Triumph Group 10-K 2007
Washington, D.C. 20549
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2007
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-12235
Triumph Group, Inc.
(Exact name of registrant as specified in its charter)
1550 Liberty Ridge Drive, Suite 100, Wayne, Pennsylvania 19087
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (610) 251-1000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No x
As of September 30, 2006, the aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant was approximately $659,799,192. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the New York Stock Exchange on September 30, 2006. For purposes of making this calculation only, the Registrant has defined affiliates as including all directors and executive officers.
The number of outstanding shares of the Registrants Common Stock, par value $.001 per share, on May 31, 2007 was 16,638,688
Documents Incorporated by Reference
Portions of the following document are incorporated herein by reference:
The Proxy Statement of Triumph Group, Inc. in connection with our 2007Annual Meeting of Stockholders is incorporated in part in Part III hereof, as specified herein.
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 managements beliefs concerning future performance and capital requirements based upon current available information. Actual results could differ materially from managements current expectations. Additional capital may be required and, if so, may not be available on reasonable terms, if at all, at the times and in the amounts we need. In addition to these factors and others described elsewhere in this report, other factors that could cause actual results to differ materially include competitive factors relating to the aerospace industry, dependence of some of our businesses on key customers, requirements of capital, product liabilities in excess of insurance, uncertainties relating to the integration of acquired businesses, general economic conditions affecting our business segment, technological developments, limited availability of raw materials or skilled personnel, changes in governmental regulation and oversight and international hostilities and terrorism. For a more detailed discussion of these and other factors affecting us, see the Risk Factors described in Item 1A of this Annual Report on Form 10-K. We do not undertake any obligation to revise these forward-looking statements to reflect future events.
Triumph Group, Inc. was incorporated in 1993 in Delaware. Our companies design, engineer, manufacture, repair, overhaul and distribute aircraft components, such as hydraulic, mechanical and electromechanical control systems, aircraft and engine accessories, structural components and assemblies, non-structural composite components, auxiliary power units, or APUs, avionics and aircraft instruments. We serve a broad spectrum of the aerospace industry, including original equipment manufacturers, or OEMs, of commercial, regional, business and military aircraft and components, as well as commercial regional airlines and air cargo carriers.
We offer a variety of products and services to the aerospace industry through two groups of operating businesses.
Our Aerospace Systems Group consists of companies that service the full spectrum of aerospace customers, which include aerospace OEMs and the top-tier manufacturers who supply them and airlines, air cargo carriers, and domestic and foreign militaries. This group utilizes its capabilities to design, engineer and build complete mechanical, electromechanical and hydraulic systems, while continuing to broaden the scope of detailed parts and assemblies that we supply to the aerospace market. Most of our companies designs are proprietary. Customers typically return such systems to us for repairs and overhauls and spare parts. The systems that companies within this group design, engineer, build and repair include:
· Main engine gear box assemblies
· High lift actuation
· Hydraulic systems
· Landing gear actuation systems
· Primary and secondary flight control systems
· Thermal management systems
This group also includes companies performing complex manufacturing, machining and forming processes for a full range of structural components, as well as complete assemblies and subassemblies such as:
· Wing spars and stringers
· Stretch-formed leading edges and fuselage skins
· Formed structural sheet metal components
· Monolithic floors, bulkheads and frames
· Floor beams
· Landing gear components and assemblies
· Complex composite structures
· Composite floor panels, environmental control system ducting and non-structural composite flight deck and other interior components
· Bonded components
Our Aftermarket Services Group serves a diverse group of customers which includes airlines, air cargo carriers, domestic and foreign militaries and third-party repair and overhaul providers. This group operates the worlds largest independent APU repair and overhaul business and endeavors to be the vendor of choice for airborne structures, airframe and main engine accessories and component repair and overhaul to our customers as they continue to consolidate vendors. We will also continue to develop Federal Aviation Administration, or FAA, approved Designated Engineering Representative, or DER, and Special Federal Aviation Regulation 36, or SFAR 36, proprietary repair procedures for the components we repair and overhaul. Companies in our aftermarket services group repair and overhaul various components for the aviation industry including:
· Nacelles, thrust reversers and flight control surfaces
· Engine accessories, including main engine fuel pumps
· Constant speed drives, integrated drive generators and air-cycle machines
· Cockpit instrumentation
· Interior sidewalls, ceiling panels and overhead bins
· Ground support equipment
This group also specializes in the manufacturing of precision investment castings of super alloys, titanium and aluminum alloys utilizing equiax, single crystal and directionally solidified casting processes primarily for aerospace engine OEMs and third-party engine repair and overhaul providers. In addition this group provides a full range of services including hot isostatic pressing, heat treating, machining and thermal coating.
The components that these companies manufacture, process, repair and overhaul for the aerospace gas turbine industry include:
· Airfoil castings
· Hot section components
· Gas turbine engine stators
· Blades and vanes
· Engine seals
Certain financial information about our two segments can be found in Note 18 of Notes to Consolidated Financial Statements.
We benefit from our proprietary rights relating to designs, engineering, manufacturing processes and repair and overhaul procedures. For some products, our unique manufacturing capabilities are required by the customers specifications or designs, thereby necessitating reliance on us for the production of such specially designed products. We also hold two SFAR 36 certifications that permit us to develop proprietary repair procedures to be used in some repair and overhaul processes.
We view our name and mark as significant to our business as a whole. Our products are protected by a portfolio of patents, trademarks, licenses or other forms of intellectual property that expire at various dates in the future. We develop and acquire new intellectual property on an ongoing basis and consider all of our intellectual property to be valuable. However, based on the broad scope of our product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on our results of operations, our financial position or our business segments. Our policy is to file applications and obtain patents for our new products as appropriate, including product modifications and improvements. While patents generally expire 20 years after the patent application filing date, new patents are issued to us on a regular basis.
In our overhaul and repair businesses, OEMs of equipment that we maintain for our customers are increasingly including language in repair manuals relating to their equipment asserting broad claims of proprietary rights to the contents of the manuals used in our operations. There can be no assurance that OEMs will not try to enforce such claims including the possible use of legal proceedings. In that event, there can be no assurance that such actions will not be successful. We believe that our use of manufacture and repair manuals is lawful.
We purchase raw materials, primarily consisting of extrusions, forgings, castings, aluminum and titanium sheets and shapes, from various vendors. We also purchase replacement parts which are utilized in our various repair and overhaul operations. We believe that the availability of raw materials to us is adequate to support our operations.
We conduct our business through operating companies and divisions. The following chart describes the operations, customer base and certain other information with respect to our principal operating locations at May 31, 2007:
(1) Designates FAA-certified repair station.
(2) Designates SFAR 36 certification.
While each of our operating companies maintains responsibility for company specific selling efforts through direct selling, we have developed two group marketing teams focused on cross-selling our broad capabilities. The focus of these two marketing organizations, one for the Aerospace Systems Group and one for the Aftermarket Services Group, is to sell systems, integrated assemblies and bundled repair and overhaul services, reaching across our operating companies, to our OEM, military, airline and air cargo customers. We also conduct sales activities in the Wichita, Kansas area through Triumph Wichita Support Center, a third party sales organization dedicated solely to a sales effort on behalf of Triumph Group companies, which is staffed by sales professionals focused on Boeing IDS, Spirit AeroSystems, Cessna, Bombardier/Learjet and Raytheon. In certain limited cases, we use independent, commission-based representatives to facilitate responsiveness to each customers changing needs and current trends in each market/geographic region in which we operate.
All three of these marketing organizations operate as the front-end of the selling process, establishing/maintaining relationships, identifying opportunities to leverage our brand, and providing customer service for our customers. Each individual operating company is responsible for its own engineering and technical support, pricing, manufacturing and product support.
A significant portion of our government and defense contracts are awarded on a competitive bidding basis. We generally do not bid or act as the primary contractor, but will typically bid and act as a subcontractor on contracts on a fixed fee basis. We generally sell to our other customers on a fixed fee, negotiated contract or purchase order basis.
We have a number of long-term agreements with several of our customers. These agreements generally describe the terms under which the customer may issue purchase orders to buy our products and services during the term of the agreement. These terms typically include a list of the products or repair services customers may purchase, initial pricing, anticipated quantities and, to the extent known, delivery dates. Backlog only includes amounts for which we have actual purchase orders with firm delivery dates or contract requirements generally within the next 24 months, primarily for our OEM customer base. Purchase orders issued by our aftermarket customers are usually completed within a short period of time. As a result, our backlog data relates primarily to the OEM customers. The backlog information set forth below does not include the sales that we expect to generate from long-term agreements associated with long-term aircraft production programs but for which we do not have actual purchase orders with firm delivery dates or for which contract requirements extend beyond the next 24 months.
As of March 31, 2007, our continuing operations had outstanding purchase orders representing an aggregate invoice price of approximately $1,147 million, of which $1,104 million and $43 million relate to the Aerospace Systems Group and the Aftermarket Services Group, respectively. As of March 31, 2006, our continuing operations had outstanding purchase orders representing an aggregated invoice price of approximately $888 million, of which $859 million and $29 million relate to the Aerospace Systems group and the Aftermarket Services group, respectively. Backlog amounts attributable to our two segments on March 31, 2006 reflect that, in 2007, we reclassified the operations of Triumph Fabrications-Phoenix and Triumph Fabrications-Fort Worth from the Triumph Aftermarket Services Group to the Triumph Aerospace Systems Group due to the fact that most of their product line has been transitioned to aerospace OEM products. We believe that purchase orders totaling approximately $368 million will not be shipped by March 31, 2008.
For the year ended March 31, 2007, the Boeing Company, or Boeing, represented approximately 21.6% of the net sales. The loss of such customer could have material adverse impact on us.
Our revenues from our continuing operations to customers in the United States for fiscal years 2007, 2006 and 2005 were approximately $751 million, $592 million and $531 million, respectively. Our revenues from our continuing operations to customers in all foreign countries for fiscal years 2007, 2006 and 2005 were approximately $203 million, $168 million and $158 million, respectively.
As of March 31, 2007, 2006 and 2005, our long-lived assets for our continuing operations located in the United States were approximately $702 million, $566 million and $569 million, respectively. As of March 31, 2007, 2006 and 2005, our long-lived assets for our continuing operations located in all foreign countries were approximately $23 million, $7 million and $9 million, respectively.
We compete primarily with the top-tier systems integrators and manufacturers that supply them, some of which are divisions or subsidiaries of other large companies, in the manufacture of aircraft systems components and subassemblies. OEMs are increasingly focusing on assembly activities while outsourcing more manufacturing and repair to third parties, and therefore are less of a competitive force than in previous years.
Competition for the repair and overhaul of aviation components comes from three primary sources, some with greater financial and other resources than we have: OEMs, major commercial airlines and other independent repair and overhaul companies. Some major commercial airlines continue to own and operate their own service centers, while others have begun to sell or outsource their repair and overhaul services to other aircraft operators or third parties. Large domestic and foreign airlines that provide repair and overhaul services typically provide these services not only for their own aircraft but for other airlines as well. Most low-cost carriers outsource their overhaul and repair activity to other aircraft operators as third parties. OEMs also maintain service centers which provide repair and overhaul services for the components they manufacture. Other independent service organizations also compete for the repair and overhaul business of other users of aircraft components.
Participants in the aerospace industry compete primarily on the basis of price, breadth of technical capabilities, quality, turnaround time and capacity.
The aerospace industry is highly regulated in the United States by the FAA and in other countries by similar agencies. We must be certified by the FAA and, in some cases, by individual OEMs, in order to engineer and service parts and components used in specific aircraft models. If material authorizations or approvals were revoked or suspended, our operations would be adversely affected. New and more stringent government regulations may be adopted, or industry oversight heightened, in the future and these new regulations, if enacted, or any industry oversight, if heightened, may have an adverse impact on us.
We must also satisfy the requirements of our customers, including OEMs, that are subject to FAA regulations, and provide these customers with products and repair services that comply with the government regulations applicable to aircraft components used in commercial flight operations. The FAA regulates commercial flight operations and requires that aircraft components meet its stringent standards. In addition, the FAA requires that various maintenance routines be performed on aircraft components, and we currently satisfy these maintenance standards in our repair and overhaul services. Several of our operating locations are FAA-approved repair stations.
Generally, the FAA currently only grants licenses for the manufacture or repair of a specific aircraft component, rather than the broader licenses that have been granted in the past. The FAA licensing process may be costly and time-consuming. In order to obtain an FAA license, an applicant must satisfy all
applicable regulations of the FAA governing repair stations. These regulations require that an applicant have experienced personnel, inspection systems, suitable facilities and equipment. In addition, the applicant must demonstrate a need for the license. Because an applicant must procure manufacturing and repair manuals from third parties relating to each particular aircraft component in order to obtain a license with respect to that component, the application process may involve substantial cost.
The license approval processes for the European Aviation Safety Agency (EASA was formed in 2002 and is handling most of the responsibilities of the national aviation authorities, such as the United Kingdom Civil Aviation Authority), which regulates this industry in the European Union, the Civil Aviation Administration of China, and other comparable foreign regulatory authorities are similarly stringent, involving potentially lengthy audits.
Our operations are also subject to a variety of worker and community safety laws. The Occupational Safety and Health Act of 1970, or OSHA, mandates general requirements for safe workplaces for all employees. In addition, OSHA provides special procedures and measures for the handling of hazardous and toxic substances. Specific safety standards have been promulgated for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with OSHAs health and safety requirements.
Our business, operations and facilities are subject to numerous stringent federal, state, local and foreign environmental laws and regulation by government agencies, including the Environmental Protection Agency, or the EPA. Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transportation and disposal of hazardous materials, pollutants and contaminants, govern public and private response actions to hazardous or regulated substances which may be or have been released to the environment, and require us to obtain and maintain licenses and permits in connection with our operations. This extensive regulatory framework imposes significant compliance burdens and risks on us. Although management believes that our operations and our facilities are in material compliance with such laws and regulations, future changes in these laws, regulations or interpretations thereof or the nature of our operations or regulatory enforcement actions which may arise, may require us to make significant additional capital expenditures to ensure compliance in the future.
Certain of our facilities have been or are currently the subject of environmental remediation activities, the cost of which is subject to indemnification provided by IKON Office Solutions, Inc. (IKON) in connection with the acquisition by us of these facilities in 1993 from IKON. One of these facilities is connected with a site included on the National Priorities List of Superfund sites maintained by the EPA. Another of these facilities is located on a site included in the EPAs database of potential Superfund sites. IKONs indemnification covers us for losses we might suffer in connection with liabilities and obligations arising under environmental, health and safety laws with respect to operations or use of those facilities prior to their acquisition by us. Some other facilities acquired and operated by us or one of our subsidiaries, including a leased facility located on an EPA National Priorities List site, were under active investigation for environmental contamination by federal or state agencies when acquired, and at least in some cases, continue to be under investigation. We are generally indemnified by prior owners or operators and/or present owners of the facilities for liabilities which we incur as a result of these investigations and the environmental contamination found which pre-dates our acquisition of these facilities, subject to certain limitations. We also maintain a pollution liability policy that provides coverage for material liabilities associated with the clean-up of on-site pollution conditions, as well as defense and indemnity for certain third party suits (including Superfund liabilities at third party sites), in each case, to the extent not otherwise indemnified. This policy applies to all of our manufacturing and assembly operations worldwide. However, if we were required to pay the expenses related to environmental liabilities for which neither
indemnification nor insurance coverage is available, these expenses could have a material adverse effect on us.
As of March 31, 2007, we employed 5,147 persons, of whom 468 were management employees, 123 were sales and marketing personnel, 595 were technical personnel, 610 were administrative personnel and 3,351 were production workers.
Several of our subsidiaries are parties to collective bargaining agreements with labor unions. Under those agreements, we currently employ approximately 651 full-time employees. Currently, approximately 13% of our permanent employees are represented by labor unions and approximately 22% of net sales are derived from the facilities at which at least some employees are unionized. One collective bargaining agreement that we are party to will expire on June 30, 2007, but we are currently in discussions to enter into a new collective bargaining agreement following its expiration. No work stoppage is expected at the relevant location. Our inability to negotiate an acceptable contract with this or other labor unions could result in strikes by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. If the unionized workers were to engage in a strike or other work stoppage, or other employees were to become unionized, we could experience a significant disruption of our operations and higher ongoing labor costs, which could have an adverse effect on our business and results of operations.
We have not experienced any material labor-related work stoppage and consider our relations with our employees to be good.
Richard C. Ill has been our President and Chief Executive Officer and a director since 1993. Mr. Ill is a director of P.H. Glatfelter Company, Airgas Inc. and Baker Industries and a member of the advisory board of Outward Bound, USA.
Lawrence J. Resnick has been a Senior Vice President since April 2004. From August 2000 until April 2004, he was a Vice President. Mr. Resnick was the President of Triumph Controls, Inc., one of our subsidiaries, from January 1996 through July 2000.
John B. Wright, II has been a Vice President and our General Counsel and Secretary since July 12, 2004. From May 2001 until he joined us, Mr. Wright was a partner with the law firm of Ballard Spahr Andrews & Ingersoll, LLP, where he practiced corporate and securities law. From 1994 through 2000, Mr. Wright served as Senior Corporate Counsel with Safeguard Scientifics, Inc., a publicly traded company engaged in the operation of technology companies.
Kevin E. Kindig has been our Controller since 1993 and a Vice President since April 1999.
In addition, as previously announced, M. David Kornblatt is joining us in June 2007 as Senior Vice President and Chief Financial Officer. Immediately prior to joining us, Mr. Kornblatt served as Senior Vice PresidentFinance and Chief Financial Officer at Carpenter Technology Corporation, a manufacturer and distributor of specialty alloys and various engineered products. From 2003 to 2005, he was Vice President and Chief Financial Officer at York International, prior to its acquisition by Johnson Controls in December 2005. Before that, Mr. Kornblatt was the Director of Taxes-Europe for The Gillette Company in London, England for three years.
For more information about us, visit our website at www.triumphgroup.com. The contents of the website are not part of this Form 10-K. Our electronic filings with the Securities and Exchange Commission (including all Forms 10-K, 10-Q and 8-K, and any amendments to these reports) are available free of charge through our website immediately after we electronically file with or furnish them to the Securities and Exchange Commission. These filings may also be read and copied at the SECs Public Reference Room which is located at 100 F Street, N.E., Washington, D.C. 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers who file electronically with the SEC at www.sec.gov.
Factors that have an adverse impact on the aerospace industry may adversely affect our results of operations. A substantial percentage of our gross profit and operating income was derived from commercial aviation for fiscal year 2007. Our operations are focused on designing, engineering and manufacturing aircraft components for new aircraft, selling spare parts and performing repair and overhaul services on existing aircraft and aircraft components. Therefore, our business is directly affected by economic factors and other trends that affect our customers in the aerospace industry, including a possible decrease in outsourcing by OEMs and aircraft operators or projected market growth that may not materialize or be sustainable. When these economic and other factors adversely affect the aerospace industry, they tend to reduce the overall customer demand for our products and services, which decreases our operating income. Economic and other factors that might affect the aerospace industry may have an adverse impact on our results of operations.
There has been a recovery in commercial air travel to levels above those prior to the terrorist attacks of September 11, 2001 resulting in recovery of demand for commercial aerospace products and services. Nevertheless, as a result of market conditions since September 11, 2001, the financial condition of our airline customers has deteriorated and thereby introduced credit risk with some of our significant airline customers, as well as introducing negative implications for their ability to fund the acquisition of new aircraft for their fleet. In addition, the recent rise in energy costs has significantly increased the price of fuel to the airlines resulting in additional pressure on operating costs. These or other events may lead to further declines in the worldwide aerospace industry that could further adversely affect our business and financial condition.
Competitive pressures may adversely affect us. We have numerous competitors in the aerospace industry. We compete primarily with the top-tier systems integrators and the manufacturers that supply them, some of which are divisions or subsidiaries of OEMs and other large companies that manufacture aircraft components and subassemblies. Competition for the repair and overhaul of aviation components comes from three primary sources: OEMs, major commercial airlines and other independent repair and overhaul companies. Some of our competitors have substantially greater financial and other resources than we have. Competitive pressures may materially adversely affect our operating revenues and margins, and, in turn, our business and financial condition.
We may need to expend significant capital to keep pace with technological developments in our industry. The aerospace industry is constantly undergoing development and change and it is likely that new products, equipment and methods of repair and overhaul service will be introduced in the future. In order to keep pace with any new developments, we may need to expend significant capital to purchase new equipment and machines or to train our employees in the new methods of production and service. We may not be successful in developing new products and these capital expenditures may have a material adverse effect on us.
We may incur significant expenses to comply with new or more stringent governmental regulation. The aerospace industry is highly regulated in the United States by the FAA and in other countries by similar agencies. We must be certified by the FAA and, in some cases, by individual OEMs in order to engineer and service parts and components used in specific aircraft models. If any of our material authorizations or approvals were revoked or suspended, our operations would be adversely affected. New or more stringent governmental regulations may be adopted, or industry oversight heightened in the future, and we may incur significant expenses to comply with any new regulations or any heightened industry oversight.
The loss of our key customer could have a material adverse effect on us. For the year ended March 31, 2007, The Boeing Company, or Boeing, represented approximately 21.6% of net sales, respectively. The loss of this customer could have a material adverse impact on us. In addition, some of our operating locations have significant customers, the loss of whom could have an adverse effect on those businesses.
We may be unable to successfully achieve tier one supplier status with OEMs, and we may be required to risk our capital to achieve tier one supplier status. Many OEMs are moving toward developing strategic partnerships with their larger suppliers, frequently called tier one suppliers. Each tier one supplier provides an array of integrated services including research and development, engineering purchasing, warehousing and assembly for OEM customers. We have been designated as a tier one supplier by some OEMs and are striving to achieve tier one status with other OEMs. In order to maintain or achieve tier one status, we may need to expand our existing capacities or capabilities, and there is no assurance that we will be able to do so. As we expand into the tier one supplier status, we are exposed to adverse litigation action by competitors whose market share is being diminished.
Many new aircraft programs require that major suppliers become risk-sharing partners, meaning that the cost of design, development and engineering work associated with the development of the aircraft is borne by the supplier, usually in exchange for a long-term agreement to supply critical parts once the aircraft is in production. Boeings 787 and Airbus A380 are examples of two new aircraft programs in which we are competing in a product development process in order to obtain eventual long term production agreements. In the event that the aircraft fails to reach the full production stage or we fail to win the long-term contract, the investment that we have made in research and development and other start-up costs may not produce the anticipated return on investment.
We may not realize our anticipated return on capital commitments made to expand our capabilities. From time to time, we make significant capital expenditures to implement new processes and to increase both efficiency and capacity. Some of these projects require additional training for our employees and not all projects may be implemented as anticipated. If any of these projects do not achieve the anticipated increase in efficiency or capacity, our returns on these capital expenditures may not be as expected.
Our expansion into international markets may increase credit, currency and other risks. As we pursue customers in Asia, South America and other less developed aerospace markets throughout the world, our inability to ensure the creditworthiness of our customers in these areas could adversely impact our overall profitability. In addition, with the completion of our Thailand facility and as we pursue customers in other parts of the world, we will be subject to the legal, political, social and regulatory requirements and economic conditions of other jurisdictions. We may also make additional foreign capital investments, including acquisitions of foreign companies, in the future. Risk inherent to international operations include, but are not limited to, the following:
· difficulty in enforcing agreements in foreign legal systems;
· foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade and investment, including currency exchange controls;
· fluctuations in exchange rates may affect demand for our products and services and may adversely affect our profitability in U.S. dollars;
· inability to obtain, maintain or enforce intellectual property rights;
· changes in general economic and political conditions in the countries in which we operate;
· unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to environmental protection, export duties and quotas;
· difficulty with staffing and managing widespread operations; and
· difficulty of and costs relating to compliance with the different commercial and legal requirements of the countries in which we operate.
We may need additional financing for acquisitions and capital expenditures and additional financing may not be available on terms acceptable to us. A key element of our strategy has been, and continues to be, internal growth supplemented by growth through the acquisition of additional companies and product lines engaged in the aerospace industry. In order to grow internally, we may need to make significant capital expenditures, such as investing in facilities in low cost countries, and may need additional capital to do so. Our ability to grow is dependent upon, and may be limited by, among other things, availability under our credit facility and by particular restrictions contained in our credit facility and our other financing arrangements. In that case, additional funding sources may be needed, and we may not be able to obtain the additional capital necessary to pursue our internal growth and acquisition strategy or, if we can obtain additional financing, the additional financing may not be on financial terms that are satisfactory to us.
Cancellations, reductions or delays in customer orders may adversely affect our results of operations. Our overall operating results are affected by many factors, including the timing of orders from large customers and the timing of expenditures to manufacture parts and purchase inventory in anticipation of future sales of products and services. A large portion of our operating expenses are relatively fixed. Because several of our operating locations typically do not obtain long-term purchase orders or commitments from our customers, they must anticipate the future volume of orders based upon the historic purchasing patterns of customers and upon our discussions with customers as to their anticipated future requirements. These historic patterns may be disrupted by many factors, including changing economic conditions, inventory adjustments, or work stoppages or labor disruptions at our customers. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on our business, financial condition and results of operations.
Our acquisition strategy exposes us to risks, including the risk that we may not be able to successfully integrate acquired businesses. We have a consistent strategy to grow, in part, by the acquisition of additional businesses in the aerospace industry and are continuously evaluating various acquisition opportunities, including those outside the United States and those that are larger than the acquisitions we have made previously. However, we do not have any definitive agreements at this time to acquire additional businesses. Our ability to grow by acquisition is dependent upon, among other factors, the availability of suitable acquisition candidates. Growth by acquisition involves risks that could adversely affect our operating results, including difficulties in integrating the operations and personnel of acquired companies, the potential amortization of acquired intangible assets, the potential impairment of goodwill and the potential loss of key employees of acquired companies. We may not be able to consummate acquisitions on satisfactory terms or, if any acquisitions are consummated, satisfactorily integrate these acquired businesses.
Any product liability claims in excess of insurance may adversely affect our financial condition. Our operations expose us to potential liability for personal injury or death as a result of the failure of an aircraft component that has been serviced by us or the failure of an aircraft component designed or manufactured by us. While we believe that our liability insurance is adequate to protect us from these liabilities, our insurance may not cover all liabilities. Additionally, insurance coverage may not be available in the future at a cost acceptable to us. Any material liability not covered by insurance or for which third party indemnification is not available could have a material adverse effect on our financial condition.
The lack of available skilled personnel may have an adverse effect on our operations. From time to time, some of our operating locations have experienced difficulties in attracting and retaining skilled personnel to design, engineer, manufacture, repair and overhaul sophisticated aircraft components. Our ability to operate successfully could be jeopardized if we are unable to attract and retain a sufficient number of skilled personnel to conduct our business.
Any exposure to environmental liabilities may adversely affect us. Our business, operations and facilities are subject to numerous stringent federal, state, local and foreign environmental laws and regulations. Although management believes that our operations and facilities are in material compliance with such laws and regulations, future changes in such laws, regulations or interpretations thereof or the nature of our operations or regulatory enforcement actions which may arise, may require us to make significant additional capital expenditures to ensure compliance in the future. Some of our facilities have been or are currently the subject of environmental remediation activities, the cost of which is subject to indemnification provided by IKON Office Solutions, Inc., or IKON. The IKON indemnification covers the cost of liabilities that arise from environmental conditions or activities existing at facilities prior to our acquisition from IKON in July 1993, including the costs and claims associated with the environmental remediation activities and liabilities discussed above. Some other facilities acquired and operated by us or one of our subsidiaries have at one time or another been under active investigation for environmental contamination by federal or state agencies when acquired have and, at least in some cases, continue to be under investigation or subject to remediation. Individual facilities of ours have also been subject to investigation on occasion for possible past waste disposal practices which might have contributed to contamination at or from remote waste disposal sites. We are often indemnified by prior owners or operators and/or present owners of the facilities for liabilities which we might otherwise incur as a result of these investigations and the environmental contamination found which pre-dates our acquisition of these facilities, subject to certain limitations, including but not limited to limitations on the survival period of the indemnity. We also maintain a pollution liability policy that provides coverage for material liabilities associated with the clean-up of on-site pollution conditions, as well as defense and indemnity for certain third party suits (including Superfund liabilities at third party sites), in each case, to the extent not otherwise indemnified. This policy applies to all of our manufacturing and assembly operations worldwide. However, if we were required to pay the expenses related to environmental liabilities for which neither indemnification nor insurance coverage is available, these expenses could have a material adverse effect on us.
We may become involved in intellectual property litigation, which could have a material and adverse impact on our profitability. We and other companies in our industry possess certain proprietary rights relating to designs, engineering, manufacturing processes and repair and overhaul procedures. In the event that we believe that a third party is infringing upon our proprietary rights, we may bring an action to enforce such rights. In addition, third parties may claim infringement by us with respect to their proprietary rights and may initiate legal proceedings against us in the future. The expense and time of bringing an action to enforce such rights or defending against infringement claims may have a material and adverse impact on our profitability. In addition, in our overhaul and repair businesses, OEMs of equipment that we maintain for our customers increasingly include language in repair manuals relating to their equipment asserting broad claims of proprietary rights to the contents of the manuals used in our operations. Although we believe that our use of manufacture and repair manuals is lawful, there can be no
assurance that OEMs will not try to enforce such claims, including through the possible use of legal proceedings, or that any such actions will not be successful.
Our executive offices are located in Wayne, Pennsylvania, where we lease 9,139 square feet of space. In addition, as of April 1, 2007, we owned or leased the following facilities in which our operating locations are located.
We believe that our properties are adequate to support our operations for the foreseeable future.
On July 9, 2004, Eaton Corporation and several Eaton subsidiaries filed a complaint against us, our subsidiary, Frisby Aerospace, LLC (now named Triumph Actuation Systems, LLC), certain related subsidiaries and certain employees of ours and our subsidiaries. The complaint was filed in the Circuit Court of the First Judicial District of Hinds County, Mississippi and alleged nineteen causes of action under Mississippi law. In particular, the complaint alleges the misappropriation of trade secrets and intellectual property allegedly belonging to Eaton relating to hydraulic pumps and motors used in military and commercial aviation.
On September 30, 2004, Frisby Aerospace and the individual defendants filed separate responses to Eatons claims. Frisby Aerospace filed counterclaims against Eaton alleging common law unfair competition, interference with existing and prospective contracts, abuse of process, defamation, violation of North Carolinas Unfair and Deceptive Trade Practices Act, and violation of the false advertising provisions of the Lanham Act. We and defendant Jeff Frisby, President of Frisby Aerospace at the time the engineer defendants were hired, moved to dismiss for lack of personal jurisdiction.
A Special Master was appointed by the Court and discovery began, which has included written discovery responses, exchange of documents, and depositions.
On January 4, 2006, we, Frisby Aerospace and Jeff Frisby filed a Motion to Dismiss and for Sanctions Against Plaintiffs for Unlawfully Compensating [a] Fact Witness. Plaintiffs opposed this motion and filed their brief on January 31, 2006. Oral Argument was held before the Court on March 31, 2006. On March 31, 2006, the Court stayed the case pending the resolution of certain related issues that the Court referred to the Special Master.
On December 5, 2006, after conducting discovery and hearings on the issues referred by the Court, the Special Master issued a Report and Recommendation to the Court, which the Court reviewed. On April 6, 2007, the Court denied our motion to dismiss, but entered sanctions against Eaton, which include a jury instruction should Eaton call a certain witness to testify. The Court also ordered that discovery in the case resume. We and the other defendants have filed a motion for reconsideration, which has now been briefed and is awaiting the decision of the Court.
No trial date has been scheduled. It is too early to determine what, if any, exposure to liability we or Frisby Aerospace face as a result of this lawsuit. We intend to continue to vigorously defend the allegations contained in Eatons complaint and to vigorously prosecute Frisby Aerospaces counterclaims.
The above allegations also relate to alleged conduct that is the subject of an investigation by the office of the U.S. Attorney in Jackson, Mississippi. On January 22, 2004, a search warrant was executed on the offices of Frisby Aerospace, in connection with this investigation. Frisby Aerospace cooperated with the investigation. On December 20, 2006, five engineers of Frisby Aerospace who are former employees of Eaton Aerospace, LLC, were indicted by a grand jury sitting in the Southern District of Mississippi on five counts of trade secret misappropriation, conspiracy to misappropriate trade secrets, and mail and wire fraud. No charges were brought against Frisby Aerospace, and we understand that neither we nor Frisby Aerospace is currently the subject of the criminal investigation. Trial for these individuals is scheduled to begin in September 2007.
In the ordinary course of our business, we are also involved in disputes, claims, lawsuits, and governmental and regulatory inquiries that we deem to be immaterial. Some may involve claims or potential claims of substantial damages, fines or penalties. While we cannot predict the outcome of any pending or future litigation or proceeding and no assurances can be given, we do not believe that any pending matter will have a material effect, individually or in the aggregate, on our financial position or results of operations.
Our Common Stock is traded on the New York Stock Exchange under the symbol TGI. The following table sets forth the range of high and low prices for our Common Stock for the periods indicated:
On May 31, 2007, the reported closing price for our Common Stock was $66.08. As of May 31, 2007, there were approximately 74 holders of record of our Common Stock and we believe that our Common Stock was beneficially owned by approximately 12,852 persons.
During fiscal 2007, we paid a quarterly cash dividend of $0.04 per share in each of the second, third and fourth fiscal quarters. However, our declaration and payment of cash dividends in the future and the amount thereof will depend upon our results of operations, financial condition, cash requirements, future prospects, limitations imposed by credit agreements or indentures governing debt securities and other factors deemed relevant by our board of directors. No assurance can be given that cash dividends will continue to be declared and paid at historical levels or at all. Certain of our debt arrangements, including our credit facility, restrict our paying dividends and making distributions on our capital stock, except for the payment of stock dividends and redemptions of an employees shares of capital stock upon termination of employment.
The information required regarding equity compensation plan information is included in our Proxy Statement in connection with our 2007 Annual Meeting of Stockholders to be held on July 25, 2007, under the heading Equity Compensation Plan Information and is incorporated herein by reference.
The graph below compares the percentage change in cumulative total stockholder return on our common stock, on a quarterly basis, from March 31, 2002 to present with the cumulative total return over the same period of the Russell 2000 index and the S & P Aerospace & Defense index. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
* $100 invested on 3/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending March 31.
The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included herein.
(1) Includes the acquisition of the assets and businesses of Excel Manufacturing, Inc., Air Excellence International, Inc., Grand Prairie Accessory Services, LLC and the acquisition through merger of Allied Aerospace Industries, Inc., from the date of each respective acquisition. See Note 3 to the Consolidated Financial Statements.
(2) Results include $3.1 million of restructuring costs associated with ceasing the operations of the Companys Phoenix Manufacturing Division of the Companys Triumph Engineered Solutions subsidiary and the divestitures of the Companys IGT repair division and the Wisconsin Manufacturing division of the Companys Triumph Engineered Solutions subsidiary. See Note 4 to the Consolidated Financial Statements.
(3) Includes the acquisitions of Parker Hannifins United Aircraft Products Division and Rolls-Royce Gear Systems, Inc. from the date of each respective acquisition.
(4) Includes the acquisition of the Ozone Assets, the Aerocell Assets, Furst and the assets of The Boeing Companys Spokane Fabrication Operation from the date of each respective acquisition.
(5) Fiscal 2007 includes stock-based compensation pre-tax charges of $2,524 related to the adoption of SFAS No. 123R as of April 1, 2006.
(The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained elsewhere herein.)
We are a major supplier to the aerospace industry and have two operating segments: (i) Triumph Aerospace Systems Group, whose companies design, engineer and manufacture a wide range of proprietary and build-to-print components, assemblies and systems for the global aerospace OEM market; and (ii) 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.
Financial highlights for fiscal 2007 include:
· Net sales for fiscal 2007 increased 26% to $954.7 million
· Operating income in fiscal 2007 increased 62% to $90.7 million
· Net income for fiscal 2007 increased 36% to $47.1 million
· Backlog increased 29% over prior year to $1.1 billion
For fiscal year 2007, net sales totaled $954.7 million, a 26% increase from fiscal year 2006 net sales of $760.4 million. Net income for fiscal year 2007 increased 36% to $47.1 million, or $2.87 per diluted common share, versus $34.5 million, or $2.15 per diluted common share, for fiscal year 2006.
Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. For the fiscal year ended March 31, 2007, we generated approximately $46.2 million of cash flows from operating activities, used approximately $199.2 million in investing activities and generated approximately $154.3 million in financing activities.
We continue to remain focused on growing our core businesses as well as growing through strategic acquisitions. Our organic growth has remained robust through continually adding products and services, expanding our operating capacity and marketing our complete portfolio of capabilities. Our core revenue growth in fiscal 2007 as compared to fiscal 2006 excluding the impact of acquisitions was 15%. Our company has an aggressive but highly selective acquisition approach that adds capabilities and increases our capacity for strong and consistent internal growth. During fiscal 2007 we acquired four companies, which have significantly enhanced our product and service capabilities, while adding in excess of $120 million in annualized revenue.
During fiscal 2007, we restructured our financing facilities through the issuance of low interest convertible debt and the retirement of higher interest notes. We have also increased our revolving credit facility. These transactions will enable us to support internal growth initiatives and the funding of future acquisitions.
In July 2006, our Board of Directors declared our first quarterly cash dividend.
Net Sales for fiscal 2008 are expected to grow in the range of $1.1 billion to $1.2 billion, and earnings per share for fiscal 2008 are expected to be between $3.60 and $3.80.
Our fiscal 2008 outlook is based on the following market assumptions:
· The commercial jet aircraft market and the airline industry remain extremely competitive. Market liberalization in Europe and Asia has continued to enable low-cost airlines to gain market share, and traditional airlines continue to improve their competitive position by lowering their cost structure through merger (US Airways/America West), bankruptcy (Delta Airlines and Northwest) and restructuring (American Airlines). Some of the airline restructurings have led to increased outsourcing opportunities, benefiting our Aftermarket Services segment.
· Aircraft seat miles, a key indicator of airline health, remains steady at a 4% growth in calendar 2007, positively affecting our business. The continued growth in air freight also will benefit us and the industry. Finally, recent upward movement in airline ticket prices, which are being sustained, should help stabilize the financial position of the airlines.
· Air cargo continues to exhibit strong growth and financial stability, a key market segment for Triumph given our product penetration with these carriers.
· The major trends that shape the current military/defense environment include: a growing U.S. Government defense budget and rapid expansion of information and communication technologies. The 2007 U.S. Department of Defense (DoD) authorization was approved in the fourth quarter of 2006 at a total level of $424 billion for 2007 and $460 billion for 2008 (excluding supplementals). Although under pressure, the DoD budget remains strong and focused on transformation. With this continued pressure on the budget, the DoD will continue to focus on affordability strategies emphasizing network-centric operations, joint interoperability, long-range strike, unmanned air combat and reconnaissance vehicles, precision guided weapons and continued privatization of logistics and support activities as a means to improve overall effectiveness while maintaining control over costs.
· Deliveries of Airbus and Boeing large commercial aircraft are expected to be higher in calendar 2007 compared to calendar 2006. Airbus and Boeing reported actual deliveries for calendar 2006 of 832 aircraft. Their deliveries for calendar 2007 are expected to increase by approximately 8%, to about 891 aircraft. Capacity in the global airline system, as measured by available seat miles (ASMs) is expected to continue to grow. We expect global ASM growth of about 4% in calendar 2007 compared to calendar 2006. Our sales to airlines for large commercial and regional aircraft aftermarket parts and service are expected to grow with increases in capacity.
· Total regional and business aircraft production is expected to increase in fiscal 2008 compared to fiscal 2007, as deliveries of business jets are expected to significantly increase with a strong domestic economy and the production of various models of very light jets (VLJ). In the regional aircraft market we expect to see growth driven by the 80-100 seat jet and 40-60 seat turboprop segments, slightly offset by continued weakness in the 40-60 seat jet products.
· Military sales (OEM and aftermarket) are expected to increase roughly in line with global military budgets, which are expected to grow in the single digit range for calendar 2007 compared to calendar 2006.
Net sales increased by $194.3 million, or 25.6%, to $954.7 million for the fiscal year ended March 31, 2007 from $760.4 million for the fiscal year ended March 31, 2006. The acquisitions of the assets and businesses of Excel Manufacturing, Inc., Air Excellence International, Inc. and its affiliates, Allied Aerospace Industries, Inc., and Grand Prairie Accessory Services, LLC, herein referred to as the 2007 Acquisitions, contributed $75.7 million of the net sales increase. Excluding the effects of the 2007 Acquisitions, organic sales growth was $117.5 million, or 15.4%.
The Aerospace Systems segment benefited primarily from increased sales to our OEM customers driven by increased aircraft build rates, while the increase in sales for our Aftermarket Services segment was the result of increased demand for our services as a result of growth in global air traffic.
Segment operating income increased by $39.4 million, or 55.8%, to $110.0 million for the year ended March 31, 2007 from $70.6 million for the year ended March 31, 2006. Operating income growth was a direct result of margins attained on increased sales volume as described above and the contribution of $22.3 million from the 2007 Acquisitions, partially offset by increases in payroll, healthcare, litigation costs and costs associated with the startup of our new Thailand maintenance and repair facility.
Corporate general and administrative expenses increased by $4.8 million, or 33.4%, to $19.4 million for the year ended March 31, 2007 from $14.5 million for the year ended March 31, 2006, primarily due to recognition of stock-based compensation, increased bonus accruals and a settlement of a $1.1 million claim.
Interest expense and other increased by $1.9 million, or 15.6%, to $14.5 million for the year ended March 31, 2007 from $12.5 million for the year ended March 31, 2006. This increase was due to higher average borrowings outstanding used to fund the 2007 Acquisitions and our capital expenditures, partially offset by lower interest on our new convertible notes issued on September 18, 2006 as compared to the Class A Senior Notes and Class B Senior Notes (collectively, the Senior Notes).
During fiscal 2007, we recorded a charge for early extinguishment of debt totaling $5.1 million related to the prepayment of the Senior Notes on October 4, 2006, which included a make whole premium of approximately $4.4 million and the write-off of unamortized debt issuance costs related to the Senior Notes of $0.7 million.
The effective income tax rates of 33.8% and 20.8% for the year ended March 31, 2007 and 2006, respectively, vary from the Federal statutory tax rate of 35% primarily due to tax benefits realized from export sales and domestic production activities and from the research and development tax credit. Additionally, fiscal 2006 included a $2.0 million reduction of income tax resulting from adjusting the
income tax rate at which reversals of temporary differences were taxed and a $2.2 million reduction of income tax expense related to the completion of income tax audits.
Net sales increased by $71.9 million, or 10.4%, to $760.4 million for the fiscal year ended March 31, 2006 from $688.5 million for the fiscal year ended March 31, 2005.
The Aerospace Systems segment benefited primarily from increased sales to our OEM customers driven by increased aircraft build rates and sales of large structural precision components and assemblies for the aerospace and defense markets while the increase in sales for our Aftermarket Services segment was the result of increased demand for our services as a result of growth in global air traffic and increased market share of certain components.
Segment operating income increased by $23.9 million, or 51.2%, to $70.6 million for the year ended March 31, 2006 from $46.7 million for the year ended March 31, 2005. Operating income growth was a direct result of margins attained on increased sales volume as described above. Also adding to the increase was the shutdown of the Other segment, partially offset by increases in payroll, healthcare, litigation costs and costs associated with the startup of our new Thailand maintenance and repair facility.
Corporate general and administrative expenses increased by $1.3 million, or 9.5%, to $14.5 million for fiscal 2006 from $13.3 million for fiscal 2005, primarily due to rent expense and other costs associated with idle facilities, as well as increased staffing, incentive compensation expense and costs associated with acquisitions that we pursued but did not complete, partially offset by decreased regulatory costs.
Interest expense and other decreased by $0.5 million, or 3.9%, to $12.5 million for fiscal 2006 from $13.0 million for fiscal 2005. This decrease was primarily due to a reduction in average borrowings outstanding and less foreign exchange losses, partially offset by increased interest rates on our Credit Facility and industrial revenue bonds, and higher imputed interest on our liability related to our purchase of the revenue sharing program position on the CFM56.
The effective tax rate was 20.8% for fiscal 2006 and 22.5% for fiscal 2005. The fiscal 2006 and 2005 effective tax rates vary from the federal statutory tax rate of 35% primarily due to benefits realized from the research and development tax credit and the Extraterritorial Income Exclusion. Fiscal 2006 also includes a $2.0 million reduction of income tax expense resulting from adjusting the income tax rate at which reversals of temporary differences will be taxed and a $2.2 million reduction of income tax expense resulting from completion of income tax audits.
Loss from discontinued operations before income taxes was $7.1 million for fiscal 2005. The benefit for income taxes from discontinued operations was $2.7 million in fiscal 2005. During fiscal 2005, we sold
substantially all of the assets and certain liabilities of our metals businesses (Metals) for cash proceeds of $17.1 million and recorded a $10.0 million loss on the sale of these businesses. The businesses that comprise the discontinued operations manufacture, machine, process and distribute metal products to customers in the computer, container and office furniture industries, primarily within North America, in addition to providing structural steel erection services.
We are a major supplier to the aerospace industry and have two operating segments: (i) Triumph Aerospace Systems Group; and (ii) Triumph Aftermarket Services Group. Our Aerospace Systems segment consists of 34 operating locations, and the Aftermarket Services segment consists of 18 operating locations at March 31, 2007. The Other segment consisted of 4 operating locations prior to the elimination of this segment as of March 31, 2005 due to the shutdown, sale or transfer of assets to our other operating segments.
The Aerospace Systems segment consists of the Companys operations which manufacture products primarily for the aerospace OEM market. The Aerospace Systems operations design and engineer mechanical and electromechanical controls, such as hydraulic systems and components, main engine gearbox assemblies, accumulators and mechanical control cables. The Aerospace Systems revenues are also derived from stretch forming, die forming, milling, bonding, machining, welding and assembly and fabrication of various structural components used in aircraft wings, fuselages and other significant assemblies. Further, the segments operations also design and manufacture composite assemblies for floor panels, environmental control system ducts and non-structural cockpit components. These products are sold to various aerospace OEMs on a global basis.
The Aftermarket Services segment consists of the Companys 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 Aftermarket Services operations repair and overhaul thrust reversers, nacelle components and flight control surfaces. The Aftermarket Services 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.
The Other segments operations and assets, primarily comprised of the Industrial Gas Turbine (IGT) businesses, manufactured or repaired and overhauled IGT components, primarily for OEMs and power generation equipment operators, and applied high temperature coatings for both internal and external customers. These operations and assets have been sold, liquidated, or re-deployed to the other two remaining segments, and were not a reportable segment after March 31, 2005.
Prior year segment results have been changed to classify certain revenue and costs from the Aftermarket Services segment to the Aerospace Systems segment for the operations of Triumph Fabrications-Phoenix and Triumph Fabrications-Fort Worth as most of their product line has been transitioned to aerospace OEM products. The transitioning of these business units resulted in the shift of approximately $21.7 million in revenue and $6.8 million in operating loss for the year ended March 31, 2006, previously reported in the Aftermarket Services segment, to the Aerospace Systems segment. For all years presented, segment results have been adjusted to reflect these changes.
Aerospace Systems: The Aerospace Systems segment net sales increased by $150.9 million, or 25.1%, to $750.9 million for the year ended March 31, 2007 from $600.0 million for the year ended March 31, 2006. The increase was primarily due to increased sales to our OEM customers of $95.1 million driven by increased aircraft build rates and the net sales contributed from the acquisition of the assets and business of Excel Manufacturing, Inc. (now Triumph Structures-Wichita) and Allied Aerospace Industries, Inc. (now Triumph Aerospace SystemsNewport News) of $55.8 million.
Aerospace Systems segment operating income increased by $35.6 million, or 53.9%, to $101.6 million for the year ended March 31, 2007 from $66.0 million for the year ended March 31, 2006. Operating income increased primarily due to margins attained on increased sales volume of $30.0 million and the margins contributed from the Triumph StructuresWichita and Triumph Aerospace SystemsNewport News acquisitions of $19.7 million, partially offset by increases in payroll, research and development costs, litigation costs and healthcare costs.
Aftermarket Services: The Aftermarket Services segment net sales increased by $42.3 million, or 25.8%, to $206.3 million for the year ended March 31, 2007 from $164.0 million for the year ended March 31, 2006. This increase was primarily due to organic growth of $22.4 million which was principally associated with global air traffic growth, resulting in increased demand for our repair and overhaul services and $19.9 million of net sales contributed from the acquisition of the assets and business of Air Excellence International, Inc. and its affiliates (now Triumph Interiors) and Grand Prairie Accessory Services, LLC (now Triumph Accessory ServicesGrand Prairie).
Aftermarket Services segment operating income increased by $3.8 million, or 83.1%, to $8.4 million for the year ended March 31, 2007 from $4.6 million for the year ended March 31, 2006. Operating income increased primarily due to margins attained on increased sales volume of $4.6 million and the contribution from the acquisition of Triumph Interiors and Triumph Accessory ServicesGrand Prairie of $2.6 million partially offset by increases in payroll, costs associated with the startup of our new Thailand maintenance and repair facility and a charge related to a change in our method of recognizing revenue for the power by the hour contracts.
Prior year segment results have been changed to classify certain revenue and costs from the Aftermarket Services segment to the Aerospace Systems segment for the operations of Triumph Fabrications-Fort Worth as most of their product line has been transitioned to aerospace OEM products. The transitioning of these business units resulted in the shift of approximately $12.3 million in revenue and $0.2 million in operating income for the year ended March 31, 2005, previously reported in the Aftermarket Services segment, to the Aerospace Systems segment. For all years presented, segment results have been adjusted to reflect these changes.
Aerospace Systems: The Aerospace Systems segment net sales increased by $92.2 million, or 18.2%, to $600.0 million for fiscal 2006 from $507.8 million for fiscal 2005. The increase was due to the increased sales of large structural precision components and assemblies for the aerospace and defense markets and cabin windows for the general aviation and corporate jet markets resulting from increased production of both commercial and military aircraft.
Aerospace Systems segment operating income increased by $11.7 million, or 21.7%, to $66.0 million for fiscal 2006 from $54.3 million for fiscal 2005. Operating income increased due to higher sales volume as described above and improved sales mix, primarily for structural precision components partially offset by an increase in staffing, depreciation and amortization expenses, incentive compensation expense and increased investments in research and development costs.
Aftermarket Services: The Aftermarket Services segment net sales increased by $1.4 million, or 0.9%, to $164.0 million for fiscal 2006 from $162.6 million for fiscal 2005. This increase was primarily due to growth in global commercial air traffic and U.S. military maintenance demand resulting in increased demands for our repair and overhaul services.
Aftermarket Services segment operating income decreased by $2.8 million, or 38.2%, to $4.6 million for fiscal 2006 from income of $7.4 million for fiscal 2005. The sales increases as discussed above have been offset by an increase in staffing, depreciation expense, losses associated with customer bankruptcies, compensation expense, costs incurred in developing products associated with new aerospace programs and costs associated with the construction of our new Thailand maintenance and repair facility.
Other Segment: Effective March 31, 2005, we no longer have Other as a reportable segment. As of March 31, 2005, the Other segment operations had ceased and any residual assets were transferred to other Company facilities. During the year ended March 31, 2005, the Other segment had sales primarily related to its IGT operations of $26.6 million. During the year ended March 31, 2005, the Other segment incurred an operating loss of $15.0 million primarily as a result of falling sales to both OEMs and power generation equipment operators in the IGT market.
Our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements. During the year ended March 31, 2007, we generated approximately $46.2 million of cash flows from operating activities, used approximately $199.2 million in investing activities and generated approximately $154.3 million in financing activities.
In April 2006, the Company acquired the assets and business of Excel Manufacturing, Inc. (now Triumph StructuresWichita), located in Wichita, Kansas. In April 2006, the Company also acquired the assets and business of Air Excellence International, Inc. and its affiliates (now Triumph Interiors) which is headquartered in Pittsburgh, Pennsylvania, and operates two other strategically located facilities: Dallas, Texas, and Shannon, Ireland. In November 2006, the Company acquired Allied Aerospace Industries, Inc. (now Triumph Aerospace SystemsNewport News) located in Newport News, Virginia. In January 2007, the Company acquired Grand Prairie Accessory Services, LLC (now Triumph Accessory ServicesGrand Prairie), located in Grand Prairie, Texas. The total cash paid at closing for these acquisitions of approximately $136.8 million was funded by borrowings under the Companys revolving credit facility.
On September 18, 2006, the Company amended its existing amended and restated credit agreement (the Credit Facility) with its lenders to permit the issuance of up to $202.0 million of convertible debt and to revise the definition of consolidated total indebtedness to exclude indebtedness under the senior notes.
On September 18, 2006, the Company issued $201.3 million in convertible senior subordinated notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the Notes). The Notes are direct, unsecured, senior subordinated obligations of the Company, and rank (i) junior in right of payment to all of the Companys 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. In connection with the issuance and sale of the Notes, the Company entered into an indenture (the Indenture), dated as of September 18, 2006, with The Bank of New York Trust Company, N.A., as trustee.
The Company received net proceeds from the sale of the Notes of approximately $195.0 million after deducting estimated offering expenses of approximately $6.3 million. The net proceeds from the sale were used to prepay the Companys then outstanding Senior Notes (described below), including a make-whole premium, fees and expenses in connection with the prepayment, and to repay a portion of the outstanding indebtedness under the Companys credit facility. Approximately $6.3 million in debt issuance costs have been recorded as other assets in the accompanying consolidated balance sheets. Debt issuance costs are being amortized over a period of five years.
The Notes bear interest at a fixed rate of 2.625% per annum, payable in cash semi-annually in arrears on each April 1 and October 1 beginning April 1, 2007. During the period commencing on October 6, 2011 and ending on, but excluding, April 1, 2012 and each six-month period from October 1 to March 31 or from April 1 to September 30 thereafter, the Company will pay contingent interest during the applicable interest period if the average trading price (as defined in the Indenture) of a Note for the five consecutive trading days ending on the third trading day immediately preceding the first day of the relevant six-month period equals or exceeds 120% of the principal amount of the Notes. The contingent interest
payable per Note in respect of any six-month period will equal 0.25% per annum calculated on the average trading price of a Note for the relevant five trading day period. This contingent interest feature represents an embedded derivative. Since it is in the control of the Company to call the Notes at any time after October 6, 2011, the value of the embedded derivative was determined to be de minimis. Accordingly, no value has been assigned at issuance or at March 31, 2007.
The Notes mature on October 1, 2026 unless earlier redeemed, repurchased or converted. The Company may redeem the Notes for cash, either in whole or in part, anytime on or after October 6, 2011 at a redemption price equal to 100% of the principal amount of the 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. In addition, holders of the Notes will have the right to require the Company to repurchase for cash all or a portion of their Notes on October 1, 2011, 2016 and 2021, at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any, up to, but not including, the date of repurchase. The Notes are convertible into the Companys common stock at a rate equal to 18.3655 shares per $1,000 principal amount of the Notes (equal to an initial conversion price of approximately $54.45 per share), subject to adjustment as described in the Indenture. Upon conversion, the Company will deliver to the holder surrendering the Notes for conversion, for each $1,000 principal amount of Notes, an amount consisting of cash equal to the lesser of $1,000 and the Companys total conversion obligation and, to the extent that the Companys total conversion obligation exceeds $1,000, at the Companys election, cash or shares of the Companys common stock in respect of the remainder.
A holder may surrender its Notes for conversion during any fiscal quarter if the last reported sale price per share of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter is more than 130% of the applicable conversion price per share of our common stock on such last trading day. The last reported sale price of our common stock on any date means the closing sales price per share on such date as reported by the New York Stock Exchange.
If the Company undergoes a fundamental change (as defined in the Indenture), holders of the Notes will have the right, subject to certain conditions, to require the Company to repurchase for cash all or a portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, including contingent interest and additional amounts, if any. The carrying amount of the Notes approximates fair value.
On December 14, 2006, the Company filed a shelf registration statement covering resales of the Notes and common stock issuable on conversion under Rule 415 under the Securities Act, which registration statement was automatically effective.
On October 4, 2006, the Company prepaid all of its outstanding Senior Notes and, accordingly, the rights of the holders of the Senior Notes under the Note Purchase Agreement, dated November 21, 2002, between the Company and such holders, as amended, ceased. Immediately prior to prepayment, $68.4 million aggregate principal amount of Class A Senior Notes, which carried a fixed rate of interest of 6.06%, were outstanding, and $56.0 million aggregate amount of Class B Senior Notes, which carried a fixed rate of interest of 5.59%, were outstanding. If the Company had not prepaid the outstanding Senior Notes, they would have matured on December 2, 2012, subject to a requirement under the Note Purchase Agreement that the Company annually prepay $8.0 million of the outstanding Class B notes starting on December 2, 2006. The Senior Notes were senior unsecured obligations of the Company and ranked junior in right of payment to the rights of the Companys secured creditors to the extent of their security in the Companys assets, equal in right of payment to the rights of creditors under the Companys other existing and future unsecured unsubordinated obligations, senior in right of payment to the rights of creditors under
obligations expressly subordinated to the Senior Notes, and effectively subordinated to secured and unsecured creditors of the Companys subsidiaries.
The prepayment was made upon proper notice to the holders of the Senior Notes at a price equal to 100% of the principal amount of the outstanding Senior Notes being prepaid, plus accrued and unpaid interest of approximately $2.5 million, plus a make whole premium of approximately $4.4 million based on the value of the remaining scheduled interest payments on the Senior Notes being prepaid. The Company expensed the make whole premium of $4.4 million as well as unamortized debt issuance costs related to the Senior Notes of $0.7 million in the third quarter of fiscal 2007.
On October 20, 2006, the Company amended the Credit Facility with its lenders to increase the Credit Facility to $350.0 million from $250.0 million, extend the maturity date to June 30, 2011 and amend certain other terms and covenants. The Credit Facility bears interest at either (i) LIBOR plus between 0.625% and 2.00% or (ii) the prime rate or (iii) an overnight rate at the option of the Company. The applicable interest rate is based upon the Companys ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. In addition, the Company is required to pay a commitment fee of between 0.175% and 0.400% on the unused portion of the Credit Facility. On December 22, 2006, the Company amended the Credit Facility with its lenders primarily to eliminate a financial covenant restricting aggregate capital expenditures to 200% of consolidated depreciation expense in any fiscal year. The Companys obligations under the Credit Facility are guaranteed by the Companys subsidiaries. Capital expenditures were approximately $59.7 million for the year ended March 31, 2007, primarily for manufacturing machinery and equipment used to expand capacity or replace old equipment at several facilities.
The indentures under the debt agreements described above and the Credit Facility contain restrictions and covenants which include limitations on the Companys ability to incur additional indebtedness, issue stock options or warrants, make certain restricted payments and acquisitions, create liens, enter into transactions with affiliates, sell substantial portions of its assets and pay cash dividends. Additional covenants require compliance with financial tests, including leverage, interest coverage ratio, and maintenance of minimum net worth.
At March 31, 2007, there were $100.8 million in borrowings and $6.3 million in letters of credit outstanding under the Credit Facility. At March 31, 2006, there were $31.8 million in borrowings and $6.3 million in letters of credit outstanding under the Credit Facility. The level of unused borrowing capacity under the Companys revolving Credit Facility varies from time to time depending in part upon its compliance with financial and other covenants set forth in the related agreement. The Company is currently in compliance with all such covenants. As of March 31, 2007, the Company had borrowing capacity under the Credit Facility of $242.9 million, after reductions for borrowings and letters of credit outstanding.
Effective April 2007, the Company entered into a settlement agreement with a customer relating to a long-term supply agreement (LTSA). The LTSA is related to the Companys acquisition of Rolls-Royce Gear Systems, Inc. in fiscal 2004. The Company has been producing the component parts for this LTSA at a loss for approximately one year which has been reserved for through a loss contract reserve. The agreement provides for the parties to establish a transition plan that provides for the customer to re-source the component parts from other suppliers, essentially terminating the Companys requirement to provide future deliveries of these component parts. The agreement establishes a date no later than December 31, 2008 for completion of the re-sourcing effort, as well as providing a cap on the number of units during this time period. Additionally, the Company will be required to make four payments of $0.5 million each over the next two years, upon successful transition of the component parts, by the customer, to other vendors. The Company has recorded the estimated impact of this settlement in its March 31, 2007 balance sheet, which did not result in a significant adjustment to the recorded loss reserve. The recorded loss reserve at
March 31, 2007 was $7.2 million. If the transition is completed earlier than December 2008 or, the number of delivered units produced by the Company is less than the cap established in the settlement agreement, the recorded loss reserve may be in excess of the amount required. Because we cannot determine the extent of re-sourcing that may occur or the timing of the re-sourcing, we will monitor progress and make appropriate adjustments, as may be necessary, to the loss contract reserve on a periodic basis.
Capital expenditures were approximately $59.7 million for the fiscal year ended March 31, 2007 primarily for manufacturing machinery and equipment. We funded these expenditures through borrowings under our Credit Facility. We expect capital expenditures to be in the range of $55.0 to $65.0 million for our fiscal year ending March 31, 2008. The expenditures are expected to be used mainly to expand capacity or replace old equipment at several facilities.
Our expected future cash flows for the next five years for long term debt, leases and other obligations are as follows:
(1) Included in the Companys balance sheet at March 31, 2007.
(2) Includes fixed-rate interest only.
(3) Includes interest component.
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. However, we have a stated policy to grow through acquisitions and are continuously evaluating various acquisition opportunities. 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 are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations, and that require the use of complex and subjective estimates based upon past experience and managements judgment. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions. For additional accounting policies, see Note 2 of Notes to Consolidated Financial Statements.
Trade receivables are presented net of an allowance for doubtful accounts. In determining the appropriate allowance, we consider a combination of factors, such as industry trends, our customers
financial strength and credit standing, and payment and default history. The calculation of the required allowance requires a judgment as to the impact of these and other factors on the ultimate realization of our trade receivables. We believe that these estimates are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual amounts.
Inventories are stated at the lower of cost or market using the average cost or specific identification methods. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those anticipated, inventory adjustments may be required. We believe that these estimates are reasonable and historically have not resulted in material adjustments in subsequent periods when the estimates are adjusted to actual amounts.
Revenues are recognized in accordance with the contract terms when products are shipped, delivery has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Reserves for contract losses are accrued when estimated costs to complete exceed expected future revenues. The Companys policy with respect to sales returns and allowances generally provides that the customer may not return products or be given allowances, except at the Companys option. Accruals for sales returns, other allowances, and estimated warranty costs are provided at the time of shipment based upon past experience.
Under Statement of Financial Accounting Standards No. 142, Goodwill and Intangible Assets (SFAS No. 142), goodwill and intangible assets with indefinite lives are not amortized; rather, they are tested for impairment on at least an annual basis. Additionally, intangible assets with finite lives continue to be amortized over their useful lives.
The Companys operating segments of Aerospace Systems and Aftermarket Services are also the reporting units under SFAS No. 142. Each operating segment has a president who is responsible for managing the segment and reporting to the president and CEO of the Company, the Companys Chief Operating Decision Maker (CODM), as defined in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Each of the operating segments is comprised of a number of operating units which are considered to be components under SFAS No. 142. The operating units, for which discrete financial information is available, are aggregated for purposes of goodwill impairment testing. The Companys acquisition strategy is to acquire companies that complement and enhance the capabilities of the operating segments of the Company. Each acquisition is assigned to either the Aerospace Systems reporting unit or the Aftermarket Services reporting unit. The goodwill that results from each acquisition is also assigned to the reporting unit to which the acquisition is allocated, because it is that reporting unit which is intended to benefit from the synergies of the acquisition.
SFAS No. 142 requires a two-step impairment test for goodwill. The first step is to compare the carrying amount of the reporting units assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then the second step is required to be completed, which involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. The determination of the fair value of our reporting units is based, among other things, on estimates of
future operating performance of the reporting unit being valued. We are required to complete an impairment test for goodwill and record any resulting impairment losses annually. Changes in market conditions, among other factors, may have an impact on these estimates. We completed our required annual impairment test in the fourth quarter of fiscal 2007 and determined that there was no impairment. For our impairment test, we use market multiples from an external source for an average of stock price to earnings before interest, taxes, depreciation and amortization (EBITDA) for certain companies in the aerospace and defense markets in computing the fair value of each reporting unit. In the event that market multiples for stock price to EBITDA in the aerospace and defense markets decrease, or the expected EBITDA for our reporting units decreases, a goodwill impairment charge may be required, which would adversely affect our operating results and financial condition. No impairment charges have been incurred since the adoption of SFAS No. 142.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers Accounting for Defined Benefit and Other Postretirement Plans. This statement amends SFAS Nos. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in the statement of financial position, and to recognize annual changes in gains or losses, prior service costs, or other credits that have not been recognized as a component of net periodic pension cost, net of tax, through comprehensive income. SFAS No. 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of its year-end statement of financial position, with limited exceptions.
The recognition and disclosures under SFAS No. 158 are required as of the end of fiscal years ending after December 15, 2006, while the new measurement date is effective for fiscal years ending after December 15, 2008. The Company adopted the recognition and disclosure provisions of this statement as of March 31, 2007 and included in accumulated other comprehensive income, net of tax, as of March 31, 2007, the gains and losses and prior service costs and credits that, pursuant to SFAS No. 87 and 106, have not been recognized as components of net periodic benefit costs. The Company also recognized in its consolidated balance sheet a liability that represents the funded status of its various defined benefit pension and postretirement plans. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the affect of adopting the recognition and disclosure provisions of this statement.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (FIN 48). FIN 48 creates a single model to address accounting for uncertainty in tax positions, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company will adopt FIN 48 as of April 1, 2007, as required. The cumulative effect of adopting FIN 48 will be recorded to retained earnings. The Company is continuing to evaluate the potential impact of adopting FIN 48.
In March 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-10 (EITF 06-10), Accounting for Collateral Assignment Split-Dollar Life Insurance Agreements. EITF 06-10 provides guidance for determining a liability for the postretirement benefit obligation as well as recognition and measurement of the associated asset on the basis of the terms of the collateral assignment agreement. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact the adoption of the EITF will have on the Companys results of operations or financial condition.
Share Based Compensation
Through March 31, 2006, the Company used the accounting method set forth in Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, generally, when the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost is recognized.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which requires companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. The Company adopted SFAS No. 123R, using the modified-prospective transition method, beginning on April 1, 2006, and therefore began to expense the fair value of all outstanding options over their remaining vesting periods to the extent the options were not fully vested as of the adoption date and began to expense the fair value of all options granted subsequent to March 31, 2006 over their requisite service periods. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow ($1.9 million for fiscal year ended March 31, 2007), rather than an operating cash flow. Stock-based compensation expense related to employee stock options recognized under SFAS No. 123R for fiscal 2007 was $2.5 million and, in accordance with Staff Accounting Bulletin (SAB) 107 the Company has classified share-based compensation within selling, general and administrative expenses to correspond with the same line item as the majority of the cash compensation paid to employees. Previous periods have not been restated. The Company estimates it will record share-based compensation expense of approximately $3.6 million in fiscal 2008. This estimate may be impacted by potential changes to the structure of the Companys share-based compensation plans which could impact the number of stock options granted in fiscal 2008, changes in valuation assumptions, and changes in the market price of the Companys common stock, among other things and, as a result, the actual share-based compensation expense in fiscal 2008 may differ from the Companys current estimate. (See Note 11 of Notes to Consolidated Financial Statements for further details).
Our primary exposure to market risk consists of changes in interest rates on borrowings. An increase in interest rates would adversely affect our operating results and the cash flow available after debt service to fund operations and expansion. In addition, an increase in interest rates would adversely affect our ability to pay dividends on our common stock, if permitted to do so under certain of our debt arrangements, including the Credit Facility. We manage exposure to interest rate fluctuations by optimizing the use of fixed and variable rate debt. The information below summarizes our market risks associated with debt obligations and should be read in conjunction with Note 7 of Notes to Consolidated Financial Statements.
The following table presents principal cash flows and the related interest rates. Fixed interest rates disclosed represent the weighted average rate as of March 31, 2007. Variable interest rates disclosed fluctuate with the LIBOR, federal funds rates and other weekly rates and represent the weighted average rate at March 31, 2007.