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OFFON

TRIUMPH GROUP, INC.

(TGI)
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TRIUMPH GROUP INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/09/2021 | 06:18am EST

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto contained elsewhere herein.


OVERVIEW

Business

We are a major supplier to the aerospace industry and have two reportable
segments: (i) Systems & Support, whose companies' revenues are derived from
integrated solutions, including design, development and support of proprietary
components, subsystems and systems, production of complex assemblies using
external designs, as well as full life cycle solutions for commercial, regional,
and military aircraft; and (ii) Aerospace Structures, whose companies supply
commercial, business, and regional manufacturers with large metallic structures
and produce close-tolerance parts primarily to customer designs and model-based
definition, including a wide range of aluminum, hard metal, and composite
structure capabilities.

Divestitures


During the fiscal year ended March 31, 2021, we divested of a number of our
assets and operations, including the transfer of the assets and certain
liabilities associated with our Gulfstream G650 wing supply chain activities.
The operating results associated with the G650 wing supply chain activities were
included within Aerospace Structures through the date of transfer. We recognized
a net loss of approximately $0.8 million upon the completion of the transfer of
the G650 wing supply chain activities in the fiscal year ended March 31, 2021.



As disclosed in Note 3, in May 2021 we completed the divestiture of our
composites manufacturing operations located in Milledgeville, Georgia, and
Rayong, Thailand, as well as our large structure manufacturing operations
located in Red Oak, Texas. The related assets and liabilities associated with
these divestitures were classified as held for sale as of March 31, 2021, and we
recognized combined net losses of approximately $102.5 million in the year ended
March 31, 2021. Upon the completion of the divestiture, we recognized an
additional loss of approximately $6.0 million primarily as a result of changes
in working capital balances. These losses are presented on the accompanying
consolidated statements of operations within loss on sale of assets and
businesses. The operating results associated with the composites and large
structure manufacturing operations were included within Aerospace Structures
through the date of divestiture. Refer to Note 3 for a discussion of other less
significant divestitures occurring through and subsequent to September 30, 2021.
The Company recognized an additional loss in the three months ended September
30, 2021, of approximately $7.7 million as a result of its current year
divestiture transactions.

Summary of Significant Financial Results

Significant financial results for the second quarter of the fiscal year ending March 31, 2022, include:


?
Net sales were $357.4 million compared with $481.8 million for the prior year
period.
?
Operating income was $16.5 million compared with $7.4 million for the prior year
period.
?
Net loss was $9.1 million, or ($0.14) per common share, compared with $33.5
million, or ($0.64) per common share, for the prior year period.
?
Backlog as of September 30, 2021, was $1.94 billion. Of our existing backlog, we
estimate that approximately $865.6 million will not be shipped by September 30,
2022.
?
We used $185.5 million of cash in operating activities for the six months ended
September 30, 2021, as compared with cash used in operations of $239.7 million
in the comparable prior year period.

Restructuring


We have committed to several plans that incorporated the restructuring of
certain of our businesses. As of March 31, 2021, with the exception of two
pending facility closures to be completed in fiscal 2022 or 2023, we have
substantially completed these plans. For the six months ended September 30, 2021
and 2020, we incurred $8.4 million and $28.7 million in restructuring costs,
respectively. Full fiscal 2022 restructuring costs are expected to be in the
range of $15.0 million.

COVID-19 Pandemic Response

We are unable at this time to reasonably estimate potential future additional
financial impacts or a range of loss, if any, due to continued uncertainties
related to the impacts of the COVID-19 pandemic on our operations, supply chain,
and customers. Any such impacts, including any changes in our estimates, could
have a material adverse effect on our financial position, results of operations,
and cash flows. Key factors determining the potential impacts include the
severity and duration of the pandemic which could be impacted by the emergence
and circulation of new variants of SARS-CoV-2, the virus that causes COVID-19;
governmental, business, and individuals' actions in response to the pandemic;
and the development, availability, and public acceptance of effective treatments
and vaccines. These factors are not within our control. In response to the
continued

                                                                              25

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uncertainties arising from the impact of the COVID-19 pandemic, we have maintained certain of the cost reduction initiatives originally implemented in late fiscal 2020.


Pursuant to the Biden Administration's Executive Order 14042, all U.S. based
employees of Triumph and certain of its suppliers, industry partners, and
contractors working directly or indirectly on covered government contracts, or
working at a facility where those contracts are performed, administered, or
otherwise supported, must be fully vaccinated, or have an approved medical or
religious accommodation. This includes employees who telework. We have
determined the January 4, 2021, deadline for vaccination will apply to all U.S.
sites. We are in the process of executing this executive order across our
workforce and actively taking steps to assess and mitigate risks arising from
vaccine requirements. It is uncertain to what extent compliance with the vaccine
mandate may result in workforce attrition for us or our suppliers. If attrition
is significant, our operations and ability to execute on our contracts could be
adversely affected.

Significant Developments in Key Programs

Discussion of significant developments on key programs is included below.

Boeing 787


The Boeing 787 program represented approximately 6% of revenue for the fiscal
year ended March 31, 2021. During 2020, Boeing experienced significant
reductions in deliveries due to the impacts of the COVID-19 pandemic as well as
production issues and associated rework. Boeing expanded the scope of its
production inspections, and those inspections and associated rework have and
continue to delay scheduled deliveries. While Boeing resumed deliveries of the
787 aircraft in March, Boeing announced in July 2021 that additional rework
requirements on undelivered 787 aircraft had been identified and that, based on
their assessment of the time required to complete the rework, the 787 production
rate would temporarily be reduced to two per month, gradually returning to a
higher rate. Boeing also disclosed that China is a significant market for the
787 program, and if the program is unable to obtain orders from China in future
quarters, Boeing may be required to adjust production rate assumptions further.

Boeing 767


Boeing's 767 program includes the commercial program and a derivative to support
the related tanker program. The 767 currently has a production rate of three
aircraft per month. Of our $1.94 billion in backlog as of September 30, 2021,
approximately 24% relates to the 767 program, the significant majority of which
is Aerospace Structures backlog.

Boeing 747-8


Production on this program has substantially completed as of September 30, 2021.
Facility exit plans are underway and expected to result in additional cost to
exit of approximately $5.0 million through fiscal 2022 and result in projected
cash uses.

Although none of the programs noted above individually are expected to have a
material impact on our net revenues, they do have the potential, either
individually or in the aggregate, to materially and negatively impact our
consolidated results of operations if future changes in estimates result in the
need for a forward loss provision. Absent any such loss provisions, we do not
anticipate that any of these programs will significantly dilute our future
consolidated margins, although a prolonged impact of the COVID-19 pandemic could
result in changes in expectations.

RESULTS OF OPERATIONS


The following includes a discussion of our consolidated and business segment
results of operations. Our 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 annual audited and quarterly unaudited financial
statements prepared in accordance with U.S. GAAP. In accordance with Securities
and Exchange Commission (the "SEC") rules, we also disclose and discuss certain
non-GAAP financial measures in our public filings and earning releases.
Currently, the non-GAAP financial measures that we disclose are Adjusted EBITDA,
which is our net loss before interest, income taxes, amortization of acquired
contract liabilities, legal settlements, loss on divestitures, depreciation and
amortization; and Adjusted EBITDAP, which is Adjusted EBITDA, before pension
expense or benefit, including the effects of curtailments, settlements, and
other early retirement incentives. We disclose Adjusted EBITDA on a consolidated
and Adjusted EBITDAP 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

                                                                              26

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financial measures in order to help our investors more meaningfully evaluate and
compare our future results of operations with our previously reported results of
operations.

We view Adjusted EBITDA and Adjusted EBITDAP as operating performance measures
and, as such, we believe that the U.S. GAAP financial measure most directly
comparable to such measures is net loss. In calculating Adjusted EBITDA and
Adjusted EBITDAP, we exclude from net loss 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 and Adjusted EBITDAP are not measurements of financial performance under
U.S. GAAP and should not be considered as a measure of liquidity, as an
alternative to net loss, or as an indicator of any other measure of performance
derived in accordance with U.S. GAAP. Investors and potential investors in our
securities should not rely on Adjusted EBITDA or Adjusted EBITDAP as a
substitute for any U.S. GAAP financial measure, including net loss. In addition,
we urge investors and potential investors in our securities to carefully review
the reconciliation of Adjusted EBITDA and Adjusted EBITDAP to net loss set forth
below, in our earnings releases, and in other filings with the SEC and to
carefully review the U.S. 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
U.S. GAAP financial information with our Adjusted EBITDA and Adjusted EBITDAP.

Adjusted EBITDA and Adjusted EBITDAP are 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 U.S. 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 20
years expanding our product and service capabilities, partially through
acquisitions of complementary businesses. Due to the expansion of our
operations, which included acquisitions, our net loss has included significant
charges for depreciation and amortization. Adjusted EBITDA and Adjusted EBITDAP
exclude these charges and provide meaningful information about the operating
performance of our business, apart from charges for depreciation and
amortization. We believe the disclosure of Adjusted EBITDA and Adjusted EBITDAP
helps investors meaningfully evaluate and compare our performance from quarter
to quarter and from year to year. We also believe Adjusted EBITDA and Adjusted
EBITDAP are measures of our ongoing operating performance because the isolation
of noncash charges, such as depreciation and amortization, and nonoperating
items, such as interest, income taxes, pension and other postretirement
benefits, 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 and Adjusted
EBITDAP to provide financial measures 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 net income to calculate Adjusted EBITDA and Adjusted EBITDAP and the
material limitations associated with using these non-GAAP financial measures as
compared with net loss from continuing operations:

?
Gains or losses from sale of assets and businesses may be useful for investors
to consider because they reflect gains or losses from sale of operating units or
other assets. We do not believe these earnings necessarily reflect the current
and ongoing cash earnings related to our operations.
?
Legal judgments and settlements, when applicable, 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.
?
Non-service defined benefit income or expense from our pension and other
postretirement benefit plans (inclusive of certain pension related transactions
such as curtailments, settlements, early retirement or other incentives) may be
useful for investors to consider because they represent the cost of
postretirement benefits to plan participants, net of the assumption of returns
on the plan's assets and are not indicative of the cash paid for such benefits.
We do not believe these earnings (expenses) 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 noncash 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 and nonrecurring asset impairments (including goodwill,
intangible asset impairments, and nonrecurring rotable inventory impairments)
may be useful for investors to consider because it represents the estimated
attrition of our acquired customer base and the diminishing value of tradenames,
product rights, licenses, or, in the case of goodwill, other assets that are not
individually identified and separately recognized under U.S. GAAP, or, in the
case of nonrecurring asset impairments, the impact of unusual and nonrecurring
events affecting the estimated recoverability of existing assets. 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.

                                                                            

27

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?
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 by using non-GAAP
measures only to supplement our U.S. 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 and Adjusted EBITDAP reconciled to our net loss for the indicated periods (in thousands):




                                           Three Months Ended
                                              September 30,                

Six Months Ended September 30,

                                          2021             2020             2021                   2020
Net loss (U.S. GAAP measure)           $   (9,070 )$  (33,489 )$       (39,421 )$       (309,275 )
Income tax expense                          1,787              832               3,001                  1,685
Interest expense and other                 34,183           52,506              72,741                 87,463
Debt extinguishment loss                        -                -               9,689                      -
Pension settlement, curtailment, and
special termination benefit charges         3,968                -              20,046                      -
Loss on sale of assets and
businesses, net                             7,660              747              13,629                    747
Amortization of acquired contract
liabilities                                (1,493 )        (17,163 )            (2,707 )              (28,150 )
Depreciation and amortization*             12,945           22,098              28,376                303,082

Adjusted EBITDA (non-GAAP measure) $ 49,980$ 25,531 $

    105,354       $         55,552
Non-service defined benefit income
(excluding curtailments and special
termination benefits)                     (14,417 )        (12,427 )           (28,773 )              (24,843 )

Adjusted EBITDAP (non-GAAP measure) $ 35,563$ 13,104 $

76,581 $ 30,709

* Includes impairment charges related to long-lived assets in the first quarter of fiscal 2021

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


                                                       Three Months Ended 

September 30, 2021

                                                           Systems &       

Aerospace Corporate/

                                            Total           Support        Structures       Eliminations
Operating income (loss)                   $   16,451$    38,100$      3,605$      (25,254 )
Loss on sale of assets and businesses          7,660                -                -              7,660
Amortization of acquired contract
liabilities                                   (1,493 )         (1,493 )              -                  -
Depreciation and amortization                 12,945            8,440            3,414              1,091
Adjusted EBITDAP                          $   35,563$    45,047$      7,019$      (16,503 )




                                                      Three Months Ended September 30, 2020
                                                         Systems &      

Aerospace Corporate/

                                            Total         Support        Structures       Eliminations
Operating income (loss)                   $   7,422$    29,592$     (2,512 )$      (19,658 )
Loss on sale of assets and businesses           747               -                -                747
Amortization of acquired contract
liabilities                                 (17,163 )        (3,544 )        (13,619 )                -
Depreciation and amortization                22,098           8,121           13,170                807
Adjusted EBITDAP                          $  13,104$    34,169$     (2,961 )$      (18,104 )




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                                                       Six Months Ended September 30, 2021
                                                         Systems &       Aerospace         Corporate/
                                            Total         Support        Structures       Eliminations
Operating income (loss)                   $  37,283$    73,646$     14,828$      (51,191 )
Loss on sale of assets and businesses        13,629               -                -             13,629
Amortization of acquired contract
liabilities                                  (2,707 )        (2,695 )            (12 )                -
Depreciation and amortization                28,376          16,944            9,573              1,859
Adjusted EBITDAP                          $  76,581$    87,895$     24,389$      (35,703 )




                                                       Six Months Ended September 30, 2020
                                                          Systems &       Aerospace        Corporate/
                                            Total          Support       Structures       Eliminations
Operating (loss) income                   $ (244,970 )$    55,023$  (258,632 )$      (41,361 )
Loss on sale of assets and businesses            747               -               -                747
Amortization of acquired contract
liabilities                                  (28,150 )        (7,263 )       (20,887 )                -
Depreciation and amortization*               303,082          16,477         284,942              1,663
Adjusted EBITDAP                          $   30,709$    64,237$     5,423$      (38,951 )

* Includes impairment charges related to long-lived assets

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 September 30, 2021, compared with three months ended
September 30, 2020



                                        Three Months Ended September 30,
                                           2021                   2020
                                                 (in thousands)
Net sales                            $        357,396$        481,815
Segment operating income             $         41,705       $         27,080
Corporate expense                             (25,254 )              (19,658 )
Total operating income                         16,451                  7,422
Interest expense and other                     34,183                 52,506
Non-service defined benefit income            (10,449 )              (12,427 )
Income tax expense                              1,787                    832
Net loss                             $         (9,070 )     $        (33,489 )


Net Sales

Organic sales adjusted for intersegment sales decreased $6.7 million, or 1.9%,
with additional declines from the composites and large structure manufacturing
operations and G650 divestitures of $83.6 million and sunsetting programs (i.e.,
747-8 and G280) of $34.2 million. Organic sales decreased primarily from
decreased volume on the 787 as a result of an announced production pause and
decreased volume as a result of the exit of our Spokane, Washington, operations.
These decreases were partially offset by increased repair & overhaul services
and increased commercial narrow body production. Net sales for the three months
ended September 30, 2021, included $7.9 million in total nonrecurring revenues,
as compared with $11.9 million in total nonrecurring revenues for the three
months ended September 30, 2020.

Cost of Sales and Gross Margin


Organic cost of sales adjusted for intersegment sales decreased $18.8 million,
or 6.9% with additional declines from the composites and large structure
manufacturing operations and G650 divestitures of $69.4 million and sunsetting
programs of $31.6 million. Organic cost of sales decreased primarily due to
$13.9 million in reduced acquired contract reserves as well as the decreased
volumes described above, partially offset by increased inventory reserves.
Organic gross margin for the three months ended September 30, 2021, was 25.7%
compared with 21.6% for the three months ended September 30, 2020. The gross
margin for the three months ended September 30, 2021, increased primarily as a
result of the net reduction in reserves described above.

Gross margin for the three months ended September 30, 2021, included net favorable cumulative catch-up adjustments on long-term contracts of $7.5 million. The favorable cumulative catch-up adjustments to operating income included gross favorable adjustments of $11.7 million and gross unfavorable adjustments of $4.3 million. Gross margins for the three months ended September 30, 2020, included net favorable cumulative catch-up adjustments of $10.1 million.


                                                                              29

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Segment Operating Income


Organic segment operating income increased by $29.9 million, or 755.9%,
primarily due to the increased margins described above, as well as decreased
depreciation and amortization expense of approximately $9.4 million, decreased
rent expense of $3.2 million, decreased research and development costs of $2.7
million, and decreased information technology costs of $2.4 million. The
divestitures and sunsetting programs resulted in decreases to operating income
of approximately $15.3 million.

Corporate Expense

Corporate expenses increased primarily due to increased loss on sale of assets and businesses of $6.9 million.

Interest Expense and Other

Interest expense and other decreased due to lower relative debt levels as a result of current period redemptions as well as favorable changes in foreign currency exchange rates of approximately $1.6 million.

Non-service Defined Benefit Income


Non-service defined benefit income decreased primarily due to the recognition of
settlement losses of approximately $4.0 million resulting from the settlement of
the fully-funded pension obligation we retained subsequent to our fiscal year
2019 divestiture of Triumph Geared Solutions - Toronto.

Income Taxes


The effective income tax rate for the three months ended September 30, 2021, was
(24.5)% compared with (2.5)% for the three months ended September 30, 2020. For
the three months ended September 30, 2021, the effective tax rate reflected a
limitation on the recognition of tax benefits due to the full valuation
allowance.

Business Segment Performance - Three months ended September 30, 2021, compared with three months ended September 30, 2020

We report our financial performance based on the following two reportable segments: Systems & Support and Aerospace Structures. Our Chief Operating Decision Maker ("CODM") utilizes Adjusted EBITDAP as a primary measure of profitability to evaluate performance of its segments and allocate resources.


The results of operations among our reportable segments vary due to differences
in competitors, customers, extent of proprietary deliverables and performance.
For example, Systems & Support, which generally includes proprietary products
and/or arrangements where we become the primary source or one of a few primary
sources to our customers, our unique engineering and 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. This
compares with Aerospace Structures, which generally includes long-term
sole-source or preferred supplier contracts.

Refer to Note 1 for further details regarding the operations and capabilities of each of our reportable segments.


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 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
                                             September 30,             % Change         % of Total Sales
                                         2021             2020                          2021         2020
                                            (in thousands)
NET SALES
Systems & Support                     $  248,781$  254,171           (2.1 )%       69.6 %       52.8 %
Aerospace Structures                     108,643          228,778          (52.5 )%       30.4 %       47.5 %
Elimination of intersegment sales            (28 )         (1,134 )         97.5 %        (0.0 )%      (0.3 )%
Total net sales                       $  357,396$  481,815          (25.8 )%      100.0 %      100.0 %




                                            Three Months Ended
                                               September 30,             % Change          % of Segment Sales
                                           2021             2020                          2021            2020
                                              (in thousands)
SEGMENT OPERATING (LOSS) INCOME
Systems & Support                       $   38,100$   29,592           28.8 %         15.3 %         11.6 %
Aerospace Structures                         3,605           (2,512 )        243.5 %          3.3 %         (1.1 )%
Corporate                                  (25,254 )        (19,658 )        (28.5 )%         n/a            n/a

Total segment operating (loss) income $ 16,451$ 7,422

 121.7 %          4.6 %          1.5 %




                                                                              30

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                                         Three Months Ended
                                            September 30,             % Change         % of Segment Sales
                                        2021             2020                         2021            2020
                                           (in thousands)
Adjusted EBITDAP
Systems & Support                    $   45,047$   34,169           31.8 %        18.2 %         13.6 %
Aerospace Structures                      7,019           (2,961 )        337.1 %         6.5 %         (1.4 )%
Corporate                               (16,503 )        (18,104 )          8.8 %         n/a            n/a
                                     $   35,563$   13,104          171.4 %        10.0 %          2.8 %




Systems & Support:

Net Sales

Net sales decreased primarily from decreased volume on the 787 as a result of an
announced production pause partially offset by increased repair and overhaul
services as well as initial recoveries from the impacts of the COVID-19
pandemic.

Cost of Sales and Gross Margin


Cost of sales decreased by $18.4 million, or 9.8%, primarily due to $13.9
million in reduced acquired contract reserves as well as the decreased volumes
described above, partially offset by increased inventory reserves. Gross margin
for the three months ended September 30, 2021, was 32.2% compared with 26.4% for
the three months ended September 30, 2020. Gross margin increased primarily as a
result of the net reduction in reserves.

Operating Income and Adjusted EBITDAP


Operating income increased primarily due to the increased margins described
above partially offset by increased compensation costs of approximately $4.3
million due to the lapsing of prior year austerity measures. The increase in
Adjusted EBITDAP year over year is due to the same factors that increased
operating income.

Operating Margin and Adjusted EBITDAP Margin

Systems & Support operating income and Adjusted EBITDAP as a percentage of segment sales both increased due to the factors described above.

Aerospace Structures:

Net Sales


Organic net sales decreased by $2.4 million, or 2.6%, offset by declines from
the composites and large structure manufacturing operations and G650
divestitures of $83.6 million and sunsetting programs (i.e., 747-8 and G280) of
$34.2 million. Net sales for the three months ended September 30, 2021, included
$7.9 million in total nonrecurring revenues, as compared with $11.9 million in
total nonrecurring revenues for the three months ended September 30, 2020.

Cost of Sales and Gross Margin


Organic cost of sales decreased by $1.5 million, or 1.7%, offset by declines
from the composites and large structure manufacturing operations and G650
divestitures of $69.4 million and sunsetting programs of $31.6 million. Organic
gross margin for the three months ended September 30, 2021, was 7.9% compared
with 8.6% for the three months ended September 30, 2020. The gross margin
included net favorable cumulative catch-up adjustments of $7.6 million. The net
favorable cumulative catch-up adjustments included gross favorable adjustments
of $11.3 million and gross unfavorable adjustments of $3.7 million. The net
favorable cumulative catch-up adjustment for the three months ended September
30, 2020, was $9.1 million.

Operating Income and Adjusted EBITDAP


Organic operating income increased by $21.4 million, or 83.6%, primarily due to
decreased depreciation and amortization expense of approximately $9.8 million,
decreased rent expense of approximately $3.2 million, decreased information
technology costs of approximately $2.4 million, decreased research and
development costs of approximately $2.2 million, decreased credit losses of
approximately $1.8 million, and decreased compensation costs of approximately
$1.6 million on lower headcount. The divestitures and sunsetting programs
resulted in decreases to operating income of approximately $15.3 million. The
increase in Adjusted EBITDAP year over year is due to the same factors that
increased operating income except for the increase resulting from decreased
depreciation and amortization, which is excluded from Adjusted EBITDAP.

Operating Margin and Adjusted EBITDAP Margin

Operating income as a percentage of segment sales increased due to the increase in operating income as noted above. These same factors affecting Adjusted EBITDAP contributed to the increase in Adjusted EBITDAP margin.


Six months ended September 30, 2021, compared with six months ended September
30, 2020



                                                                              31

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                                         Six Months Ended September 30,
                                          2021                   2020
                                                 (in thousands)
Net sales                            $       754,042$        976,892
Segment operating income (loss)      $        88,474$       (203,609 )
Corporate expenses                           (51,191 )              (41,361 )
Total operating income (loss)                 37,283               (244,970 )
Interest expense and other                    72,741                 87,463
Debt extinguishment loss                       9,689                      -
Non-service defined benefit income            (8,727 )              (24,843 )
Income tax expense                             3,001                  1,685
Net loss                             $       (39,421 )$       (309,275 )


Net Sales

Organic sales adjusted for intersegment sales increased $28.8 million, or 4.2%,
offset by declines from the composites and large structure manufacturing
operations and G650 divestitures of $175.5 million and sunsetting programs
(i.e., 747-8 and G280) of $76.1 million. Organic sales increased primarily from
increased repair and overhaul services and increased production rates on
commercial narrow body platforms, partially offset by decreased volume on the
787 as a result of an announced production pause. Net sales for the six months
ended September 30, 2021, included $16.6 million in total nonrecurring revenues,
as compared with $33.9 million in total nonrecurring revenues for the six months
ended September 30, 2020.

Cost of Sales and Gross Margin


Organic cost of sales adjusted for intersegment sales decreased $2.4 million, or
0.5%, with additional declines from the composites and large structure
manufacturing operations and G650 divestitures of $148.0 million and sunsetting
programs of $74.2 million. Organic cost of sales decreased primarily due to
approximately $19.2 million in reduced acquired contract reserves partially
offset by the increased volumes described above, Organic gross margin for the
six months ended September 30, 2021, was 25.9% compared with 23.0% for the six
months ended September 30, 2020. The gross margin for the six months ended
September 30, 2021, increased primarily as a result of the reduction in acquired
contract reserves.

Gross margin for the six months ended September 30, 2021, included net favorable
cumulative catch-up adjustments on long-term contracts of $16.9 million. The
favorable cumulative catch-up adjustments to operating income included gross
favorable adjustments of $23.3 million and gross unfavorable adjustments of $6.4
million. Gross margins for the six months ended September 30, 2020, included net
favorable cumulative catch-up adjustments of $13.6 million.

Segment Operating Income


Organic segment operating income increased by $318.7 million, or 130.2%,
primarily due to long-lived asset impairment charges of $252.4 million in the
six months ended September 30, 2020, the increased margins described above, as
well as decreased depreciation and amortization expense of approximately $22.3
million, decreased credit losses of approximately $4.4 million, and decreased
rent expense of approximately $3.4 million. The divestitures and sunsetting
programs resulted in additional decreases to operating income of approximately
$26.6 million.

Corporate Expense

The corporate expenses increased primarily due to increased loss on sale of assets and businesses of $12.9 million, partially offset by approximately $2.6 million in reduced compensation costs on lower headcount.

Interest Expense and Other

Interest expense and other decreased due to lower relative debt levels as a result of current period redemptions as well as favorable changes in foreign currency exchange rates of approximately $5.0 million.

Non-service Defined Benefit Income


Non-service defined benefit income decreased primarily due the recognition of
curtailment and settlement losses of approximately $20.0 million in the
aggregate upon the completion of the composites and large structure
manufacturing divestitures and the settlement of the fully-funded pension
obligation it had retained subsequent to its fiscal year 2019 divestiture of
Triumph Geared Solutions - Toronto.

Income Taxes


The effective income tax rate for the six months ended September 30, 2021, was
(8.2)% compared with (0.5)% for the six months ended September 30, 2020. For the
six months ended September 30, 2021, the effective tax rate reflected a
limitation on the recognition of tax benefits due to the full valuation
allowance.

                                                                              32

--------------------------------------------------------------------------------

Business Segment Performance - Six months ended September 30, 2021, compared with six months ended September 30, 2020

                                         Six Months Ended September 30,          % Change         % of Total Sales
                                           2021                  2020                             2021         2020
                                                 (in thousands)
NET SALES
Systems & Support                     $       507,194$       494,058            2.7 %        67.3 %       50.6 %
Aerospace Structures                          246,895               486,655          (49.3 )%       32.7 %       49.8 %
Elimination of intersegment sales                 (47 )              (3,821 )         98.8 %        (0.0 )%      (0.4 )%
Total net sales                       $       754,042$       976,892          (22.8 )%      100.0 %      100.0 %




                                            Six Months Ended September 30,          % Change         % of Segment Sales
                                             2021                   2020                             2021           2020
                                                    (in thousands)
SEGMENT OPERATING INCOME (LOSS)
Systems & Support                       $        73,646       $         55,023           33.9 %         14.5 %        11.1 %
Aerospace Structures                             14,828               (258,632 )        105.7 %          6.0 %       (53.1 )%
Corporate                                       (51,191 )              (41,361 )        (23.8 )%         n/a           n/a
Total segment operating income (loss)   $        37,283$       (244,970 )        115.2 %          4.9 %       (25.1 )%




                                         Six Months Ended September 30,          % Change          % of Segment Sales
                                           2021                  2020                             2021            2020
                                                 (in thousands)
Adjusted EBITDAP
Systems & Support                     $        87,895$        64,237           36.8 %         17.4 %         13.2 %
Aerospace Structures                           24,389                 5,423          349.7 %          9.9 %          1.2 %
Corporate                                     (35,703 )             (38,951 )          8.3 %          n/a            n/a
                                      $        76,581$        30,709          149.4 %         10.2 %          3.2 %


Systems & Support:

Net Sales

Net sales increased primarily from increased repair and overhaul services as well as increased production rates on commercial narrow body platforms, partially offset by decreased volume on the 787 as a result of an announced production pause.

Cost of Sales and Gross Margin


Cost of sales decreased by $7.5 million, or 2.1%, due to approximately $19.2
million in reduced acquired contract reserves partially offset by the increased
volumes described above and increased inventory reserves. Gross margin for the
six months ended September 30, 2021, was 30.9% compared with 27.5% for the six
months ended September 30, 2020. Gross margin increased primarily as a result of
the net reduction in reserves.

Operating Income and Adjusted EBITDAP

Operating income increased primarily due to the increased sales and margins described above as well as decreased consulting costs of approximately $1.1 million and decreased credit losses of $0.9 million, partially offset by an increase in compensation cost of approximately $4.8 million. The increase in Adjusted EBITDAP year over year is due to the same factors that decreased operating income.

Operating Margin and Adjusted EBITDAP Margin

Systems & Support operating income and Adjusted EBITDAP as a percentage of segment sales both increased due to the factors described above.

33

--------------------------------------------------------------------------------


Aerospace Structures:

Net Sales

Organic net sales increased by $11.8 million, or 6.3%, offset by declines from
the composites and large structure manufacturing operations and G650
divestitures of $175.5 million and sunsetting programs (i.e., 747-8 and G280) of
$76.1 million. Organic net sales increased due initial recoveries from the
impacts of the COVID-19 pandemic. Net sales for the six months ended September
30, 2021, included $16.6 million in total nonrecurring revenues, as compared
with $33.9 million in total nonrecurring revenues for the six months ended
September 30, 2020.

Cost of Sales and Gross Margin


Organic cost of sales increased by $6.1 million, or 3.7%, offset by declines
from the composites and large structure manufacturing operations and G650
divestitures of $148.0 million and sunsetting programs of $74.2 million. The
increase in organic cost of sales is due to increase in sales described above.
Organic gross margin for the six months ended September 30, 2021, was 13.4%
compared with 11.1% for the six months ended September 30, 2020 largely
reflecting a change in sales mix. The gross margin included net favorable
cumulative catch-up adjustments of $16.9 million. The net favorable cumulative
catch-up adjustments included gross favorable adjustments of $23.0 million and
gross unfavorable adjustments of $6.1 million. The net favorable cumulative
catch-up adjustment for the six months ended September 30, 2020, was $12.7
million.

Operating Income and Adjusted EBITDAP


Organic operating income increased by $300.0 million, or 100.1%, primarily due
to long-lived asset impairment charges of $252.4 million in the six months ended
September 30, 2020, the increased margins described above, as well as decreased
depreciation and amortization expense of approximately $23.0 million, decreased
compensation costs of approximately $5.8 million, decreased credit losses of
approximately $3.5 million, decreased rent expense of approximately $3.4
million, decreased research and development costs of approximately $2.5 million,
and decreased information technology costs of approximately $2.4 million. The
divestitures and sunsetting programs resulted in additional decreases to
operating income of approximately $26.6 million. The increase in Adjusted
EBITDAP year over year is due to the same factors that increased operating
income except for the increase resulting from the long-lived asset impairment
and depreciation and amortization expense, which is excluded from Adjusted
EBITDAP.

Operating Margin and Adjusted EBITDAP Margin

Operating income as a percentage of segment sales increased due to the increase in operating income as noted above. These same factors affecting Adjusted EBITDAP contributed to the increase in Adjusted EBITDAP margin.

Liquidity and Capital Resources

Operating Cash Flows


Our working capital needs are generally funded through our current cash and cash
equivalents, cash flows from operations, and the availability of proceeds from
the Securitization Facility. During the six months ended September 30, 2021, we
had a net cash outflow of $185.5 million from operating activities compared with
a net cash outflow of $239.7 million for the six months ended September 30,
2020, an improvement of $54.2 million. Cash flows from operations were
unfavorably impacted by increased disbursements to our suppliers relative to the
receipts from our customers. Cash flows included stable inventory levels and
lower accounts payable. Reflecting the change in our portfolio of businesses
that is a result of our strategic divestitures, working capital stability has
improved in the six months ended September 30, 2021, compared with the six
months ended September 30, 2020, with the exception of the fluctuations in
certain liability accounts as a result of the timing of disbursements. Cash
flows from operations are expected to improve over the balance of the fiscal
year assuming there are no additional extended shut-downs of operations due to
the pandemic. Cash flows from operations also included approximately $41.6
million in the liquidation of prior period customer advances. Interest payments
were approximately $75.1 million for six months ended September 30, 2021, as
compared with $52.8 million for the six months ended September 30, 2020. The
increase in interest payments was the specific timing of interest payments under
the First Lien Notes and the 2022 Notes as compared with the related redemptions
disclosed in Note 6.

Investing Cash Flows

                                                                              34

--------------------------------------------------------------------------------



Cash flows provided by investing activities for the six months ended September
30, 2021, increased $165.8 million from the six months ended September 30, 2020.
Cash flows provided by investing activities for the six months ended September
30, 2021, included cash from the sales of assets and businesses of $185.6
million as a result of the completion of the divestiture of our composites and
large structure manufacturing operations and the asset sales associated with the
exit of our Spokane, Washington manufacturing operations as described in Note 3.
As part of the activities necessary to bring the composites and large structure
manufacturing operations divestiture to completion, we used approximately $21.6
million net of transaction related costs to acquire the manufacturing facility
in our Rayong, Thailand, operations. This facility was included in the assets
transferred in the divestiture. We also used approximately $7.5 million for
capital expenditures and $2.1 million as part of the formation of a joint
venture to which future cash and non-cash contributions are expected to be
insignificant. Cash flows used in investing activities for the six months ended
September 30, 2020, included cash from the sale of assets and businesses of $1.5
million with additional investing outflows from capital expenditures of $12.8
million. We currently expect full year capital expenditures in fiscal 2022 to be
in the range of $25.0 million, of which approximately $21.0 million pertains to
our core Systems & Support operating segment. The majority of our fiscal 2022
capital expenditures are capital investments designed to improve our
manufacturing efficiency and expand our capabilities.

Financing Cash Flows


Cash flows used in financing activities for the six months ended September 30,
2021, were $364.1 million, compared with cash flows provided by financing
activities for the six months ended September 30, 2020, of $203.2 million. In
the six months ended September 30, 2021, the following significant financing
cash flow events occurred:

?
We used approximately $236.5 million to redeem 100% of the outstanding principal
balance under the 2022 Notes
?
As disclosed in Note 3, under the terms of the First Lien Notes indenture, we
were required to use approximately $120.0 million to redeem approximately $112.5
million of the outstanding principle balance and pay a redemption premium of
approximately $7.5 million.

The remainder of financing cash flows pertain primarily to borrowings and
payments under finance leases and the repurchase of common stock to satisfy
employee tax withholding obligations resulting from equity compensation. As of
September 30, 2021, we had $194.1 million of cash on hand and $50.2 million was
available under our Securitization Facility (subject to any additional
constraints arising from the balance of eligible receivables at that time) after
giving effect to approximately $24.8 million in outstanding letters of credit,
all of which were accruing interest at LIBOR plus applicable basis points
totaling approximately 3.50% per annum.

As disclosed in Note 12, the exit of our composites manufacturing operations in
Spokane, Washington could trigger a multiemployer pension plan withdrawal
obligation that, if incurred, would likely be satisfied through annual payments
over a period of at least ten years.

As disclosed in Note 14, subsequent to September 30, 2021, we completed the sale
and licensing of certain legacy product lines of our Staverton, United Kingdom
operations. The transaction includes the existing facility and select product
lines associated with the site. Net proceeds on the transactions are
approximately $34.0 million. In October 2021, we used approximately $26.0
million of the net proceeds to redeem approximately $24.3 million aggregate
principal amount of the First Lien Notes at a redemption price of 106.656%, plus
accrued and unpaid interest. The redemption was required by the terms of the
First Lien Notes, and following the redemption, approximately $563.2 million
aggregate principal amount of First Lien Notes remains outstanding.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act
("CARES Act") was signed into law. The CARES Act provided for, among other
things, deferred payment of the employer portion of social security taxes
through the end of 2020, with 50% of the deferred amount due December 31, 2021,
and the remaining 50% due December 31, 2022. As of September 30, 2021, we had
deferred approximately $18.0 million in social security tax payments. The
deferred amounts are recorded within accrued expenses and within other
noncurrent liabilities on our condensed consolidated balance sheet as of
September 30, 2021.

During the quarter ended September 30, 2021, under the terms of the American
Manufacturing Jobs Protection Program, we filed an application with the
Department of Transportation ("DOT") for possible funding in the range of $20.0
million to cover the compensation costs for certain groups within our U.S.
employee base for up to six months. In November 2021, we were deemed eligible
for receipt of funds under the program. We are evaluating the terms and
conditions governing the receipt and use of these funds that, if received, would
primarily offset our direct labor costs and enhance our liquidity.

With the redemption of the 2022 Notes in the six months ended September 30,
2021, the 2025 Notes are our senior unsecured obligations and rank equally in
right of payment with all of our other existing and future senior unsecured
indebtedness and senior in right of payment to all of our existing and future
subordinated indebtedness. The 2025 Notes are guaranteed on a full, joint and
several basis by each of our existing and future domestic restricted
subsidiaries that is a borrower under any of our credit facilities or that
guarantees any of our debt or that of any of our restricted subsidiaries, in
each case incurred under any of our credit facilities.

                                                                            

35

--------------------------------------------------------------------------------



Pursuant to the documentation governing the 2025 Notes, we may redeem, at
specified redemption prices, some or all of the 2025 Notes prior to their stated
maturities, subject to certain limitations set forth in the indenture governing
the 2025 Notes. We are obligated to offer to repurchase the Senior Notes at
specified prices as a result of certain change-of-control events and a sale of
all or substantially all of our assets. These restrictions and prohibitions are
subject to certain qualifications and exceptions.

The indentures governing the 2025 Notes, as well as Securitization Facility,
contain covenants and restrictions that, among other things, limit our ability
and the ability of any of the Guarantor Subsidiaries to (i) grant liens on our
assets; (ii) make dividend payments, other distributions or other restricted
payments; (iii) incur restrictions on the ability of the Guarantor Subsidiaries
to pay dividends or make other payments or investments; (iv) enter into sale and
leaseback transactions; (v) merge, consolidate, transfer or dispose of
substantially all of their assets; (vi) incur additional indebtedness; (vii) use
the proceeds from sales of assets, including capital stock of restricted
subsidiaries (in the case of the 2025 Notes); and (viii) enter into transactions
with affiliates. We are currently in compliance with all covenants under our
debt documents and expect to remain in compliance for the foreseeable future.

The First Lien Notes, the 6.250% Senior Secured Notes due September 15, 2024
(the "2024 Notes"),and the guarantees related to the foregoing are secured,
subject to permitted liens, by first-priority or second-priority liens (as
applicable) on substantially all of our assets and the assets of our subsidiary
guarantors (the "Collateral"). The First Lien Notes and the 2024 Notes and the
related guarantees are not secured by the assets of Non-Guarantor Subsidiaries
(as defined below). Some of our assets are excluded from the Collateral,
including certain real property assets. Currently, our only consolidated
subsidiaries that are not guarantors of the First Lien Notes, 2022 Notes, the
2024 Notes and the 2025 Notes (the "Non-Guarantor Subsidiaries") are: (i) the
receivables securitization special purpose entity, and (ii) the foreign
operating subsidiaries.

In November 2021, the Company amended the Securitization Facility, increasing
the purchase limit from $75.0 million to $100.0 million, modifying certain other
terms to increase eligible receivables and availability, and extending the term
through November 2024.

For further information on our long-term debt, see Note 6.


The following tables present summarized financial information of the Company and
the Guarantor Subsidiaries on a combined basis. The combined summarized
financial information eliminates intercompany balances and transactions among
the Company and the Guarantor Subsidiaries and equity in earnings and
investments in any Guarantor Subsidiaries or Non-Guarantor Subsidiaries. The
summarized financial information is provided in accordance with the reporting
requirements of Rule 13-01 under SEC Regulation S-X for the issuer and Guarantor
Subsidiaries.



Parent and Guarantor Summarized Financial
Information                                             September 30,           March 31,
Summarized Balance Sheet                                    2021                  2021
                                                                    in thousands
Assets
Due from non-guarantor subsidiaries                    $         3,292     $               441
Current assets                                                 695,004               1,232,055
Noncurrent assets                                              686,573                 748,480
Noncurrent receivable from non-guarantor
subsidiaries                                                    80,662                 107,059

Liabilities

Due to non-guarantor subsidiaries                               51,283                  14,556
Current liabilities                                            508,378                 664,260
Noncurrent liabilities                                       2,071,494               2,556,915

                                                                            Six Months Ended
Summarized Statement of Operations                                         

September 30, 2021

                                                                              in thousands
Net sales to non-guarantor subsidiaries                                                  2,052
Net sales to unrelated parties                                                         691,376
Gross profit                                                                           179,224
Loss from continuing operations before income
taxes                                                                                  (34,992 )
Net loss                                                                               (35,597 )


Critical Accounting Policies

Our critical accounting policies are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations and notes accompanying
the consolidated financial statements that appear in the Annual Report on Form
10-K for the fiscal year ended March 31, 2021. Except as otherwise disclosed in
the condensed consolidated financial statements and

                                                                            

36

--------------------------------------------------------------------------------



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, 2021, in our 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," "plan," "estimate," 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 our ability to execute on our restructuring plans, the integration
of acquired businesses, divestitures of our business, 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, 2021, filed with the SEC on May 20, 2021, and in our
quarterly reports on Form 10-Q.

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