TDG Transdigm Group Incorporated

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the quarterly period ended June 27, 2020

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

For the transition period from             to            

Commission File Number 001-32833

TransDigm Group Incorporated

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

41-2101738

(I.R.S. Employer Identification No.)

1301 East 9th Street,

Suite 3000,

Cleveland,

Ohio

44114

(Address of principal executive offices)

(Zip Code)

(216) 706-2960

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares outstanding of TransDigm Group Incorporated’s common stock, par value $.01 per share, was 54,206,278 as of July 22, 2020.

INDEX

 

									Page
Part I						FINANCIAL INFORMATION
			Item 1			Financial Statements
						Condensed Consolidated Balance Sheets – June 27, 2020 and September 30, 2019			1
						Condensed Consolidated Statements of (Loss) Income – Thirteen and Thirty-Nine Week Periods Ended June 27, 2020 and June 29, 2019			2
						Condensed Consolidated Statements of Comprehensive Income – Thirteen and Thirty-Nine Week Periods Ended June 27, 2020 and June 29, 2019			3
						Condensed Consolidated Statements of Changes in Stockholders’ Deficit – Thirteen and Thirty-Nine Week Periods Ended June 27, 2020 and June 29, 2019			4
						Condensed Consolidated Statements of Cash Flows – Thirty-Nine Week Periods Ended June 27, 2020 and June 29, 2019			6
						Notes to Condensed Consolidated Financial Statements			7
			Item 2			Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
			Item 3			Quantitative and Qualitative Disclosure About Market Risk			51
			Item 4			Controls and Procedures			51
Part II						OTHER INFORMATION			52
			Item 1			Legal Proceedings			52
			Item 1A			Risk Factors			52
			Item 2			Unregistered Sales of Equity Securities and Use of Proceeds			52
			Item 6			Exhibits			53
SIGNATURES									54

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share amounts)

(Unaudited)

			June 27, 2020						September 30, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	4,549					$	1,467
Trade accounts receivable—Net			726						1,068
Inventories—Net			1,344						1,233
Assets held-for-sale			—						962
Prepaid expenses and other			152						135
Total current assets			6,771						4,865
PROPERTY, PLANT AND EQUIPMENT—NET			744						757
GOODWILL			7,858						7,820
OTHER INTANGIBLE ASSETS—NET			2,634						2,744
DEFERRED INCOME TAXES			12						—
OTHER			160						69
TOTAL ASSETS			$	18,179					$	16,255
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt			$	279					$	80
Short-term borrowings—trade receivable securitization facility			350						350
Accounts payable			231						276
Accrued liabilities			791						675
Liabilities held-for-sale			—						157
Total current liabilities			1,651						1,538
LONG-TERM DEBT			19,410						16,469
DEFERRED INCOME TAXES			372						441
OTHER NON-CURRENT LIABILITIES			925						691
Total liabilities			22,358						19,139
TD GROUP STOCKHOLDERS’ DEFICIT:
Common stock - $.01 par value; authorized 224,400,000 shares; issued 58,380,866 and 57,623,311 at June 27, 2020 and September 30, 2019, respectively			1						1
Additional paid-in capital			1,527						1,379
Accumulated deficit			(4,427)						(3,120)
Accumulated other comprehensive loss			(490)						(379)
Treasury stock, at cost; 4,198,226 and 4,161,326 shares at June 27, 2020 and September 30, 2019, respectively			(794)						(775)
Total TD Group stockholders’ deficit			(4,183)						(2,894)
NONCONTROLLING INTERESTS			4						10
Total stockholders' deficit			(4,179)						(2,884)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT			$	18,179					$	16,255

See Notes to Condensed Consolidated Financial Statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(Amounts in millions, except per share amounts)

(Unaudited) 

			Thirteen Week Periods Ended																		Thirty-Nine Week Periods Ended
			June 27, 2020						June 29, 2019						June 27, 2020						June 29, 2019
NET SALES			$	1,022					$	1,521					$	3,930					$	3,682
COST OF SALES			531						808						1,819						1,755
GROSS PROFIT			491						713						2,111						1,927
SELLING AND ADMINISTRATIVE EXPENSES			163						252						544						535
AMORTIZATION OF INTANGIBLE ASSETS			42						38						128						80
INCOME FROM OPERATIONS			286						423						1,439						1,312
INTEREST EXPENSE - NET			262						241						762						614
REFINANCING COSTS			1						—						27						3
OTHER INCOME			(11)						(1)						(14)						(1)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			34						183						664						696
INCOME TAX PROVISION			39						55						112						172
(LOSS) INCOME FROM CONTINUING OPERATIONS			(5)						128						552						524
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX			(1)						17						66						19
NET (LOSS) INCOME			(6)						145						618						543
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			—						—						(1)						—
NET (LOSS) INCOME ATTRIBUTABLE TO TD GROUP			$	(6)					$	145					$	617					$	543
NET (LOSS) INCOME APPLICABLE TO TD GROUP COMMON STOCKHOLDERS			$	(6)					$	145					$	432					$	519
(Loss) Earnings per share attributable to TD Group common stockholders:
(Loss) Earnings per share from continuing operations - basic and diluted			$	(0.09)					$	2.27					$	6.38					$	8.87
(Loss) Earnings per share from discontinued operations - basic and diluted			(0.01)						0.30						1.15						0.35
(Loss) Earnings per share			$	(0.10)					$	2.57					$	7.53					$	9.22
Cash dividends declared per common share			$	—					$	—					$	32.50					$	—
Weighted-average shares outstanding:
Basic and diluted			57.3						56.3						57.4						56.3

See Notes to Condensed Consolidated Financial Statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

			Thirteen Week Periods Ended																		Thirty-Nine Week Periods Ended
			June 27, 2020						June 29, 2019						June 27, 2020						June 29, 2019
Net (loss) income			$	(6)					$	145					$	618					$	543
Less: Net income attributable to noncontrolling interests			—						—						(1)						—
Net (loss) income attributable to TD Group			$	(6)					$	145					$	617					$	543
Other comprehensive income (loss), net of tax:
Foreign currency translation			27						51						19						27
Unrealized loss on derivatives			(14)						(70)						(136)						(207)
Pensions and other postretirement benefits			—						—						6						—
Other comprehensive income (loss), net of tax, attributable to TD Group			13						(19)						(111)						(180)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO TD GROUP			$	7					$	126					$	506					$	363

See Notes to Condensed Consolidated Financial Statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Amounts in millions, except share amounts)

(Unaudited)

			TD Group Stockholders
			Common Stock																		Additional Paid-In Capital												Accumulated Other Comprehensive Income (Loss)						Treasury Stock
			Number of Shares						Par Value															Accumulated Deficit															Number of Shares						Value						Non-controlling Interests						Total
BALANCE, SEPTEMBER 30, 2018			56,895,686						$	1					$	1,209					$	(2,247)					$	4					(4,161,326)						$	(775)					$	—					$	(1,808)
Cumulative effect of ASC 606 and ASU 2016-16, adopted October 1, 2018			—						—						—						3						—						—						—						—						3
Accrued unvested dividend equivalents and other			—						—						—						(3)						—						—						—						—						(3)
Compensation expense recognized for employee stock options			—						—						16						—						—						—						—						—						16
Exercise of employee stock options			109,695						—						14						—						—						—						—						—						14
Net income attributable to TD Group			—						—						—						196						—						—						—						—						196
Foreign currency translation adjustments, net of tax			—						—						—						—						(11)						—						—						—						(11)
Unrealized loss on derivatives, net of tax			—						—						—						—						(74)						—						—						—						(74)
BALANCE, DECEMBER 29, 2018			57,005,381						$	1					$	1,239					$	(2,051)					$	(81)					(4,161,326)						$	(775)					$	—					$	(1,667)
Noncontrolling interests assumed related to acquisitions			—						—						—						—						—						—						—						9						9
Accrued unvested dividend equivalents and other			—						—						—						(2)						—						—						—						—						(2)
Compensation expense recognized for employee stock options			—						—						19						—						—						—						—						—						19
Exercise of employee stock options			298,240						—						33						—						—						—						—						—						33
Common stock issued			476						—						—						—						—						—						—						—						—
Net income attributable to TD Group			—						—						—						202						—						—						—						—						202
Foreign currency translation adjustments, net of tax			—						—						—						—						(13)						—						—						—						(13)
Unrealized loss on derivatives, net of tax			—						—						—						—						(63)						—						—						—						(63)
BALANCE, MARCH 30, 2019			57,304,097						$	1					$	1,291					$	(1,851)					$	(157)					(4,161,326)						$	(775)					$	9					$	(1,482)
Noncontrolling interests assumed related to acquisitions			—						—						—						—						—						—						—						1						1
Accrued unvested dividend equivalents and other			—						—						—						(4)						—						—						—						—						(4)
Compensation expense recognized for employee stock options			—						—						31						—						—						—						—						—						31
Exercise of employee stock options			146,109						—						17						—						—						—						—						—						17
Net income attributable to TD Group			—						—						—						145						—						—						—						—						145
Foreign currency translation adjustments, net of tax			—						—						—						—						51						—						—						—						51
Unrealized loss on derivatives, net of tax			—						—						—						—						(70)						—						—						—						(70)
BALANCE, JUNE 29, 2019			57,450,206						$	1					$	1,339					$	(1,710)					$	(176)					(4,161,326)						$	(775)					$	10					$	(1,311)

See Notes to Condensed Consolidated Financial Statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Amounts in millions, except share amounts)

(Unaudited)

			TD Group Stockholders
			Common Stock																		Additional Paid-In Capital												Accumulated Other Comprehensive (Loss) Income						Treasury Stock
			Number of Shares						Par Value															Accumulated Deficit															Number of Shares						Value						Non-controlling Interests						Total
BALANCE, SEPTEMBER 30, 2019			57,623,311						$	1					$	1,379					$	(3,120)					$	(379)					(4,161,326)						$	(775)					$	10					$	(2,884)
Noncontrolling interests attributable to divestiture			—						—						—						—						—						—						—						(6)						(6)
Special dividends and vested dividend equivalents declared			—						—						—						(1,864)						—						—						—						—						(1,864)
Accrued unvested dividend equivalents and other			—						—						—						(19)						—						—						—						—						(19)
Compensation expense recognized for employee stock options			—						—						23						—						—						—						—						—						23
Exercise of employee stock options			169,470						—						20						—						—						—						—						—						20
Net income attributable to TD Group			—						—						—						304						—						—						—						—						304
Foreign currency translation adjustments, net of tax			—						—						—						—						98						—						—						—						98
Unrealized gain on derivatives, net of tax			—						—						—						—						23						—						—						—						23
Pensions and other postretirement benefits adjustments, net of tax			—						—						—						—						6						—						—						—						6
BALANCE, DECEMBER 28, 2019			57,792,781						$	1					$	1,422					$	(4,699)					$	(252)					(4,161,326)						$	(775)					$	4					$	(4,299)
Accrued unvested dividend equivalents and other			—						—						—						(21)						—						—						—						—						(21)
Compensation expense recognized for employee stock options			—						—						17						—						—						—						—						—						17
Exercise of employee stock options			440,793						—						49						—						—						—						—						—						49
Treasury stock purchased			—						—						—						—						—						(36,900)						(19)						—						(19)
Net income attributable to TD Group			—						—						—						319						—						—						—						—						319
Foreign currency translation adjustments, net of tax			—						—						—						—						(106)						—						—						—						(106)
Unrealized loss on derivatives, net of tax			—						—						—						—						(145)						—						—						—						(145)
BALANCE, MARCH 28, 2020			58,233,574						$	1					$	1,488					$	(4,401)					$	(503)					(4,198,226)						$	(794)					$	4					$	(4,205)
Accrued unvested dividend equivalents and other			—						—						—						(20)						—						—						—						—						(20)
Compensation expense recognized for employee stock options			—						—						19						—						—						—						—						—						19
Exercise of employee stock options			147,292						—						20						—						—						—						—						—						20
Net loss attributable to TD Group			—						—						—						(6)						—						—						—						—						(6)
Foreign currency translation adjustments, net of tax			—						—						—						—						27						—						—						—						27
Unrealized loss on derivatives, net of tax			—						—						—						—						(14)						—						—						—						(14)
BALANCE, JUNE 27, 2020			58,380,866						$	1					$	1,527					$	(4,427)					$	(490)					(4,198,226)						$	(794)					$	4					$	(4,179)

See Notes to Condensed Consolidated Financial Statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

			Thirty-Nine Week Periods Ended
			June 27, 2020						June 29, 2019
OPERATING ACTIVITIES:
Net income			$	618					$	543
Net income from discontinued operations			(66)						(19)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			83						57
Amortization of intangible assets			128						80
Amortization of debt issuance costs, original issue discount and premium			25						20
Amortization of inventory step-up			—						109
Amortization of loss contract reserves			(32)						(10)
Refinancing costs			27						3
Non-cash equity compensation			59						70
Deferred income taxes			(17)						5
Changes in assets/liabilities, net of effects from acquisitions of businesses:
Trade accounts receivable			347						(65)
Inventories			(126)						(100)
Income taxes receivable/payable			(49)						(9)
Other assets			6						(24)
Accounts payable			(48)						(7)
Accrued interest			109						95
Accrued and other liabilities			(73)						20
Net cash provided by operating activities			991						768
INVESTING ACTIVITIES:
Capital expenditures			(62)						(80)
Payments made in connection with acquisitions, net of cash acquired			—						(3,957)
Proceeds in connection with the sale of discontinued operations, net			904						—
Net cash provided by (used in) investing activities			842						(4,037)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options			89						64
Dividends and dividend equivalent payments			(1,928)						(24)
Treasury stock purchased			(19)						—
Proceeds from revolving credit facility			200						—
Repayments on term loans			(38)						(57)
Cash tender and redemption of senior subordinated notes due 2020			—						(550)
Redemption of senior subordinated notes due 2022, net			(1,168)						—
Proceeds from 7.50% senior subordinated notes due 2027, net			—						544
Proceeds from 5.50% senior subordinated notes due 2027, net			2,625						—
Proceeds from 8.00% senior secured notes due 2025, net			1,092						—
Proceeds from 6.25% senior secured notes due 2026, net			401						3,936
Financing fees and other, net			(9)						(1)
Net cash provided by financing activities			1,245						3,912
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			4						1
NET INCREASE IN CASH AND CASH EQUIVALENTS			3,082						644
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			1,467						2,073
CASH AND CASH EQUIVALENTS, END OF PERIOD			$	4,549					$	2,717
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest			$	638					$	533
Cash paid during the period for income taxes, net of refunds			$	194					$	183

See Notes to Condensed Consolidated Financial Statements

TRANSDIGM GROUP INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THIRTY-NINE WEEK PERIODS ENDED JUNE 27, 2020 AND JUNE 29, 2019

(UNAUDITED)

1. DESCRIPTION OF THE BUSINESS AND IMPACT OF COVID-19 PANDEMIC

Description of the Business

TransDigm Group Incorporated (“TD Group”), through its wholly-owned subsidiary, TransDigm Inc., is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly every commercial and military aircraft in service today. TransDigm Inc., along with TransDigm Inc.’s direct and indirect wholly-owned operating subsidiaries (collectively, with TD Group, the “Company” or “TransDigm”), offers a broad range of proprietary aerospace components. TD Group has no significant assets or operations other than its 100% ownership of TransDigm Inc. TD Group’s common stock is listed on the New York Stock Exchange, or the NYSE, under the trading symbol “TDG.”

TransDigm's major product offerings, substantially all of which are ultimately provided to end-users in the aerospace industry, include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, databus and power controls, cockpit security components and systems, specialized and advanced cockpit displays, aircraft audio systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products, switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems.

Impact of COVID-19 Pandemic

In December 2019, a novel strain of coronavirus ("COVID-19") surfaced in Wuhan, China, and has since spread to other countries, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally.

Cost Mitigation Measures

As part of the Company’s response to the impact of the COVID-19 pandemic on its business, the Company began taking certain cost reduction measures in the third quarter of fiscal 2020 such as: (1) reducing its workforce by at least 30% to align operations with customer demand. These actions are in addition to the cost mitigation efforts implemented earlier this calendar year in response to the 737 MAX production rate changes; (2) implementing unpaid furloughs of various lengths at many businesses over approximately the next six months in response to business specific situations; (3) TransDigm’s senior management team substantially reducing its cash compensation for the balance of fiscal 2020; (4) members of TransDigm's Board of Directors forgoing their annual retainer fees for fiscal 2020; and (5) delaying non-essential capital projects and minimizing discretionary spending to only those activities and projects deemed essential in the near term.

For the thirteen and thirty-nine week periods ended June 27, 2020, COVID-19 restructuring costs incurred were approximately $24 million, of which $19 million was recorded in cost of sales and $5 million was recorded in selling and administrative expenses. These were costs related to the Company's actions to reduce its workforce to align with customer demand. Additionally, the Company incurred approximately $3 million in incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment, etc.).

As of June 27, 2020 the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was immaterial. The Company expects to incur restructuring and incremental costs of between approximately $40 million to $60 million during fiscal 2020 related to the COVID-19 pandemic. The Company continues to analyze its cost structure and may implement additional cost reduction measures as necessary due to the ongoing business challenges resulting from the COVID-19 pandemic.

Interim Impairment Testing

US GAAP requires that both indefinite-lived intangible assets and goodwill are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not (i.e., a likelihood greater than 50%) that the intangible asset or the reporting unit is impaired. Therefore, during interim periods, ASC 350 requires companies to focus on those events and circumstances that affect significant inputs used to determine the fair value of the asset, asset group or reporting unit to determine whether an interim quantitative impairment test is required. Given the adverse global economic and market conditions attributable to the COVID-19 pandemic, particularly as it pertains to the commercial sector of the aerospace and defense industry, the Company determined that an interim impairment evaluation of goodwill and indefinite-lived intangible assets was necessary as of March 28, 2020 for certain reporting units in which it was concluded a potential impairment existed.

For the identified reporting units, a Step 1 impairment test was performed using an income approach based on management’s determination of the prospective financial information with consideration taken of the existing uncertainty in the global economy and aerospace and defense industry, particularly the commercial sector. Management also included projected declines and subsequent recovery in commercial OEM and aftermarket as a percentage of sales based on available industry data. The Company utilized a third party valuation firm to assist in the determination of the weighted average cost of capital. For each indefinite-lived intangible asset and reporting unit tested, the fair value exceeded carrying value by at least approximately 80%.

As a result of the interim impairment testing performed as of March 28, 2020, no indefinite-lived intangible assets or goodwill was determined to be impaired. We updated our assessment during the third quarter of fiscal 2020 and validated that the assumptions used in the analyses performed as of March 28, 2020 and the resulting conclusions remained appropriate as of June 27, 2020.

CARES Act

On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The most significant impact of the CARES Act for the Company is an increase of the IRC 163(j) Interest Disallowance Limitations from 30% to 50% of adjusted taxable income which will allow the Company to deduct additional interest expense for fiscal years 2020 and 2021. The CARES Act is further described in Note 10, "Income Taxes." The Company continues to assess the impact of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.

2. UNAUDITED INTERIM FINANCIAL INFORMATION

The financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations and cash flows for the interim periods presented. These financial statements and notes should be read in conjunction with the financial statements and related notes for the year ended September 30, 2019 included in TD Group’s Form 10-K filed on November 19, 2019. As disclosed therein, the Company’s annual consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“US GAAP”). The September 30, 2019 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the thirty-nine week period ended June 27, 2020 are not necessarily indicative of the results to be expected for the full year.

Historical information has been retrospectively adjusted to reflect the classification of discontinued operations. Discontinued operations are further described in Note 3, "Acquisitions and Divestitures," and Note 18, "Discontinued Operations."

3. ACQUISITIONS AND DIVESTITURES

During the fiscal year ended September 30, 2019, the Company completed the acquisitions of Esterline Technologies Corporation ("Esterline") and substantially all of the assets and technical data rights of the Stormscope product line from L3Harris Technologies, Inc. ("Stormscope") and NavCom Defense Electronics ("NavCom"). The Company accounted for the acquisitions using the acquisition method and included the results of operations of the acquisitions in its condensed consolidated financial statements from the effective date of each acquisition.

The acquisitions strengthen and expand the Company’s position to design, produce and supply highly engineered proprietary aerospace components in niche markets with significant aftermarket content and provide opportunities to create value through the application of our three core value-driven operating strategies (obtaining profitable new business, improving our cost structure, and providing highly engineered value-added products to customers). The purchase price paid for each acquisition reflects the current earnings before interest, taxes, depreciation and amortization (EBITDA) and cash flows, as well as the future EBITDA and cash flows expected to be generated by the business, which are driven in most cases by the recurring aftermarket consumption over the life of a particular aircraft, estimated to be approximately 25 to 30 years.

Acquisitions

Esterline – On March 14, 2019, TransDigm completed the acquisition of all the outstanding stock of Esterline for $122.50 per share in cash, plus the payoff of Esterline debt. The purchase price, net of cash acquired of approximately $398.2 million, totaled approximately $3,923.9 million. Of the $3,923.9 million purchase price, $3,536.3 million was paid at closing and the remaining $387.6 million was classified as restricted cash for the redemption of the outstanding senior notes due 2023 (herein the "2023 Notes"). The 2023 Notes were redeemed on April 15, 2019. Esterline, through its subsidiaries, was an industry leader in specialized manufacturing for the aerospace and defense industry primarily within three core disciplines: advanced materials, avionics and controls and sensors and systems. The acquisition of Esterline expands TransDigm's platform of proprietary and sole source content for the aerospace and defense industry. TransDigm evaluated the strategic fit and description of each Esterline reporting unit to determine the appropriate business segment for the reporting unit. Each Esterline reporting unit is included in one of TransDigm's segments: Power and Control, Airframe, or Non-aviation. Refer to Note 13, "Segments," for additional information about the Company's segments.

The total purchase price of Esterline was allocated to the underlying assets acquired and liabilities assumed based upon the respective fair value at the date of acquisition. To the extent the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill. Allocations were based on the acquisition method of accounting and third-party valuation appraisals.

Except where otherwise noted in the notes to the condensed consolidated financial statements, changes in balances and activity where comparable periods are presented in the condensed consolidated financial statements are generally driven by the Esterline acquisition.

The allocation of the fair value of the assets acquired and liabilities assumed in the Esterline acquisition as of the acquisition date of March 14, 2019 is summarized in the table below (in millions).

Of the approximately $2.3 billion of goodwill recognized for the acquisition, approximately $25.6 million is deductible for tax purposes. Also, of the approximately $1.3 billion of other intangible assets recognized for the acquisition, approximately $48.9 million is deductible for tax purposes.

In connection with the Esterline acquisition, we acquired existing long-term contracts with customers that were incurring gross margin losses as of the date of acquisition. Based on our review of these contracts, we concluded that the terms of certain of these loss-making contracts were unfavorable when compared to market terms as of the acquisition date. As a result, we recognized loss contract reserves of $267.9 million as of the acquisition date based on the present value of the difference between the contractual cash flows of the existing long-term contracts and the estimated cash flows had the contracts been executed at market terms as of the acquisition date. These adjustments applied only to contracts generating a negative margin as of the date of acquisition. As of September 30, 2019, we reclassified $9.3 million in loss contract reserves to liabilities held-for-sale, as it pertained to Souriau-Sunbank. Significant assumptions used to determine the fair value of the loss contract reserves using the discounted cash flow model include discount rates, forecasted quantities of products to be sold under the long-term contracts and market prices for respective products. While the Company conservatively selected values for these assumptions, they were forward looking and could be affected by future economic and market conditions. The loss contract reserves are amortized and recorded as an offset to cost of sales over the life of the contracts as actual sales occur under the long-term contracts. Approximately $26.0 million was amortized and recorded as an offset to cost of sales in the condensed consolidated statement of (loss) income for the thirty-nine week period ended June 27, 2020. Total loss contract reserves related to the Esterline acquisition are $205.3 million and $231.8 million at June 27, 2020 and September 30, 2019, respectively, of which $33.4 million and $60.0 million is classified in accrued liabilities and $171.9 million and $171.8 million is classified in other non-current liabilities in the condensed consolidated balance sheets at June 27, 2020 and September 30, 2019, respectively.

Extant Acquisitions – On August 30, 2019, the Company's Extant subsidiary completed the acquisition of substantially all of the assets and technical data rights of the Stormscope product line from L3Harris Technologies, Inc. for approximately $20 million in cash. Stormscope is a lightning detection system for the general aviation and business jet markets. Stormscope is included as a product line of Extant, which is included in TransDigm's Power and Control segment. Approximately $11.1 million of goodwill and approximately $7.5 million of other intangible assets recognized for the acquisition is deductible for tax purposes over 15 years.

On October 1, 2018, the Company's Extant subsidiary completed the acquisition of substantially all of the assets and technical data rights from the Corona, California operations of NavCom for approximately $27 million in cash. NavCom develops, manufactures, and supports high-reliability, mission-critical electronics, avionics and sub-assemblies. NavCom is included as a product line of Extant, which is included in TransDigm's Power and Control segment. Approximately $9.0 million of goodwill recognized for the acquisition is deductible for tax purposes over 15 years.

Pro forma net sales and results of operations for the Extant acquisitions had they occurred at the beginning of the applicable thirty-nine week periods ended June 27, 2020 and June 29, 2019 are not material and, accordingly, are not provided.

Divestitures

Souriau-Sunbank – On December 20, 2019, TransDigm completed the divestiture of the Souriau-Sunbank Connection Technologies business (“Souriau-Sunbank”) to Eaton Corporation plc (“Eaton”) for approximately $920 million. Souriau-Sunbank was acquired by TransDigm as part of its acquisition of Esterline in March 2019.

Esterline Interface Technology Group – On September 20, 2019, TransDigm completed the divestiture of its Esterline Interface Technology (“EIT”) group of businesses to an affiliate of KPS Capital Partners, LP for approximately $190 million, which included a working capital settlement of $0.7 million that was paid in February 2020. EIT was acquired by TransDigm as part of its acquisition of Esterline in March 2019.

Refer to Note 18, "Discontinued Operations," for further information on the Company's divestitures.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, “Leases (ASC 842),” which requires lessees to recognize a right-of-use asset and lease liability for all leases with a term of more than 12 months. ASU 2016-02 was effective for the Company on October 1, 2019, and required a modified retrospective application. In July 2018, the FASB issued ASU 2018-11, “Leases (ASC 842) Targeted Improvements,” which provided an additional transition method that allowed entities to initially apply the new standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. The Company has completed the necessary changes to the consolidated financial statements and related disclosures, internal controls, financial policies and information systems. On October 1, 2019, the Company adopted ASC 842 and related amendments using the modified retrospective method. Results for reporting periods beginning after October 1, 2019, are presented under ASC 842, while prior period amounts continue to be reported under ASC 840, “Leases." The Company elected to apply the package of practical expedients permitted within the new standard, which among other things, allows the carry forward of historical lease classification of existing leases. Additionally, the adoption of the new standard resulted in the recording of lease assets and lease liabilities for operating leases of $99 million and $105 million, respectively, as of October 1, 2019. The effects of our transition to ASC 842 resulted in no cumulative adjustment to retained earnings in the period of adoption. The adoption of the standard did not have a material impact on our condensed consolidated statements of (loss) income or cash flows. Refer to Note 16, "Leases," for additional disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)," which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after October 1, 2020. The adoption of this standard is not expected to have a material impact on our consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” to eliminate Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for the Company for fiscal years beginning after October 1, 2020. The adoption of this standard is not expected to have a material impact on our consolidated financial statements and disclosures.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) - Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify US GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements and disclosures.

In March 2020, the Securities and Exchange Commission adopted amendments to simplify the financial disclosure requirements for guarantors and issuers of guaranteed securities registered under Rule 3-10 of Regulation S-X. As permitted, the Company elected to early adopt these amendments during the third quarter of fiscal 2020. The amendments replace the condensed consolidating financial information with summarized financial information of the issuers and guarantors, require expanded qualitative disclosures with respect to information about guarantors, the terms and conditions of guarantees and the factors that may affect payment, and permit these disclosures to be provided outside the notes to the parent company’s annual and interim consolidated financial statements. The Company elected to provide this information in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform." This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in this ASU are effective through December 31, 2022. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements and disclosures.

5. REVENUE RECOGNITION

TransDigm's sales are concentrated in the aerospace industry. The Company’s customers include: distributors of aerospace components, commercial airlines, large commercial transport and regional and business aircraft OEMs, various armed forces of the United States and friendly foreign governments, defense OEMs, system suppliers, and various other industrial customers.

The majority of the Company's revenue is recorded at a point in time. Revenue is recognized from the sale of products when control transfers to the customer, which is demonstrated by our right to payment, a transfer of title, a transfer of the risk and rewards of ownership, or the customer acceptance, but most frequently upon shipment where the customer obtains physical possession of the goods.

In some contracts, control transfers to the customer over time, primarily in contracts where the customer is required to pay for the cost of both the finished and unfinished goods at the time of cancellation plus a reasonable profit relative to the work performed for products that were customized for the customer. Therefore, we recognize revenue over time for those agreements that have a right to margin and where the products being produced have no alternative use. 

Based on our production cycle, it is generally expected that goods related to the revenue will be shipped and billed within the current year. For revenue recognized over time, we estimate the amount of revenue attributable to a contract earned at a given point during the production cycle based on certain costs, such as materials and labor incurred to date, plus the expected profit, which is a cost-to-cost input method.

The Company’s payment terms vary by the type and location of the customer and the products or services offered. The Company does not offer any payment terms that would meet the requirements for consideration as a significant financing component.

Shipping and handling fees and costs incurred in connection with products sold are recorded in cost of sales in the condensed consolidated statements of (loss) income, and are not considered a performance obligation to our customers.

The Company pays sales commissions that relate to contracts for products or services that are satisfied at a point in time or over a period of one year or less and are expensed as incurred. These costs are reported as a component of selling and administrative expenses in the unaudited condensed consolidated statements of (loss) income.

Contract Assets and Liabilities - Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing or reimbursable costs related to a specific contract. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. The following table summarizes our contract assets and liabilities balances (in millions):

⁽¹⁾Included in prepaid expenses and other on the condensed consolidated balance sheets.

⁽²⁾Included in other non-current assets on the condensed consolidated balance sheets.

⁽³⁾Included in accrued liabilities on the condensed consolidated balance sheets.

⁽⁴⁾Included in other non-current liabilities on the condensed consolidated balance sheets.

For the thirteen and thirty-nine week periods ended June 27, 2020, the revenue recognized that was previously included in contract liabilities was not material.

Refer to Note 13, “Segments,” for disclosures related to the disaggregation of revenue.

6. (LOSS) EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted (loss) earnings per share (in millions, except per share data) using the two-class method:

7. INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost of inventories is generally determined by the average cost and the first-in, first-out (FIFO) methods and includes material, labor and overhead related to the manufacturing process.

Inventories consist of the following (in millions):

8. INTANGIBLE ASSETS

Other intangible assets - net in the condensed consolidated balance sheets consist of the following (in millions):

The aggregate amortization expense on identifiable intangible assets for the thirty-nine week periods ended June 27, 2020 and June 29, 2019 was approximately $128 million and $80 million, respectively. The estimated amortization expense is $172 million for fiscal year 2020, $115 million for fiscal year 2021 and $114 million for each of the four succeeding fiscal years 2022 through 2025.

The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2019 through June 27, 2020 (in millions):

The purchase price allocation adjustments relate to opening balance sheet adjustments recorded by the sixteen reporting units acquired from Esterline up to the expiration of the one year measurement period in March 2020.

9. DEBT

The Company’s debt consists of the following (in millions):