United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Period Ended September 30, 1999. or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From _________ to ________ Commission File Number: 1-12235 -------------- TRIUMPH GROUP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 51-0347963 - ----------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1255 Drummers Lane, Suite 200 Wayne, PA 19087-1565 - ----------------------------------- --------------- (Address of principal executive offices) (Zip Code) (610) 975-0420 ----------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 periods 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 / / --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, par value $0.001 per share, 8,314,986 shares and Class D common stock, par value $0.001 per share, 3,348,535 shares, each as of October 29, 1999
TRIUMPH GROUP, INC. INDEX Part I. Financial Information Item 1. Financial Statements (Unaudited) <TABLE> <CAPTION> PAGE NUMBER ----------- <S> <C> Consolidated Balance Sheets 1 March 31, 1999 and September 30, 1999 Consolidated Statements of Income 3 Three months ended September 30, 1998 and 1999 Six months ended September 30, 1998 and 1999 Consolidated Statements of Cash Flows 4 Six months ended September 30, 1998 and 1999 Notes to Consolidated Financial Statements 6 September 30, 1999 Item 2. Management's Discussion and Analysis of Financial 10 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 16 Market Risk Part II. Other Information Item 1. Legal Proceedings 17 Item 2. Changes in Securities 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature Page 19 </TABLE>
Part I. Financial Information Item: 1. Financial Statements Triumph Group, Inc. Consolidated Balance Sheets (dollars in thousands, except per share data) <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, 1999 1999 --------- ------------- (unaudited) <S> <C> <C> ASSETS Current assets: Cash $ 4,953 $ 7,177 Accounts receivable, net 65,613 73,661 Inventories 104,771 117,812 Prepaid expenses and other 2,473 5,608 Deferred income taxes 2,408 2,333 -------- -------- Total current assets 180,218 206,591 Property and equipment, net 107,123 116,770 Excess of cost over net assets acquired, net 124,667 133,876 Intangible assets and other, net 16,849 22,044 -------- -------- Total assets $428,857 $479,281 -------- -------- -------- -------- </TABLE> -1-
Triumph Group, Inc. Consolidated Balance Sheets (continued) (dollars in thousands, except per share data) <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, 1999 1999 --------- ------------- (unaudited) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 33,894 $ 33,806 Accrued expenses 47,263 53,238 Income taxes payable 4,453 3,506 Current portion of long-term debt 1,151 2,472 --------- --------- Total current liabilities 86,761 93,022 Long-term debt, less current portion 91,857 117,635 Deferred income taxes and other 35,462 41,892 Stockholders' equity: Common stock, $.001 par value, 50,000,000 shares authorized, 8,551,786 shares issued 9 9 Class D common stock convertible, $.001 par value, 6,000,000 shares authorized, 3,348,535 shares issued and outstanding 3 3 Capital in excess of par value 135,418 135,418 Treasury stock, at cost, 52,700 and 236,800 shares (1,336) (5,766) Retained earnings 80,683 97,068 --------- --------- Total stockholders' equity 214,777 226,732 --------- --------- Total liabilities and stockholders' equity $ 428,857 $ 479,281 --------- --------- --------- --------- </TABLE> SEE ACCOMPANYING NOTES. -2-
Triumph Group, Inc. Consolidated Statements of Income (in thousands, except per share data) (unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- ---------------------- 1998 1999 1998 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 99,482 $110,276 $190,622 $215,170 Operating costs and expenses: Cost of products sold 68,337 76,370 131,360 148,281 Selling, general, and administrative 13,324 13,882 25,396 27,317 Depreciation and amortization 3,437 4,790 6,324 9,516 -------- -------- -------- -------- 85,098 95,042 163,080 185,114 Operating income 14,384 15,234 27,542 30,056 Interest expense and other 1,306 2,316 2,011 4,171 -------- -------- -------- -------- Income before income taxes 13,078 12,918 25,531 25,885 Income tax expense 5,100 4,728 9,959 9,460 -------- -------- -------- -------- Net income $ 7,978 $ 8,190 $ 15,572 $ 16,425 -------- -------- -------- -------- -------- -------- -------- -------- Earnings Per Share--Basic: Net income $ 0.67 $ 0.70 $ 1.31 $ 1.40 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares outstanding--Basic 11,900 11,692 11,899 11,712 -------- -------- -------- -------- -------- -------- -------- -------- Earnings Per Share--Assuming Dilution: Net income $ 0.63 $ 0.66 $ 1.23 $ 1.32 -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares outstanding-- Assuming Dilution 12,654 12,397 12,673 12,423 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> SEE ACCOMPANYING NOTES. -3-
Triumph Group, Inc. Consolidated Statements of Cash Flows (dollars in thousands) (unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED SEPTEMBER 30, ------------------------------ 1998 1999 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net income $ 15,572 $ 16,425 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,324 9,516 Other amortization included in interest expense 69 117 Provision for doubtful accounts receivable 133 175 Provision for deferred income taxes 749 3,267 Interest on subordinated and junior subordinated promissory notes paid by issuance of additional notes 386 444 Changes in other current assets and liabilities, net of acquisition of businesses: Accounts receivable 2,364 (360) Inventories (8,262) (7,647) Prepaid expenses and other current assets (1,485) (990) Accounts payable, accrued expenses, and accrued income taxes payable (3,716) (8,261) Other (550) (754) -------- -------- Net cash provided by operating activities 11,584 11,932 INVESTING ACTIVITIES Capital expenditures, net (7,742) (7,113) Proceeds from sale of assets -- 5,794 Cost of businesses acquired, net of cash acquired (27,330) (22,419) -------- -------- Net cash used in investing activities (35,072) (23,738) </TABLE> -4-
Triumph Group, Inc. Consolidated Statements of Cash Flows (continued) (dollars in thousands) (unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED SEPTEMBER 30, ------------------------------ 1998 1999 ---- ---- <S> <C> <C> FINANCING ACTIVITIES Net increase in revolving credit facility $ 25,497 $ 19,506 Repayment of debt and capital lease obligations (570) (1,758) Purchase of Treasury Stock -- (4,611) Payments of deferred financing costs (25) (963) Proceeds from exercise of stock options 72 141 -------- -------- Net cash provided by financing activities 24,974 12,315 -------- -------- Net change in cash 1,486 509 Cash at beginning of period 4,642 4,953 -------- -------- Cash at end of period $ 6,128 $ 5,462 -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for income taxes $ 9,910 $ 7,062 Cash paid for interest 1,518 3,808 </TABLE> SEE ACCOMPANYING NOTES. -5-
Triumph Group, Inc. Notes to Consolidated Financial Statements (dollars in thousands, except per share data) (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in Triumph Group, Inc.'s (the "Company") Annual Report on Form 10-K for the year ended March 31, 1999. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The Company's aviation segment designs, engineers, manufactures or repairs and overhauls aircraft components for commercial airlines, air cargo carriers, and original equipment manufacturers on a worldwide basis. The Company's metals segment manufactures, machines, processes, and distributes metal products to customers in the computer, construction, container and office furniture industries, primarily within North America. NEW ACCOUNTING STANDARDS In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to the development of internal-use software other than those incurred during the application development stage to be expensed as incurred. Costs incurred during the application development stage are required to be capitalized and amortized over the estimated useful life of the software. The adoption of SOP 98-1 had no material effect on results of operations or financial position for the three or six month periods ended September 30, 1999. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 3. ACQUISITIONS Effective April 1, 1999, the Company acquired all of the outstanding stock of Ralee Engineering Company ("Ralee"), based in City of Industry, California, for an aggregate purchase price of approximately $32,213. The purchase price includes cash paid at closing, net of cash acquired, the assumption of debt and certain liabilities, direct costs of the acquisition, deferred payments and a contingent payment of approximately $6,000, which is included in accrued expenses at September 30, 1999. Ralee manufactures long structural components such as stringers, cords, floor beams and spars for the aviation industry. The excess of the purchase price over the fair value of the net assets acquired of $8,207 was recorded as excess of cost over net assets acquired and is being amortized over thirty years on a straight-line basis. The acquisition has been accounted for under the purchase method and, accordingly, is included in the consolidated financial statements from its date of acquisition. The acquisition was funded through the Company's Credit Facility. -6-
Triumph Group, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands, except per share data) (Unaudited) 4. INVENTORIES The components of inventories are as follows: <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, 1999 1999 --------- ------------- <S> <C> <C> Raw materials $ 30,896 $ 33,942 Work-in-process 39,280 45,823 Finished goods 34,595 38,047 -------- -------- Total inventories $104,771 $117,812 -------- -------- -------- -------- </TABLE> Effective April 1, 1999, the Company's method of valuing all inventory was the lower of First-in First-out ("FIFO") cost or market. As of March 31, 1999, approximately 10% of the inventory was valued using the Last-in First-out ("LIFO") method. 5. LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> MARCH 31, SEPTEMBER 30, 1999 1999 --------- ------------- <S> <C> <C> Revolving credit facility $ 76,095 $95,601 Subordinated promissory notes 11,734 11,352 Industrial revenue bonds 4,665 4,330 Capital lease obligations 28 8,301 Other debt 486 523 -------- -------- 93,008 120,107 Less current portion 1,151 2,472 -------- -------- $ 91,857 $117,635 -------- -------- -------- -------- </TABLE> On June 11, 1999, the Company amended and restated its Credit Facility ("New Credit Facility") with its Lenders to increase the Credit Facility to $250,000 from $125,000, extend the term and amend certain terms and covenants. The New Credit Facility bears interest at either LIBOR plus between 0.75% and 1.75% or the prime rate (or the Federal Funds rate plus 0.5% if greater) at the option of the Company and expires on June 13, 2004. The variation in the 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 0.175% and 0.375% on the unused portion of the New Credit Facility without penalty. The Company may allocate up to $5,000 of the available New Credit Facility for the issuance of letters of credit. Effective April 1, 1999, in connection with the Ralee acquisition, the Company assumed approximately $8,665 of capital leases with interest rates ranging from 7.1% to 10.2%, maturing between September 2003 and August 2005. Each capital lease is secured by a piece of equipment. -7-
Triumph Group, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands, except per share data) (Unaudited) 6. COMMITMENTS AND CONTINGENCIES Certain of the Company's business operations and facilities are subject to a number of federal, state, and local environmental laws and regulations. The Company is indemnified for environmental liabilities related to assets purchased from IKON Office Solutions, Inc. (formerly Alco Standard Corporation) which existed prior to the acquisition of such assets and any unidentified environmental liabilities which arise subsequent to the date of settlement through July 22, 2000, arising from conditions or activities existing at these facilities prior to the acquisition. In the opinion of management, there are no significant environmental concerns which would have a material effect on the financial condition or operating results of the Company which are not covered by such indemnification. The Company is involved in certain litigation matters arising out of its normal business activities. In the opinion of management, the ultimate resolution of such litigation will not have a material effect on the financial condition or operating results of the Company. 7. EARNINGS PER SHARE The following is a reconciliation between the weighted average outstanding shares used in the calculation of basic and diluted earnings per share: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ---------------- (in thousands) 1998 1999 1998 1999 ------ ------ ------ ------ <S> <C> <C> <C> <C> Weighted average common shares outstanding 11,900 11,692 11,899 11,712 Net effect of dilutive stock options 104 55 124 61 Net effect of dilutive warrant 650 650 650 650 ------ ------ ------ ------ Weighted average common shares outstanding - assuming dilution 12,654 12,397 12,673 12,423 ------ ------ ------ ------ ------ ------ ------ ------ </TABLE> Options to purchase 344,300 shares of common stock, at prices ranging from $26.25 per share to $45.38 per share, were outstanding during the second quarter of fiscal 2000. These options were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common stock during the three months ended September 30, 1999 and, therefore, the effect would be antidilutive. Also, warrants to purchase up to 60,000 share of common stock at $10.00 per share, subject to certain performance criteria, were not included in the computation of diluted earnings per share during the second quarter of fiscal 2000 because the number of contingently issuable warrants was zero, based on the number of shares, if any, that would be issuable under the terms of the arrangement, as if the end of the contingency period were September 30, 1999. -8-
Triumph Group, Inc. Notes to Consolidated Financial Statements (continued) (dollars in thousands, except per share data) (Unaudited) 8. SEGMENT REPORTING Selected financial information for each reportable segment is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1998 1999 1998 1999 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net Sales: Aviation $ 81,807 $ 91,728 $155,864 $177,783 Metals 17,675 18,548 34,758 37,387 -------- -------- -------- -------- $ 99,482 $110,276 $190,622 $215,170 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes: Operating income (expense): Aviation $ 14,428 $ 15,181 $ 27,847 $ 29,850 Metals 1,296 998 2,050 1,928 Corporate (1,340) (945) (2,355) (1,722) -------- -------- -------- -------- 14,384 15,234 27,542 30,056 Interest expense and other 1,306 2,316 2,011 4,171 -------- -------- -------- -------- $ 13,078 $ 12,918 $25,531 $ 25,885 -------- -------- -------- -------- -------- -------- -------- -------- Capital expenditures: Aviation $ 2,871 $ 2,353 $ 7,265 $ 6,488 Metals 212 244 436 616 Corporate 7 9 41 9 -------- -------- -------- -------- $ 3,090 $ 2,606 $ 7,742 $ 7,113 -------- -------- -------- -------- -------- -------- -------- -------- Depreciation and amortization: Aviation $ 3,162 $ 4,481 $ 5,777 $ 8,900 Metals 260 297 517 592 Corporate 15 12 30 24 -------- -------- -------- -------- $ 3,437 $ 4,790 $ 6,324 $ 9,516 -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> <TABLE> <CAPTION> MARCH 31, 1999 SEPTEMBER 30, 1999 -------------- ------------------ Assets: <S> <C> <C> Aviation $395,745 $445,338 Metals 31,228 31,571 Corporate 1,884 2,372 -------- -------- $428,857 $479,281 -------- -------- -------- -------- </TABLE> For the three months ended September 30, 1998 and 1999, the Company had foreign sales of $12,079 and $17,116, respectively. For the six months ended September 30, 1998 and 1999, the Company had foreign sales of $23,821 and $33,037, respectively. 9. SUBSEQUENT EVENT In November 1999 the Company announced the acquisitions of Construction Brevitees d'Alfortville ("CBA"), KT Aerofab and Lee Aerospace, Inc. CBA, located near Paris, France, is a manufacturer of mechanical ball bearing control assemblies for the aerospace, ground transportation and marine industries. KT Aerofab, located in San Diego, California, is a developer of high-temperature metal alloy parts. Lee Aerospace, Inc., located in Wichita, Kansas, is a leading supplier of unheated windshields, flight deck and cabin windows to the general aviation and corporate jet market. The combined cash portion of the purchase prices paid at closing for these companies of approximately $16,100 was funded by borrowings under the Company's New Credit Facility. -9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (The following discussion should be read in conjunction with the Consolidated Financial Statements contained elsewhere herein.) THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 AVIATION GROUP NET SALES. Net sales for the Aviation Group increased by $9.9 million, or 12.1%, to $91.7 million for the second quarter of fiscal 2000 from $81.8 million for the second quarter of fiscal 1999. This increase was due to the inclusion of an aggregate of $17.0 million and $4.8 million in net sales in the second quarter of fiscal 2000 and 1999, respectively, for Nu-Tech Industries, Inc. ("Nu-Tech"), DG Industries, Inc. ("DG"), DV Industries, Inc. ("DV"), Triumph Air Repair (Europe) Ltd. ("Triumph Air (Europe)"), HTD Aerospace, Inc. ("HTD") and Triumph Precision, Inc. ("Triumph Precision"), (collectively, the "1999 Acquisitions") and Ralee Engineering Company ("Ralee"). Net sales for the other operating divisions and subsidiaries in the Aviation Group experienced a 2.9% decrease, totaling $2.3 million, from the prior year period. The decline in sales was due to slowdowns in the production rates of certain Boeing commercial airplane programs, specifically the 737 Classic, 747 and 777, as well as effects from Boeing working off excess inventory for these programs, slightly offset by an increase in the production rate of the 737 New Generation and the C-17 military aircraft program. COSTS OF PRODUCTS SOLD. Costs of products sold for the Aviation Group increased by $6.7 million, or 12.1%, to $61.8 million for the second quarter of fiscal 2000 from $55.1 million for the second quarter fiscal 1999. This increase was due to the inclusion of $10.9 million and $2.7 million in the second quarter of fiscal 2000 and 1999, respectively, of costs of products sold associated with net sales generated by the 1999 Acquisitions and Ralee. Costs of products sold for the other operating divisions and subsidiaries in the Aviation Group decreased by $1.5 million, or 2.8%, due to the decline in shipments for Boeing commercial airplane programs discussed above. GROSS PROFIT. Gross profit for the Aviation Group increased by $3.2 million, or 12.1%, to $30.0 million for the second quarter of fiscal 2000 from $26.7 million for the second quarter of fiscal 1999. This increase was due to the inclusion of $6.1 million and $2.0 million in the second quarter of fiscal 2000 and 1999, respectively, of gross profit on the net sales generated by the 1999 Acquisitions and Ralee. The remaining net decrease of $0.8 million was due to reasons discussed above. As a percentage of net sales, gross profit for the Aviation Group was 32.7% for the second quarter of both fiscal 2000 and 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the Aviation Group increased by $1.2 million, or 12.8%, to $10.3 million for the second quarter of fiscal 2000 from $9.1 million for the second quarter of fiscal 1999, primarily due to the 1999 Acquisitions and Ralee. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the Aviation Group increased by $1.3 million, or 41.7%, to $4.5 million for the second quarter of fiscal 2000 from $3.2 million for the second quarter of fiscal 1999, primarily due to the assets acquired in connection with the 1999 Acquisitions and Ralee. OPERATING INCOME. Operating income for the Aviation Group increased by $0.8 million, or 5.2%, to $15.2 million for the second quarter of fiscal 2000 from $14.4 million for the second quarter of fiscal 1999. This increase was primarily due to the addition of net sales and profits generated by the 1999 Acquisitions and Ralee. All other operating divisions and subsidiaries in the Aviation group experienced a 7.3% decline in operating income from the prior year due to the reasons discussed above. As a percentage of net sales, operating income for the Aviation Group was 16.6% for the second quarter of fiscal 2000 and 17.6% for the second quarter of fiscal 1999. -10-
Management's Discussion And Analysis of Financial Condition and Results of Operations (continued) METALS GROUP NET SALES. Net sales for the Metals Group increased by $0.9 million, or 4.9%, to $18.5 million for the second quarter of fiscal 2000 from $17.7 million for the second quarter of fiscal 1999. This increase was mainly due to an increase in activity at the Company's structural steel erection operation. COSTS OF PRODUCTS SOLD. Costs of products sold for the Metals Group increased by $1.4 million, or 10.2%, to $14.6 million for the second quarter of fiscal 2000 from $13.2 million for the second quarter of fiscal 1999. This increase mainly was due to the increase in activity at the Company's structural steel erection operation. GROSS PROFIT. Gross profit for the Metals Group decreased by $0.5 million, or 10.8%, to $4.0 million for fiscal 2000 from $4.4 million for the prior year period, due to the reasons discussed above. As a percentage of net sales, gross profit for the Metals Group was 21.3% and 25.1% for the second quarter of fiscal 2000 and fiscal 1999, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the Metals Group decreased by $0.2 million, or 7.5%, to $2.7 million from $2.9 million in the second quarter of fiscal 1999. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the Metals Group remained unchanged at $0.3 million for the second quarter of fiscal 2000 from the second quarter of fiscal 1999. OPERATING INCOME. Operating income for the Metals Group decreased by $0.3 million, or 23.0%, to $1.0 million for the second quarter of fiscal 2000 from $1.3 million for the second quarter of fiscal 1999, due to the reasons discussed above. As a percentage of net sales, operating income for the Metals Group was 5.4% and 7.3% for the second quarter of fiscal 2000 and 1999, respectively. OVERALL RESULTS CORPORATE EXPENSES. Corporate expenses decreased by $0.4 million, or 29.5%, to $0.9 million for the second quarter of fiscal 2000 from $1.3 million for the second quarter of fiscal 1999. INTEREST EXPENSE AND OTHER. Interest expense and other increased by $1.0 million, or 77.3%, to $2.3 million for the second quarter of fiscal 2000 from $1.3 million for the second quarter of fiscal 1999. This increase was primarily due to increased debt levels associated with the 1999 Acquisitions and the acquisition of Ralee, the cash portions of which were financed by borrowings under the Company's Credit Facility, as well as a slightly higher rate on and amortization of fees relating to the Company's amended and restated credit facility ("New Credit Facility"). INCOME TAX EXPENSE. The effective tax rate was 36.6% for the second quarter of fiscal 2000 and 39.0% for the second quarter of fiscal 1999. The second quarter of fiscal 2000 effective tax rate is comparable to the third and fourth quarters of fiscal 1999 effective tax rates of 37.0% in each of those quarters and the first quarter of fiscal 2000 effective tax rate of 36.5%. NET INCOME. Net income increased by $0.2 million, or 2.7%, to $8.2 million for the second quarter of fiscal 2000 from $8.0 million for the second quarter of fiscal 1999. The increase in second quarter 2000 net income was primarily attributable to the 1999 Acquisitions and Ralee, partially offset by the reduced earnings of the remaining Aviation Group operating units due to the decline in shipments for Boeing commercial airplane programs discussed above. -11-
Management's Discussion And Analysis of Financial Condition and Results of Operations (continued) SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30, 1998 AVIATION GROUP NET SALES. Net sales for the Aviation Group increased by $21.9 million, or 14.1%, to $177.8 million for the six months ended September 30, 1999 from $155.9 million for the six months ended September 30, 1998. This increase was due to the inclusion of an aggregate of $36.1 million and $4.8 million in net sales in the first six months of fiscal 2000 and 1999, respectively, generated by the 1999 Acquisitions and Ralee. Net sales for the other operating divisions and subsidiaries in the Aviation Group experienced a 6.2% decrease, totaling $9.4 million, from the prior year period. The decline in sales was due to slowdowns in the production rates of certain Boeing commercial airplane programs, specifically the 737 Classic, 747 and 777, as well as effects from Boeing working off excess inventory for these programs, slightly offset by an increase in the production rate of the 737 New Generation and the C-17 military aircraft program. COSTS OF PRODUCTS SOLD. Costs of products sold for the Aviation Group increased by $14.2 million, or 13.5%, to $118.8 million for the first six months of fiscal 2000 from $104.6 million for the first six months of fiscal 1999. This increase was due to the inclusion of $21.9 million and $2.7 million in the first six months of fiscal 2000 and 1999, respectively, of costs of products sold associated with net sales generated by the 1999 Acquisitions and Ralee. Costs of products sold for the other operating divisions and subsidiaries in the Aviation Group decreased by $5.0 million, or 4.9%, due to the decline in shipments for Boeing commercial airplane programs discussed above. GROSS PROFIT. Gross profit for the Aviation Group increased by $7.7 million, or 15.1%, to $59.0 million for the first six months of fiscal 2000 from $51.2 million for the first six months of fiscal 1999. This increase was due to the inclusion of $14.2 million and $2.0 million in the first six months of fiscal 2000 and 1999, respectively, of gross profit on the net sales generated by the 1999 Acquisitions and Ralee. The remaining net decrease of $4.4 million was due to reasons discussed above. As a percentage of net sales, gross profit for the Aviation Group was 33.2% and 32.9% for the first six months of fiscal 2000 and 1999, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the Aviation Group increased by $2.6 million, or 14.9%, to $20.2 million for the first six months of fiscal 2000 from $17.6 million for the first six months of fiscal 1999, primarily due to the 1999 Acquisitions and Ralee. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the Aviation Group increased by $3.1 million, or 54.1%, to $8.9 million for the first six months of fiscal 2000 from $5.8 million for the first six months of fiscal 1999, primarily due to the assets acquired in connection with the 1999 Acquisitions and Ralee. OPERATING INCOME. Operating income for the Aviation Group increased by $2.0 million, or 7.2%, to $29.9 million for the first six months of fiscal 2000 from $27.8 million for the first six months of fiscal 1999. This increase was primarily due to the addition of net sales and profits generated by the 1999 Acquisitions and Ralee. All other operating divisions and subsidiaries in the Aviation group experienced a 17.0% decline in operating income from the prior year due to the reasons discussed above. As a percentage of net sales, operating income for the Aviation Group was 16.8% for the first six months of fiscal 2000 and 17.9% for the first six months of fiscal 1999. -12-
Management's Discussion And Analysis of Financial Condition and Results of Operations (continued) METALS GROUP NET SALES. Net sales for the Metals Group increased by $2.6 million, or 7.6%, to $37.4 million for the first six months of fiscal 2000 from $34.8 million for the first six months of fiscal 1999. This increase was mainly due to an increase in activity at the Company's structural steel erection operation. COSTS OF PRODUCTS SOLD. Costs of products sold for the Metals Group increased by $2.8 million, or 10.3%, to $29.5 million for the first six months of fiscal 2000 from $26.7 million for the first six months of fiscal 1999. This increase mainly was due to the increase in activity at the Company's structural steel erection operation. GROSS PROFIT. Gross profit for the Metals Group decreased by $0.1 million, or 1.5%, to $7.9 million for the first six months of fiscal 2000 from $8.0 million for the prior year period, due to the reasons discussed above. As a percentage of net sales, gross profit for the Metals Group was 21.2% and 23.1% for the first six months of fiscal 2000 and fiscal 1999, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the Metals Group decreased by $0.1 million, or 1.4%, to $5.4 million from $5.5 million in the first six months of fiscal 1999. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the Metals Group increased by $0.1 million, or 14.5%, to $0.6 million for the first six months of fiscal 2000 from $0.5 million the first six months of fiscal 1999. OPERATING INCOME. Operating income for the Metals Group decreased by $0.1 million, or 6.0%, to $1.9 million for the first six months of fiscal 2000 from $2.1 million for the first six months of fiscal 1999, due to the reasons discussed above. As a percentage of net sales, operating income for the Metals Group was 5.2% and 5.9% for the first six months of fiscal 2000 and 1999, respectively. OVERALL RESULTS CORPORATE EXPENSES. Corporate expenses decreased by $0.6 million, or 26.9%, to $1.7 million for the first six months of fiscal 2000 from $2.4 million for the first six months of fiscal 1999. INTEREST EXPENSE AND OTHER. Interest expense and other increased by $2.2 million, or 107.4%, to $4.2 million for the first six months of fiscal 2000 from $2.0 million for the first six months of fiscal 1999. This increase was primarily due to increased debt levels associated with the 1999 Acquisitions and the acquisition of Ralee, the cash portions of which were financed by borrowings under the Company's Credit Facility, as well as a slightly higher rate on and amortization of fees relating to the Company's New Credit Facility. INCOME TAX EXPENSE. The effective tax rate was 36.5% for the first six months of fiscal 2000 and 39.0% for the first six months of fiscal 1999. The first six months of fiscal 2000 effective tax rate is comparable to the third and fourth quarters of fiscal 1999 effective tax rates of 37.0% in each of those quarters. NET INCOME. Net income increased by $0.9 million, or 5.5%, to $16.4 million for the first six months of fiscal 2000 from $15.6 million for the first six months of fiscal 1999. The increase fiscal 2000 net income was primarily attributable to the 1999 Acquisitions and Ralee, partially offset by the reduced earnings of the remaining Aviation Group operating units due to the decline in shipments for Boeing commercial airplane programs discussed above. -13-
Management's Discussion And Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY AND CAPITAL RESOURCES The Company's working capital needs are generally funded through cash flows from operations and borrowings under its credit arrangements. The Company generated approximately $11.9 million of cash flows from operating activities for the six months ended September 30, 1999. The Company used approximately $23.7 million in investing activities and raised $12.3 million in financing activities for the six months ended September 30, 1999. On June 11, 1999, the Company amended and restated its Credit Facility ("New Credit Facility") with its Lenders to increase the Credit Facility to $250.0 million from $125.0 million, extend the term and amend certain terms and covenants. The New Credit Facility bears interest at either LIBOR plus between 0.75% and 1.75% or the prime rate (or the Federal Funds rate plus 0.5% if greater) at the option of the Company and expires on June 13, 2004. The variation in the 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 0.175% and 0.375% on the unused portion of the New Credit Facility without penalty. The Company may allocate up to $5.0 million of the available New Credit Facility for the issuance of letters of credit. As of September 30, 1999, $153.0 million was available under the New Credit Facility. On September 30, 1999, an aggregate amount of approximately $95.6 million was outstanding under the New Credit Facility, $93.0 million of which was accruing interest at LIBOR plus applicable basis points totaling 6.4% per annum, and $2.6 million of which was accruing interest at the prime rate of 8.25% per annum. Amounts repaid under the New Credit Facility may be reborrowed. In the first quarter of fiscal 2000, the Company acquired all of the outstanding stock of Ralee. Ralee, located in City of Industry, California, manufactures long structural components such as stringers, cords, floor beams and spars for the aviation industry. The cash purchase price for this acquisition, net of cash acquired, of approximately $13.0 million was funded by borrowings under the Company's Credit Facility. Also, in connection with this acquisition, the Company assumed $8.7 million of capital leases for equipment with interest rates ranging from 7.1% to 10.2%, maturing between September 2003 and August 2005. In November 1999 the Company announced the acquisitions of Construction Brevitees d'Alfortville ("CBA"), KT Aerofab and Lee Aerospace, Inc. CBA, located near Paris, France, is a manufacturer of mechanical ball bearing control assemblies for the aerospace, ground transportation and marine industries. KT Aerofab, located in San Diego, California, is a developer of high-temperature metal alloy parts. Lee Aerospace, Inc., located in Wichita, Kansas, is a leading supplier of unheated windshields, flight deck and cabin windows to the general aviation and corporate jet market. The combined cash portion of the purchase prices paid at closing for these companies of approximately $16.1 million was funded by borrowings under the Company's New Credit Facility. During the first quarter of fiscal 2000, the Company purchased 117,500 shares of its Common stock for total cash consideration of $2.9 million. During the second quarter of fiscal 2000, the Company purchased 74,000 shares of its Common stock for total cash consideration of $1.7 million. The purchases were funded by borrowings under the Company's New Credit Facility. Capital expenditures were approximately $7.1 million for the six months ended September 30, 1999 primarily for manufacturing machinery and equipment for the Aviation Group. The Company funded these expenditures through borrowings under its New Credit Facility. The Company expects capital expenditures to be approximately $21.0 million for its fiscal year ending March 31, 2000. The expenditures are expected to be used primarily to expand capacity at several facilities in the Aviation Group. The Company believes that cash generated by operations and borrowings under the New Credit Facility will be sufficient to meet anticipated cash requirements for its current operations. However, the Company has a stated policy to grow through acquisition and is continuously evaluating various acquisition opportunities. As a result, the Company currently is pursuing the potential purchase of a number of candidates. In the event that more than one of these transactions are successfully consummated, the availability under the New Credit Facility might be fully utilized and additional funding sources may be needed. There can be no assurance that such funding sources will be available to the Company on terms favorable to the Company, if at all. YEAR 2000 DATE CONVERSION The Year 2000 issue exists because many software programs, computer hardware, operating systems and microprocessor based embedded controls in automated equipment use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems may recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the year 2000 may cause systems to process financial and operational information incorrectly or fail to operate. -14-
Management's Discussion And Analysis of Financial Condition and Results of Operations (continued) The Company has recognized the need to ensure that its business operations will not be adversely affected by the upcoming calendar year 2000 date change and is cognizant of the time sensitive nature of the problem. The Company's operating units have assessed or are in the process of assessing how each may be impacted by Year 2000 and have formulated and commenced or are formulating and commencing implementation of a comprehensive plan to address all known aspects of the Year 2000 problem: information systems, production and facilities equipment, suppliers and customers. The Company's operating units are currently making inquiries of customers and suppliers to assess their Year 2000 readiness. The operating units are also in the process of testing information technology ("IT") systems, as well as non-IT systems, and verifying that vendor-supplied or outsourced systems will be Year 2000 compliant and will repair or replace any such systems found to be non-compliant. Currently, the Company estimates that, on a consolidated basis, it has substantially completed its assessment of how it may be impacted, the development of plans to address the testing and remediation of its systems and its testing and remediation activities. The Company has not separately tracked its Year 2000 costs as a project, but rather has incurred the costs in conjunction with normal sustaining activities. The discretely identifiable costs incurred through September 30, 1999 of completing the Company's Year 2000 assessment and of modifying its computer software and hardware, as well as its production and facilities equipment, to be Year 2000 compliant were approximately $0.9 million. The estimated costs yet to be incurred are approximately $0.2 million. The current assessment does not include costs related to software and hardware replaced in the normal course of business other than replacements accelerated due to the Year 2000 issue. The variety and complexity of the Year 2000 issues identified and the proposed solutions, the Company's dependence on the technical skills of employees and independent contractors, and especially the representations and readiness of third parties are among the factors that could cause the Company's efforts to be less than fully effective. In addition, Year 2000 issues present a number of risks that are beyond the Company's reasonable control, such as continued service from outside parties such as utility companies, financial institutions, and transportation and delivery companies (such as Federal Express and United Parcel Service). Also, certain significant customers are material to the Company and a Year 2000 failure by one or more of these parties could result in a material adverse effect on the Company's operating results and financial position. The most likely worst case scenario would be the failure of particular computer systems or machines with embedded chips that would require manual processes in order to continue production and invoicing activities. The Company believes that it could obtain materials at reasonably competitive prices from alternate suppliers given a failure at a current vendor. While the Company does not currently foresee any material problems, there can be no assurance that the Company and its material suppliers and customers will be Year 2000 compliant by January 1, 2000 and that any such non-compliance will not have a material adverse effect on the Company. The Company is in the process of developing contingency plans in the event that any unresolved issues are identified. The foregoing Year 2000 discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the Company's efforts and management's expectations relating to Year 2000 readiness. The Company's Year 2000 project is dependent on certain future events including the availability and cost of personnel trained to perform Year 2000 modifications, the ability of the Company to locate and correct all non-compliant computer codes and embedded controls, the ability of material customers, suppliers and trading partners to successfully complete their own Year 2000 remediation projects, the accuracy of information received from third parties concerning the Year 2000 compliance of their information systems or automated equipment or concerning their Year 2000 business risk assessment, and similar uncertainties. -15-
Management's Discussion And Analysis of Financial Condition and Results of Operations (continued) FORWARD LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to the Company's future operations and prospects, including statements that are based on current projections and expectations about the markets in which the Company operates, and management's beliefs concerning future performance and capital requirements based upon current available information. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, words like "may", "might", "will", "expect", "anticipate", "believe", "potential", and similar expressions are intended to identify forward looking statements. Actual results could differ materially from management's current expectations and there can be no assurance that additional capital will not be required or that additional capital, if required, will be available on reasonable terms, if at all, at such times and in such amounts as may be needed by the Company. In addition to these factors, among other factors that could cause actual results to differ materially are uncertainties relating to the integration of acquired businesses, general economic conditions affecting the Company's two business segments, dependence of certain of the Company's businesses on certain key customers as well as competitive factors relating to the aviation and metals industries. For a more detailed discussion of these and other factors affecting the Company, see the risk factors described in the Company's Annual Report on Form 10-K, for the year ended March 31, 1999, filed with the SEC in June 1999. Item 3. Quantitative and Qualitative Disclosures About Market Risk For information regarding the Company's exposure to certain market risks, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. There has been no material change in this information. -16-
TRIUMPH GROUP, INC. Part II. Other Information Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities Not applicable Item 3. Defaults upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Stockholders was held on July 28, 1999. At such meeting, the following matters were voted upon by the stockholders, receiving the number of affirmative, negative and withheld votes, as well as abstentions and broker non-votes, set forth below for each matter. 1. Election of seven persons to the Company's Board of Directors to serve until the 2000 Annual Meeting of Stockholders and until their successors are elected and qualified. RICHARD C. ILL: 7,389,078 Affirmative 372,687 Negative JOHN R. BARTHOLDSON: 7,389,083 Affirmative 372,682 Negative RICHARD C. GOZON: 7,389,090 Affirmative 372,675 Negative CLAUDE F. KRONK: 7,288,741 Affirmative 473,024 Negative JOSEPH M. SILVESTRI: 7,389,090 Affirmative 372,675 Negative MICHAEL A. DELANEY: 7,388,900 Affirmative 372,865 Negative WILLIAM O. ALBERTINI: 7,389,000 Affirmative 372,765 Negative -17-
2. Approval of an amendment to the Company's 1996 Stock Option Plan to increase to 1,268,750 the number of shares issuable upon exercise of options granted under the plan, an increase of 750,000. 9,058,866 Affirmative 794,843 Negative 6,133 Withheld 3. Ratification of the selection of Ernst & Young LLP as independent public accountants for the Company for the fiscal year ending March 31, 2000. 11,028,711 Affirmative 76,745 Negative 4,844 Withheld Item 5. Other Information Not applicable Item 6. Exhibits & Reports on Form 8-K A. Exhibits (10.25) Employment Agreement with Richard C. Ill dated July 1, 1999. (10.26) Employment Agreement with John R. Bartholdson dated July 1, 1999. (10.27) Employment Agreement with Richard M. Eisenstaedt dated July 1, 1999. (10.28) Employment Agreement with Craig N. Kitchen dated July 1, 1999. (27) Financial Data Schedule B. Reports on Form 8-K The Company did not file any reports on Form 8-K during the three months ended September 30, 1999. -18-
Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Triumph Group, Inc. ------------------------------------------------ (Registrant) /s/ Richard C. Ill ------------------------------------------------ Richard C. Ill, President & CEO /s/ John R. Bartholdson ------------------------------------------------ John R. Bartholdson, Senior Vice President & CFO (Principal Financial Officer) /s/ Kevin E. Kindig ------------------------------------------------ Kevin E. Kindig, Vice President & Controller (Principal Accounting Officer) Dated: November 12, 1999 -19-