News Column

TRIUMPH GROUP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 4, 2014

(The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements contained elsewhere herein.)

OVERVIEW

We are a major supplier to the aerospace industry and have three operating segments: (i) Triumph Aerostructures Group, whose companies' revenues are derived from the design, manufacture, assembly and integration of both build-to-print and proprietary metallic and composite aerostructures and structural components for the global aerospace original equipment manufacturers, or OEM, market; (ii) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build-to-print components, assemblies and systems also for the OEM market and the related aftermarket; and (iii) Triumph Aftermarket Services Group, whose companies serve aircraft fleets, notably commercial airlines, the U.S. military and cargo carriers, through the maintenance, repair and overhaul of aircraft components and accessories manufactured by third parties. Effective June 27, 2014, the Company acquired the hydraulic actuation business of GE Aviation ("GE"). GE's hydraulic actuation business consists of three facilities located in Yakima, Washington, Cheltenham, England and the Isle of Man and is a technology leader in actuation systems. GE's key product offerings include complete landing gear actuation systems, door actuation, nose-wheel steerings, hydraulic fuses, manifolds flight control actuation and locking mechanisms for the commercial, military and business jet markets. The acquired business will operate as Triumph Actuation Systems-Yakima and Triumph Actuation Systems-UK & IOM and its results are included in Aerospace Systems Group from the date of acquisition. On June 18, 2014, the Company announced it had settled all pending litigation involving the Company, its subsidiary, certain employees of the Company and its subsidiary and Eaton Corporation and several of its subsidiaries ("Eaton"). As part of the settlement, Eaton agreed to pay the Company $135,300 in cash. The Company has reflected the gain on legal settlement, net of expense, of $134,693, on the Condensed Consolidated Statements of Income for the three months ended June 30, 2014 due to the fact that all contingencies have been resolved as of that date. The Company received the legal settlement from Eaton during the second quarter of the fiscal year ended March 31, 2015, while the amount of the settlement is included in "Trade and other receivables" in the Condensed Consolidated Balance Sheet as of June 30, 2014. Highlights for the first quarter of the fiscal year ending March 31, 2015 included: Net sales for the first quarter of the fiscal year ending March 31, 2015



decreased 5.0% over the prior year period to $896.9 million.

Operating income in the first quarter of fiscal 2015 was $240.5 million,

and included a gain on legal settlement, net of related legal expense, of

$134.7 million.

Net income for the first quarter of fiscal 2015 increased 62.2% over the

prior year period to $128.2 million. Backlog as of June 30, 2014 increased 5.5% year over year to $5.01 billion, and includes expected milestone payments on development contracts. Of our existing backlog of $5.01 billion, we estimate that approximately $2.10 billion will not be shipped by June 30, 2015.



Net income for the first quarter of fiscal 2015 was $2.46 per diluted

common share, as compared to $1.50 per diluted share in the prior year period.



We used $52.1 million of cash flow from operating activities for the three

months ended June 30, 2014, after $45.2 million in pension contributions,

as compared to cash provided by operations of $11.9 million in the prior

year period.

As of June 30, 2014, we have incurred approximately $165.8 million in inventory costs associated with the Bombardier Global 7000/8000 and the Embraer second generation E-Jet programs, for which we have not yet begun to deliver. We expect to incur additional costs related to these programs as they continue to develop. As disclosed during the second quarter of fiscal 2014, we identified additional program costs in the prior fiscal year of approximately $85.0 million, primarily related to the 747-8 program. These changes in program cost estimates were largely due to production rate changes, continued inefficiency, rework, high overtime levels, increased costs from suppliers and expedited delivery charges. While we have experienced improvements in performance metrics since the issues were identified, we have not yet recovered to the levels previously expected or as quickly as expected. These amounts have resulted primarily 34



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) from reductions to the profitability estimates of our previous 747-8 production lots. Both the current and future production lots are expected to be profitable and not result in loss reserves. While we are currently projecting the recurring production contracts to be profitable, there is still a substantial amount of risk similar to what we have experienced on these programs (particularly the 747-8). Particularly, our ability to manage risks related to supplier performance, execution of cost reduction strategies, hiring and retaining skilled production and management personnel, quality and manufacturing execution, program schedule delays and many other risks, will determine the ultimate performance of these programs. Additionally, further production rate reductions by our customers would be expected to have a negative impact on our profitability. The next twelve months will be a critical time for these programs as we attempt to return to baseline performance for the recurring cost structure. Recognition of forward-losses in the future periods continues to be a significant risk and will depend upon several factors including our market forecast, possible airplane program delays or customer production rate changes, our ability to successfully perform under revised design and manufacturing plans, achievement of forecasted cost reductions as we continue production and our ability to successfully resolve claims and assertions with our customers and suppliers. Our union contract with Local 848 of the United Auto Workers with employees at our Dallas and Grand Prairie, Texas, facilities expired in October 2013. The employees are currently working without a contract. If we are unable to negotiate a new contract with that workforce, our operations may be disrupted and we may be prevented from completing production and delivery of products from those facilities, which would negatively impact our results. A contingency plan has been developed that would allow production to continue in the event of a strike. As previously announced by Boeing in September 2013 and then subsequently revised in March 2014 to curtail production by an additional three months, the decision has been made to cease production of the C-17 during calendar year 2015. Major production related to this program is expected to cease by the end of fiscal 2015. We have received inquiries regarding proposal for spares which could extend production through the end of fiscal 2016, as we believe the United States Air Force will want to have continued contractor support for the C-17 program. Effective October 4, 2013, the Company acquired all of the issued and outstanding shares of General Donlee Canada, Inc. ("General Donlee"). General Donlee is based in Toronto, Canada and is a leading manufacturer of precision machined products for the aerospace, nuclear and oil and gas industries. The acquired business now operates as Triumph Gear Systems-Toronto and its results are included in the Aerospace Systems Group from the date of acquisition. Effective May 6, 2013, the Company acquired four related entities collectively comprising the Primus Composites business ("Primus") from Precision Castparts Corp. The acquired business, which includes two manufacturing facilities in Farnborough, England and Rayong, Thailand, operates as Triumph Structures - Farnborough and Triumph Structures - Thailand and is included in the Aerostructures segment from the date of acquisition. Together, Triumph Structures - Farnborough and Triumph Structures - Thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies. In addition to its composite operations, the Thailand operation also machines and processes metal components. 35



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RESULTS OF OPERATIONS The following includes a discussion of our consolidated and business segment results of operations. The Company's diverse structure and customer base do not provide for precise comparisons of the impact of price and volume changes to our results. However, we have disclosed the significant variances between the respective periods. Non-GAAP Financial Measures We prepare and publicly release quarterly unaudited financial statements prepared in accordance with GAAP. In accordance with Securities and Exchange Commission (the "SEC") guidance on Compliance and Disclosure Interpretations, we also disclose and discuss certain non-GAAP financial measures in our public releases. Currently, the non-GAAP financial measure that we disclose is Adjusted EBITDA, which is our income from continuing operations before interest, income taxes, amortization of acquired contract liabilities, curtailments, settlements and early retirement incentives, legal settlements and depreciation and amortization. We disclose Adjusted EBITDA on a consolidated and a reportable segment basis in our earnings releases, investor conference calls and filings with the SEC. The non-GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-GAAP financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations. We view Adjusted EBITDA as an operating performance measure and, as such, we believe that the GAAP financial measure most directly comparable to it is income from continuing operations. In calculating Adjusted EBITDA, we exclude from income from continuing operations the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business. We have outlined below the type and scope of these exclusions and the material limitations on the use of these non-GAAP financial measures as a result of these exclusions. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as a measure of liquidity, as an alternative to net income (loss), income from continuing operations, or as an indicator of any other measure of performance derived in accordance with GAAP. Investors and potential investors in our securities should not rely on Adjusted EBITDA as a substitute for any GAAP financial measure, including net income (loss) or income from continuing operations. In addition, we urge investors and potential investors in our securities to carefully review the reconciliation of Adjusted EBITDA to income from continuing operations set forth below, in our earnings releases and in other filings with the SEC and to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed with the SEC, as well as our quarterly earnings releases, and compare the GAAP financial information with our Adjusted EBITDA. Adjusted EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business. We have spent more than 15 years expanding our product and service capabilities partially through acquisitions of complementary businesses. Due to the expansion of our operations, which included acquisitions, our income from continuing operations has included significant charges for depreciation and amortization. Adjusted EBITDA excludes these charges and provides meaningful information about the operating performance of our business, apart from charges for depreciation and amortization. We believe the disclosure of Adjusted EBITDA helps investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We also believe Adjusted EBITDA is a measure of our ongoing operating performance because the isolation of non-cash charges, such as depreciation and amortization, and non-operating items, such as interest and income taxes, provides additional information about our cost structure, and, over time, helps track our operating progress. In addition, investors, securities analysts and others have regularly relied on Adjusted EBITDA to provide a financial measure by which to compare our operating performance against that of other companies in our industry. Set forth below are descriptions of the financial items that have been excluded from our income from continuing operations to calculate Adjusted EBITDA and the material limitations associated with using this non-GAAP financial measure as compared to income from continuing operations: Legal settlements may be useful for investors to consider because it reflects gains or losses from disputes with third parties. We do not believe these earnings necessarily reflect the current and ongoing cash earnings related to our operations. 36



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)



Curtailments, settlements and early retirement incentives may be useful

for investors to consider because it represents the current period impact

of the change in the defined benefit obligation due to the reduction in

future service costs as well as the incremental cost of retirement

incentive benefits paid to participants. We do not believe these earnings

necessarily reflect the current and ongoing cash earnings related to our operations.



Amortization of acquired contract liabilities may be useful for investors

to consider because it represents the non-cash earnings on the fair value

of off-market contracts acquired through acquisitions. We do not believe

these earnings necessarily reflect the current and ongoing cash earnings

related to our operations.

Amortization expense may be useful for investors to consider because it

represents the estimated attrition of our acquired customer base and the diminishing value of product rights and licenses. We do not believe these



charges necessarily reflect the current and ongoing cash charges related

to our operating cost structure.

Depreciation may be useful for investors to consider because it generally

represents the wear and tear on our property and equipment used in our

operations. We do not believe these charges necessarily reflect the

current and ongoing cash charges related to our operating cost structure.

The amount of interest expense and other we incur may be useful for

investors to consider and may result in current cash inflows or outflows.

However, we do not consider the amount of interest expense and other to be

a representative component of the day-to-day operating performance of our

business. Income tax expense may be useful for investors to consider because it



generally represents the taxes which may be payable for the period and the

change in deferred income taxes during the period and may reduce the

amount of funds otherwise available for use in our business. However, we

do not consider the amount of income tax expense to be a representative

component of the day-to-day operating performance of our business.

Management compensates for the above-described limitations of using non-GAAP measures by using a non-GAAP measure only to supplement our GAAP results and to provide additional information that is useful to gain an understanding of the factors and trends affecting our business. The following table shows our Adjusted EBITDA reconciled to our net income for the indicated periods (in thousands): Three Months Ended June 30, 2014 2013 Net income $ 128,243$ 79,043 Gain on legal settlement, net of expenses (134,693 ) - Amortization of acquired contract liabilities, net (8,967 ) (11,150 ) Depreciation and amortization 37,551 37,934 Interest expense and other 42,360 19,710 Income tax expense 69,921 42,593 Adjusted EBITDA $ 134,415$ 168,130



The following tables show our Adjusted EBITDA by reportable segment reconciled to our operating income for the indicated periods (in thousands):

Three Months Ended June 30, 2014 Aerospace Aftermarket Corporate/ Total Aerostructures Systems Services Eliminations Operating income $ 240,524$ 70,866$ 37,352$ 10,504$ 121,802 Gain on legal settlement, net of expenses (134,693 ) - - - (134,693 ) Amortization of acquired contract liabilities, net (8,967 ) (5,117 ) (3,850 ) - - Depreciation and amortization 37,551 24,979 9,517 1,877 1,178 Adjusted EBITDA $ 134,415$ 90,728$ 43,019

$ 12,381$ (11,713 ) 37



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Three Months Ended June 30, 2013 Aerospace Aftermarket Corporate/ Total Aerostructures Systems Services Eliminations Operating income $ 141,346$ 100,387$ 42,643$ 11,279$ (12,963 ) Amortization of acquired contract liabilities, net (11,150 ) (6,141 ) (5,009 ) - - Depreciation and amortization 37,934 26,313 8,539 1,877 1,205 Adjusted EBITDA $ 168,130$ 120,559$ 46,173$ 13,156$ (11,758 )



The fluctuations from period to period within the amounts of the components of the reconciliations above are discussed further below within Results of Operations.

Three months ended June 30, 2014 compared to three months ended June 30, 2013 Three Months Ended June 30, 2014 2013 (dollars in thousands) Net sales $ 896,905$ 943,683 Segment operating income $ 118,722$ 154,309 Corporate income (expenses) 121,802 (12,963 ) Total operating income 240,524 141,346 Interest expense and other 42,360 19,710 Income tax expense 69,921 42,593 Net income $ 128,243$ 79,043 Net sales decreased by $46.8 million, or 5.0%, to $896.9 million for the three months ended June 30, 2014 from $943.7 million for the three months ended June 30, 2013. The fiscal 2014 acquisitions, net of the prior year divestitures, contributed $7.0 million in net sales. Organic sales decreased $53.8 million, or 5.7%, due to production rate reductions by our customers on the 747-8, 767 and V-22 programs. Net sales for the three months ended June 30, 2014 included $5.5 million in total non-recurring revenues, as compared to $4.8 million in non-recurring revenues for the three months ended June 30, 2013. The prior year period was negatively impacted by our customers' decreased production rates on existing programs and decreased military sales. Cost of sales decreased $11.7 million, or 1.7%, to $684.8 million for the three months ended June 30, 2014 from $696.5 million for the three months ended June 30, 2013. This decrease was largely due to decreased sales. Gross margin for the three months ended June 30, 2014 was 23.6%, as compared to 26.2% for the prior year period. This change is impacted by reductions in profitability estimates on the 747-8 program, driven largely by production rate changes and performance issues previously mentioned and identified in the prior fiscal year, additional program costs resulting from disruption and accelerated depreciation associated with the relocation from our Jefferson Street facilities ($3.4 million), and sales mix changes, offset by improved pension and other postretirement benefit expenses ($5.4 million). Gross margin included net unfavorable cumulative catch-up adjustments on long-term contracts ($0.7 million). The cumulative catch-up adjustments to gross margin included gross favorable adjustments of $5.3 million and gross unfavorable adjustments of $6.0 million. The cumulative catch-up adjustments for the three months ended June 30, 2014 were due primarily to labor cost growths, partially offset by other minor improvements. Gross margin for the three months ended June 30, 2013 included net unfavorable cumulative catch-up adjustments of $4.7 million. Segment operating income decreased by $35.6 million, or 23.1%, to $118.7 million for the three months ended June 30, 2014 from $154.3 million for the three months ended June 30, 2013. The segment operating income decreased as a result of the decreased sales and gross margin changes noted above, costs related to the relocation from our Jefferson Street facilities ($1.8 million), offset by decreased legal fees ($1.6 million). 38



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Corporate income (expenses) increased by $134.8 million, or 1,039.6%, to $121.8 million for the three months ended June 30, 2014 from $(13.0) million for the three months ended June 30, 2013. This increase is due to the previously announced legal settlement between the Company and Eaton, a net gain of $134.7 million. Interest expense and other increased by $22.7 million, or 114.9%, to $42.4 million for the three months ended June 30, 2014 compared to $19.7 million for the prior year period. Interest expense and other for the three months ended June 30, 2014 increased due to the redemption of the 2018 Notes, which included $22.7 million of pre-tax losses associated with the 4.79% redemption premium, and the write-off of the remaining related unamortized discount and deferred financing fees. The effective income tax rate for the three months ended June 30, 2014 was 35.3% compared to 35.0% for the three months ended June 30, 2013. For the three months ended June 30, 2014, the income tax provision was reduced to reflect the release of previously reserved for unrecognized tax benefits ($1.1 million) and offset by the expiration of the research and development tax credit as of December 31, 2013. For the three months ended June 30, 2013, the income tax provision was reduced to reflect unrecognized tax benefits of $0.7 million and additional research and development tax credit carryforward and NOL carryforward of $2.3 million. For the fiscal year ending March 31, 2015, the Company expects its effective tax rate to be approximately 35.5%, assuming the retroactive reinstatement of the research and development tax credit.



Business Segment Performance

We report our financial performance based on the following three reportable segments: the Aerostructures Group, the Aerospace Systems Group and the Aftermarket Services Group. The results of operations among our operating segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. For example, our Aerostructures segment generally includes long-term sole-source or preferred supplier contracts and the success of these programs provides a strong foundation for our business and positions us well for future growth on new programs and new derivatives. This compares to our Aerospace Systems segment which generally includes proprietary products and/or arrangements where we become the primary source or one of a few primary sources to our customers, where our unique manufacturing capabilities command a higher margin. Also, OEMs are increasingly focusing on assembly activities while outsourcing more manufacturing and repair to third parties, and as a result, are less of a competitive force than in previous years. In contrast, our Aftermarket Services segment provides MRO services on components and accessories manufactured by third parties, with more diverse competition, including airlines, OEMs and other third-party service providers. In addition, variability in the timing and extent of customer requests performed in the Aftermarket Services segment can provide for greater volatility and less predictability in revenue and earnings than that experienced in the Aerostructures and Aerospace Systems segments. The Aerostructures segment consists of the Company's operations that manufacture products primarily for the aerospace OEM market. The Aerostructures segment's revenues are derived from the design, manufacture, assembly and integration of both build-to-print and proprietary metallic and composite aerostructures and structural components, including aircraft wings, fuselage sections, tail assemblies, engine nacelles, flight control surfaces as well as helicopter cabins. Further, the segment's operations also design and manufacture composite assemblies for floor panels and environmental control system ducts. These products are sold to various aerospace OEMs on a global basis. The Aerospace Systems segment consists of the Company's operations that also manufacture products primarily for the aerospace OEM market. The segment's operations design a wide range of proprietary and build-to-print components and engineer mechanical and electromechanical controls, such as hydraulic systems, main engine gearbox assemblies, accumulators, mechanical control cables and non-structural cockpit components. These products are sold to various aerospace OEMs on a global basis and the related aftermarket. The Aftermarket Services segment consists of the Company's operations that provide maintenance, repair and overhaul services to both commercial and military markets on components and accessories manufactured by third parties. Maintenance, repair and overhaul revenues are derived from services on auxiliary power units, airframe and engine accessories, including constant-speed drives, cabin compressors, starters and generators, and pneumatic drive units. In addition, the segment's operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The segment's operations also perform repair and overhaul services and supply spare parts for various types of cockpit instruments and gauges for a broad range of commercial airlines on a worldwide basis. 39



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) We currently generate a majority of our revenue from clients in the commercial aerospace industry, the military, the business jet industry and the regional airline industry. Our growth and financial results are largely dependent on continued demand for our products and services from clients in these industries. If any of these industries experiences a downturn, our clients in these sectors may conduct less business with us. The following table summarizes our net sales by end market by business segment. The loss of one or more of our major customers or an economic downturn in the commercial airline or the military and defense markets could have a material adverse effect on our business. Three Months Ended June 30, Aerostructures 2014 2013 Commercial aerospace 42.8 % 41.9 % Military 14.4 % 15.0 % Business Jets 10.1 % 11.2 % Regional 0.6 % 0.3 % Non-aviation 0.2 % 0.6 % Total Aerostructures net sales 68.1 % 69.0 % Aerospace Systems Commercial aerospace 9.5 % 8.1 % Military 10.8 % 11.8 % Business Jets 1.5 % 1.0 % Regional 1.0 % 1.0 % Non-aviation 1.6 % 1.2 % Total Aerospace Systems net sales 24.4 % 23.1 % Aftermarket Services Commercial aerospace 5.8 % 6.6 % Military 0.7 % 0.9 % Business Jets - % 0.1 % Regional 0.5 % 0.1 % Non-aviation 0.5 % 0.2 % Total Aftermarket Services net sales 7.5 % 7.9 % Total Consolidated net sales 100.0 % 100.0 % We continue to experience a higher proportion of our sales mix in the commercial aerospace end market. We recently have experienced a slight decrease in our military end market due to reductions in defense spending. Due to our continued expected growth in the commercial aerospace end market and the planned reductions in defense spending under the Budget Act, we expect the declining trend in the military end market to continue. % of Total Three Months Ended June 30, Sales 2014 2013 % Change 2014 2013 (in thousands) NET SALES Aerostructures $ 611,863$ 651,888 (6.1 )% 68.2 % 69.1 % Aerospace Systems 219,852 219,526 0.1 % 24.5 % 23.2 % Aftermarket Services 67,608 74,353 (9.1 )% 7.5 % 7.9 % Elimination of inter-segment sales (2,418 ) (2,084 ) 16.0 % (0.3 )% (0.2 )% Total Net Sales $ 896,905$ 943,683 (5.0 )% 100.0 % 100.0 % 40



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) % of Segment Three Months Ended June 30, Sales 2014 2013 % Change 2014 2013 (in thousands) SEGMENT OPERATING INCOME Aerostructures $ 70,866$ 100,387 (29.4 )% 11.6 % 15.4 % Aerospace Systems 37,352 42,643 (12.4 )% 17.0 % 19.4 % Aftermarket Services 10,504 11,279 (6.9 )% 15.5 % 15.2 % Corporate 121,802 (12,963 ) 1,039.6 % n/a n/a Total Operating Income $ 240,524$ 141,346 70.2 % 26.8 % 15.0 % % of Segment Three Months Ended June 30, Sales 2014 2013 % Change 2014 2013 (in thousands) Adjusted EBITDA Aerostructures $ 90,728$ 120,559 (24.7 )% 14.8 % 18.5 % Aerospace Systems 43,019 46,173 (6.8 )% 19.6 % 21.0 % Aftermarket Services 12,381 13,156 (5.9 )% 18.3 % 17.7 % Corporate (11,713 ) (11,758 ) 0.4 % n/a n/a $ 134,415$ 168,130 (20.1 )% 15.0 % 17.8 % Aerostructures: The Aerostructures segment net sales decreased by $40.0 million, or 6.1%, to $611.9 million for the three months ended June 30, 2014 from $651.9 million for the three months ended June 30, 2013. Organic sales decreased $37.0 million, or 5.9%, and the acquisition of Primus net of divestitures resulted in a $3.2 million decrease in net sales. Organic sales decreased primarily due to production rate cuts by our customers on the 747-8 and 767 programs. Net sales for the three months ended June 30, 2014 included $5.5 million in total non-recurring revenues, as compared to $4.8 million in total non-recurring revenues for the three months ended June 30, 2013. Aerostructures segment cost of sales decreased by $9.8 million, or 1.9%, to $492.0 million for the three months ended June 30, 2014 from $501.8 million for the three months ended June 30, 2013. Cost of sales decrease resulted from the net sales decrease noted above. The gross margin for the three months ended June 30, 2014 was 19.6% compared with 23.0% for the three months ended June 30, 2013. Gross margin decreased due to reductions in profitability estimates on the 747-8 program, driven largely by the production rate changes and performance issues previously mentioned and identified in the prior fiscal year, additional program costs resulting from disruption and accelerated depreciation associated with the relocation from our Jefferson Street facilities ($3.4 million), offset by improved pension and other postretirement benefit expenses ($5.4 million). Segment cost of sales for the three months ended June 30, 2014 included net unfavorable cumulative catch-up adjustments of ($0.7 million). The gross margin percent decreased during the three months ended June 30, 2014 as the result of net unfavorable cumulative catch-up adjustments with gross favorable adjustments of $5.3 million and gross unfavorable adjustments of $6.0 million. The cumulative catch-up adjustments for the three months ended June 30, 2014 were due primarily to labor cost growths, partially offset by other minor improvements. Segment operating income for the three months ended June 30, 2013 included net unfavorable cumulative catch-up adjustments of $4.7 million Aerostructures segment operating income decreased by $29.5 million, or 29.4%, to $70.9 million for the three months ended June 30, 2014 from $100.4 million for the three months ended June 30, 2013. Operating income for the three months ended June 30, 2014 was directly affected by the decreases to the gross margin as discussed above and costs related to the relocation from our Jefferson Street facilities ($1.8 million). These same factors contributed to the decrease in Adjusted EBITDA year over year. Aerostructures segment operating income as a percentage of segment sales decreased to 11.6% for the three months ended June 30, 2014 as compared to 15.4% for the three months ended June 30, 2013, due to the decrease in organic sales and other specific variances noted above. 41



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Aerospace Systems: The Aerospace Systems segment net sales increased by $0.3 million, or 0.1%, to $219.9 million for the three months ended June 30, 2014 from $219.5 million for the three months ended June 30, 2013. Organic sales decreased $10.1 million, or 4.6%, primarily due to production rate reductions on the V-22 program and decreased military sales. The General Donlee acquisition contributed $10.4 million in net sales. Aerospace Systems segment cost of sales increased by $3.6 million, or 2.5%, to $144.9 million for the three months ended June 30, 2014 from $141.3 million for the three months ended June 30, 2013. Organic cost of sales decreased $5.8 million, or 4.1%, and the General Donlee acquisition contributed $9.4 million in cost of sales. Organic gross margin for the three months ended June 30, 2014 was 35.3% compared with 35.6% for the three months ended June 30, 2013. Aerospace Systems segment operating income decreased by $5.3 million, or 12.4%, to $37.4 million for the three months ended June 30, 2014 from $42.6 million for the three months ended June 30, 2013. Operating income decreased primarily due to the decline in gross margin as noted above. These same factors contributed to the decrease in Adjusted EBITDA year over year. Aerospace Systems segment operating income as a percentage of segment sales decreased to 17.0% for the three months ended June 30, 2014 as compared to 19.4% for the three months ended June 30, 2013, due to the decline in gross margin as noted above. These same factors contributed to the decrease in Adjusted EBITDA margin year over year. Aftermarket Services: The Aftermarket Services segment net sales decreased by $6.7 million, or 9.1%, to $67.6 million for the three months ended June 30, 2014 from $74.4 million for the three months ended June 30, 2013. Organic net sales decreased $6.4 million, or 8.6%, and the previously divested Triumph Instruments companies contributed $0.4 million in net sales for the three months ended June 30, 2013. Organic net sales decreased primarily due to decreased military sales. Aftermarket Services segment cost of sales decreased by $5.3 million, or 9.8%, to $49.2 million for the three months ended June 30, 2014 from $54.6 million for the three months ended June 30, 2013. The organic cost of sales decreased $5.0 million, or 9.2%, and the previously divested Triumph Instruments companies contributed $0.3 million to cost of sales for the three months ended June 30, 2013. Organic gross margin for the three months ended June 30, 2014 was 27.2% compared with 26.7% for the three months ended June 30, 2013. Aftermarket Services segment operating income decreased by $0.8 million, or 6.9%, to $10.5 million for the three months ended June 30, 2014 from $11.3 million for the three months ended June 30, 2013. Operating income decreased primarily due to the decrease in organic sales as noted above. These same factors contributed to the decrease in Adjusted EBITDA year over year. Aftermarket Services segment operating income as a percentage of segment sales increased to 15.5% for the three months ended June 30, 2014, as compared to 15.2% for the three months ended June 30, 2013.



Liquidity and Capital Resources

Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. During the three months ended June 30, 2014, we used approximately $52.1 million of cash flows from operating activities, used approximately $83.3 million in investing activities and received approximately $131.0 million in financing activities. For the three months ended June 30, 2014, we had a net cash outflow of $43.7 million from operating activities, a decrease of $55.6 million, compared to a net cash inflow of $11.9 million from the three months ended June 30, 2013. During the three months ended June 30, 2014, net cash used in operating activities was primarily due to increased payments on pension and other postretirement benefits, and timing of payments on accounts payable and other accrued expenses. We continue to invest in inventory for new programs and additional production costs for ramp-up activities in support of increasing build rates on several programs and build ahead in anticipation of our relocation from our largest facility. During the three months ended June 30, 2014, inventory build for capitalized pre-production costs on new programs, including the Bombardier Global 7000/8000 program and the Embraer E-Jet, were $26.7 million and $7.8 million, respectively. Additionally, inventory build for mature programs, including costs associated with deferred shipments on several programs, was approximately $14.8 million. Unliquidated progress payments netted against inventory increased $25.0 million, due to timing of receipts. Cash flows used in investing activities for the three months ended June 30, 2014 increased $9.0 million from the three months ended June 30, 2013. Cash flows used in investing activities for the three months ended June 30, 2014, included the 42



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) acquisition of GE ($60.9 million) and $63.5 million in capital expenditures associated with our new facilities in Red Oak, Texas. Cash flows provided by financing activities for the three months ended June 30, 2014 increased $82.3 million from the three months ended June 30, 2013 due to additional borrowings on our Credit Facility to fund the acquisitions of GE, the redemption of the 2018 Notes, settlement of the Convertible Senior Subordinated Notes ("Convertible Notes") redemptions and the purchase of our common stock ($51.0 million), offset by the issuance of the 2022 Notes. As of June 30, 2014, $509.2 million was available under our revolving credit facility (the "Credit Facility"). On June 30, 2014, an aggregate amount of approximately $453.9 million was outstanding under the Credit Facility, all of which was accruing interest at LIBOR plus applicable basis points totaling 2.0% per annum. Amounts repaid under the Credit Facility may be reborrowed. In May 2014, the Company amended its existing Credit Facility with its lenders to (i) to increase the maximum amount allowed for the receivable securitization facility (the "Securitization Facility") and (ii) amend certain other terms and covenants. In November 2013, the Company amended the Credit Facility with its lenders to (i) provide for a $370.3 million Term Loan with a maturity date of May 14, 2019, (ii) maintain a Revolving Line of Credit under the Credit Facility to $1.0 billion, with a $250.0 million accordion feature, (iii) extend the maturity date of November 19, 2018 and (iv) amend certain other terms and covenants. At June 30, 2014, there was $164.6 million outstanding under our Securitization Facility. Interest rates on the Securitization Facility are based on prevailing market rates for short-term commercial paper, plus a program fee and a commitment fee. In June 2014, the Company issued the Senior Notes due 2022 (the "2022 Notes") for $300.0 million in principal amount. The 2022 Notes were sold at 100% of principal amount and have an effective yield of 5.25%. Interest on the 2022 Notes is payable semiannually in cash in arrears on June 1 and December 1 of each year. We used the net proceeds to redeem the 2018 Notes and pay related fees and expenses. In connection with the issuance of the 2022 Notes, the Company incurred approximately $5.0 million of costs, which were deferred and are being amortized on the effective interest method over the term of the notes. In February 2013, the Company issued the Senior Notes due 2021 (the "2021 Notes") for $375.0 million in principal amount. The 2021 Notes were sold at 100% of principal amount and have an effective yield of 4.875%. Interest on the 2021 Notes is payable semiannually in cash in arrears on April 1 and October 1 of each year. We used the net proceeds to repay borrowings under our Credit Facility and pay related fees and expenses, and for general corporate purposes. In connection with the issuance of the 2021 Notes, the Company incurred approximately $6.3 million of costs, which were deferred and are being amortized on the effective interest method over the term of the notes. In June 2010, the Company issued the Senior Notes due 2018 (the "2018 Notes") for $350.0 million in principal amount. The 2018 Notes were sold at 99.27% of principal amount for net proceeds of $347.5 million, and have an effective interest yield of 8.75%. Interest on the 2018 Notes is payable semiannually in cash in arrears on January 15 and May 15 of each year. We used the net proceeds as partial consideration of the acquisition of Vought. In connection with the issuance of the 2018 Notes, the Company incurred approximately $7.3 million of costs, which were deferred and are being amortized on the effective interest method over the term of the notes. On June 23, 2014, the Company completed the redemption of the 2018 Notes. The principal amount of $350.0 million was redeemed at a price of 104.79% plus accrued and unpaid interest. As a result of the redemption, we recognized a pre-tax loss in the first quarter of fiscal 2015 of $22.6 million, consisting of early termination premium, unamortized discount and deferred financing fees. In November 2009, the Company issued the Senior Subordinated Notes due 2017 (the "2017 Notes") for $175.0 million in principal amount. The 2017 Notes were sold at 98.56% of principal amount for net proceeds of $172.5 million, and have an effective interest yield of 8.25%. Interest on the 2017 Notes is payable semiannually in cash in arrears on May 15 and November 15 of each year. We used the net proceeds for general corporate purposes, which included debt reduction, including repayment of amounts outstanding under the Credit Facility, without any permanent reduction of the commitments thereunder. In connection with the issuance of the 2017 Notes, the Company incurred approximately $4.4 million of costs, which were deferred and are being amortized on the effective interest method over the term of the notes. 43



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) On November 15, 2013, the Company completed the redemption of the 2017 Notes. The principal amount of $175.0 million was redeemed at a price of 104% plus accrued and unpaid interest. As a result of the redemption, we recognized a pre-tax loss in the third quarter of fiscal 2014 of $11.1 million, consisting of early termination premium, unamortized discount and deferred financing fees. In September 2006, the Company issued the Convertible Notes. The Convertible Notes are direct, unsecured, senior subordinated obligations of the Company, and rank (i) junior in right of payment to all of the Company's existing and future senior indebtedness, (ii) equal in right of payment with any other future senior subordinated indebtedness, and (iii) senior in right of payment to all subordinated indebtedness. The Convertible Notes mature on October 1, 2026, unless earlier redeemed, repurchased or converted. The Company may redeem the Convertible Notes for cash, either in whole or in part, at any time on or after October 6, 2011 at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to but not including the date of redemption. The Convertible Notes are eligible for conversion upon meeting certain conditions as provided in the indenture governing the Convertible Notes. For the periods from January 1, 2011 through June 30, 2014, the Convertible Notes were eligible for conversion. During the three months ended June 30, 2014, the Company settled the conversion of $7,752 in principal value of the Convertible Notes, as requested by the respective holders, with the principal and the conversion benefit settled in cash. During the three months ended June 30, 2013, the Company settled the conversion of $77,260 in principal value of the Convertible Notes, as requested by the respective holders, with the principal settled in cash and the conversion benefit settled through the issuance of 1,849,548 shares. During June 2014, the Company received notice of conversion from holders of $5,082 in principal value of the Convertible Notes. These conversions were settled in the second quarter of fiscal 2015 with the principal and the conversion benefit settled in cash. On May 22, 2014, the Company announced the redemption of the Convertible Notes. The redemption price for the Convertible Notes was equal to the sum of 100% of the principal amount of the Convertible Notes outstanding, plus accrued and unpaid interest on the Convertible Notes up to, but not including, the redemption date of June 23, 2014. The Convertible Notes were able to be converted at the option of the holder. Holders of $34 in Convertible Notes elected not to convert prior to the redemption date. Accordingly, the balance sheet classification of the Convertible Notes will be short term for as long as the put option remains in effect. Capital expenditures were approximately $23.1 million for the three months ended June 30, 2014. We funded these expenditures through cash generated from operations and borrowings under the Credit Facility. We expect capital expenditures and investments in new major programs of approximately $240.0 million to $260.0 million for our fiscal year ending March 31, 2015, of which $125.0 million will be reflected in inventory. The expenditures are expected to be used mainly to expand capacity or replace old equipment at several facilities. The expected future cash flows for the next five years for long-term debt, leases and other obligations are as follows: Payments Due by Period (dollars in thousands) Less than More than 5 Contractual Obligations Total 1 year 1-3 years 3-5 years years Debt principal (1) $ 1,757,633$ 43,323$ 699,953$ 320,798$ 693,559 Debt interest (2) 365,147 69,240 138,019 128,184 29,704 Operating leases 126,209 21,277 33,716 21,122 50,094 Contingent payments 1,900 900 1,000 - - Purchase obligations 1,551,406 1,237,385 299,735 2,645 11,641 Total $ 3,802,295$ 1,372,125$ 1,172,423$ 472,749$ 784,998 (1) Included in the Company's balance sheet at June 30, 2014. (2) Includes fixed-rate interest only. The above table excludes unrecognized tax benefits of $7.8 million as of June 30, 2014 since we cannot predict with reasonable certainty the timing of cash settlements with the respective taxing authorities. The table also excludes our defined pension benefit obligations. We made contributions to our defined benefit pension plans of $46.3 million and $109.8 million in fiscal 2014 and 2013, respectively. We expect to make total pension and postretirement plan contributions of $114.8 million to our benefit plans during fiscal 2015. For the three months ended June 30, 2014, the Company made pension contributions of $45.2 million versus $25.8 million for the three months ended 44



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Table Of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) June 30, 2013. For the fiscal year ended March 31, 2015, the Company is not required to make minimum contributions to its U.S. defined benefit pension plans under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and the Pension Protection Act of 2006. We believe that cash generated by operations and borrowings under the Credit Facility will be sufficient to meet anticipated cash requirements for our current operations for the foreseeable future. However, we have a stated policy to grow through acquisitions and are continuously evaluating various acquisition opportunities, while opportunistically buying back shares to return capital to our shareholders. As a result, we currently are pursuing the potential purchase of a number of candidates. In the event that more than one of these transactions are successfully consummated, the availability under the Credit Facility might be fully utilized and additional funding sources may be needed. There can be no assurance that such funding sources will be available to us on terms favorable to us, if at all. Critical Accounting Policies The Company's critical accounting policies are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and notes accompanying the condensed consolidated financial statements that appear in the Annual Report on Form 10-K for the fiscal year ended March 31, 2014. Except as otherwise disclosed in the financial statements and accompanying notes included in this report, there were no material changes subsequent to the filing of the Annual Report on Form 10-K for the fiscal year ended March 31, 2014 in the Company's critical accounting policies or in the assumptions or estimates used to prepare the financial information appearing in this report.



Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to our future operations and prospects, including statements that are based on current projections and expectations about the markets in which we operate, and our beliefs concerning future performance and capital requirements based upon current available information. Such statements are based on our beliefs as well as assumptions made by and information currently available to us. When used in this document, words like "may," "might," "will," "expect," "anticipate," "believe," "potential," and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from our current expectations. For example, there can be no assurance that additional capital will not be required or that additional capital, if required, will be available on reasonable terms, if at all, at such times and in such amounts as may be needed by us. In addition to these factors, among other factors that could cause actual results to differ materially are uncertainties relating to the integration of acquired businesses, general economic conditions affecting our business, dependence of certain of our businesses on certain key customers as well as competitive factors relating to the aviation industry. For a more detailed discussion of these and other factors affecting us, see the risk factors described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, filed with the SEC in May 2014.


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