|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
September 30, 2019
|
|
|
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
Interest rate cap agreements
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Interest rate swap agreements (1)
|
|
—
|
|
|
(395)
|
|
|
—
|
|
|
(216)
|
|
Net derivatives as classified in the balance sheet (2)
|
|
$
|
—
|
|
|
$
|
(395)
|
|
|
$
|
1
|
|
|
$
|
(216)
|
|
(1)The increase in the interest rate swap liability is primarily attributable to a downward trend in the LIBO rate during the second and third quarters of fiscal 2020.
(2)Refer to Note 11, "Fair Value Measurements," for the condensed consolidated balance sheet classification of our interest rate swap and cap agreements.
Based on the fair values of the interest rate swap and cap agreements determined as of June 27, 2020, the estimated net amount of existing gains and losses and caplet amortization expected to be reclassified into interest expense within the next twelve months is approximately $50.2 million. Subsequent to the end of the third quarter of fiscal 2020, the $750 million notional amount interest rate swap agreement and the $750 million notional amount interest rate cap agreement, both with maturity dates of June 30, 2020, were settled. Upon the settlement of both agreements, the Company recognized interest expense of $2.5 million.
Foreign Currency Forward Exchange Contracts – The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At June 27, 2020, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $78.9 million. These notional values consist primarily of contracts for the Canadian dollar and the European euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. During the thirty-nine week period ended June 27, 2020, the Company recognized gains on foreign currency forward exchange contracts designated as fair value hedges of $2.2 million in cost of sales in the condensed consolidated statements of (loss) income. During the thirty-nine week period ended June 27, 2020, the gains reclassified on foreign currency forward exchange contracts designated as cash flow hedges in the condensed consolidated statements of (loss) income were immaterial. The gains (losses) were previously recorded as a component of accumulated other comprehensive income (loss).
During the thirty-nine week period ended June 27, 2020, the Company recorded a gain of $3.7 million on foreign currency forward exchange contracts that have not been designated as accounting hedges. These foreign currency exchange gains are included in selling and administrative expenses.
There was an immaterial impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the thirty-nine week period ended June 27, 2020. In addition, there was an immaterial impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the thirty-nine week period ended June 27, 2020.
Amounts related to foreign currency forward exchange contracts included in accumulated other comprehensive income (loss) in stockholders' deficit are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $6.0 million of net losses into earnings over the next 12 months. The maximum duration of the Company’s foreign currency cash flow hedge contracts at June 27, 2020 is 9 months.
13. SEGMENTS
The Company’s businesses are organized and managed in three reporting segments: Power & Control, Airframe and Non-aviation.
The Power & Control segment includes operations that primarily develop, produce and market systems and components that predominately provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies. Major product offerings 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, databus and power controls, advanced sensor products, switches and relay panels, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Primary customers of this segment are engine and power system and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.
The Airframe segment includes operations that primarily develop, produce and market systems and components that are used in non-power airframe applications utilizing airframe and cabin structure technologies. Major product offerings include engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, 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, thermal protection and insulation, lighting and control technology and parachutes. Primary customers of this segment are airframe manufacturers and cabin system suppliers and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.
The Non-aviation segment includes operations that primarily develop, produce and market products for non-aviation markets. Major product offerings include headsets for high-noise, medium-noise, and dismounted applications, seat belts and safety restraints for ground transportation applications, mechanical/electro-mechanical actuators and controls for space applications, hydraulic/electromechanical actuators and fuel valves for land based gas turbines, and refueling systems for heavy equipment used in mining, construction and other industries and turbine controls for the energy and oil and gas markets. Primary customers of this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers, manufacturers of heavy equipment used in mining, construction and other industries and turbine original equipment manufacturers, gas pipeline builders and electric utilities.
The Esterline businesses were acquired during the second quarter of fiscal 2019 and preliminarily assessed as a separate segment of the Company. During the third quarter of fiscal 2019, the Esterline businesses were integrated into TransDigm's existing Power & Control, Airframe, and Non-Aviation segments. Previously reported operating results for the Esterline businesses were reclassified to conform to the presentation for the thirteen and thirty-nine week periods ended June 29, 2019. The re-segmentation did not impact prior period results.
The primary measurement used by management to review and assess the operating performance of each segment is EBITDA As Defined. The Company defines EBITDA As Defined as earnings before interest, taxes, depreciation and amortization plus certain non-operating items recorded as corporate expenses including refinancing costs, acquisition-related costs, transaction-related costs, foreign currency gains and losses, and non-cash compensation charges incurred in connection with the Company’s stock incentive plans. Acquisition-related costs represent accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold; costs incurred to integrate acquired businesses and product lines into the Company’s operations, facility relocation costs and other acquisition-related costs; transaction related costs comprising deal fees; legal, financial and tax diligence expenses and valuation costs that are required to be expensed as incurred and other acquisition accounting adjustments.
EBITDA As Defined is not a measurement of financial performance under US GAAP. Although the Company uses EBITDA As Defined to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with US GAAP.
The Company’s segments are reported on the same basis used internally for evaluating performance and for allocating resources. The accounting policies for each segment are the same as those described in the summary of significant accounting policies in the Company’s consolidated financial statements. Intersegment sales and transfers are recorded at values based on market prices, which creates intercompany profit on intersegment sales or transfers that is eliminated in consolidation. Intersegment sales were immaterial for the periods presented below. Certain corporate-level expenses are allocated to the operating segments.
The following table presents net sales by reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
|
Net sales to external customers
|
|
|
|
|
|
|
|
Power & Control
|
|
|
|
|
|
|
|
Commercial OEM
|
$
|
118
|
|
|
$
|
198
|
|
|
$
|
493
|
|
|
$
|
475
|
|
Commercial Aftermarket
|
112
|
|
|
209
|
|
|
557
|
|
|
552
|
|
Defense
|
326
|
|
|
362
|
|
|
1,006
|
|
|
933
|
|
Total Power & Control
|
556
|
|
|
769
|
|
|
2,056
|
|
|
1,960
|
|
|
|
|
|
|
|
|
|
Airframe
|
|
|
|
|
|
|
|
Commercial OEM
|
155
|
|
|
261
|
|
|
628
|
|
|
568
|
|
Commercial Aftermarket
|
107
|
|
|
241
|
|
|
571
|
|
|
624
|
|
Defense
|
172
|
|
|
209
|
|
|
563
|
|
|
417
|
|
Total Airframe
|
434
|
|
|
711
|
|
|
1,762
|
|
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-aviation
|
32
|
|
|
41
|
|
|
112
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
$
|
1,022
|
|
|
$
|
1,521
|
|
|
$
|
3,930
|
|
|
$
|
3,682
|
|
The following table reconciles EBITDA As Defined by segment to consolidated income from continuing operations before income taxes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
|
EBITDA As Defined
|
|
|
|
|
|
|
|
Power & Control
|
$
|
270
|
|
|
$
|
378
|
|
|
$
|
1,036
|
|
|
$
|
1,006
|
|
Airframe
|
166
|
|
|
306
|
|
|
767
|
|
|
740
|
|
Non-aviation
|
12
|
|
|
13
|
|
|
39
|
|
|
36
|
|
Total segment EBITDA As Defined
|
448
|
|
|
697
|
|
|
1,842
|
|
|
1,782
|
|
Less: Unallocated corporate expenses
|
24
|
|
|
38
|
|
|
62
|
|
|
70
|
|
Total Company EBITDA As Defined
|
424
|
|
|
659
|
|
|
1,780
|
|
|
1,712
|
|
Depreciation and amortization expense
|
70
|
|
|
63
|
|
|
211
|
|
|
138
|
|
Interest expense - net
|
262
|
|
|
241
|
|
|
762
|
|
|
614
|
|
Acquisition-related costs
|
3
|
|
|
135
|
|
|
19
|
|
|
185
|
|
Non-cash stock compensation expense
|
21
|
|
|
32
|
|
|
59
|
|
|
70
|
|
Refinancing costs
|
1
|
|
|
—
|
|
|
27
|
|
|
3
|
|
COVID-19 & 737 MAX restructuring costs
|
30
|
|
|
—
|
|
|
30
|
|
|
—
|
|
Other, net
|
3
|
|
|
5
|
|
|
8
|
|
|
6
|
|
Income from continuing operations before income taxes
|
$
|
34
|
|
|
$
|
183
|
|
|
$
|
664
|
|
|
$
|
696
|
|
The following table presents total assets by segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
September 30, 2019
|
Total assets
|
|
|
|
Power & Control
|
$
|
7,001
|
|
|
$
|
7,037
|
|
Airframe
|
6,641
|
|
|
6,672
|
|
Non-aviation
|
251
|
|
|
262
|
|
Corporate
|
4,286
|
|
|
1,322
|
|
Assets of discontinued operations
|
—
|
|
|
962
|
|
|
$
|
18,179
|
|
|
$
|
16,255
|
|
The Company’s sales principally originate from the United States, and the Company’s long-lived assets are principally located in the United States.
14. RETIREMENT PLANS
The components of net periodic pension cost for the Company's defined benefit plans were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
|
|
June 29, 2019
|
|
|
|
June 27, 2020
|
|
|
|
June 29, 2019
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
Service cost
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Interest cost
|
3
|
|
|
1
|
|
|
3
|
|
|
1
|
|
|
8
|
|
|
4
|
|
|
5
|
|
|
2
|
|
Expected return on plan assets
|
(5)
|
|
|
(2)
|
|
|
(4)
|
|
|
(2)
|
|
|
(14)
|
|
|
(6)
|
|
|
(6)
|
|
|
(2)
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of actuarial loss
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Amortization of transition obligation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic pension cost
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
The net periodic pension cost for the Company's post-retirement pension plans was immaterial for the thirteen and thirty-nine week periods ended June 27, 2020 and June 29, 2019. The defined benefit plan components of total pension cost, other than service cost, are included in other expense in the Company's condensed consolidated statements of (loss) income.
15. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The following table presents the components of accumulated other comprehensive (loss) income, net of taxes, for the thirty-nine week period ended June 27, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges (1)
|
|
Defined benefit pension plan activity (2)
|
|
Currency translation adjustment
|
|
Total
|
Balance at September 30, 2019
|
$
|
(172)
|
|
|
$
|
(40)
|
|
|
$
|
(167)
|
|
|
$
|
(379)
|
|
|
|
|
|
|
|
|
|
Current-period other comprehensive (loss) income
|
(136)
|
|
|
6
|
|
|
19
|
|
|
(111)
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 2020
|
$
|
(308)
|
|
|
$
|
(34)
|
|
|
$
|
(148)
|
|
|
$
|
(490)
|
|
(1)Unrealized (loss) gain represents derivative instruments, net of taxes of $(6) million and $22 million for the thirteen week periods ended June 27, 2020 and June 29, 2019, respectively, and $(40) million and $64 million for the thirty-nine week periods ended June 27, 2020 and June 29, 2019, respectively.
(2)There were no material pension liability adjustments, net of taxes, for the thirteen and thirty-nine week periods ended June 27, 2020 and June 29, 2019.
A summary of reclassifications out of accumulated other comprehensive (loss) income for the thirty-nine week periods ended June 27, 2020 and June 29, 2019 is provided below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
Description of reclassifications out of accumulated other comprehensive (loss) income
|
|
June 27, 2020
|
|
June 29, 2019
|
Amortization from redesignated interest rate swap and cap agreements (1)
|
|
$
|
3
|
|
|
$
|
2
|
|
Gains from settlement of foreign currency forward exchange contracts (2)
|
|
(3)
|
|
|
—
|
|
Deferred tax expense on reclassifications out of accumulated other comprehensive (loss) income
|
|
—
|
|
|
1
|
|
Losses reclassified into earnings, net of tax
|
|
$
|
—
|
|
|
$
|
3
|
|
(1)This component of accumulated other comprehensive (loss) income is included in interest expense (see Note 12, “Derivatives and Hedging Activities,” for additional information).
(2)This component of accumulated other comprehensive (loss) income is included in net sales (see Note 12, “Derivatives and Hedging Activities,” for additional information).
16. LEASES
The Company leases certain manufacturing facilities, offices, land, equipment and vehicles. Such leases, some of which are noncancelable and, in many cases, include renewals, expire at various dates. Such options to renew are included in the lease term when it is reasonably certain that the option will be exercised. The Company’s lease agreements typically do not contain any significant residual value guarantees or restrictive covenants, and payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on the lease term and the currency in which lease payments are made. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.
The components of lease expense for the thirteen and thirty-nine week periods ended June 27, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
Thirteen Week Period Ended
June 27, 2020
|
|
Thirty-Nine Week Period Ended
June 27, 2020
|
Operating lease cost
|
Cost of Sales or Selling and Administrative Expenses
|
|
$
|
7
|
|
|
$
|
21
|
|
Finance lease cost
|
|
|
|
|
|
Amortization of leased assets
|
Cost of Sales
|
|
1
|
|
|
2
|
|
Interest on lease liabilities
|
Interest Expense - Net
|
|
1
|
|
|
3
|
|
Total lease cost
|
|
|
$
|
9
|
|
|
$
|
26
|
|
Supplemental cash flow information related to leases for the thirty-nine week period ended June 27, 2020 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash outflows from operating leases
|
|
$
|
21
|
|
Operating cash outflows from finance leases
|
|
3
|
|
Financing cash outflows from finance leases
|
|
1
|
|
|
|
|
Lease assets obtained in exchange for new lease obligations:
|
|
|
Operating leases
|
|
$
|
21
|
|
|
|
|
Supplemental balance sheet information related to leases is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
June 27, 2020
|
Operating Leases
|
|
|
|
Operating lease right-of-use assets
|
Other Assets
|
|
$
|
102
|
|
|
|
|
|
Current operating lease liabilities
|
Accrued Liabilities
|
|
22
|
|
Long-term operating lease liabilities
|
Other Non-current Liabilities
|
|
86
|
|
Total operating lease liabilities
|
|
|
$
|
108
|
|
|
|
|
|
Finance Leases
|
|
|
|
Finance lease right-of-use assets, net
|
Property, Plant and Equipment—Net
|
|
$
|
68
|
|
|
|
|
|
Current finance lease liabilities
|
Accrued Liabilities
|
|
2
|
|
Long-term finance lease liabilities
|
Other Non-current Liabilities
|
|
55
|
|
Total finance lease liabilities
|
|
|
$
|
57
|
|
As of June 27, 2020, the Company has the following remaining lease term and weighted average discount rates:
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
Operating leases
|
6.1 years
|
Finance leases
|
16.6 years
|
|
|
Weighted-average discount rate
|
|
Operating leases
|
6.2%
|
Finance leases
|
7.2%
|
Maturities of lease liabilities at June 27, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2020
|
$
|
7
|
|
|
$
|
1
|
|
2021
|
27
|
|
|
6
|
|
2022
|
24
|
|
|
6
|
|
2023
|
19
|
|
|
6
|
|
2024
|
16
|
|
|
6
|
|
Thereafter
|
39
|
|
|
76
|
|
Total future minimum lease payments
|
132
|
|
|
101
|
|
Less: imputed interest
|
24
|
|
|
44
|
|
Present value of lease liabilities reported
|
$
|
108
|
|
|
$
|
57
|
|
A summary of minimum rental commitments at June 27, 2020 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, for each of the next five years and thereafter in the aggregate, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
2020
|
|
$
|
7
|
|
2021
|
|
28
|
|
2022
|
|
24
|
|
2023
|
|
19
|
|
2024
|
|
16
|
|
Thereafter
|
|
42
|
|
Total lease commitments
|
|
$
|
136
|
|
17. COMMITMENTS AND CONTINGENCIES
On August 8, 2019, a fire caused significant damage to the Niort, France operating facility of Leach International Europe, which is a subsidiary of TransDigm acquired via the Esterline acquisition. Leach International Europe’s results are reported within the Company’s Power & Control segment. The facility as well as certain machinery, equipment and inventory sustained damage. The Company suspended operations at the Niort facility as a result of the fire; however, has transferred certain operations to temporary facilities until operations are fully restored at the rebuilt facility. The facility is estimated to be complete and fully operational between the first quarter and second quarter of fiscal 2021.
The Company’s insurance covers damage to the facility, equipment, inventory, and other assets, at replacement cost, as well as business interruption, and recovery-related expenses caused by the fire, subject to a $1 million deductible and certain sub-limits based on the nature of the covered item. Anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory will not be recorded until all contingencies relating to the claim have been resolved. As of June 27, 2020, approximately $26 million in insurance recoveries have been received to date for property loss. The recoveries received were previously recorded as an insurance recovery receivable (classified as a component of prepaid expenses and other on the condensed consolidated balance sheets) at the time of loss. The timing of and amounts of insurance recoveries for business interruption is not known at this time.
18. DISCONTINUED OPERATIONS
Current Year Divestitures
On December 20, 2019, TransDigm completed the divestiture of Souriau-Sunbank to Eaton for approximately $920 million. Souriau-Sunbank was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm’s Non-aviation segment. The divestiture represented a strategic shift in TransDigm’s business and, in accordance with US GAAP, qualified as discontinued operations.
(Loss) Income from discontinued operations, net of tax, in the condensed consolidated statements of (loss) income for the thirteen and thirty-nine week periods ended June 27, 2020 was $(1) million and $66 million, respectively. The $66 million income from discontinued operations, net of tax, for the thirty-nine week period ended June 27, 2020 was comprised of $7 million income from Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank, net of tax, of $59 million. Income from discontinued operations, net of tax, was $11 million and $12 million for the thirteen and thirty-nine week periods ended June 29, 2019.
At September 30, 2019, Souriau-Sunbank’s assets held-for-sale and liabilities held-for-sale were $962 million and $157 million, respectively. Under US GAAP, assets held for sale are to be reported at lower of its carrying amount or fair value less cost to sell. The following is the summarized balance sheet of Souriau-Sunbank’s assets held-for-sale and liabilities held-for-sale as of September 30, 2019 (in millions):
|
|
|
|
|
|
|
|
|
Assets and Liabilities of Discontinued Operations Held-for-Sale
|
|
Fiscal Year Ended September 30, 2019
|
Cash and cash equivalents
|
|
$
|
29
|
|
Trade accounts receivable—Net
|
|
67
|
|
Inventories—Net
|
|
88
|
|
Prepaid expenses and other
|
|
2
|
|
Property, plant and equipment—Net
|
|
101
|
|
Goodwill
|
|
480
|
|
Other intangibles—Net
|
|
194
|
|
Other
|
|
1
|
|
Total assets of discontinued operations
|
|
$
|
962
|
|
|
|
|
Accounts payable
|
|
$
|
33
|
|
Accrued liabilities
|
|
55
|
|
Long-term debt
|
|
6
|
|
Deferred income taxes
|
|
42
|
|
Other
|
|
21
|
|
Total liabilities of discontinued operations
|
|
$
|
157
|
|
Prior Year Divestitures
On September 20, 2019, TransDigm completed the divestiture of EIT to an affiliate of KPS Capital Partners, LP for approximately $190 million. EIT was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm’s Non-aviation segment. The divestiture represented a strategic shift in TransDigm’s business and, in accordance with US GAAP, qualified as discontinued operations.
There was no impact to the (loss) income from discontinued operations, net of tax, in the condensed consolidated statements of (loss) income for the thirteen and thirty-nine week periods ended June 27, 2020. Income from discontinued operations, net of tax was $6 million and $7 million for the thirteen and thirty-nine week periods ended June 29, 2019.
Operating Results Summary
The following is the summarized operating results for Souriau-Sunbank for the thirteen and thirty-nine week periods ended June 27, 2020 and June 29, 2019 and EIT for the thirteen and thirty-nine week periods ended June 29, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended
|
|
|
|
Thirty-Nine Week Period Ended
|
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
|
Net sales
|
|
$
|
—
|
|
|
$
|
138
|
|
|
$
|
79
|
|
|
$
|
166
|
|
(Loss) Income from discontinued operations before income taxes
|
|
(1)
|
|
|
23
|
|
|
12
|
|
|
26
|
|
Income tax expense
|
|
—
|
|
|
6
|
|
|
5
|
|
|
7
|
|
(Loss) Income from discontinued operations, net of tax
|
|
(1)
|
|
|
17
|
|
|
7
|
|
|
19
|
|
Gain from sale of discontinued operations, net of tax
|
|
—
|
|
|
—
|
|
|
59
|
|
|
—
|
|
(Loss) Income from discontinued operations, net of tax
|
|
$
|
(1)
|
|
|
$
|
17
|
|
|
$
|
66
|
|
|
$
|
19
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
The following discussion of the Company’s financial condition and results of operations should be read together with TD Group’s consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. References in this section to “TransDigm,” “the Company,” “we,” “us,” “our,” and similar references refer to TD Group, TransDigm Inc. and TransDigm Inc.’s subsidiaries, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q contains both historical and “forward-looking statements” within the meaning of Section 21E of the Exchange Act, and 27A of the Securities Act. All statements other than statements of historical fact included that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained throughout this Quarterly Report on Form 10-Q. These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to, among other things, our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q, including the risks outlined under “Risk Factors,” will be important in determining future results. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described under “Risk Factors” in the Quarterly Report on Form 10-Q. Since our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events anticipated by these forward-looking statements will occur or, if any of them does occur, what impact they will have on our business, results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. We do not undertake any obligation to update these forward-looking statements or the risk factors contained in this Quarterly Report on Form 10-Q to reflect new information, future events or otherwise, except as may be required under federal securities laws.
Important factors that could cause actual results to differ materially from the forward-looking statements made in this Quarterly Report on Form 10-Q include but are not limited to: the impact that the COVID-19 pandemic has on our business, results of operations, financial condition and liquidity; the sensitivity of our business to the number of flight hours that our customers’ planes spend aloft and our customers’ profitability, both of which are affected by general economic conditions; future geopolitical or other worldwide events; cyber-security threats and natural disasters; our reliance on certain customers; the U.S. defense budget and risks associated with being a government supplier including government audits and investigations; failure to maintain government or industry approvals; failure to complete or successfully integrate acquisitions, including our acquisition of Esterline; our indebtedness; potential environmental liabilities; liabilities arising in connection with litigation; increases in raw material costs, taxes and labor costs that cannot be recovered in product pricing; risks and costs associated with our international sales and operations; and other factors. Refer to Item IA included in this Quarterly Report on Form 10-Q and to Item 1A of the Annual Report on Form 10-K for additional information regarding the foregoing factors that may affect our business.
Overview
We believe we are a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly every commercial and military aircraft in service today. Our business is well diversified due to the broad range of products we offer to our customers. Some of our more significant 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. Each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer.
For the third quarter of fiscal year 2020, we generated net sales of $1,022 million and a net loss attributable to TD Group of $(6) million. This included a net loss from continuing operations attributable to TD Group of $(5) million and a loss from discontinued operations, net of tax, of $(1) million. EBITDA As Defined was $424 million, or 41.5% of net sales. See the "Non-GAAP Financial Measures" section for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to (loss) income from continuing operations and net cash provided by operating activities.
In December 2019, 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 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. As a result, demand for travel declined at a rapid pace and has remained depressed. The exact timing and pace of the recovery is indeterminable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines. Governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impact of COVID-19. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally.
Since the early days of the pandemic, we have been following guidance from the World Health Organization and the U.S. Center for Disease Control to protect employees and prevent the spread of the virus within all of our facilities globally. Some of the actions implemented include: flexible work-from-home scheduling; alternate shift schedules; pre-shift temperature screenings, where allowed by law; social distancing; appropriate personal protective equipment; facility deep cleaning; and paid quarantine time for impacted employees.
Within the United States, our business has been designated as "essential," which has allowed us to continue to serve our customers; nonetheless, the COVID-19 pandemic has significantly disrupted our operations. The outbreak of COVID-19 has heightened the risk that a significant portion of our workforce will suffer illness or otherwise be unable to work. Furthermore, in light of enacted and any additional reductions in our workforce as a result of declines in our business caused by the COVID-19 pandemic, we cannot assure that we will be able to rehire our workforce once our business has begun to recover. Certain of our facilities have experienced temporary disruptions as a result of the COVID-19 pandemic, and we cannot predict whether our facilities will experience more significant disruptions in the future. Finally, our acquisition strategy, which is a key element of our overall business strategy, may be impacted by our efforts to maintain the Company’s cash liquidity position in response to the COVID-19 pandemic.
The COVID-19 pandemic has caused a significant adverse impact on our sales, net income and EBITDA as Defined for the third quarter of fiscal 2020 and is expected to continue to do so for at least the remainder of fiscal 2020. This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer demand for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce. The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results.
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 is recorded in cost of sales and $5 million is 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.). 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. The Company is continuing to focus on the application of its three core value-driven operating strategies (obtaining profitable new business, continually improving its cost structure and providing highly engineered value-added products to customers).
Critical Accounting Policies and Estimates
The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements and contain certain amounts that were based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. On an ongoing basis, we evaluate the accounting policies and estimates used to prepare financial statements. Estimates are based on historical experience, judgments and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management.
A comprehensive discussion of the Company’s critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Other than the adoption of ASC 842, "Leases," there have been no significant changes in critical accounting policies, management estimates or accounting policies since the fiscal year ended September 30, 2019. Refer to Note 4, "Recent Accounting Pronouncements," and Note 16, "Leases," for further disclosure of accounting standards recently adopted or required to be adopted in the future.
Acquisitions and Divestitures
Recent acquisitions and divestitures are described in Note 3, “Acquisitions and Divestitures,” to the condensed consolidated financial statements.
Results of Operations
The following table sets forth, for the periods indicated, certain operating data of the Company, including presentation of the amounts as a percentage of net sales (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
% of Sales
|
|
June 29, 2019
|
|
% of Sales
|
Net sales
|
$
|
1,022
|
|
|
100.0
|
%
|
|
$
|
1,521
|
|
|
100.0
|
%
|
Cost of sales
|
531
|
|
|
52.0
|
%
|
|
808
|
|
|
53.1
|
%
|
Selling and administrative expenses
|
163
|
|
|
15.9
|
%
|
|
252
|
|
|
16.6
|
%
|
Amortization of intangible assets
|
42
|
|
|
4.1
|
%
|
|
38
|
|
|
2.5
|
%
|
Income from operations
|
286
|
|
|
28.0
|
%
|
|
423
|
|
|
27.8
|
%
|
Interest expense, net
|
262
|
|
|
25.6
|
%
|
|
241
|
|
|
15.8
|
%
|
Refinancing costs
|
1
|
|
|
0.1
|
%
|
|
—
|
|
|
—
|
%
|
Other income
|
(11)
|
|
|
(1.1)
|
%
|
|
(1)
|
|
|
(0.1)
|
%
|
Income tax provision
|
39
|
|
|
3.8
|
%
|
|
55
|
|
|
3.6
|
%
|
(Loss) Income from continuing operations
|
(5)
|
|
|
(0.5)
|
%
|
|
128
|
|
|
8.4
|
%
|
Less: Net income attributable to noncontrolling interests
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
(Loss) Income from continuing operations attributable to TD Group
|
(5)
|
|
|
(0.5)
|
%
|
|
128
|
|
|
8.4
|
%
|
(Loss) Income from discontinued operations, net of tax
|
(1)
|
|
|
(0.1)
|
%
|
|
17
|
|
|
1.1
|
%
|
Net (loss) income attributable to TD Group
|
$
|
(6)
|
|
|
(0.6)
|
%
|
|
$
|
145
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
% of Sales
|
|
June 29, 2019
|
|
% of Sales
|
Net sales
|
$
|
3,930
|
|
|
100.0
|
%
|
|
$
|
3,682
|
|
|
100.0
|
%
|
Cost of sales
|
1,819
|
|
|
46.3
|
%
|
|
1,755
|
|
|
47.7
|
%
|
Selling and administrative expenses
|
544
|
|
|
13.8
|
%
|
|
535
|
|
|
14.5
|
%
|
Amortization of intangible assets
|
128
|
|
|
3.3
|
%
|
|
80
|
|
|
2.2
|
%
|
Income from operations
|
1,439
|
|
|
36.6
|
%
|
|
1,312
|
|
|
35.6
|
%
|
Interest expense, net
|
762
|
|
|
19.4
|
%
|
|
614
|
|
|
16.7
|
%
|
Refinancing costs
|
27
|
|
|
0.7
|
%
|
|
3
|
|
|
0.1
|
%
|
Other income
|
(14)
|
|
|
(0.4)
|
%
|
|
(1)
|
|
|
—
|
%
|
Income tax provision
|
112
|
|
|
2.8
|
%
|
|
172
|
|
|
4.7
|
%
|
Income from continuing operations
|
552
|
|
|
14.0
|
%
|
|
524
|
|
|
14.2
|
%
|
Less: Net income attributable to noncontrolling interests
|
(1)
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Income from continuing operations attributable to TD Group
|
551
|
|
|
14.0
|
%
|
|
524
|
|
|
14.2
|
%
|
Income from discontinued operations, net of tax
|
66
|
|
|
1.7
|
%
|
|
19
|
|
|
0.5
|
%
|
Net income attributable to TD Group
|
$
|
617
|
|
|
15.7
|
%
|
|
$
|
543
|
|
|
14.7
|
%
|
Changes in Results of Operations
Thirteen week period ended June 27, 2020 compared with the thirteen week period ended June 29, 2019
Total Company
•Net Sales. Net sales and the related dollar and percentage changes for the thirteen week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
% Change
Total Sales
|
|
June 27, 2020
|
|
June 29, 2019
|
|
Change
|
|
|
Organic sales
|
$
|
1,022
|
|
|
$
|
1,521
|
|
|
$
|
(499)
|
|
|
(32.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition sales
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
$
|
1,022
|
|
|
$
|
1,521
|
|
|
$
|
(499)
|
|
|
(32.8)
|
%
|
The decrease in organic sales for the thirteen week period ended June 27, 2020 compared to the thirteen week period ended June 29, 2019, is primarily related to a decrease in commercial aftermarket sales ($228 million, a decrease of 52.1%), commercial OEM sales ($178 million, a decrease of 41.6%), defense sales ($73 million, a decrease of 12.6%) and other non-aerospace sales ($20 million, a decrease of 25.2%). The decreases in the commercial aftermarket and commercial OEM markets are attributable to the adverse impact that the COVID-19 pandemic had on customer demand for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. Commercial OEM was also impacted to a lesser extent by the 737 MAX production stoppage. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce.
Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their respective acquisition date. There were no acquisition sales for the thirteen week period ended June 27, 2020 as the Esterline acquisition was completed on March 14, 2019. All sales after the one year measurement expired on March 14, 2020 are classified as organic sales.
•Cost of Sales and Gross Profit. Cost of sales decreased by $277 million, or 34.3%, to $531 million for the thirteen week period ended June 27, 2020 compared to $808 million for the thirteen week period ended June 29, 2019. Cost of sales and the related percentage of total sales for the thirteen week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
Change
|
|
% Change
|
Cost of sales - excluding costs below
|
$
|
511
|
|
|
$
|
708
|
|
|
$
|
(197)
|
|
|
(27.8)
|
%
|
% of total sales
|
50.0
|
%
|
|
46.5
|
%
|
|
|
|
|
COVID-19 restructuring costs
|
19
|
|
|
—
|
|
|
19
|
|
|
100.0
|
%
|
% of total sales
|
1.9
|
%
|
|
—
|
%
|
|
|
|
|
Foreign currency losses
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
%
|
% of total sales
|
0.5
|
%
|
|
0.3
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
2
|
|
|
3
|
|
|
(1)
|
|
|
(33.3)
|
%
|
% of total sales
|
0.2
|
%
|
|
0.2
|
%
|
|
|
|
|
Acquisition integration costs
|
—
|
|
|
8
|
|
|
(8)
|
|
|
(100.0)
|
%
|
% of total sales
|
—
|
%
|
|
0.5
|
%
|
|
|
|
|
Inventory acquisition accounting adjustments
|
—
|
|
|
89
|
|
|
(89)
|
|
|
(100.0)
|
%
|
% of total sales
|
—
|
%
|
|
5.9
|
%
|
|
|
|
|
Loss contract amortization
|
(6)
|
|
|
(5)
|
|
|
(1)
|
|
|
(20.0)
|
%
|
% of total sales
|
(0.6)
|
%
|
|
(0.3)
|
%
|
|
|
|
|
Total cost of sales
|
$
|
531
|
|
|
$
|
808
|
|
|
$
|
(277)
|
|
|
(34.3)
|
%
|
% of total sales
|
52.0
|
%
|
|
53.1
|
%
|
|
|
|
|
Gross profit
|
$
|
491
|
|
|
$
|
713
|
|
|
$
|
(222)
|
|
|
(31.1)
|
%
|
Gross profit percentage
|
48.0
|
%
|
|
46.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the dollar amount of cost of sales during the thirteen week period ended June 27, 2020 was primarily due to lower sales volume from decreased customer demand due to the COVID-19 pandemic and the other factors summarized above. Also, fixed overhead costs incurred were spread over a lower production volume because of the COVID-19 pandemic resulting in an adverse impact to gross profit during the third quarter of fiscal 2020.
Gross profit as a percentage of sales increased by 1.1 percentage points to 48.0% for the thirteen week period ended June 27, 2020 from 46.9% for the thirteen week period ended June 29, 2019. The increase in the gross profit percentage is driven by the lack of inventory acquisition accounting adjustments during the thirteen week period ended June 27, 2020. This was partially offset by COVID-19 restructuring costs and fixed overhead costs incurred which were spread over lower production volume.
•Selling and Administrative Expenses. Selling and administrative expenses decreased by $89 million to $163 million, or 15.9% of sales, for the thirteen week period ended June 27, 2020 from $252 million, or 16.6% of sales, for the thirteen week period ended June 29, 2019. Selling and administrative expenses and the related percentage of total sales for the thirteen week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
Change
|
|
% Change
|
Selling and administrative expenses - excluding costs below
|
$
|
128
|
|
|
$
|
183
|
|
|
$
|
(55)
|
|
|
(30.1)
|
%
|
% of total sales
|
12.5
|
%
|
|
12.0
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
19
|
|
|
29
|
|
|
(10)
|
|
|
(34.5)
|
%
|
% of total sales
|
1.9
|
%
|
|
1.9
|
%
|
|
|
|
|
Bad debt expense
|
9
|
|
|
2
|
|
|
7
|
|
|
350.0
|
%
|
% of total sales
|
0.9
|
%
|
|
0.1
|
%
|
|
|
|
|
COVID-19 restructuring costs
|
5
|
|
|
—
|
|
|
5
|
|
|
100.0
|
%
|
% of total sales
|
0.5
|
%
|
|
—
|
%
|
|
|
|
|
Acquisition-related expenses
|
2
|
|
|
38
|
|
|
(36)
|
|
|
(94.7)
|
%
|
% of total sales
|
0.2
|
%
|
|
2.5
|
%
|
|
|
|
|
Total selling and administrative expenses
|
$
|
163
|
|
|
$
|
252
|
|
|
$
|
(89)
|
|
|
(35.3)
|
%
|
% of total sales
|
15.9
|
%
|
|
16.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in selling and administrative expenses during the thirteen week period ended June 27, 2020 is primarily due to lower sales volume and cost mitigation measures enacted in response to the COVID-19 pandemic in addition to the other factors summarized above. The cost mitigation measures enacted during the third quarter of fiscal 2020 are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic."
•Amortization of Intangible Assets. Amortization of intangible assets was $42 million for the thirteen week period ended June 27, 2020 compared to $38 million in the thirteen week period ended June 29, 2019. The increase in amortization expense of $4 million was due to additional amortization expense on definite-lived intangible assets recorded in connection with the acquisition of Esterline based on the final third party valuation of intangible assets completed in the second quarter of fiscal 2020.
•Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium and revolving credit facility fees; slightly offset by interest income. Interest expense-net increased $21 million, or 8.7%, to $262 million for the thirteen week period ended June 27, 2020 from $241 million for the comparable thirteen week period last year. The net increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $19.9 billion for the thirteen week period ended June 27, 2020 and approximately $17.0 billion for the thirteen week period ended June 29, 2019. The increase in the weighted average level of borrowings was primarily due to the activity in fiscal 2020 consisting of the issuance of $2.65 billion in 5.50% 2027 Notes, $1.1 billion in 2025 Secured Notes, $400 million in 6.25% 2026 New Notes and a $200 million draw on the revolving credit facility. The increases in new debt described above were slightly offset by the redemption of $1.15 billion in 6.00% 2022 Notes in the first quarter of fiscal 2020, as well as the attributable LIBO rate decrease, when comparing the period ended June 27, 2020 to June 29, 2019. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirteen week period ended June 27, 2020 was 5.03%.
•Refinancing Costs. Refinancing costs of $1 million were recorded for the thirteen week period ended June 27, 2020 and primarily related to certain fees incurred for the Company's fiscal 2020 financing activities described herein.
•Other Income. Other income of $11 million was recorded for the thirteen week period ended June 27, 2020 and primarily related to proceeds received from a business interruption insurance settlement and non-service related components of net periodic benefit costs on the Company's defined benefit pension plans.
•Income Taxes. Income tax expense as a percentage of income before income taxes was approximately 113.5% for the thirteen week period ended June 27, 2020 compared to 30.0% for the thirteen week period ended June 29, 2019. On March 27, 2020, President Trump signed into law the CARES Act in response to the COVID-19 pandemic. The CARES Act was intended to infuse negatively affected companies with various tax cash benefits to ease the impact of the pandemic and, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, 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 (retroactive to October 1, 2019 for the Company) and 2021. The Company's higher effective tax rate for the thirteen week period ended June 27, 2020, which also was higher than the Federal statutory tax rate of 21%, was primarily due to the unfavorable economic impact of the COVID-19 pandemic on the Company’s net interest expense deduction limitation, the associated valuation allowance and a resulting discrete detriment recognized for a cumulative adjustment associated with excess tax benefits for share-based payments. While the CARES Act increased the net interest expense deduction limitation, the unfavorable economic impact of COVID-19 decreased overall taxable income and therefore limited the amount of deductible interest expense.
•(Loss) Income from Discontinued Operations. The loss from discontinued operations for the thirteen week period ended June 27, 2020 is $(1) million and is driven by certain wind down activity associated with the dispositions of the Souriau-Sunbank Connection Technologies business and Esterline Interface Technology ("EIT") group of businesses. Income from discontinued operations for the thirteen week period ended June 29, 2019 is $17 million and includes the results of operations of the Souriau-Sunbank and EIT businesses.
Both businesses were acquired by TransDigm as part of its acquisition of Esterline in March 2019. On December 20, 2019, TransDigm completed the divestiture of Souriau-Sunbank to Eaton Corporation plc (“Eaton”) for approximately $920 million. On September 20, 2019, TransDigm completed the divestiture of EIT to an affiliate of KPS Capital Partners, LP for approximately $190 million.
•Net (Loss) Income Attributable to TD Group. Net income attributable to TD Group decreased $151 million, or 104%, to a net loss of $(6) million for the thirteen week period ended June 27, 2020 compared to net income attributable to TD Group of $145 million for the thirteen week period ended June 29, 2019, primarily due to the adverse impact that the COVID-19 pandemic had on the Company's operations as well as the other factors referred to above.
•(Loss) Earnings per Share. Basic and diluted (loss) earnings per share was $(0.10) for the thirteen week period ended June 27, 2020 and $2.57 per share for the thirteen week period ended June 29, 2019. Basic and diluted (loss) earnings per share from continuing operations and discontinued operations was $(0.09) and $(0.01), respectively, for the thirteen week period ended June 27, 2020. Basic and diluted earnings per share from continuing operations and discontinued operations was $2.27 and $0.30, respectively, for the thirteen week period ended June 29, 2019.
Business Segments
•Segment Net Sales. Net sales by segment for the thirteen week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
% of Sales
|
|
June 29, 2019
|
|
% of Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
556
|
|
|
54.4
|
%
|
|
$
|
769
|
|
|
50.6
|
%
|
|
$
|
(213)
|
|
|
(27.7)
|
%
|
Airframe
|
434
|
|
|
42.5
|
%
|
|
711
|
|
|
46.7
|
%
|
|
(277)
|
|
|
(39.0)
|
%
|
Non-aviation
|
32
|
|
|
3.1
|
%
|
|
41
|
|
|
2.7
|
%
|
|
(9)
|
|
|
(22.0)
|
%
|
|
$
|
1,022
|
|
|
100.0
|
%
|
|
$
|
1,521
|
|
|
100.0
|
%
|
|
$
|
(499)
|
|
|
(32.8)
|
%
|
Sales for the Power & Control segment decreased $213 million, a decrease of 27.7%, for the thirteen week period ended June 27, 2020 compared to the thirteen week period ended June 29, 2019. The sales decrease resulted primarily from decreases in commercial aftermarket sales ($95 million, a decrease of 47.2%), commercial OEM sales ($75 million, a decrease of 42.3%) and defense sales ($35 million, a decrease of 9.8%).
Sales for the Airframe segment decreased $277 million, a decrease of 39.0%, for the thirteen week period ended June 27, 2020 compared to the thirteen week period ended June 29, 2019. The sales decrease resulted primarily from decreases in commercial aftermarket sales ($132 million, a decrease of 56.4%), commercial OEM sales ($105 million, an increase of 42.1%) and defense sales ($37 million, an increase of 17.6%).
Sales for the Non-aviation segment decreased $9 million, or a decrease of 22.0%, for the thirteen week period ended June 27, 2020 compared to the thirteen week period ended June 29, 2019. The sales decrease resulted primarily from decreases in other, non-aerospace sales ($9 million, a decrease of 29%).
•EBITDA As Defined. EBITDA As Defined by segment for the thirteen week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
% of Segment
Sales
|
|
June 29, 2019
|
|
% of Segment
Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
270
|
|
|
48.6
|
%
|
|
$
|
378
|
|
|
49.2
|
%
|
|
$
|
(108)
|
|
|
(28.6)
|
%
|
Airframe
|
166
|
|
|
38.2
|
%
|
|
306
|
|
|
43.0
|
%
|
|
(140)
|
|
|
(45.8)
|
%
|
Non-aviation
|
12
|
|
|
37.5
|
%
|
|
13
|
|
|
31.7
|
%
|
|
(1)
|
|
|
(7.7)
|
%
|
|
$
|
448
|
|
|
43.8
|
%
|
|
$
|
697
|
|
|
45.8
|
%
|
|
$
|
(249)
|
|
|
(35.7)
|
%
|
EBITDA As Defined for the Power & Control segment decreased approximately $108 million, a decrease of 28.6%, resulting from sales decreases in the commercial aftermarket and commercial OEM markets as a result of COVID-19 pandemic and, to a lesser extent, supply chain disruptions in the defense market and "stay at home" orders, quarantines and other actions impacting the government procurement workforce.
EBITDA as Defined for the Airframe segment decreased approximately $140 million, a decrease of 45.8%, resulting from sales decreases in the commercial aftermarket and commercial OEM markets as a result of COVID-19 pandemic and, to a lesser extent, supply chain disruptions in the defense market and "stay at home" orders, quarantines and other actions impacting the government procurement workforce.
EBITDA As Defined for the Non-aviation segment decreased approximately $1 million, a decrease of 7.7%, resulting from decreases in other, non-aerospace sales as a result of the COVID-19 pandemic.
Thirty-nine week period ended June 27, 2020 compared with the thirty-nine week period ended June 29, 2019
Total Company
•Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the thirty-nine week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
% Change
Total Sales
|
|
June 27, 2020
|
|
June 29, 2019
|
|
Change
|
|
|
Organic sales
|
$
|
3,231
|
|
|
$
|
3,586
|
|
|
$
|
(355)
|
|
|
(9.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition sales
|
699
|
|
|
96
|
|
|
603
|
|
|
16.4
|
%
|
|
$
|
3,930
|
|
|
$
|
3,682
|
|
|
$
|
248
|
|
|
6.7
|
%
|
The decrease in organic sales for the thirty-nine week period ended June 27, 2020 compared to the thirty-nine week period ended June 29, 2019, is primarily related to decreases in commercial aftermarket sales ($186 million, a decrease of 16.2%), commercial OEM sales ($156 million, a decrease of 15.7%), other non-aerospace sales ($13 million, a decrease of 7.2%) and defense sales ($1 million, a decrease of 0.1%). The decreases in the commercial aftermarket and commercial OEM markets are attributable to the adverse impact that the COVID-19 pandemic had on customer demand beginning in March 2020 for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. Commercial OEM was also impacted to a lesser extent by the 737 MAX production stoppage. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce.
Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their respective acquisition date. The acquisition sales in the table above for the thirty-nine week period ended June 27, 2020 and June 29, 2019 were attributable to the sales recorded by the Esterline businesses between March 14, 2019, which was the acquisition date by TransDigm, and March 14, 2020 in consideration of the respective thirty-nine week periods ended June 27, 2020 and June 29, 2019 presented above.
•Cost of Sales and Gross Profit. Cost of sales increased by $64 million, or 3.6%, to $1,819 million for the thirty-nine week period ended June 27, 2020 compared to $1,755 million for the thirty-nine week period ended June 29, 2019. Cost of sales and the related percentage of total sales for the thirty-nine week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
Change
|
|
% Change
|
Cost of sales - excluding costs below
|
$
|
1,818
|
|
|
$
|
1,635
|
|
|
$
|
183
|
|
|
11.2
|
%
|
% of total sales
|
46.3
|
%
|
|
44.4
|
%
|
|
|
|
|
COVID-19 restructuring costs
|
19
|
|
|
—
|
|
|
19
|
|
|
100.0
|
%
|
% of total sales
|
0.5
|
%
|
|
—
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
6
|
|
|
7
|
|
|
(1)
|
|
|
(14.3)
|
%
|
% of total sales
|
0.2
|
%
|
|
0.2
|
%
|
|
|
|
|
Foreign currency losses
|
4
|
|
|
3
|
|
|
1
|
|
|
(33.3)
|
%
|
% of total sales
|
0.1
|
%
|
|
0.1
|
%
|
|
|
|
|
Acquisition integration costs
|
4
|
|
|
11
|
|
|
(7)
|
|
|
(63.6)
|
%
|
% of total sales
|
0.1
|
%
|
|
0.3
|
%
|
|
|
|
|
Inventory acquisition accounting adjustments
|
—
|
|
|
109
|
|
|
(109)
|
|
|
(100.0)
|
%
|
% of total sales
|
—
|
%
|
|
3.0
|
%
|
|
|
|
|
Loss contract amortization
|
(32)
|
|
|
(10)
|
|
|
(22)
|
|
|
(220.0)
|
%
|
% of total sales
|
(0.8)
|
%
|
|
(0.3)
|
%
|
|
|
|
|
Total cost of sales
|
$
|
1,819
|
|
|
$
|
1,755
|
|
|
$
|
64
|
|
|
3.6
|
%
|
% of total sales
|
46.3
|
%
|
|
47.7
|
%
|
|
|
|
|
Gross profit
|
$
|
2,111
|
|
|
$
|
1,927
|
|
|
$
|
184
|
|
|
9.5
|
%
|
Gross profit percentage
|
53.7
|
%
|
|
52.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the dollar amount of cost of sales during the thirty-nine week period ended June 27, 2020 was primarily due to the increase in sales from a full fiscal year of ownership of the Esterline businesses in fiscal 2020 in addition to the other factors summarized above. Partially offsetting the increase in cost of sales is the lower sales volume since March 2020 from decreased customer demand attributable to the COVID-19 pandemic.
Gross profit as a percentage of sales increased by 1.4 percentage points to 53.7% for the thirty-nine week period ended June 27, 2020 from 52.3% for the thirty-nine week period ended June 29, 2019. The increase in the gross profit percentage is primarily driven by the increase in loss contract amortization and the lack of inventory acquisition accounting adjustments during the thirty-nine week period ended June 27, 2020.
•Selling and Administrative Expenses. Selling and administrative expenses increased by $9 million to $544 million, or 13.8% of sales, for the thirty-nine week period ended June 27, 2020 from $535 million, or 14.5% of sales, for the thirty-nine week period ended June 29, 2019. Selling and administrative expenses and the related percentage of total sales for the thirty-nine week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
Change
|
|
% Change
|
Selling and administrative expenses - excluding costs below
|
$
|
447
|
|
|
$
|
404
|
|
|
$
|
43
|
|
|
10.6
|
%
|
% of total sales
|
11.4
|
%
|
|
11.0
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
53
|
|
|
63
|
|
|
(10)
|
|
|
(15.9)
|
%
|
% of total sales
|
1.3
|
%
|
|
1.7
|
%
|
|
|
|
|
Bad debt expense
|
24
|
|
|
3
|
|
|
21
|
|
|
700.0
|
%
|
% of total sales
|
0.6
|
%
|
|
0.1
|
%
|
|
|
|
|
Acquisition-related expenses
|
15
|
|
|
65
|
|
|
(50)
|
|
|
(76.9)
|
%
|
% of total sales
|
0.4
|
%
|
|
1.8
|
%
|
|
|
|
|
COVID-19 restructuring costs
|
5
|
|
|
—
|
|
|
5
|
|
|
100.0
|
%
|
% of total sales
|
0.1
|
%
|
|
—
|
%
|
|
|
|
|
Total selling and administrative expenses
|
$
|
544
|
|
|
$
|
535
|
|
|
$
|
9
|
|
|
1.7
|
%
|
% of total sales
|
13.8
|
%
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the dollar amount of selling and administrative expenses during the thirty-nine week period ended June 27, 2020 is primarily due to the increase in sales from a full fiscal year of ownership of the Esterline businesses in fiscal 2020 in addition to the other factors summarized above. Partially offsetting the increase in selling and administrative expenses is a reduction in expenses as a result of the cost mitigation measures enacted during the third quarter of fiscal 2020 in response to the COVID-19 pandemic. The cost mitigation measures enacted during the third quarter of fiscal 2020 are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic."
•Amortization of Intangible Assets. Amortization of intangible assets was $128 million for the thirty-nine week period ended June 27, 2020 compared to $80 million in the thirty-nine week period ended June 29, 2019. The increase in amortization expense of $48 million was due to the amortization expense on the definite-lived intangible assets recorded in connection with the acquisition of Esterline.
•Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium and revolving credit facility fees slightly offset by interest income. Interest expense-net increased $148 million, or 24.1%, to $762 million for the thirty-nine week period ended June 27, 2020 from $614 million for the comparable thirty-nine week period last year. The net increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $18.5 billion for the thirty-nine week period ended June 27, 2020 and approximately $15.1 billion for the thirty-nine week period ended June 29, 2019. The increase in weighted average level of borrowings was primarily due to the activity in the second quarter of fiscal 2019 consisting of the issuance of $4.0 billion in 2026 Secured Notes and the issuance of $550 million in 7.50% 2027 Notes and the activity in fiscal 2020 consisting of the issuance of $2.65 billion in 5.50% 2027 Notes, $1.1 billion in 2025 Secured Notes, $400 million 6.25% 2026 New Notes and a $200 million draw on the revolving credit facility. The increases in new debt described above were slightly offset by the redemptions of $550 million in 5.50% 2020 Notes and $1.15 billion in 6.00% 2022 Notes. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirty-nine week period ended June 27, 2020 was 4.93%.
•Refinancing Costs. Refinancing costs of $27 million were recorded for the thirty-nine week period ended June 27, 2020 and primarily related to the fees incurred on the redemption of the 2022 Notes that occurred in the first quarter of fiscal 2020.
•Other Income. Other income of $14 million was recorded for the thirty-nine week period ended June 27, 2020 and primarily relates to proceeds received from a business interruption insurance settlement during the third quarter of fiscal 2020 and non-service related components of net periodic benefit costs on the Company's defined benefit pension plans.
•Income Taxes. Income tax expense as a percentage of income before income taxes was approximately 16.9% for the thirty-nine week period ended June 27, 2020 compared to 24.9% for the thirty-nine week period ended June 29, 2019. On March 27, 2020, President Trump signed into law the CARES Act in response to the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, 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 Company's lower effective tax rate for the thirty-nine week period ended June 27, 2020, which also was lower than the Federal statutory tax rate of 21%, was primarily due to a discrete benefit recognized for excess tax benefits for share-based payments, in addition to the modification of the interest expense limitation under IRC Section 163(j) enacted as part of the CARES Act.
•Income from Discontinued Operations. Discontinued operations for the thirty-nine week period ended June 27, 2020 include the results of the operations of Souriau-Sunbank. Discontinued operations for the thirty-nine week period ended June 29, 2019 include the results of the operations of Souriau-Sunbank and the Esterline Interface Technology ("EIT") group of businesses. Both businesses were acquired by TransDigm as part of its acquisition of Esterline in March 2019. On December 20, 2019, TransDigm completed the divestiture of Souriau-Sunbank to Eaton for approximately $920 million. On September 20, 2019, TransDigm completed the divestiture of EIT to an affiliate of KPS Capital Partners, LP for approximately $190 million.
Income from discontinued operations for the thirty-nine week period ended June 27, 2020 was $66 million and included $7 million from Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank, net of tax, of $59 million. Income from discontinued operations for the thirty-nine week period ended June 29, 2019 was $19 million and included the results of operations of the Souriau-Sunbank and EIT group of businesses.
•Net Income Attributable to TD Group. Net income attributable to TD Group increased $74 million, or 13.6%, to $617 million for the thirty-nine week period ended June 27, 2020 compared to net income attributable to TD Group of $543 million for the thirty-nine week period ended June 29, 2019, primarily as a result of the factors referred to above. The COVID-19 pandemic has adversely impacted the results of operations since March 2020.
•Earnings per Share. Basic and diluted earnings per share was $7.53 for the thirty-nine week period ended June 27, 2020 and $9.22 per share for the thirty-nine week period ended June 29, 2019. Basic and diluted earnings per share from continuing operations and discontinued operations was $6.38 and $1.15, respectively, for the thirty-nine week period ended June 27, 2020. Basic and diluted earnings per share from continuing operations and discontinued operations was $8.87 and $0.35, respectively, for the thirty-nine week period ended June 29, 2019. Net income attributable to TD Group for the thirty-nine week period ended June 27, 2020 of $617 million was decreased by special dividend and dividend equivalent payments paid of $185 million, or $3.22 per share, resulting in net income available to common shareholders of $432 million, or $7.53 per share. Net income for the thirty-nine week period ended June 29, 2019 of $543 million was decreased by dividend equivalent payments of $24 million, or $0.43 per share, resulting in net income available to common shareholders of $519 million, or $9.22 per share.
Business Segments
•Segment Net Sales. Net sales by segment for the thirty-nine week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
% of Sales
|
|
June 29, 2019
|
|
% of Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
2,056
|
|
|
52.4
|
%
|
|
$
|
1,960
|
|
|
53.2
|
%
|
|
$
|
96
|
|
|
4.9
|
%
|
Airframe
|
1,762
|
|
|
44.8
|
%
|
|
1,609
|
|
|
43.7
|
%
|
|
153
|
|
|
9.5
|
%
|
Non-aviation
|
112
|
|
|
2.8
|
%
|
|
113
|
|
|
3.1
|
%
|
|
(1)
|
|
|
(0.9)
|
%
|
|
$
|
3,930
|
|
|
100.0
|
%
|
|
$
|
3,682
|
|
|
100.0
|
%
|
|
$
|
248
|
|
|
6.7
|
%
|
Acquisition sales for the Power & Control segment increased $196 million, or an increase of 10.0%, resulting from the acquisition of Esterline. Organic sales for the Power & Control segment decreased $100 million, a decrease of 5.1%, for the thirty-nine week period ended June 27, 2020 compared to the thirty-nine week period ended June 29, 2019. The organic sales decrease resulted primarily from decreases in commercial OEM sales ($59 million, a decrease of 13.7%), a decrease in commercial aftermarket sales ($54 million, a decrease of 10.0%); partially offset by an increase in defense sales ($13 million, an increase of 1.4%). The decreases in organic commercial OEM and aftermarket sales are attributable to the COVID-19 pandemic.
Acquisition sales for the Airframe segment increased $401 million, or an increase of 24.9%, resulting from the acquisition of Esterline. Organic sales for the Airframe segment decreased $248 million, a decrease of 15.4%, for the thirty-nine week period ended June 27, 2020 compared to the thirty-nine week period ended June 29, 2019. The organic sales decrease resulted primarily from decreases in commercial aftermarket sales ($132 million, a decrease of 21.5%), commercial OEM sales ($98 million, a decrease of 17.9%), defense sales ($15 million, a decrease of 3.6%) and other non-aerospace sales ($3 million, a decrease of 8.9%). The decreases in organic commercial OEM and aftermarket sales are attributable to the COVID-19 pandemic.
Acquisition sales for the Non-aviation segment increased $7 million, or an increase of 6.2%, resulting from the acquisition of Esterline. Organic sales for the Non-aviation segment decreased by $8 million, a decrease of 7.1%, for the thirty-nine week period ended June 27, 2020 compared to the thirty-nine week period ended June 29, 2019.
•EBITDA As Defined. EBITDA As Defined by segment for the thirty-nine week periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
|
|
|
|
|
|
June 27, 2020
|
|
% of Segment
Sales
|
|
June 29, 2019
|
|
% of Segment
Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
1,036
|
|
|
50.4
|
%
|
|
$
|
1,006
|
|
|
51.3
|
%
|
|
$
|
30
|
|
|
3.0
|
%
|
Airframe
|
767
|
|
|
43.5
|
%
|
|
740
|
|
|
46.0
|
%
|
|
27
|
|
|
3.6
|
%
|
Non-aviation
|
39
|
|
|
34.8
|
%
|
|
36
|
|
|
31.9
|
%
|
|
3
|
|
|
8.3
|
%
|
|
$
|
1,842
|
|
|
46.9
|
%
|
|
$
|
1,782
|
|
|
48.4
|
%
|
|
$
|
60
|
|
|
3.4
|
%
|
EBITDA As Defined for the Power & Control segment from the acquisition of Esterline increased approximately $55 million for the thirty-nine week period ended June 27, 2020. Organic EBITDA As Defined for the Power & Control segment decreased approximately $25 million, a decrease of 2.5%, as a result of lower sales volume in the commercial OEM and commercial aftermarket market channels as a result of the COVID-19 pandemic.
EBITDA As Defined for the Airframe segment from the acquisition of Esterline increased approximately $153 million for the thirty-nine week period ended June 27, 2020. Organic EBITDA as Defined for the Airframe segment decreased approximately $126 million, a decrease of 17.0%, primarily as a result of lower volume in the commercial OEM and commercial aftermarket channels as a result of the COVID-19 pandemic.
EBITDA As Defined for the Non-aviation segment from the acquisition of Esterline increased approximately $1 million for the thirty-nine week period ended June 27, 2020. Organic EBITDA As Defined for the Non-aviation segment increased approximately $2 million, an increase of 5.6%.
Backlog
As of June 27, 2020, the Company estimated its sales order backlog at $3,425 million compared to $3,856 million as of June 29, 2019. The decrease in backlog is due to the adverse impact that the COVID-19 pandemic has had on customer demand, particularly our commercial customers, domestically and internationally. The uncertainty of the duration of the pandemic and its impact on the aerospace industry is expected to continue to inhibit sales order backlog growth in the commercial OEM and commercial aftermarket channels for at least the remainder of fiscal 2020.
The majority of the purchase orders outstanding as of June 27, 2020 are scheduled for delivery within the next twelve months. Purchase orders may be subject to cancellation or deferral by the customer prior to shipment. The level of unfilled purchase orders at any given date during the year will be materially affected by the timing of the Company’s receipt of purchase orders and the speed with which those orders are filled. Accordingly, the Company’s backlog as of June 27, 2020 may not necessarily represent the actual amount of shipments or sales for any future period.
Foreign Operations
Although we manufacture a significant portion of our products in the United States, we manufacture certain products in Europe, Asia, Canada, Mexico and other countries globally. We sell our products in the United States as well as in foreign countries. Although the majority of sales of our products are made to customers (including distributors) located in the United States, our products are ultimately sold to and used by customers, including airlines and other end users of aircraft, throughout the world. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including the COVID-19 pandemic, currency fluctuations, difficulties in staffing and managing multi-national operations, general economic and political uncertainties and potential for social unrest in countries in which we operate, limitations on our ability to enforce legal rights and remedies, restrictions on the repatriation of funds, change in trade policies, tariff regulation, difficulties in obtaining export and import licenses and the risk of government financed competition.
There can be no assurance that foreign governments will not adopt regulations or take other action that would have a direct or indirect adverse impact on the business or market opportunities of the Company within such governments’ countries. Furthermore, there can be no assurance that the political, cultural and economic climate outside the United States will be favorable to our operations and growth strategy.
Liquidity and Capital Resources
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
We continually evaluate our debt facilities to assess whether they most efficiently and effectively meet the current and future needs of our business. The Company evaluates from time to time the appropriateness of its current leverage, taking into consideration the Company’s debt holders, equity holders, credit ratings, acquisition opportunities and other factors.
If the Company has excess cash, it generally prioritizes allocating the excess cash in the following manner: (1) capital spending at existing businesses, (2) acquisitions of businesses, (3) payment of a special dividend and/or repurchases of our common stock and (4) prepayment of indebtedness or repurchase of debt. Whether the Company undertakes common stock repurchases or other aforementioned activities will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, the Company may issue additional debt if prevailing market conditions are favorable to doing so.
The Company’s ability to make scheduled interest payments on, or to refinance, the Company’s indebtedness, or to fund non-acquisition related capital expenditures and research and development efforts, will depend on the Company’s ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control, including the ongoing COVID-19 pandemic.
The COVID-19 pandemic has caused a significant adverse impact on our sales, net income and EBITDA as Defined for the third quarter of fiscal 2020 and is expected to continue to do so for at least the remainder of fiscal 2020. This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer demand for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce. The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results.
The Company is actively managing the business to maintain cash flow, including the cost mitigation efforts described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic," to the condensed consolidated financial statements in response to the COVID-19 pandemic and are continuing to focus on the application of its three core value-driven operating strategies (obtaining profitable new business, continually improving its cost structure and providing highly engineered value-added products to customers).
In March 2020, the President of the United States signed the 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, 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 for fiscal years 2020 and 2021. The Company continues to assess the impact of the CARES Act and ongoing government guidance related to COVID-19 that may be issued.
In March 2020, the Company drew $200 million on its revolving credit facility to increase the Company's liquidity as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic. Also, in further actions to increase the Company's liquidity, the Company executed two notes offerings in April 2020 in which the proceeds received are for general Corporate purposes. On April 8, 2020, the Company entered into a purchase agreement in connection with a private offering of $1,100 million in aggregate principal amount of 8.00% Senior Secured Notes due 2025 at an issue price of 100% of the principal amount. On April 17, 2020, the Company entered into a purchase agreement in connection with a private offering of $400 million in aggregate principal amount of 6.25% Senior Secured Notes due 2026 at an issue price of 101% of the principal amount.
As of June 27, 2020, the Company has significant cash liquidity as illustrated in the table presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of June 27, 2020
|
Cash and cash equivalents
|
|
$
|
4,549
|
|
Availability on revolving credit facility
|
|
523
|
|
Cash liquidity
|
|
$
|
5,072
|
|
We believe our significant cash liquidity will allow us to meet our anticipated funding requirements. We expect to meet our short-term cash liquidity requirements (including interest obligations and capital expenditures) through net cash from operating activities, cash on hand and, if needed, additional draws on the revolving credit facility. Long-term cash liquidity requirements consist primarily of obligations under our long-term debt agreements. There is no maturity on any tranche of term loans or notes until July 2024.
Operating Activities. The Company generated $991 million of net cash from operating activities during the thirty-nine week period ended June 27, 2020 compared to $768 million during the thirty-nine week period ended June 29, 2019.
The change in accounts receivable during the thirty-nine week period ended June 27, 2020 was a source of cash of $347 million compared to a use of cash of $65 million during the thirty-nine week period ended June 29, 2019. The increase in the source of cash of $412 million is primarily attributable to a decline in sales, and the related accounts receivable, in the third quarter due to the COVID-19 pandemic. The Company also continues to actively manage its accounts receivable, the related agings and collection efforts.
The change in inventories during the thirty-nine week period ended June 27, 2020 was a use of cash of $126 million compared to a use of cash of $100 million during the thirty-nine week period ended June 29, 2019. The increase in the use of cash is primarily driven by higher inventory levels due to reduced demand as a result of the COVID-19 pandemic.
The change in accounts payable during the thirty-nine week period ended June 27, 2020 was a use of cash of $48 million compared to a use of cash of $7 million during the thirty-nine week period ended June 29, 2019. The increase in the use of cash is primarily driven by a corresponding decline in accounts payable as inventory and other purchases have slowed as a result of the COVID-19 pandemic.
Investing Activities. Net cash provided by investing activities was $842 million during the thirty-nine week period ended June 27, 2020, consisting of proceeds of $904 million from the divestiture of Souriau-Sunbank and partially offset by capital expenditures of $62 million. We do not expect to incur material capital expenditures for the remainder of fiscal 2020 in response to the cost mitigation measures enacted in response to the COVID-19 pandemic. Planned capital expenditures for the remainder of the fiscal year are limited to those deemed to be essential.
Net cash used in investing activities was $4,037 million during the thirty-nine week period ended June 29, 2019, consisting of capital expenditures of $80 million and payments for acquisitions, net of cash acquired, of $3,957 million which is primarily comprised of the acquisitions of Esterline for $3,536 million and NavCom for $27 million.
Financing Activities. Net cash provided by financing activities during the thirty-nine week period ended June 27, 2020 was $1,245 million. The source of cash was primarily attributable to $2,625 million in net proceeds from the completion of the 5.50% 2027 Notes offering, $1,092 million in net proceeds from the completion of the 2025 Secured Notes offering, $401 million in net proceeds from the completion of the 6.25% 2026 New Notes offering, $200 million drawn from the existing revolving credit facility and $89 million in proceeds from stock option exercises. This was partially offset by special dividend and dividend equivalent payments of $1,928 million, the redemption of the 2022 Notes outstanding for $1,168 million, repayments on term loans of $38 million and the purchase of treasury stock of $19 million.
Net cash provided by financing activities during the thirty-nine week period ended June 29, 2019 was $3,912 million. The source of cash was primarily attributable to $4,480 million in net proceeds from the completion of the 2026 Secured Notes and 2027 Notes offerings in the second quarter of fiscal 2019 and $64 million in proceeds from stock option exercises. Sources were partially offset by the cash tender and redemption of the 2020 Notes for $550 million, repayments on term loans of $57 million and dividend equivalent payments of $24 million.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments, finance and operating leases, pension and post-retirement benefit plans and purchase obligations. During the thirty-nine week period ended June 27, 2020, other than the debt financing transactions described herein and in Note 9, "Debt," to the condensed consolidated financial statements, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Description of Senior Secured Term Loans and Indentures
Senior Secured Term Loans Facility
TransDigm has $7,487 million in fully drawn term loans (the “Term Loans Facility”) and a $760 million revolving credit facility, on which the Company drew approximately $200 million on March 24, 2020. The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as of June 27, 2020):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans Facility
|
|
Aggregate Principal
|
|
Maturity Date
|
|
Interest Rate
|
Tranche E
|
|
$2,210 million
|
|
May 30, 2025
|
|
LIBO rate + 2.25%
|
Tranche F
|
|
$3,507 million
|
|
December 9, 2025
|
|
LIBO rate + 2.25%
|
Tranche G
|
|
$1,770 million
|
|
August 22, 2024
|
|
LIBO rate + 2.25%
|
The Term Loans Facility requires quarterly aggregate principal payments of $18.8 million. The revolving commitments consist of two tranches which includes up to $151.5 million of multicurrency revolving commitments. At June 27, 2020, the Company had $36.8 million in letters of credit outstanding and $523.2 million in borrowings available under the revolving commitments. The interest rates per annum applicable to the loans under the Credit Agreement are, at TransDigm’s option, equal to either an alternate base rate or an adjusted LIBO rate for one, two, three or six-month (or to the extent agreed to by each relevant lender, nine or twelve-month) interest periods chosen by TransDigm, in each case plus an applicable margin percentage. The adjusted LIBO rate related to the tranche E, tranche F and tranche G term loans are not subject to a floor. For the thirty-nine week period ended June 27, 2020, the applicable interest rates ranged from approximately 2.4% to 3.2% on the existing term loans. Interest rate swaps and caps used to hedge and offset, respectively, the variable interest rates on the credit facility are described in Note 12, “Derivatives and Hedging Activities,” to the condensed consolidated financial statements.
Recent Amendments to the Credit Agreement
On February 6, 2020, the Company entered into Amendment No. 7 and Refinancing Facility Agreement (herein, "Amendment No. 7"). Under the terms of Amendment No. 7, the Company, among other things, (i) incurred new tranche E term loans in an aggregate principal amount equal to approximately $2,216 million, new tranche F term loans in an aggregate principal amount equal to approximately $3,515 million and new tranche G term loans, (collectively, the "New Term Loans") in an aggregate principal amount equal to approximately $1,774 million, (ii) repaid in full all of the existing tranche E term loans, tranche F term loans and tranche G term loans outstanding under the Credit Agreement immediately prior to Amendment No. 7 and (iii) extended the maturity date of the tranche F term loans to December 9, 2025, (iv) modified the definition of consolidated EBITDA in the Credit Agreement to add back certain cost savings and non-recurring cost and expenses and (v) modified certain negative covenants to provide additional flexibility to enable TransDigm to incur additional debt and make additional investments and asset sales.
The New Term Loans were fully drawn on February 6, 2020. The LIBO rate per annum applicable to the New Term Loans is 2.25%, down from the previous rate of 2.50%. The other terms and conditions that apply to the New Term Loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 7.
On March 14, 2019, the Company entered into Amendment No. 6 to the Second Amended and Restated Credit Agreement ("Amendment No. 6"). Under the terms of Amendment No. 6, the capacity of the revolving credit facility increased from $600 million to $760 million. The revolving credit facility consist of two tranches which include up to $151.5 million of multicurrency revolving commitments. The terms and conditions that apply to the revolving credit facility, other than the additional revolving credit commitments, are substantially the same as the terms and conditions that applied to the revolving credit facility immediately prior to Amendment No. 6.
Indentures
The following table represents the notes outstanding as of June 27, 2020:
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Description
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Aggregate Principal
|
|
Maturity Date
|
|
Interest Rate
|
2024 Notes
|
|
$1,200 million
|
|
July 15, 2024
|
|
6.50%
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2025 Notes
|
|
$750 million
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May 15, 2025
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6.50%
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2025 Secured Notes
|
|
$1,100 million
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December 15, 2025
|
|
8.00%
|
2026 Secured Notes
|
|
$4,400 million
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|
March 15, 2026
|
|
6.25%
|
6.875% 2026 Notes
|
|
$500 million
|
|
May 15, 2026
|
|
6.875%
|
6.375% 2026 Notes
|
|
$950 million
|
|
June 15, 2026
|
|
6.375%
|
7.50% 2027 Notes
|
|
$550 million
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|
March 15, 2027
|
|
7.50%
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5.50% 2027 Notes
|
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$2,650 million
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November 15, 2027
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5.50%
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The 2024 Notes, the 6.375% 2026 Notes, the 2025 Secured Notes, the 7.50% 2027 Notes and the 5.50% 2027 Notes (the “TransDigm Inc. Notes”) were issued at a price of 100% of the principal amount. The initial $450 million offering of the 2025 Notes (also considered to be part of the “TransDigm Inc. Notes”) were issued at a price of 100% of the principal amount and the subsequent $300 million offering of 2025 Notes in the second quarter of fiscal 2017 were issued at a price of 101.5% of the principal amount, resulting in gross proceeds of $304.5 million. The 6.875% 2026 Notes (the "TransDigm UK Notes" and together with the TransDigm Inc. Notes, the "Notes," are further described below) offered in May 2018 were issued at a price of 99.24% of the principal amount, resulting in gross proceeds of $496.2 million. The initial $3,800 million offering of the 2026 Secured Notes (the "Secured Notes") were issued at a price of 100% of their principal amount and the subsequent $200 million and $400 million offerings of the 2026 Secured Notes in the second quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively, were issued at a price of 101% of their principal amount, resulting in gross proceeds of $4,400 million.
The Notes do not require principal payments prior to their maturity. Interest under the Notes is payable semi-annually. The Notes represent our unsecured obligations ranking subordinate to our senior debt, as defined in the applicable indentures.
The Notes are subordinated to all of our existing and future senior debt, rank equally with all of our existing and future senior subordinated debt and rank senior to all of our future debt that is expressly subordinated to the Notes. The TransDigm Inc. Notes are guaranteed on a senior subordinated unsecured basis by TD Group and TransDigm Inc.'s domestic restricted subsidiaries. The TransDigm UK Notes are guaranteed on a senior subordinated basis by TransDigm Inc., TD Group and TransDigm Inc.'s domestic restricted subsidiaries. The guarantees of the Notes are subordinated to all of the guarantors’ existing and future senior debt, rank equally with all of their existing and future senior subordinated debt and rank senior to all of their future debt that is expressly subordinated to the guarantees of the Notes. The Notes are structurally subordinated to all of the liabilities of TD Group’s non-guarantor subsidiaries. The Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Notes.
On November 13, 2019, the Company issued $2,650 million in aggregate principal amount of 5.50% Senior Subordinated Notes due 2027 (herein the "5.50% 2027 Notes") at an issue price of 100% of the principal amount thereof in a private offering. The 2027 Notes were issued pursuant to an indenture, dated as of November 13, 2019, among TransDigm, as issuer, TD Group, TD UK and the other subsidiaries of TransDigm named therein, as guarantors.
On November 26, 2019, the Company used a portion of the net proceeds from the offering of the 5.50% 2027 Notes to redeem all of its outstanding 6.00% 2022 Notes. The Company redeemed the principal amount of $1,150 million, plus accrued interest of approximately $25.5 million and early redemption premium of $17.3 million.
In April 2020, the Company executed two notes offerings for general Corporate purposes, including increasing its cash liquidity as a result of the COVID-19 pandemic. On April 8, 2020, the Company entered into a purchase agreement in connection with a private offering of $1,100 million in aggregate principal amount of 8.00% Senior Secured Notes due 2025 (herein the "2025 Secured Notes") at an issue price of 100% of the principal amount. On April 17, 2020, the Company entered into a purchase agreement in connection with a private offering of $400 million in aggregate principal amount of 6.25% Senior Secured Notes due 2026 (also considered to be part of the "2026 Secured Notes") at an issue price of 101% of the principal amount. Refer to Note 9, "Debt," to the condensed consolidated financial statements for further information.
TransDigm Inc's 2024 Notes, 2025 Notes, 6.375% 2026 Notes, 2026 Secured Notes, 7.50% Notes 2027 Notes, 5.50% 2027 Notes and 2025 Secured Notes are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm UK Holdings plc ("TransDigm UK") and TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indentures. TransDigm UK's 6.875% 2026 Notes are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm Inc. and TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indenture.
Separate financial statements of TransDigm Inc. are not presented because TransDigm Inc.'s 2024 Notes, 2025 Notes, 6.375% 2026 Notes, 2026 Secured Notes, 7.50% 2027 Notes, 5.50% 2027 Notes and 2025 Secured Notes are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries and because TD Group has no significant operations or assets separate from its investment in TransDigm Inc.
Separate financial statements of TransDigm UK are not presented because TransDigm UK's 6.875% 2026 Notes, issued in May 2018, are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries.
The financial information presented is that of TD Group and the Guarantors, which includes TransDigm Inc. and TransDigm UK, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between TD Group and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.
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(in millions)
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June 27, 2020
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September 30, 2019
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Current assets
|
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$
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5,166
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$
|
2,458
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|
Noncurrent assets
|
|
9,162
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|
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8,286
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Current liabilities
|
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966
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742
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|
Noncurrent liabilities
|
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20,392
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17,328
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Amounts due to subsidiaries that are non-issuers and non-guarantors - net
|
|
55
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|
|
171
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|
|
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(in millions)
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|
Thirty-Nine Week Period Ended June 27, 2020
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Net sales
|
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$
|
3,123
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|
Sales to subsidiaries that are non-issuers and non-guarantors
|
|
24
|
|
Cost of products sold
|
|
1,371
|
|
Expense from subsidiaries that are non-issuers and non-guarantors - net
|
|
32
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|
Income from continuing operations
|
|
499
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Net income attributable to TD Group
|
|
613
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Certain Restrictive Covenants in Our Debt Documents
The Credit Agreement and the Indentures governing the Notes contain restrictive covenants that, among other things, limit the incurrence of additional indebtedness, the payment of special dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances, and prepayments of certain other indebtedness.
The restrictive covenants included in the Credit Agreement are subject to amendments executed periodically. The most recent amendment that impacted the restrictive covenants contained in the Credit Agreement is Amendment No. 7. The restrictive covenants are described above in the Recent Amendments to the Credit Agreement section.
Under the terms of the Credit Agreement, TransDigm is entitled, on one or more occasions, to request additional term loans or additional revolving commitments to the extent that the existing or new lenders agree to provide such incremental term loans or additional revolving commitments provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25 to 1.00 and the consolidated secured net debt ratio would be no greater than 5.00 to 1.00, in each case, after giving effect to such incremental term loans or additional revolving commitments.
If any such default occurs, the lenders under the Credit Agreement and the holders of the Notes may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the Credit Agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the Credit Agreement, the lenders thereunder will have the right to proceed against the collateral granted to them to secure the debt, which includes our available cash, and they will also have the right to prevent us from making debt service payments on the Notes.
With the exception of the revolving credit facility, the Company has no maintenance covenants in its existing term loan and indenture agreements. Under the Credit Agreement, if the usage of the revolving credit facility exceeds 35%, or $266 million, of the total revolving commitments, the Company is required to maintain a maximum consolidated net leverage ratio of net debt to trailing four-quarter EBITDA As Defined of 7.25x as of the last day of the fiscal quarter.
As of June 27, 2020, the Company was in compliance with its debt covenants and expects to remain in compliance with its debt covenants in subsequent periods.
Trade Receivables Securitization Facility
During fiscal 2014, the Company established a trade receivable securitization facility (the “Securitization Facility”). The Securitization Facility effectively increases the Company’s borrowing capacity depending on the amount of the domestic operations’ trade accounts receivable. The Securitization Facility includes the right for the Company to exercise annual one year extensions as long as there have been no termination events as defined by the agreement. The Company uses the proceeds from the Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs.
On July 22, 2020, the Company amended the Securitization Facility to extend the maturity date to July 27, 2021. As of June 27, 2020, the Company has borrowed $350 million under the Securitization Facility, which bears interest at a rate of 0.9% plus LIBOR. At June 27, 2020, the applicable interest rate was 1.1%. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable.
Stock Repurchase Program
On November 8, 2017, our Board of Directors, authorized a stock repurchase program permitting repurchases of our outstanding shares not to exceed $650 million in the aggregate, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
During March 2020, the Company repurchased 36,900 shares of its common stock at a gross cost of $18.9 million at the weighted average cost of $512.67 under the $650 million stock repurchase program. As of June 27, 2020, the remaining amount of repurchases allowable under the $650 million program was $631.1 million subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
Off-Balance Sheet Arrangements
The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company’s revolving credit facility. As of June 27, 2020, the Company had $36.8 million in letters of credit outstanding.
Non-GAAP Financial Measures
We present below certain financial information based on our EBITDA and EBITDA As Defined. References to “EBITDA” mean earnings before interest, taxes, depreciation and amortization, and references to “EBITDA As Defined” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of (loss) income from continuing operations to EBITDA and EBITDA As Defined and the reconciliations of net cash provided by operating activities to EBITDA and EBITDA As Defined presented below.
Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under accounting principles generally accepted in the United States of America (“US GAAP”). We present EBITDA and EBITDA As Defined because we believe they are useful indicators for evaluating operating performance and liquidity.
Our management believes that EBITDA and EBITDA As Defined are useful as indicators of liquidity because securities analysts, investors, rating agencies and others use EBITDA to evaluate a company’s ability to incur and service debt. In addition, EBITDA As Defined is useful to investors because the revolving credit facility under our senior secured credit facility requires compliance under certain circumstances, on a pro forma basis, with a financial covenant that measures the ratio of the amount of our secured indebtedness to the amount of our Consolidated EBITDA defined in the same manner as we define EBITDA As Defined herein.
In addition to the above, our management uses EBITDA As Defined to review and assess the performance of the management team in connection with employee incentive programs and to prepare its annual budget and financial projections. Moreover, our management uses EBITDA As Defined to evaluate acquisitions.
Although we use EBITDA and EBITDA As Defined as measures to assess the performance of our business and for the other purposes set forth above, the use of these non-GAAP financial measures as analytical tools has limitations, and you should not consider any of them in isolation, or as a substitute for analysis of our results of operations as reported in accordance with US GAAP. Some of these limitations are:
•neither EBITDA nor EBITDA As Defined reflects the significant interest expense, or the cash requirements, necessary to service interest payments on our indebtedness;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor EBITDA As Defined reflects any cash requirements for such replacements;
•the omission of the substantial amortization expense associated with our intangible assets further limits the usefulness of EBITDA and EBITDA As Defined;
•neither EBITDA nor EBITDA As Defined includes the payment of taxes, which is a necessary element of our operations; and
•EBITDA As Defined excludes the cash expense we have incurred to integrate acquired businesses into our operations, which is a necessary element of certain of our acquisitions.
Because of these limitations, EBITDA and EBITDA As Defined should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA or EBITDA As Defined in isolation and specifically by using other US GAAP measures, such as net income, net sales and operating profit, to measure our operating performance. Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under US GAAP, and neither should be considered as an alternative to net income or cash flow from operations determined in accordance with US GAAP. Our calculation of EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.
The following table sets forth a reconciliation of (loss) income from continuing operations to EBITDA and EBITDA As Defined (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
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|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
|
June 27, 2020
|
|
June 29, 2019
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(Loss) Income from continuing operations
|
$
|
(5)
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|
|
$
|
128
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|
|
$
|
552
|
|
|
$
|
524
|
|
Adjustments:
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|
|
|
|
|
|
|
Depreciation and amortization expense
|
70
|
|
|
63
|
|
|
211
|
|
|
138
|
|
Interest expense, net
|
262
|
|
|
241
|
|
|
762
|
|
|
614
|
|
Income tax provision
|
39
|
|
|
55
|
|
|
112
|
|
|
172
|
|
EBITDA
|
366
|
|
|
487
|
|
|
1,637
|
|
|
1,448
|
|
Adjustments:
|
|
|
|
|
|
|
|
Inventory acquisition accounting adjustments (1)
|
—
|
|
|
89
|
|
|
—
|
|
|
109
|
|
Acquisition integration costs (2)
|
3
|
|
|
41
|
|
|
18
|
|
|
49
|
|
Acquisition transaction-related expenses (3)
|
—
|
|
|
5
|
|
|
1
|
|
|
27
|
|
Non-cash stock compensation expense (4)
|
21
|
|
|
32
|
|
|
59
|
|
|
70
|
|
Refinancing costs (5)
|
1
|
|
|
—
|
|
|
27
|
|
|
3
|
|
COVID-19 & 737 MAX restructuring costs (6)
|
30
|
|
|
—
|
|
|
30
|
|
|
—
|
|
Other, net (7)
|
3
|
|
|
5
|
|
|
8
|
|
|
6
|
|
EBITDA As Defined
|
$
|
424
|
|
|
$
|
659
|
|
|
$
|
1,780
|
|
|
$
|
1,712
|
|
(1)Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.
(2)Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.
(3)Represents transaction-related costs comprising deal fees, legal, financial and tax due diligence expenses and valuation costs that are required to be expensed as incurred.
(4)Represents the compensation expense recognized by TD Group under our stock incentive plans.
(5)Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(6)Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic ($24 million) and 737 MAX production rate changes ($3 million). These were costs related to the Company's actions to reduce its workforce to align with customer demand. This also includes $3 million of 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.).
(7)Primarily represents foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation, and gain or loss on sale of fixed assets.
The following table sets forth a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
June 27, 2020
|
|
June 29, 2019
|
Net cash provided by operating activities
|
$
|
991
|
|
|
$
|
768
|
|
Adjustments:
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|
|
|
Changes in assets and liabilities, net of effects from acquisitions of businesses
|
(134)
|
|
|
(8)
|
|
Interest expense, net (1)
|
737
|
|
|
594
|
|
Income tax provision - current
|
129
|
|
|
167
|
|
Non-cash stock compensation expense (2)
|
(59)
|
|
|
(70)
|
|
Refinancing costs (3)
|
(27)
|
|
|
(3)
|
|
EBITDA
|
1,637
|
|
|
1,448
|
|
Adjustments:
|
|
|
|
Inventory acquisition accounting adjustments (4)
|
—
|
|
|
109
|
|
Acquisition integration costs (5)
|
18
|
|
|
49
|
|
Acquisition transaction-related expenses (6)
|
1
|
|
|
27
|
|
Non-cash stock compensation expense (2)
|
59
|
|
|
70
|
|
Refinancing costs (3)
|
27
|
|
|
3
|
|
COVID-19 & 737 MAX restructuring costs (7)
|
30
|
|
|
—
|
|
Other, net (8)
|
8
|
|
|
6
|
|
EBITDA As Defined
|
$
|
1,780
|
|
|
$
|
1,712
|
|
(1)Represents interest expense excluding the amortization of debt issuance costs and premium and discount on debt.
(2)Represents the compensation expense recognized by TD Group under our stock incentive plans.
(3)Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(4)Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.
(5)Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.
(6)Represents transaction-related costs comprising deal fees; legal, financial and tax due diligence expenses, and valuation costs that are required to be expensed as incurred.
(7)Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic ($24 million) and 737 MAX production rate changes ($3 million). These were costs related to the Company's actions to reduce its workforce to align with customer demand. This also includes $3 million of 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.).
(8)Primarily represents foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation, and gain or loss on sale of fixed assets.