TRIUMPH GROUP INC - Quarter Report: 2021 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, 2021


☐	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.

The number of outstanding shares of the Registrant's Common Stock, par value $.001 per share, on February 7, 2022, was 64,630,111.

Table of Contents

TRIUMPH GROUP, INC.

TABLE OF CONTENTS


		Page Number
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at December 31, 2021 and March 31, 2021	1
	Condensed Consolidated Statements of Operations - Three and nine months ended December 31, 2021 and 2020	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) - Three and nine months ended December 31, 2021 and 2020	3
	Condensed Consolidated Statements of Stockholders' Deficit - Three and nine months ended December 31, 2021 and 2020	4
	Condensed Consolidated Statements of Cash Flows - Nine months ended December 31, 2021 and 2020	8
	Notes to Condensed Consolidated Financial Statements - December 31, 2021	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

Part II. Other Information		43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
Signatures		44

TRIUMPH GROUP, INC.

Condensed Consolidated Balance Sheets

(unaudited)

(Dollars in thousands, except per share data)


	December 31,			March 31,
	2021			2021
ASSETS
Current assets:
Cash and cash equivalents	$	206,139		$	589,882
Trade and other receivables, less allowance for credit losses of $7,785 and $8,095		158,871			194,066
Contract assets		150,755			134,638
Inventory, net		394,532			400,366
Prepaid expenses and other current assets		14,922			19,206
Assets held for sale		3,029			216,276
Total current assets		928,248			1,554,434
Property and equipment, net		178,663			211,369
Goodwill		515,773			521,638
Intangible assets, net		87,679			102,453
Other, net		42,176			61,041
Total assets	$	1,752,539		$	2,450,935
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt	$	3,534		$	5,247
Accounts payable		168,894			179,473
Contract liabilities		160,982			204,379
Accrued expenses		229,750			271,160
Liabilities related to assets held for sale		—			58,108
Total current liabilities		563,160			718,367
Long-term debt, less current portion		1,584,989			1,952,296
Accrued pension and other postretirement benefits		322,874			384,256
Deferred income taxes		7,426			7,491
Other noncurrent liabilities		86,128			207,378
Stockholders' deficit:
Common stock, $.001 par value, 100,000,000 shares authorized, 64,613,402 and 64,488,674 shares issued; 64,613,232 and 64,185,001 shares outstanding		65			64
Capital in excess of par value		970,787			978,272
Treasury stock, at cost, 170 and 303,673 shares		(10	)		(12,606	)
Accumulated other comprehensive loss		(496,306	)		(530,192	)
Accumulated deficit		(1,286,574	)		(1,254,391	)
Total stockholders' deficit		(812,038	)		(818,853	)
Total liabilities and stockholders' deficit	$	1,752,539		$	2,450,935

See accompanying notes to condensed consolidated financial statements.

TRIUMPH GROUP, INC.

Condensed Consolidated Statements of Operations

(unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended December 31,						Nine Months Ended December 31,
	2021			2020			2021			2020
Net sales	$	319,249		$	425,994		$	1,073,291		$	1,402,886
Operating costs and expenses:
Cost of sales (exclusive of depreciation shown separately below)		232,328			340,753			788,341			1,116,668
Selling, general and administrative		42,416			48,747			152,775			162,189
Depreciation and amortization		11,659			22,119			40,035			72,819
Impairment of long-lived assets		—			—			—			252,382
Restructuring		4,649			4,071			13,031			32,747
Loss on sale of assets and businesses		—			45,273			13,629			46,020
		291,052			460,963			1,007,811			1,682,825
Operating income (loss)		28,197			(34,969	)		65,480			(279,939	)
Non-service defined benefit income		(14,400	)		(12,432	)		(23,127	)		(37,275	)
Debt extinguishment loss		1,935			—			11,624			—
Interest expense and other, net		32,319			44,881			105,060			132,344
Income (loss) from continuing operations before income taxes		8,343			(67,418	)		(28,077	)		(375,008	)
Income tax expense		1,105			698			4,106			2,383
Net income (loss)	$	7,238		$	(68,116	)	$	(32,183	)	$	(377,391	)
Earnings (loss) per share—basic:
Net income (loss)	$	0.11		$	(1.30	)	$	(0.50	)	$	(7.24	)
Weighted average common shares outstanding—basic		64,621			52,488			64,486			52,126
Earnings (loss) per share—diluted:
Net income (loss)	$	0.11		$	(1.30	)	$	(0.50	)	$	(7.24	)
Weighted average common shares outstanding—diluted		65,096			52,488			64,486			52,126

See accompanying notes to condensed consolidated financial statements.

TRIUMPH GROUP, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

(Dollars in thousands)


	Three Months Ended December 31,						Nine Months Ended December 31,
	2021			2020			2021			2020
Net income (loss)	$	7,238		$	(68,116	)	$	(32,183	)	$	(377,391	)
Other comprehensive income:
Foreign currency translation adjustment		(776	)		12,637			(3,719	)		20,838
Defined benefit pension plans and other postretirement benefits:
Amounts arising during the period - net of tax expense
Actuarial gain, net of taxes of $0, $0, $0, and $0, respectively		—			—			10,440			—
Reclassification to net income (loss) - net of expense
Amortization of net loss, net of taxes of $0, $0, $0, and $0, respectively		8,514			5,298			25,525			15,894
Recognized prior service (credits) cost, net of taxes of $0, $0, $0, and $0, respectively		(1,250	)		(1,033	)		3,134			(3,099	)
Total defined benefit pension plans and other postretirement benefits, net of taxes		7,264			4,265			39,099			12,795
Cash flow hedges:
Unrealized gain (loss) arising during the period, net of tax expense of $0, $0, $0, and $0, respectively		662			1,878			(2,670	)		8,308
Reclassification of (loss) gain included in net earnings, net of tax expense of $0, $0, $0, and $0, respectively		(251	)		437			1,176			(1,662	)
Net unrealized gain (loss) on cash flow hedges, net of tax		411			2,315			(1,494	)		6,646
Total other comprehensive income		6,899			19,217			33,886			40,279
Total comprehensive income (loss)	$	14,137		$	(48,899	)	$	1,703		$	(337,112	)

See accompanying notes to condensed consolidated financial statements.

TRIUMPH GROUP, INC.

Condensed Consolidated Statements of Stockholders' Deficit

For the three and nine months ended December 31, 2021

(unaudited)

(Dollars in thousands)


	Outstanding Shares	Common Stock All Classes	Capital in Excess of Par Value	Treasury Stock	Accumulated Other Comprehensive Loss	Accumulated Deficit	Total
March 31, 2021	64,185,001	$64	$978,272	$(12,606)	$(530,192)	$(1,254,391)	$(818,853)
Net loss	—	—	—	—	—	(30,351)	(30,351)
Foreign currency translation adjustment	—	—	—	—	2,749	—	2,749
Pension liability adjustment, net of income taxes of $0	—	—	—	—	20,629	—	20,629
Change in fair value of foreign currency hedges, net of income taxes of $0	—	—	—	—	(706)	—	(706)
Share-based compensation	355,821	—	(11,505)	13,975	—	—	2,470
Repurchase of shares for share-based compensation minimum tax obligation	(116,796)	—	—	(2,336)	—	—	(2,336)
Employee stock purchase plan	9,794	—	(235)	407	—	—	172
June 30, 2021	64,433,820	$64	$966,532	$(560)	$(507,520)	$(1,284,742)	$(826,226)
Net loss	—	—	—	—	—	(9,070)	(9,070)
Foreign currency translation adjustment	—	—	—	—	(5,692)	—	(5,692)
Pension liability adjustment, net of income taxes of $0	—	—	—	—	11,206	—	11,206
Change in fair value of foreign currency hedges, net of income taxes of $0	—	—	—	—	(1,199)	—	(1,199)
Share-based compensation	196,674	1	1,480	1,256	—	—	2,737
Repurchase of shares for share-based compensation minimum tax obligation	(36,824)	—	—	(782)	—	—	(782)
Employee stock purchase plan	7,683	—	78	79	—	—	157
September 30, 2021	64,601,353	$65	$968,090	$(7)	$(503,205)	$(1,293,812)	$(828,869)
Net income	—	—	—	—	—	7,238	7,238


Foreign currency translation adjustment	—	—	—	—	(776)	—	(776)
Pension liability adjustment, net of income taxes of $0	—	—	—	—	7,264	—	7,264
Change in fair value of foreign currency hedges, net of income taxes of $0	—	—	—	—	411	—	411
Share-based compensation	2,749	—	2,537	7	—	—	2,544
Repurchase of shares for share-based compensation minimum tax obligation	(855)	—	—	(17)	—	—	(17)
Employee stock purchase plan	9,985	—	160	7	—	—	167
December 31, 2021	64,613,232	$65	$970,787	$(10)	$(496,306)	$(1,286,574)	$(812,038)

TRIUMPH GROUP, INC.

Condensed Consolidated Statements of Stockholders' Deficit

For the three and nine months ended December 31, 2020

(unaudited)

(Dollars in thousands)


	Outstanding Shares	Common Stock All Classes	Capital in Excess of Par Value	Treasury Stock	Accumulated Other Comprehensive Loss	Accumulated Deficit	Total
March 31, 2020	51,858,089	$52	$804,830	$(36,217)	$(746,448)	$(803,481)	$(781,264)
Net loss	—	—	—	—	—	(275,786)	(275,786)
Foreign currency translation adjustment	—	—	—	—	919	—	919
Pension liability adjustment, net of income taxes of $0	—	—	—	—	4,265	—	4,265
Change in fair value of foreign currency hedges, net of income taxes of $0	—	—	—	—	2,100	—	2,100
Share-based compensation	158,274	—	(6,670)	9,291	—	—	2,621
Repurchase of shares for share-based compensation minimum tax obligation	(50,955)	—	—	(474)	—	—	(474)
Employee stock purchase plan	36,802	—	(1,974)	2,212	—	—	238
June 30, 2020	52,002,210	$52	$796,186	$(25,188)	$(739,164)	$(1,079,267)	$(1,047,381)
Net loss	—	—	—	—	—	(33,489)	(33,489)
Foreign currency translation adjustment	—	—	—	—	7,282	—	7,282
Pension liability adjustment, net of income taxes of $0	—	—	—	—	4,265	—	4,265
Change in fair value of foreign currency hedges, net of income taxes of $0	—	—	—	—	2,231	—	2,231
Share-based compensation	54,313	—	(446)	2,982	—	—	2,536
Repurchase of shares for share-based compensation minimum tax obligation	(2,246)	—	—	(21)	—	—	(21)


Employee stock purchase plan	24,413	—	(1,122)	1,341	—	—	219
September 30, 2020	52,078,690	$52	$794,619	$(20,886)	$(725,386)	$(1,112,756)	$(1,064,357)
Net loss	—	—	—	—	—	(68,116)	(68,116)
Foreign currency translation adjustment	—	—	—	—	12,637	—	12,637
Pension liability adjustment, net of income taxes of $0	—	—	—	—	4,265	—	4,265
Change in fair value of foreign currency hedges, net of income taxes of $0	—	—	—	—	2,315	—	2,315
Share-based compensation	31,967	—	2,457	1,158	—	—	3,615
Repurchase of shares for share-based compensation minimum tax obligation	(5,876)	—	—	(57)	—	—	(57)
Employee stock purchase plan	21,276	—	(1,545)	1,748	—	—	203
Contribution of common stock to pension plan, net of issuance costs	2,849,002	3	39,662	—	—	—	39,665
December 31, 2020	54,975,059	$55	$835,193	$(18,037)	$(706,169)	$(1,180,872)	$(1,069,830)

See accompanying notes to condensed consolidated financial statements.

TRIUMPH GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)


	Nine Months Ended December 31,
	2021			2020
Operating Activities
Net loss	$	(32,183	)	$	(377,391	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		40,035			72,819
Impairment of long-lived assets		—			252,382
Amortization of acquired contract liability		(3,645	)		(35,017	)
Loss on sale of assets and businesses		13,629			46,020
Curtailments, settlements, and special termination benefits loss, net		20,046			—
Other amortization included in interest expense		7,502			21,912
Provision for credit losses		247			4,890
Share-based compensation		7,664			9,086
Changes in other assets and liabilities, excluding the effects of acquisitions and divestitures:
Trade and other receivables		30,060			169,744
Contract assets		(7,538	)		55,170
Inventories		(5,165	)		(2,152	)
Prepaid expenses and other current assets		3,716			1,041
Accounts payable, accrued expenses, and contract liabilities		(201,476	)		(375,967	)
Accrued pension and other postretirement benefits		(42,195	)		(36,838	)
Other, net		(678	)		(1,570	)
Net cash used in operating activities		(169,981	)		(195,871	)
Investing Activities
Capital expenditures		(15,817	)		(18,988	)
Proceeds from sale of assets and businesses		220,550			2,380
Investment in joint venture		(2,101	)		—
Purchase of facility related to divested businesses		(21,550	)		—
Net cash provided by (used in) investing activities		181,082			(16,608	)
Financing Activities
Net decrease in revolving credit facility		—			(400,000	)
Proceeds from issuance of long-term debt		107			713,900
Retirement of debt and finance lease obligations		(379,021	)		(95,439	)
Payment of deferred financing costs		(400	)		(20,215	)
Premium on redemption of First Lien Notes		(9,108	)		—
Repurchase of shares for share-based compensation minimum tax obligation		(3,135	)		(552	)
Net cash (used in) provided by financing activities		(391,557	)		197,694
Effect of exchange rate changes on cash		(3,287	)		6,598
Net change in cash and cash equivalents		(383,743	)		(8,187	)
Cash and cash equivalents at beginning of period		589,882			485,463
Cash and cash equivalents at end of period	$	206,139		$	477,276

See accompanying notes to condensed consolidated financial statements.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

1. BACKGROUND AND BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Triumph Group, Inc. ("Triumph") 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, 2021 and 2020, are not necessarily indicative of results that may be expected for the year ending March 31, 2022. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2021 audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended March 31, 2021, filed with the Securities and Exchange Commission (the "SEC") on May 20, 2021.

Triumph is a Delaware corporation that, through its operating subsidiaries, designs, engineers, manufactures, and sells products for the global aerospace original equipment manufacturers ("OEMs") of aircraft and aircraft components and repairs and overhauls aircraft components and accessories for commercial airline, air cargo carrier, and military customers on a worldwide basis. Triumph and its subsidiaries (collectively, the "Company") are organized based on the products and services that they provide. The Company has two reportable segments: Systems & Support and Aerospace Structures.

Systems & Support 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. Systems & Support also provides 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, Systems & Support is positioned to provide integrated planeside repair solutions globally. Capabilities include repair services for 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.

Aerospace Structures consists of the Company’s operations that supply commercial, business, and regional 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 insulation 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, and conventional mechanical fasteners.

The accompanying condensed consolidated financial statements include the accounts of Triumph and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated from the accompanying condensed consolidated financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Revenue Recognition and Contract Balances

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

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

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 distinct 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 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 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 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 or for work performed on a customer-owned asset.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

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 its 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 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 condensed consolidated balance sheets. The Company believes that the accounting estimates and assumptions made by management are appropriate given the increased uncertainties surrounding the severity and duration of the impacts of the COVID-19 pandemic; however, actual results could differ materially from those estimates.

For the three months ended December 31, 2021, cumulative catch-up adjustments resulting from changes in contract values and estimated costs that arose during the fiscal year decreased net sales, operating income, net income, and earnings per diluted share by approximately ($1,791), ($4,599), ($4,599), and ($0.07), respectively. For the three months ended December 31, 2020, cumulative catch-up adjustments resulting from changes in estimates decreased revenue by approximately ($37) and decreased operating loss, net loss, and loss per share by approximately $3,688, $3,688, and $0.07, respectively.

For the nine months ended December 31, 2021, cumulative catch-up adjustments resulting from changes in contract values and estimated costs that arose during the fiscal year increased net sales by approximately $5,340, and decreased operating loss, net loss, and loss per share by approximately $13,115, $13,115, and $0.20, respectively. For the nine months ended December 31, 2020, cumulative catch-up adjustments resulting from changes in estimates increased revenue by approximately $4,577, and decreased operating loss, net loss, and loss per share by approximately $19,349, $19,349, and $0.37, respectively.

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.

In connection with several prior acquisitions, the Company assumed existing long-term contracts. Based on review of these contracts at the acquisition date, the Company concluded that the terms of certain contracts were either more or less favorable than could be realized in market transactions as of the date of the acquisition. As a result, the Company recognized acquired contract liabilities, net of acquired contract assets as of the acquisition date of each respective acquisition, based on the present value of the difference between the contractual cash flows of the executory contracts and the estimated cash flows had the contracts been executed at the acquisition date. The liabilities principally relate to long-term contracts that were initially executed several years prior to the respective acquisition. The Company measured these net liabilities in the year they were acquired under the measurement provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, which is based on the price to transfer the obligation to a market participant at the measurement date, assuming that the net liabilities will remain outstanding in the marketplace. The portion of the Company's revenue resulting from transactions other than contracts with customers pertains to the amortization of these acquired contract liabilities as the related contractual performance obligations are satisfied. Adjustments to these liabilities due to significant changes in the total estimated costs of the contract are accounted for in a manner consistent with other loss contract reserves, with such adjustments recognized in cost of sales.

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 17% and 23% of total trade accounts receivable as of December 31, 2021 and March 31, 2021, respectively. Trade and other accounts receivable from Qarbon Aerospace Inc. include receivables that largely correspond with payables associated with transition services and represented

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

approximately 10% and 0% of total trade accounts receivable as of December 31, 2021 and March 31, 2021, respectively. The Company had no other concentrations of credit risk of more than 10%.

Sales to Boeing for the nine months ended December 31, 2021, were $376,413, or 35% of net sales, of which $121,057 and $255,357 were from Systems & Support and Aerospace Structures, respectively. Sales to Boeing for the nine months ended December 31, 2020, were $528,263, or 38% of net sales, of which $164,520 and $363,743 were from Systems & Support and Aerospace Structures, respectively.

No other single customer accounted for more than 10% of the Company’s net sales. However, the loss of any significant customer, including Boeing, could have a material adverse effect on the Company and its operating subsidiaries.

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 or disclosed 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 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. The Company has applied fair value measurements when comparing the carrying value of assets held for sale with the related fair value less cost to sell (see Note 3) and to its pension and postretirement plan assets (see Note 9).

Supplemental Cash Flow Information

In November 2021, the Company entered into an agreement with the Department of Transportation (“DOT”) under the Aviation Manufacturing Jobs Protection Program (“AMJP”) for a grant of up to $21,259. The Company received the first installment of $10,630 under the grant in November 2021. The Company expects to receive additional funds from the DOT as costs are incurred over the remainder of the service period with final installment to be received upon final confirmation from the DOT of the Company's compliance with the terms of the agreement. The receipt of the full award is primarily conditioned upon the Company committing to not furlough or lay off a defined group of employees during the six-month period of performance between November 2021 and May 2022. The grant benefit will be recognized over the six-month performance period as a reduction to cost of sales in proportion to the compensation expense that the award is intended to defray. During the quarter ended December 31, 2021, the Company recognized approximately $2,670 as a reduction in cost of sales with the remaining $7,960 of the initial installment presented in accrued expenses on the accompanying condensed consolidated balance sheet as of December 31, 2021.

For the nine months ended December 31, 2021, the Company paid $3,065 for income taxes, net of income tax refunds received. For the nine months ended December 31, 2020, the Company paid $2,474 for income taxes, net of income tax refunds received.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

3. DIVESTED OPERATIONS AND ASSETS HELD FOR SALE

Fiscal 2022 Divestitures and Assets Held for Sale

In May 2020, the Company’s Board of Directors committed to a plan to sell its composites manufacturing operations located in Milledgeville, Georgia and Rayong, Thailand. In August 2020, the Company entered into a definitive agreement with the buyer of the composites manufacturing operations in Georgia and Thailand. In February 2021, the Company entered into a definitive agreement to sell its large structure manufacturing operations in Red Oak, Texas, to the same buyer of the Milledgeville and Rayong composites manufacturing operations. These transactions closed in May 2021. In the year ended March 31, 2021, the Company adjusted the carrying amount of these assets held for sale to its estimated fair value less cost to sell and recognized a loss of approximately $102,500. The estimate of fair value is categorized as Level 2 within the fair value hierarchy. The key assumptions used in the estimate of fair value were the negotiated sales price of the assets and the assumption of the disposal group’s liabilities.

In May 2021, upon the completion of the sale of composites and large structure manufacturing operations, the Company received proceeds of approximately $155,000 net of the purchase of a facility related to the divestiture and other transaction costs and recognized an additional loss of approximately $6,000, which is presented on the accompanying condensed consolidated statements of operations within loss on sale of assets and businesses. The additional loss was primarily the result of changes in the working capital balances of the disposal group from March 31, 2021, to the date of divestiture, the final amount of which will be subject to any adjustments in the purchase price as a result of routine closing working capital adjustments and may be further adjusted as a result of closing working capital settlement. The operating results of these related operations are included within the Aerospace Structures reportable segment through the date of divestiture. As disclosed in Note 9, as a result of the completed sale of these manufacturing operations, the Company recognized a curtailment loss of approximately $16,000.

In January 2021, the Company announced the shutdown of its composites manufacturing operations located in Spokane, Washington, and began to execute the strategic exit of these facilities. The Company has entered into agreements to sell certain asset groups within the related manufacturing operations. These transactions have not been completed and certain of the related asset groups have not yet met the relevant criteria for derecognition and therefore have been classified as held for sale as of the balance sheet date. Losses for some asset groups arising from adjustments to the carrying amounts to their estimated fair value less cost to sell were insignificant, and other asset groups are expected to result in insignificant gains upon derecognition. The total purchase price associated with these transactions is approximately $11,000, of which approximately $7,500 has been received as of December 31, 2021.

In August 2021, the Company's Board of Directors committed to a plan to sell and license certain legacy product lines of the Company's Staverton, United Kingdom operations. The transaction includes the existing facility and select product lines associated with the site. The transaction closed in October 2021 for net proceeds of approximately $34,000, and the effect on earnings was insignificant. The operating results of the Staverton, United Kingdom, manufacturing operations were included within the Systems & Support reportable segment through the date of divestiture.

As a result of the transactions described above, including routine closing working capital adjustments, the Company recognized approximately $13,600 in additional net losses on divestiture of assets and businesses in the nine months ended December 31, 2021, largely comprising changes in working capital balances of disposal groups and related routine working capital adjustments that could be further adjusted as a result of closing working capital settlements.

Fiscal 2021 Divestitures

In August 2020, the Company completed the transfer of the assets and certain liabilities associated with its Gulfstream G650 wing supply chain activities for cash proceeds net of transaction costs of approximately $51,000. The Company recognized a loss of approximately $819. The operating results associated with the G650 wing supply chain activities were included within Aerospace Structures through the date of transfer.

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 11, Segments.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

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, 2021 and 2020:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2021		2020		2021		2020
Systems & Support
Satisfied over time	$	108,343	$	118,813	$	342,007	$	324,968
Satisfied at a point in time		127,000		140,519		397,804		418,753
Revenue from contracts with customers		235,343		259,332		739,811		743,721
Amortization of acquired contract liabilities		938		4,306		3,633		11,569
Total revenue		236,281		263,638		743,444		755,290

Aerospace Structures
Satisfied over time	$	81,511	$	148,526	$	308,667	$	596,145
Satisfied at a point in time		1,457		11,269		21,168		28,003
Revenue from contracts with customers		82,968		159,795		329,835		624,148
Amortization of acquired contract liabilities		—		2,561		12		23,448
Total revenue		82,968		162,356		329,847		647,596
	$	319,249	$	425,994	$	1,073,291	$	1,402,886

The following table shows disaggregated net sales by end market (excluding intercompany sales) for the three and nine months ended December 31, 2021 and 2020:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2021		2020		2021		2020
Systems & Support
Commercial aerospace	$	99,762	$	92,529	$	290,347	$	280,102
Military		113,343		145,168		375,671		396,672
Business jets		11,148		7,802		34,026		26,884
Regional		5,706		5,231		16,294		18,218
Non-aviation		5,384		8,602		23,473		21,845
Revenue from contracts with customers		235,343		259,332		739,811		743,721
Amortization of acquired contract liabilities		938		4,306		3,633		11,569
Total revenue	$	236,281	$	263,638	$	743,444	$	755,290

Aerospace Structures
Commercial aerospace	$	75,624	$	109,929	$	288,153	$	372,249
Military		454		31,670		15,367		105,365
Business jets		5,078		18,039		21,588		138,141
Regional		1,544		—		4,441		8,025
Non-aviation		268		157		286		368
Revenue from contracts with customers		82,968		159,795		329,835		624,148
Amortization of acquired contract liabilities		—		2,561		12		23,448
Total revenue		82,968		162,356		329,847		647,596
	$	319,249	$	425,994	$	1,073,291	$	1,402,886

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 typically derecognized when billed in accordance with the terms of the contract. The Company pools contract assets that share underlying risk characteristics and records an allowance for expected credit losses based on a combination of prior experience, current economic conditions and management’s expectations of future economic conditions, and specific collectibility matters when they arise. Contract assets are presented net of this reserve

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

on the condensed consolidated balance sheets. For the three and nine months ended December 31, 2021 and 2020, credit loss expense and write-offs related to contract assets were immaterial.

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 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 the Company's 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 and 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 the Company's contract assets and liabilities balances:


	December 31, 2021			March 31, 2021			Change
Contract assets	$	155,284		$	139,937		$	15,347
Contract liabilities		(186,972	)		(305,116	)		118,144
Net contract liability	$	(31,688	)	$	(165,179	)	$	133,491

During the nine months ended December 31, 2021, the Company recognized revenue due to changes in estimates associated with performance obligations satisfied or partially satisfied in previous periods of $5,340. The change in contract assets is the result of revenue recognized in excess of amounts billed during the nine months ended December 31, 2021. The change in contract liabilities is the result of revenue recognized in excess of the receipt of additional customer advances as well as certain customer advance repayments settled during the nine months ended December 31, 2021. For the nine months ended December 31, 2021, the Company recognized $68,083 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 condensed consolidated balance sheets as of December 31, 2021 and March 31, 2021, were $4,529 and $5,299, respectively. Noncurrent contract liabilities presented in other noncurrent liabilities on the accompanying condensed consolidated balance sheets as of December 31, 2021 and March 31, 2021, were $25,990 and $100,737, respectively.

Performance Obligations

Customers generally contract with the Company for requirements in a segment relating to a specific program, and 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 OEMs. A single contract may contain multiple performance obligations consisting of both recurring and nonrecurring elements.

As of December 31, 2021, 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	$	1,853,956	$	1,085,257	$	750,259	$	18,311	$	129

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

5. INVENTORIES

Inventories are stated at the lower of cost (average-cost or specific-identification methods) or market. The components of inventories are as follows:


	December 31, 2021		March 31, 2021
Raw materials	$	46,823	$	45,211
Work-in-process, including manufactured and purchased components		300,547		277,729
Finished goods		18,706		51,221
Rotable assets		28,456		26,205
Total inventories	$	394,532	$	400,366

6. LONG-TERM DEBT

Long-term debt consists of the following:


	December 31, 2021			March 31, 2021
Finance leases	$	17,023		$	20,125
Senior secured first lien notes due 2024		563,171			700,000
Senior secured notes due 2024		525,000			525,000
Senior notes due 2022		—			236,471
Senior notes due 2025		500,000			500,000
Less: debt issuance costs		(16,671	)		(24,053	)
		1,588,523			1,957,543
Less: current portion		3,534			5,247
	$	1,584,989		$	1,952,296

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

Receivables Securitization Program

In connection with the Company's receivables securitization facility (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. Interest rates are based on the Bloomberg Short Term Bank Yield Index ("BSBY"), plus a 2.25% fee on the drawn portion and a fee ranging from 0.45% to 0.50% on the undrawn portion of the Securitization Facility. The drawn fee may be reduced to 2.00% depending on the credit rating of the Company. Collateralized letters of credit incur fees at a rate of 1.25%. 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 Company has established a letter of credit facility under the Securitization Facility. Under the provisions of the letter of credit facility, the Company may request the Securitization Facility’s administrator to issue one or more letters of credit that will expire no later than 12 months after the date of issuance, extension or renewal, as applicable.

In November 2021, the Company amended the Securitization Facility, increasing the purchase limit from $75,000 to $100,000, modifying certain other terms to increase eligible receivables and availability, and extending the term through November 2024. The actual amount available under the Securitization Facility at any point in time is dependent upon the balance of eligible accounts receivable as well as the amount of letters of credit outstanding.

At December 31, 2021, there were $0 in borrowings and $24,562 in letters of credit outstanding under the Securitization Agreement, primarily to support insurance policies.

The agreements governing the Securitization Facility contain 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 the Company's assets.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

Senior Secured First Lien Notes due 2024

On August 17, 2020, the Company issued $700,000 principal amount of 8.875% Senior Secured First Lien Notes due June 1, 2024 (the “First Lien Notes”). The First Lien Notes were sold at 100% of the principal amount and have an effective interest yield of 8.875%. Interest is payable semiannually in cash in arrears on June 1 and December 1 of each year. The First Lien Notes are first lien secured obligations of the Company. The First Lien Notes are guaranteed on a full, senior secured, joint and several basis by each of the Company’s domestic restricted subsidiaries that guarantees either of the Company’s 2024 Notes and 2025 Notes, as defined below (the “Guarantor Subsidiaries”). In the future, each of the Company’s domestic restricted subsidiaries (other than any domestic restricted subsidiary that is a receivable subsidiary) that (1) is not an immaterial subsidiary, (2) becomes a borrower under any of its material debt facilities or (3) guarantees (a) any of the Company’s indebtedness or (b) any indebtedness of the Company’s domestic restricted subsidiaries, in the case of either (a) or (b), incurred under any of the Company’s material debt facilities, will guarantee the First Lien Notes. Under certain circumstances, the guarantees may be released without action by, or consent of, any holder of the First Lien Notes.

The Company may redeem the First Lien Notes, in whole or in part, at any time or from time to time on or after February 1, 2023, 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 February 1, 2023, the Company may redeem the First Lien Notes, in whole or in part, at a redemption price equal 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 First Lien Notes prior to June 1, 2023, with the net cash proceeds from certain equity offerings at a redemption price equal to 108.875% 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 First Lien Notes at a purchase price of 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

The First Lien Notes 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. In addition, the First Lien Notes Indenture requires, among other things, the Company to provide financial and current reports to holders of the First Lien Notes or file such reports electronically with the SEC. Furthermore, the First Lien Notes Indenture requires that the future net proceeds from certain asset sales will be required to repay the First Lien Notes at a premium of 106.656%, until the aggregate principal amount of Notes outstanding is $350,000 or less, provided that the Company may retain the first $100,000 of such net proceeds (subject to compliance with the asset sale covenants in the Company’s other outstanding indentures) or use it for certain other permitted purposes. These covenants are subject to a number of exceptions, limitations and qualifications set forth in the Indenture, as well as suspension periods in certain circumstances. Upon the completion of the sale of the composites and large structure manufacturing operations as disclosed in Note 3, the Company surpassed the $100,000 threshold of net proceeds from certain asset sales resulting in a required redemption of $112,511 of the outstanding principal balance and a premium of approximately $7,489. As a result of the completion of the sale and license of certain legacy product lines of the Company's Staverton, United Kingdom operations, the Company was required to pay an additional required redemption of $24,318 of the outstanding principal balance and a premium of approximately $1,619.

Senior Secured Notes Due 2024

On September 23, 2019, the Company issued $525,000 principal amount of 6.250% Senior Secured Notes due September 15, 2024 (the "2024 Notes"). The 2024 Notes were sold at 100% of principal amount and have an effective interest yield of 6.250%. Interest on the 2024 Notes is payable semiannually in cash in arrears on March 15 and September 15 of each year. The 2024 Notes are secured by second-priority liens on all of the Company's and the Guarantor Subsidiaries' assets that secure all of the indebtedness under the First Lien Notes and certain hedging and cash management obligations. The Company has the ability to incur additional first and/or second lien debt under certain circumstances.

Senior Notes Due 2022

On May 19, 2021, the Company called all outstanding 5.250% Senior Notes due June 1, 2022 (the "2022 Notes"). On June 18, 2021, the Company redeemed $236,471 principal amount of the 2022 Notes.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

Senior Notes Due 2025

On August 17, 2017, the Company issued $500,000 principal amount of 7.750% Senior Notes due August 15, 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.

Financial Instruments Not Recorded at Fair Value

Carrying amounts and the related estimated fair values of the Company's long-term debt not recorded at fair value in the consolidated financial statements are as follows:


December 31, 2021				March 31, 2021
Carrying Value		Fair Value		Carrying Value		Fair Value
$	1,588,523	$	1,666,314	$	1,957,543	$	2,085,204

The fair value of the long-term debt was calculated based on either interest rates available for debt with terms and maturities similar to the Company's existing debt arrangements or broker quotes on the Company's existing debt (Level 2 inputs).

Interest paid on indebtedness during the nine months ended December 31, 2021 and 2020, amounted to $110,488 and $79,382, respectively. The interest paid during the nine months ended December 31, 2021, includes the redemption premiums on the First Lien Notes of $9,108.

7. EARNINGS PER SHARE

The following is a reconciliation between the weighted average outstanding shares used in the calculation of basic and diluted earnings per share:


	Three Months Ended December 31,				Nine Months Ended December 31,
	(in thousands)				(in thousands)
	2021		2020		2021		2020
Weighted average common shares outstanding – basic		64,621		52,488		64,486		52,126
Net effect of dilutive stock options and non-vested stock (1)		475		—		—		—
Weighted average common shares outstanding – diluted		65,096		52,488		64,486		52,126

(1) For the three and nine months ended December 31, 2021 and 2020, 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.

8. 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 derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company's policy is to release the tax effects from accumulated other comprehensive income when all of the related assets or liabilities that gave rise to the accumulated other comprehensive income have been derecognized.

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, 2021 and March 31, 2021, the total amount of unrecognized tax benefits was $11,688 and $11,536, 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, 2021, 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 fiscal 2022 and future periods.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

The effective income tax rate for the three months ended December 31, 2021, was 13.2% as compared with (1.0)% for the three months ended December 31, 2020. The effective income tax rate for the nine months ended December 31, 2021, was (14.6)% as compared with (0.6)% for the nine months ended December 31, 2020. For the three and nine months ended December 31, 2021, the effective income 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, 2021, the Company settled its only foreign income tax examination. The Company believes appropriate provisions for all outstanding issues have been made for all jurisdictions and all open years.

9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

The Company sponsors several defined benefit pension plans covering some of its employees. Most employees 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.

In addition to the defined benefit pension plans, the Company provides certain healthcare benefits for eligible retired employees. Such benefits are unfunded. No active employees are eligible for these benefits. The vast majority of eligible retirees receive a fixed-dollar benefit they can use to purchase healthcare services. A small number of eligible retirees receive traditional retiree medical benefits for which the company pays all premiums. All retirees who are eligible for these traditional benefits are Medicare-eligible. Current plan documents reserve the right to amend or terminate the plans at any time, subject to applicable collective bargaining requirements for represented employees.

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 the Company's evaluation of data from fund managers and comparable market data.

Net Periodic Benefit Plan Costs

The components of net periodic benefit income for the Company's postretirement benefit plans are shown in the following table:


	Pension Benefits
	Three Months Ended December 31,						Nine Months Ended December 31,
	2021			2020			2021			2020
Components of net periodic benefit income:
Service cost	$	183		$	386		$	562		$	1,146
Interest cost		11,695			16,107			35,207			48,294
Expected return on plan assets		(33,361	)		(34,154	)		(100,188	)		(102,395	)
Amortization of prior service credits		26			243			93			728
Amortization of net loss		9,614			7,812			28,803			23,417
Curtailment loss		—			—			16,024			—
Settlement loss		—			—			3,826			—
Special termination benefits		—			—			196			—
Net periodic benefit income	$	(11,843	)	$	(9,606	)	$	(15,477	)	$	(28,810	)

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

The Company recognized net periodic benefit income from its other postretirement benefits plan of approximately $2,349 and $7,047 for the three and nine months ended December 31, 2021, respectively.

Upon the completion of the sale of the composites and large structure manufacturing operations as disclosed in Note 3, the expected future service of certain defined benefit pension plan participants was curtailed and certain participants became eligible for subsidized early retirement benefits under the terms of the relevant plan. As a result, the Company performed an interim remeasurement and recognized a onetime pension curtailment charge of approximately $16,024 which is presented in non-service defined benefit income on the accompanying condensed consolidated statement of operations for nine months ended December 31, 2021

Effective August 31, 2021, the Company settled the fully-funded pension obligation it had retained subsequent to its fiscal year 2019 divestiture of Triumph Geared Solutions - Toronto. The settlement resulted in the recognition of prior noncash actuarial losses of approximately $3,826 in the three months ended September 30, 2021. The settlement's impact on the accompanying condensed consolidated balance sheets was insignificant as the plan's assets were materially consistent with the pension obligation.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

10. STOCKHOLDERS' DEFICIT

Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss ("AOCI") by component for the three and nine months ended December 31, 2021 and 2020, were as follows:


	Currency Translation Adjustment			Unrealized Gains and Losses on Derivative Instruments			Defined Benefit Pension Plans and Other Postretirement Benefits				Total (1)
September 30, 2021	$	(45,104	)	$	(890	)	$	(457,211	)		$	(503,205	)
Other comprehensive (loss) income before reclassifications		(776	)		662			—				(114	)
Amounts reclassified from AOCI		—			(251	)		7,264		(2)		7,013
Net current period OCI		(776	)		411			7,264				6,899
December 31, 2021	$	(45,880	)	$	(479	)	$	(449,947	)		$	(496,306	)

September 30, 2020	$	(53,844	)	$	28		$	(671,570	)		$	(725,386	)
Other comprehensive income before reclassifications		12,637			1,878			—				14,515
Amounts reclassified from AOCI		—			437			4,265		(2)		4,702
Net current period OCI		12,637			2,315			4,265				19,217
December 31, 2020	$	(41,207	)	$	2,343		$	(667,305	)		$	(706,169	)

March 31, 2021	$	(42,161	)	$	1,015		$	(489,046	)		$	(530,192	)
Other comprehensive (loss) income before reclassifications		(3,719	)		(2,670	)		10,440				4,051
Amounts reclassified from AOCI		—			1,176			28,659		(2)		29,835
Net current period OCI		(3,719	)		(1,494	)		39,099				33,886
December 31, 2021	$	(45,880	)	$	(479	)	$	(449,947	)		$	(496,306	)

March 31, 2020	$	(62,045	)	$	(4,303	)	$	(680,100	)		$	(746,448	)
Other comprehensive income before reclassifications		20,838			8,308			—				29,146
Amounts reclassified from AOCI		—			(1,662	)		12,795		(2)		11,133
Net current period OCI		20,838			6,646			12,795				40,279
December 31, 2020	$	(41,207	)	$	2,343		$	(667,305	)		$	(706,169	)

(1)

Net of tax.

(2)

Includes amortization of actuarial losses and recognized prior service costs, which are included in net periodic pension income. Refer to Note 9 for additional disclosure regarding the Company's postretirement benefit plans.

11. SEGMENTS

The Company reports financial performance based on the following two reportable segments: Systems & Support and Aerospace Structures. 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 operating expenses (less depreciation and amortization) identifiable with that segment. Corporate includes general corporate administrative costs and any other costs not identifiable with one of the Company’s segments.

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

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

Selected financial information for each reportable segment is as follows:


	Three Months Ended December 31, 2021
	Total			Corporate & Eliminations			Systems & Support			Aerospace Structures
Net sales to external customers	$	319,249		$	—		$	236,281		$	82,968
Segment profit and reconciliation to consolidated income before income taxes:
Adjusted EBITDAP		47,043			—			47,450			(407	)

Reconciliation of segment profit to income before income taxes
Depreciation and amortization		(11,659	)		(733	)		(7,821	)		(3,105	)
Interest expense and other, net		(32,319	)
Corporate expenses		(5,533	)
Share-based compensation expense		(2,592	)
Amortization of acquired contract liabilities		938
Non-service defined benefit income		14,400
Debt extinguishment loss		(1,935	)
Income before income taxes		8,343

Total capital expenditures	$	8,336		$	4		$	7,984		$	348
Total assets	$	1,752,539		$	167,893		$	1,394,608		$	190,038


	Three Months Ended December 31, 2020
	Total			Corporate & Eliminations			Systems & Support			Aerospace Structures
Net sales to external customers	$	425,994		$	—		$	263,638		$	162,356
Intersegment sales (eliminated in consolidation)		—			(536	)		482			54
Segment profit and reconciliation to consolidated income before income taxes:
Adjusted EBITDAP		61,407			—			46,746			14,661

Reconciliation of segment profit to loss before income taxes
Depreciation and amortization		(22,119	)		(989	)		(8,353	)		(12,777	)
Interest expense and other, net		(44,881	)
Corporate expenses		(8,483	)
Share-based compensation expense		(3,679	)
Loss on sale of assets and businesses		(45,273	)
Amortization of acquired contract liabilities		6,867
Non-service defined benefit income		12,432
Impairment of rotable inventory		(23,689	)

Loss before income taxes		(67,418	)

Total capital expenditures	$	6,184		$	158		$	2,308		$	3,718

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)


	Nine Months Ended December 31, 2021
	Total			Corporate & Eliminations			Systems & Support			Aerospace Structures
Net sales to external customers	$	1,073,291		$	—		$	743,444		$	329,847
Intersegment sales (eliminated in consolidation)		—			(47	)		31			16
Segment profit and reconciliation to consolidated income before income taxes:
Adjusted EBITDAP		159,327			—			135,345			23,982

Reconciliation of segment profit to loss before income taxes
Depreciation and amortization		(40,035	)		(2,592	)		(24,765	)		(12,678	)
Interest expense and other, net		(105,060	)
Corporate expenses		(36,164	)
Share-based compensation expense		(7,664	)
Loss on sale of assets and businesses		(13,629	)
Amortization of acquired contract liabilities		3,645
Non-service defined benefit income		23,127
Debt extinguishment loss		(11,624	)

Loss before income taxes		(28,077	)

Total capital expenditures	$	15,817		$	518		$	11,741		$	3,558


	Nine Months Ended December 31, 2020
	Total			Corporate & Eliminations			Systems & Support			Aerospace Structures
Net sales to external customers	$	1,402,886		$	—		$	755,290		$	647,596
Intersegment sales (eliminated in consolidation)		—			(4,357	)		2,888			1,469
Segment profit and reconciliation to consolidated income before income taxes:
Adjusted EBITDAP		131,067			—			110,983			20,084

Reconciliation of segment profit to loss before income taxes
Depreciation and amortization		(72,819	)		(2,652	)		(24,830	)		(45,337	)
Interest expense and other, net		(132,344	)
Corporate expenses		(42,027	)
Share-based compensation expense		(9,086	)
Loss on sale of assets and businesses		(46,020	)
Amortization of acquired contract liabilities		35,017
Non-service defined benefit income		37,275
Impairment of rotable inventory		(23,689	)
Impairment of long-lived assets		(252,382	)

Loss before income taxes		(375,008	)

Total capital expenditures	$	18,988		$	801		$	11,819		$	6,368

During the three months ended December 31, 2021 and 2020, the Company had foreign sales of $73,093 and $78,440, respectively. During the nine months ended December 31, 2021 and 2020, the Company had foreign sales of $231,136 and $267,370, respectively.

12. 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

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

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.

As the Company completes its restructuring plans as disclosed in Note 13, 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. For example, the Company participates in a multiemployer pension plan for the benefit of certain represented employees at its Spokane, Washington, composites manufacturing operations. Under the terms of the multiemployer pension plan, it is reasonably possible that the Company will trigger a withdrawal liability related to the exit of the related facilities and termination of the affected employees. The amount of this potential liability is determined based on the funded status of the plan at the time of withdrawal from the plan. The funded status of the plan is measured by estimating the value of the plan's assets and liabilities, and these values can change significantly based on market conditions and changes in actuarial assumptions made by the plan sponsor. If a withdrawal liability is triggered, the obligation would likely be satisfied through annual payments over a period of at least ten years.

Triumph Group, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollars in thousands, except per share data)

13. RESTRUCTURING

As disclosed in the Company's Form 10-K for the fiscal year ended March 31, 2020, 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, 2020. During the nine months ended December 31, 2021, the Company incurred costs of $1,153, $11,447, and $432, within Systems & Support, Aerospace Structures, and its corporate headquarters, respectively, for total restructuring costs of $13,031. The restructuring costs represent third-party facility closures, third-party consulting costs, and severance. The Company estimates that it will incur consolidated restructuring costs of approximately $15,000 for the fiscal year ended March 31, 2022, with the majority of the remaining costs associated with Aerospace Structures facility closures.

14. SUBSEQUENT EVENTS

Subsequent to December 31, 2021, the Company entered into a definitive agreement to sell its manufacturing operations located in Stuart, Florida. The Stuart operations specialize in the assembly of large, complex metallic structures such as wing and fuselage assemblies. Specific terms and conditions of the sale are still being finalized. The transaction is subject to customary closing conditions and is expected to close in the first half of calendar year 2022 and result in a gain. The operating results of the Stuart, Florida, operations are included within the Aerospace Structures reportable segment. As of December 31, 2021, the Board of Directors had not committed to a plan to sell the Stuart operations due to uncertainty pertaining to specific terms and conditions, and therefore the transaction did not meet the requirements for the related assets and liabilities to be classified as held for sale on the accompanying condensed consolidated balance sheets.

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 and notes thereto contained elsewhere herein.

OVERVIEW

Business

We are a major supplier to the aerospace industry and have two reportable segments: (i) Systems & Support, whose companies’ revenues are derived from integrated solutions, including design, development and support of proprietary components, subsystems and systems, production of complex assemblies using external designs, as well as full life cycle solutions for commercial, regional, and military aircraft; and (ii) Aerospace Structures, whose companies supply commercial, business, and regional manufacturers with large metallic 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.

Divestitures

During the fiscal year ended March 31, 2021, we divested of a number of our assets and operations, including the transfer of the assets and certain liabilities associated with our Gulfstream G650 wing supply chain activities. The operating results associated with the G650 wing supply chain activities were included within Aerospace Structures through the date of transfer. We recognized a net loss of approximately $0.8 million upon the completion of the transfer of the G650 wing supply chain activities in the fiscal year ended March 31, 2021.

As disclosed in Note 3, in May 2021 we completed the divestiture of our composites manufacturing operations located in Milledgeville, Georgia, and Rayong, Thailand, as well as our large structure manufacturing operations located in Red Oak, Texas. The related assets and liabilities associated with these divestitures were classified as held for sale as of March 31, 2021, and we recognized combined net losses of approximately $102.5 million in the year ended March 31, 2021. Upon the completion of the divestiture, we recognized an additional loss of approximately $6.0 million primarily as a result of changes in working capital balances. These losses are presented on the accompanying condensed consolidated statements of operations within loss on sale of assets and businesses. The operating results associated with the composites and large structure manufacturing operations were included within Aerospace Structures through the date of divestiture.

As disclosed in Note 14, subsequent to December 31, 2021, we entered into a definitive agreement to sell our manufacturing operations located in Stuart, Florida. The Stuart operations specialize in the assembly of large, complex metallic structures such as wing and fuselage assemblies. Upon closing of the sale of the Stuart operations, we will have exited our structures business and reshaped our portfolio of companies to consist of businesses providing systems and aftermarket services. Closing is expected to occur in the first half of calendar year 2022. The operating results associated with the Stuart operations are included within Aerospace Structures.

Refer to Note 3 for a discussion of other less significant divestitures occurring through December 31, 2021. Including the $6.0 million loss referred to above, in the nine months ended December 31, 2021, the Company recognized total losses on the sale of assets and businesses of approximately $13.6 million.

Summary of Significant Financial Results

Significant financial results for the third quarter of the fiscal year ending March 31, 2022, include:

•

Net sales were $319.2 million compared with $426.0 million for the prior year period.

•

Operating income was $28.2 million compared with an operating loss of $35.0 million for the prior year period.

•

Net income was $7.2 million, or $0.11 per diluted common share, compared with a net loss of $68.1 million, or ($1.30) per diluted common share, for the prior year period.

•

Backlog as of December 31, 2021, was $1.95 billion, of which, we estimate that approximately $1.13 billion will be shipped by December 31, 2022.

•

We used $170.0 million of cash in operating activities for the nine months ended December 31, 2021, as compared with cash used in operations of $195.9 million in the comparable prior year period.

Restructuring

We have committed to several plans that incorporated the restructuring of certain of our businesses. As of March 31, 2021, with the exception of two pending facility closures to be completed in fiscal 2022 or 2023, we have substantially completed these plans. For the nine months ended December 31, 2021 and 2020, we incurred $13.0 million and $32.7 million in restructuring costs, respectively. Full fiscal 2022 restructuring costs are expected to be in the range of $15.0 million.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

COVID-19 Pandemic Response

We are unable at this time to reasonably estimate potential future additional financial impacts or a range of loss, if any, due to continued uncertainties related to the impacts of the COVID-19 pandemic on our operations, supply chain, and customers. Any such impacts, including any changes in our estimates, could have a material adverse effect on our financial position, results of operations, and cash flows. Key factors determining the potential impacts include the severity and duration of the pandemic which could be impacted by the emergence and circulation of new variants of SARS-CoV-2, the virus that causes COVID-19; governmental, business, and individuals' actions in response to the pandemic; and the development, availability, and public acceptance of effective treatments and vaccines. These factors are not within our control. In response to the continued uncertainties arising from the impact of the COVID-19 pandemic, we have maintained certain of the cost reduction initiatives originally implemented in late fiscal 2020.

Pursuant to the Biden Administration’s Executive Order 14042, all U.S. based employees of Triumph and certain of its suppliers, industry partners, and contractors working directly or indirectly on covered government contracts, or working at a facility where those contracts are performed, administered, or otherwise supported, must be fully vaccinated, or have an approved medical or religious accommodation. This includes employees who telework. A majority of our workforce is already fully vaccinated. While we are in the process of complying with the requirements of this executive order across our workforce and actively taking steps to assess and mitigate risks arising from vaccine requirements, we continue to monitor court rulings with regard to certain of the legal challenges that have been raised in response to Executive Order 14042. If the vaccine mandate is upheld by court ruling, it is uncertain to what extent compliance with the vaccine mandate may result in workforce attrition for us or our customers and suppliers. If attrition is significant, our operations and ability to execute on our contracts could be adversely affected.

Significant Developments in Key Programs

Discussion of significant developments on key programs is included below.

Boeing 787

The Boeing 787 program represented approximately 6% of revenue for the fiscal year ended March 31, 2021. During 2020, Boeing experienced significant reductions in deliveries due to the impacts of the COVID-19 pandemic as well as production issues and associated rework. Boeing expanded the scope of its production inspections, and those inspections and associated rework have and continue to delay scheduled deliveries. While Boeing resumed deliveries of the 787 aircraft in March, Boeing announced in July 2021 that additional rework requirements on undelivered 787 aircraft had been identified and that, based on their assessment of the time required to complete the rework, the 787 production rate would temporarily be reduced to two per month, gradually returning to a higher rate. In January 2022, Boeing announced that the rework activities will take longer than previously expected and that program production rates remain low. Boeing also disclosed that China is a significant market for the 787 program, and if the program is unable to obtain orders from China in future quarters, Boeing may be required to adjust production rate assumptions further.

Boeing 767

Boeing's 767 program includes the commercial program and a derivative to support the related tanker program. The 767 currently has a production rate of three aircraft per month. Of our $1.95 billion in backlog as of December 31, 2021, approximately 22% relates to the 767 production from our Stuart, Florida, operations, the results of which are included in Aerospace Structures.

Boeing 747-8

Production on this program has substantially completed as of September 30, 2021. Production facility exit plans are complete. Certain storage facility exit plans are underway and expected to result in additional cost to exit of approximately $1.0 million through the first fiscal quarter of 2023.

Although none of the 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

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

that any of these programs will significantly dilute our future consolidated margins, although a prolonged impact of the COVID-19 pandemic could result in changes in expectations.

RESULTS OF OPERATIONS

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

Non-GAAP Financial Measures

We prepare and publicly release annual audited and quarterly unaudited financial statements prepared in accordance with U.S. GAAP. In accordance with Securities and Exchange Commission (the "SEC") rules, 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 loss before interest, income taxes, amortization of acquired contract liabilities, legal settlements, 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 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. In calculating Adjusted EBITDA and Adjusted EBITDAP, we exclude from net income 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, 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. 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 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 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 noncash charges, such as depreciation and amortization, and nonoperating 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.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Set forth below are descriptions of the financial items that have been excluded from our net income to calculate Adjusted EBITDA and Adjusted EBITDAP and the material limitations associated with using these non-GAAP financial measures as compared with net income from continuing operations:

•

Gains or losses from sale of assets and businesses may be useful for investors to consider because they reflect gains or losses from sale of operating units or other assets. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations.

•

Legal judgments and settlements, 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 certain pension related transactions such as curtailments, settlements, early retirement or other 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 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 noncash 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.

•

Amortization expense and nonrecurring asset impairments (including goodwill, intangible asset impairments, and nonrecurring rotable inventory impairments) may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of trade names, product rights, licenses, or, in the case of goodwill, other assets that are not individually identified and separately recognized under U.S. GAAP, or, in the case of nonrecurring asset impairments, the impact of unusual and nonrecurring events affecting the estimated recoverability of existing assets. 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.

•

Share-based compensation may be useful for investors to consider because it represents a portion of the total compensation to management and the board of directors. 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's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Management compensates for the above-described limitations by 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. Beginning in the current quarter, we began excluding share-based compensation from net income when calculating Adjusted EBITDAP in order to improve comparability with certain of our peers that have similar adjustments and measurements and to more closely align the calculation with Adjusted EBITDAP as defined in certain of our debt agreements.

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,
	2021			2020			2021			2020
Net income (loss) (U.S. GAAP measure)	$	7,238		$	(68,116	)	$	(32,183	)	$	(377,391	)
Income tax expense		1,105			698			4,106			2,383
Interest expense and other		32,319			44,881			105,060			132,344
Debt extinguishment loss		1,935			—			11,624			—
Pension settlement, curtailment, and special termination benefit charges		—			—			20,046			—
Impairment of rotable inventory		—			23,689			—			23,689
Loss on sale of assets and businesses, net		—			45,273			13,629			46,020
Amortization of acquired contract liabilities		(938	)		(6,867	)		(3,645	)		(35,017	)
Depreciation and amortization*		11,659			22,119			40,035			325,201
Adjusted EBITDA (non-GAAP measure)	$	53,318		$	61,677		$	158,672		$	117,229
Non-service defined benefit income (excluding curtailments and special termination benefits)		(14,400	)		(12,432	)		(43,173	)		(37,275	)
Adjusted EBITDAP (non-GAAP measure), as historically presented		38,918			49,245			115,499			79,954
Share-based compensation		2,592			3,679			7,664			9,086
Adjusted EBITDAP (non-GAAP measure)	$	41,510		$	52,924		$	123,163		$	89,040

* Includes impairment charges related to long-lived assets in the first quarter of fiscal 2021

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


	Three Months Ended December 31, 2021
	Total			Systems & Support			Aerospace Structures			Corporate/ Eliminations
Operating income (loss)	$	28,197		$	40,567		$	(3,512	)	$	(8,858	)
Amortization of acquired contract liabilities		(938	)		(938	)		—			—
Depreciation and amortization		11,659			7,821			3,105			733
Adjusted EBITDAP, as historically presented		38,918			47,450			(407	)		(8,125	)
Share-based compensation		2,592			—			—			2,592
Adjusted EBITDAP	$	41,510		$	47,450		$	(407	)	$	(5,533	)


	Three Months Ended December 31, 2020
	Total			Systems & Support			Aerospace Structures			Corporate/ Eliminations
Operating (loss) income	$	(34,969	)	$	19,010		$	4,445		$	(58,424	)
Loss on sale of assets and businesses		45,273			—			—			45,273
Impairment of rotable inventory		23,689			23,689			—			—
Amortization of acquired contract liabilities		(6,867	)		(4,306	)		(2,561	)		—
Depreciation and amortization		22,119			8,353			12,777			989
Adjusted EBITDAP, as historically presented		49,245			46,746			14,661			(12,162	)
Share-based compensation		3,679			—			—			3,679
Adjusted EBITDAP	$	52,924		$	46,746		$	14,661		$	(8,483	)

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)


	Nine Months Ended December 31, 2021
	Total			Systems & Support			Aerospace Structures			Corporate/ Eliminations
Operating income (loss)	$	65,480		$	114,213		$	11,316		$	(60,049	)
Loss on sale of assets and businesses		13,629			—			—			13,629
Amortization of acquired contract liabilities		(3,645	)		(3,633	)		(12	)		—
Depreciation and amortization		40,035			24,765			12,678			2,592
Adjusted EBITDAP, as historically presented		115,499			135,345			23,982			(43,828	)
Share-based compensation		7,664			—			—			7,664
Adjusted EBITDAP	$	123,163		$	135,345		$	23,982		$	(36,164	)


	Nine Months Ended December 31, 2020
	Total			Systems & Support			Aerospace Structures			Corporate/ Eliminations
Operating (loss) income	$	(279,939	)	$	74,033		$	(254,187	)	$	(99,785	)
Loss on sale of assets and businesses		46,020			—			—			46,020
Impairment of rotable inventory		23,689			23,689			—			—
Amortization of acquired contract liabilities		(35,017	)		(11,569	)		(23,448	)		—
Depreciation and amortization*		325,201			24,830			297,719			2,652
Adjusted EBITDAP, as historically presented		79,954			110,983			20,084			(51,113	)
Share-based compensation		9,086			—			—			9,086
Adjusted EBITDAP	$	89,040		$	110,983		$	20,084		$	(42,027	)

* Includes impairment charges related to long-lived assets

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

Three months ended December 31, 2021, compared with three months ended December 31, 2020


	Three Months Ended December 31,
	2021			2020
	(in thousands)
Net sales	$	319,249		$	425,994
Segment operating income	$	37,055		$	23,455
Corporate expense		(8,858	)		(58,424	)
Total operating income (loss)		28,197			(34,969	)
Interest expense and other		32,319			44,881
Debt extinguishment loss		1,935			—
Non-service defined benefit income		(14,400	)		(12,432	)
Income tax expense		1,105			698
Net loss	$	7,238		$	(68,116	)

Net Sales

Organic sales adjusted for intersegment sales decreased $16.7 million, or 5.0%, with additional declines from the composites and large structure manufacturing operations, G650, and Staverton, United Kingdom, divestitures of $66.1 million and sunsetting programs (i.e., 747-8 and G280) of $23.9 million. Organic sales decreased primarily due to decreased volume on the 787 as a result of an announced production pause, decreased rotorcraft volume, and decreased volume as a result of the exit of our Spokane, Washington, operations. These decreases were partially offset by increased commercial narrow body production and $4.0 million recognized as a result of a nonrecurring licensing transaction. Net sales for the three months ended December 31, 2021, included $4.5 million in total nonrecurring revenues, as compared with $4.6 million in total nonrecurring revenues for the three months ended December 31, 2020.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Cost of Sales and Gross Margin

Organic cost of sales adjusted for intersegment sales decreased $32.6 million, or 12.2% with additional declines from the composites and large structure manufacturing operations, G650, and Staverton, United Kingdom, divestitures of $51.1 million and sunsetting programs of $24.7 million. Organic cost of sales decreased primarily due to the decreased volumes described above as well as a prior period impairment of rotable inventory of $23.7 million impairment. Organic gross margin for the three months ended December 31, 2021, was 25.7% compared with 19.6% for the three months ended December 31, 2020. The gross margin for the three months ended December 31, 2021, increased primarily as a result of the prior period impairment of rotable inventory and the licensing transaction described above.

Gross margin for the three months ended December 31, 2021, included net unfavorable cumulative catch-up adjustments on long-term contracts of $4.6 million. The unfavorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $6.4 million and gross unfavorable adjustments of $11.0 million. Gross margins for the three months ended December 31, 2020, included net favorable cumulative catch-up adjustments of $3.7 million.

Segment Operating Income

Organic segment operating income increased by $22.9 million, or 264.2%, primarily due to the increased margins described above, as well as decreased depreciation and amortization expense of approximately $2.0 million and decreased administrative compensation cost of $2.0 million. The divestitures and sunsetting programs resulted in decreases to operating income of approximately $9.3 million.

Corporate Expense

Corporate expenses decreased primarily due to decreased loss on sale of assets and businesses of $45.3 million.

Interest Expense and Other

Interest expense and other decreased due to lower relative debt levels as a result of current period redemptions as well as favorable changes in foreign currency exchange rates of approximately $3.0 million.

Non-service Defined Benefit Income

Non-service defined benefit income increased primarily due to changes in actuarial assumptions and experience.

Income Taxes

The effective income tax rate for the three months ended December 31, 2021, was 13.2% compared with (1.0)% for the three months ended December 31, 2020. For the three months ended December 31, 2021, the effective tax rate reflected a limitation on the recognition of tax benefits due to the full valuation allowance.

Business Segment Performance — Three months ended December 31, 2021, compared with three months ended December 31, 2020

We report our financial performance based on the following two reportable segments: Systems & Support and Aerospace Structures. Our Chief Operating Decision Maker ("CODM") utilizes Adjusted EBITDAP as a primary measure of profitability to evaluate performance of its segments and allocate resources.

The results of operations among our reportable segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. For example, Systems & Support, 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 engineering and manufacturing capabilities command a higher margin. Also, OEMs are increasingly focusing on assembly activities while outsourcing more manufacturing and repair to third parties, and as a result, are less of a competitive force than in previous years. This compares with Aerospace Structures, which generally includes long-term sole-source or preferred supplier contracts.

Refer to Note 1 for further details regarding the operations and capabilities of each of our reportable segments.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

We currently generate a majority of our revenue from clients in the commercial aerospace industry, the military, the business jet industry, and the regional airline industry. Our growth and financial results are largely dependent on continued demand for our products and services from clients in these industries. If any of these industries experiences a downturn, our clients in these sectors may conduct less business with us. The 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,					% Change			% of Total Sales
	2021		2020						2021			2020
	(in thousands)
NET SALES
Systems & Support	$	236,281	$	264,120			(10.5	)%		74.0	%		62.0	%
Aerospace Structures		82,968		162,410			(48.9	)%		26.0	%		38.1	%
Elimination of intersegment sales		—		(536	)		100.0	%		—			(0.1	)%
Total net sales	$	319,249	$	425,994			(25.1	)%		100.0	%		100.0	%


	Three Months Ended December 31,						% Change			% of Segment Sales
	2021			2020						2021			2020
	(in thousands)
SEGMENT OPERATING (LOSS) INCOME
Systems & Support	$	40,567		$	19,010			113.4	%		17.2	%		7.2	%
Aerospace Structures		(3,512	)		4,445			(179.0	)%		(4.2	)%		2.7	%
Corporate		(8,858	)		(58,424	)		84.8	%	n/a			n/a
Total segment operating (loss) income	$	28,197		$	(34,969	)		180.6	%		8.8	%		(8.2	)%


	Three Months Ended December 31,						% Change			% of Segment Sales
	2021			2020						2021			2020
	(in thousands)
Adjusted EBITDAP
Systems & Support	$	47,450		$	46,746			1.5	%		20.2	%		18.0	%
Aerospace Structures		(407	)		14,661			(102.8	)%		(0.5	)%		9.2	%
Corporate		(5,533	)		(8,483	)		34.8	%	n/a			n/a
	$	41,510		$	52,924			(21.6	)%		13.0	%		12.6	%

Systems & Support:

Net Sales

Organic net sales adjusted for intersegment sales decreased by $19.3 million, or 7.6%, with additional declines from the Staverton, United Kingdom, divestiture of $8.5 million. Organic sales decreased primarily due to decreased volume on the 787 as a result of an announced production pause and decreased rotorcraft volume partially offset by increased commercial narrow body production and $4.0 million recognized as a result of a nonrecurring licensing transaction.

Cost of Sales and Gross Margin

Organic cost of sales adjusted for intersegment sales decreased by $42.1 million, or 21.1%, with additional declines from the Staverton, United Kingdom, divestiture of $6.6 million. Organic cost of sales decreased primarily due to the decreased volumes described above as well as a prior period impairment of rotable inventory of $23.7 million. Gross margin for the three months ended December 31, 2021, was 33.2% compared with 21.8% for the three months ended December 31, 2020. Gross margin increased primarily as a result of the prior period impairment of rotable inventory and the licensing transaction described above.

Operating Income and Adjusted EBITDAP

Organic operating income increased by $22.7 million, or 127.2%, with additional declines from the Staverton, United Kingdom, divestiture of $1.2 million. Organic operating income increased primarily due to the increased margins described above. The increase in Adjusted EBITDAP year over year is due to the same factors that increased operating income except for the increase resulting from the prior period impairment of rotable inventory, which is excluded from Adjusted EBITDAP.

Operating Margin and Adjusted EBITDAP Margin

Systems & Support operating income and Adjusted EBITDAP as a percentage of segment sales both increased due to the factors described above except for the increase resulting from the prior period impairment of rotable inventory, which is excluded from Adjusted EBITDAP.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Aerospace Structures:

Net Sales

Organic net sales increased by $2.1 million, or 2.7%, offset by declines from the composites and large structure manufacturing operations and G650 divestitures of $57.6 million and sunsetting programs (i.e., 747-8 and G280) of $23.9 million. Net sales for the three months ended December 31, 2021, included $0.5 million in total nonrecurring revenues, as compared with $4.6 million in total nonrecurring revenues for the three months ended December 31, 2020.

Cost of Sales and Gross Margin

Organic cost of sales increased by $8.9 million, or 13.0%, offset by declines from the composites and large structure manufacturing operations and G650 divestitures of $44.5 million and sunsetting programs of $24.7 million. Organic gross margin for the three months ended December 31, 2021, was 3.7% compared with 12.5% for the three months ended December 31, 2020. The gross margin included net unfavorable cumulative catch-up adjustments of $4.9 million. The net unfavorable cumulative catch-up adjustments included gross favorable adjustments of $6.1 million and gross unfavorable adjustments of $11.0 million. The net favorable cumulative catch-up adjustment for the three months ended December 31, 2020, was $4.0 million.

Operating Income and Adjusted EBITDAP

Organic operating income increased by $0.2 million, or 2.1%, primarily due to decreased depreciation and amortization expense and decreased administrative compensation costs of approximately $2.7 million on lower headcount. The divestitures and sunsetting programs resulted in decreases to operating income of approximately $8.2 million. The decrease in Adjusted EBITDAP year over year is due to the same factors that decreased operating income except for the decrease from depreciation and amortization, which is excluded from Adjusted EBITDAP.

Operating Margin and Adjusted EBITDAP Margin

Operating loss as a percentage of segment sales decreased due to the decrease in operating income as noted above. These same factors affecting Adjusted EBITDAP contributed to the decrease in Adjusted EBITDAP margin except for the decrease from depreciation and amortization, which is excluded from Adjusted EBITDAP.

Nine months ended December 31, 2021, compared with nine months ended December 31, 2020


	Nine Months Ended December 31,
	2021			2020
	(in thousands)
Net sales	$	1,073,291		$	1,402,886
Segment operating income (loss)	$	125,529		$	(180,154	)
Corporate expenses		(60,049	)		(99,785	)
Total operating income (loss)		65,480			(279,939	)
Interest expense and other		105,060			132,344
Debt extinguishment loss		11,624			—
Non-service defined benefit income		(23,127	)		(37,275	)
Income tax expense		4,106			2,383
Net loss	$	(32,183	)	$	(377,391	)

Net Sales

Organic sales adjusted for intersegment sales increased $12.7 million, or 1.3%, offset by declines from the composites and large structure manufacturing operations, G650, and Staverton, United Kingdom, divestitures of $242.3 million and sunsetting programs (i.e., 747-8 and G280) of $100.0 million. Organic sales increased primarily due to increased repair and overhaul services, increased production rates on commercial narrow body platforms, and $4.0 million recognized as a result of a nonrecurring licensing transaction, partially offset by decreased volume on the 787 as a result of an announced production pause and decreased volume as a result of the exit of our Spokane, Washington, operations. Net sales for the nine months ended December 31, 2021, included $21.1 million in total nonrecurring revenues, as compared with $38.5 million in total nonrecurring revenues for the nine months ended December 31, 2020.

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Cost of Sales and Gross Margin

Organic cost of sales adjusted for intersegment sales decreased $34.6 million, or 4.4%, with additional declines from the composites and large structure manufacturing operations, G650, and Staverton, United Kingdom, divestitures of $194.8 million and sunsetting programs of $98.9 million. Organic cost of sales decreased primarily due to the prior period impairment of rotable inventory of $23.7 million impairment, decreased volume as a result of the exit of our Spokane, Washington, operations, and changes in sales mix. Organic gross margin for the nine months ended December 31, 2021, was 25.9% compared with 21.4% for the nine months ended December 31, 2020. The gross margin for the nine months ended December 31, 2021, increased primarily as a result of the prior period impairment of rotable inventory and the licensing transaction described above and the change in sales mix.

Gross margin for the nine months ended December 31, 2021, included net favorable cumulative catch-up adjustments on long-term contracts of $13.1 million. The favorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $24.0 million and gross unfavorable adjustments of $10.9 million. Gross margins for the nine months ended December 31, 2020, included net favorable cumulative catch-up adjustments of $19.3 million.

Segment Operating Income

Organic segment operating income increased by $341.6 million, or 145.0%, primarily due to long-lived asset impairment charges of $252.4 million in the nine months ended December 31, 2021, the increased margins described above, as well as decreased depreciation and amortization expense of approximately $32.8 million, decreased credit losses of approximately $4.7 million, decreased rent expense of approximately $3.5 million, and decreased administrative compensation cost of approximately $3.0 million. The divestitures and sunsetting programs resulted in additional decreases to operating income of approximately $35.9 million.

Corporate Expense

The corporate expenses increased primarily due to decreased loss on sale of assets and businesses of $32.4 million, decreased legal and consulting expense of approximately $5.1 million, and decreased compensation cost of approximately $3.0 million on lower headcount.

Interest Expense and Other

Non-service Defined Benefit Income

Non-service defined benefit income decreased primarily due the recognition of curtailment and settlement losses of approximately $20.0 million in the aggregate upon the completion of the composites and large structure manufacturing divestitures and the settlement of the fully-funded pension obligation it had retained subsequent to its fiscal year 2019 divestiture of Triumph Geared Solutions - Toronto, partially offset by increases due to changes in actuarial assumptions and experience.

Income Taxes

The effective income tax rate for the nine months ended December 31, 2021, was (14.6)% compared with (0.6)% for the nine months ended December 31, 2020. For the nine months ended December 31, 2021, 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, 2021, compared with nine months ended December 31, 2020


	Nine Months Ended December 31,						% Change			% of Total Sales
	2021			2020						2021			2020
	(in thousands)
NET SALES
Systems & Support	$	743,475		$	758,178			(1.9	)%		69.3	%		54.0	%
Aerospace Structures		329,863			649,065			(49.2	)%		30.7	%		46.3	%
Elimination of intersegment sales		(47	)		(4,357	)		98.9	%		—			(0.3	)%
Total net sales	$	1,073,291		$	1,402,886			(23.5	)%		100.0	%		100.0	%

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)


	Nine Months Ended December 31,						% Change			% of Segment Sales
	2021			2020						2021			2020
	(in thousands)
SEGMENT OPERATING INCOME (LOSS)
Systems & Support	$	114,213		$	74,033			54.3	%		15.4	%		9.8	%
Aerospace Structures		11,316			(254,187	)		104.5	%		3.4	%		(39.2	)%
Corporate		(60,049	)		(99,785	)		39.8	%	n/a			n/a
Total segment operating income (loss)	$	65,480		$	(279,939	)		123.4	%		6.1	%		(20.0	)%


	Nine Months Ended December 31,						% Change			% of Segment Sales
	2021			2020						2021			2020
	(in thousands)
Adjusted EBITDAP
Systems & Support	$	135,345		$	110,983			22.0	%		18.3	%		14.9	%
Aerospace Structures		23,982			20,084			19.4	%		7.3	%		3.2	%
Corporate		(36,164	)		(42,027	)		14.0	%	n/a			n/a
	$	123,163		$	89,040			38.3	%		11.5	%		6.5	%

Systems & Support:

Net Sales

Organic net sales adjusted for intersegment sales decreased by $5.5 million, or 0.8%, with additional declines from the Staverton, United Kingdom, divestiture of $9.2 million. Organic sales decreased primarily due to decreased volume on the 787 as a result of an announced production pause and decreased rotorcraft volume partially offset by increased commercial narrow body production, increased repair and overhaul services, and approximately $4.0 million recognized as a result of a nonrecurring licensing transaction.

Cost of Sales and Gross Margin

Organic cost of sales adjusted for intersegment sales decreased by $48.5 million, or 8.9%, with additional declines from the Staverton, United Kingdom, divestiture of $7.8 million. Organic cost of sales decreased primarily due to the decreased volumes described above as well as a prior period impairment of rotable inventory of $23.7 million. Gross margin for the nine months ended December 31, 2021, was 32.0% compared with 25.9% for the nine months ended December 31, 2020. Gross margin increased primarily as a result of the prior period impairment of rotable inventory, the licensing transaction described above, and changes in sales mix.

Operating Income and Adjusted EBITDAP

Organic operating income increased by $41.3 million, or 56.3%, with additional declines from the Staverton, United Kingdom, divestiture of $1.2 million. Organic operating income increased primarily due to the increased margins described above as well as decreased consulting costs of approximately $1.7 million and decreased credit losses of $0.8 million, partially offset by an increase in compensation cost of approximately $5.4 million. The increase in Adjusted EBITDAP year over year is due to the same factors that increased operating income except for the increase resulting from the prior period impairment of rotable inventory, which is excluded from Adjusted EBITDAP.

Operating Margin and Adjusted EBITDAP Margin

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

Aerospace Structures:

Net Sales

Organic net sales increased by $14.0 million, or 5.3%, offset by declines from the composites and large structure manufacturing operations and G650 divestitures of $233.1 million and sunsetting programs (i.e., 747-8 and G280) of $100.0 million. Organic net sales increased due to initial recoveries from the impacts of the COVID-19 pandemic mainly reflected in increased volumes on 767. Net sales for the nine months ended December 31, 2021, included $17.1 million in total nonrecurring revenues, as compared with $38.5 million in total nonrecurring revenues for the nine months ended December 31, 2020.

Cost of Sales and Gross Margin

Organic cost of sales increased by $9.6 million, or 3.9%, offset by declines from the composites and large structure manufacturing operations and G650 divestitures of $187.0 million and sunsetting programs of $98.9 million. The increase in organic cost of sales is due to increase in sales described above. Organic gross margin for the nine months ended December 31, 2021, was 9.9% compared with 8.7% for the nine months ended December 31, 2020, largely reflecting a change in sales mix. The gross margin included net favorable cumulative catch-up adjustments of $12.9 million. The net favorable cumulative catch-up adjustments included gross favorable adjustments of $23.7 million and gross unfavorable adjustments of $10.9 million. The net favorable cumulative catch-up adjustment for the nine months ended December 31, 2020, was $18.7 million.

Operating Income and Adjusted EBITDAP

Organic operating income increased by $300.2 million, or 97.2%, primarily due to long-lived asset impairment charges of $252.4 million in the nine months ended December 31, 2020, the increased margins described above, as well as decreased depreciation and amortization expense of approximately $32.6 million, decreased compensation costs of approximately $8.6 million, decreased credit losses of approximately $3.8 million, decreased rent expense of approximately $3.5 million, decreased research and development costs of approximately $2.0 million, and decreased information technology costs of approximately $2.9 million. The divestitures and sunsetting programs resulted in additional decreases to operating income of approximately $34.7 million. The increase in Adjusted EBITDAP year over year is due to the same factors that increased operating income except for the increase resulting from the long-lived asset impairment and depreciation and amortization expense, which are excluded from Adjusted EBITDAP.

Operating Margin and Adjusted EBITDAP Margin

Operating income as a percentage of segment sales increased due to the increase in operating income as noted above. These same factors affecting Adjusted EBITDAP contributed to the increase in Adjusted EBITDAP margin.

Liquidity and Capital Resources

Operating Cash Flows

Our working capital needs are generally funded through our current cash and cash equivalents, cash flows from operations, and the availability of proceeds from the Securitization Facility. During the nine months ended December 31, 2021, we had a net cash outflow of $170.0 million from operating activities compared with a net cash outflow of $195.9 million for the nine months ended December 31, 2020, an improvement of $25.9 million. Cash flows included stable inventory levels and lower accounts payable. Reflecting the change in our portfolio of businesses that is a result of our strategic divestitures, working capital stability has improved in the nine months ended December 31, 2021, compared with the nine months ended December 31, 2020. Cash flows from operations improved in the third fiscal quarter, and we expect that trend to continue in the fourth fiscal quarter. Cash flows from operations also included approximately $62.4 million in the liquidation of prior period customer advances. Including $9.1 million in redemption premiums, interest payments were approximately $110.5 million for the nine months ended December 31, 2021, as compared with $79.4 million for the nine months ended December 31, 2020. The increase in interest payments was the specific timing of interest payments under the First Lien Notes and the 2022 Notes as compared with the related redemptions disclosed in Note 6.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provided for, among other things, deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021, and the remaining 50% due December 31, 2022. Of the approximately $17.8 million of these deferred payments, we paid approximately $8.9 million in December 2021. The remaining $8.9 million will be repaid in December 2022 in accordance with the provisions of the CARES Act described above. The deferred amounts are recorded within accrued expenses on our condensed consolidated balance sheet as of December 31, 2021.

As disclosed in Note 2, in November 2021 the Company entered into an agreement with the Department of Transportation (“DOT”) under the Aviation Manufacturing Jobs Protection Program (“AMJP”) for a grant of up to $21.3 million. The Company received the first installment of $10.6 million under the grant in November 2021 and classified the cash receipt within cash from operations. The Company expects to receive additional funds from the DOT as costs are incurred over the remainder of the

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

service period with final installment to be received upon final confirmation from the DOT of the Company's compliance with the terms of the agreement. Refer to Note 2 for further discussion.

Investing Cash Flows

Cash flows provided by investing activities for the nine months ended December 31, 2021, increased $197.7 million from the nine months ended December 31, 2020. Cash flows provided by investing activities for the nine months ended December 31, 2021, included cash from the sales of assets and businesses of $220.6 million as a result of the completion of the divestiture of our composites and large structure manufacturing operations, the asset sales associated with the exit of our Spokane, Washington, manufacturing operations, and the sale of certain legacy product lines of our Staverton, United Kingdom, operations as described in Note 3. As part of the activities necessary to bring the composites and large structure manufacturing operations divestiture to completion, we used approximately $21.6 million net of transaction related costs to acquire the manufacturing facility in our Rayong, Thailand, operations. This facility was included in the assets transferred in the divestiture. We also used approximately $15.8 million for capital expenditures and $2.1 million as part of the formation of a joint venture to which future cash and non-cash contributions are expected to be insignificant. Cash flows used in investing activities for the nine months ended December 31, 2020, included cash from the sale of assets and businesses of $2.4 million with additional investing outflows from capital expenditures of $19.0 million. We currently expect full year capital expenditures in fiscal 2022 to be in the range of $25.0 million, of which approximately $21.0 million pertains to our core Systems & Support operating segment. The majority of our fiscal 2022 capital expenditures are capital investments designed to improve our manufacturing efficiency and expand our capabilities.

Financing Cash Flows

Cash flows used in financing activities for the nine months ended December 31, 2021, were $391.6 million, compared with cash flows provided by financing activities for the nine months ended December 31, 2020, of $197.7 million. In the nine months ended December 31, 2021, the following significant financing cash flow events occurred:

•

We used approximately $236.5 million to redeem 100% of the outstanding principal balance under the 2022 Notes

•

As disclosed in Note 3, under the terms of the First Lien Notes indenture, we were required to use approximately $120.0 million to redeem approximately $136.8 million of the outstanding principle balance and pay a redemption premium of approximately $9.1 million.

The remainder of financing cash flows pertain primarily to borrowings and payments under finance leases and the repurchase of common stock to satisfy employee tax withholding obligations resulting from equity compensation. As of December 31, 2021, we had $206.1 million of cash on hand and $75.4 million was available under our Securitization Facility (subject to any additional constraints arising from the balance of eligible receivables at that time) after giving effect to approximately $24.6 million in outstanding letters of credit, all of which were accruing interest at 1.25% per annum.

As disclosed in Note 12, the exit of our composites manufacturing operations in Spokane, Washington could trigger a multiemployer pension plan withdrawal obligation that, if incurred, would likely be satisfied through annual payments over a period of at least ten years.

With the redemption of the 2022 Notes in the nine months ended December 31, 2021, the 2025 Notes are our senior unsecured obligations and rank equally in right of payment with all of our other existing and future senior unsecured indebtedness and senior in right of payment to all of our existing and future subordinated indebtedness. The 2025 Notes are guaranteed on a full, joint and several basis by each of our existing and future domestic restricted subsidiaries that is a borrower under any of our credit facilities or that guarantees any of our debt or that of any of our restricted subsidiaries, in each case incurred under any of our credit facilities.

Pursuant to the documentation governing the 2025 Notes, we may redeem, at specified redemption prices, some or all of the 2025 Notes prior to their stated maturities, subject to certain limitations set forth in the indenture governing the 2025 Notes. We are 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 our assets. These restrictions and prohibitions are subject to certain qualifications and exceptions.

The indentures governing the 2025 Notes, as well as Securitization Facility, contain covenants and restrictions that, among other things, limit our ability and the ability of any of the Guarantor Subsidiaries to (i) grant liens on our 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 2025 Notes); and (viii) enter into transactions with affiliates. We are currently in compliance with all covenants under our debt documents and expect to remain in compliance for the foreseeable future.

The First Lien Notes, the 6.250% Senior Secured Notes due September 15, 2024 (the “2024 Notes”),and the guarantees related to the foregoing are secured, subject to permitted liens, by first-priority or second-priority liens (as applicable) on substantially all of our assets and the assets of our subsidiary guarantors (the “Collateral”). The First Lien Notes and the 2024 Notes and the

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

related guarantees are not secured by the assets of Non-Guarantor Subsidiaries (as defined below). Some of our assets are excluded from the Collateral, including certain real property assets. Currently, our only consolidated subsidiaries that are not guarantors of the First Lien Notes, 2022 Notes, the 2024 Notes and the 2025 Notes (the "Non-Guarantor Subsidiaries") are: (i) the receivables securitization special purpose entity, and (ii) the foreign operating subsidiaries.

In November 2021, the Company amended the Securitization Facility, increasing the purchase limit from $75.0 million to $100.0 million, modifying certain other terms to increase eligible receivables and availability, and extending the term through November 2024.

For further information on our long-term debt, see Note 6.

The following tables present summarized financial information of the Company and the Guarantor Subsidiaries on a combined basis. The combined summarized financial information eliminates intercompany balances and transactions among the Company and the Guarantor Subsidiaries and equity in earnings and investments in any Guarantor Subsidiaries or Non-Guarantor Subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and Guarantor Subsidiaries.


Parent and Guarantor Summarized Financial Information	December 31,		March 31,
Summarized Balance Sheet	2021		2021
	(in thousands)
Assets
Due from Non-Guarantor Subsidiaries	$	3,394	$	441
Current assets		697,947		1,232,055
Noncurrent assets		679,489		748,480
Noncurrent receivable from Non-Guarantor Subsidiaries		67,903		107,059

Liabilities
Due to Non-Guarantor Subsidiaries		85,326		14,556
Current liabilities		525,033		664,260
Noncurrent liabilities		1,992,721		2,556,915

			Nine Months Ended
Summarized Statement of Operations			December 31, 2021
			(in thousands)
Net sales to Non-Guarantor Subsidiaries				2,539
Net sales to unrelated parties				985,053
Gross profit				254,644
Loss from continuing operations before income taxes				(33,798	)
Net loss				(34,501	)

Critical Accounting Policies

Our critical accounting policies are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and notes accompanying the consolidated financial statements that appear in the Annual Report on Form 10-K for the fiscal year ended March 31, 2021. 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, 2021, in our 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

Management's Discussion and Analysis of

Financial Condition and Results of Operations

(continued)

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, 2021, filed with the SEC on May 20, 2021, and in our quarterly reports on Form 10-Q.

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, 2021. 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 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, 2021, 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, 2021.

(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, 2021.

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.

Item 6. Exhibits.


Exhibit 10.1		Amendment No. 14 to Blocked Account Agreement, effective as of November 5, 2021, between Triumph Receivables LLC, Triumph Group, Inc., and PNC Bank, National Association.
Exhibit 10.2		Twelfth Amended and Restated Purchaser Group Fee Letter, effective as of November 5, 2021, among Triumph Receivables, LLC, Triumph Group, Inc., the various purchasers and purchaser agents from time to time party thereto, PNC Capital Markets LLC, and PNC Bank, National Association.
Exhibit 10.3		Second Amended and Restated Performance Guaranty, effective as of November 5, 2021, by Triumph Group, Inc., in favor of PNC Bank, National Association.
Exhibit 10.4		First Amendment to Amended and Restated Purchase and Sale Agreement, effective as of November 5, 2021, among Triumph Group, Inc., Triumph Receivables, LLC, and each of the entities listed on the signature pages hereto as an Originator.
Exhibit 10.5		Second Amendment to Amended and Restated Receivables Purchase Agreement, effective as of November 5, 2021, among Triumph Group, Inc., Triumph Receivables, LLC, and PNC Bank, National Association.
Exhibit 22.1		List of Subsidiary Guarantors and Issuers of Guaranteed Securities.
Exhibit 31.1		Certification by President and Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
Exhibit 31.2		Certification by Senior Vice President and Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
Exhibit 32.1		Certification of Periodic Report by President and Chief Executive Officer Furnished Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 Sarbanes-Oxley Act of 2002.
Exhibit 32.2		Certification of Periodic Report by Senior Vice President and Chief Financial Officer Furnished Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 Sarbanes-Oxley Act of 2002.
Exhibit 101		The following financial information from Triumph Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, formatted in iXBRL: (i) Condensed Consolidated Balance Sheets as of December 31, 2021 and March 31, 2021; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2021 and 2020; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended December 31, 2021 and 2020; (iv) Condensed Consolidated Statements of Stockholders' Deficit for the three and nine months ended December 31, 2021 and 2020; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2021 and 2020; and (vi) Notes to Condensed Consolidated Financial Statements.
Exhibit 104		Cover Page Interactive Data File, formatted as Inline XBRL and contained in Exhibit 101.

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)

	President and Chief Executive Officer	February 8, 2022
/s/ Daniel J. Crowley	(Principal Executive Officer)
Daniel J. Crowley

	Senior Vice President and Chief Financial Officer	February 8, 2022
/s/ James F. McCabe, Jr.	(Principal Financial Officer)
James F. McCabe, Jr.

	Vice President, Investor Relations and Controller
/s/ Thomas A. Quigley, III	(Principal Accounting Officer)	February 8, 2022
Thomas A. Quigley, III