Description
Filed with the SEC from June 14 to June 20:
Triumph Group (TGI)
Asset management and private-equity firm Carlyle Group sold all of its 4,666,116 shares of the aircraft-parts maker and designer in a secondary offering on June 6, at $58.82 per share.
BUSINESS OVERVIEW
General
Triumph Group, Inc. ("Triumph" or the "Company") 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.
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 include fuselages, wings, empennages, nacelles and helicopter cabins. Strategically, the acquisition of Vought substantially increased our design capabilities and provides further diversification across customers and programs, as well as exposure to new growth platforms. The acquired business is operating as Triumph Aerostructures—Vought Commercial Division, Triumph Aerostructures—Vought Integrated Programs Division and Triumph Structures—Everett. The results of Vought are included in the Company's Aerostructures Segment from the date of acquisition.
Products and Services
We offer a variety of products and services to the aerospace industry through three groups of 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.
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.
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 tradename, 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 develop and acquire new intellectual property on an ongoing basis 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, 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.
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 relates 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, 2012 , our continuing operations had outstanding purchase orders representing an aggregate invoice price of approximately $3,907 million , of which $3,185 million , $690 million and $32 million relate to the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group, respectively. As of March 31, 2011 , our continuing operations had outstanding purchase orders representing an aggregate invoice price of approximately $3,780 million , of which $3,082 million , $664 million and $34 million relate to the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group, respectively. Of the existing backlog of $3,907 million , approximately $596 million will not be shipped by March 31, 2013 .
Dependence on Significant Customer
For the fiscal years ended March 31, 2012, 2011 and 2010 , the Boeing Company, or Boeing, represented approximately 47% , 45% and 30% , respectively, of our net sales, covering virtually every Boeing plant and product. A significant reduction in sales to Boeing could 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, 2012, 2011 and 2010 were approximately $2,944 million , $2,511 million , and $1,039 million , respectively. Our revenues from our continuing operations to customers in all other countries for the fiscal years ended March 31, 2012, 2011 and 2010 were approximately $464 million , $395 million , and $256 million , respectively.
As of March 31, 2012 and 2011 , our long-lived assets for continuing operations located in the United States were approximately $3,046 million and $3,068 million , respectively. As of March 31, 2012 and 2011 , our long-lived assets for continuing operations located in all other countries were approximately $90 million and $96 million , respectively.
Competition
We compete primarily with Tier 1 and Tier 2 systems integrators and the manufacturers that supply them, some of which are divisions or subsidiaries of other large companies, in the manufacture of aircraft 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 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 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), 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.
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 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, or the 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 (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 were required to pay the expenses related to environmental liabilities for which neither indemnification nor insurance coverage is available, these expenses could have a material adverse effect on us.
Employees
As of March 31, 2012 , we employed 12,602 persons, of whom 2,904 were management employees, 115 were sales and marketing personnel, 682 were technical personnel, 759 were administrative personnel and 8,142 were production workers.
Several of our subsidiaries are parties to collective bargaining agreements with labor unions. Under those agreements, we currently employ approximately 3,573 full-time employees. Currently, approximately 28% of our permanent employees are represented by labor unions and approximately 64% of net sales are derived from the facilities at which at least some employees are unionized. 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.
CEO BACKGROUND
Richard C. Ill has been Chairman and Chief Executive Officer of Triumph since 2009, and was President and Chief Executive Officer of Triumph from 1993 to 2009. He has been a Director of Triumph since 1993. Mr. Ill expects to retire as Chief Executive Officer effective July 19, 2012. Mr. Ill is a director of P.H. Glatfelter Company, Mohawk Industries and Baker Industries and a trustee of the Eisenhower Fellowships. Mr. Ill led the management buyout pursuant to which Triumph was founded in 1993 and has led the Company as its Chief Executive Officer and a Director since that time. He serves a key leadership role on the Board, including as Chair of the finance committee and the executive committee, provides the Board with detailed knowledge of each of Triumph's businesses and its industry, challenges and opportunities, and communicates management's perspective on important matters to the Board. His experience in serving on the boards of other public companies provides additional insights that are valuable in the management and oversight of Triumph's business.
Richard C. Gozon has been a Director of Triumph since 1993. Prior to his retirement in 2002, Mr. Gozon served as Executive Vice President of Weyerhaeuser Company (“Weyerhaeuser”), a position which he held for more than five years. Weyerhaeuser is an international forest products company. He was responsible for Weyerhaeuser's Pulp, Paper, Containerboard Packaging, Newsprint, Recycling and Ocean Transportation businesses. He also served as Chairman of Norpac, a joint venture between Weyerhaeuser and Nippon Paper Industries. Mr. Gozon is Chairman and director of AmerisourceBergen Corporation and serves on the boards of directors of AmeriGas Partners, L.P. and UGI Corporation. Mr. Gozon's service on Triumph's Board since the Company's inception as a separate company provides him with a deep familiarity with the Company's business and industry. His own extensive experience as a senior executive in public companies has included broad management responsibility, including supervisory responsibility for the preparation of complex public company financial statements. This management experiences enables Mr. Gozon to contribute substantially to the oversight of all aspects of Triumph's operations, including service as the Company's lead independent director. The Company also benefits from Mr. Gozon's insights drawn from his long experience as a director of several other public companies.
Jeffry D. Frisby , has been President and Chief Operating Officer of Triumph Group, Inc. since July 2009. He joined the company in 1998 as President of Frisby Aerospace, Inc. upon its acquisition by Triumph. In 2000, he was named Group President of the Triumph Control Systems Group and was later named Group President of the Triumph Aerospace Systems Group upon its formation in April, 2003. Mr. Frisby is expected to assume the role of Chief Executive Officer of Triumph effective July 19, 2012. Mr. Frisby currently serves as a member of the Board of Directors of Quaker Chemical Corporation. Mr. Frisby will provide the Board with detailed knowledge of Triumph's businesses and its industry, challenges and opportunities, having spent his business career in the aerospace industry. He will also communicate management's perspective on important matters before the Board.
George Simpson has been a Director of Triumph since 2002. Prior to his retirement in 2001, Mr. Simpson served as Chief Executive Officer of Marconi Corporation plc, formerly GEC plc, a position which he held since September 1996. Marconi Corporation plc was a communications and information technology company. In addition, Mr. Simpson has also served on the boards of directors of Nestlé SA and Alstom SA. Mr. Simpson's long and successful career leading or serving on the boards of directors of manufacturing enterprises doing business internationally provides Triumph with advice and insights on a wide range of management issues, including issues of operational and financial discipline, resource allocation and executive and senior management compensation. As a citizen of the United Kingdom resident in Europe, Mr. Simpson also brings an international perspective and the benefits of international business contacts to the Board's deliberations and his service as Chair of the compensation and management development committee.
Paul Bourgon has been a Director of Triumph since October 2008. Mr. Bourgon has served as President of the Aeroengine division of SKF Aeroengine since 2006. SKF Group supplies products, solutions and services within rolling bearings, seals, mechatronics, services and lubrication systems and SKF Aeroengine, a division of SKF Group, focuses on providing services in bearing repair and overhaul. Prior to joining SKF Aeroengine, Mr. Bourgon served as Vice President-Marketing of Heroux‑Devtex Inc., a company which supplies the commercial and military sectors with landing gear, airframe structural components, including kits, and aircraft engine components. Mr. Bourgon also serves on the board of directors of Venture Aerobearing LLC. Mr. Bourgon's current experience as a Chief Executive Officer of a significant aerospace business and his past experience within the aerospace industry enables him to serve as an additional point of reference on trends and developments affecting Triumph's business and its customers, suppliers and competitors. In addition, his background as a Chartered Accountant, member of the Canadian Institute of Chartered Accountants since 1983, articling with Coopers & Lybrand in Montreal in the Auditing and Taxes departments, as well as his ongoing responsibility for the financial statements of the business he manages, enables him to lend additional financial expertise to the deliberations of the Board and as Chair of the audit committee.
Joseph M. Silvestri has been a Director of Triumph since October 2008 and previously served as a Director of Triumph from 1995 to 2005. Mr. Silvestri is currently a Managing Partner of Court Square Capital Partners, an independent private equity firm, and has been employed by Court Square Capital Partners and its predecessors since 1990. Mr. Silvestri also serves on the board of directors of SGS International, a digital imaging company that provides design-to-print graphic services to the international consumer products packaging market in North America, Europe and Asia. Through his two periods of service on the Board, Mr. Silvestri has acquired a deep understanding of Triumph's background and development. He also lends to the Board's deliberations the benefit of his own knowledge and understanding of the operation of the capital markets, financial matters and mergers and acquisitions generally gained through his years of participation in private equity investments. In addition, as an experienced private equity investor, he is able to share with the Board insights on corporate management and best practices derived from his experience with the many portfolio companies with which he has been associated.
Elmer L. Doty has been a Director of Triumph since June 2010. Mr. Doty served as the President of Triumph Aerostructures-Vought Aircraft Division, which represents a substantial majority of the business acquired by Triumph in 2010 in the acquisition (the “Vought Acquisition”) of Vought Aircraft Industries, Inc. (“Vought”), until December 31, 2010. From February 2006 until the closing of the Vought Acquisition, Mr. Doty served as President and Chief Executive Officer of Vought and as a member of Vought's board of directors. Prior to joining Vought, Mr. Doty served as the Vice President & General Manager of BAE Systems Ground Systems Division, a position he held since July 2005, when BAE acquired United Defense Inc. (“UDI”). Mr. Doty had served in the identical position with UDI since April 2001, with the additional duties of an executive officer of UDI. Prior to that time, he had served in other senior executive positions with UDI and its predecessor company, FMC Corporation. Mr. Doty joined the Board as part of an arrangement in connection with the Vought Acquisition. Mr. Doty brings to the Board not only his knowledge of Vought and its business but the benefit of years of management experience as a senior executive and a deep knowledge of the aerospace and defense industry.
Ralph E. Eberhart has been a Director of Triumph since June 2010. General Eberhart served as Commander of the North American Aerospace Defense Command (NORAD) and U.S. Northern Command from October 2002 to January 2005. General Eberhart's active military career spanned 36 years. He is also a member of the board of directors of Rockwell Collins, Inc. and VSE Corporation and is a director of several private companies. He is also Chairman and President of the Armed Forces Benefit Association. General Eberhart joined the Board as part of an arrangement in connection with the Vought Acquisition. Given the significant share of Triumph's business focused on serving the militaries of the United States and other countries, General Eberhart provides the Board with valuable insight into military operations that enables the Company to better serve its military customers. The Company also benefits from his experience as a director of other aerospace and defense companies. Moreover, his senior leadership experience enables him to provide management with valuable advice on management issues.
Adam J. Palmer has been a Director of Triumph since June 2010. Mr. Palmer is currently a Managing Director and Head of the Global Aerospace, Defense and Services Group at The Carlyle Group (“Carlyle”), a global alternative asset management firm. Prior to joining Carlyle in 1996, Mr. Palmer was with Lehman Brothers focusing on mergers, acquisitions and financings for aerospace, defense and information services companies. Mr. Palmer also currently serves on the boards of directors of Sequa Corporation, Wesco Aircraft Holdings, Inc. and RPK Capital Partners. Mr. Palmer served a member of Vought's board of directors from 2000 until the Vought Acquisition and led the negotiations on behalf of Carlyle that culminated in Triumph's acquisition of Vought from equity funds affiliated with Carlyle. Mr. Palmer joined the Board as part of an arrangement in connection with the Vought Acquisition. The Board benefits from Mr. Palmer's deep familiarity with Vought's business acquired through his years of involvement in developing its business as a Carlyle investment. The Board also benefits from Mr. Palmer's knowledge and understanding of the aerospace and defense industry, acquired through his years of active involvement as an investor, as well as his understanding of management issues derived from his participation on corporate boards.
MANAGEMENT DISCUSSION FROM LATEST 10K
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.
On June 16, 2010, we acquired Vought Aircraft Industries, Inc. ("Vought") from The Carlyle Group. The acquisition of Vought establishes the Company as a leading global manufacturer of aerostructures for commercial, military and business jet aircraft. Products include fuselages, wings, empennages, nacelles and helicopter cabins. Strategically, the acquisition of Vought substantially increased our design capabilities and provided further diversification across customers and programs, as well as exposure to new growth platforms. The acquired business is operating as Triumph Aerostructures—Vought Commercial Division and Triumph Aerostructures—Vought Integrated Programs Division. The Company's consolidated financial statements include Vought's results of operations and cash flows from June 16, 2010.
Financial highlights for the fiscal year ended March 31, 2012 include:
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Net sales for fiscal 2012 increased 17.3% to $3.41 billion , including a 6.6% increase due to organic growth.
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Operating income in fiscal 2012 increased 63.9% to $514.7 million , which included a $40.4 million increase due to a net curtailment gain resulting from amendments to defined benefit plans, partially offset by $6.3 million of acquisition and integration expenses associated with the fiscal year 2011 acquisition of Vought.
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Net income for fiscal 2012 increased 87.4% to $280.9 million .
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Backlog increased 3.4% over the prior year to $3.91 billion .
For the fiscal year ended March 31, 2012 , net sales totaled $3.41 billion , a 17.3% increase from fiscal year 2011 net sales of $2.91 billion . Net income for fiscal year 2012 increased 87.4% to $280.9 million , or $5.41 per diluted common share, versus $149.9 million , or $3.16 per diluted common share, for fiscal year 2011 . As discussed in further detail below under "Results of Operations," the increase in net income is attributable to contribution from the acquisition of Vought for the full year, a $40.4 million curtailment gain, net of special termination benefits resulting from amendments to certain defined benefit pension plans, and organic growth. Also, the prior year included the acquisition and integration expenses and additional interest expense associated with the financing of the acquisition of Vought.
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, 2012 , we generated $227.8 million of cash flows from operating activities, used $69.8 million in investing activities and used $166.3 million from financing activities. Cash flows from operating activities in fiscal year 2012 included $122.2 million in pension contributions.
We continue to remain focused on growing our core businesses as well as growing through strategic acquisitions. Our organic sales increased in fiscal 2012 due to continuing improvement to the overall economy, increased build rates by Boeing and Airbus, increased passenger and freight traffic from previously depressed levels and less airline inventory de-stocking. Our Company has an aggressive but selective acquisition approach that adds capabilities and increases our capacity for strong and consistent internal growth.
The Budget Act, which became law in August 2011, has two primary parts. The first mandates a $487 billion reduction to previously planned defense spending over the next decade. The second part is a sequester mechanism that would impose an additional $500 billion of cuts on defense funding between the government's fiscal year 2013 (ending September 30) and fiscal year 2021 if Congress does not identify a means to reduce the U.S. deficit by $1.2 trillion. As of May 25, 2012 , Congress has not identified these required savings. If Congress does not identify the required reduction, defense spending would likely sustain further cuts. For fiscal year 2013, the President has requested total defense funding of $525 billion, including $168 billion for investment accounts. In accordance with the first part of the Budget Act, the DoD’s five-year spending plan submitted with the fiscal year 2013 funding request incorporates $259 billion of cuts when compared with the previous five-year plan. However, the spending plan does not include the impact of sequestration, the second part of the Budget Act. Due to the planned reductions in defense spending under the Budget Act, we expect the declining trend in the military end market to continue.
In fiscal 2012, our wholly-owned subsidiary, Triumph Interiors, LLC, acquired the assets of Aviation Network Services, LLC ("ANS"), a leading provider of repair and refurbishment of aircraft interiors primarily for commercial airlines. ANS provides Triumph Interiors, LLC with additional capacity and expanded product offerings, such as the repair and refurbishment of passenger service units and other interior products. The results of Triumph Interiors, LLC continue to be included in the Company's Aftermarket Services segment. This acquisition did not have a material impact on the fiscal 2012 results of operations.
In fiscal 2012, we began efforts to establish a new facility in Red Oak, Texas to expand our capacity, particularly under the Bombardier Global 7000/8000 program. As of March 31, 2012, we have incurred approximately $9.0 million in capital expenditures.
In fiscal 2010, we began efforts to establish a new manufacturing facility in Zacatecas, Mexico to complement our existing manufacturing sites. Our expansion is expected to allow us to better manage our production costs in a competitive global market and to effectively increase capacity at our existing domestic plants and involve a significant number of our operating companies and a wide range of capabilities and technologies. As of March 31, 2012 , we have incurred approximately $32.5 million in capital expenditures in Zacatecas.
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 EBITDA, which is our income from continuing operations before interest, income taxes, amortization of acquired contract liabilities, curtailment gains (losses), depreciation and amortization, and Adjusted EBITDA, which is EBITDA adjusted for acquisition-related costs associated with the acquisition of Vought. We disclose EBITDA and 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 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 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. 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 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 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 EBITDA.
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. 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 EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe 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 EBITDA to provide a financial measure by which to compare our operating performance against that of other companies in our industry.
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 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 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 and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators, mechanical control cables and non-structural cockpit components. These products are sold 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 cockpit instruments and 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.
Aerostructures: The Aerostructures segment net sales increased by $1.5 billion, or 251.2%, to $2.1 billion for the fiscal year ended March 31, 2011 from $605.4 million for the fiscal year ended March 31, 2010. The acquisition of Vought contributed $1.5 billion of increased net sales. Excluding the elimination of intercompany sales to Vought for the year ended March 31, 2011, organic sales increased $20.9 million, or 3.5%, as compared to the prior year, when the respective sales were not eliminated. The prior year period was negatively impacted by reductions in the business jet and regional jet markets due to the overall economic conditions and by major program delays (particularly in the 787 and 747-8 programs). The fiscal year ended March 31, 2011 continued to be negatively impacted by the decreased demand for business jets and regional jets as well as commercial rate reductions (particularly in the 777 program). On a pro forma basis, assuming the acquisition of Vought occurred in the prior year period, the current year was also negatively impacted by rate reductions to the C-17 program and decreased non-recurring sales associated with the transition to the 747-8 program.
Aerostructures segment operating income increased by $165.5 million, or 161.8%, to $267.8 million for the fiscal year ended March 31, 2011 from $102.3 million for the fiscal year ended March 31, 2010. Operating income increased primarily due to contribution from the acquisition of Vought ($161.6 million), as well as improvements in organic gross margin, partially offset by increases in legal expenses ($0.9 million). These same factors contributed to the increase in EBITDA year over year. The increase of EBITDA was greater than the increase in operating income, due to the increase in depreciation and amortization, which is not included in EBITDA. The increase in depreciation and amortization expense was due principally to the Vought acquisition.
Aerostructures segment operating income as a percentage of segment sales decreased to 12.6% for the fiscal year ended March 31, 2011 as compared with 16.9% for the fiscal year ended March 31, 2010, due to lower margins from Vought, which also caused the decline in EBITDA margin.
Aerospace Systems: The Aerospace Systems segment net sales increased by $40.0 million, or 8.5%, to $513.4 million for the fiscal year ended March 31, 2011 from $473.4 million for the fiscal year ended March 31, 2010. The acquisition of Fabritech contributed $15.0 million of increased net sales. Organic sales increased by $25.0 million due to improvements in the broader market and benefits from large outsourcing programs. The prior year period sales were negatively impacted by the Boeing strike.
Aerospace Systems segment operating income increased by $7.2 million, or 10.6%, to $75.3 million for the fiscal year ended March 31, 2011 from $68.1 million for the fiscal year ended March 31, 2010. Operating income increased primarily due to margins attained on increased sales ($7.5 million), including the contribution from the Fabritech acquisition ($1.5 million), as well as decreases in legal fees ($4.0 million), partially offset by decreases in organic gross margin ($4.0 million) due in part to increased warranty reserves and increases in bad debt expense ($1.0 million). These same factors contributed to the increase in EBITDA year over year.
Aerospace Systems segment operating income as a percentage of segment sales increased slightly to 14.7% for the fiscal year ended March 31, 2011 as compared with 14.4% for the fiscal year ended March 31, 2010, due to decreases in selling, general and administrative expenses noted above, offset by the decreases in organic gross margin. The EBITDA margin remained relatively stable year over year.
Aftermarket Services: The Aftermarket Services segment net sales increased by $48.0 million, or 21.4%, to $272.7 million for the fiscal year ended March 31, 2011 from $224.7 million for the fiscal year ended March 31, 2010. The prior year period was negatively impacted by a decline in global commercial air traffic and airline inventory de-stocking resulting in lower demand for the repair and overhaul of auxiliary power units and the brokering of similar units. While we expect segment net sales to continue to experience growth over our prior fiscal year, it is unlikely it will continue at the current growth rates.
Aftermarket Services segment operating income increased by $17.6 million, or 156.3%, to $28.8 million for the fiscal year ended March 31, 2011 from $11.2 million for the fiscal year ended March 31, 2010. Operating income increased primarily due to increased sales volume. In addition, the sales volume increases improved our production efficiencies by increasing gross margins to 25.0% from 22.6% in the prior fiscal year. Also, the period was favorably impacted by the gain on sale of certain intellectual property ($0.7 million) and decreased salaries and benefits ($0.7 million) due to lower headcounts, as well as $0.3 million in expenses incurred to shut down a service facility in Austin, Texas in the prior period. These same factors contributed to the increase in EBITDA year over year, however, the growth in EBITDA was less than the growth in operating income, as depreciation and amortization was lower in fiscal year 2011 versus fiscal year 2010.
Aftermarket Services segment operating income as a percentage of segment sales increased to 10.6% for the fiscal year ended March 31, 2011 as compared with 5.0% for the fiscal year ended March 31, 2010, due to the increase in sales volume and related efficiencies noted above which also caused the improvement in the EBITDA margin.
Liquidity and Capital Resources
Our working capital needs are generally funded through cash flow from operations and borrowings under our credit arrangements. During the year ended March 31, 2012 , we generated approximately $227.8 million of cash flow from operating activities, used approximately $69.8 million in investing activities and used approximately $166.3 million in financing activities. Cash flows from operating activities included $122.2 million in pension contributions in fiscal 2012 , compared to $135.1 million in fiscal 2011 .
Cash flows from operations for the fiscal year ended March 31, 2012 increased $85.5 million , or 60.1% , from the fiscal year ended March 31, 2011 . Our cash flows from operations increased due to an increase in net income of $131.0 million , and an increase of $58.4 million in noncash charges such as depreciation and amortization associated with the acquisition of Vought, the write-off of unamortized discounts and deferred financing fees on the extinguishment of the Term Loan and the reduction in income taxes paid due to the utilization of the net operating loss carryforward acquired in the acquisition of Vought.
These increases were offset in part by a decrease of $106.1 million in net working capital changes. Net working capital changes included increased cash uses for inventories of $47.5 million for fiscal 2012, as compared to $21.0 million in fiscal 2011 due to production buildup and increases in capitalized pre-production costs. Capitalized pre-production costs are expected to continue to increase, while our production buildup is expected to decline over the next few quarters. Also, cash uses for excess funding above expense of our pension and other postretirement benefits plans increased to $157.1 million for fiscal 2012, as compared to $124.3 million in fiscal 2011. In addition, cash uses for accounts receivable increased to $82.1 million for fiscal 2012, from $15.9 million in fiscal 2011 due largely to the increase in sales. Cash flows from operations for the fiscal year ended March 31, 2012 included the receipt of an income tax refund of $29.3 million as a result of carrying back tax losses from fiscal 2011 to prior years.
Cash flows used in investing activities for the fiscal year ended March 31, 2012 decreased $349.2 million from the fiscal year ended March 31, 2011 . Our cash flows used in investing activities decreased as the prior year period included the acquisition of Vought ($333.1 million). Cash flows used in investing activities for the fiscal year ended March 31, 2012 included $20.0 million in funds received from escrow on the acquisition of Vought for the settlement of opening balance sheet liabilities, offset by $7.3 million in cash payments for the acquisition of Aviation Network Services, LLC. Cash flows from financing activities for the fiscal year ended March 31, 2012 decreased $324.6 million from the fiscal year ended March 31, 2011 included the extinguishment of the Term Loan ($350.0 million), the redemption of certain Convertible Notes ( $50.4 million ), and the payment of contingent earnouts and deferred acquisition payments ($7.3 million).
As of March 31, 2012 , $496.8 million was available under our revolving credit facility (the “Credit Facility”). On March 31, 2012 , an aggregate amount of approximately $320.0 million was outstanding under the Credit Facility, all of which was accruing interest at LIBOR plus applicable basis points totaling 2.00% per annum. Amounts repaid under the Credit Facility may be reborrowed.
On April 5, 2011, the Company amended the Credit Facility with its lenders to (i) increase the availability under the Credit Facility to $850.0 million , with a $50.0 million accordion feature, from $535.0 million , (ii) extend the maturity date to April 5, 2016 and (iii) amend certain other terms and covenants. The amendment resulted in a more favorable pricing grid and a more streamlined package of covenants and restrictions. Using the availability under the Credit Facility, the Company immediately extinguished its Term Loan at face value of $350.0 million , plus accrued interest. The Company recognized a pretax loss of approximately $7.7 million associated with these transactions during the first quarter of fiscal 2012 due to the write-off of unamortized discounts and deferred financing fees on the Term Loan.
Pursuant to the Credit Facility, the Company can borrow, repay and re-borrow revolving credit loans, and cause to be issued letters of credit, in an aggregate principal amount not to exceed $850.0 million outstanding at any time. The Credit Facility bears interest at either: (i) LIBOR plus between 1.75% and 3.00%; (ii) the prime rate; or (iii) an overnight rate at the option of the Company. The applicable interest rate is based upon the Company's ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. In addition, the Company is required to pay a commitment fee of between 0.30% and 0.50% on the unused portion of the Credit Facility. The Company's obligations under the Credit Facility are guaranteed by the Company's domestic subsidiaries.
The level of unused borrowing capacity under the Company's revolving Credit Facility varies from time to time depending in part upon its compliance with financial and other covenants set forth in the related agreement. The Credit Facility contains certain affirmative and negative covenants including limitations on specified levels of indebtedness to earnings before interest, taxes, depreciation and amortization, and interest coverage requirements, and includes limitations on, among other things, liens, mergers, consolidations, sales of assets, and incurrence of debt. As of March 31, 2012, the Company was in compliance with all such covenants.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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.
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 measures that we disclose are EBITDA, which is our income from continuing operations before interest, income taxes, amortization of acquired contract liabilities, depreciation and amortization, and Adjusted EBITDA, which is EBITDA adjusted for acquisition-related costs associated with the acquisition of Vought. We disclose EBITDA and Adjusted EBITDA on a consolidated and an operating 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 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 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. EBITDA is not a measure 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 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 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 EBITDA.
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. 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 EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe EBITDA is a measure of our ongoing operating performance because the isolation of noncash income and expenses, such as amortization of acquired contract liabilities, depreciation and amortization, and nonoperating 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 EBITDA to provide a financial measure by which to compare our operating performance against that of other companies in our industry.
Interest expense and other decreased by $7.3 million , or 33.5% , to $14.5 million for the quarter ended December 31, 2011 compared to $21.9 million for the prior year period. Interest expense and other decreased due to lower average debt outstanding during the quarter ended December 31, 2011 as compared to the quarter ended December 31, 2010 . Included in interest expense and other for the quarter ended December 31, 2011 is a $2.9 million favorable fair value adjustment due to the reduction of a contingent earnout liability associated with a prior acquisition due to changes in the projected earnings over the respective earnout periods. In addition, the Company considered these changes in projected earnings to be an indicator of impairment of the associated long-lived asset group (whose carrying value was $9.3 million at December 31, 2011) and, as a result, tested these long-lived assets for recoverability as of December 31, 2011 and concluded the long-lived assets were recoverable. The quarter ended December 31, 2010 also included an additional $1.6 million for amortization of discount on the convertible senior subordinated notes ("Convertible Notes"). The discount on the Convertible Notes was fully amortized as of September 30, 2011.
The effective income tax rate for the quarter ended December 31, 2011 was 36.1% compared to 30.6% for the quarter ended December 31, 2010 . In December 2011, the Company filed a refund claim for approximately $29 million as a result of carrying back tax losses from fiscal 2011 to prior years. The refund claim is included in "prepaid and other current assets" in the consolidated balance sheet as of December 31, 2011 and is expected to be received in the fourth quarter of fiscal 2012. For the quarter ended December 31, 2011, the income tax provision included $1.6 million of tax expense due to the recapture of domestic production deductions taken in those carry-back periods, offset by a $1.2 million net tax benefit related to filing our fiscal 2011 tax return. The effective income tax rate for the quarter ended December 31, 2010 was benefited by the retroactive reinstatement of the research and development tax credit back to January 1, 2010. For the fiscal year ending March 31, 2012 , the Company expects its effective tax rate to be approximately 35.6%, reflecting 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.
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. As a result, loss from discontinued operations before income taxes was zero for the quarter ended December 31, 2011 compared with a loss from discontinued operations before income taxes of $0.5 million , for the quarter ended December 31, 2010 . The benefit for income taxes was zero for the quarter ended December 31, 2011 compared to a benefit of $0.2 million in the prior year period.
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 results of operations among our operating 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 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 and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators, mechanical control cables and non-structural cockpit components. These products are sold 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 cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis.
Cost of sales increased $336.1 million , or 22.1% , to $1.86 billion for the nine months ended December 31, 2011 from $1.52 billion for the nine months ended December 31, 2010 . This increase includes the impact of the acquisition of Vought noted above, which contributed $283.0 million. Gross margin for the nine months ended December 31, 2011 was 24.5% , as compared to 23.3% for the prior year period. Excluding the effects of the acquisition of Vought, gross margin was 29.1% for the nine months ended December 31, 2011 , compared with 29.2% for the nine months ended December 31, 2010 .
Segment operating income increased by $117.6 million , or 46.8% , to $369.0 million for the nine months ended December 31, 2011 from $251.3 million for the nine months ended December 31, 2010 . The operating income increase was due to the contribution from the acquisition of Vought ($101.3 million) and increased organic sales ($11.6 million). The contribution of Vought included cumulative catch-up adjustments to operating income with gross favorable adjustments of $26.2 million and gross unfavorable adjustments of $10.5 million , as well as lower pension and other postretirement benefit expenses ( $23.5 million ). The cumulative catch-up adjustments for the nine months ended December 31, 2011 were due to improvements in overhead allocations, revisions in our mix of various material and labor costs related to our efforts to gain efficiencies through expansion of our in-sourcing capabilities and the reduction in provisions for technical problems on production lots at or near completion, net of ERP system implementation expenses.
Corporate expenses decreased by $8.2 million , or 18.0% , to $37.5 million for the nine months ended December 31, 2011 from $45.7 million for the nine months ended December 31, 2010 . Corporate expenses for fiscal 2011 included $19.7 million of non-recurring acquisition and integration expenses associated with the acquisition of Vought, as compared to $3.7 million in acquisition and integration expenses for the nine months ended December 31, 2011 . This decrease in corporate expenses was partially offset by increased compensation and benefits ($4.7 million) due to increased corporate head count as compared to the prior year period and an increase of $2.1 million of start up costs related to the Mexican facility compared to the prior year period. Our corporate compensation and benefits are not expected to continue to increase at recent rates, however; the costs of our Mexican facility are expected to continue to increase versus the prior year as it is in the early stages of production.
Interest expense and other increased by $1.6 million , or 2.7% , to $58.7 million for the nine months ended December 31, 2011 compared to $57.1 million for the prior year period. Interest expense and other increased due to the write-off of $7.7 million of unamortized discounts and deferred financing fees associated with the extinguishment of the term loan credit agreement (the “Term Loan”) in April 2011, as well as higher average debt outstanding during the nine months ended December 31, 2011 as compared to the nine months ended December 31, 2010 , including the Senior Notes due 2018 (the “2018 Notes”), along with higher interest rates on our revolving credit facility. Included in interest expense and other for the nine months ended December 31, 2011 is a $2.9 million favorable fair value adjustment due to the reduction of a contingent earnout liability associated with a prior acquisition due to changes in the projected earnings over the respective earnout periods. The Company considered these changes in projected earnings to be an indicator of impairment of the long-lived assets directly related to this acquisition and, as a result, tested these long-lived assets for recoverability resulting in no impairment as of December 31, 2011. The nine months ended December 31, 2010 also included an additional $1.6 million for amortization of discount on the Convertible Notes. The discount on the Convertible Notes was fully amortized as of September 30, 2011.
The effective income tax rate for the nine months ended December 31, 2011 was 35.7% compared to 33.7% for the nine months ended December 31, 2010 . In December 2011, the Company filed a refund claim for approximately $29 million as a result of carrying back tax losses from fiscal 2011 to prior years. The refund claim is included in "prepaid and other current assets" in the consolidated balance sheet as of December 31, 2011 and is expected to be received in the fourth quarter of fiscal 2012. For the nine months ended December 31, 2011, the income tax provision included $1.6 million of tax expense due to the recapture of domestic production deductions taken in those carry-back periods, offset by a $1.2 million net tax benefit related to filing our fiscal 2011 tax return. The fiscal 2011 effective income tax rate was negatively impacted by the $19.7 million in acquisition-related expenses, which were only partially deductible for tax purposes, which was more than offset by the retroactive reinstatement of the research and development tax credit back to January 1, 2010 and by reductions to unrecognized tax benefits as a result of the resolution of prior years' tax examinations . For the full fiscal year ending March 31, 2012, the Company expects its effective tax rate to be approximately 35.6%, reflecting 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.
Loss from discontinued operations before income taxes was $1.2 million for the nine months ended December 31, 2011 compared with a loss from discontinued operations before income taxes of $1.3 million for the nine months ended December 31, 2010 . The benefit for income taxes was $0.4 million for the nine months ended December 31, 2011 compared to a benefit of $0.4 million in the prior year period. 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.
CONF CALL
Richard C. Ill
Thank you, and good morning everybody. We are very proud of our strong quarter and fiscal year. Our results, our sales, our operating income, earnings per share as well as cash flow reached record levels in spite of the uncertain environment and the pessimistic outlook by some who cover the industry. Our companies have performed well and their management of working capital and general plant efficiency can be classified as a job well done.
As you see in the first slide, I repeat, we had record earnings, record cash flow. Dave will get into some of the numbers specifically. Our backlog expanded to a record level of 1.3 billion. That includes our new acquisitions, I'll talk about in a minute. We have a strong increase in our Aerospace Systems Group margins and remaining challenges within the Phoenix APU operations.
We have established... announced the establishment of a Mexican manufacturing facility and we've expanded the capabilities and international presence via four completed acquisitions which we recently announced. All are expected to be immediately accretive.
Entering fiscal '010, we have a very strong position, a very healthy balance sheet and a robust backlog. As I mentioned, our backlog is up including our acquisitions to 1.3 billion. Our same-store sales backlog were down $5 million without those acquisitions, but the acquisitions produced a good backlog going forward. We feel much more confident than some others in regards to 787 production going forward.
If you look at our position now in short and we see some headwinds. We have acquisition expense; I'll get to some specifics in a second. We have some accounting changes on how we account for the interest in our convertibles. We have Mexican start-up costs on the plant we announced we were going to build in Mexico. We have some slip in the general aviation market specifically. And the there are those who've that said that the 787 is a headwind.
We are optimistic about our abilities in the future. We don't have any information right now on any cuts in the 737 as a lot in the industry have predicted.
Our military sales, our military percentage of backlog is up to 43%. As a result, we see our earnings per share to be approximately $5 for the year on sales of $1.275 billion to $1.375 billion.
The headwinds that we mentioned are specifically in cents per share of the following. We see $0.20 per share more in legal expense due to trials coming up in the criminal area and the civil area. We see $0.35 in imputed interest on our convertibles due to accounting changes there. We see $0.27 from startup in our Mexican operation and we see $0.08 due to expensing due diligence costs which we have to do starting April 1.
At that, I'll turn it over to Dave for some more color.
M. David Kornblatt
Thank you, Rick and good morning everyone. I'd like start off with a review of financial results for both the fourth quarter and the full fiscal year.
First, turning to the income statements. Sales for the fourth quarter were $311.2 million compared to $321.2 million for the prior year period.
Operating income was basically flat at $35.4 million with an improvement in operating margin to 11.4%.
Income from continuing operations was up 12% from $21.3 million, to $23.8 million resulting in earnings per share from continuing operations of $1.43 per diluted share, versus $1.26 per diluted share for the prior year quarter.
The loss from discontinued operations was $1.6 million, or $0.10 per diluted share.
Net income increased 14% to $22.1 million, or $1.33 per diluted share.
EBITDA grew 2% to $47.8 million, resulting in a 15.3% EBITDA margin.
Turning now to our full fiscal year results. Sales for the fiscal year increased 8% to $1.24 billion.
Operating income increased 20% over the prior year to $151.9 million. Operating margin improved from 11% to 12.2%.
Income from continuing operations was up 29% to $97.8 million, resulting in earnings per share from continuing operations of $5.90 per diluted share versus $4.32 per diluted share for the prior year.
The loss from discontinued operations was $4.7 million, or $0.29 per diluted share.
EBITDA grew 18% to $200.5 million, resulting in a 16.2% EBITDA margin.
Looking now at our segment performance and the Aerospace System segment. Sales for the fourth quarter decreased 3% to $249.8 million.
Were it not for the impact of the Boeing strike and delays on the 787 and 747-8 programs, sales would have increased by approximately 2%.
Operating income increased 10% over the prior year quarter to $41.2 million, with an operating margin of 16.5%.
EBITDA for the segment was $50 million and an EBITDA margin at 20%.
For the year, sales for the segment increased 9% to $988.4 million.
Excluding the impact of the Boeing strike and the program delays, year-over-year sales increase would have been approximately 14%.
Operating income increased 35% over the prior year to $168 million with an operating margin of 17%, an improvement over the prior year of 320 basis points.
EBITDA for the segment was $202.8 million at an EBITDA margin of 20.5%.
The segment's fiscal year results included $4.7 million of legal expenses, net of insurance reimbursement associated with the previously disclosed trade secret litigation.
In our Aftermarket Services segment, sales for the fourth quarter decreased 5% to $62.1 million.
Fourth quarter operating income decreased 71%, from $6.4 million to $1.9 million at an operating margin of 3%.
The fourth quarter results include $600,000 of shutdown expense related to a manufacturing facility in Shannon, Ireland.
EBITDA in the quarter was $5.2 million with an EBITDA margin of 8.3%.
For the fiscal year, sales for the segment increased 3% to $254.6 million.
Operating income decreased 54% than the prior year to $10.9 million with an operating margin of 4.3%.
EBITDA for the segment was $24.4 million at an EBITDA margin of 9.6%.
As we said in our press release, this segment's results continue to be negatively impacted by losses sustained at the Phoenix APU operations. Excluding these operations, the segment's year-over-year revenue growth was 6% for the quarter and 17% for the year, with operating margins of 9% for the quarter and 10% for the year.
As Rick said, our order backlog is up and at an all time high of $1.3 billion, despite a net year-over-year negative impact of $62 million related to the push out of the 787 program beyond our 24-month window.
Military now represents approximately 43% of our total backlog.
Our Top-10 programs listed on the next slide are ranked according to backlog. Remaining in first place is the Boeing 777 followed by the 737 Next Generation in second place. Third is the Osprey V-22 combat helicopter. Fourth is the Boeing CH-47 Chinook followed by the Black Hawk helicopter in fifth place. The 787 was back up to sixth place with the C-17 freighter dropping to seventh. The F-15 moves up to eighth place followed by the 747 program in ninth place. In tenth place, is the Airbus A320 family.
Looking at overall sales, Boeing remains our only customer which exceeded 10% of revenue. Billings to Boeing commercial, military, and space totaled 23% of our revenue.
Looking at our sales mix among end-markets, the next slide shows that compared to fiscal 2008, commercial aerospace decreased slightly to 43% while military increased to 36%. Regional jets increased to six and business jets remain unchanged at nine. Non-aviation decreased from 9% last year's 6%.
Finishing our sales analysis, the next slide shows our sales trends for the quarter and the year. Total organic growth for the quarter decreased 5% from the prior year to $302 million.
Breaking that down by segment; fourth quarter same-store sales for Aerospace Systems was $239.9 million, compared to $252.4 million in the prior year period. The Aftermarket Services segment has same store-sales of $62.1 million, a decrease of 5% over the prior year sales.
With respect to the fiscal year, total organic growth increased 5% over the prior year to $1,201.8 billion.
Breaking that down by segment; fiscal year same-store sales for our Aerospace System segment was $947.2 million, an increase of 5%. The Aftermarket Services segment had same-store sales of $254.6 million, an increase of 3%. Export sales for the fourth quarter were $62.8 million and $266.6 million for the year, an increase of 12%.
Turning to the balance sheet in the next slide. We generated $62.7 million of cash flow from operations in the quarter and $139.5 million for the year.
CapEx in the quarter was $14.2 million and $45.4 million for the year.
At the beginning of our fiscal year, we set a goal to hold inventory flat. We almost met this goal and we take into account the distraction and inefficiencies resulting from the Boeing strike and the various major program delays, we are very proud of our performance in fiscal 2009 in this area.
Net debt at the end of the year was $460.8 million versus $406.1 million at end of the prior year, representing 37.1% of total capital.
During the quarter, we entered into a lease financing agreement, which provided $59 million of liquidity for a term of seven years at an average interest rate of 6%. Interest expense and other for quarter was a net of $1.4 million foreign exchange gain, resulting from our European acquisitions in the quarter. For the year, the global effective tax rate from continuing operations was 31.8%.
With that, I'll turn it back over to Rick. Rick?
Richard C. Ill
On the last slide, we indicate some of the things that I spoke of in the opening. Admittedly this year, we had a more difficult time coming up with our business plan for the units, different individual units then before due to mixed conditions across all our markets.
You see, listed there the guidance that I gave earlier. The headwinds that I gave you in regard to legal et cetera, add up to approximately 90... not approximately, but $0.90. So at the risk of being accused of being conservative, with that $0.90 headwind and the uncertain conditions and mix conditions across all our markets, we think we are not being overly conservative in this particular issue, and most of the analysts that cover us, don't think that we're being that conservative either.
The guidance reflects current productions rate and as I said, we haven't heard anything about any cutbacks on the 737, at least in the short-term. It indicates the accounting change for convertible debt and due diligence cost of approximately two million and that's an estimate on our part based on what we spent before on acquisition due diligence, which we think is money well spent.
Legal expenses budgeted at nine million for the year and startup expenses approximately $7.5 million for the new Mexico plant... not the New Mexico plant. But effective tax rate at 33%. That assumes the R&D credit is extended and share count of 17.2 million shares.
So with that, I'll turn it over to... back to you for any more... any questions you may have.
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