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Section 1: 10-Q (10-Q)

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

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2019

or

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

For the Transition Period From _________ to ________

Commission File Number: 1-12235

TRIUMPH GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
51-0347963
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

899 Cassatt Road,
Suite 210,
Berwyn,
PA
 
19312
(Address of principal executive offices)
 
(Zip Code)

(610) 251-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.001 per share
TGI
New York Stock Exchange
Purchase Rights
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one)
Large accelerated filer
Accelerated filer
Non-accelerated filer 
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes     No 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, par value $0.001 per share, 50,085,440 shares outstanding as of November 6, 2019.



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



Table of Contents

Part I. Financial Information

Item 1. Financial Statements.

Triumph Group, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
 
September 30,
2019
 
March 31,
2019
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
24,852

 
$
92,807

Trade and other receivables, less allowance for doubtful accounts of $4,713 and $3,646
342,306

 
373,590

Contract assets
300,670

 
326,667

Inventory, net
454,402

 
413,560

Prepaid expenses and other current assets
20,854

 
34,446

Total current assets
1,143,084

 
1,241,070

Property and equipment, net
502,990

 
543,710

Goodwill
578,916

 
583,225

Intangible assets, net
405,982

 
430,954

Other, net
130,831

 
55,615

Total assets
$
2,761,803

 
$
2,854,574

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
7,759

 
$
8,201

Accounts payable
418,706

 
433,783

Contract liabilities
276,967

 
293,719

Accrued expenses
221,966

 
239,572

Total current liabilities
925,398

 
975,275

Long-term debt, less current portion
1,460,774

 
1,480,620

Accrued pension and other postretirement benefits
554,400

 
540,479

Deferred income taxes
21,116

 
6,964

Other noncurrent liabilities
390,939

 
424,549

Stockholders’ deficit:
 
 
 
Common stock, $.001 par value, 100,000,000 shares authorized, 52,460,920 and 52,460,920 shares issued; 50,074,523 and 49,887,268 shares outstanding
52

 
52

Capital in excess of par value
858,030

 
867,545

Treasury stock, at cost, 2,386,397 and 2,573,652 shares
(145,496
)
 
(159,154
)
Accumulated other comprehensive loss
(565,901
)
 
(487,684
)
Accumulated deficit
(737,509
)
 
(794,072
)
Total stockholders’ deficit
(590,824
)
 
(573,313
)
Total liabilities and stockholders’ deficit
$
2,761,803

 
$
2,854,574


SEE ACCOMPANYING NOTES.

1


Table of Contents

Triumph Group, Inc.
Condensed Consolidated Statements of Operations

(in thousands, except per share data)
(unaudited)

 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net sales
$
772,110

 
$
855,108

 
$
1,502,341

 
$
1,688,008

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation and amortization shown separately below)
622,236

 
724,474

 
1,204,469

 
1,494,688

Selling, general and administrative
66,201

 
69,551

 
128,538

 
151,208

Depreciation and amortization
30,219

 
38,134

 
74,269

 
76,945

Restructuring costs
5,782

 
11,832

 
8,746

 
15,879

Legal judgment gain, net of expenses
(5,400
)
 

 
(5,400
)
 

(Gain) loss on sale of assets and businesses
(7,965
)
 
13,118

 
(4,829
)
 
17,837

 
711,073

 
857,109

 
1,405,793

 
1,756,557

Operating income (loss)
61,037

 
(2,001
)
 
96,548

 
(68,549
)
Non-service defined benefit income
(28,416
)
 
(16,524
)
 
(43,291
)
 
(33,061
)
Interest expense and other
35,400

 
28,714

 
62,891

 
54,206

Income (loss) before income taxes
54,053

 
(14,191
)
 
76,948

 
(89,694
)
Income tax expense
11,352

 
485

 
16,159

 
1,516

Net income (loss)
$
42,701

 
$
(14,676
)
 
$
60,789

 
$
(91,210
)
 
 
 
 
 
 
 
 
Earnings (loss) per share—basic:
$
0.85

 
$
(0.30
)
 
$
1.22

 
$
(1.84
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
49,987

 
49,628

 
49,927

 
49,590

 
 
 
 
 
 
 
 
Earnings (loss) per share—diluted:
$
0.85

 
$
(0.30
)
 
$
1.21

 
$
(1.84
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—diluted
50,460

 
49,628

 
50,385

 
49,590

 
 
 
 
 
 
 
 
Dividends declared and paid per common share
$
0.04

 
$
0.04

 
$
0.08

 
$
0.08


SEE ACCOMPANYING NOTES.

2


Table of Contents

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

 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
42,701

 
$
(14,676
)
 
$
60,789

 
$
(91,210
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(6,227
)
 
1,038

 
(8,910
)
 
(13,486
)
Defined benefit pension plans and other postretirement benefits:
 
 
 
 
 
 
 
 
Amounts arising during the period - gains (losses), net of tax (expense) benefit:
 
 
 
 
 
 
 
 
Prior service gain, net of taxes of $0
 
(4,898
)
 

 
(4,898
)
 

Actuarial loss, net of taxes of $0
 
(118,073
)
 

 
(118,073
)
 

Reclassifications from accumulated other comprehensive income - losses (gains), net of tax expense (benefits):
 
 
 
 
 
 
 
 
Amortization of net loss, net of taxes of $0 and $0 for the three months ended and $0 and $0 for the six months ended, respectively
 
4,707

 
1,676

 
7,558

 
3,351

Recognized prior service credits, net of taxes of $0 and $0 for the three months ended and $0 and $0 for the six months ended, respectively
 
48,945

 
(2,075
)
 
47,503

 
(4,149
)
Total defined benefit pension plans and other postretirement expense, net of taxes
 
(69,319
)
 
(399
)
 
(67,910
)
 
(798
)
Cash flow hedges:
 
 
 
 
 
 
 
 
Unrealized gain arising during period, net of tax of $0 and $(189) for the three months ended and $0 and $(64) for the six months ended, respectively
 
245

 
1,706

 
340

 
742

Reclassification of loss included in net earnings, net of tax of $0 and $88 for the three months ended and $0 and $123 for the six months ended, respectively
 
(1,323
)
 
(742
)
 
(1,737
)
 
(813
)
Net unrealized (loss) gain on cash flow hedges, net of tax
 
(1,078
)
 
964

 
(1,397
)
 
(71
)
Total other comprehensive (loss) income
 
(76,624
)
 
1,603

 
(78,217
)
 
(14,355
)
Total comprehensive loss
 
$
(33,923
)
 
$
(13,073
)
 
$
(17,428
)
 
$
(105,565
)

SEE ACCOMPANYING NOTES.

3


Table of Contents

Triumph Group, Inc.
Condensed Consolidated Statements of Stockholders' (Deficit) Equity
For the three and six months ended September 30, 2019
(dollars in thousands)
(unaudited)

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

 
$
52

 
$
867,545

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

 

 

 

 

 
18,088

 
18,088

Adoption of ASC 842

 

 

 

 

 
(225
)
 
(225
)
Foreign currency translation adjustment

 

 

 

 
(2,683
)
 

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

 

 

 

 
1,409

 

 
1,409

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

 

 

 

 
(319
)
 

 
(319
)
Cash dividends ($0.04 per share)

 

 

 

 

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

 

 
(7,631
)
 
9,534

 

 

 
1,903

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

 

 
(1,043
)
 

 

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

 

 
(634
)
 
896

 

 

 
262

Balance, June 30, 2019
50,005,153

 
$
52

 
$
859,280

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

 

 

 

 

 
42,701

 
42,701

Foreign currency translation adjustment

 

 

 

 
(6,227
)
 

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

 

 

 

 
(69,319
)
 

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

 

 

 

 
(1,078
)
 

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

 

 

 

 

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

 

 
(850
)
 
3,654

 

 

 
2,804

Repurchase of restricted shares for minimum tax obligation
(764
)
 

 

 
(5
)
 

 

 
(5
)
Employee stock purchase plan
10,196

 

 
(400
)
 
622

 

 

 
222

Balance, September 30, 2019
50,074,523

 
$
52

 
$
858,030

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

4


Table of Contents

Triumph Group, Inc.
Condensed Consolidated Statements of Stockholders' (Deficit) Equity
For the three and six months ended September 30, 2018
(dollars in thousands)
(unaudited)

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

 
$
51

 
$
851,280

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

 
$
450,534

Net loss

 

 

 

 

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

 

 

 

 

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

 

 

 

 
(14,524
)
 

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

 

 

 

 
(399
)
 

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

 

 

 

 
(1,035
)
 

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

 

 

 

 

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

 

 
(84
)
 
2,548

 

 

 
2,464

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

 

 
(532
)
 

 

 
(532
)
Employee stock purchase plan
16,020

 

 
(644
)
 
1,028

 

 

 
384

Balance, June 30, 2018
49,764,360

 
$
51

 
$
850,552

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

 

 

 

 

 
(14,676
)
 
(14,676
)
Other

 

 

 

 

 
19

 
19

Foreign currency translation adjustment

 

 

 

 
1,038

 

 
1,038

Pension liability adjustment, net of income taxes of $0

 

 

 

 
(399
)
 

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

 

 

 

 
964

 

 
964

Cash dividends ($0.04 per share)

 

 

 

 

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

 

 
2,671

 
595

 

 

 
3,266

Repurchase of restricted shares for minimum tax obligation
(857
)
 

 

 
(16
)
 

 

 
(16
)
Employee stock purchase plan
17,618

 

 
(821
)
 
1,148

 

 

 
327

Balance, September 30, 2018
49,812,717

 
$
51

 
$
852,402

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

5


Table of Contents



Triumph Group, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
Six Months Ended September 30,
 
2019
 
2018
 
 
 
 
Operating Activities
 
 
 
Net income (loss)
$
60,789

 
$
(91,210
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
74,269

 
76,945

Amortization of acquired contract liabilities
(39,556
)
 
(34,038
)
(Gain) loss on divestitures and transfers
(4,829
)
 
17,837

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

Other amortization included in interest expense
6,955

 
4,852

Provision for doubtful accounts receivable
1,140

 
212

Provision for deferred income taxes
15,159

 

Employee stock-based compensation
5,290

 
5,728

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions of businesses:
 
 
 
Trade and other receivables
29,436

 
(4,722
)
Contract assets
33,930

 
6,129

Inventories
(41,807
)
 
(49,981
)
Prepaid expenses and other current assets
16,209

 
5,918

Accounts payable, accrued expenses and contract liabilities
(121,112
)
 
(101,460
)
Accrued pension and other postretirement benefits
(32,114
)
 
(37,021
)
Other
21

 
3,632

Net cash used in operating activities
(10,593
)
 
(197,179
)
Investing Activities
 
 
 
Capital expenditures
(16,995
)
 
(24,254
)
(Payments on) proceeds from sale of assets
(574
)
 
41,037

Net cash (used in) provided by investing activities
(17,569
)
 
16,783

Financing Activities
 
 
 
Net (decrease) increase in revolving credit facility
(147,615
)
 
219,773

Proceeds from issuance of long-term debt and finance leases
546,000

 
24,700

Repayment of debt and finance lease obligations
(415,447
)
 
(58,823
)
Payment of deferred financing costs
(16,275
)
 
(1,922
)
Dividends paid
(4,001
)
 
(3,981
)
Repurchase of restricted shares for minimum tax obligation
(1,048
)
 
(548
)
Net cash (used in) provided by financing activities
(38,386
)
 
179,199

Effect of exchange rate changes on cash
(1,407
)
 
(1,395
)
Net change in cash
(67,955
)
 
(2,592
)
Cash and cash equivalents at beginning of period
92,807

 
35,819

Cash and cash equivalents at end of period
$
24,852

 
$
33,227


SEE ACCOMPANYING NOTES.

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Table of Contents

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

1.     BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed consolidated financial statements of Triumph Group, Inc. (the "Company") have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position and cash flows. The results of operations for the three and six months ended September 30, 2019, are not necessarily indicative of results that may be expected for the year ending March 31, 2020. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the fiscal 2019 audited consolidated financial statements and notes thereto included in the Company's Form 10-K for the year ended March 31, 2019, filed with the Securities and Exchange Commission (the "SEC") on May 23, 2019.

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

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

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

Use of Estimates

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

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

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

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

representing repair, maintenance, and engineering activities are recognized over the contractual period or as services are rendered. Sales under long-term contracts with performance obligations satisfied over time are recognized using either an input or output method. The Company recognizes revenue over time as it performs on these contracts because of the continuous transfer of control to the customer as represented by contractual terms that entitle the Company to the reimbursement of costs plus a reasonable profit for work performed to manufacture products for which the Company has no alternate use or for work performed on a customer-owned asset.
With control transferring over time, revenue is recognized based on the extent of progress toward completion of the performance obligation. The Company generally uses the cost-to-cost input method of progress for our contracts because it best depicts the transfer of control to the customer that occurs as work progresses. Under the cost-to-cost method, the extent of progress toward completion is measured based on the proportion of costs incurred to date to the total estimated costs at completion of the performance obligation. The Company reviews its cost estimates on significant contracts on a periodic basis, or when circumstances change and warrant a modification to a previous estimate. Cost estimates are largely based on negotiated or estimated purchase contract terms, historical performance trends and other economic projections. Significant factors that influence these estimates include inflationary trends, technical and schedule risk, internal and subcontractor performance trends, business volume assumptions, asset utilization, and anticipated labor agreements.
Revenue and cost estimates are regularly monitored and revised based on changes in circumstances. Impacts from changes in estimates of net sales and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. Forward loss reserves for anticipated losses on long-term contracts are recorded in full when such losses become evident, to the extent required, and are included in contract liabilities on the accompanying consolidated balance sheets.
For the three months ended September 30, 2019, cumulative catch-up adjustments from changes in estimates, including changes in forward loss estimates, increased net sales by approximately $3,189 and decreased operating income, net income, and earnings per share by approximately $(5,127), $(4,050) and $(0.08), net of tax, respectively. For the three months ended September 30, 2018, cumulative catch-up adjustments from changes in estimates increased net sales by approximately $3,459 and decreased operating loss, net loss and loss per share by approximately $(10,191), $(10,191) and $(0.21), net of tax, respectively.
For the six months ended September 30, 2019, cumulative catch-up adjustments from changes in estimates, including changes in forward loss estimates, increased net sales by approximately $1,245 and decreased operating income, net income, and earnings per share by approximately $(12,270), $(9,693) and $(0.19), net of tax, respectively. For the six months ended September 30, 2018, cumulative catch-up adjustments from changes in estimates decreased net sales, operating loss, net loss and loss per share by approximately $(3,292), $(12,968), $(12,968) and $(0.26), net of tax, respectively. These cumulative catch-up adjustments do not include a non-cash charge the Company recorded as a result of the adoption of ASU 2017-07 of $87,241 due to a change in estimate inseparable from a change in accounting principles, which is presented on the accompanying consolidated statements of operations within cost of sales.
Revenues for performance obligations that are not recognized over time are recognized at the point in time when control transfers to the customer. For performance obligations that are satisfied at a point in time, the Company evaluates the point in time when the customer can direct the use of and obtain the benefits from the products and services. Generally, the shipping terms determine the point in time when control transfers to customers. Shipping and handling activities are not considered performance obligations and related costs are included in cost of sales as incurred.
Differences in the timing of revenue recognition and contractual billing and payment terms result in the recognition contract assets and liabilities. Refer to Note 4 for further discussion.
The portion of the Company's revenue resulting from transactions other than contracts with customers pertains to the non-cash amortization of acquired contract liabilities that were recognized as fair value adjustments through purchase accounting from various acquisitions.
Leases
The Company leases office space, manufacturing facilities, land, vehicles, and equipment. The Company determines if an agreement is or contains a lease at the lease inception date and recognizes right-of-use assets and lease liabilities at the lease commencement date. A ROU asset and corresponding lease liability are not recorded for leases with an initial term of 12 months or less (short-term leases).

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

ROU assets represent the Company's right to use an underlying asset during the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The determination of the length of lease terms is affected by options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The existence of significant economic incentive is the primary consideration when assessing whether the Company is reasonably certain of exercising an option in a lease. Both finance and operating lease ROU assets and liabilities are recognized at commencement date and measured as the present value of lease payments to be made over the lease term. As the interest rate implicit in the lease is not readily available for most of the Company's leases, the Company uses its estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date. The lease ROU asset recognized at commencement is adjusted for any lease payments related to initial direct costs, prepayments, and lease incentives.
For operating leases, lease expense is recognized on a straight-line basis over the lease term. For finance leases, lease expense comprises the amortization of the ROU assets recognized on a straight-line basis generally over the shorter of the lease term or the estimated useful life of the underlying asset and interest on the lease liability. Variable lease payments not dependent on a rate or index are recognized when the event, activity, or circumstance in the lease agreement upon which those payments are contingent is probable of occurring and are presented in the same line of the consolidated balance sheet as the rent expense arising from fixed payments. The Company has lease agreements with lease and non-lease components. Non-lease components are combined with the related lease components and accounted for as lease components for all classes of underlying assets.
Concentration of Credit Risk
The Company’s trade accounts receivable are exposed to credit risk. However, the risk is limited due to the diversity of the customer base and the customer base’s wide geographical area. Trade accounts receivable from The Boeing Company ("Boeing") (representing commercial, military and space) represented approximately 17% and 18% of total trade accounts receivable as of September 30, 2019 and March 31, 2019, respectively. Trade accounts receivable from Gulfstream Aerospace Corporation ("Gulfstream") represented approximately 7% and 11% of total trade accounts receivable as of September 30, 2019 and March 31, 2019, respectively. Trade accounts receivable from Bombardier Inc. ("Bombardier") represented approximately 14% and 13% as of September 30, 2019 and March 31, 2019, respectively. The Company had no other concentrations of credit risk of more than 10%.
Sales to Boeing for the six months ended September 30, 2019, were $510,934, or 34% of net sales, of which $117,938, $382,457, and $10,539 were from the Integrated Systems, Aerospace Structures and Product Support, respectively. Sales to Boeing for the six months ended September 30, 2018, were $527,896, or 31% of net sales, of which $110,971, $410,133 and $6,792 were from the Integrated Systems, Aerospace Structures and Product Support, respectively.
Sales to Gulfstream for the six months ended September 30, 2019, were $187,689, or 12% of net sales, of which $1,168, $185,973, and $548 were from the Integrated Systems, Aerospace Structures and Product Support, respectively. Sales to Gulfstream for the six months ended September 30, 2018, were $174,805, or 10% of net sales, of which $1,065, $173,437, and $303 were from the Integrated Systems, Aerospace Structures and Product Support, respectively.
No other single customer accounted for more than 10% of the Company’s net sales. However, the loss of any significant customer, including Boeing and Gulfstream, could have a material adverse effect on the Company and its operating subsidiaries.

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

Intangible Assets
The components of intangible assets, net, are as follows:
 
September 30, 2019
 
Weighted
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
17.7
 
$
549,965

 
$
(261,063
)
 
$
288,902

Product rights, technology and licenses
11.4
 
54,646

 
(45,035
)
 
9,611

Non-compete agreements and other
16.7
 
2,656

 
(1,124
)
 
1,532

Tradenames
10.0
 
150,000

 
(44,063
)
 
105,937

Total intangibles, net
 
 
$
757,267

 
$
(351,285
)
 
$
405,982

 
March 31, 2019
 
Weighted
Average Life
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
 
 
 
 
 
 
 
Customer relationships
17.7
 
$
551,093

 
$
(245,626
)
 
$
305,467

Product rights, technology and licenses
11.4
 
54,850

 
(43,978
)
 
10,872

Non-compete agreements and other
16.7
 
2,656

 
(1,041
)
 
1,615

Tradenames
10.0
 
150,000

 
(37,000
)
 
113,000

Total intangibles, net
 
 
$
758,599

 
$
(327,645
)
 
$
430,954


Amortization expense for the three months ended September 30, 2019 and 2018, was $12,063 and $13,203, respectively. Amortization expense for the six months ended September 30, 2019 and 2018, was $24,146 and $26,436, respectively. Significant changes in expected cash flows generated by long-lived assets could result in the recognition of impairment losses; no such changes or losses were identified as of September 30, 2019.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. When determining fair value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing an asset or liability. The fair value hierarchy has three levels of inputs that may be used to measure fair value: Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2—Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and Level 3—Unobservable inputs for the asset or liability. The Company has applied fair value measurements to its divestitures (see Note 3).
Warranty Reserves
A reserve has been established to provide for the estimated future cost of warranties on our delivered products. The Company periodically reviews the reserves and adjustments are made accordingly. A provision for warranty on products delivered is made on the basis of historical experience and identified warranty issues. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The majority of the Company's agreements include a 3-year warranty, although certain programs have warranties up to twenty years. The warranty reserves as of September 30, 2019 and March 31, 2019, were $60,207 and $58,395, respectively.
Supplemental Cash Flow Information
The Company made income tax payments, net of refunds of $2,724 during the six months ended September 30, 2019. The Company received income tax refunds, net of payments of $7,120 during the six months ended September 30, 2018.

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

As of September 30, 2019, the Company remains able to purchase an additional 2,277,789 shares under the existing stock repurchase program. However, there are certain restrictions placed on the repurchase program by the Company's lenders that prevent any repurchases at this time.
3.     DIVESTED OPERATIONS AND ASSETS HELD FOR SALE
In October 2019, the Company entered into a definitive agreement to sell its manufacturing operations at its Nashville, TN, facility. The Company expects to record a loss during the third fiscal quarter of approximately $50,000 to $60,000 from the sale of approximately $125,000 in net assets at this facility. As of September 30, 2019, the Board of Directors had not approved the transaction due to uncertainty pertaining to specific terms and conditions, and therefore the transaction did not meet the requirements for the related assets and liabilities to be classified as held for sale on the accompanying condensed consolidated balance sheets.

In September 2019, the Company completed the assignment of its E-2 Jets contract with Embraer for the manufacture of structural components for their program to AeroSpace Technologies of Korea Inc. ("ASTK"). As part of this transaction, the Company transferred certain assets and liabilities to ASTK and recognized a gain of approximately $10,000 which is presented on the accompanying consolidated statements of operations within (gain) loss on sale of assets and businesses. 
In March 2019, the Company sold all of the shares of Triumph Structures – Kansas City, Inc.; Triumph Structures – Wichita, Inc.; Triumph Gear Systems – Toronto; ULC; and Triumph Northwest (The Triumph Group Operations, Inc.) (together, "Machining"). Total cash proceeds net of transaction costs for the sale of Machining was approximately $43,000. A portion of the proceeds associated with the sale of Machining included consideration in the form of a note receivable of $10,000. Upon closing, the Company recognized a loss of approximately $116,000. An additional loss of approximately $5,000 was recognized during the six months ended September 30, 2019, as a result of working capital adjustments and additional transaction costs and is presented within loss on divestitures on the accompanying condensed consolidated statements of operations.
In March 2019, the Company sold all of the shares of (i) Triumph Fabrications - San Diego, Inc. and Triumph Fabrications - Ft. Worth, Inc. (together, "Fabrications"), and (ii) Triumph Aviation Services - NAAS Division, Inc. ("NAAS"). Total cash proceeds net of transaction costs for the sales of Fabrications and NAAS were approximately $133,000 and $18,000, respectively. As a result of the sales of Fabrications, the Company recognized a gain of approximately $54,000. The sale of NAAS resulted in an immaterial gain.
In February 2019, the Company transitioned responsibility for the Global 7500 wing program manufacturing operations of Aerospace Structures to Bombardier at which point Bombardier assumed the program’s assets and obligations. As a result of this transfer, the Company recognized a loss of approximately $169,000. The Company continues to provide transition services related to infrastructure support reducing in scope over the next several months, as well as a lease of the building in Red Oak, Texas, dedicated to the manufacturer of the Global 7500 wing to Bombardier.

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


13


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




The following table shows disaggregated net sales satisfied overtime and at a point in time (excluding intercompany sales) for the three and six months ended September 30, 2019:
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Integrated Systems
 
 
 
 
 
 
 
Satisfied over time
$
75,871

 
$
72,188

 
$
148,176

 
$
136,547

Satisfied at a point in time
198,648

 
177,626

 
369,275

 
342,804

          Revenue from contracts with customers
274,519

 
249,814

 
517,451

 
479,351

     Amortization of acquired contract liabilities
9,624

 
8,768

 
17,749

 
17,617

          Total revenue
284,143

 
258,582

 
535,200

 
496,968