Triumph (TGI) - 2024 Q2 - Quarterly Report

Part I. Financial Information This section presents Triumph Group's unaudited condensed consolidated financial statements and management's discussion and analysis. Item 1. Financial Statements (Unaudited) This section presents Triumph Group's unaudited condensed consolidated financial statements for the periods ended September 30, 2023, and March 31, 2023. Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' deficit as of September 30, 2023, and March 31, 2023. Condensed Consolidated Balance Sheets (September 30, 2023 vs. March 31, 2023) | Metric | Sep 30, 2023 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | ASSETS | | | | | Cash and cash equivalents | $169,885 | $227,403 | $(57,518) | | Total current assets | $897,197 | $933,512 | $(36,315) | | Total assets | $1,673,132 | $1,714,844 | $(41,712) | | LIABILITIES & STOCKHOLDERS' DEFICIT | | | | | Total current liabilities | $314,627 | $396,924 | $(82,297) | | Long-term debt, less current portion | $1,655,989 | $1,688,620 | $(32,631) | | Total stockholders' deficit | $(668,216) | $(797,396) | $129,180 | | Total liabilities and stockholders' deficit | $1,673,132 | $1,714,844 | $(41,712) | Condensed Consolidated Statements of Operations This section presents the company's financial performance, including net sales, operating income, and net income (loss) for the three and six months ended September 30, 2023, and 2022. Condensed Consolidated Statements of Operations (Three Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Net sales | $354,061 | $307,600 | $46,461 | 15.1% | | Operating income | $34,278 | $132,166 | $(97,888) | -74.1% | | Income (loss) from continuing operations before income taxes | $446 | $108,276 | $(107,830) | -99.6% | | Net (loss) income | $(1,296) | $106,526 | $(107,822) | -101.2% | | (Loss) earnings per share—basic | $(0.02) | $1.64 | $(1.66) | -101.2% | | Weighted average common shares outstanding—basic | 76,447 | 65,036 | 11,411 | 17.5% | Condensed Consolidated Statements of Operations (Six Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Net sales | $681,206 | $656,984 | $24,222 | 3.7% | | Operating income | $44,302 | $146,900 | $(102,598) | -69.8% | | Income (loss) from continuing operations before income taxes | $(15,967) | $99,684 | $(115,651) | -116.0% | | Net (loss) income | $(19,459) | $96,184 | $(115,643) | -120.2% | | (Loss) earnings per share—basic | $(0.27) | $1.48 | $(1.75) | -118.2% | | Weighted average common shares outstanding—basic | 71,368 | 64,946 | 6,422 | 9.9% | Condensed Consolidated Statements of Comprehensive (Loss) Income This section details the company's comprehensive income (loss), including net income (loss) and other comprehensive income (loss) components for the three and six months ended September 30, 2023, and 2022. Condensed Consolidated Statements of Comprehensive (Loss) Income (Three Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Net (loss) income | $(1,296) | $106,526 | $(107,822) | -101.2% | | Total other comprehensive (loss) income | $(845) | $(7,482) | $6,637 | -88.7% | | Total comprehensive (loss) income | $(2,141) | $99,044 | $(101,185) | -102.2% | Condensed Consolidated Statements of Comprehensive (Loss) Income (Six Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Net (loss) income | $(19,459) | $96,184 | $(115,643) | -120.2% | | Total other comprehensive (loss) income | $7,695 | $(13,379) | $21,074 | -157.5% | | Total comprehensive (loss) income | $(11,764) | $82,805 | $(94,569) | -114.2% | Condensed Consolidated Statements of Stockholders' Deficit This section outlines changes in the company's stockholders' deficit, including common stock, capital in excess of par value, and accumulated deficit. Condensed Consolidated Statements of Stockholders' Deficit (September 30, 2023 vs. March 31, 2023) | Metric | Sep 30, 2023 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Stockholders' Deficit | $(668,216) | $(797,396) | $129,180 | | Common Stock (shares outstanding) | 76,835,661 | 65,432,589 | 11,403,072 | | Capital in excess of par value | $1,105,673 | $964,741 | $140,932 | | Accumulated deficit | $(1,227,015) | $(1,207,556) | $(19,459) | Condensed Consolidated Statements of Cash Flows This section presents the company's cash flows from operating, investing, and financing activities for the six months ended September 30, 2023, and 2022. Condensed Consolidated Statements of Cash Flows (Six Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Net cash used in operating activities | $(95,945) | $(112,376) | $16,431 | -14.6% | | Net cash used in investing activities | $(19,340) | $(13,328) | $(6,012) | 45.1% | | Net cash provided by (used in) financing activities | $59,236 | $(5,299) | $64,535 | -1217.9% | | Net change in cash and cash equivalents | $(57,518) | $(136,428) | $78,910 | -57.8% | | Cash and cash equivalents at end of period | $169,885 | $104,450 | $65,435 | 62.6% | Notes to Condensed Consolidated Financial Statements This section provides detailed notes explaining accounting policies, significant transactions, and financial instrument details supporting the unaudited financial statements. 1. BACKGROUND AND BASIS OF PRESENTATION This note provides an overview of Triumph Group, Inc.'s business and the basis for preparing the financial statements. - Triumph Group, Inc. is a Delaware corporation focused on aerospace OEM products and MRO services[23] - The company has two reportable segments: Systems & Support and Interiors (formerly Aerospace Structures)[23] 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the significant accounting policies applied in preparing the financial statements, including revenue recognition, credit risk concentration, warrant accounting, contingencies, and fair value measurements. Revenue Recognition and Contract Balances This section details the company's policies for recognizing revenue from long-term contracts and managing contract balances. - Revenue is primarily from long-term contracts for design, development, manufacturing, and support services, often with sole supplier status[28] - Revenue is recognized over time using the cost-to-cost input method for performance obligations where control transfers continuously to the customer[36][37] - Cumulative catch-up adjustments from changes in estimates were immaterial for the three and six months ended September 30, 2023, but significantly increased net sales and income in the prior year periods[41] Concentration of Credit Risk This section identifies significant concentrations of credit risk, particularly with major customers like The Boeing Company. - Trade accounts receivable from The Boeing Company represented approximately 17% of total trade accounts receivable as of September 30, 2023, up from 12% at March 31, 2023[44] - Sales to Boeing accounted for 22% of net sales ($149.0 million) for the six months ended September 30, 2023, down from 29% ($189.3 million) in the prior year[45] Warrants This section provides details on the exercise and redemption of the company's outstanding warrants. - Approximately 7.7 million warrants were exercised in the six months ended September 30, 2023, generating $80.0 million in cash proceeds[52] - On July 6, 2023, the company redeemed all remaining 11.4 million outstanding warrants for a total redemption price of less than $0.1 million[52] Contingencies This section describes the company's policy for accruing liabilities related to loss contingencies. - Liabilities for loss contingencies are accrued when probable and reasonably estimable, based on the low-end of a range of possible costs[53] Fair Value Measurements This section explains the categorization and methods used for fair value measurements of financial instruments. - Fair value measurements are categorized into three levels based on input observability, with warrants initially measured using a Level 3 Monte Carlo model and later a Level 1 trading price[51][54] Supplemental Cash Flow Information This section provides additional details on non-cash investing and financing activities and other cash flow items. - Income taxes paid, net of refunds, were $1.7 million for the six months ended September 30, 2023, compared to $2.6 million in the prior year[55] 3. DIVESTED OPERATIONS AND ASSETS HELD FOR SALE This note details the divestiture of the Stuart, Florida manufacturing operations in July 2022, and subsequent adjustments and claims related to the sale. - The company completed the sale of its Stuart, Florida manufacturing operations in July 2022, recognizing a gain in fiscal year 2023[56] - In the six months ended September 30, 2023, the company recognized a loss of approximately $3.9 million due to the resolution of claims and purchase price adjustments related to the Stuart divestiture[58] 4. REVENUE RECOGNITION AND CONTRACTS WITH CUSTOMERS This note provides disaggregated revenue data by satisfaction method (over time or point in time) and end market, along with details on contract assets and liabilities. Disaggregation of Revenue This section breaks down net sales by segment and end market for the three and six months ended September 30, 2023, and 2022. Disaggregated Net Sales by Segment (Three Months Ended September 30) | Segment | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | YoY Change | | :---------------- | :-------------------------- | :-------------------------- | :--------- | | Systems & Support | $318,768 | $274,198 | 16.26% | | Interiors | $35,293 | $33,402 | 5.66% | | Total revenue | $354,061 | $307,600 | 15.11% | Disaggregated Net Sales by Segment (Six Months Ended September 30) | Segment | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | YoY Change | | :---------------- | :-------------------------- | :-------------------------- | :--------- | | Systems & Support | $609,343 | $528,841 | 15.22% | | Interiors | $71,863 | $128,143 | -43.92% | | Total revenue | $681,206 | $656,984 | 3.69% | Disaggregated Net Sales by End Market (Six Months Ended September 30, 2023) | End Market | Systems & Support (in thousands) | Interiors (in thousands) | Total (in thousands) | | :----------------- | :------------------------------- | :----------------------- | :------------------- | | OEM Commercial | $177,454 | $70,740 | $248,194 | | OEM Military | $126,853 | $0 | $126,853 | | MRO Commercial | $183,382 | $704 | $184,086 | | MRO Military | $103,358 | $0 | $103,358 | | Non-aviation | $17,131 | $419 | $17,550 | | Total | $608,178 | $71,863 | $680,041 | Contract Assets and Liabilities This section presents the balances of contract assets and liabilities and explains changes between periods. Contract Assets and Liabilities Balances | Metric | Sep 30, 2023 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Contract assets | $109,351 | $103,027 | $6,324 | | Contract liabilities | $(39,853) | $(44,945) | $5,092 | | Net contract asset | $69,498 | $58,082 | $11,416 | - The increase in net contract assets is due to revenue recognized in excess of amounts billed and customer advances during the six months ended September 30, 2023[68] Performance Obligations This section details the total value and expected timing of revenue from unsatisfied performance obligations. Unsatisfied Performance Obligations (as of September 30, 2023) | Period | Amount (in thousands) | | :------------------------ | :-------------------- | | Total | $1,550,486 | | Less than 1 year | $891,840 | | 1-3 years | $627,737 | | 4-5 years | $29,962 | | More than 5 years | $947 | 5. INVENTORIES This note details the components of the company's inventories, which are valued at the lower of cost or market. Inventory Components (September 30, 2023 vs. March 31, 2023) | Component | Sep 30, 2023 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | | Raw materials | $54,723 | $44,834 | $9,889 | | Work-in-process | $346,443 | $304,874 | $41,569 | | Finished goods | $10,760 | $17,000 | $(6,240) | | Rotable assets | $22,455 | $22,537 | $(82) | | Total inventories | $434,381 | $389,245 | $45,136 | 6. LONG-TERM DEBT This note provides a breakdown of the company's long-term debt, including finance leases, senior secured first lien notes, and senior notes, along with details on the receivables securitization program and debt covenants. Receivables Securitization Program This section describes the company's receivables securitization facility, including its maximum available amount and outstanding letters of credit. - The company has a receivables securitization facility with a maximum available amount of $100.0 million as of September 30, 2023[76] - As of September 30, 2023, there were no borrowings but $19.6 million in letters of credit outstanding under the facility, which expires in November 2024[77] Senior Secured First Lien Notes due 2028 This section details the issuance and security of the company's 9.000% Senior Secured First Lien Notes due March 15, 2028. - The company issued $1.2 billion principal amount of 9.000% Senior Secured First Lien Notes due March 15, 2028, on March 14, 2023[79] - These notes are secured by first-priority liens on substantially all of the company's and guarantor subsidiaries' assets[83] Senior Notes Due 2025 This section provides information on the company's 7.750% Senior Notes due August 15, 2025, including amounts used for warrant exercises and repurchases. - The company has $500.0 million principal amount of 7.750% Senior Notes due August 15, 2025, issued on August 17, 2017[88] - In the six months ended September 30, 2023, approximately $13.4 million of 2025 Notes were used for warrant exercises, and $19.1 million were repurchased under a 10b5-1 plan[94] Financial Instruments Not Recorded at Fair Value This section presents the carrying and fair values of long-term debt and discusses changes in interest expense. Long-Term Debt Fair Value (September 30, 2023 vs. March 31, 2023) | Metric | Sep 30, 2023 (in thousands) | Mar 31, 2023 (in thousands) | | :---------------- | :-------------------------- | :-------------------------- | | Carrying Value | $1,659,097 | $1,691,782 | | Fair Value | $1,652,467 | $1,676,879 | - Interest paid on indebtedness increased to $74.2 million for the six months ended September 30, 2023, from $62.7 million in the prior year, due to higher interest rates[96][204] 7. EARNINGS PER SHARE This note provides the reconciliation between basic and diluted earnings per share, detailing the impact of dilutive securities like warrants and restricted stock units. Weighted Average Common Shares Outstanding (Six Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Weighted average common shares outstanding - basic | 71,368 | 64,946 | 6,422 | 9.9% | | Weighted average common shares outstanding - diluted | 71,368 | 65,318 | 6,050 | 9.3% | - For the six months ended September 30, 2023, no shares from warrants were included in diluted EPS as they would be anti-dilutive, while 11.5 million shares could potentially dilute EPS in the future[99] 8. INCOME TAXES This note discusses the company's income tax policies, unrecognized tax benefits, and the impact of a full valuation allowance on deferred tax assets. Unrecognized Tax Benefits | Date | Amount (in thousands) | | :---------------- | :-------------------- | | Sep 30, 2023 | $12,253 | | Mar 31, 2023 | $12,085 | - The company maintains a full valuation allowance against most net deferred tax assets due to insufficient positive evidence for realization[103] - The effective income tax rate for the three months ended September 30, 2023, was 390.6% (vs. 1.6% in 2022) and for six months was (21.9)% (vs. 3.5% in 2022), reflecting the valuation allowance and foreign operations tax expense[104] 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS This note describes the company's defined benefit pension plans and other postretirement benefits, including funding policies and the impact of a common stock contribution. - The company contributed 3.2 million shares of common stock, valued at approximately $39.1 million, to its U.S. defined benefit pension plan trust[106] - This contribution is expected to reduce the required cash contribution for fiscal year 2024 to zero and reduce future required cash contributions[108] Net Periodic Benefit Plan Costs This section details the components of net periodic pension benefit expense (income) for the six months ended September 30, 2023, and 2022. Net Periodic Pension Benefit Expense (Income) (Six Months Ended September 30) | Component | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Service cost | $200 | $342 | $(142) | | Interest cost | $40,234 | $32,579 | $7,655 | | Expected return on plan assets | $(52,504) | $(60,647) | $8,143 | | Amortization of prior service credits | $51 | $51 | $0 | | Amortization of net loss | $15,046 | $15,449 | $(403) | | Net periodic benefit expense (income) | $3,027 | $(12,226) | $15,253 | 10. STOCKHOLDERS' DEFICIT This note details changes in stockholders' deficit, specifically focusing on the components of accumulated other comprehensive loss. Accumulated Other Comprehensive Loss This section breaks down the components of accumulated other comprehensive loss (AOCI) for the six months ended September 30, 2023, and 2022. Accumulated Other Comprehensive Loss (AOCI) Components (Six Months Ended September 30) | Component | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Currency Translation Adjustment | $(50,662) | $(70,748) | $20,086 | | Unrealized Gains and Losses on Derivative Instruments | $22 | $(1,481) | $1,503 | | Defined Benefit Pension Plans and Other Postretirement Benefits | $(496,311) | $(404,504) | $(91,807) | | Total AOCI | $(546,951) | $(476,733) | $(70,218) | 11. SEGMENTS This note provides financial performance information for the company's two reportable segments, Systems & Support and Interiors, using Adjusted EBITDAP as a primary measure. - The company's two reportable segments are Systems & Support and Interiors, with performance evaluated using Adjusted EBITDAP[115] Segment Net Sales and Adjusted EBITDAP (Three Months Ended September 30) | Metric | Systems & Support (in thousands) | Interiors (in thousands) | Total (in thousands) | | :---------------- | :------------------------------- | :----------------------- | :------------------- | | Net sales | $318,768 | $35,293 | $354,061 | | Adjusted EBITDAP | $61,002 | $(2,704) | $46,383 | Segment Net Sales and Adjusted EBITDAP (Six Months Ended September 30) | Metric | Systems & Support (in thousands) | Interiors (in thousands) | Total (in thousands) | | :---------------- | :------------------------------- | :----------------------- | :------------------- | | Net sales | $609,343 | $71,863 | $681,206 | | Adjusted EBITDAP | $113,151 | $(4,597) | $82,094 | 12. COMMITMENTS AND CONTINGENCIES This note outlines the company's environmental obligations, commercial disputes, litigation, and liabilities related to divestitures, disposals, guarantees, and indemnifications. Environmental Matters This section discusses the company's ongoing responsibilities and potential financial impact related to environmental remediation costs. - An interim arbitration decision indicated ongoing responsibility for environmental remediation costs at four formerly occupied properties, with $1.3 million accrued for one property[124] - The ultimate impact on operations could be a loss of up to $27.0 million, with annual cash expenditures not likely to exceed $1.0-$2.0 million[124] Commercial Disputes and Litigation This section addresses the company's involvement in various disputes, claims, and lawsuits in the ordinary course of business. - The company is involved in various disputes, claims, and lawsuits in the ordinary course of business, but does not believe any pending matter will have a material effect on its financial position or results of operations[126] Divestitures, Disposals, Guarantees, and Indemnifications This section details disputes arising from divestitures, related claims, and the company's withdrawal liability from a pension fund. - Disputes have arisen or may arise with acquirers post-divestiture, including claims related to working capital adjustments and contractual terms[128] - The divestiture agreement for the Stuart facility includes caps on breaches of representations ($18.8 million general cap, $25.0 million for specific representations)[128] - The company accrued for probable losses associated with divestiture disputes, but losses in excess of current accruals could be material[128] - The company withdrew from the IAM National Pension Fund, with an estimated withdrawal liability of $14.6 million, payable in quarterly installments of approximately $0.4 million over thirteen years[132] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, results of operations, and cash flows for the three and six months ended September 30, 2023, compared to the prior year periods, including segment performance and liquidity. OVERVIEW This overview introduces Triumph Group's business, recent divestitures, key financial highlights for the quarter, and significant program developments. Business This section describes Triumph Group's role as an aerospace industry supplier with two primary segments. - Triumph is a major aerospace industry supplier with two segments: Systems & Support (proprietary components, MRO) and Interiors (thermo-acoustic insulation, composite components)[134] Divestitures This section highlights the completion of the company's exit from the structures business through recent divestitures. - The sale of Stuart, Florida manufacturing operations in July 2022 completed the exit from the structures business, reshaping the portfolio towards systems and aftermarket services[135] Summary of Significant Financial Results This section summarizes key financial performance metrics, including net sales, operating income, net loss, and EPS for the quarter. Significant Financial Results (Three Months Ended September 30, 2023) | Metric | Amount (in thousands) | Prior Year Period (in thousands) | Change | | :-------------------------------- | :------------------- | :------------------------------ | :----- | | Net sales | $354,100 | $307,600 | +15.1% | | Operating income | $34,300 | $132,200 | -74.1% | | Net loss | $(1,300) | $106,500 (income) | -101.2% | | Diluted EPS | $(0.02) | $1.63 | -101.2% | - Backlog as of September 30, 2023, was $1.82 billion, with an estimated $1.14 billion expected to be shipped by September 30, 2024[138] - Cash used in operating activities for the six months ended September 30, 2023, improved to $95.9 million from $112.4 million in the prior year[138] - The company increased cash by approximately $84.1 million and reduced debt by $14.4 million from warrant exercises and redemption between December 2022 and July 2023[137] Significant Developments in Key Programs This section discusses important updates and production expectations for key aerospace programs, such as the Boeing 737. - The Boeing 737 program accounted for 13% of revenue for the six months ended September 30, 2023, with OEM production representing 71% of that revenue[140] - Boeing expects 737 production to reach 38 per month by December 31, 2023, and 50 per month in the 2025/2026 timeframe[140] RESULTS OF OPERATIONS This section analyzes the consolidated and segment-level financial results, highlighting key variances in net sales, operating income, and other financial metrics for the three and six months ended September 30, 2023, compared to the prior year. Non-GAAP Financial Measures This section explains the company's use of non-GAAP financial measures like Adjusted EBITDA and Adjusted EBITDAP to assess operating performance. - The company uses Adjusted EBITDA and Adjusted EBITDAP as non-GAAP measures to evaluate operating performance, excluding items like interest, taxes, depreciation, amortization, and non-recurring gains/losses[143][144] Adjusted EBITDA and Adjusted EBITDAP Reconciliation (Three Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Net (loss) income (U.S. GAAP measure) | $(1,296) | $106,526 | $(107,822) | -101.2% | | Adjusted EBITDA (non-GAAP measure) | $47,203 | $48,616 | $(1,413) | -2.9% | | Adjusted EBITDAP (non-GAAP measure) | $46,383 | $40,053 | $6,330 | 15.8% | Adjusted EBITDA and Adjusted EBITDAP Reconciliation (Six Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Net (loss) income (U.S. GAAP measure) | $(19,459) | $96,184 | $(115,643) | -120.2% | | Adjusted EBITDA (non-GAAP measure) | $83,734 | $99,982 | $(16,248) | -16.2% | | Adjusted EBITDAP (non-GAAP measure) | $82,094 | $82,833 | $(739) | -0.9% | Three months ended September 30, 2023, compared with three months ended September 30, 2022 This section details the financial performance for the three months ended September 30, 2023, compared to the same period in 2022, focusing on net sales, operating income, and other key financial metrics. Net Sales This section analyzes the changes in net sales across commercial OEM, military OEM, and aftermarket categories for the three-month period. Net Sales by Category (Three Months Ended September 30) | Category | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Commercial OEM | $130,980 | $127,846 | $3,134 | 2.5% | | Military OEM | $61,058 | $61,423 | $(365) | -0.6% | | Total OEM Revenue | $192,038 | $189,269 | $2,769 | 1.5% | | Commercial Aftermarket | $96,443 | $65,078 | $31,365 | 48.2% | | Military Aftermarket | $55,756 | $44,960 | $10,796 | 24.0% | | Total Aftermarket Revenue | $152,199 | $110,038 | $42,161 | 38.3% | | Non-Aviation Revenue | $9,234 | $7,426 | $1,808 | 24.3% | | Total Net Sales | $354,061 | $307,600 | $46,461 | 15.1% | - Organic Commercial OEM sales increased by $5.6 million (4.5%), driven by Boeing 787 and 737 programs, despite a nonrecurring intellectual property transaction in the prior year[155] - Commercial Aftermarket sales surged by $31.4 million (48.2%) due to improved air travel metrics, impacting both repair/overhaul and spare part sales[156] - Military aftermarket sales increased by $10.8 million (24.0%) organically, driven by increased sales across fixed-wing and rotorcraft platforms[157] Segment Operating Income This section examines the changes in segment operating income and consolidated gross profit margin for the three-month period. Segment Operating Income (Three Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Segment operating income | $51,291 | $49,337 | $1,954 | 4.0% | | Corporate (expense) income | $(17,013) | $82,829 | $(99,842) | -120.5% | | Total operating income | $34,278 | $132,166 | $(97,888) | -74.1% | - Organic segment operating income increased by $9.5 million (22.7%), driven by increased volumes and a $4.0 million reduction in general and administrative human capital costs[159] - Consolidated gross profit margin decreased to 26.2% from 32.4%, primarily due to inflationary costs, the prior year's nonrecurring intellectual property transaction, and favorable adjustments on sunsetting programs, partially offset by increased aftermarket sales mix[162] Corporate Expense This section explains the significant decrease in corporate income, primarily due to a prior-period divestiture gain. - Corporate income decreased by $99.8 million, primarily due to a $103.9 million gain on the Stuart divestiture in the prior period, partially offset by a $4.6 million reduction in human capital costs[163] Interest Expense and Other This section discusses the increase in interest expense due to higher interest rates. - Interest expense and other increased due to higher interest rates compared to the prior year period[164] Non-service Defined Benefit Income This section details the decrease in non-service defined benefit income, mainly attributed to changes in discount rates. - Non-service defined benefit income decreased by $7.7 million, mainly due to changes in discount rates and experience[166] Income Taxes This section explains the effective tax rate for the three-month period, influenced by a full valuation allowance and foreign operations tax expense. - The effective tax rate was 390.6% for the three months ended September 30, 2023, compared to 1.6% in the prior year, reflecting a limitation on tax benefit recognition due to a full valuation allowance and foreign operations tax expense[167] Business Segment Performance — Three months ended September 30, 2023, compared with three months ended September 30, 2022 This section provides a detailed comparison of the performance of the Systems & Support and Interiors segments for the three months ended September 30, 2023, versus 2022. Systems & Support This section analyzes the net sales and operating income growth for the Systems & Support segment, driven by market recovery and cost reductions. - Net sales increased by $44.6 million (16.3%) organically, driven by market recovery and increased commercial OEM and aftermarket sales volumes, despite a prior-year nonrecurring intellectual property transaction[174] - Operating income increased by $11.2 million (25.9%) organically, benefiting from increased sales gross profit and a $4.5 million reduction in human capital costs[175] Interiors This section examines the net sales increase and operating loss for the Interiors segment, impacted by OEM volume and inflationary costs. - Organic net sales increased by $4.7 million (15.4%), primarily due to increased 737 OEM volume[177] - Organic operating loss increased by $1.7 million, as inflationary labor and material costs (including unfavorable Mexican peso effects) outpaced net sales growth[178] Six months ended September 30, 2023, compared with six months ended September 30, 2022 This section details the financial performance for the six months ended September 30, 2023, compared to the same period in 2022, focusing on net sales, operating income, and other key financial metrics. Net Sales This section analyzes the changes in net sales across commercial OEM, military OEM, and aftermarket categories for the six-month period. Net Sales by Category (Six Months Ended September 30) | Category | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Commercial OEM | $248,194 | $296,385 | $(48,191) | -16.3% | | Military OEM | $126,853 | $118,387 | $8,466 | 7.2% | | Total OEM Revenue | $375,047 | $414,772 | $(39,725) | -9.6% | | Commercial Aftermarket | $184,086 | $128,261 | $55,825 | 43.5% | | Military Aftermarket | $103,358 | $95,906 | $7,452 | 7.8% | | Total Aftermarket Revenue | $287,444 | $224,167 | $63,277 | 28.2% | | Non-Aviation Revenue | $17,550 | $16,655 | $895 | 5.4% | | Total Net Sales | $681,206 | $656,984 | $24,222 | 3.7% | - Commercial OEM sales decreased by $48.2 million (16.3%) due to divestitures and sunsetting programs, but organic sales increased by $14.3 million (6.1%) from Boeing 787 and 737 programs[180][181] - Commercial Aftermarket sales increased by $55.8 million (43.5%), with organic sales up $57.6 million (45.8%) due to improved air travel metrics[183] - Military OEM sales increased by $8.5 million (7.2%) organically, driven by CH-53K, V-22, and F35 programs[182] Segment Operating Income This section examines the changes in segment operating income and consolidated gross profit margin for the six-month period. Segment Operating Income (Six Months Ended September 30) | Metric | Sep 30, 2023 (in thousands) | Sep 30, 2022 (in thousands) | Change (in thousands) | YoY Change | | :------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :--------- | | Segment operating income | $94,499 | $80,187 | $14,312 | 17.8% | | Corporate expense | $(50,197) | $66,713 | $(116,910) | -175.2% | | Total operating income | $44,302 | $146,900 | $(102,598) | -69.8% | - Organic segment operating income increased by $26.9 million (38.1%), driven by increased volumes and reduced human capital costs, partially offset by a prior-year nonrecurring intellectual property transaction and AMJP grant benefit[186] - Consolidated gross profit margin decreased to 26.3% from 26.9%, primarily due to inflationary costs, prior-year nonrecurring intellectual property transaction and AMJP grant benefit, partially offset by increased aftermarket sales mix[189] Corporate Expense This section explains the shift from corporate income to expense, primarily due to a prior-year divestiture gain. - Corporate income decreased to expense primarily due to the $103.9 million gain on the Stuart divestiture in the prior year period[190] Interest Expense and Other This section discusses the increase in interest expense due to higher interest rates. - Interest expense and other increased due to higher interest rates compared to the prior year period[192] Non-service Defined Benefit Income This section details the decrease in non-service defined benefit income, mainly attributed to changes in discount rates. - Non-service defined benefit income decreased by $15.5 million, primarily due to changes in discount rates and experience[193] Income Taxes This section explains the effective tax rate for the six-month period, influenced by a full valuation allowance and foreign operations tax expense. - The effective tax rate was (21.9)% for the six months ended September 30, 2023, compared to 3.5% in the prior year, reflecting a limitation on tax benefit recognition due to a full valuation allowance and foreign operations tax expense[194] Business Segment Performance - Six months ended September 30, 2023, compared with six months ended September 30, 2022 This section provides a detailed comparison of the performance of the Systems & Support and Interiors segments for the six months ended September 30, 2023, versus 2022. Systems & Support This section analyzes the net sales and operating income growth for the Systems & Support segment, driven by market recovery and cost reductions. - Net sales increased by $80.5 million (15.2%) organically, driven by continued market recovery and increased commercial OEM and aftermarket sales volumes, despite a prior-year nonrecurring intellectual property transaction[196] - Operating income increased by $23.9 million (31.2%) organically, benefiting from increased sales gross profit and a $4.8 million reduction in human capital costs, partially offset by prior-year nonrecurring intellectual property transaction and AMJP grant benefit[197][199] Interiors This section examines the net sales increase and operating income changes for the Interiors segment, impacted by OEM volume, divestitures, and inflationary costs. - Organic net sales increased by $8.0 million (12.9%), primarily due to increased OEM volume on the 787 and 737 programs, offsetting a $64.3 million decrease from divestitures and sunsetting programs[201] - Organic operating income increased by $3.1 million due to increased volumes, partially offset by inflationary labor and material costs, but overall operating income decreased due to divestitures[202] Liquidity and Capital Resources This section discusses the company's cash flows from operating, investing, and financing activities, highlighting changes in liquidity and capital management strategies. Operating Cash Flows This section analyzes the changes in net cash flow from operating activities and interest payments. - Net cash outflow from operating activities improved by $16.5 million, from $112.4 million in 2022 to $95.9 million in 2023, driven by timing of payables and inventory increases[204] - Interest payments increased to $74.2 million for the six months ended September 30, 2023, from $62.7 million in the prior year, due to higher interest rates[204] Investing Cash Flows This section details cash used in investing activities, including asset sales, capital expenditures, and joint venture investments. - Cash used in investing activities increased by $6.0 million, totaling $19.3 million for the six months ended September 30, 2023[207] - Investing activities included $6.8 million for asset sales and business resolution claims, $11.0 million for capital expenditures, and $1.5 million for a joint venture investment[207] - Full-year capital expenditures for fiscal 2024 are expected to be around $25.0 million, primarily for manufacturing efficiency and capability expansion[207] Financing Cash Flows This section discusses cash flows from financing activities, including warrant exercises, debt redemption, and pension contributions. - Cash flows provided by financing activities were $59.2 million for the six months ended September 30, 2023, a significant increase from $5.3 million used in the prior year[208] - This was primarily driven by $80.0 million in proceeds from warrant exercises, partially offset by $19.1 million in 2025 Notes redemption[208] - The company contributed 3.2 million shares of common stock to its U.S. defined benefit plan trust, expected to reduce the fiscal 2024 cash contribution by $14.7 million to zero[209] - As of September 30, 2023, the company had $169.9 million cash on hand and $59.1 million available under its Securitization Facility[208] Critical Accounting Policies This section confirms no material changes to the company's critical accounting policies or estimates since the last fiscal year. - No material changes to critical accounting policies or estimates were reported since the fiscal year ended March 31, 2023[222] Forward-Looking Statements This section advises that the report contains forward-looking statements subject to various risks and uncertainties. - The report contains forward-looking statements based on current projections and expectations, with actual results potentially differing due to factors like restructuring, acquisitions, divestitures, economic conditions, and customer dependence[224] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the Annual Report on Form 10-K for detailed information on market risk, noting no material changes in the current period. - No material changes in market risk disclosures were reported during the period covered by this report, referring to the Annual Report on Form 10-K for detailed information[225] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of September 30, 2023, and reports no material changes in internal control over financial reporting. - The company's disclosure controls and procedures were deemed effective at a reasonable assurance level as of September 30, 2023[227] - No material changes occurred in internal control over financial reporting during the fiscal quarter[228] Part II. Other Information This section covers various other disclosures, including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits. Item 1. Legal Proceedings This item states that there are no applicable legal proceedings to report. - Not applicable[229] Item 1A. Risk Factors This item indicates no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K. - No material changes in risk factors from those disclosed in the Annual Report on Form 10-K for the fiscal year ended March 31, 2023[230] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This item states that there are no applicable unregistered sales of equity securities, use of proceeds, or issuer purchases of equity securities to report. - Not applicable[231] Item 3. Defaults Upon Senior Securities This item states that there are no applicable defaults upon senior securities to report. - Not applicable[232] Item 4. Mine Safety Disclosures This item states that there are no applicable mine safety disclosures to report. - Not applicable[233] Item 5. Other Information This item states that there is no other information to report. - Not applicable[234] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including certificates, certifications, and financial information in iXBRL format. - The report includes various exhibits such as Certificate of Amendment to the Amended and Restated Certificate of Incorporation, List of Subsidiary Guarantors, CEO/CFO Certifications, and financial information in iXBRL format[235] Signatures This section provides the names and titles of the company officers who signed the report. - The report is signed by Daniel J. Crowley (President and CEO), James F. McCabe, Jr. (SVP and CFO), and Kai W. Kasiguran (VP, Controller) on November 7, 2023[238]