TDG Transdigm Group Incorporated

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the quarterly period ended July 3, 2021

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

For the transition period from             to            

Commission File Number 001-32833

TransDigm Group Incorporated

(Exact name of registrant as specified in its charter)

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

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

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

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

Large Accelerated Filer

☒

Accelerated Filer

☐

Non-Accelerated Filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

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

☐

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

The number of shares outstanding of TransDigm Group Incorporated’s common stock, par value $.01 per share, was 55,112,432 as of July 29, 2021.

INDEX

 

									Page
Part I						FINANCIAL INFORMATION
			Item 1			Financial Statements
						Condensed Consolidated Balance Sheets – July 3, 2021 and September 30, 2020			1
						Condensed Consolidated Statements of Income (Loss) – Thirteen and Thirty-Nine Week Periods Ended July 3, 2021 and June 27, 2020			2
						Condensed Consolidated Statements of Comprehensive Income – Thirteen and Thirty-Nine Week Periods Ended July 3, 2021 and June 27, 2020			3
						Condensed Consolidated Statements of Changes in Stockholders’ Deficit – Thirteen and Thirty-Nine Week Periods Ended July 3, 2021 and June 27, 2020			4
						Condensed Consolidated Statements of Cash Flows – Thirty-Nine Week Periods Ended July 3, 2021 and June 27, 2020			6
						Notes to Condensed Consolidated Financial Statements			7
			Item 2			Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
			Item 3			Quantitative and Qualitative Disclosure About Market Risk			48
			Item 4			Controls and Procedures			48
Part II						OTHER INFORMATION			49
			Item 1			Legal Proceedings			49
			Item 1A			Risk Factors			49
			Item 2			Unregistered Sales of Equity Securities and Use of Proceeds			49
			Item 6			Exhibits			50
SIGNATURES									51

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share amounts)

(Unaudited)

			July 3, 2021						September 30, 2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	4,529					$	4,717
Trade accounts receivable—Net			694						720
Inventories—Net			1,225						1,283
Prepaid expenses and other			275						240
Total current assets			6,723						6,960
PROPERTY, PLANT AND EQUIPMENT—Net			777						752
GOODWILL			8,591						7,889
OTHER INTANGIBLE ASSETS—Net			2,838						2,610
DEFERRED INCOME TAXES			—						17
OTHER			160						167
TOTAL ASSETS			$	19,089					$	18,395
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt			$	276					$	276
Short-term borrowings—trade receivable securitization facility			350						349
Accounts payable			206						218
Accrued and other current liabilities			804						773
Total current liabilities			1,636						1,616
LONG-TERM DEBT			19,384						19,384
DEFERRED INCOME TAXES			420						430
OTHER NON-CURRENT LIABILITIES			781						933
Total liabilities			22,221						22,363
TD GROUP STOCKHOLDERS’ DEFICIT:
Common stock - $.01 par value; authorized 224,400,000 shares; issued 59,272,711 and 58,612,028 at July 3, 2021 and September 30, 2020, respectively			1						1
Additional paid-in capital			1,783						1,581
Accumulated deficit			(3,906)						(4,359)
Accumulated other comprehensive loss			(222)						(401)
Treasury stock, at cost; 4,198,226 shares at July 3, 2021 and September 30, 2020, respectively			(794)						(794)
Total TD Group stockholders’ deficit			(3,138)						(3,972)
NONCONTROLLING INTERESTS			6						4
Total stockholders’ deficit			(3,132)						(3,968)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT			$	19,089					$	18,395

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Amounts in millions, except per share amounts)

(Unaudited) 

			Thirteen Week Periods Ended												Thirty-Nine Week Periods Ended
			July 3, 2021						June 27, 2020						July 3, 2021						June 27, 2020
NET SALES			$	1,218					$	1,022					$	3,519					$	3,930
COST OF SALES			563						531						1,731						1,819
GROSS PROFIT			655						491						1,788						2,111
SELLING AND ADMINISTRATIVE EXPENSES			172						163						531						544
AMORTIZATION OF INTANGIBLE ASSETS			36						42						101						128
INCOME FROM OPERATIONS			447						286						1,156						1,439
INTEREST EXPENSE—NET			263						262						798						762
REFINANCING COSTS			13						1						36						27
OTHER INCOME			(5)						(11)						(37)						(14)
GAIN ON SALE OF BUSINESSES—NET			(68)						—						(69)						—
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			244						34						428						664
INCOME TAX (BENEFIT) PROVISION			(73)						39						(45)						112
INCOME (LOSS) FROM CONTINUING OPERATIONS			317						(5)						473						552
(LOSS) INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX			—						(1)						—						66
NET INCOME (LOSS)			317						(6)						473						618
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			—						—						(2)						(1)
NET INCOME (LOSS) ATTRIBUTABLE TO TD GROUP			$	317					$	(6)					$	471					$	617
NET INCOME (LOSS) APPLICABLE TO TD GROUP COMMON STOCKHOLDERS			$	317					$	(6)					$	398					$	432
Earnings (Loss) per share attributable to TD Group common stockholders:
Earnings (Loss) per share from continuing operations—basic and diluted			$	5.43					$	(0.09)					$	6.83					$	6.38
(Loss) Earnings per share from discontinued operations—basic and diluted			—						(0.01)						—						1.15
Earnings (Loss) per share			$	5.43					$	(0.10)					$	6.83					$	7.53
Cash dividends paid per common share			$	—					$	—					$	—					$	32.50
Weighted-average shares outstanding:
Basic and diluted			58.4						57.3						58.4						57.4

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

			Thirteen Week Periods Ended												Thirty-Nine Week Periods Ended
			July 3, 2021						June 27, 2020						July 3, 2021						June 27, 2020
Net income (loss)			$	317					$	(6)					$	473					$	618
Less: Net income attributable to noncontrolling interests			—						—						(2)						(1)
Net income (loss) attributable to TD Group			$	317					$	(6)					$	471					$	617
Other comprehensive income (loss), net of tax:
Foreign currency translation gain			10						27						121						19
Unrealized gain (loss) on derivatives			2						(14)						58						(136)
Pensions and other postretirement benefits			—						—						—						6
Other comprehensive income (loss), net of tax, attributable to TD Group			12						13						179						(111)
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO TD GROUP			$	329					$	7					$	650					$	506

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Amounts in millions, except share amounts)

(Unaudited)

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

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Amounts in millions, except share amounts)

(Unaudited)

			TD Group Stockholders
			Common Stock												Additional Paid-In Capital												Accumulated Other Comprehensive Loss						Treasury Stock
			Number of Shares						Par Value												Accumulated Deficit												Number of Shares						Value						Non-controlling Interests						Total
BALANCE—September 30, 2020			58,612,028						$	1					$	1,581					$	(4,359)					$	(401)					(4,198,226)						$	(794)					$	4					$	(3,968)
Changes in noncontrolling interest of consolidated subsidiaries, net			—						—						—						—						—						—						—						3						3
Accrued unvested dividend equivalents and other			—						—						—						(5)						—						—						—						—						(5)
Compensation expense recognized for employee stock options			—						—						43						—						—						—						—						—						43
Exercise of employee stock options			240,979						—						32						—						—						—						—						—						32
Net income attributable to TD Group			—						—						—						50						—						—						—						—						50
Foreign currency translation adjustments, net of tax			—						—						—						—						111						—						—						—						111
Unrealized gain on derivatives, net of tax			—						—						—						—						13						—						—						—						13
Pensions and other postretirement benefits adjustments, net of tax			—						—						—						—						—						—						—						—						—
BALANCE—January 2, 2021			58,853,007						$	1					$	1,656					$	(4,314)					$	(277)					(4,198,226)						$	(794)					$	7					$	(3,721)
Changes in noncontrolling interest of consolidated subsidiaries, net			—						—						—						—						—						—						—						—						—
Accrued unvested dividend equivalents and other			—						—						—						(5)						—						—						—						—						(5)
Compensation expense recognized for employee stock options			—						—						21						—						—						—						—						—						21
Exercise of employee stock options			207,509						—						37						—						—						—						—						—						37
Net income attributable to TD Group			—						—						—						104						—						—						—						—						104
Foreign currency translation adjustments, net of tax			—						—						—						—						—						—						—						—						—
Unrealized gain on derivatives, net of tax			—						—						—						—						43						—						—						—						43
Pensions and other postretirement benefits adjustments, net of tax			—						—						—						—						—						—						—						—						—
BALANCE—April 3, 2021			59,060,516						$	1					$	1,714					$	(4,215)					$	(234)					(4,198,226)						$	(794)					$	7					$	(3,521)
Changes in noncontrolling interest of consolidated subsidiaries, net			—						—						—						—						—						—						—						(1)						(1)
Accrued unvested dividend equivalents and other			—						—						—						(8)						—						—						—						—						(8)
Compensation expense recognized for employee stock options			—						—						32						—						—						—						—						—						32
Exercise of employee stock options			212,195						—						37						—						—						—						—						—						37
Net income attributable to TD Group			—						—						—						317						—						—						—						—						317
Foreign currency translation adjustments, net of tax			—						—						—						—						10						—						—						—						10
Unrealized gain on derivatives, net of tax			—						—						—						—						2						—						—						—						2
Pensions and other postretirement benefits adjustments, net of tax			—						—						—						—						—						—						—						—						—
BALANCE—July 3, 2021			59,272,711						$	1					$	1,783					$	(3,906)					$	(222)					(4,198,226)						$	(794)					$	6					$	(3,132)

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

			Thirty-Nine Week Periods Ended
			July 3, 2021						June 27, 2020
OPERATING ACTIVITIES:
Net income			$	473					$	618
Income from discontinued operations, net of tax			—						(66)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			87						83
Amortization of intangible assets and product certification costs			101						128
Amortization of debt issuance costs, original issue discount and premium			26						25
Amortization of inventory step-up			6						—
Amortization of loss contract reserves			(47)						(32)
Refinancing costs			36						27
Gain on sale of businesses, net			(69)						—
Non-cash stock compensation expense			105						59
Deferred income taxes			14						(17)
Foreign currency exchange loss			20						5
Gain on insurance proceeds from fire			(21)						—
Changes in assets/liabilities, net of effects from acquisitions and sales of businesses:
Trade accounts receivable			23						347
Inventories			40						(126)
Income taxes receivable			(90)						(49)
Other assets			(35)						6
Accounts payable			(19)						(48)
Accrued interest			(3)						109
Accrued and other liabilities			(23)						(78)
Net cash provided by operating activities			624						991
INVESTING ACTIVITIES:
Capital expenditures			(80)						(62)
Acquisition of businesses, net of cash acquired			(951)						—
Net proceeds from sale of businesses			259						904
Insurance proceeds for fixed assets damaged from fire			24						—
Net cash (used in) provided by investing activities			(748)						842
FINANCING ACTIVITIES:
Proceeds from exercise of stock options			106						89
Dividend equivalent payments			(73)						(1,928)
Treasury stock purchases			—						(19)
Proceeds from revolving credit facility			200						200
Repayment on revolving credit facility			(200)						—
Repayment on term loans			(56)						(38)
Redemption of 6.50% senior subordinated notes due 2024, net			(1,220)						—
Redemption of 6.50% senior subordinated notes due 2025, net			(762)						—
Redemption of 6.00% senior subordinated notes due 2022, net			—						(1,168)
Proceeds from 5.50% senior subordinated notes due 2027, net			—						2,625
Proceeds from 8.00% senior secured notes due 2025, net			—						1,092
Proceeds from 6.25% senior secured notes due 2026, net			—						401
Proceeds from 4.625% senior subordinated notes due 2029, net			1,189						—
Proceeds from 4.875% senior subordinated notes due 2029, net			743						—
Financing costs and other, net			(1)						(9)
Net cash (used in) provided by financing activities			(74)						1,245
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			10						4
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(188)						3,082
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			4,717						1,467
CASH AND CASH EQUIVALENTS, END OF PERIOD			$	4,529					$	4,549
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest			$	774					$	638
Cash paid during the period for income taxes, net of refunds			$	51					$	194

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THIRTY-NINE WEEK PERIODS ENDED JULY 3, 2021 AND JUNE 27, 2020

(UNAUDITED)

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

Description of the Business

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

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

Impact of COVID-19 Pandemic - Restructuring Costs

The commercial aerospace industry continues to be significantly disrupted, both domestically and internationally, by the COVID-19 pandemic resulting in ongoing business challenges. While global vaccination efforts are underway and commercial air travel demand has shown slight signs of recovery in recent months, the continued impact of COVID-19, including any increases in infection rates, new variants and renewed governmental action to slow the spread of COVID-19 cannot be estimated. Material actions to reduce costs in response to the impact that the pandemic has had on operating results include: (1) reducing the Company's workforce to align operations with customer demand through a reduction in force or through a realignment of certain business units; (2) implementing unpaid furloughs and salary reductions; (3) delaying non-essential capital projects and (4) minimizing discretionary spending.

For the thirteen week period ended July 3, 2021, COVID-19 restructuring costs of less than $1 million were incurred, all of which was recorded in selling and administrative expenses on the condensed consolidated statements of income (loss). For the thirty-nine week period ended July 3, 2021, COVID-19 restructuring costs of approximately $36 million were incurred, of which $26 million was recorded in cost of sales and $10 million was recorded in selling and administrative expenses on the condensed consolidated statements of income (loss). For the thirteen and thirty-nine week periods ended June 27, 2020, COVID-19 restructuring costs of approximately $24 million were incurred, of which $19 million was recorded in cost of sales and $5 million was recorded in selling and administrative expenses on the condensed consolidated statement of income (loss). These costs are primarily related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand.

Additionally, for the thirteen and thirty-nine week periods ended July 3, 2021, the Company incurred approximately $1 million and $4 million, respectively, 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). For the thirteen and thirty-nine week periods ended June 27, 2020, the Company incurred approximately $3 million in incremental costs related to the pandemic.

As of July 3, 2021 and September 30, 2020, the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was approximately $26 million and $13 million, respectively. This accrual is recorded as a component of accrued and other current liabilities on the condensed consolidated balance sheets. The increase in the accrual is primarily driven by costs to reduce its workforce that have been incurred but not paid; partially offset by payments against the accrual. The Company expects to incur additional restructuring and incremental costs related to the COVID-19 pandemic though at a reduced level in comparison to fiscal 2020 and the first half of fiscal 2021. 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.

2.    UNAUDITED INTERIM FINANCIAL INFORMATION

The financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s condensed consolidated financial statements for the interim periods presented. These financial statements and notes should be read in conjunction with the financial statements and related notes for the year ended September 30, 2020 included in TD Group’s Form 10-K filed on November 12, 2020. As disclosed therein, the Company’s annual consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The September 30, 2020 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the thirty-nine week period ended July 3, 2021 are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications have been made to the prior year financial statements to conform to current year presentation.

3.    ACQUISITIONS AND DIVESTITURES

Acquisitions

Cobham Aero Connectivity – On November 24, 2020, the Company entered into a definitive agreement to acquire all the outstanding stock of Chelton Limited, Chelton Avionics Holdings, Inc. and Mastsystem Int'l Oy, collectively, Cobham Aero Connectivity (“CAC”), for an enterprise value of $965 million, inclusive of tax benefits. The acquisition was substantially completed on January 5, 2021 and financed through existing cash on hand. The Company completed the remainder of the acquisition of CAC on February 12, 2021, also through existing cash on hand. CAC operates from two primary facilities (Marlow, United Kingdom and Prescott, Arizona) and is a leading provider of highly engineered antennas and radios for the aerospace end market. The products are primarily proprietary with significant aftermarket content and have a strong presence across major defense platforms as well as select commercial applications. CAC's operating results are included in TransDigm's Airframe segment.

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

The Company accounted for the CAC acquisition using the acquisition method and included the results of operations of the acquisition in its condensed consolidated financial statements from the effective dates of the acquisition. The Company made an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. As of July 3, 2021, the measurement period (not to exceed one year) is open; therefore, the assets acquired and liabilities assumed related to the CAC acquisition are subject to adjustment until the end of the measurement period. The allocation of the purchase price is preliminary and will likely change in future periods, perhaps materially, as fair value estimates of the assets acquired and liabilities assumed are finalized during the allowable one year measurement period. The Company is in the process of obtaining a third-party valuation of certain intangible assets, tangible assets and liabilities of CAC. The fair values of acquired intangibles and certain liabilities, such as loss contract reserves, are determined based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions used to determine the fair values of acquired intangible assets include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including revenue, EBITDA, growth rates, royalty rates and technology obsolescence rates. Significant assumptions used to determine the fair value of the loss contract reserves using the discounted cash flow model include discount rates and forecasted costs to be incurred under the long-term contracts and at-market bid prices for respective contracts. These assumptions are forward looking and could be affected by future economic and market conditions. Pro forma net sales and results of operations for the acquisition had it occurred at the beginning of the applicable thirty-nine week period ended July 3, 2021 or June 27, 2020 are not material and, accordingly, are not provided.

The preliminary allocation of the estimated fair value of assets acquired and liabilities assumed in the CAC acquisition as of the acquisition date, as well as measurement period adjustments recorded as of July 3, 2021, are summarized in the table below (in millions):

(1)The Company expects that of the approximately $694 million of goodwill recognized for the acquisition, approximately $57 million will be deductible for tax purposes. The Company also expects that of the approximately $325 million of other intangible assets recognized for the acquisition, approximately $108 million will be deductible for tax purposes. The goodwill and intangible assets will be deductible over 15 years.

(2)Primarily relates to the recording of loss contract reserves associated with acquired ongoing long-term contracts with customers that were incurring gross margin losses as of the date of acquisition. Based on our review of these contracts, we concluded that the terms of certain contracts were unfavorable when compared to market terms as of the acquisition date. The reserves are preliminarily estimated to be released over a three to five year period.

Divestitures

ScioTeq and TREALITY Simulation Visual Systems – On June 30, 2021, TransDigm completed the divestiture of its ScioTeq and TREALITY Simulation Visual Systems businesses (“ScioTeq and TREALITY”) to OpenGate Capital for approximately $200 million in cash. ScioTeq and TREALITY were acquired by TransDigm as part of its acquisition of Esterline Technologies Corporation ("Esterline") in March 2019 and were included in TransDigm’s Airframe segment.

Technical Airborne Components – On April 27, 2021, TransDigm completed the divestiture of the Technical Airborne Components business (“TAC”) to Searchlight Capital Partners for approximately $40 million in cash. TAC was included in TransDigm’s Airframe segment.

The net gain on sale recognized during the third quarter of fiscal 2021 as a result of the ScioTeq and TREALITY and TAC divestitures was approximately $68 million and is classified as a component of gain on sale of businesses-net within the condensed consolidated statements of income (loss).

Racal Acoustics – On January 29, 2021, TransDigm completed the divestiture of the Racal Acoustics business (“Racal”) to Invisio Communications AB ("Invisio") for approximately $20 million in cash. The gain on sale recognized as a result of the divestiture is immaterial and is classified as a component of gain on sale of businesses-net within the condensed consolidated statements of income (loss). Racal was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Non-aviation segment.

Avista Inc. – On November 17, 2020, TransDigm completed the divestiture of the Avista, Inc. business ("Avista") to Belcan, LLC ("Belcan") for approximately $8 million in cash. Avista was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Airframe segment. The gain on sale recognized as a result of the divestiture is immaterial and is classified as a component of gain on sale of businesses-net within the condensed consolidated statements of income (loss). During the fourth quarter of fiscal 2020, the Company determined Avista met the criteria to be classified as held for sale. Therefore, the assets and liabilities of Avista, which were not material, have been presented as held for sale included in other assets, accrued and other current liabilities and other non-current liabilities in the condensed consolidated balance sheet as of September 30, 2020.

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

Refer to Note 18, "Discontinued Operations," for additional details on the Company's divestitures for fiscal years 2021 and 2020.

4.    RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)," which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. The Company adopted ASU 2016-13 on October 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements. Refer to Note 5, "Revenue Recognition," for additional disclosures.

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

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

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform." Certain amendments were provided for in ASU 2021-01, "Reference Rate Reform (ASC 848): Scope," which was issued in January 2021. This ASU provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate ("LIBOR"). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in this ASU are effective through December 31, 2022. The Company is currently evaluating the impact of adopting this standard on our condensed consolidated financial statements and disclosures.

5.    REVENUE RECOGNITION

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

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

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

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

We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.

When contracts are modified to account for changes in contract specifications and requirements, the Company considers whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original good or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification to an existing contract on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct and at relative stand-alone selling price, they are accounted for as a new contract and performance obligation, which are recognized prospectively.

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

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

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

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

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

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

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

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

For the thirteen and thirty-nine week periods ended July 3, 2021, the revenue recognized that was previously included in contract liabilities was not material.

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

Allowance for Credit Losses - The Company's allowance for credit losses is the allowance for uncollectible accounts. The allowance for uncollectible accounts reduces the trade accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected.

The Company’s method for developing its allowance for credit losses is based on historical write-off experience, the aging of receivables, an assessment of the creditworthiness of customers, economic conditions and other external market information. All provisions for allowances for uncollectible accounts are included in selling and administrative expenses.

As of July 3, 2021 and September 30, 2020, the allowance for uncollectible accounts was $37 million. The allowance for uncollectible accounts is assessed individually at each operating unit by the operating unit’s management team.

6.    EARNINGS (LOSS) PER SHARE

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

7. INVENTORIES

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

Inventories consist of the following (in millions):

8.    INTANGIBLE ASSETS

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

(1)Fully amortized order backlog associated with the Esterline acquisition was written down from the gross carrying amount and accumulated amortization in the second quarter of fiscal 2021 due to being fully amortized. There was no impact on the net balance.

The aggregate amortization expense on identifiable intangible assets for the thirty-nine week periods ended July 3, 2021 and June 27, 2020 was approximately $101 million and $128 million, respectively.

As disclosed in Note 3, "Acquisitions and Divestitures," the estimated fair value of the net identifiable tangible and intangible assets acquired is based on the acquisition method of accounting and is subject to adjustment upon completion of the third-party valuation. Material adjustments may occur. The fair value of the net identifiable tangible and intangible assets acquired will be finalized within the measurement period (not to exceed one year). Intangible assets acquired during the thirty-nine week period ended July 3, 2021 are summarized in the table below (in millions):

The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2020 through July 3, 2021 (in millions):

Given the continued adverse global economic and market conditions attributable to the COVID-19 pandemic, particularly as it pertains to the commercial aerospace sector, the Company continues to monitor for any indicators of impairment of goodwill and indefinite-lived intangible assets. For certain reporting units that have higher commercial aerospace content and potentially present a higher risk for impairment, the Company performed a quantitative impairment test using an income approach in the prior year annual impairment assessment. In the second quarter of fiscal 2021, the Company reviewed the key assumptions used within the models to identify if any changes were necessary. Key assumptions reviewed included revenue growth rates and EBITDA margins, available industry data and management’s determination of the prospective financial information with consideration of the estimated length of time for the commercial aerospace sector to rebound to pre-pandemic levels. As a result of the interim impairment testing performed as of April 3, 2021, no goodwill or indefinite-lived intangible assets were determined to be impaired. We updated our assessment during the third quarter of fiscal 2021 and validated that the assumptions used in the analyses performed as of April 3, 2021 and the resulting conclusions remain appropriate as of July 3, 2021.

9.    DEBT

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

Accrued interest, which is classified as a component of accrued and other current liabilities, was $175.0 million and $177.6 million as of July 3, 2021 and September 30, 2020, respectively.

Issuance of 4.625% Senior Subordinated Notes due 2029 – On January 14, 2021, the Company entered into a purchase agreement in connection with a private offering of $1,200 million of 4.625% Senior Subordinated Notes due 2029 (the “4.625% 2029 Notes”) at an issue price of 100% of the principal amount. The 4.625% 2029 Notes were issued pursuant to an indenture, dated January 20, 2021, among TransDigm, Inc., as issuer, TransDigm Group, TransDigm UK and the other subsidiaries of TransDigm, Inc. named therein, as guarantors.

The 4.625% 2029 Notes bear interest at the rate of 4.625% per annum, which accrues from January 14, 2021 and is payable in arrears on January 15th and July 15th of each year, commencing on July 15, 2021. The 4.625% 2029 Notes mature on January 15, 2029, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.

The Company capitalized $11.3 million representing debt issuance costs associated with the 4.625% 2029 Notes during the thirty-nine week period ended July 3, 2021.

Repurchase of 6.50% Senior Subordinated Notes due 2024 – On January 14, 2021, the Company announced a cash tender offer for any and all of its outstanding 6.50% Senior Subordinated Notes due 2024 (the "2024 Notes"). On February 16, 2021, the Company redeemed the principal amount of $1,200 million, plus accrued interest of approximately $6.3 million and early redemption premium of $19.5 million.

The Company recorded refinancing costs of $23.6 million, consisting of the $19.5 million early redemption premium and the write off of $4.1 million in unamortized debt issuance costs during the thirty-nine week period ended July 3, 2021 in conjunction with the redemption of the 2024 Notes.

Issuance of 4.875% Senior Subordinated Notes due 2029 – On April 12, 2021, the Company entered into a purchase agreement in connection with a private offering of $750 million in 4.875% Senior Subordinated Notes due 2029 (the “4.875% 2029 Notes”) at an issue price of 100% of the principal amount. The 4.875% 2029 Notes were issued pursuant to an indenture, dated April 21, 2021, among TransDigm, Inc., as issuer, TransDigm Group, TransDigm UK and the other subsidiaries of TransDigm, Inc. named therein, as guarantors.

The 4.875% 2029 Notes bear interest at a rate of 4.875% per annum, which accrues from April 12, 2021 and is payable in arrears on May 1st and November 1st of each year, commencing on November 1, 2021. The 4.875% 2029 Notes mature on May 1, 2029, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.

The Company capitalized $7.1 million representing debt issuance costs associated with the 4.875% 2029 Notes during the thirty-nine week period ended July 3, 2021.

Repurchase of 6.50% Senior Subordinated Notes due 2025 – On April 12, 2021, the Company announced a cash tender offer for any and all of its outstanding 6.50% Senior Subordinated Notes due 2025 (the "2025 Notes"). On May 14, 2021, the Company redeemed the principal amount of $750 million, plus accrued interest of approximately $24.4 million and an early redemption premium of $12.2 million.

The Company recorded refinancing costs of $12.1 million, consisting of the $12.2 million early redemption premium and the write off of $2.1 million in unamortized debt issuance costs; offset by the write off of $2.2 million in unamortized premiums during the thirty-nine week period ended July 3, 2021 in conjunction with the redemption of the 2025 Notes.

Amendment No. 8 and Loan Modification Agreement – On May 24, 2021, the Company entered into Amendment No. 8 and Loan Modification Agreement (herein, "Amendment No. 8") to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the "Credit Agreement").

Amendment No. 8, among other things, (i) extends the maturity date of the revolving credit commitments and revolving loans under its existing Credit Agreement to May 24, 2026, and (ii) the LIBOR interest rate per annum applicable to the revolving loans under its existing Credit Agreement is 2.50%, a decrease from the 3.00% rate that applied previously to the amendment. The other terms and conditions that apply to the revolving loans are substantially the same as the terms and conditions that applied to the revolving loans immediately prior to Amendment No. 8.

The refinancing costs incurred in conjunction with Amendment No. 8 during the thirty-nine week period ended July 3, 2021 were not material.

Subsequent Event - Trade Receivables Securitization Facility – On July 27, 2021, the Company amended the Securitization Facility to, among other things, (i) extend the maturity date to July 26, 2022, and (ii) bear interest at a rate of 1.20% plus three month LIBOR, compared to the interest rate of 1.35% plus 0.50% or three month LIBOR, whichever is greater, that applied prior to the amendment. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable. As of July 3, 2021, the Company has borrowed $350 million under the Securitization Facility, which is fully drawn. The refinancing costs incurred in conjunction with the amendment to the Securitization Facility during the thirty-nine week period ended July 3, 2021 were not material.

Government Refundable Advances – Government refundable advances consist of payments received from the Canadian government to assist in research and development related to commercial aviation. The requirement to repay this advance is solely based on year-over-year commercial aviation revenue growth at CMC Electronics, which is a subsidiary of TransDigm. The balance was $30 million at July 3, 2021 and $28 million at September 30, 2020.

Obligations under Finance Leases – The Company leases certain buildings and equipment under finance leases. The present value of the minimum capital lease payments, net of the current portion, represents a balance of $101 million at July 3, 2021 and $57 million at September 30, 2020. Refer to Note 16, "Leases," for further disclosure on the Company's finance lease obligations.

10.    INCOME TAXES

At the end of each reporting period, TD Group makes an estimate of its annual effective income tax rate. The estimate used in the year-to-date period may change in subsequent periods.

During the thirteen week periods ended July 3, 2021 and June 27, 2020, the effective income tax rate was (30.0)% and 113.5%, respectively. During the thirty-nine week periods ended July 3, 2021 and June 27, 2020, the effective income tax rate was (10.5)% and 16.9%, respectively. The Company’s lower effective tax rate for the thirteen and thirty-nine week periods ended July 3, 2021, which was lower than the federal statutory tax rate of 21%, was primarily due to a tax election made on the Company’s recently filed U.S. federal income tax return enabling the Company to utilize its net interest deduction limitation carryforward pursuant to IRC Section 163(j). The associated effective tax rate benefit was primarily the result of the release of the valuation allowance applicable to such carryforward. The Company recognized approximately $69.0 million due to the release of the valuation allowance, of which approximately $51.0 million was recognized as a discrete benefit during the thirteen week period ended July 3, 2021. Also contributing to the Company’s lower effective tax rate was the discrete impact of excess tax benefits associated with share-based compensation.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company is no longer subject to U.S. federal examinations for years before fiscal 2015. The Company is currently under examination for its federal income taxes in the U.S. in Canada for fiscal years 2013 through 2015, in France for fiscal years 2015 through 2019 and in Germany for fiscal years 2014 through 2017. The Company expects the examinations in France to be completed during the current fiscal year. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.

At July 3, 2021 and September 30, 2020, TD Group had $24.2 million and $40.9 million, respectively, in unrecognized tax benefits, the recognition of which would have an effect of approximately $19.0 million and $35.7 million on the effective tax rate at July 3, 2021 and September 30, 2020, respectively. Unrecognized tax benefits were reduced during the thirteen week period ended July 3, 2021 as a result of the partial settlement of tax examinations. The Company believes the tax positions that comprise the unrecognized tax benefits will be reduced by approximately $3.8 million over the next 12 months. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

11.    FAIR VALUE MEASUREMENTS

The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following summarizes the carrying amounts and fair values of financial instruments (in millions):