,071

 
—

 
7,071

 
—

 
—

Adjusted EBITDAP
$
199,172

 
$
129,056

 
$
88,118

 
$
32,952

 
$
(50,954
)


43

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Nine Months Ended December 31, 2018
 
Total
 
Integrated Systems
 
Aerospace Structures
 
Product Support
 
Corporate/
Eliminations
Operating (loss) income
$
(85,482
)
 
$
115,221

 
$
(152,143
)
 
$
30,604

 
$
(79,164
)
Loss on sale of assets and businesses
17,837

 
—

 
—

 
—

 
17,837

Adoption of ASU 2017-07
87,241

 
—

 
87,241

 
—

 
—

Amortization of acquired contract liabilities, net
(48,769
)
 
(25,789
)
 
(22,980
)
 
—

 
—

Depreciation and amortization
114,349

 
22,316

 
84,888

 
4,944

 
2,201

Adjusted EBITDAP
$
85,176

 
$
111,748

 
$
(2,994
)
 
$
35,548

 
$
(59,126
)

Corporate operating loss includes share-based compensation expense of $3.0 million and $3.3 million for the three months ended December 31, 2019 and 2018, and $8.2 million and $8.5 million for the nine months ended December 31, 2019 and 2018, respectively.

44

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

Three months ended December 31, 2019, compared with three months ended December 31, 2018
 
Three Months Ended December 31,
 
2019
 
2018
 
(dollars in thousands)
Net sales
$
704,666

 
$
807,895

Segment operating income
$
75,473

 
$
1,555

Corporate expense
(70,857
)
 
(15,222
)
Share-based compensation expense
(2,955
)
 
(3,266
)
Total operating income (loss)
1,661

 
(16,933
)
Interest expense and other
33,178

 
29,309

Non-service defined benefit income
(13,989
)
 
(16,520
)
Income tax (benefit) expense
(3,682
)
 
1,223

Net loss
$
(13,846
)
 
$
(30,945
)
Net sales decreased by $103.2 million, or 12.8%, to $704.7 million for the three months ended December 31, 2019, from $807.9 million for the three months ended December 31, 2018. Organic sales adjusted for inter-segment sales increased $48.9 million, or 7.8%, offset by declines from divestitures of $152.2 million. Organic sales increased primarily due to increased volumes across Airbus commercial programs and aftermarket demand for military rotorcraft programs in Integrated Systems, increased volume on 787, G550 and 767 programs in Aerospace Structures as well as increased demand for accessory components. Net sales for the three months ended December 31, 2019, included $8.9 million in total nonrecurring revenues, as compared with $3.8 million in nonrecurring revenues for the three months ended December 31, 2018.
Cost of sales decreased $167.0 million, or 23.4%, to $546.3 million for the three months ended December 31, 2019, from $713.3 million for the three months ended December 31, 2018. Organic cost of sales adjusted for inter-segment sales increased $14.0 million, or 2.8%, offset by declines from divestitures of $181.0 million. Organic cost of sales increased primarily due to the higher volumes in the above programs. The organic gross margin for the three months ended December 31, 2019, was 23.3%, as compared with 19.5%, for the three months ended December 31, 2018.
Gross margin included net unfavorable cumulative catch-up adjustments on long-term contracts of $0.2 million. The cumulative catch-up adjustments to gross margin included gross favorable adjustments of $18.3 million and gross unfavorable adjustments of $18.5 million. Gross margin for the three months ended December 31, 2018, included net unfavorable cumulative catch-up adjustments of $47.0 million.
Segment operating income increased by $73.9 million, to $75.5 million for the three months ended December 31, 2019, from $1.6 million for the three months ended December 31, 2018. Organic segment operating income increased by $34.7 million primarily due to margins on the organic sales increases, $11.7 million on forward losses on transitioning programs in the prior year period and decreases in research and development of $2.5 million and consulting of $1.7 million. Divestitures contributed $39.2 million improvement to operating income due to operating losses in the prior period, including $40.5 million on the Global 7500 program.
Corporate expenses were $70.9 million for the three months ended December 31, 2019, as compared with $15.2 million for the three months ended December 31, 2018. The increase in corporate expenses was $55.6 million, or 365.5%, and was primarily the result of increased loss on sale of assets and businesses partially offset by the current period gain on a legal judgment.

Interest expense and other increased by $3.9 million, or 13.2%, to $33.2 million for the three months ended December 31, 2019, compared with $29.3 million for the three months ended December 31, 2018, due to a higher interest expense due to differences in relative debt levels and higher interest rates and $1.3 million in increased foreign exchange transaction losses.
The effective income tax rate for the three months ended December 31, 2019, was 21.0% compared with (4.1)% for the three months ended December 31, 2018. For the three months ended December 31, 2018, the effective tax rate reflected a limitation on the recognition of tax benefits due to the full valuation allowance.


45

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

Business Segment Performance - Three months ended December 31, 2019, compared with three months ended December 31, 2018
We report our financial performance based on the following three reportable segments: Integrated Systems, Aerospace Structures, and Product Support. The Company's Chief Operating Decision Maker ("CODM") utilizes Adjusted EBITDAP as a primary measure of profitability to evaluate performance of its segments and allocate resources. For further details regarding our reportable segments, refer to Note 1.
The results of operations among our reportable segments, as well as our operating segments, vary due to differences in competitors, customers, extent of proprietary deliverables and performance. For example, Integrated Systems, which generally includes proprietary products and/or arrangements where we become the primary source or one of a few primary sources to our customers, our unique manufacturing capabilities command a higher margin. This compares to Aerospace Structures, which generally includes long-term sole-source or preferred supplier contracts and the success of these programs provides a strong foundation for our business and positions us well for future growth on new programs and new derivatives. In contrast, Product Support provides MRO services on components and accessories manufactured by third parties, with more diverse competition, including airlines, OEMs and other third-party service providers. In addition, variability in the timing and extent of customer requests performed in Product Support can provide for greater volatility and less predictability in revenue and earnings than that experienced in Integrated Systems and Aerospace Structures segments.
We currently generate a majority of our revenue from customers in the commercial aerospace industry, the military, the business jet industry and the regional airline industry. Our growth and financial results are largely dependent on continued demand for our products and services from customers in these industries. If any of these industries experiences a downturn, our customers in these sectors may conduct less business with us. 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 December 31,
 
 
 
% of Total
Sales
 
2019
 
2018
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
NET SALES
 
 
 
 
 
 
 
 
 
Integrated Systems
$
275,248

 
$
252,437

 
9.0
 %
 
39.1
 %
 
31.3
 %
Aerospace Structures
368,972

 
490,337

 
(24.8
)%
 
52.4
 %
 
60.7
 %
Product Support
63,978

 
71,446

 
(10.5
)%
 
9.1
 %
 
8.8
 %
Elimination of inter-segment sales
(3,532
)
 
(6,325
)
 
(44.2
)%
 
(0.6
)%
 
(0.8
)%
Total Net Sales
$
704,666

 
$
807,895

 
(12.8
)%
 
100.0
 %
 
100.0
 %

 
Three Months Ended December 31,
 
 
 
% of Segment
Sales
 
2019
 
2018
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
SEGMENT OPERATING INCOME (LOSS)
 
 
 
 
 
 
 
 
 
Integrated Systems
$
47,896

 
$
39,947

 
19.9
 %
 
17.4
%
 
15.8
 %
Aerospace Structures
18,039

 
(49,813
)
 
(136.2
)%
 
4.9
%
 
(10.2
)%
Product Support
9,538

 
11,421

 
(16.5
)%
 
14.9
%
 
16.0
 %
Corporate
(70,857
)
 
(15,222
)
 
(365.5
)%
 
n/a

 
n/a

Share-based compensation expense
(2,955
)
 
(3,266
)
 
9.5
 %
 
n/a

 
n/a

Total Operating Income (Loss)
$
1,661

 
$
(16,933
)
 
 
 
0.2
%
 
(2.1
)%


46

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Three Months Ended December 31,
 
 
 
% of Segment
Sales
 
2019
 
2018
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Adjusted EBITDAP
 
 
 
 
 
 
 
 
 
Integrated Systems
$
46,511

 
$
39,151

 
18.8
 %
 
17.4
%
 
16.0
 %
Aerospace Structures
32,140

 
(28,699
)
 
(212.0
)%
 
8.9
%
 
(5.9
)%
Product Support
10,621

 
13,032

 
(18.5
)%
 
16.6
%
 
18.2
 %
Corporate and share-based compensation
(16,803
)
 
(17,744
)
 
5.3
 %
 
n/a

 
n/a

 
$
72,469

 
$
5,740

 
1,162.5
 %
 
10.5
%
 
0.7
 %

Integrated Systems: Integrated Systems net sales increased by $22.8 million, or 9.0%, to $275.2 million for the three months ended December 31, 2019, from $252.4 million for the three months ended December 31, 2018. The increase was primarily due to increased volumes across Airbus commercial platforms, and aftermarket military rotorcraft sales.
Integrated Systems cost of sales increased by $11.3 million, or 6.4%, to $189.2 million for the three months ended December 31, 2019, from $177.9 million for the three months ended December 31, 2018. The increase was driven by the increased sales volume noted above.
The gross margin for the three months ended December 31, 2019, was 31.3% compared with 29.5% for the three months ended December 31, 2018. The increase in gross margin for the three months ended December 31, 2019, is the result of a change in sales mix, including a 49% increase in aftermarket sales.
Integrated Systems operating income increased by $7.9 million, or 19.9%, to $47.9 million for the three months ended December 31, 2019, from $39.9 million for the three months ended December 31, 2018. Adjusted EBITDAP increased by $7.4 million, or 18.8%, to $46.5 million for the three months ended December 31, 2019, from $39.2 million for the three months ended December 31, 2018. The increase of both operating income and Adjusted EBITDAP was due to the increased gross margin as noted above, partially offset by increased restructuring costs of $1.7 million.
Integrated Systems operating income as a percentage of segment sales increased to 17.4% for the three months ended December 31, 2019, as compared with 15.8% for the three months ended December 31, 2018. The same factors noted above affecting the Adjusted EBITDAP contributed to the increased Adjusted EBITDAP margin year over year.
Aerospace Structures: Aerospace Structures net sales decreased by $121.4 million, or 24.8%, to $369.0 million for the three months ended December 31, 2019, from $490.3 million for the three months ended December 31, 2018. Organic sales increased $21.9 million, or 6.8%. Net sales decreased as a result of the fiscal 2019 Aerostructures divestitures and the fiscal 2020 Nashville divestiture by $143.2 million. The organic sales increased due to increased volumes on 787, G550 and 767 programs. Net sales for the three months ended December 31, 2019, included $8.9 million in total nonrecurring revenues, as compared with $3.8 million in total nonrecurring revenues for the three months ended December 31, 2018.
Aerospace Structures cost of sales decreased by $175.1 million, or 35.8%, to $313.6 million for the three months ended December 31, 2019, from $488.6 million for the three months ended December 31, 2018. Organic cost of sales decreased $1.1 million, or 0.4% as the prior year period included $11.7 million in forward loss charges on transitioning programs. Cost of sales decreased as a result of the fiscal 2019 Aerostructures divestitures and the fiscal 2020 Nashville divestiture by $173.9 million. The organic gross margin for the three months ended December 31, 2019, was 16.3% compared with 10.2% for the three months ended December 31, 2018.
Aerospace Structures cost of sales for the three months ended December 31, 2019, included net unfavorable cumulative catch-up adjustments on long-term contracts of $0.4 million. The cumulative catch-up adjustments to gross margin for the three months ended December 31, 2019, included gross favorable adjustments of $18.1 million and gross unfavorable adjustments of $18.5 million. Segment cost of sales for the three months ended December 31, 2018, included net unfavorable cumulative catch-up adjustments of $47.9 million.
Aerospace Structures operating income increased by $67.9 million, or 136.2%, to $18.0 million for the three months ended December 31, 2019, from an operating loss of $49.8 million for the three months ended December 31, 2018. The organic operating income increased $27.8 million, or 390.9% due to increased sales and gross margin noted above. Operating income

47

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

also increased as a result of the fiscal 2019 Aerostructures divestitures and the fiscal 2020 Nashville divestiture by $40.1 million. The increase in Adjusted EBITDAP year over year is due to the increased operating income noted above.
Aerospace Structures operating income as a percentage of segment sales was 4.9% for the three months ended December 31, 2019, as compared with an operating loss as a percentage of segment sales of (10.2)% for the three months ended December 31, 2018. The Adjusted EBITDAP margin year over year has increased for the same reasons noted above for operating income.

Product Support: Product Support net sales decreased by $7.5 million, or 10.5%, to $64.0 million for the three months ended December 31, 2019, from $71.4 million for the three months ended December 31, 2018. The decrease was primarily the result of the divestiture of NAAS partially offset by increases due to improvement in demand for accessory component repairs.
Product Support cost of sales decreased by $6.0 million, or 11.3%, to $47.1 million for the three months ended December 31, 2019, from $53.1 million for the three months ended December 31, 2018. The decrease was driven by the divestiture of NAAS partially offset by the increased sales noted above. Organic gross margin for the three months ended December 31, 2019, and December 31, 2018, was 26.4%.
Product Support operating income decreased by $1.9 million, or 16.5%, to $9.5 million for the three months ended December 31, 2019, from $11.4 million for the three months ended December 31, 2018. The decrease was primarily driven by the divestiture of NAAS.
Product Support operating income as a percentage of segment sales decreased to 14.9% for the three months ended December 31, 2019, as compared with 16.0% for the three months ended December 31, 2018. The Adjusted EBITDAP margin was 16.6% for the three months ended December 31, 2019, as compared with 18.2% for the three months ended December 31, 2018.

Nine months ended December 31, 2019, compared with nine months ended December 31, 2018
 
Nine Months Ended December 31,
 
2019
 
2018
 
(dollars in thousands)
Net sales
$
2,207,007

 
$
2,495,903

Segment operating income (loss)
$
207,750

 
$
(6,318
)
Corporate expense
(101,296
)
 
(70,655
)
Share-based compensation expense
(8,245
)
 
(8,509
)
Total operating income (loss)
98,209

 
(85,482
)
Interest expense and other
96,069

 
83,515

Non-service defined benefit income
(57,280
)
 
(49,581
)
Income tax expense
12,477

 
2,739

Net income (loss)
$
46,943

 
$
(122,155
)


Net sales decreased by $288.9 million, or 11.6%, to $2.21 billion for the nine months ended December 31, 2019, from $2.50 billion for the nine months ended December 31, 2018. Organic sales adjusted for inter-segment sales increased by $188.2 million, or 9.7%, offset by declines from divestitures of $477.1 million. Organic sales increased primarily due to increased volumes across Airbus commercial programs and aftermarket demand for military rotorcraft programs in Integrated Systems, increased volumes on G550, 787, 777 and G280 programs as well as, increased volume and pricing on E-2 Jets sales to ASTK in Aerospace Structures, and increased demand for accessory components. Net sales for the nine months ended December 31, 2019, included $34.1 million in total nonrecurring revenues, as compared with $48.0 million in nonrecurring revenues for the nine months ended December 31, 2018.

48

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

Cost of sales decreased by $457.2 million, or 20.7%, to $1.75 billion for the nine months ended December 31, 2019, from $2.21 billion for the nine months ended December 31, 2018. Organic cost of sales adjusted for inter-segment sales increased $75.6 million, or 4.7%, offset by declines from divestitures of $532.8 million. Organic cost of sales increased due to the increase in organic sales mentioned above partially offset by the nonrecurring charge of $87.2 million in the nine months ended December 31, 2018, arising from the adoption of ASU 2017-07. The organic gross margin for the nine months ended December 31, 2019, was 21.2%, as compared with 17.4% for the nine months ended December 31, 2018.
Gross margin for the nine months ended December 31, 2019, included net unfavorable cumulative catch-up adjustments on long-term contracts of $16.4 million. The cumulative catch-up adjustments to gross margin included gross favorable adjustments of $29.0 million and gross unfavorable adjustments of $45.4 million. Gross margin for the nine months ended December 31, 2018, included the previously mentioned net unfavorable cumulative catch-up adjustments of $59.4 million.

Segment operating income increased by $214.1 million to operating income of $207.8 million for the nine months ended December 31, 2019, from an operating loss of $(6.3) million for the nine months ended December 31, 2018. Organic segment operating income increased $121.6 million. Divestitures contributed additional increases to operating income of $92.4 million. Organic operating income for the nine months ended December 31, 2019, primarily increased due to the factors noted above, as well as the $10.0 million gain recognized upon the assignment of the E-2 Jets contract to ASTK in the current year. Additionally, research and development expenses were higher in the prior year by approximately $10.0 million.
Corporate expenses were $101.3 million for the nine months ended December 31, 2019, as compared with $70.7 million for the nine months ended December 31, 2018. The increase in corporate expenses of $30.6 million, or 43.4%, was primarily due to increases in losses on sales of assets and businesses of $47.4 million, partially offset by the current period gain on a legal judgment of $9.3 million and decreases in compensation expenses of $10.4 million.
Interest expense and other increased by $12.6 million, or 15.0%, to $96.1 million for the nine months ended December 31, 2019, compared with $83.5 million for the nine months ended December 31, 2018, due to a write-off of deferred financing costs of approximately $3.0 million as a result of the debt transactions disclosed in Note 7 and higher interest expense due to differences in relative debt levels and higher interest rates and $3.4 million in increased foreign exchange transaction losses.
The effective income tax rate for the nine months ended December 31, 2019, was 21.0% compared with (2.3)% for the nine months ended December 31, 2018. For the nine months ended December 31, 2018, the effective tax rate reflected a limitation on the recognition of tax benefits due to the full valuation allowance.

Business Segment Performance - Nine months ended December 31, 2019, compared with nine months ended December 31, 2018:
 
Nine Months Ended December 31,
 
 
 
% of Total
Sales
 
2019
 
2018
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
NET SALES
 
 
 
 
 
 
 
 
 
Integrated Systems
$
813,454

 
$
754,193

 
7.9
 %
 
36.9
 %
 
30.2
 %
Aerospace Structures
1,210,729

 
1,551,090

 
(21.9
)%
 
54.9
 %
 
62.1
 %
Product Support
193,127

 
209,860

 
(8.0
)%
 
8.8
 %
 
8.4
 %
Elimination of inter-segment sales
(10,303
)
 
(19,240
)
 
(46.5
)%
 
(0.6
)%
 
(0.7
)%
Total Net Sales
$
2,207,007

 
$
2,495,903

 
(11.6
)%
 
100.0
 %
 
100.0
 %


49

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

 
Nine Months Ended December 31,
 
 
 
% of Segment
Sales
 
2019
 
2018
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
SEGMENT OPERATING INCOME (LOSS)
 
 
 
 
 
 
 
 
 
Integrated Systems
$
134,140

 
$
115,221

 
16.4
 %
 
16.5
%
 
15.3
 %
Aerospace Structures
43,930

 
(152,143
)
 
(128.9
)%
 
3.6
%
 
(9.8
)%
Product Support
29,680

 
30,604

 
(3.0
)%
 
15.4
%
 
14.6
 %
Corporate
(101,296
)
 
(70,655
)
 
(43.4
)%
 
n/a

 
n/a

Share-based compensation
(8,245
)
 
(8,509
)
 
3.1
 %
 
n/a

 
n/a

Total Operating Income (Loss)
$
98,209

 
$
(85,482
)
 
 
 
4.4
%
 
(3.4
)%

 
Nine Months Ended December 31,
 
 
 
% of Segment
Sales
 
2019
 
2018
 
% Change
 
2019
 
2018
 
(in thousands)
 
 
 
 
 
 
Adjusted EBITDAP
 
 
 
 
 
 
 
 
 
Integrated Systems
$
129,056

 
$
111,748

 
15.5
 %
 
16.4
%
 
15.3
 %
Aerospace Structures
88,118

 
(2,994
)
 
(3,043.2
)%
 
7.5
%
 
(0.2
)%
Product Support
32,952

 
35,548

 
(7.3
)%
 
17.1
%
 
16.9
 %
Corporate and share-based compensation
(50,954
)
 
(59,126
)
 
13.8
 %
 
n/a

 
n/a

 
$
199,172

 
$
85,176

 
133.8
 %
 
9.3
%
 
3.5
 %

Integrated Systems: Integrated Systems net sales increased by $59.3 million, or 7.9%, to $813.5 million for the nine months ended December 31, 2019, from $754.2 million for the nine months ended December 31, 2018. The increase was due to increased volumes on engine components, Airbus commercial programs, aftermarket demand for military rotorcraft components, and aftermarket spare part sales as well as $5.0 million in a nonrecurring licensing transaction.
Integrated Systems cost of sales increased by $30.6 million, or 5.7%, to $563.4 million for the nine months ended December 31, 2019, from $532.8 million for the nine months ended December 31, 2018. Cost of sales increased due to the sales increase noted above and sales mix, partially offset by a reduction of cost of sales as a result of a $5.3 million reduction in acquired contract reserves.
The gross margin for the nine months ended December 31, 2019, was 30.7% compared with 29.4% for the nine months ended December 31, 2018. The increase in gross margin for the nine months ended December 31, 2019, is the result of sales mix, including a 19% increase in aftermarket sales, as well as the favorable impact on margin from the nonrecurring licensing transaction and reduction in acquired contract reserves.
Integrated Systems operating income increased by $18.9 million, or 16.4%, to $134.1 million for the nine months ended December 31, 2019, from $115.2 million for the nine months ended December 31, 2018. Operating income increased due to the increased gross margin as noted above, partially offset by increased restructuring costs of $6.7 million. The increase in Adjusted EBITDAP year over year is due to the same factors that increased operating income.
Integrated Systems operating income as a percentage of segment sales increased to 16.5% for the nine months ended December 31, 2019, as compared with 15.3% for the nine months ended December 31, 2018, due to the increased gross margin as noted above. These same factors noted above affecting the Adjusted EBITDAP contributed to the increased Adjusted EBITDAP margin year over year.
Aerospace Structures: Aerospace Structures net sales decreased by $340.4 million, or 21.9%, to $1,210.7 million for the nine months ended December 31, 2019, from $1.55 billion for the nine months ended December 31, 2018. Organic sales increased $111.6 million, or 11.0%, due to increased volumes for the G280, G550 and 777 programs, as well as increased volumes and pricing related to the E-2 Jets and 787 programs. Net sales decreased as a result of the fiscal 2019 Aerostructures divestitures

50

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

and the fiscal 2020 Nashville divestiture by $452.0 million. Net sales for the nine months ended December 31, 2019, included $29.1 million in total nonrecurring revenues, as compared with $48.0 million in total nonrecurring revenues for the nine months ended December 31, 2018.
Aerospace Structures cost of sales decreased by $480.0 million, or 31.2%, to $1,056.1 million for the nine months ended December 31, 2019, from $1.54 billion for the nine months ended December 31, 2018. The organic cost of sales increased $32.9 million, or 3.5%, due to the increase in organic sales mentioned above offset by the nonrecurring charge of $87.2 million in the nine months ended December 31, 2018, arising from the adoption of ASU 2017-07. Cost of sales decreased as a result of the fiscal 2019 Aerostructures divestitures and the fiscal 2020 Nashville divestiture by $513.0 million. The organic gross margin for the nine months ended December 31, 2019, was 13.4% compared with 7.1% for the nine months ended December 31, 2018.
Aerospace Structures cost of sales for the nine months ended December 31, 2019, included net unfavorable cumulative catch-up adjustments of $16.2 million. The cumulative catch-up adjustments to gross margin for the nine months ended December 31, 2019, included gross favorable adjustments of $29.0 million and gross unfavorable adjustments of $45.1 million. Segment cost of sales for the nine months ended December 31, 2018, included net unfavorable cumulative catch-up adjustments of $60.1 million.
Aerospace Structures operating income increased by $196.1 million, or 128.9%, to $43.9 million for the nine months ended December 31, 2019, compared with an operating loss of $152.1 million for the nine months ended December 31, 2018. The organic operating income increased $101.5 million or 190.3%. Operating income increased as a result of the fiscal 2019 Aerostructures divestitures and the fiscal 2020 Nashville divestiture prior period operating losses of $94.6 million. Organic operating income increased for the same reasons noted above for gross margin as well as lower compensation due to decreased severance and headcount and the approximately $10.0 million gain recognized as a result of the transfer of the E-2 Jets program to ASTK. The increase in Adjusted EBITDAP year over year is due to the same factors that increased operating income.
Aerospace Structures operating income as a percentage of segment sales increased to 3.6% for the nine months ended December 31, 2019, as compared with an operating loss as a percentage of segment sales of (9.8)% for the nine months ended December 31, 2018, due to the increase in operating income as noted above. These same factors as noted above for the Adjusted EBITDAP contributed to the increased Adjusted EBITDAP margin year over year.

Product Support: Product Support net sales decreased by $16.7 million, or 8.0%, to $193.1 million for the nine months ended December 31, 2019, from $209.9 million for the nine months ended December 31, 2018. The decrease was primarily the result of the divestiture of NAAS partially offset by increases due to improvement in demand for accessory component repairs.
Product Support cost of sales decreased by $16.7 million, or 10.6%, to $141.6 million for the nine months ended December 31, 2019, from $158.3 million for the nine months ended December 31, 2018. The decrease was driven by the divestiture of NAAS partially offset by the increased sales noted above. Organic gross margin for the nine months ended December 31, 2019, was 26.7% compared with 25.1% for the nine months ended December 31, 2018.
Product Support operating income decreased by $0.9 million, or 3.0%, to $29.7 million for the nine months ended December 31, 2019, from $30.6 million for the nine months ended December 31, 2018. The increased gross margins contributed to the increase in operating income and Adjusted EBITDAP year over year.
Product Support operating income as a percentage of segment sales increased to 15.4% for the nine months ended December 31, 2019, as compared with 14.6% for the nine months ended December 31, 2018, due to the increased gross profit noted above and the lower sales due to the divestiture of NAAS. These same factors contributed to the increased Adjusted EBITDAP margin year over year.



51

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

Liquidity and Capital Resources
Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. During the nine months ended December 31, 2019, we generated approximately $39.3 million of cash flows from operating activities, received approximately $22.7 million in investing activities and used approximately $101.9 million in financing activities.
Cash flows generated from operating activities for the nine months ended December 31, 2019, were $39.3 million, compared with cash flows used in operating activities for the nine months ended December 31, 2018, of $193.1 million. We continue to invest in inventory to support ramping programs and also liquidated approximately $60.0 million in prior period customer advances against current period deliveries.
Cash flows received from investing activities for the nine months ended December 31, 2019, increased $16.1 million from the nine months ended December 31, 2018. Cash flows received from investing activities for the nine months ended December 31, 2019, included capital expenditures of $27.3 million and net proceeds from sales of assets and businesses of $50.0 million. Cash provided by investing activities for the nine months ended December 31, 2018, included capital expenditures of $34.8 million and proceeds from the sale of assets of $41.4 million.
Cash flows used in financing activities for the nine months ended December 31, 2019, were $101.9 million, compared with cash flows provided by financing activities for the nine months ended December 31, 2018, of $181.5 million.
As of December 31, 2019, $581.3 million was available under our revolving credit facility (the “Credit Facility”) after consideration of covenant limitations.  On December 31, 2019, the amount outstanding under the Credit Facility was zero. Outstanding balances accrue interest at LIBOR plus applicable basis points totaling 3.50% per annum. Amounts repaid under the Credit Facility may be re-borrowed.
We believe that cash flows from 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 are continuously evaluating various acquisition and divestiture opportunities. In the event that such a transaction occurs, the availability under the Credit Facility may change or 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.
In December 2019, the Company amended its receivable securitization facility (the "Securitization Facility") decreasing the purchase limit from $125.0 million to $75.0 million and extended the term through December 2022. At December 31, 2019, there was $75.0 million outstanding under our 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. The Securitization Facility's net availability is not affected by the borrowing capacity of the Credit Facility.
The 2021 Notes, the 2022 Notes, and the 2025 Notes (collectively, the "Senior 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 Senior Notes are guaranteed on a full, joint and several basis by each of the Guarantor Subsidiaries.
The Company may redeem some or all of its Senior Notes prior to their stated maturities, subject to certain limitations set forth in the indenture governing the applicable Senior Notes and, in certain cases, subject to significant prepayment premiums. The Company is obligated to offer to repurchase the Senior Notes at specified prices as a result of certain change-of-control events and a sale of all or substantially all of its assets. These restrictions and prohibitions are subject to certain qualifications and exceptions.
The indentures governing the Senior Notes, as well as the Credit Facility and Securitization Facility, contain 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 or investments; (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 (in the case of the Senior Notes); and (viii) enter into transactions with affiliates. The Company is currently in compliance with all financial covenants under its debt

52

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

agreements. Although the Company does not anticipate any violations of the financial covenants, its ability to comply with these covenants is depended upon achieving earnings and cash flow projections.
For further details regarding the Company's long-term debt arrangements, including the 2021 Notes, the 2022 Notes, 2024 Notes, and the 2025 Notes (collectively, the "Senior Notes"), including current period transactions, refer to Note 7.
For the fiscal year ending March 31, 2020, the Company is not required to make minimum contributions to its U.S. defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006. Additionally, as disclosed on the Form 8-K dated December 11, 2019, the Company contributed 1,730,703 shares of common stock to Vought Aircraft Industries Inc., Master Defined Benefit Trust (the "Trust"), which is the funding vehicle for the Vought Aircraft Industries, Inc. Hourly Retirement Plan. The closing price of the Company’s common stock on the New York Stock Exchange on the date of the contribution was $28.89 per share (for an aggregate contribution value of approximately $50 million). As a result of the contribution, the Company does not expect that it will have any required contribution to the Trust for the fiscal year ending March 31, 2021. 

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 condensed consolidated financial statements that appear in the Annual Report on Form 10-K for the fiscal year ended March 31, 2019. Except as otherwise disclosed in the condensed consolidated 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, 2019, 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,” "plan," "estimate," 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 our ability to execute on our restructuring plans, the integration of acquired businesses, divestitures of our business, 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, 2019, filed with the SEC on May 23, 2019.
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, 2019. 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, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’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

53

Triumph Group, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(continued)

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 December 31, 2019, we completed an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019.
(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.


Part II. Other Information

Item 1. Legal Proceedings.
Not applicable.

Item 1A. Risk Factors.
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.


Item 3. Defaults Upon Senior Securities.
Not applicable.

Item 4. Mine Safety Disclosures.
Not applicable.

Item 5. Other Information.
Not applicable.

54




Item 6. Exhibits.

 
 
 
 
 
 
 
 
 
 
 
Exhibit 101
 
The following financial information from Triumph Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2019, formatted in iXBRL: (i) Condensed Consolidated Balance Sheets as of December 31, 2019 and March 31, 2019; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2019 and 2018; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended December 31, 2019 and 2018; (iv) Condensed Consolidated Statements of Stockholders' (Deficit) Equity for the three and nine months ended December 31, 2019 and 2018; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2019 and 2018; and (vi) Notes to Condensed Consolidated Financial Statements.
 
Exhibit 104
 
Cover Page Interactive Data File, formatted in iXBRL and contained in Exhibit 101.













55




TRIUMPH GROUP, INC.

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/ Daniel J. Crowley
 
February 6, 2020
 
 
Daniel J. Crowley, President and Chief Executive Officer
 
 
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ James F. McCabe, Jr.
 
February 6, 2020
 
 
James F. McCabe, Jr., Senior Vice President and Chief Financial Officer
 
 
 
 
 
(Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ Thomas A. Quigley, III
 
February 6, 2020
 
 
Thomas A. Quigley, III, Vice President, Investor Relations and Controller
 
 
 
 
 
(Principal Accounting Officer)
 
 
 
 


56