UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-K
(Mark One) | |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2014 | |
or | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission File No. 1-12235
Triumph Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 51-0347963 (I.R.S. Employer Identification Number) |
899 Cassatt Road, Suite 210, Berwyn, Pennsylvania 19312 (Address of principal executive offices, including zip code) | |
Registrant's telephone number, including area code:(610) 251-1000 | |
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Securities registered pursuant to Section 12(b) of the Act: | |
Common Stock, par value $.001 per share (Title of each class) | New York Stock Exchange (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one)
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x
As of September 30, 2013, the aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $3,578 million. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the New York Stock Exchange on September 30, 2013. For purposes of making this calculation only, the Registrant has defined affiliates as including all directors and executive officers.
The number of outstanding shares of the Registrant's Common Stock, par value $.001 per share, on May 1, 2014 was 52,151,782.
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Documents Incorporated by Reference
Portions of the following document are incorporated herein by reference:
The Proxy Statement of Triumph Group, Inc. to be filed in connection with our 2014 Annual Meeting of Stockholders is incorporated in part in Part III hereof, as specified herein.
Table of Contents
Item No. | Page | |
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PART I
Item 1. | Business |
Cautionary Note Regarding 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 management's beliefs concerning future performance and capital requirements based upon current available information. Actual results could differ materially from management's current expectations. Additional capital may be required and, if so, may not be available on reasonable terms, if at all, at the times and in the amounts we need. In addition to these factors and others described elsewhere in this report, other factors that could cause actual results to differ materially include competitive and cyclical factors relating to the aerospace industry, dependence of some of our businesses on key customers, requirements of capital, product liabilities in excess of insurance, uncertainties relating to the integration of acquired businesses, general economic conditions affecting our business segment, technological developments, limited availability of raw materials or skilled personnel, changes in governmental regulation and oversight and international hostilities and terrorism. For a more detailed discussion of these and other factors affecting us, see the Risk Factors described in Item 1A of this Annual Report on Form 10-K. We do not undertake any obligation to revise these forward-looking statements to reflect future events.
General
Triumph Group, Inc. ("Triumph", the "Company", "we", "us", or "our") was incorporated in 1993 in Delaware. Our companies design, engineer, manufacture, repair, overhaul and distribute a broad portfolio of aerostructures, aircraft components, accessories, subassemblies and systems. We serve a broad, worldwide spectrum of the aviation industry, including original equipment manufacturers, or OEMs, of commercial, regional, business and military aircraft and aircraft components, as well as commercial and regional airlines and air cargo carriers.
Effective October 4, 2013, the Company acquired all of the issued and outstanding shares of General Donlee Canada, Inc. ("General Donlee"). General Donlee is based in Toronto, Canada and is a leading manufacturer of precision machined products for the aerospace, nuclear and oil and gas industries. The acquired business now operates as Triumph Gear Systems-Toronto and its results are included in the Aerospace Systems Group.
Effective May 6, 2013, the Company acquired four related entities collectively comprising the Primus Composites business ("Primus") from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, operates as Triumph Structures - Farnborough and Triumph Structures - Thailand and is included in the Aerostructures segment from the date of acquisition. Together, Triumph Structures - Farnborough and Triumph Structures - Thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies. In addition to its composite operations, the Thailand operation also machines and processes metal components.
Effective March 18, 2013, a wholly-owned subsidiary of the Company, Triumph Engine Control Systems, LLC, acquired the assets of Goodrich Pump & Engine Control Systems, Inc. ("GPECS"), a leading independent aerospace fuel system supplier for the commercial, military, helicopter and business jet markets. The acquisition of GPECS provides new capabilities in a market where we did not previously participate and further diversifies our customer base in electronic engine controls, fuel metering units and main fuel pumps for both OEM and aftermarket/spares end markets. The results for Triumph Engine Control Systems, LLC are included in the Aerospace Systems Group segment from the date of acquisition.
Effective December 19, 2012, the Company acquired all of the outstanding shares of Embee, Inc. ("Embee"), renamed Triumph Processing - Embee Division, Inc., which is a leading commercial metal finishing provider offering more than seventy metal finishing, inspecting and testing processes primarily for the aerospace industry. The acquisition of Embee expands our current capabilities to provide comprehensive processing services on precision engineered parts for hydraulics, landing gear, spare parts and electronic actuation systems. The results for Triumph Processing - Embee Division, Inc. are included in the Aerospace Systems Group segment from the date of acquisition.
In June 2010, we acquired Vought Aircraft Industries, Inc. ("Vought") from The Carlyle Group. The acquisition of Vought established the Company as a leading global manufacturer of aerostructures for commercial, military and business jet aircraft.
Products and Services
We offer a variety of products and services to the aerospace industry through three operating segments: (i) Triumph Aerostructures Group, whose companies' revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components for the global aerospace original equipment manufacturers, or OEM, market; (ii) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build-to-print components, assemblies and systems also for the OEM market; and (iii) Triumph Aftermarket
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Services Group, whose companies serve aircraft fleets, notably commercial airlines, the U.S. military and cargo carriers, through the maintenance, repair and overhaul of aircraft components and accessories manufactured by third parties.
Our Aerostructures Group utilizes its capabilities to design, manufacture and build complete metallic and composite aerostructures and structural components. This group also includes companies performing complex manufacturing, machining and forming processes for a full range of structural components, as well as complete assemblies and subassemblies. This group services the full spectrum of aerospace customers, which include aerospace OEMs and the top-tier manufacturers who supply them and airlines, air cargo carriers, and domestic and foreign militaries.
The products that companies within this group design, manufacture, build and repair include:
Acoustic and thermal insulation systems | Engine nacelles |
Aircraft wings | Flight control surfaces |
Composite and metal bonding | Helicopter cabins |
Composite ducts and floor panels | Stretch-formed leading edges and fuselage skins |
Comprehensive processing services | Windows and window assemblies |
Empennages | Wing spars and stringers |
Our Aerospace Systems Group utilizes its capabilities to design and engineer mechanical, electromechanical, hydraulic and hydromechanical control systems, while continuing to broaden the scope of detailed parts and assemblies that we supply to the aerospace market. Customers typically return such systems to us for repairs and overhauls and spare parts. This group services the full spectrum of aerospace customers, which include aerospace OEMs and the top-tier manufacturers who supply them and airlines, air cargo carriers, and domestic and foreign militaries.
The products that companies within this group design, engineer, build and repair include:
Aircraft and engine mounted accessory drives | Heat exchangers |
Cargo hooks | High lift actuation |
Cockpit control levers | Hydraulic systems and components |
Comprehensive processing services | Landing gear actuation systems |
Control system valve bodies | Landing gear components and assemblies |
Electronic engine controls | Main engine gear box assemblies |
Exhaust nozzles and ducting | Main fuel pumps |
Geared transmissions | Secondary flight control systems |
Fuel metering units | Vibration absorbers |
Our Aftermarket Services Group performs maintenance, repair and overhaul services ("MRO") and supplies spare parts for the commercial and military aviation industry and primarily services the world's airline and air cargo carrier customers. This group also designs, engineers, manufactures, repairs and overhauls aftermarket aerospace gas turbine engine components, offers comprehensive MRO solutions, leasing packages, exchange programs and parts and services to airline, air cargo and third-party overhaul facilities. We also continue to develop Federal Aviation Administration, or ("FAA"), approved Designated Engineering Representative, or ("DER"), proprietary repair procedures for the components we repair and overhaul, which range from detailed components to complex subsystems. Companies in our Aftermarket Services Group repair and overhaul various components for the aviation industry including:
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Air cycle machines | Blades and vanes |
APUs | Cabin interior panes, shades, light lenses and other plastic components |
Constant speed drives | Combustors |
Engine and airframe accessories | Stators |
Flight control surfaces | Transition ducts |
Integrated drive generators | Sidewalls |
Nacelles | Light assemblies |
Remote sensors | Overhead bins |
Thrust reversers | |
Certain financial information about our three segments can be found in Note 21 of "Notes to Consolidated Financial Statements."
Proprietary Rights
We benefit from our proprietary rights relating to designs, engineering and manufacturing processes and repair and overhaul procedures. For some products, our unique manufacturing capabilities are required by the customer's specifications or designs, thereby necessitating reliance on us for the production of such specially designed products.
We view our name and mark, as well as the Vought and Embee tradenames, as significant to our business as a whole. Our products are protected by a portfolio of patents, trademarks, licenses or other forms of intellectual property that expire at various dates in the future. We continually develop and acquire new intellectual property and consider all of our intellectual property to be valuable. However, based on the broad scope of our product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on our results of operations, our financial position or our business segments. Our policy is to file applications and obtain patents for our new products as appropriate, including product modifications and improvements. While patents generally expire 20 years after the patent application filing date, new patents are issued to us on a regular basis.
In our overhaul and repair businesses, OEMs of equipment that we maintain for our customers increasingly include language in repair manuals that relate to their equipment asserting broad claims of proprietary rights to the contents of the manuals used in our operations. There can be no assurance that OEMs will not try to enforce such claims including the possible use of legal proceedings. In the event of such legal proceedings, there can be no assurance that such actions against the Company will be unsuccessful. However, we believe that our use of manufacture and repair manuals is lawful.
Raw Materials and Replacement Parts
We purchase raw materials, primarily consisting of extrusions, forgings, castings, aluminum and titanium sheets and shapes and stainless steel alloys, from various vendors. We also purchase replacement parts, which are utilized in our various repair and overhaul operations. We believe that the availability of raw materials to us is adequate to support our operations.
Operating Locations
We conduct our business through operating segments. The following chart describes the operations, customer base and certain other information with respect to our principal operating locations at March 31, 2014:
Operation | Subsidiary | Operating Location | Business | Type of Customers | Number of Employees |
TRIUMPH AEROSTRUCTURES GROUP | |||||
Triumph Aerostructures— Vought Aircraft Division | Triumph Aerostructures, LLC | Arlington, TX Grand Prairie, TX Red Oak, TX Hawthorne, CA Torrence, CA Nashville, TN Stuart, GA Milledgeville, GA | Develops and manufactures a wide range of complex aerostructures such as aircraft fuselages, wing and tail assemblies, wing panels and skins, engine nacelles, flight control surfaces and helicopter cabins. | Commercial, General Aviation and Military OEMs. | 4,725 |
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Operation | Subsidiary | Operating Location | Business | Type of Customers | Number of Employees |
Triumph Fabrications—Fort Worth(1) | Triumph Fabrications—Fort Worth, Inc. | Fort Worth, TX | Manufactures metallic/composite bonded components and assemblies. | Commercial, General Aviation and Military OEMs and Aftermarket. | 200 |
Triumph Fabrications—Hot Springs | Triumph Fabrications—Hot Springs, Inc. | Hot Springs, AR | Produces complex sheet metal parts and assemblies, titanium hot forming, and performs chem-milling and other metal finishing processes. | Commercial, General Aviation and Military OEMs and Aftermarket. | 344 |
Triumph Fabrications—Shelbyville | The Triumph Group Operations, Inc. | Shelbyville, IN | Produces aircraft fuselage skins, leading edges and web assemblies through the stretch forming of sheet, extrusion, rolled shape and light plate metals. | Commercial, General Aviation and Military OEMs. | 112 |
Triumph Fabrications—San Diego(1) | Triumph Fabrications—San Diego, Inc. | El Cajon, CA | Produces complex welded and riveted sheet metal assemblies for aerospace applications. Components include exhaust systems, ducting, doors, panels, control surfaces and engine components. | Commercial, General Aviation and Military OEMs. | 150 |
Triumph Integrated Aircraft Interiors | Triumph Composite Systems, Inc. | Spokane, WA | Designs and manufactures structural and non-structural composites for the aviation industry, including environmental control systems ducting, floor panels, structural thermoplastic clips/brackets as well as a variety of composite interior components. | Commercial, General Aviation, and Military OEMs; Commercial Aftermarket. | 615 |
Triumph Insulation Systems, LLC | Calexico, CA Hawthorne, CA Taylorsville, NC Hamburg, Germany Mexicali, Mexico Beijing, China (2) | Produces insulation systems provided to original equipment manufactures, airlines, maintenance, repair and overhaul organizations and air cargo carriers. Also provides products in the ancillary aircraft interiors and spares markets. | Commercial and Military OEMs. | 1,066 | |
Triumph Processing | Triumph Processing, Inc. | Lynwood, CA | Provides high-quality finishing services to the aerospace, military and commercial industries. | Commercial, General Aviation, and Military OEMs. | 91 |
Triumph Structures—East Texas | Triumph Structures—East Texas, Inc. | Kilgore, TX | Manufactures structural components specializing in complex precision machining primarily for commercial and military aerospace programs. | Commercial and Military OEMs. | 106 |
Triumph Structures—Everett | Triumph Structures—Everett, Inc. | Everett, WA | Precision machining of complex aluminum and hard metal structural components and subassemblies, serving commercial and military aerospace customers, ranging in size from a few inches to 120 feet long. | Commercial, General Aviation and Military OEMs. | 146 |
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Operation | Subsidiary | Operating Location | Business | Type of Customers | Number of Employees |
Triumph Structures—International | Triumph Structures—Farnborough Triumph Structures—Thailand | Farnborough, England Rayong, Thailand | Global supplier of composite and metallic propulsion and structural composites assemblies. | Commercial and General Aviation OEMs. | 746 |
Triumph Structures—Kansas City | Triumph Structures—Kansas City, Inc. | Grandview, MO | Manufactures precision machined parts and mechanical assemblies for the aviation, aerospace and defense industries. | Commercial and Military OEMs. | 119 |
Triumph Structures—Long Island | Triumph Structures—Long Island, LLC | Westbury, NY | Manufactures high-quality structural and dynamic parts and assemblies for commercial and military aerospace programs. | Commercial and Military OEMs. | 139 |
Triumph Structures—Los Angeles | Triumph Structures—Los Angeles, Inc. | Brea, CA Chatsworth, CA City of Industry, CA Walnut, CA | Manufactures long structural components, such as stringers, cords, floor beams and spars, for the aviation industry. Machines, welds and assembles large, complex, precision structural components. | Commercial, General Aviation and Military OEMs. | 336 |
Triumph Structures—Wichita | Triumph Structures—Wichita, Inc. | Wichita, KS | Specializes in complex, high-speed monolithic precision machining, turning, subassemblies, and sheet metal fabrication, serving domestic and international aerospace customers. | Commercial and Military OEMs. | 167 |
TRIUMPH AEROSPACE SYSTEMS GROUP | |||||
Triumph Actuation & Motion Control Systems | Triumph Actuation & Motion Control Systems—UK, Ltd. | Buckley, UK | Designs and builds proprietary advanced control products for flight actuation and motor control applications in all electrical aircraft and Unmanned Aerial Vehicles ("UAVs"). | Commercial, General Aviation, and Military OEMs. | 42 |
Triumph Actuation Systems—Clemmons(1) Triumph Actuation Systems—Freeport | Triumph Actuation Systems, LLC | Clemmons, NC Freeport, NY | Designs, manufactures and repairs complex hydraulic and hydromechanical aircraft components and systems, such as variable displacement pumps and motors, linear actuators and valves, and cargo door actuation systems. | Commercial, General Aviation, and Military OEMs; Commercial Airlines, General Aviation and Military Aftermarket. | 274 |
Triumph Actuation Systems—Connecticut | Triumph Actuation Systems—Connecticut, LLC | Bloomfield, CT East Lyme, CT Bethel, CT | Designs, manufactures and repairs complex hydraulic, hydromechanical and mechanical components and systems, such as nose wheel steering motors, helicopter blade lag dampers, mechanical hold open rods, coupling and latching devices, as well as mechanical and electromechanical actuation products. | Commercial, General Aviation, and Military OEMs; Military Aftermarket. | 151 |
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Operation | Subsidiary | Operating Location | Business | Type of Customers | Number of Employees |
Triumph Actuation Systems—Valencia(1) | Triumph Actuation Systems—Valencia, Inc. | Valencia, CA | Designs, manufactures and repairs complex hydraulic and hydromechanical aircraft components and systems, such as accumulators, actuators, complex valve packages, and landing gear retract actuators. | Commercial, General Aviation, and Military OEMs. | 196 |
Triumph Aerospace Systems—Newport News | Triumph Aerospace Systems—Newport News, Inc. | Newport News, VA San Diego, CA | Offers a fully integrated range of capabilities, including systems engineering, conceptual engineering, mechanical design and analysis, prototype and limited-rate production, instrumentation, assembly and testing services and complex structural composite design and manufacturing. | Commercial and Military OEMs; Commercial and Military Aftermarket. | 93 |
Triumph Aerospace Systems—Seattle | Triumph Actuation Systems—Connecticut, LLC | Redmond, WA Rochester, NY | System engineering and integration for landing gear, hydraulic, deployment, cargo door and electro-mechanical type systems. Capabilities include design, analysis and testing to support these types of systems and components. | Commercial, General Aviation and Military OEMs. | 116 |
Triumph Controls(1) | Triumph Controls, LLC | North Wales, PA Shelbyville, IN | Designs and manufactures mechanical and electromechanical control systems. | Commercial, General Aviation and Military OEMs and Aftermarket. | 147 |
Triumph Controls— France | Construction Brevetees d'Alfortville SAS | Alfortville, France | Manufactures mechanical ball bearing control assemblies for the aerospace, ground transportation, defense and marine industries. | Commercial and Military OEMs, Ground Transportation and Marine OEMs. | 66 |
Triumph Controls—Germany Triumph Controls—UK | Triumph Controls—Germany, GmbH Triumph Controls—UK, Ltd. | Heiligenhaus, Germany Basildon, UK | Produces and repairs cable control systems for ground, flight, engine management and cabin comfort features in aircraft. | Commercial and Military OEMs. | 50 |
Triumph Engine Control Systems | Triumph Engine Controls Systems, LLC | West Hartford, CT | Manufactures aerospace fuel systems including electronic engine controls, fuel metering units and main pumps. | Commercial, General Aviation and Military OEMs and Aftermarket. | 543 |
Triumph Fabrications—Orangeburg | Triumph Fabrications—Orangeburg | Orangeburg, SC | Provides maintenance and manufactured solutions for aviation drive train, mechanical, hydraulic and electrical hardware items including gearboxes, cargo hooks and vibration absorbers. Also, produces fabricated textile items such as seat cushions and sound insulation blankets for military rotary-wing platforms. | Commercial, General Aviation and Military Aftermarket. | 59 |
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Operation | Subsidiary | Operating Location | Business | Type of Customers | Number of Employees |
Triumph Fabrications—Phoenix | Triumph Engineered Solutions, Inc. | Chandler, AZ | Produces complex welded and riveted sheet metal assemblies for aerospace applications. Components include exhaust systems, ducting, doors, panels, control surfaces and engine components. | Commercial, General Aviation and Military OEMs. | 97 |
Triumph Gear Systems—Park City(1) Triumph Gear Systems—Macomb(1) | Triumph Gear Systems, Inc. Triumph Gear Systems—Macomb, Inc. | Park City, UT Macomb, MI | Specializes in the design, development, manufacture, sale and repair of gearboxes, high-lift flight control actuators, gear-driven actuators and gears for the aerospace industry. | Commercial and Military OEMs and Aftermarket. | 477 |
Triumph Gear Systems—Toronto | Triumph Gear Systems—Toronto ULC | Toronto, Canada | Manufacture superior precision aircraft engine shafts, engine links, helicopter masts, components for landing gears; and perform highly complex precision machining and gearing work for a variety of industries. | Commercial and Military OEMs and Aftermarket. | 190 |
Triumph Northwest | The Triumph Group Operations, Inc. | Albany, OR | Machines and fabricates refractory, reactive, heat and corrosion-resistant precision products. | Military, Medical and Electronic OEMs. | 25 |
Triumph Processing — Embee Division | Triumph Processing - Embee Division, Inc. | Santa Ana, CA | Provides comprehensive processing services on precision engineered parts for hydraulics, landing gear, spare parts and electronic actuation systems. | Commercial and Military OEMs and Specialty Automotive, Medical Device and Electronic Industries | 403 |
Triumph Thermal Systems(1) | Triumph Thermal Systems, Inc. | Forest, OH | Designs, manufactures and repairs engine and aircraft thermal transfer systems and components. | Commercial, General Aviation and Military OEMs. | 192 |
TRIUMPH AFTERMARKET SERVICES GROUP | |||||
Triumph Accessory Services—Wellington(1) | The Triumph Group Operations, Inc. | Wellington, KS | Provides maintenance services for aircraft heavy accessories and airborne electrical power generation devices, including constant speed drives, integrated drive generators, air cycle machines and electrical generators. | Commercial, General Aviation and Military Aftermarket. | 118 |
Triumph Accessory Services—Grand Prairie(1) | Triumph Accessory Services—Grand Prairie, Inc. | Grand Prairie, TX | Provides maintenance services for engine and airframe accessories including a variety of engine gearboxes, pneumatic starters, valves and drive units, hydraulic actuators, lube system pumps, fuel nozzles, fuel pumps and fuel controls. | Commercial and Military Aftermarket. | 135 |
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Operation | Subsidiary | Operating Location | Business | Type of Customers | Number of Employees |
Triumph Air Repair(1) | The Triumph Group Operations, Inc. | Chandler, AZ Phoenix, AZ | Repairs and overhauls auxiliary power units (APUs) and related accessories; sells, leases and exchanges APUs, related components and other aircraft material. | Commercial, General Aviation and Military Aftermarket. | 93 |
Triumph Airborne Structures(1) | Triumph Airborne Structures, Inc. | Hot Springs, AR Indianapolis, IN | Repairs and overhauls fan reversers, nacelle components, flight control surfaces and other aerostructures. | Commercial Aftermarket. | 175 |
Triumph Aviation Services—Asia(1) | Triumph Aviation Services Asia Ltd. | Chonburi, Thailand | Repairs and overhauls complex aircraft operational components, such as auxiliary power units (APUs), nacelles, constant speed drives, fan reversers and related accessories. | Commercial Aftermarket. | 147 |
Triumph Engines—Tempe(1) | Triumph Engineered Solutions, Inc. | Tempe, AZ | Designs, engineers, manufactures, repairs and overhauls aftermarket aerospace gas turbine engine components and provides repair services and aftermarket parts and services to aircraft operators, maintenance providers, and third-party overhaul facilities. | Commercial, General Aviation and Military Aftermarket. | 94 |
Triumph Interiors(1) | Triumph Interiors, LLC | Atlanta, GA Oakdale, PA Grand Prairie, TX | Refurbishes and repairs aircraft interiors such as sidewalls, ceiling panels, galleys and overhead storage bins and manufactures a full line of interior lighting and plastic components. | Commercial Aftermarket. | 218 |
Triumph San Antonio Support Center | The Triumph Group Operations, Inc. | San Antonio, TX | Provides maintenance services for aircraft ground support equipment. | Military Aftermarket. | 33 |
CORPORATE AND OTHER | |||||
Triumph Group, Inc. | Triumph Group, Inc. | Berwyn, PA | Parent company | N/A | 123 |
Triumph Group—Mexico | Triumph Group—Mexico, S. de R.L. de C.V. | Zacatecas, Mexico | Provides rough machining of gears, actuators and structural components, as well as assembly, fabrications, engineering and composites to Triumph companies and certain customers. | Commercial and General Aviation OEMs | 509 |
(1) | Designates FAA-certified repair station. |
(2) | Through an affiliate, Triumph Insulation Systems, LLC acquired a 100% controlling interest in a venture, operating in Beijing, China, from Beijing Kailan Aviation Technology Co., Ltd., an unrelated party based in China, during the fiscal year ended March 31, 2014. |
Sales, Marketing and Engineering
While each of our operating companies maintains responsibility for selling and marketing its specific products, we have developed two marketing teams at the group level who are focused on cross-selling our broad capabilities. One team supports the Aerostructures and Aerospace Systems Groups and the other the Aftermarket Services Group. These teams are responsible for selling systems, integrated assemblies and repair and overhaul services, reaching across our operating companies, to our OEM, military, airline and air cargo customers. In certain limited cases, we use independent, commission-based representatives to serve our customers' changing needs and the current trends in some of the markets and geographic regions in which we operate. During the fiscal year ended March 31, 2013, we terminated our relationship with Triumph Wichita Support
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Center, a third-party sales organization which had been dedicated solely to a sales effort on behalf of Triumph Group companies.
The two group-level marketing teams operate as the front-end of the selling process, establishing or maintaining relationships, identifying opportunities to leverage our brand, and providing service for our customers. Each individual operating company is responsible for its own technical support, pricing, manufacturing and product support. Also, within the Aerospace Systems Group, we have created a group engineering function to provide integrated solutions to meet our customer needs by designing systems that integrate the capabilities of our companies.
A significant portion of our government and defense contracts are awarded on a competitive bidding basis. We generally do not bid or act as the primary contractor, but will typically bid and act as a subcontractor on contracts on a fixed-price basis. We generally sell to our other customers on a fixed-price, negotiated contract or purchase order basis.
Backlog
We have a number of long-term agreements with several of our customers. These agreements generally describe the terms under which the customer may issue purchase orders to buy our products and services during the term of the agreement. These terms typically include a list of the products or repair services customers may purchase, initial pricing, anticipated quantities and, to the extent known, delivery dates. In tracking and reporting our backlog, however, we only include amounts for which we have actual purchase orders with firm delivery dates or contract requirements generally within the next 24 months, which primarily relate to sales to our OEM customer base. Purchase orders issued by our aftermarket customers are usually completed within a short period of time. As a result, our backlog data relates primarily to the OEM customers. The backlog information set forth below does not include the sales that we expect to generate from long-term agreements for which we do not have actual purchase orders with firm delivery dates.
As of March 31, 2014, our continuing operations had outstanding purchase orders representing an aggregate invoice price of approximately $4,751 million, of which $3,796 million, $923 million and $32 million relate to the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group, respectively. As of March 31, 2013, our continuing operations had outstanding purchase orders representing an aggregate invoice price of approximately $4,527 million, of which $3,663 million, $832 million and $32 million related to the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group, respectively. Of the existing backlog of $4,751 million, approximately $2,017 million will not be shipped by March 31, 2015.
Dependence on Significant Customer
For the fiscal years ended March 31, 2014, 2013 and 2012, the Boeing Company ("Boeing") represented approximately 45%, 49% and 47%, respectively, of our net sales, covering virtually every Boeing plant and product. A significant reduction in sales to Boeing would have a material adverse impact on our financial position, results of operations, and cash flows.
United States and International Operations
Our revenues from continuing operations to customers in the United States for the fiscal years ended March 31, 2014, 2013 and 2012 were approximately $3,142 million, $3,199 million, and $2,944 million, respectively. Our revenues from our continuing operations to customers in all other countries for the fiscal years ended March 31, 2014, 2013 and 2012 were approximately $622 million, $504 million, and $464 million, respectively.
As of March 31, 2014 and 2013, our long-lived assets for continuing operations located in the United States were approximately $3,482 million and $3,500 million, respectively. As of March 31, 2014 and 2013, our long-lived assets for continuing operations located in all other countries were approximately $289 million and $99 million, respectively.
Competition
We compete primarily with Tier 1 and Tier 2 aerostructures manufacturers, systems integrators and the manufacturers that supply them, some of which are divisions or subsidiaries of other large companies, in the manufacture of aircraft structures, systems components and subassemblies. OEMs are increasingly focusing on assembly and integration activities while outsourcing more manufacturing and, therefore, are less of a competitive force than in previous years.
Competition for the repair and overhaul of aviation components comes from three primary sources, some of whom possess greater financial and other resources than we have: OEMs, major commercial airlines, government support depots and other independent repair and overhaul companies. Some major commercial airlines continue to own and operate their own service centers, while others have begun to sell or outsource their repair and overhaul services to other aircraft operators or third parties. Large domestic and foreign airlines that provide repair and overhaul services typically provide these services not only for their own aircraft but for other airlines as well. OEMs also maintain service centers which provide repair and overhaul
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services for the components they manufacture. Many governments maintain aircraft support depots in their military organizations that maintain and repair the aircraft they operate. Other independent service organizations also compete for the repair and overhaul business of other users of aircraft components.
Participants in the aerospace industry compete primarily on the basis of breadth of technical capabilities, quality, turnaround time, capacity and price.
Government Regulation and Industry Oversight
The aerospace industry is highly regulated in the United States by the FAA and in other countries by similar agencies. We must be certified by the FAA and, in some cases, by individual OEMs, in order to engineer and service parts and components used in specific aircraft models. If material authorizations or approvals were revoked or suspended, our operations would be adversely affected. New and more stringent government regulations may be adopted, or industry oversight heightened, in the future and these new regulations, if enacted, or any industry oversight, if heightened, may have an adverse impact on us.
We must also satisfy the requirements of our customers, including OEMs, that are subject to FAA regulations, and provide these customers with products and repair services that comply with the government regulations applicable to aircraft components used in commercial flight operations. The FAA regulates commercial flight operations and requires that aircraft components meet its stringent standards. In addition, the FAA requires that various maintenance routines be performed on aircraft components, and we currently satisfy these maintenance standards in our repair and overhaul services. Several of our operating locations are FAA-approved repair stations.
Generally, the FAA only grants licenses for the manufacture or repair of a specific aircraft component, rather than the broader licenses that have been granted in the past. The FAA licensing process may be costly and time-consuming. In order to obtain an FAA license, an applicant must satisfy all applicable regulations of the FAA governing repair stations. These regulations require that an applicant have experienced personnel, inspection systems, suitable facilities and equipment. In addition, the applicant must demonstrate a need for the license. Because an applicant must procure manufacturing and repair manuals from third parties relating to each particular aircraft component in order to obtain a license with respect to that component, the application process may involve substantial cost.
The license approval processes for the European Aviation Safety Agency ("EASA"), which regulates this industry in the European Union, the Civil Aviation Administration of China, and other comparable foreign regulatory authorities are similarly stringent, involving potentially lengthy audits. EASA was formed in 2002 and is handling most of the responsibilities of the national aviation authorities in Europe, such as the United Kingdom Civil Aviation Authority.
Our operations are also subject to a variety of worker and community safety laws. For example, the Occupational Safety and Health Act of 1970, or OSHA, mandates general requirements for safe workplaces for all employees in the United States. In addition, OSHA provides special procedures and measures for the handling of hazardous and toxic substances. Specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with OSHA's health and safety requirements.
Environmental Matters
Our business, operations and facilities are subject to numerous stringent federal, state, local and foreign environmental laws and regulation by government agencies, including the Environmental Protection Agency, ("EPA"). Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transportation and disposal of hazardous materials, pollutants and contaminants, govern public and private response actions to hazardous or regulated substances which may be or have been released to the environment, and require us to obtain and maintain licenses and permits in connection with our operations. This extensive regulatory framework imposes significant compliance burdens and risks on us. Although management believes that our operations and our facilities are in material compliance with such laws and regulations, future changes in these laws, regulations or interpretations thereof or the nature of our operations or regulatory enforcement actions which may arise, may require us to make significant additional capital expenditures to ensure compliance in the future.
Certain of our facilities, including facilities acquired and operated by us or one of our subsidiaries have at one time or another been under active investigation for environmental contamination by federal or state agencies when acquired, and at least in some cases, continue to be under investigation or subject to remediation for potential environmental contamination. We are frequently indemnified by prior owners or operators and/or present owners of the facilities for liabilities which we incur as a result of these investigations and the environmental contamination found which pre-dates our acquisition of these facilities, subject to certain limitations. We also maintain a pollution liability policy that provides coverage for material liabilities associated with the clean-up of on-site pollution conditions, as well as defense and indemnity for certain third-party suits
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(including Superfund liabilities at third-party sites), in each case, to the extent not otherwise indemnified. This policy applies to all of our manufacturing and assembly operations worldwide. However, if we are required to pay the expenses related to environmental liabilities because neither indemnification nor insurance coverage is available, these expenses could have a material adverse effect on us.
Employees
As of March 31, 2014, we employed 13,828 persons, of whom 3,434 were management employees, 134 were sales and marketing personnel, 559 were technical personnel, 872 were administrative personnel and 8,829 were production workers.
Several of our subsidiaries are parties to collective bargaining agreements with labor unions. Under those agreements, we currently employ approximately 2,918 full-time employees. Currently, approximately 21% of our permanent employees are represented by labor unions and approximately 61% of net sales are derived from the facilities at which at least some employees are unionized. Of the 2,918 employees represented by unions, 546 employees are working under contracts that have expired or will expire within one year and 510 employees in our Red Oak, Texas facility have not yet negotiated an initial contract. Our inability to negotiate an acceptable contract with any of these labor unions could result in strikes by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike or other work stoppage, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have an adverse effect on our business and results of operations.
We have not experienced any material labor-related work stoppage and consider our relations with our employees to be good.
Research and Development Expenses
Certain information about our research and development expenses for the fiscal years ended March 31, 2014, 2013 and 2012 is available in Note 2 of "Notes to Consolidated Financial Statements."
Executive Officers
Name | Age | Position | ||
Richard C. Ill | 70 | Chairman | ||
Jeffry D. Frisby | 59 | President and Chief Executive Officer and Director | ||
Jeffrey L. McRae | 50 | Senior Vice President, Chief Financial Officer | ||
John B. Wright, II | 60 | Vice President, General Counsel and Secretary | ||
Thomas A. Quigley, III | 37 | Vice President and Controller | ||
Richard C. Ill was elected Chairman in July 2009, and had been our President and Chief Executive Officer and a director since 1993. Mr. Ill retired as Chief Executive Officer of the Company in July 2012 and has remained as the Company's Chairman. Mr. Ill is a director of P.H. Glatfelter Company, Mohawk Industries, Inc. and Baker Industries and a trustee of the Eisenhower Fellowships.
Jeffry D. Frisby has been our President and Chief Executive Officer since July 2012 and served as President and Chief Operating Officer from July 2009 to July 2012. Mr. Frisby has been a director of Triumph since July 2012. Mr. Frisby joined the Company in 1998 as President of Frisby Aerospace, Inc. upon its acquisition by Triumph. In 2000, Mr. Frisby was named Group President of the Triumph Control Systems Group and was later named Group President of our Aerospace Systems Group upon its formation in April 2003. Mr. Frisby serves on the Board of Directors of Quaker Chemical Corporation.
Jeffrey L. McRae became Senior Vice President and Chief Financial Officer in February 2014. Mr. McRae was named President of Triumph Aerostructures – Vought Aircraft Division in October 2013, having previously served as President of Triumph Aerostructures – Vought Integrated Programs Division and Chief Financial Officer for Triumph Aerostructures – Vought Aircraft Division, a position he had assumed upon the completion of Triumph’s acquisition of Vought Aircraft Industries, Inc. in June 2010. Prior to the acquisition, Mr. McRae had served as Vought’s Vice President of Business Operations, and had been employed by the Company since 2007.
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John B. Wright, II has been a Vice President and our General Counsel and Secretary since 2004. From 2001 until he joined us, Mr. Wright was a partner with the law firm of Ballard Spahr, LLP, where he practiced corporate and securities law.
Thomas A. Quigley, III has been our Vice President and Controller since November 2012, and serves as the Company's principal accounting officer. Mr. Quigley has served as the Company's SEC Reporting Manager since January 2009. From June 2002 until joining Triumph in 2009, Mr. Quigley held various roles within the audit practice of KPMG LLP, including Senior Audit Manager.
Available Information
For more information about us, visit our website at www.triumphgroup.com. The contents of the website are not part of this Annual Report on Form 10-K. Our electronic filings with the Securities and Exchange Commission, ("SEC") (including all Forms 10-K, 10-Q and 8-K, and any amendments to these reports) are available free of charge through our website immediately after we electronically file with or furnish them to the SEC. These filings may also be read and copied at the SEC's Public Reference Room which is located at 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers who file electronically with the SEC at www.sec.gov.
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Item 1A. | Risk Factors |
Factors that have an adverse impact on the aerospace industry may adversely affect our results of operations and liquidity.
A substantial percentage of our gross profit and operating income derives from commercial aviation. Our operations have been focused on designing, engineering, manufacturing, repairing and overhauling a broad portfolio of aerostructures, aircraft components, accessories, subassemblies and systems. Therefore, our business is directly affected by economic factors and other trends that affect our customers in the aerospace industry, including a possible decrease in outsourcing by OEMs and aircraft operators or projected market growth that may not materialize or be sustainable. We are also significantly dependent on sales to the commercial aerospace market, which has been cyclical in nature with significant downturns in the past. When these economic and other factors adversely affect the aerospace industry, they tend to reduce the overall customer demand for our products and services, which decreases our operating income. Economic and other factors that might affect the aerospace industry may have an adverse impact on our results of operations and liquidity. We have credit exposure to a number of commercial airlines, some of which have encountered financial difficulties. In addition, an increase in energy costs and the price of fuel to the airlines could result in additional pressure on the operating costs of airlines. The market for jet fuel is inherently volatile and is subject to, among other things, changes in government policy on jet fuel production, fluctuations in the global supply of crude oil and disruptions in oil production or delivery caused by sudden hostility in oil-producing areas. Airlines are sometimes unable to pass on increases in fuel prices to customers by increasing fares due to the competitive nature of the airline industry, and this compounds the pressure on operating costs. Other events of general impact such as natural disasters, war, terrorist attacks against the industry or pandemic health crises may lead to declines in the worldwide aerospace industry that could adversely affect our business and financial condition.
In addition, demand for our maintenance, repair and overhaul services is strongly correlated with worldwide flying activity. A significant portion of the MRO activity required on commercial aircraft is mandated by government regulations that limit the total time or number of flights that may elapse between scheduled MRO events. As a result, although short-term deferrals are possible, MRO activity is ultimately required to continue to operate the aircraft in revenue-producing service. Therefore, over the intermediate and long-term, trends in the MRO market are closely related to the size and utilization level of the worldwide aircraft fleet, as reflected by the number of available seat miles, commonly referred to as ASMs, and cargo miles flown. Consequently, conditions or events which contribute to declines in worldwide ASMs and cargo miles flown, such as those mentioned above, could negatively impact our MRO business.
Demand for military and defense products is dependent upon government spending.
The military and defense market is largely dependent upon government budgets, particularly the U.S. defense budget, and an increase in defense spending may not be allocated to programs that would benefit our business. Moreover, the military aircraft programs in which we participate may not enter full-scale production as expected. A change in the levels of defense spending or levels of military flight operations could curtail or enhance our prospects in the military and defense market depending upon the programs affected.
A substantial portion of our net sales were derived from the military and defense market, which includes primarily indirect sales to the U.S. Government. As a result, our exposure to the military and defense market is significant.
The programs in which we participate must compete with other programs and policy imperatives for consideration during the budget and appropriation process. Concerns about increased deficit spending, along with continued economic challenges, continue to place pressure on U.S. and international customer budgets. While we believe that our programs are well aligned with national defense and other priorities, shifts in domestic and international spending and tax policy, changes in security, defense, and intelligence priorities, the affordability of our products and services, general economic conditions and developments, and other factors may affect a decision to fund or the level of funding for existing or proposed programs.
In August 2011, the Budget Control Act (the "Act") reduced the United States defense top-line budget by approximately $490 billion through 2021. The Act further reduced the defense top-line budget by an additional $500 billion through 2021 if Congress did not enact $1.2 trillion in further budget reductions by January 15, 2012. Should Congress in future years provide funding above the yearly spending limits of the Act, sequestration will automatically take effect and cancel any excess amount above the limits. The annual spending limits of the Act will remain unless and until the current law is changed.
On March 1, 2013, sequestration was implemented for the U.S. government fiscal year 2013. The lack of agreement between Congress and the Administration to end sequestration, certain Office of Management and Budget reports and communications from the U.S. Department of Defense ("U.S. DoD") indicate that there are likely to be reductions to our military business. Reductions, cancellations or delays impacting existing contracts or programs could have a material effect on our results of operations, financial position and/or cash flows. While the U.S. DoD would sustain the bulk of sequestration cuts affecting us, civil programs and agencies could be significantly impacted as well.
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As previously announced by Boeing in September 2013 and then subsequently revised in March 2014, the decision has been made to cease production of the C-17 Globemaster ("C-17") during calendar year 2015. Major production related to this program is expected to cease during the first quarter of fiscal 2016. We currently have agreements in place with Boeing for orders to support C-17 production through March 2014 and Boeing has authorized and funded Triumph to begin long lead procurement for an additional 10 units that would extend our production through March 2015. Boeing currently has confirmed orders with the U.S. Air Force, India and various other foreign governments to support production of C-17 through 2014 at a rate of approximately 10 aircraft per year. We have received inquiries regarding proposal for spares which could extend production through the end of fiscal 2016, as we believe the United States Air Force will want to have continued contractor support for the C-17 program. The loss of the C-17 program and the failure to win additional work to replace the C-17 program could materially reduce our cash flow and results of operations.
Cancellations, reductions or delays in customer orders may adversely affect our results of operations.
Our overall operating results are affected by many factors, including the timing of orders from large customers and the timing of expenditures to manufacture parts and purchase inventory in anticipation of future sales of products and services. A large portion of our operating expenses are relatively fixed. Because several of our operating locations typically do not obtain long-term purchase orders or commitments from our customers, they must anticipate the future volume of orders based upon the historic purchasing patterns of customers and upon our discussions with customers as to their anticipated future requirements. These historic patterns may be disrupted by many factors, including changing economic conditions, inventory adjustments, or work stoppages or labor disruptions at our customers' locations. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on our business, financial condition and results of operations.
Our acquisition strategy exposes us to risks, including the risk that we may not be able to successfully integrate acquired businesses.
We have a consistent strategy to grow, in part, through the acquisition of additional businesses in the aerospace industry and are continuously evaluating various acquisition opportunities, including those outside the United States and those that may have a material impact on our business. Our ability to grow by acquisition is dependent upon, among other factors, the availability of suitable acquisition candidates. Growth by acquisition involves risks that could adversely affect our operating results, including difficulties in integrating the operations and personnel of acquired companies, the risk of diverting the attention of senior management from our existing operations, the potential amortization of acquired intangible assets, the potential impairment of goodwill and the potential loss of key employees of acquired companies. We may not be able to consummate acquisitions on satisfactory terms or, if any acquisitions are consummated, successfully integrate these acquired businesses.
A significant decline in business with a key customer could have a material adverse effect on us.
Boeing, or Boeing Commercial, Military and Space, represented approximately 45% of our net sales for the fiscal year ended March 31, 2014, covering virtually every Boeing plant and product. As a result, a significant reduction in purchases by Boeing could have a material adverse impact on our financial position, results of operations, and cash flows. In addition, some of our other group companies rely significantly on particular customers, the loss of which could have an adverse effect on those businesses.
Future volatility in the financial markets may impede our ability to successfully access capital markets and ensure adequate liquidity and may adversely affect our customers and suppliers.
Future turmoil in the capital markets may impede our ability to access the capital markets when we would like, or need, to raise capital or restrict our ability to borrow money on favorable terms. Such market conditions could have an adverse impact on our flexibility to react to changing economic and business conditions and on our ability to fund our operations and capital expenditures in the future. In addition, interest rate fluctuations, financial market volatility or credit market disruptions may also negatively affect our customers' and our suppliers' ability to obtain credit to finance their businesses on acceptable terms. As a result, our customers' need for and ability to purchase our products or services may decrease, and our suppliers may increase their prices, reduce their output or change their terms of sale. If our customers' or suppliers' operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, our customers may not be able to pay, or may delay payment of, accounts receivable owed to us, and our suppliers may restrict credit or impose different payment terms. Any inability of customers to pay us for our products and services or any demands by suppliers for different payment terms may adversely affect our earnings and cash flow.
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Our international sales and operations are subject to applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable export control laws and regulations of the United States and other countries. United States laws and regulations applicable to us include the Arms Export Control Act, the International Traffic in Arms Regulations ("ITAR"), the Export Administration Regulations ("EAR") and the trade sanctions laws and regulations administered by the United States Department of the Treasury's Office of Foreign Assets Control ("OFAC"). EAR restricts the export of dual-use products and technical data to certain countries, while ITAR restricts the export of defense products, technical data and defense services. The U.S. Government agencies responsible for administering EAR and ITAR have significant discretion in the interpretation and enforcement of these regulations. We cannot provide services to certain countries subject to United States trade sanctions unless we first obtain the necessary authorizations from OFAC. In addition, we are subject to the Foreign Corrupt Practices Act which generally bars bribes or unreasonable gifts to foreign governments or officials.
Violations of these laws or regulations could result in significant additional sanctions, including fines, more onerous compliance requirements, more extensive debarments from export privileges, loss of authorizations needed to conduct aspects of our international business and criminal penalties and may harm our ability to enter into contracts with the U.S. Government. A future violation of ITAR or the other regulations enumerated above could materially adversely affect our business, financial condition and results of operations.
Our expansion into international markets may increase credit, currency and other risks, and our current operations in international markets expose us to such risks.
As we pursue customers in Asia, South America and other less developed aerospace markets throughout the world, our inability to ensure the creditworthiness of our customers in these areas could adversely impact our overall profitability. In addition, with operations in Canada, China, France, Germany, Mexico, Thailand and the United Kingdom, and customers throughout the world, we will be subject to the legal, political, social and regulatory requirements and economic conditions of other jurisdictions. In the future, we may also make additional international capital investments, including further acquisitions of companies outside the United States or companies having operations outside the United States. Risks inherent to international operations include, but are not limited to, the following:
• | difficulty in enforcing agreements in some legal systems outside the United States; |
• | imposition of additional withholding taxes or other taxes on our foreign income, tariffs or other restrictions on foreign trade and investment, including currency exchange controls; |
• | fluctuations in exchange rates which may affect demand for our products and services and may adversely affect our profitability in U.S. dollars; |
• | inability to obtain, maintain or enforce intellectual property rights; |
• | changes in general economic and political conditions in the countries in which we operate; |
• | unexpected adverse changes in the laws or regulatory requirements outside the United States, including those with respect to environmental protection, export duties and quotas; |
• | failure by our employees or agents to comply with U.S. laws affecting the activities of U.S. companies abroad; |
• | difficulty with staffing and managing widespread operations; and |
• | difficulty of and costs relating to compliance with the different commercial and legal requirements of the countries in which we operate. |
We may need additional financing for acquisitions and capital expenditures and additional financing may not be available on terms acceptable to us.
A key element of our strategy has been, and continues to be, internal growth supplemented by growth through the acquisition of additional aerospace companies and product lines. In order to grow internally, we may need to make significant capital expenditures, such as investing in facilities in low-cost countries, and may need additional capital to do so. Our ability to grow is dependent upon, and may be limited by, among other things, access to markets and conditions of markets, availability under the Credit Facility and the Securitization Facility (each as defined in Note 10 of the "Notes to Consolidated Financial Statements") and by particular restrictions contained in the Credit Facility and our other financing arrangements. In that case, additional funding sources may be needed, and we may not be able to obtain the additional capital necessary to pursue our internal growth and acquisition strategy or, if we can obtain additional financing, the additional financing may not be on financial terms that are satisfactory to us.
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Competitive pressures may adversely affect us.
We have numerous competitors in the aerospace industry. We compete primarily with the top-tier systems integrators and the manufacturers that supply them, some of which are divisions or subsidiaries of OEMs and other large companies that manufacture aircraft components and subassemblies. Our OEM competitors, which include Boeing, Airbus, Bell Helicopter, Bombardier, Cessna, General Electric, Gulfstream, Honeywell, Lockheed Martin, Northrop Grumman, Raytheon, Rolls Royce and Sikorsky, may choose not to outsource production of aerostructures or other components due to, among other things, their own direct labor and overhead considerations, capacity utilization at their own facilities and desire to retain critical or core skills. Consequently, traditional factors affecting competition, such as price and quality of service, may not be significant determinants when OEMs decide whether to produce a part in-house or to outsource. We also face competition from non-OEM component manufacturers, including Alenia Aeronautica, Fuji Heavy Industries, GKN Westland Aerospace (U.K.), UTC Aerospace Systems, Kawasaki Heavy Industries, Mitsubishi Heavy Industries, Spirit AeroSystems and Fokker Technologies. Competition for the repair and overhaul of aviation components comes from three primary sources: OEMs, major commercial airlines and other independent repair and overhaul companies.
We may need to expend significant capital to keep pace with technological developments in our industry.
The aerospace industry is constantly undergoing development and change and it is likely that new products, equipment and methods of repair and overhaul service will be introduced in the future. In order to keep pace with any new developments, we may need to expend significant capital to purchase new equipment and machines or to train our employees in the new methods of production and service.
The construction of aircraft is heavily regulated and failure to comply with applicable laws could reduce our sales or require us to incur additional costs to achieve compliance, and we may incur significant expenses to comply with new or more stringent governmental regulation.
The aerospace industry is highly regulated in the United States by the FAA and in other countries by similar agencies. We must be certified by the FAA and, in some cases, by individual OEMs in order to engineer and service parts, components and aerostructures used in specific aircraft models. If any of our material authorizations or approvals were revoked or suspended, our operations would be adversely affected. New or more stringent governmental regulations may be adopted, or industry oversight heightened in the future, and we may incur significant expenses to comply with any new regulations or any heightened industry oversight.
Some contractual arrangements with customers may cause us to bear significant up-front costs that we may not be able to recover.
Many new aircraft programs require that major suppliers bear the cost of design, development and engineering work associated with the development of the aircraft usually in exchange for a long-term agreement to supply critical parts once the aircraft is in production. If the aircraft fails to reach the full production stage or we fail to win the long-term contract, the outlays we have made in research and development and other start-up costs may not generate our anticipated return on investment.
We may not realize our anticipated return on capital commitments made to expand our capabilities.
We continually make significant capital expenditures to implement new processes and to increase both efficiency and capacity. Some of these projects require additional training for our employees and not all projects may be implemented as anticipated. If any of these projects do not achieve the anticipated increase in efficiency or capacity, our returns on these capital expenditures may be lower than expected.
Any product liability claims in excess of insurance may adversely affect our financial condition.
Our operations expose us to potential liability for personal injury or death as a result of the failure of an aircraft component that has been serviced by us or the failure of an aircraft component designed or manufactured by us. While we believe that our liability insurance is adequate to protect us from these liabilities, our insurance may not cover all liabilities. Additionally, as the number of insurance companies providing general aviation product liability insurance coverage has decreased in recent years, insurance coverage may not be available in the future at a cost acceptable to us. Any material liability not covered by insurance or for which third-party indemnification is not available could have a material adverse effect on our financial condition.
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The lack of available skilled personnel may have an adverse effect on our operations.
From time to time, some of our operating locations have experienced difficulties in attracting and retaining skilled personnel to design, engineer, manufacture, repair and overhaul sophisticated aircraft components. Our ability to operate successfully could be jeopardized if we are unable to attract and retain a sufficient number of skilled personnel to conduct our business.
Our fixed-price contracts may commit us to unfavorable terms.
A significant portion of our net sales are derived from fixed-price contracts under which we have agreed to provide components or aerostructures for a price determined on the date we entered into the contract. Several factors may cause the costs we incur in fulfilling these contracts to vary substantially from our original estimates, and we bear the risk that increased or unexpected costs may reduce our profit or cause us to sustain losses on these contracts. In a fixed-price contract, we must fully absorb cost overruns, notwithstanding the difficulty of estimating all of the costs we will incur in performing these contracts. Because our ability to terminate contracts is generally limited, we may not be able to terminate our performance requirements under these contracts at all or without substantial liability and, therefore, in the event we are sustaining reduced profits or losses, we could continue to sustain these reduced profits or losses for the duration of the contract term. Our failure to anticipate technical problems, estimate delivery reductions, estimate costs accurately or control costs during performance of a fixed-price contract may reduce our profitability or cause significant losses on programs such as Boeing 747-8 ("747-8").
Due to the size and long-term nature of many of our contracts, we are required by GAAP to estimate sales and expenses relating to these contracts in our financial statements, which may cause actual results to differ materially from those estimated under different assumptions or conditions.
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States ("GAAP"). These principles require our management to make estimates and assumptions regarding our contracts that affect the reported amounts of revenue and expenses during the reporting period. Contract accounting requires judgment relative to assessing risks, estimating contract sales and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total sales and cost at completion is complicated and subject to many variables. While we base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances at the time made, actual results may differ materially from those estimated.
Any exposure to environmental liabilities may adversely affect us.
Our business, operations and facilities are subject to numerous stringent federal, state, local and foreign environmental laws and regulations, and we are subject to potentially significant fines or penalties, including criminal sanctions, if we fail to comply with these requirements. In addition, we could be affected by future laws and regulations, including those imposed in response to climate change concerns and other actions commonly referred to as "green initiatives." Compliance with current and future environmental laws and regulations currently requires and is expected to continue to require significant operating and capital costs.
Pursuant to certain environmental laws, a current or previous owner or operator of a contaminated site may be held liable for the entire cost of investigation, removal or remediation of hazardous materials at such property, whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials. Although management believes that our operations and facilities are in material compliance with such laws and regulations, future changes in such laws, regulations or interpretations thereof or the nature of our operations or regulatory enforcement actions which may arise, may require us to make significant additional capital expenditures to ensure compliance in the future. Certain of our facilities, including facilities acquired and operated by us or one of our subsidiaries, have at one time or another been under active investigation for environmental contamination by federal or state agencies when acquired and, at least in some cases, continue to be under investigation or subject to remediation for potential or identified environmental contamination. Lawsuits, claims and costs involving environmental matters are likely to continue to arise in the future. Individual facilities of ours have also been subject to investigation on occasion for possible past waste disposal practices which might have contributed to contamination at or from remote third-party waste disposal sites. In some instances, we are indemnified by prior owners or operators and/or present owners of the facilities for liabilities which we incur as a result of these investigations and the environmental contamination found which pre-dates our acquisition of these facilities, subject to certain limitations, including but not limited to specified exclusions, deductibles and limitations on the survival period of the indemnity. We also maintain a pollution liability policy that provides coverage, subject to specified limitations, for specified material liabilities associated with the clean-up of certain on-site pollution conditions, as well as defense and indemnity for certain third-party suits (including Superfund liabilities at third-party sites), in each case, to the extent not otherwise indemnified. However, if we are required to
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pay the expenses related to environmental liabilities because neither indemnification nor insurance coverage is available, these expenses could have a material adverse effect on our financial position, results of operations, and cash flows.
We are currently involved in intellectual property litigation, which could have a material and adverse impact on our profitability, and we could become so involved again in the future.
We and other companies in our industry possess certain proprietary rights relating to designs, engineering, manufacturing processes and repair and overhaul procedures. In the event that we believe that a third party is infringing upon our proprietary rights, we may bring an action to enforce such rights. In addition, third parties may claim infringement by us with respect to their proprietary rights and may initiate legal proceedings against us in the future. The expense and time of bringing an action to enforce such rights or defending against infringement claims can be significant. Intellectual property litigation involves complex legal and factual questions which makes the outcome of any such proceedings subject to considerable uncertainty. Not only can such litigation divert management's attention, but it can also expose the Company to damages and potential injunctive relief which, if granted, may preclude the Company from making, using or selling particular products or technology. The expense and time associated with such litigation may have a material and adverse impact on our profitability.
We do not own certain intellectual property and tooling that is important to our business.
In our overhaul and repair businesses, OEMs of equipment that we maintain for our customers include language in repair manuals relating to their equipment asserting broad claims of proprietary rights to the contents of the manuals used in our operations. Although we believe that our use of manufacture and repair manuals is lawful, there can be no assurance that OEMs will not try to enforce such claims, including through the possible use of legal proceedings, or that any such actions will be unsuccessful.
Our business also depends on using certain intellectual property and tooling that we have rights to use pursuant to license grants under our contracts with our OEM customers. These contracts contain restrictions on our use of the intellectual property and tooling and may be terminated if we violate certain of these restrictions. Our loss of a contract with an OEM customer and the related license rights to use an OEM's intellectual property or tooling would materially adversely affect our business.
Any significant disruption from key suppliers of raw materials and key components could delay production and decrease revenue.
We are highly dependent on the availability of essential raw materials such as carbon fiber, aluminum and titanium, and purchased engineered component parts from our suppliers, many of which are available only from single customer-approved sources. Moreover, we are dependent upon the ability of our suppliers to provide raw materials and components that meet our specifications, quality standards and delivery schedules. Our suppliers' failure to provide expected raw materials or component parts could require us to identify and enter into contracts with alternate suppliers that are acceptable to both us and our customers, which could result in significant delays, expenses, increased costs and management distraction and adversely affect production schedules and contract profitability.
We have from time to time experienced limited interruptions of supply, and we may experience a significant interruption in the future. Our continued supply of raw materials and component parts are subject to a number of risks including:
• | availability of capital to our suppliers; |
• | the destruction of our suppliers' facilities or their distribution infrastructure; |
• | a work stoppage or strike by our suppliers' employees; |
• | the failure of our suppliers to provide raw materials or component parts of the requisite quality; |
• | the failure of essential equipment at our suppliers' plants; |
• | the failure or shortage of supply of raw materials to our suppliers; |
• | contractual amendments and disputes with our suppliers; and |
• | geopolitical conditions in the global supply base. |
In addition, some contracts with our suppliers for raw materials, component parts and other goods are short-term contracts, which are subject to termination on a relatively short-term basis. The prices of our raw materials and component parts fluctuate depending on market conditions, and substantial increases in prices could increase our operating costs, which, as a result of our fixed-price contracts, we may not be able to recoup through increases in the prices of our products.
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Due to economic difficulty, we may face pressure to renegotiate agreements resulting in lower margins. Our suppliers may discontinue provision of products to us at attractive prices or at all, and we may not be able to obtain such products in the future from these or other providers on the scale and within the time periods we require. Furthermore, substitute raw materials or component parts may not meet the strict specifications and quality standards we and our customers demand, or that the U.S. Government requires. If we are not able to obtain key products on a timely basis and at an affordable cost, or we experience significant delays or interruptions of their supply, revenues from sales of products that use these supplies will decrease.
Our operations depend on our manufacturing facilities, which are subject to physical and other risks that could disrupt production.
Our manufacturing facilities could be damaged or disrupted by a natural disaster, war, or terrorist activity. We maintain property damage and business interruption insurance at the levels typical in our industry, however, a major catastrophe, such as an earthquake, hurricane, fire, flood, tornado or other natural disaster at any of our sites, or war or terrorist activities in any of the areas where we conduct operations could result in a prolonged interruption of our business. Any disruption resulting from these events could cause significant delays in shipments of products and the loss of sales and customers and we may not have insurance to adequately compensate us for any of these events.
If we are unable to protect our information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.
We rely on information technology networks and systems to manage and support a variety of business activities, including procurement and supply chain, engineering support, and manufacturing. Our information technology systems, some of which are managed by third-parties, may be susceptible to damage, disruptions or shutdown due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunications failures, user errors or catastrophic events. In addition, security breaches could result in unauthorized disclosures of confidential information. If our information technology systems suffer severe damage, disruption or shutdown and our business continuity plans do not effectively resolve the issues in a timely manner, our manufacturing process could be disrupted resulting in late deliveries or even no deliveries if there is a total shutdown.
Significant consolidation by aerospace industry suppliers could adversely affect our business.
The aerospace industry has recently experienced consolidation among suppliers. Suppliers have consolidated and formed alliances to broaden their product and integrated system offerings and achieve critical mass. This supplier consolidation is in part attributable to aircraft manufacturers more frequently awarding long-term sole-source or preferred supplier contracts to the most capable suppliers, thus reducing the total number of suppliers. This consolidation could cause us to compete against certain competitors with greater financial resources, market penetration and purchasing power. When we purchase component parts and services from suppliers to manufacture our products, consolidation reduces price competition between our suppliers, which could diminish incentives for our suppliers to reduce prices. If this consolidation continues, our operating costs could increase and it may become more difficult for us to be successful in obtaining new customers.
We may be subject to work stoppages at our facilities or those of our principal customers and suppliers, which could seriously impact the profitability of our business.
At March 31, 2014, we employed 13,828 people, of which 21.1% belonged to unions. Our unionized workforces and those of our customers and suppliers may experience work stoppages. For example, the International Association of Machinists-represented employees at Vought's Nashville, Tennessee, plant engaged in a strike that continued for approximately 16 weeks during 2008 and 2009 (prior to our acquisition of Vought). A contingency plan was implemented that allowed production to continue in Nashville during the course of that strike. Additionally, our union contract with Local 848 of the United Auto Workers with employees at Grand Prairie, Texas, facility expired in October 2013, and the employees at this facility are currently working without a contract . If we are unable to negotiate a new contract with that workforce, our operations may be disrupted and we may be prevented from completing production and delivery of products from those facilities, which would negatively impact our results of operations.
Many aircraft manufacturers, airlines and aerospace suppliers have unionized workforces. Strikes, work stoppages or slowdowns experienced by aircraft manufacturers, airlines or aerospace suppliers could reduce our customers' demand for our products or prevent us from completing production. In turn, this may have a material adverse effect on our financial condition, results of operations and cash flows.
21
Financial market conditions may adversely affect the benefit plan assets for our defined benefit plans, increase funding requirements and materially impact our statements of financial position and cash flows.
Our benefit plan assets are invested in a diversified portfolio of investments in both the equity and debt categories, as well as limited investments other alternative investments. The current market values of all of these investments, as well as the related benefit plan liabilities are impacted by the movements and volatility in the financial markets. In accordance with the Compensation—Retirement Benefits topic of the Accounting Standards Codification ("ASC"), we have recognized the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in our balance sheet, and will recognize changes in that funded status in the year in which the changes occur. The funded status is measured as the difference between the fair value of the plan's assets and the projected benefit obligation. A decrease in the fair value of these plan assets or a decrease in interest rates resulting from movements in the financial markets will increase the under-funded status of the plans recorded in our statement of financial position and result in additional cash funding requirements to meet the minimum required funding levels.
The U.S. Government is a significant customer of our largest customers, and we and they are subject to specific U.S. Government contracting rules and regulations.
As a result of the acquisition of Vought, we have become a more significant provider of aerostructures to military aircraft manufacturers. The military aircraft manufacturers' business, and by extension, our business, is affected by the U.S. Government's continued commitment to programs under contract with our customers. The terms of defense contracts with the U.S. Government generally permit the government to terminate contracts partially or completely, either for its convenience or if we default by failing to perform under the contract. Termination for convenience provisions provide only for our recovery of unrecovered costs incurred or committed, settlement expenses and profit on the work completed prior to termination. Termination for default provisions provide for the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source. On contracts where the price is based on cost, the U.S. Government may review our costs and performance, as well as our accounting and general business practices. Based on the results of such audits, the U.S. Government may adjust our contract-related costs and fees, including allocated indirect costs. In addition, under U.S. Government purchasing regulations, some of our costs, including most financing costs, portions of research and development costs, and certain marketing expenses may not be subject to reimbursement.
We bear the potential risk that the U.S. Government may unilaterally suspend our customers or us from new contracts pending the resolution of alleged violations of procurement laws or regulations. Sales to the U.S. Government are also subject to changes in the government's procurement policies in advance of design completion. An unexpected termination of, or suspension from, a significant government contract, a reduction in expenditures by the U.S. Government for aircraft using our products, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts awarded to us, or substantial cost overruns could have a material adverse effect on our financial condition, results of operations and cash flows.
We are subject to the requirements of the National Industrial Security Program Operating Manual for facility security clearance, which is a prerequisite for our ability to perform on classified contracts for the U.S. Government.
U.S. DoD, facility security clearance is required in order to be awarded and perform on classified contracts for the DoD and certain other agencies of the U.S. Government, which is a significant part of our business. We have obtained clearance at appropriate levels that require stringent qualifications, and we may be required to seek higher level clearances in the future. We cannot assure you that we will be able to maintain our security clearance. If for some reason our security clearance is invalidated or terminated, we may not be able to continue to perform our present classified contracts or be able to enter into new classified contracts, which could affect our ability to compete for and capture new business.
New regulations related to conflict minerals have and will continue to force us to incur additional expenses, may make our supply chain more complex, and could adversely impact our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 contains provisions to improve transparency and accountability concerning the supply of certain minerals and metals, known as conflict minerals, originating from the Democratic Republic of Congo (the "DRC") and adjoining countries. As a result, in August 2012, the SEC adopted annual investigation, disclosure and reporting requirements for those companies that manufacture or contract to manufacture products that contain conflict minerals that originated from the DRC and adjoining countries. As initial disclosure requirements commence in May 2014 (with respect to 2013), we have and will continue to incur compliance costs, including costs related to determining the sources of conflict minerals used in our products and other potential changes to processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in certain of our products. As there may be only a limited number of suppliers offering "conflict
22
free" minerals, we cannot be sure that we will be able to obtain necessary conflict-free minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free.
Item 1B. | Unresolved Staff Comments |
None.
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Item 2. | Properties |
As of March 31, 2014, we owned or leased the following facilities:
Location | Description | Square Footage | Owned/ Leased | |||
TRIUMPH AEROSTRUCTURES GROUP | ||||||
Hot Springs, AR | Manufacturing facility/office | 195,200 | Owned | |||
Brea, CA | Manufacturing facility | 90,000 | Leased | |||
Calexico, CA | Warehouse | 4,600 | Leased | |||
Chatsworth, CA | Manufacturing facility/office | 101,900 | Owned | |||
City of Industry, CA | Manufacturing facility/office | 75,000 | Leased | |||
El Cajon, CA | Manufacturing facility/office | 94,300 | Leased | |||
Hawthorne, CA | Manufacturing facility | 1,348,700 | Leased | |||
Lynwood, CA | Processing and finishing facility/office | 59,700 | Leased | |||
Lynwood, CA | Office/warehouse/aerospace metal processing | 105,000 | Leased | |||
Torrance, CA | Processing facility | 86,000 | Leased | |||
Walnut, CA | Manufacturing facility/office | 207,000 | Leased | |||
Bejing, China | Manufacturing facility/office | 57,500 | Leased | |||
Farnborough, England | Manufacturing facility/office | 31,600 | Leased | |||
Stuart, FL | Manufacturing facility | 519,700 | Leased | |||
Milledgeville, GA | Manufacturing facility/assembly facility | 566,200 | Owned | |||
Milledgeville, GA | Manufacturing facility/assembly facility | 66,000 | Leased | |||
Hamburg, Germany | Office | 1,200 | Leased | |||
Shelbyville, IN | Manufacturing facility/office | 193,900 | Owned | |||
Wichita, KS | Manufacturing facility/office | 172,275 | Leased | |||
Mexicali, Mexico | Manufacturing facility/office | 261,000 | Owned | |||
Grandview, MO | Manufacturing facility/office | 78,000 | Owned | |||
Taylorsville, NC | Manufacturing facility/office | 52,100 | Lease | |||
Westbury, NY | Manufacturing facility/office | 93,500 | Leased | |||
Westbury, NY | Aerospace metal processing | 12,500 | Leased | |||
Westbury, NY | Office | 10,700 | Owned | |||
Nashville, TN | Manufacturing facility/assembly facility/office | 2,198,700 | Owned | |||
Arlington, TX | Office | 111,400 | Leased | |||
Dallas, TX | High-speed wind tunnel | 28,900 | Owned | |||
Fort Worth, TX | Manufacturing facility/office | 114,100 | Owned | |||
Grand Prairie, TX | Manufacturing facility | 804,500 | Leased | |||
Kilgore, TX | Manufacturing facility/office | 83,000 | Owned | |||
Red Oak, TX | Manufacturing facility/office | 904,500 | Owned | |||
Rayong, Thailand | Manufacturing facility/office | 158,000 | Leased | |||
Everett, WA | Manufacturing facility | 153,000 | Leased | |||
Spokane, WA | Manufacturing facility/office | 392,000 | Owned | |||
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Location | Description | Square Footage | Owned/ Leased | |||
TRIUMPH AEROSPACE SYSTEMS GROUP | ||||||
Chandler, AZ | Manufacturing facility/office | 34,300 | Leased | |||
Santa Ana, CA | Processing and finishing facility/office | 105,145 | Owned | |||
San Diego, CA | Force measurement systems facility | 7,000 | Leased | |||
Valencia, CA | Manufacturing facility/office | 87,000 | Leased | |||
Toronto, Canada | Manufacturing facility/office | 76,800 | Owned | |||
Bethel, CT | Office | 1,700 | Leased | |||
Bloomfield, CT | Manufacturing facility/office | 29,800 | Leased | |||
East Lyme, CT | Manufacturing facility/office | 59,600 | Owned | |||
West Hartford, CT | Manufacturing facility/office | 250,000 | Owned | |||
Alfortville, France | Manufacturing facility/office | 18,200 | Leased | |||
Heiligenhaus, Germany | Manufacturing facility/office | 19,214 | Leased | |||
Shelbyville, IN | Manufacturing facility/office | 100,000 | Owned | |||
Macomb, MI | Manufacturing facility/office | 86,000 | Leased | |||
Freeport, NY | Manufacturing facility/office/warehouse | 29,000 | Owned | |||
Rochester, NY | Engineering office | 3,900 | Leased | |||
Clemmons, NC | Manufacturing facility/repair/office | 110,000 | Owned | |||
Forest, OH | Manufacturing facility/office | 125,000 | Owned | |||
Albany, OR | Machine shop/office | 25,000 | Owned | |||
North Wales, PA | Manufacturing facility/office | 111,400 | Owned | |||
Orangeburg, SC | Machine shop | 52,000 | Owned | |||
Basildon, UK | Manufacturing facility/office | 9,110 | Leased | |||
Buckley, UK | Manufacturing facility/office | 8,000 | Leased | |||
Park City, UT | Manufacturing facility/office | 180,000 | Owned | |||
Newport News, VA | Engineering/manufacturing/office | 93,000 | Leased | |||
Redmond, WA | Manufacturing facility/office | 41,800 | Leased | |||
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Location | Description | Square Footage | Owned/ Leased | |||
TRIUMPH AFTERMARKET SERVICES GROUP | ||||||
Hot Springs, AR | Machine shop/office | 219,700 | Owned | |||
Hot Springs, AR | Machine shop/office | 257,500 | Owned | |||
Chandler, AZ | Thermal processing facility/office | 15,000 | Leased | |||
Chandler, AZ | Repair and overhaul/office | 91,013 | Leased | |||
Phoenix, AZ | Repair and overhaul/office | 48,900 | Leased | |||
Tempe, AZ | Manufacturing facility/office | 59,500 | Owned | |||
Tempe, AZ | Machine shop | 7,000 | Owned | |||
Atlanta, GA | Manufacturing facility/office | 32,000 | Leased | |||
Indianapolis, IN | Machine shop/office | 21,000 | Leased | |||
Wellington, KS | Repair and overhaul/office | 83,400 | Leased | |||
Oakdale, PA | Production/warehouse/office | 48,000 | Leased | |||
Grand Prairie, TX | Production/office | 28,600 | Leased | |||
Grand Prairie, TX | Repair and overhaul shop/office | 60,000 | Leased | |||
San Antonio, TX | Repair and overhaul/office | 30,000 | Leased | |||
Chonburi, Thailand | Repair and overhaul shop/office | 85,000 | Owned | |||
CORPORATE AND OTHER | ||||||
Berwyn, PA | Office | 17,000 | Leased | |||
Zacatecas, Mexico | Manufacturing facility/office | 270,000 | Owned | |||
We believe that our properties are adequate to support our operations for the foreseeable future.
Item 3. | Legal Proceedings |
In the ordinary course of our business, we are involved in disputes, claims, lawsuits, and governmental and regulatory inquiries that we deem to be immaterial. Some may involve claims or potential claims of substantial damages, fines or penalties. While we cannot predict the outcome of any pending or future litigation or proceeding, we do not believe that any pending matter will have a material effect, individually or in the aggregate, on our financial position or results of operations, although no assurances can be given to that effect.
Item 4. | Mine Safety Disclosures |
Not applicable.
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PART II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Range of Market Price
Our common stock is traded on the New York Stock Exchange under the symbol "TGI." The following table sets forth the range of high and low prices for our common stock for the periods indicated:
High | Low | ||||||
Fiscal 2013 | |||||||
1st Quarter | $ | 66.89 | $ | 53.46 | |||
2nd Quarter | 63.88 | 55.71 | |||||
3rd Quarter | 67.51 | 60.79 | |||||
4th Quarter | 79.77 | 65.73 | |||||
Fiscal 2014 | |||||||
1st Quarter | $ | 81.80 | $ | 71.02 | |||
2nd Quarter | 85.50 | 67.90 | |||||
3rd Quarter | 76.37 | 68.56 | |||||
4th Quarter | 79.90 | 61.41 | |||||
On May 1, 2014, the reported closing price for our common stock was $65.17. As of May 1, 2014, there were approximately 102 holders of record of our common stock and we believe that our common stock was beneficially owned by approximately 30,000 persons.
Dividend Policy
During fiscal 2014 and 2013, we paid cash dividends of $0.16 per share and $0.16 per share, respectively. However, our declaration and payment of cash dividends in the future and the amount thereof will depend upon our results of operations, financial condition, cash requirements, future prospects, limitations imposed by credit agreements or indentures governing debt securities and other factors deemed relevant by our Board of Directors. No assurance can be given that cash dividends will continue to be declared and paid at historical levels or at all. Certain of our debt arrangements, including the Credit Facility, restrict our paying dividends and making distributions on our capital stock, except for the payment of stock dividends and redemptions of an employee's shares of capital stock upon termination of employment. On April 29, 2014, the Company announced that its Board of Directors declared a regular quarterly dividend of $0.04 per share on its outstanding Common Stock. The dividend is next payable on June 15, 2014 to stockholders of record as of May 30, 2014.
Repurchases of Stock
The following summarizes repurchases made pursuant to the Company's share repurchase plan during the three years ended March 31, 2014. In December 1998, we announced a program to repurchase up to 500,000 shares of our common stock. In February 2008, the Company's Board of Directors authorized an increase in the Company's existing stock repurchase program by up to an additional 500,000 shares of its common stock. In February 2014, the Company's Board of Directors authorized an increase in the Company's existing stock repurchase program by up to an additional 5,000,000 shares of its common stock. From the inception of the program through March 31, 2013, we have repurchased 499,200 shares (prior to fiscal 2012 stock split) for a purchase price of $19.2 million. During the fiscal year ended March 31, 2014, we repurchased 300,000 shares (subsequent to fiscal 2012 stock split) for a purchase price of $19.1 million. Repurchases may be made from time to time in open market transactions, block purchases, privately negotiated transactions or otherwise at prevailing prices. No time limit has been set for completion of the program. In May 2014, under the existing stock repurchase program, the Company repurchased 324,841 shares for $22.1 million. As a result, as of May 17, 2014, the Company remains able to purchase an additional 4,875,959 shares.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans | Maximum number of shares that may yet be purchased under the plans | ||||||||
March 1, 2014 - March 31, 2014 | 300,000 | $ | 63.78 | 799,200 | 5,200,800 | |||||||
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Equity Compensation Plan Information
The information required regarding equity compensation plan information will be included in our Proxy Statement in connection with our 2014 Annual Meeting of Stockholders to be held on July 18, 2014, under the heading "Equity Compensation Plan Information" and is incorporated herein by reference.
The following graph compares the cumulative 5-year total return provided stockholders on our common stock relative to the cumulative total returns of the Russell 1000 and Russell 2000 indexes and the S&P Aerospace & Defense index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on March 31, 2009 and its relative performance is tracked through March 31, 2014.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*
Among Triumph Group, Inc., The Russell 1000 and Russell 2000 Indexes
And The S&P Aerospace & Defense Index
* $100 invested on March 31, 2009 in stock or index, including reinvestment of dividends.
** During fiscal year ended March 31, 2013, we moved from the Russell 2000 index to the Russell 1000 index.
Fiscal year ended March 31 | |||||||||||
3/09 | 3/10 | 3/11 | 3/12 | 3/13 | 3/14 | ||||||
Triumph Group, Inc. | 100.00 | 184.14 | 232.87 | 330.77 | 415.43 | 342.52 | |||||
Russell 1000 | 100.00 | 151.60 | 176.91 | 190.82 | 218.35 | 267.29 | |||||
Russell 2000 | 100.00 | 162.77 | 204.75 | 204.37 | 237.69 | 296.87 | |||||
S&P Aerospace & Defense | 100.00 | 170.93 | 188.98 | 197.56 | 229.16 | 328.21 | |||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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Item 6. | Selected Financial Data |
The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
Fiscal Year Ended March 31, | |||||||||||||||||||
2014(1) | 2013(2) | 2012(3) | 2011(4) | 2010(5) | |||||||||||||||
(in thousands, except per share data) | |||||||||||||||||||
Operating Data: | |||||||||||||||||||
Net sales | $ | 3,763,254 | $ | 3,702,702 | $ | 3,407,929 | $ | 2,905,348 | $ | 1,294,780 | |||||||||
Cost of sales | 2,911,802 | 2,763,488 | 2,564,995 | 2,231,864 | 927,211 | ||||||||||||||
851,452 | 939,214 | 842,934 | 673,484 | 367,569 | |||||||||||||||
Selling, general and administrative expense | 254,715 | 241,349 | 242,553 | 238,889 | 157,870 | ||||||||||||||
Depreciation and amortization | 164,277 | 129,506 | 119,724 | 99,657 | 54,418 | ||||||||||||||
Relocation costs | 31,290 | — | — | — | — | ||||||||||||||
Acquisition and integration expenses | — | 2,665 | 6,342 | 20,902 | — | ||||||||||||||
Curtailments, settlements and early retirement incentives | 1,166 | 34,481 | (40,400 | ) | — | — | |||||||||||||
Operating income | 400,004 | 531,213 | 514,715 | 314,036 | 155,281 | ||||||||||||||
Interest expense and other | 87,771 | 68,156 | 77,138 | 79,559 | 28,865 | ||||||||||||||
Gain on early extinguishment of debt | — | — | — | — | (39 | ) | |||||||||||||
Income from continuing operations, before income taxes | 312,233 | 463,057 | 437,577 | 234,477 | 126,455 | ||||||||||||||
Income tax expense | 105,977 | 165,710 | 155,955 | 82,066 | 41,167 | ||||||||||||||
Income from continuing operations | 206,256 | 297,347 | 281,622 | 152,411 | 85,288 | ||||||||||||||
Loss from discontinued operations | — | — | (765 | ) | (2,512 | ) | (17,526 | ) | |||||||||||
Net income | $ | 206,256 | $ | 297,347 | $ | 280,857 | $ | 149,899 | $ | 67,762 | |||||||||
Earnings per share: | |||||||||||||||||||
Income from continuing operations: | |||||||||||||||||||
Basic | $ | 3.99 | $ | 5.99 | $ | 5.77 | $ | 3.39 | $ | 2.59 | |||||||||
Diluted(6) | $ | 3.91 | $ | 5.67 | $ | 5.43 | $ | 3.21 | $ | 2.56 | |||||||||
Cash dividends declared per share | $ | 0.16 | $ | 0.16 | $ | 0.14 | $ | 0.08 | $ | 0.08 | |||||||||
Shares used in computing earnings per share: | |||||||||||||||||||
Basic | 51,711 | 49,663 | 48,821 | 45,006 | 32,918 | ||||||||||||||
Diluted(6) | 52,787 | 52,446 | 51,873 | 47,488 | 33,332 | ||||||||||||||
As of March 31, | |||||||||||||||||||
2014(1) | 2013(2) | 2012(3) | 2011(4) | 2010(5) | |||||||||||||||
(in thousands) | |||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Working capital | $ | 1,142,144 | $ | 892,818 | $ | 741,105 | $ | 436,638 | $ | 487,411 | |||||||||
Total assets | 5,553,283 | 5,239,179 | 4,597,224 | 4,477,234 | 1,692,578 | ||||||||||||||
Long-term debt, including current portion | 1,550,383 | 1,329,863 | 1,158,862 | 1,312,004 | 505,780 | ||||||||||||||
Total stockholders' equity | $ | 2,283,911 | $ | 2,045,158 | $ | 1,793,369 | $ | 1,632,217 | $ | 860,686 | |||||||||
(1) | Includes the acquisitions of Insulfab Product Line (Chase Corporation) (October 2013), General Donlee Canada, Inc. (October 2013) and Primus Composites (May 2013) from the date of each respective acquisition. See Note 3 to the Consolidated Financial Statements. |
(2) | Includes the acquisitions of Goodrich Pump & Engine Control Systems, Inc. (March 2013) and Embee, Inc. (December 2012) from the date of each respective acquisition. See Note 3 to the Consolidated Financial Statements. |
(3) | Includes the acquisition of Aviation Network Services, LLC. (October 2011) from the date of acquisition. |
(4) | Includes the acquisition of Vought Aircraft Industries, Inc. (June 2010) from the date of acquisition. |
(5) | Includes the acquisition of DCL Avionics, Inc. (January 2010) and Fabritech, Inc. (March 2010) from the date of each respective acquisition. |
(6) | Diluted earnings per share for the fiscal years ended March 31, 2014, 2013, 2012 and 2011, included 811,083, 2,400,439, 2,606,189 and 2,040,896 shares, respectively, related to the dilutive effects of the Company's Convertible Notes. |
29
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained elsewhere herein.
OVERVIEW
We are a major supplier to the aerospace industry and have three operating segments: (i) Triumph Aerostructures Group, whose companies' revenues are derived from the design, manufacture, assembly and integration of metallic and composite aerostructures and structural components for the global aerospace original equipment manufacturers, or OEM, market; (ii) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build-to-print components, assemblies and systems also for the OEM market; and (iii) Triumph Aftermarket Services Group, whose companies serve aircraft fleets, notably commercial airlines, the U.S. military and cargo carriers, through the maintenance, repair and overhaul of aircraft components and accessories manufactured by third parties.
Effective October 4, 2013, the Company acquired all of the issued and outstanding shares of General Donlee. General Donlee is based in Toronto, Canada and is a leading manufacturer of precision machined products for the aerospace, nuclear and oil and gas industries. The acquired business now operates as Triumph Gear Systems-Toronto and its results are included in the Aerospace Systems Group.
Effective May 6, 2013, the Company acquired four related entities collectively comprising Primus from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, operates as Triumph Structures - Farnborough and Triumph Structures - Thailand and is included in the Aerostructures segement from the date of acquisition. Together, Triumph Structures - Farnborough and Triumph Structures - Thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies. In addition to its composite operations, the Thailand operation also machines and processes metal components.
Financial highlights for the fiscal year ended March 31, 2014 include:
• | Net sales for fiscal 2014 increased 1.6% to $3.76 billion, including a 6.1% decrease in organic sales. |
• | Operating income in fiscal 2014 decreased 24.7% to $400.0 million. |
• | Net income for fiscal 2014 decreased 30.6% to $206.3 million. |
• | Backlog increased 4.9% over the prior year to $4.75 billion. |
For the fiscal year ended March 31, 2014, net sales totaled $3.76 billion, a 1.6% increase from fiscal year 2013 net sales of $3.70 billion. Net income for fiscal year 2014 decreased 30.6% to $206.3 million, or $3.91 per diluted common share, versus $297.3 million, or $5.67 per diluted common share, for fiscal year 2013. As discussed in further detail below under "Results of Operations," the decrease in net income is attributable to additional 747-8 program costs ($85.0 million) and cost associated with the relocation from our Jefferson Street facility ($70.3 million).
Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. For the fiscal year ended March 31, 2014, we generated $135.1 million of cash flows from operating activities, used $246.7 million in investing activities and received $103.2 million from financing activities. Cash flows from operating activities in fiscal year 2014 included $46.3 million in pension contributions versus $109.8 million in fiscal year 2013.
We continue to remain focused on growing our core businesses as well as growing through strategic acquisitions. Our organic sales decreased in fiscal 2014 due to production rate cuts by our customers on the 747-8 and 767 program as it transitions from the commercial variant to the tanker and a decrease in military sales. Our Company has an aggressive but selective acquisition approach that adds capabilities and increases our capacity for strong and consistent internal growth.
In August 2011, the Budget Control Act (the "Act") reduced the United States defense top-line budget by approximately $490 billion through 2021. The Act further reduced the defense top-line budget by an additional $500 billion through 2021 if Congress did not enact $1.2 trillion in further budget reductions by January 15, 2012. Should Congress in future years provide funding above the yearly spending limits of the Act, sequestration will automatically take effect and cancel any excess amount above the limits. The annual spending limits of the Act will remain unless and until the current law is changed.
On March 1, 2013, sequestration was implemented for the U.S. Government fiscal year 2013. The lack of agreement between Congress and the Administration to end sequestration, certain Office of Management and Budget reports and
30
communications from the U.S. Department of Defense ("U.S. DoD") indicate that there are likely to be reductions to our military business. Reductions, cancellations or delays impacting existing contracts or programs could have a material effect on our results of operations, financial position and/or cash flows. While the U.S. DoD would sustain the bulk of sequestration cuts affecting us, civil programs and agencies could be significantly impacted as well.
In fiscal 2012, we began efforts to establish a new facility in Red Oak, Texas to expand our manufacturing capacity, particularly under the Bombardier Global 7000/8000 program. In fiscal 2013, we started construction on a second facility in association with our relocation from our Jefferson Street facilities. As of March 31, 2014, we have incurred approximately $86.6 million in capital expenditures and $111.9 million in inventory costs associated with the Bombardier Global 7000/8000 program, for which we have not yet begun to deliver. The move was substantially completed during the fiscal year ended March 31, 2014.
As disclosed during fiscal 2014, we identified additional program costs in the current year of approximately $85.0 million, primarily related to the 747-8 program which we expected to record during fiscal 2014. These changes in program cost estimates were largely due to production rate changes, continued inefficiency, rework, high overtime levels, increased costs from suppliers and expedited delivery charges. While we have experienced improvements in performance metrics since the issues were identified, we have not yet recovered to the levels previously expected or as quickly as expected. These amounts have resulted primarily from reductions to the profitability estimates of our recent 747-8 production lots. Both the current and future production lots are expected to be profitable and not result in loss reserves.
While we are currently projecting the recurring production contracts to be profitable, there is still a substantial amount of risk similar to what we have experienced on these programs (particularly the 747-8). Particularly, our ability to manage risks related to supplier performance, execution of cost reduction strategies, hiring and retaining skilled production and management personnel, quality and manufacturing execution, program schedule delays and many other risks, will determine the ultimate performance of these programs.
The next twelve months will be a critical time for these programs as we attempt to return to baseline performance for the recurring cost structure. Recognition of forward-losses in the future periods continues to be a significant risk and will depend upon several factors including our market forecast, possible airplane program delays, our ability to successfully perform under revised design and manufacturing plans, achievement of forecasted cost reductions as we continue production and our ability to successfully resolve claims and assertions with our customers and suppliers.
Our union contract with Local 848 of the United Auto Workers with employees at our Dallas and Grand Prairie, Texas, facilities expired in October 2013. The employees are currently working without a contract. If we are unable to negotiate a new contract with that workforce, our operations may be disrupted and we may be prevented from completing production and delivery of products from those facilities, which would negatively impact our results. A contingency plan has been developed that would allow production to continue in the event of a strike.
As previously announced by Boeing in September 2013 and then subsequently revised in March 2014 to curtail production by an additional three months, the decision has been made to cease production of the C-17 during calendar year 2015. Major production related to this program is expected to cease by the end of fiscal 2015 We have received inquiries regarding proposal for spares which could extend production through the end of fiscal 2016, as we believe the United States Air Force will want to have continued contractor support for the C-17 program.
Effective March 18, 2013, a wholly-owned subsidiary of the Company, Triumph Engine Control Systems, LLC, acquired the assets of GPECS, a leading independent aerospace fuel system supplier for the commercial, military, helicopter and business jet markets. The acquisition of GPECS provides new capabilities in a market where we did not previously participate and further diversifies our customer base in electronic engine controls, fuel metering units and main fuel pumps for both OEM and aftermarket/spares end markets. The results for Triumph Engine Control Systems, LLC are included in the Aerospace Systems Group segment from the date of acquisition.
Effective December 19, 2012, the Company acquired all of the outstanding shares of Embee, renamed Triumph Processing - Embee Division, Inc., which is a leading commercial metal finishing provider offering more than seventy metal finishing, inspecting and testing processes primarily for the aerospace industry. The acquisition of Embee expands our current capabilities to provide comprehensive processing services on precision engineered parts for hydraulics, landing gear, spare parts and electronic actuation systems. The results for Triumph Processing - Embee Division, Inc. are included in the Aerospace Systems Group segment from the date of acquisition. The acquisitions of GPECS and Embee are collectively referred to hereafter as the "fiscal 2013 acquisitions."
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RESULTS OF OPERATIONS
The following includes a discussion of our consolidated and business segment results of operations. The Company's diverse structure and customer base do not provide for precise comparisons of the impact of price and volume changes to our results. However, we have disclosed the significant variances between the respective periods.
Non-GAAP Financial Measures
We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. In accordance with Securities and Exchange Commission (the "SEC") guidance on Compliance and Disclosure Interpretations, we also disclose and discuss certain non-GAAP financial measures in our public releases. Currently, the non-GAAP financial measure that we disclose is Adjusted EBITDA, which is our income from continuing operations before interest, income taxes, amortization of acquired contract liabilities, curtailments, settlements and early retirement incentives and depreciation and amortization. We disclose Adjusted EBITDA on a consolidated and a reportable segment basis in our earnings releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations.
We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is income from continuing operations. In calculating Adjusted EBITDA, we exclude from income from continuing operations the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income (loss), income from continuing operations, or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on Adjusted EBITDA as a substitute for any GAAP financial measure, including net income (loss) or income from continuing operations. In addition, we urge investors and potential investors in our securities to carefully review the reconciliation of Adjusted EBITDA to income from continuing operations set forth below, in our earnings releases and in other filings with the SEC and to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed with the SEC, as well as our quarterly earnings releases, and compare the GAAP financial information with our Adjusted EBITDA.
Adjusted EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We have spent more than 15 years expanding our product and service capabilities partially through acquisitions of complementary businesses. Due to the expansion of our operations, which included acquisitions, our income from continuing operations has included significant charges for depreciation and amortization. Adjusted EBITDA excludes these charges and provides meaningful information about the operating performance of our business, apart from charges for depreciation and amortization. We believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe Adjusted EBITDA is a measure of our ongoing operating performance because the isolation of non-cash charges, such as depreciation and amortization, and non-operating items, such as interest and income taxes, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on Adjusted EBITDA to provide a financial measure by which to compare our operating performance against that of other companies in our industry.
Set forth below are descriptions of the financial items that have been excluded from our income from continuing operations to calculate Adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to income from continuing operations:
• | Curtailments, settlements and early retirement incentives may be useful for investors to consider because it represents the current period impact of the change in the defined benefit obligation due to the reduction in future service costs as well as the incremental cost of retirement incentive benefits paid to participants. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations. |
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• | Amortization of acquired contract liabilities may be useful for investors to consider because it represents the non-cash earnings on the fair value of off-market contracts acquired through acquisitions. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations. |
• | Amortization expense may be useful for investors to consider because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights and licenses. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure. |
• | Depreciation may be useful for investors to consider because it generally represents the wear and tear on our property and equipment used in our operations. We do not believe these charges necessarily reflect the current and ongoing cash charges related to our operating cost structure. |
• | The amount of interest expense and other we incur may be useful for investors to consider and may result in current cash inflows or outflows. However, we do not consider the amount of interest expense and other to be a representative component of the day-to-day operating performance of our business. |
• | Income tax expense may be useful for investors to consider because it generally represents the taxes which may be payable for the period and the change in deferred income taxes during the period and may reduce the amount of funds otherwise available for use in our business. However, we do not consider the amount of income tax expense to be a representative component of the day-to-day operating performance of our business. |
Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to gain an understanding of the factors and trends affecting our business.
The following table shows our Adjusted EBITDA reconciled to our income from continuing operations for the indicated periods (in thousands):
Fiscal year ended March 31, | |||||||||||
2014 | 2013 | 2012 | |||||||||
Income from continuing operations | $ | 206,256 | $ | 297,347 | $ | 281,622 | |||||
Amortization of acquired contract liabilities | (42,629 | ) | (25,644 | ) | (26,684 | ) | |||||
Depreciation and amortization | 164,277 | 129,506 | 119,724 | ||||||||
Curtailments, settlements and early retirement incentives | 1,166 | 34,481 | (40,400 | ) | |||||||
Interest expense and other | 87,771 | 68,156 | 77,138 | ||||||||
Income tax expense | 105,977 | 165,710 | 155,955 | ||||||||
Adjusted EBITDA | $ | 522,818 | $ | 669,556 | $ | 567,355 | |||||
The following tables show our Adjusted EBITDA by reportable segment reconciled to our operating income for the indicated periods (in thousands):
Fiscal year ended March 31, 2014 | |||||||||||||||||||
Total | Aerostructures | Aerospace Systems | Aftermarket Services | Corporate/ Eliminations | |||||||||||||||
Operating income | $ | 400,004 | $ | 252,910 | $ | 149,721 | $ | 42,265 | $ | (44,892 | ) | ||||||||
Curtailments, settlements and early retirement incentives | 1,166 | — | — | — | 1,166 | ||||||||||||||
Amortization of acquired contract liabilities | (42,629 | ) | (25,207 | ) | (17,422 | ) | — | — | |||||||||||
Depreciation and amortization | 164,277 | 114,302 | 37,453 | 7,529 | 4,993 | ||||||||||||||
Adjusted EBITDA | $ | 522,818 | $ | 342,005 | $ | 169,752 | $ | 49,794 | $ | (38,733 | ) | ||||||||
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Fiscal year ended March 31, 2013 | |||||||||||||||||||
Total | Aerostructures | Aerospace Systems | Aftermarket Services | Corporate/ Eliminations | |||||||||||||||
Operating income | $ | 531,213 | $ | 469,873 | $ | 103,179 | $ | 45,380 | $ | (87,219 | ) | ||||||||
Curtailments, settlements and early retirement incentives | 34,481 | — | — | — | 34,481 | ||||||||||||||
Amortization of acquired contract liabilities | (25,644 | ) | (25,457 | ) | (187 | ) | — | — | |||||||||||
Depreciation and amortization | 129,506 | 95,884 | 19,870 | 9,118 | 4,634 | ||||||||||||||
Adjusted EBITDA | $ | 669,556 | $ | 540,300 | $ | 122,862 | $ | 54,498 | $ | (48,104 | ) | ||||||||
Fiscal year ended March 31, 2012 | |||||||||||||||||||
Total | Aerostructures | Aerospace Systems | Aftermarket Services | Corporate/ Eliminations | |||||||||||||||
Operating income | $ | 514,715 | $ | 403,414 | $ | 90,035 | $ | 31,859 | $ | (10,593 | ) | ||||||||
Curtailments, settlements and early retirement incentives | (40,400 | ) | (40,400 | ) | |||||||||||||||
Amortization of acquired contract liabilities | (26,684 | ) | (26,684 | ) | — | — | — | ||||||||||||
Depreciation and amortization | 119,724 | 89,113 | 17,363 | 9,487 | 3,761 | ||||||||||||||
Adjusted EBITDA | $ | 567,355 | $ | 465,843 | $ | 107,398 | $ | 41,346 | $ | (47,232 | ) | ||||||||
The fluctuations from period to period within the amounts of the components of the reconciliations above are discussed further below within Results of Operations.
Fiscal year ended March 31, 2014 compared to fiscal year ended March 31, 2013
Year Ended March 31, | |||||||
2014 | 2013 | ||||||
(in thousands) | |||||||
Net sales | $ | 3,763,254 | $ | 3,702,702 | |||
Segment operating income | $ | 444,896 | $ | 618,432 | |||
Corporate general and administrative expenses | (44,892 | ) | (87,219 | ) | |||
Total operating income | 400,004 | 531,213 | |||||
Interest expense and other | 87,771 | 68,156 | |||||
Income tax expense | 105,977 | 165,710 | |||||
Net income | $ | 206,256 | $ | 297,347 | |||
Net sales increased by $60.6 million, or 1.6%, to $3.8 billion for the fiscal year ended March 31, 2014 from $3.7 billion for the fiscal year ended March 31, 2013. The fiscal 2014 and fiscal 2013 acquisitions, net of current year and prior year divestitures contributed $282.6 million. Organic sales decreased $222.0 million, or 6.1%, due to production rate cuts by our customers on the 747-8 program and, as it transitions from the commercial variant to the tanker, the 767 program, and a decrease in military sales. The prior fiscal year was positively impacted by our customers' increased production rates on existing programs and new product introductions.
Cost of sales increased by $148.3 million, or 5.4%, to $2.9 billion for the fiscal year ended March 31, 2014 from $2.8 billion for the fiscal year ended March 31, 2013. This increase in cost of sales was largely due to increased sales. Gross margin for the fiscal year ended March 31, 2014 was 22.6% compared with 25.4% for the fiscal year ended March 31, 2013. This change was impacted by reductions in profitability estimates on the 747-8 program, driven largely by the identification of additional 747-8 program costs ($85.0 million) identified during the year, additional program costs resulting from disruption and accelerated depreciation associated with the relocation from our Jefferson Street Facilities ($38.4 million), price concessions ($4.0 million) and a non-recurring termination customer settlement ($9.5 million) which had a favorable impact on the prior year gross margin.
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Gross margin included net unfavorable cumulative catch-up adjustments on long-term contracts ($53.2 million) resulting from changes in contract values and estimated costs that arose during the fiscal year. The unfavorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $14.3 million and gross unfavorable adjustments of $67.5 million, of which $29.8 million was related to the additional 747-8 program costs from reductions to profitability estimates on the 747-8 production lots that were completed during the fiscal year discussed above and $15.6 million of disruption and accelerated depreciation costs related to our exit from the Jefferson Street facilities which reduced profitability estimates on production lots completed during the year. These decreases were offset by lower pension and other postretirement benefit expense of $12.7 million. Gross margins for fiscal 2013 included net unfavorable cumulative catch-up adjustments of $14.6 million.
Segment operating income decreased by $173.5 million, or 28.1%, to $444.9 million for the fiscal year ended March 31, 2014 from $618.4 million for the fiscal year ended March 31, 2013. The organic operating income decreased $173.7 million, or 30.2%, and was a direct result of the decrease in organic sales, the decreased gross margins noted above, moving costs related to the relocation from our Jefferson Street facilities ($31.3 million), and legal fees ($4.3 million), offset by an insurance claim related to Hurricane Sandy ($6.8 million).
Corporate expenses decreased by $42.3 million, or 48.5% to $44.9 million for the fiscal year ended March 31, 2014 from $87.2 million for the fiscal year ended March 31, 2013. Corporate expenses decreased primarily due to pension curtailment losses and early retirement incentives ($34.5 million) for the fiscal year ended March 31, 2013, offset by a pension settlement charge ($2.1 million) for the fiscal year ended March 31, 2014. Corporate expenses also included lower compensation expense of $4.6 million due to decreased performance.
Interest expense and other increased by $19.6 million, or 28.8%, to $87.8 million for the fiscal year ended March 31, 2014 compared to $68.2 million for the prior year. Interest expense and other for the fiscal year ended March 31, 2014 increased due to the redemption of the 2017 Notes, which included $11.0 million of pre-tax losses associated with the 4% redemption premium, and the write-off of the remaining related unamortized discount and deferred financing fees. Interest expense and other for the fiscal year ended March 31, 2014 also increased due to higher average debt outstanding during the period as compared to the fiscal year ended March 31, 2013.
The effective income tax rate was 33.9% for the fiscal year ended March 31, 2014 and 35.8% for the fiscal year ended March 31, 2013. The income tax provision for the fiscal year ended March 31, 2014 was reduced to reflect unrecognized tax benefits of $0.7 million and an additional research and development tax credit carryforward and NOL carryforward of $2.3 million. The effective income tax rate for the fiscal year ended March 31, 2013 reflects the retroactive reinstatement of the research and development tax credit back to January 2012. The income tax provision for the fiscal year ended March 31, 2013 included $2.2 million of tax expense due to the recapture of domestic production deductions taken in earlier years associated with a refund claim of $25.2 million filed in the second quarter of fiscal 2013. The refund claim receivable is included in "Other, net" in the consolidated balance sheet as of March 31, 2014 and 2013.
In January 2014, the Company sold all of its shares of Triumph Aerospace Systems-Wichita, Inc. for total cash proceeds of $23.0 million, which resulted in no gain or loss from the sale.
In April 2013, the Company sold the assets and liabilities of Triumph Instruments-Burbank and Triumph Instruments-Ft. Lauderdale for total proceeds of $11.2 million, resulting in a loss of $1.5 million.
The Company expects to have significant continuing involvement in the businesses and markets of the disposed entities and therefore, the disposal groups did not meet the criteria to be classified as discontinued operations.
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Fiscal year ended March 31, 2013 compared to fiscal year ended March 31, 2012
Year Ended March 31, | |||||||
2013 | 2012 | ||||||
(in thousands) | |||||||
Net sales | $ | 3,702,702 | $ | 3,407,929 | |||
Segment operating income | $ | 618,432 | $ | 525,308 | |||
Corporate general and administrative expenses | (87,219 | ) | (10,593 | ) | |||
Total operating income | 531,213 | 514,715 | |||||
Interest expense and other | 68,156 | 77,138 | |||||
Income tax expense | 165,710 | 155,955 | |||||
Income from continuing operations | 297,347 | 281,622 | |||||
Loss from discontinued operations, net | — | (765 | ) | ||||
Net income | $ | 297,347 | $ | 280,857 | |||
Net sales increased by $294.8 million, or 8.6%, to $3.7 billion for the fiscal year ended March 31, 2013 from $3.4 billion for the fiscal year ended March 31, 2012. The results for fiscal 2013 included an increase in organic sales of $272.6 million, or 8.0%, due to the expected increase in commercial production rates of various customer programs. The fiscal 2013 acquisitions contributed $22.2 million in increased net sales.
Cost of sales increased by $198.5 million, or 7.7%, to $2.8 billion for the fiscal year ended March 31, 2013 from $2.6 billion for the fiscal year ended March 31, 2012. This increase in cost of sales resulted from the increase in sales. Gross margin for the fiscal year ended March 31, 2013 was 25.4% compared with 24.7% for the fiscal year ended March 31, 2012. Gross margin was favorably impacted by decreased pension and other postretirement benefit expense ($14.6 million), changes in the overall sales mix, as well as the margin on nonrecurring customer settlements ($9.5 million). These favorable items were partially offset by the net unfavorable cumulative catch-up adjustments on long-term contracts discussed further below.
Segment operating income increased by $93.1 million, or 17.7%, to $618.4 million for the fiscal year ended March 31, 2013 from $525.3 million for the fiscal year ended March 31, 2012. The segment operating income increase was a direct result of the sales volume increases and contribution from the fiscal 2013 acquisitions ($5.0 million). These improvements were partially offset by net unfavorable cumulative catch-up adjustments ($14.6 million), increased legal fees ($1.5 million) and production delay and related costs due to Hurricane Sandy ($1.6 million). The unfavorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $15.9 million and gross unfavorable adjustments of $30.5 million. The cumulative catch-up adjustments were principally due to provisions for technical problems on production lots on early-stage programs and revisions in our mix of various material and labor costs related to our efforts to gain efficiencies through expansion of our in-sourcing capabilities. Segment operating income for the fiscal year ended March 31, 2012 included net favorable cumulative catch-up adjustments of $18.3 million.
Corporate expenses increased by $76.6 million, or 723.4% (almost entirely attributed to net curtailment increases of $74.9 million) to $87.2 million for the fiscal year ended March 31, 2013 from $10.6 million for the fiscal year ended March 31, 2012. Corporate expenses increased primarily due to pension curtailment losses and early retirement incentives ($34.5 million) for the fiscal year ended March 31, 2013, as compared to a curtailment gain, net of special termination benefits associated with amendments made to certain defined benefit plans of $40.4 million for the fiscal year ended March 31, 2012. Corporate expenses also included $4.1 million in acquisition-related transaction costs associated with the fiscal 2013 acquisitions.
Interest expense and other decreased by $9.0 million, or 11.6%, to $68.2 million for the fiscal year ended March 31, 2013 compared to $77.1 million for the prior year. This decrease was due to lower average debt outstanding during the fiscal year ended March 31, 2013 due to the net decrease of the Credit Facility, along with lower interest rates. During the fiscal year ended March 31, 2012, interest expense and other included the write-off of $7.7 million of unamortized discounts and deferred financing fees associated with the extinguishment of the Term Loan and an additional $2.5 million amortization of discount on the Convertible Notes offset by a $2.9 million favorable fair value adjustment due to the reduction of the fair value of a contingent earnout liability associated with a prior acquisition due to reductions in the projected earnings over the respective earnout periods. The discount on the Convertible Notes was fully amortized as of September 30, 2011.
The effective income tax rate was 35.8% for the fiscal year ended March 31, 2013 and 35.6% for the fiscal year ended March 31, 2012. The effective income tax rate for the fiscal year ended March 31, 2013 reflects the retroactive reinstatement
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of the research and development tax credit back to January 2012. The income tax provision for the fiscal year ended March 31, 2013 included $2.2 million of tax expense due to the recapture of domestic production deductions taken in earlier years associated with a refund claim of $25.2 million filed in the second quarter. The refund claim receivable is included in "Other, net" in the consolidated balance sheet as of March 31, 2013. The income tax provision for the fiscal year ended March 31, 2012 included $1.6 million of tax expense due to the recapture of domestic production deductions taken in prior carryback periods, offset by a $1.2 million net tax benefit related to provision to return adjustments upon filing our fiscal 2011 tax return. The effective income tax rate for fiscal 2012 was impacted by the expiration of the research and development tax credit as of December 31, 2011 and the absence of the domestic production deduction due to the Company's net operating loss position for the fiscal year ended March 31, 2012.
In July 2011, the Company completed the sale of Triumph Precision Castings Co. for proceeds of $3.9 million, resulting in no gain or loss on the disposition. For the fiscal year ended March 31, 2013, there was no gain or loss from discontinued operations.
Business Segment Performance
We report our financial performance based on the following three reportable segments: the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group. The Company's Chief Operating Decision Maker ("CODM") utilizes Adjusted EBITDA 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, our Aerostructures segment generally includes long-term sole-source or preferred supplier contracts and the success of these programs provides a strong foundation for our business and positions us well for future growth on new programs and new derivatives. This compares to our Aerospace Systems segment which generally includes proprietary products and/or arrangements where we become the primary source or one of a few primary sources to our customers, where our unique 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. In contrast, our Aftermarket Services segment provides MRO services on components and accessories manufactured by third parties, with more diverse competition, including airlines, OEMs and other third-party service providers. In addition, variability in the timing and extent of customer requests performed in the Aftermarket Services segment can provide for greater volatility and less predictability in revenue and earnings than that experienced in the Aerostructures and Aerospace Systems segments.
The Aerostructures segment consists of the Company's operations that manufacture products primarily for the aerospace OEM market. The Aerostructures segment's revenues are derived from the design, manufacture, assembly and integration of both build-to-print and proprietary metallic and composite aerostructures and structural components, including aircraft wings, fuselage sections, tail assemblies, engine nacelles, flight control surfaces as well as helicopter cabins. Further, the segment's operations also design and manufacture composite assemblies for floor panels and environmental control system ducts. These products are sold to various aerospace OEMs on a global basis.
The Aerospace Systems segment consists of the Company's operations that also manufacture products primarily for the aerospace OEM market. The segment's operations design a wide range of proprietary and build-to-print components and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, engine control systems, accumulators, mechanical control cables, non-structural cockpit components and metal processing. These products are sold to various aerospace OEMs on a global basis.
The Aftermarket Services segment consists of the Company's operations that provide maintenance, repair and overhaul services to both commercial and military markets on components and accessories manufactured by third parties. Maintenance, repair and overhaul revenues are derived from services on auxiliary power units, airframe and engine accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the segment's operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The segment's operations also perform repair and overhaul services and supply spare parts for various types of gauges for a broad range of commercial airlines on a worldwide basis.
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 following table summarizes our net sales by end market by business segment. The loss of one or more of our major customers or an economic downturn in the commercial airline or the military and defense markets could have a material adverse effect on our business.
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Year Ended March 31, | ||||||||
2014 | 2013 | 2012 | ||||||
Aerostructures | ||||||||
Commercial aerospace | 42.3 | % | 43.9 | % | 39.4 | % | ||
Military | 16.1 | 18.9 | 23.5 | |||||
Business Jets | 10.0 | 11.2 | 11.3 | |||||
Regional | 0.4 | 0.5 | 0.5 | |||||
Non-aviation | 0.5 | 0.7 | 0.7 | |||||
Total Aerostructures net sales | 69.3 | % | 75.2 | % | 75.4 | % | ||
Aerospace Systems | ||||||||
Commercial aerospace | 8.5 | % | 6.3 | % | 5.9 | % | ||
Military | 11.4 | 7.9 | 7.7 | |||||
Business Jets | 1.0 | 0.7 | 0.8 | |||||
Regional | 1.0 | 0.4 | 0.5 | |||||
Non-aviation | 1.3 | 1.2 | 1.1 | |||||
Total Aerospace Systems net sales | 23.2 | % | 16.5 | % | 16.0 | % | ||
Aftermarket Services | ||||||||
Commercial aerospace | 6.3 | % | 6.8 | % | 6.6 | % | ||
Military | 0.7 | 1.0 | 0.9 | |||||
Business Jets | — | 0.3 | 0.4 | |||||
Regional | 0.2 | 0.1 | 0.2 | |||||
Non-aviation | 0.3 | 0.1 | 0.5 | |||||
Total Aftermarket Services net sales | 7.5 | % | 8.3 | % | 8.6 | % | ||
Total Consolidated net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
We continue to experience a higher proportion of our sales mix in the commercial aerospace end market. While we have recently seen an increase in our military end market, we experienced a slight decrease in our organic military end market, which has been offset by our recent acquisitions. Due to the continued strength in the commercial aerospace end market and the planned reductions in defense spending under the Budget Act and the sequestration discussed above, we expect the declining trend in the military end market to continue.
Business Segment Performance—Fiscal year ended March 31, 2014 compared to fiscal year ended March 31, 2013
Year Ended March 31, | % Change | % of Total Sales | |||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
(in thousands) | |||||||||||||||||
NET SALES | |||||||||||||||||
Aerostructures | $ | 2,612,439 | $ | 2,781,344 | (6.1 | )% | 69.4 | % | 75.1 | % | |||||||
Aerospace Systems | 871,751 | 615,771 | 41.6 | % | 23.2 | % | 16.6 | % | |||||||||
Aftermarket Services | 287,343 | 314,507 | (8.6 | )% | 7.6 | % | 8.5 | % | |||||||||
Elimination of inter-segment sales | (8,279 | ) | (8,920 | ) | (7.2 | )% | (0.2 | )% | (0.2 | )% | |||||||
Total net sales | $ | 3,763,254 | $ | 3,702,702 | 1.6 | % | 100.0 | % | 100.0 | % | |||||||
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Year Ended March 31, | % Change | % of Segment Sales | |||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
(in thousands) | |||||||||||||||||
SEGMENT OPERATING INCOME | |||||||||||||||||
Aerostructures | $ | 252,910 | $ | 469,873 | (46.2 | )% | 9.7 | % | 16.9 | % | |||||||
Aerospace Systems | 149,721 | 103,179 | 45.1 | % | 17.2 | % | 16.8 | % | |||||||||
Aftermarket Services | 42,265 | 45,380 | (6.9 | )% | 14.7 | % | 14.4 | % | |||||||||
Corporate | (44,892 | ) | (87,219 | ) | (48.5 | )% | n/a | n/a | |||||||||
Total segment operating income | $ | 400,004 | $ | 531,213 | (24.7 | )% | 10.6 | % | 14.3 | % | |||||||
Year Ended March 31, | % Change | % of Segment Sales | |||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||||
(in thousands) | |||||||||||||||||
Adjusted EBITDA | |||||||||||||||||
Aerostructures | $ | 342,005 | $ | 540,300 | (36.7 | )% | 13.1 | % | 19.4 | % | |||||||
Aerospace Systems | 169,752 | 122,862 | 38.2 | % | 19.5 | % | 20.0 | % | |||||||||
Aftermarket Services | 49,794 | 54,498 | (8.6 | )% | 17.3 | % | 17.3 | % | |||||||||
Corporate | (38,733 | ) | (48,104 | ) | (19.5 | )% | n/a | n/a | |||||||||
$ | 522,818 | $ | 669,556 | (21.9 | )% | 13.9 | % | 18.1 | % | ||||||||
Aerostructures: The Aerostructures segment net sales decreased by $168.9 million, or 6.1%, to $2.6 billion for the fiscal year ended March 31, 2014 from $2.8 billion for the fiscal year ended March 31, 2013. Organic sales decreased $228.9 million, or 8.3%, and the acquisition of Primus contributed $65.5 million in net sales. Organic sales decreased due to production rate cuts by our customers on the 747-8 program and as it transitions from the commercial variant to the tanker, the 767 program and a decrease in military sales.
Aerostructures cost of sales increased by $5.3 million, or 0.3%, to $2.1 billion for the fiscal year ended March 31, 2014 from $2.1 billion for the fiscal year ended March 31, 2013. Organic cost of sales decreased $51.7 million, or 2.5% and the acquisition of Primus contributed $61.0 million to cost of sales. Organic cost of sales declined due to decreased organic revenues discussed above partially offset by reductions in profitability estimates on the 747-8 programs, driven largely by the identification of additional program costs ($85.0 million) identified during the year and additional program costs resulting from disruption and accelerated depreciation associated with the relocation from our Jefferson Street facilities ($38.4 million).
Organic gross margin for the fiscal year ended March 31, 2014 was 18.9% compared with 23.8% for the fiscal year ended March 31, 2013. The organic gross margin included net unfavorable cumulative catch-up adjustments resulting from changes in contract values and estimated costs that arose during the fiscal year. The net unfavorable cumulative catch-up adjustments included gross favorable adjustments of $14.3 million and gross unfavorable adjustments of $67.5 million, of which $29.8 million was related to the additional 747-8 program costs from reductions to profitability estimates on the 747-8 production lots that were completed during the fiscal year and $15.6 million of disruption and accelerated depreciation costs related to our exit from the Jefferson Street facilities which reduced profitability estimates on production lots completed during the year. These decreases were offset by lower pension and other postretirement benefit expense of $12.7 million. Segment cost of sales for the fiscal year ended March 31, 2013 included net unfavorable cumulative catch-up adjustments of $14.6 million.
Aerostructures segment operating income decreased by $217.0 million, or 46.2%, to $252.9 million for the fiscal year ended March 31, 2014 from $469.9 million for the fiscal year ended March 31, 2013. Operating income was directly affected by the decrease in organic sales, the decreased organic gross margins noted above, and moving costs related to the relocation from our Jefferson Street facilities ($31.3 million). Additionally, these same factors contributed to the decrease in Adjusted EBITDA year over year.
Aerostructures segment operating income as a percentage of segment sales decreased to 9.7% for the fiscal year ended March 31, 2014 as compared with 16.9% for the fiscal year ended March 31, 2013, due to decreased sales, additional 747-8
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program costs, relocation costs related to our exit from the Jefferson Street facilities, offset by lower compensation and benefits and lower pension and other postretirement benefit expenses discussed above, which also caused the decline in the Adjusted EBITDA margin.
Aerospace Systems: The Aerospace Systems segment net sales increased by $256.0 million, or 41.6%, to $871.8 million for the fiscal year ended March 31, 2014 from $615.8 million for the fiscal year ended March 31, 2013. The acquisition of General Donlee and the fiscal 2013 acquisitions contributed $248.2 million of increased sales. Organic net sales increased $7.8 million, or 1.3%.
Aerospace Systems cost of sales increased by $156.8 million, or 37.8%, to $571.8 million for the fiscal year ended March 31, 2014 from $415.0 million for the fiscal year ended March 31, 2013. Organic cost of sales increased $11.6 million, or 2.9%, the acquisition of General Donlee and the fiscal 2013 acquisitions contributed $145.3 million in cost of sales. Organic gross margin for the fiscal year ended March 31, 2014 was 31.2% compared with 32.2% for the fiscal year ended March 31, 2013.
Aerospace Systems segment operating income increased by $46.5 million, or 45.1%, to $149.7 million for the fiscal year ended March 31, 2014 from $103.2 million for the fiscal year ended March 31, 2013. Operating income increased primarily due to the acquisition of General Donlee and fiscal 2013 acquisitions and by an insurance claim related to Hurricane Sandy ($6.8 million). These same factors contributed to the increase in Adjusted EBITDA year over year.
Aerospace Systems segment operating income as a percentage of segment sales increased to 17.2% for the fiscal year ended March 31, 2014 as compared with 16.8% for the fiscal year ended March 31, 2013, increased primarily due to the acquisition of General Donlee and fiscal 2013 acquisitions, as noted above. Adjusted EBITDA margin decreased due to the insurance gain from Hurricane Sandy.
Aftermarket Services: The Aftermarket Services segment net sales decreased by $27.2 million, or 8.6%, to $287.3 million for the fiscal year ended March 31, 2014 from $314.5 million for the fiscal year ended March 31, 2013. Organic sales decreased $1.6 million, or 0.6%, and the previously divested Triumph Instruments companies contributed $25.5 million in net sales for the fiscal year ended March 31, 2013.
Aftermarket Services cost of sales decreased by $15.6 million, or 6.8%, to $213.9 million for the fiscal year ended March 31, 2014 from $229.5 million for the fiscal year ended March 31, 2013. The organic cost of sales increased $3.0 million, or 1.4%, and the previously divested Triumph Instruments companies contributed $18.5 million to cost of sales for the fiscal year ended March 31, 2013. Organic gross margin for the fiscal year ended March 31, 2014 was 25.6% compared with 27.0% for the fiscal year ended March 31, 2013. The decrease in gross margin was impacted by decreased military sales and changes in sales mix.
Aftermarket Services segment operating income decreased by $3.1 million, or 6.9%, to $42.3 million for the fiscal year ended March 31, 2014 from $45.4 million for the fiscal year ended March 31, 2013. Operating income decreased primarily due to the decrease in gross margin noted above. These same factors contributed to the increase in Adjusted EBITDA year over year.
Aftermarket Services segment operating income as a percentage of segment sales increased to 14.7% for the fiscal year ended March 31, 2014 as compared with 14.4% for the fiscal year ended March 31, 2013.
Business Segment Performance—Fiscal year ended March 31, 2013 compared to fiscal year ended March 31, 2012
Year Ended March 31, | % Change | % of Total Sales | |||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||||
(in thousands) | |||||||||||||||||
NET SALES | |||||||||||||||||
Aerostructures | $ | 2,781,344 | $ | 2,571,576 | 8.2 | % | 75.1 | % | 75.5 | % | |||||||
Aerospace Systems | 615,771 | 551,800 | 11.6 | % | 16.6 | % | 16.2 | % | |||||||||
Aftermarket Services | 314,507 | 292,674 | 7.5 | % | 8.5 | % | 8.6 | % | |||||||||
Elimination of inter-segment sales | (8,920 | ) | (8,121 | ) | 9.8 | % | (0.2 | )% | (0.2 | )% | |||||||
Total net sales | $ | 3,702,702 | $ | 3,407,929 | 8.6 | % | 100.0 | % | 100.0 | % | |||||||
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Year Ended March 31, | % Change | % of Segment Sales | ||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
(in thousands) | ||||||||||||||
SEGMENT OPERATING INCOME | ||||||||||||||
Aerostructures | $ | 469,873 | $ | 403,414 | 16.5% | 16.9% | 15.7% | |||||||
Aerospace Systems | 103,179 | 90,035 | 14.6% | 16.8% | 16.3% | |||||||||
Aftermarket Services | 45,380 | 31,859 | 42.4% | 14.4% | 10.9% | |||||||||
Corporate | (87,219 | ) | (10,593 | ) | 723.4% | n/a | n/a | |||||||
Total segment operating income | $ | 531,213 | $ | 514,715 | 3.2% | 14.3% | 15.1% | |||||||
Year Ended March 31, | % Change | % of Total Sales | |||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||||
(in thousands) | |||||||||||||||||
Adjusted EBITDA | |||||||||||||||||
Aerostructures | $ | 540,300 | $ | 465,843 | 16.0 | % | 19.4 | % | 18.1 | % | |||||||
Aerospace Systems | 122,862 | 107,398 | 14.4 | % | 20.0 | % | 19.5 | % | |||||||||
Aftermarket Services | 54,498 | 41,346 | 31.8 | % | 17.3 | % | 14.1 | % | |||||||||
Corporate | (48,104 | ) | (47,232 | ) | 1.8 | % | n/a | n/a | |||||||||
$ | 669,556 | $ | 567,355 | 18.0 | % | 18.1 | % | 16.6 | % | ||||||||
Aerostructures: The Aerostructures segment net sales increased by $209.8 million, or 8.2%, to $2.8 billion for the fiscal year ended March 31, 2013 from $2.6 billion for the fiscal year ended March 31, 2012. The increase was entirely organic and was due to increases in our customers' production rates on existing programs and recent product introductions.
Aerostructures cost of sales increased by $153.8 million, or 7.8%, to $2.1 billion for the fiscal year ended March 31, 2013 from $2.0 billion for the fiscal year ended March 31, 2012. The increase primarily resulted from the increase in sales, as noted above. Gross margin for the fiscal year ended March 31, 2013 was 23.6% compared with 23.4% for the fiscal year ended March 31, 2012. While the gross margin percent was relatively flat, during the fiscal year ended March 31, 2013 there were offsetting charges consisting of net unfavorable cumulative catch-up adjustments with gross favorable adjustments of $15.9 million and gross unfavorable adjustments of $30.5 million, lower pension and other postretirement benefit expense of $14.6 million and nonrecurring customer settlements of $9.5 million. Segment cost of sales for the fiscal year ended March 31, 2012 included net favorable cumulative catch-up adjustments of $18.3 million.
Aerostructures segment operating income increased by $66.5 million, or 16.5%, to $469.9 million for the fiscal year ended March 31, 2013 from $403.4 million for the fiscal year ended March 31, 2012. Operating income increased due to the increase in sales and gross margin mentioned above. In addition, operating income improved due to lower compensation and benefits ($3.1 million) as a result of continued integration including early retirements offered to salaried employees and expanded in-sourcing. Additionally, these same factors contributed to the increase in Adjusted EBITDA year over year.
Aerostructures segment operating income as a percentage of segment sales increased to 16.9% for the fiscal year ended March 31, 2013 as compared with 15.7% for the fiscal year ended March 31, 2012, due to increased sales, lower compensation and benefits and lower pension and other postretirement benefit expenses discussed above, which also caused the improvements in the Adjusted EBITDA margin.
Aerospace Systems: The Aerospace Systems segment net sales increased by $64.0 million, or 11.6%, to $615.8 million for the fiscal year ended March 31, 2013 from $551.8 million for the fiscal year ended March 31, 2012. The fiscal 2013 acquisitions contributed $22.2 million of increased sales. Organic net sales increased due to continued improvements in the broader commercial market and benefits from large outsourcing programs.
Aerospace Systems cost of sales increased by $38.9 million, or 10.3%, to $415.0 million for the fiscal year ended March 31, 2013 from $376.1 million for the fiscal year ended March 31, 2012. The increase resulted from increased net sales. Gross margin for the fiscal year ended March 31, 2013 was 32.6% compared with 31.8% for the fiscal year ended March 31,
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2012. The improvement in gross margin was due to changes in our sales mix, as well as increased efficienci