TRANSDIGM GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2022 AND 2021
(Amounts in millions, except share amounts)
| | | | | | | | | | | |
| 2022 | | 2021 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 3,001 | | | $ | 4,787 | |
Trade accounts receivable—Net | 967 | | | 791 | |
Inventories—Net | 1,332 | | | 1,185 | |
Prepaid expenses and other | 349 | | | 267 | |
Total current assets | 5,649 | | | 7,030 | |
PROPERTY, PLANT AND EQUIPMENT—NET | 807 | | | 770 | |
GOODWILL | 8,641 | | | 8,568 | |
OTHER INTANGIBLE ASSETS—NET | 2,750 | | | 2,791 | |
OTHER | 260 | | | 156 | |
TOTAL ASSETS | $ | 18,107 | | | $ | 19,315 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | |
CURRENT LIABILITIES: | | | |
Current portion of long-term debt | $ | 76 | | | $ | 277 | |
Short-term borrowings—trade receivable securitization facility | 350 | | | 349 | |
Accounts payable | 279 | | | 227 | |
Accrued and other current liabilities | 721 | | | 810 | |
Total current liabilities | 1,426 | | | 1,663 | |
LONG-TERM DEBT | 19,369 | | | 19,372 | |
DEFERRED INCOME TAXES | 596 | | | 485 | |
OTHER NON-CURRENT LIABILITIES | 482 | | | 705 | |
Total liabilities | 21,873 | | | 22,225 | |
TD GROUP STOCKHOLDERS’ DEFICIT: | | | |
Common stock - $.01 par value; authorized 224,400,000 shares; issued 60,049,685 and 59,403,100 at September 30, 2022 and September 30, 2021, respectively | 1 | | | 1 | |
Additional paid-in capital | 2,113 | | | 1,830 | |
Accumulated deficit | (3,914) | | | (3,705) | |
Accumulated other comprehensive loss | (267) | | | (248) | |
Treasury stock, at cost; 5,688,639 and 4,198,226 shares at September 30, 2022 and September 30, 2021, respectively | (1,706) | | | (794) | |
Total TD Group stockholders’ deficit | (3,773) | | | (2,916) | |
NONCONTROLLING INTERESTS | 7 | | | 6 | |
Total stockholders’ deficit | (3,766) | | | (2,910) | |
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 18,107 | | | $ | 19,315 | |
See notes to consolidated financial statements
TRANSDIGM GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in millions, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
NET SALES | $ | 5,429 | | | $ | 4,798 | | | $ | 5,103 | |
COST OF SALES | 2,330 | | | 2,285 | | | 2,456 | |
GROSS PROFIT | 3,099 | | | 2,513 | | | 2,647 | |
SELLING AND ADMINISTRATIVE EXPENSES | 748 | | | 685 | | | 727 | |
AMORTIZATION OF INTANGIBLE ASSETS | 136 | | | 137 | | | 169 | |
INCOME FROM OPERATIONS | 2,215 | | | 1,691 | | | 1,751 | |
INTEREST EXPENSE—NET | 1,076 | | | 1,059 | | | 1,029 | |
REFINANCING COSTS | 1 | | | 37 | | | 28 | |
OTHER EXPENSE (INCOME) | 18 | | | (51) | | | (46) | |
GAIN ON SALE OF BUSINESSES—NET | (7) | | | (69) | | | — | |
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 1,127 | | | 715 | | | 740 | |
INCOME TAX PROVISION | 261 | | | 34 | | | 87 | |
INCOME FROM CONTINUING OPERATIONS | 866 | | | 681 | | | 653 | |
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX | 1 | | | — | | | 47 | |
NET INCOME | 867 | | | 681 | | | 700 | |
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | (1) | | | (1) | | | (1) | |
NET INCOME ATTRIBUTABLE TO TD GROUP | $ | 866 | | | $ | 680 | | | $ | 699 | |
NET INCOME APPLICABLE TO TD GROUP COMMON STOCKHOLDERS | $ | 780 | | | $ | 607 | | | $ | 514 | |
Earnings per share attributable to TD Group common stockholders | | | | | |
Earnings per share from continuing operations—basic and diluted | $ | 13.38 | | | $ | 10.41 | | | $ | 8.14 | |
Earnings per share from discontinued operations—basic and diluted | 0.02 | | | — | | | 0.82 | |
Earnings per share | $ | 13.40 | | | $ | 10.41 | | | $ | 8.96 | |
Cash dividends declared per common share | $ | 18.50 | | | $ | — | | | $ | 32.50 | |
Weighted-average shares outstanding: | | | | | |
Basic and diluted | 58.2 | | | 58.4 | | | 57.3 | |
See notes to consolidated financial statements
TRANSDIGM GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Net income | $ | 867 | | | $ | 681 | | | $ | 700 | |
Less: Net income attributable to noncontrolling interests | (1) | | | (1) | | | (1) | |
Net income attributable to TD Group | $ | 866 | | | $ | 680 | | | $ | 699 | |
Other comprehensive (loss) income, net of tax: | | | | | |
Foreign currency translation adjustment | (379) | | | 90 | | | 76 | |
Unrealized gain (loss) on derivatives | 352 | | | 73 | | | (130) | |
Pension and postretirement benefit plans adjustment | 8 | | | (10) | | | 32 | |
Other comprehensive (loss) income, net of tax, attributable to TD Group | (19) | | | 153 | | | (22) | |
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO TD GROUP | $ | 847 | | | $ | 833 | | | $ | 677 | |
See notes to consolidated financial statements
TRANSDIGM GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Amounts in millions, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TD Group Stockholders | | | | |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Treasury Stock | | | | |
| Number of Shares | | Par Value | | Number of Shares | | Value | | Noncontrolling 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 | — | | | — | | | — | | | (74) | | | — | | | — | | | — | | | — | | | (74) | |
Compensation expense recognized for employee stock options | — | | | — | | | 86 | | | — | | | — | | | — | | | — | | | — | | | 86 | |
Exercise of employee stock options | 988,717 | | | — | | | 116 | | | — | | | — | | | — | | | — | | | — | | | 116 | |
Stock repurchases under repurchase program | — | | | — | | | — | | | — | | | — | | | (36,900) | | | (19) | | | — | | | (19) | |
Net income attributable to TD Group | — | | | — | | | — | | | 699 | | | — | | | — | | | — | | | — | | | 699 | |
Foreign currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | 76 | | | — | | | — | | | — | | | 76 | |
Unrealized loss on derivatives, net of tax | — | | | — | | | — | | | — | | | (130) | | | — | | | — | | | — | | | (130) | |
Pension and postretirement benefit plans adjustment, net of tax | — | | | — | | | — | | | — | | | 32 | | | — | | | — | | | — | | | 32 | |
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 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2 | | | 2 | |
Accrued unvested dividend equivalents and other | — | | | — | | | — | | | (26) | | | — | | | — | | | — | | | — | | | (26) | |
Compensation expense recognized for employee stock options | — | | | — | | | 121 | | | — | | | — | | | — | | | — | | | — | | | 121 | |
Exercise of employee stock options | 791,072 | | | — | | | 128 | | | — | | | — | | | — | | | — | | | — | | | 128 | |
Net income attributable to TD Group | — | | | — | | | — | | | 680 | | | — | | | — | | | — | | | — | | | 680 | |
Foreign currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | 90 | | | — | | | — | | | — | | | 90 | |
Unrealized gain on derivatives, net of tax | — | | | — | | | — | | | — | | | 73 | | | — | | | — | | | — | | | 73 | |
Pension and postretirement benefit plans adjustment, net of tax | — | | | — | | | — | | | — | | | (10) | | | — | | | — | | | — | | | (10) | |
BALANCE—September 30, 2021 | 59,403,100 | | | $ | 1 | | | $ | 1,830 | | | $ | (3,705) | | | $ | (248) | | | (4,198,226) | | | $ | (794) | | | $ | 6 | | | $ | (2,910) | |
Changes in noncontrolling interest of consolidated subsidiaries, net | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
Special dividends and vested dividend equivalents declared | — | | | — | | | — | | | (1,045) | | | — | | | — | | | — | | | — | | | (1,045) | |
Accrued unvested dividend equivalents and other | — | | | — | | | — | | | (30) | | | — | | | — | | | — | | | — | | | (30) | |
Compensation expense recognized for employee stock options | — | | | — | | | 151 | | | — | | | — | | | — | | | — | | | — | | | 151 | |
Exercise of employee stock options | 646,585 | | | — | | | 132 | | | — | | | — | | | — | | | — | | | — | | | 132 | |
Stock repurchases under repurchase program | — | | | — | | | — | | | — | | | — | | | (1,490,413) | | | (912) | | | — | | | (912) | |
Net income attributable to TD Group | — | | | — | | | — | | | 866 | | | — | | | — | | | — | | | — | | | 866 | |
Foreign currency translation adjustment, net of tax | — | | | — | | | — | | | — | | | (379) | | | — | | | — | | | — | | | (379) | |
Unrealized gain on derivatives, net of tax | — | | | — | | | — | | | — | | | 352 | | | — | | | — | | | — | | | 352 | |
Pension and postretirement benefit plans adjustment, net of tax | — | | | — | | | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | |
BALANCE—September 30, 2022 | 60,049,685 | | | $ | 1 | | | $ | 2,113 | | | $ | (3,914) | | | $ | (267) | | | (5,688,639) | | | $ | (1,706) | | | $ | 7 | | | $ | (3,766) | |
See notes to consolidated financial statements
TRANSDIGM GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
OPERATING ACTIVITIES: | | | | | |
Net income | $ | 867 | | | $ | 681 | | | $ | 700 | |
Income from discontinued operations, net of tax | (1) | | | — | | | (47) | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation | 116 | | | 115 | | | 114 | |
Amortization of intangible assets and product certification costs | 137 | | | 138 | | | 169 | |
Amortization of debt issuance costs, original issue discount and premium | 34 | | | 34 | | | 33 | |
Amortization of inventory step-up | 3 | | | 6 | | | — | |
Amortization of loss contract reserves | (39) | | | (55) | | | (36) | |
Refinancing costs | 1 | | | 37 | | | 28 | |
Gain on sale of businesses, net | (7) | | | (69) | | | — | |
Non-cash stock compensation expense | 153 | | | 129 | | | 93 | |
Deferred income taxes | (22) | | | 34 | | | 24 | |
Foreign currency exchange (gains) losses | (40) | | | 11 | | | 22 | |
Gain on insurance proceeds from fire | — | | | (24) | | | — | |
Loss on settlement of the Esterline Retirement Plan (the “ERP”) | 22 | | | — | | | — | |
Contribution to the unfunded portion of the ERP | (16) | | | — | | | — | |
Changes in assets/liabilities, net of effects from acquisitions and sales of businesses: | | | | | |
Trade accounts receivable | (190) | | | (78) | | | 352 | |
Inventories | (134) | | | 79 | | | (62) | |
Income taxes payable (receivable) | 58 | | | (63) | | | (144) | |
Other assets | (56) | | | (33) | | | (16) | |
Accounts payable | 58 | | | 3 | | | (62) | |
Accrued interest | (21) | | | 14 | | | 85 | |
Accrued and other liabilities | 25 | | | (46) | | | (40) | |
Net cash provided by operating activities | 948 | | | 913 | | | 1,213 | |
INVESTING ACTIVITIES: | | | | | |
Capital expenditures | (119) | | | (105) | | | (105) | |
Acquisition of businesses, net of cash acquired | (437) | | | (963) | | | — | |
Net proceeds from sale of businesses | 3 | | | 259 | | | 904 | |
Insurance proceeds for fixed assets damaged from fire | — | | | 24 | | | — | |
Net cash (used in) provided by investing activities | (553) | | | (785) | | | 799 | |
FINANCING ACTIVITIES: | | | | | |
Proceeds from exercise of stock options | 132 | | | 128 | | | 116 | |
Dividends and dividend equivalent payments | (1,091) | | | (73) | | | (1,928) | |
Repurchases of common stock | (912) | | | — | | | (19) | |
Proceeds from issuance of senior subordinated notes, net | — | | | 1,932 | | | 4,114 | |
Repayments of senior subordinated notes, net | — | | | (1,982) | | | (1,167) | |
Proceeds from revolving credit facility | — | | | 200 | | | 200 | |
Repayment on revolving credit facility | (200) | | | (200) | | | — | |
Repayment on term loans | (75) | | | (75) | | | (75) | |
Financing costs and other, net | (2) | | | — | | | (11) | |
Net cash (used in) provided by financing activities | (2,148) | | | (70) | | | 1,230 | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (33) | | | 12 | | | 8 | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,786) | | | 70 | | | 3,250 | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 4,787 | | | 4,717 | | | 1,467 | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 3,001 | | | $ | 4,787 | | | $ | 4,717 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | |
Cash paid during the period for interest, net | $ | 1,057 | | | $ | 1,008 | | | $ | 923 | |
Cash paid during the period for income taxes, net of refunds | $ | 220 | | | $ | 83 | | | $ | 223 | |
See notes to consolidated financial statements
TRANSDIGM GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED SEPTEMBER 30, 2022, 2021 AND 2020
1. DESCRIPTION OF THE BUSINESS
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.
2. ACQUISITIONS AND DIVESTITURES
Acquisitions
DART Aerospace – On March 14, 2022, the Company entered into a definitive agreement to acquire all the outstanding stock of DART Aerospace (“DART”) for a total purchase price of $359 million, which is net of a working capital settlement received in the fourth quarter of fiscal 2022 of approximately $1 million. The acquisition was completed on May 25, 2022 and financed through existing cash on hand. DART operates from four primary facilities (Hawkesbury, Ontario, Canada; Portland, Oregon; Fort Collins, Colorado and Chihuahua, Mexico) and is a leading provider of highly engineered, unique helicopter mission equipment solutions that predominantly service civilian aircraft. The products are primarily proprietary with significant aftermarket content. DART's operating results are included within TransDigm's Airframe segment.
The Company accounted for the DART acquisition using the acquisition method and included the results of operations of the acquisition in its consolidated financial statements from the effective date 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 September 30, 2022, the measurement period (not to exceed one year) is open; therefore, the assets acquired and liabilities assumed related to the DART acquisition are subject to adjustment until the end of the respective 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, including those related to deferred taxes and income taxes. The Company is in the process of finalizing a third-party valuation of certain intangible assets and tangible assets of DART. The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”), growth rates, royalty rates and technology obsolescence rates. These assumptions are forward looking and could differ from future economic and market conditions. Pro forma net sales and results of operations for the acquisition had it occurred at the beginning of the fiscal years ended September 30, 2022 or September 30, 2021 are not material and, accordingly, are not provided.
The allocation of the estimated fair value of assets acquired and liabilities assumed in the DART acquisition as of the May 25, 2022 acquisition date is summarized in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Preliminary | | Measurement Period | | Adjusted Preliminary | |
| | Allocation | | Adjustments (2) | | Allocation | |
Assets acquired (excluding cash): | | | | | | | |
Trade accounts receivable | | $ | 16 | | | $ | (1) | | | $ | 15 | | |
Inventories | | 33 | | — | | | 33 | | |
Prepaid expenses and other | | 4 | | 1 | | | 5 | | |
Property, plant and equipment | | 9 | | — | | | 9 | | |
Goodwill | | 236 | | (34) | | | 202 | | (1) |
Other intangible assets | | 112 | | 36 | | | 148 | | (1) |
Other | | 8 | | — | | | 8 | | |
Total assets acquired (excluding cash) | | 418 | | | 2 | | | 420 | | |
Liabilities assumed: | | | | | | | |
Accounts payable | | 4 | | — | | | 4 | | |
Accrued and other current liabilities | | 11 | | 2 | | | 13 | | |
Deferred income taxes | | 35 | | 1 | | | 36 | | |
Other non-current liabilities | | 8 | | — | | | 8 | | |
Total liabilities assumed | | 58 | | | 3 | | | 61 | | |
Net assets acquired | | $ | 360 | | | $ | (1) | | | $ | 359 | | |
(1)The Company expects that none of the approximately $202 million of goodwill and $148 million of other intangible assets recognized for the acquisition will be deductible for tax purposes.
(2)Measurement period adjustments primarily related to the adjustments in the fair values of the acquired other intangible assets from the third-party valuation. The offset was to goodwill.
Extant Aerospace Acquisitions – For the fiscal year ended September 30, 2022, the Company's Extant Aerospace subsidiary, which is included in TransDigm’s Power & Control segment, completed a series of acquisitions of substantially all of the assets and technical data rights of certain product lines, each meeting the definition of a business, for a total purchase price of $88 million, of which $78 million was paid via existing cash on hand and $10 million was accrued as a component of accrued and other current liabilities in the consolidated balance sheet as of September 30, 2022. The allocation of the purchase prices is preliminary and will likely change in future periods as fair value estimates of the assets acquired and liabilities assumed are finalized. The Company expects that all of the approximately $57 million of goodwill and all of the approximately $37 million of other intangible assets recognized for the acquisitions will be deductible for tax purposes over 15 years. Pro forma net sales and results of operations for the acquisitions, had they occurred at the beginning of the fiscal years ended September 30, 2022 or September 30, 2021, are not material and, accordingly, are not provided. Acquisitions completed by the Company’s Extant Aerospace subsidiary in fiscal 2021 and fiscal 2020 were not material.
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 a total purchase price of $945 million. 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 within TransDigm's Airframe segment.
The Company accounted for the CAC acquisition using the acquisition method of accounting and third-party valuation appraisals and included the results of operations of the acquisition in its consolidated financial statements from the effective dates of the acquisition. The total purchase price of CAC was allocated to the underlying assets acquired and liabilities assumed based upon the respective fair value at the dates of acquisition. To the extent the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill. 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 growth rates, EBITDA margins, 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 differ from future economic and market conditions.
The final allocation of the fair value of assets acquired and liabilities assumed in the CAC acquisition as of the acquisition dates, as well as measurement period adjustments recorded within the permissible one year measurement period, are summarized in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Preliminary | | Measurement Period | | Final | |
| | Allocation | | Adjustments (2) | | Allocation | |
Assets acquired (excluding cash): | | | | | | | |
Trade accounts receivable | | $ | 31 | | | $ | 1 | | | $ | 32 | | |
Inventories | | 27 | | 2 | | | 29 | | |
Prepaid expenses and other | | 10 | | (3) | | | 7 | | |
Property, plant and equipment | | 18 | | 3 | | | 21 | | |
Goodwill | | 636 | | 61 | | | 697 | | (1) |
Other intangible assets | | 309 | | 15 | | | 324 | | (1) |
Other | | 34 | | (3) | | | 31 | | |
Total assets acquired (excluding cash) | | 1,065 | | | 76 | | | 1,141 | | |
Liabilities assumed: | | | | | | | |
Accounts payable | | 15 | | 3 | | | 18 | | |
Accrued and other current liabilities | | 38 | | 6 | | | 44 | | |
Deferred income taxes | | 38 | | (7) | | | 31 | | |
Other non-current liabilities | | 29 | | 74 | | | 103 | | |
Total liabilities assumed | | 120 | | | 76 | | | 196 | | |
Net assets acquired | | $ | 945 | | | $ | — | | | $ | 945 | | |
(1)Of the approximately $697 million of goodwill recognized for the acquisition, approximately $65 million is deductible for tax purposes. Of the approximately $324 million of other intangible assets recognized for the acquisition, approximately $105 million is deductible for tax purposes. The goodwill and other intangible assets are deductible over 15 years.
(2)Primarily relates to the recording of loss contract reserves within accrued and other current liabilities and other non-current liabilities associated with acquired ongoing long-term contracts with customers that were incurring negative gross margins as of the date of acquisition. The offset was to goodwill. 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 loss contract reserves, totaling $80.6 million, will be released over an estimated three to five year period. As of September 30, 2022 and 2021, $52.1 million and $75.7 million remains reserved for.
The acquisitions completed by the Company strengthen and expand the Company’s position to design, produce and supply highly engineered proprietary aerospace components in niche markets with significant aftermarket content and provide opportunities to create value through the application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure, and providing highly engineered value-added products to customers). The purchase price paid reflect the current EBITDA and cash flows, as well as the future EBITDA and cash flows expected to be generated by the businesses, 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.
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 (“OpenGate”) for approximately $200 million in cash. During the second quarter of fiscal 2021, the Company determined ScioTeq and TREALITY met the criteria to be classified as held for sale. 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 in fiscal 2021 as a result of the ScioTeq and TREALITY and TAC divestitures was approximately $68 million, which was classified as a component of gain on sale of businesses-net within the consolidated statements of income. During the second quarter of fiscal 2022, the Company received approximately $3 million in cash proceeds related to a final working capital settlement for the ScioTeq and TREALITY divestiture. These proceeds are classified as a component of gain on sale of businesses-net in the consolidated statements of income.
Racal Acoustics – On January 29, 2021, TransDigm completed the divestiture of the Racal Acoustics business (“Racal”) to Invisio Communications AB for approximately $20 million in cash. Racal was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Non-aviation segment. The gain on sale recognized in fiscal 2021 as a result of the divestiture is not material and was classified as a component of gain on sale of businesses-net in the consolidated statements of income.
Avista, Inc. – On November 17, 2020, TransDigm completed the divestiture of the Avista, Inc. business (“Avista”) to Belcan, LLC 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 in fiscal 2021 as a result of the divestiture was not material and is classified as a component of gain on sale of businesses-net in the consolidated statements of income.
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 23, “Discontinued Operations” for additional information.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation – The accompanying consolidated financial statements were prepared in conformity with U.S. GAAP and include the accounts of TD Group and subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain reclassifications within the notes to the consolidated financial statements have been made to the prior year amounts to conform to the current year presentation, none of which are material.
Revenue Recognition – 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. The majority of the Company's revenue is recorded at a point in time. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. Refer to Note 5, “Revenue Recognition,” for further details.
Shipping and Handling Costs – Shipping and handling costs are included in cost of sales in the consolidated statements of income.
Research and Development Costs – The Company expenses research and development costs as incurred and classifies such amounts in selling and administrative expenses. The expense recognized for research and development costs for the fiscal years ended September 30, 2022, 2021 and 2020 was approximately $94.9 million, $105.6 million, and $130.9 million, respectively.
Cash Equivalents—The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
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. The allowance also incorporates a provision for the estimated impact of disputes with customers. All provisions for allowances for uncollectible accounts are included in selling and administrative expenses. The determination of the amount of the allowance for uncollectible accounts is subject to judgment and estimation by management. If circumstances change or economic conditions deteriorate or improve, the allowance for uncollectible accounts could increase or decrease. Refer to Note 7, “Trade Accounts Receivable,” for further information.
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. Provision for potentially obsolete or slow-moving inventory is made based on management’s analysis of inventory levels and future sales forecasts. Refer to Note 8, “Inventories,” for further details.
Property, Plant and Equipment – Property, plant and equipment are stated at cost and include improvements which significantly increase capacities or extend the useful lives of existing plant and equipment. Depreciation is computed using the straight-line method over the following estimated useful lives: land improvements from 10 to 20 years, buildings and improvements from 5 to 30 years, machinery and equipment from 2 to 10 years and furniture and fixtures from 3 to 10 years. Net gains or losses related to asset dispositions are recognized in earnings in the period in which dispositions occur. Routine maintenance, repairs and replacements are expensed as incurred. Amortization expense of assets accounted for as finance leases is included within depreciation expense.
Property, plant and equipment is assessed for potential impairment whenever indicators of impairment are present by determining whether the carrying value of the property can be recovered through projected, undiscounted cash flows from future operations over the property’s remaining estimated useful life. Any impairment recognized is the amount by which the carrying amount exceeds the fair value of the asset. Fair value is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. Refer to Note 9, “Property, Plant and Equipment,” for further details.
Debt Issuance Costs, Premiums and Discounts – The cost of obtaining financing as well as premiums and discounts are amortized using the effective interest method over the terms of the respective obligations as a component of interest expense within the consolidated statements of income. Debt issuance costs are presented in the consolidated balance sheets as a direct reduction from the carrying amount of the related debt liabilities. Refer to Note 12, “Debt,” for further details.
Financial Instruments – Interest rate swap and cap agreements are used to manage interest rate risk associated with floating-rate borrowings under our credit facility. The interest rate swap and cap agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s variable rate debt to a fixed rate basis through the expiration date of the interest rate swap and cap agreements, thereby reducing the impact of interest rate volatility on future interest expense. These agreements involve the receipt of variable rate amounts in exchange for fixed rate interest payments over the term of the agreements without an exchange of the underlying principal amount. These derivative instruments qualify as effective cash flow hedges under U.S. GAAP.
The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and results of operations 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.
For the interest rate swap and cap agreements and the foreign currency forward contracts designated as cash flow hedges, the effective portion of the gain or loss from the financial instruments is reported as a component of accumulated other comprehensive loss in stockholders’ deficit and subsequently reclassified into earnings in the same line as the hedged item in the same period or periods during which the hedged item affected earnings. As the interest rate swap and cap agreements are used to manage interest rate risk, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in interest expense-net in the consolidated statements of income. As the foreign currency forward exchange contracts are used to manage foreign currency exposure primarily arising from sales to third parties, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in net sales in the consolidated statements of income. The cash flows from settled contracts are recognized in net cash provided by operating activities in the consolidated statements of cash flows. Refer to Note 21, “Derivatives and Hedging Activities,” for further details.
Goodwill and Other Intangible Assets – In accordance with ASC 805, “Business Combinations,” the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed were recognized as goodwill. The valuations of the acquired assets and liabilities assumed will impact the determination of future operating results. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates and EBITDA margins, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. Fair value adjustments to the Company’s assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the merger or acquisition. Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so.
Goodwill is the excess of the purchase price paid over the estimated fair value of the net assets of a business acquired. Other intangible assets consist of identifiable intangibles acquired or recognized in accounting for the acquisitions (trademarks, trade names, technology, customer relationships, order backlog and other intangible assets). Goodwill and intangible assets that have indefinite useful lives (i.e., trademarks and trade names) are subject to annual impairment testing. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. The Company performs an annual impairment test for goodwill and other intangible assets as of the first day of the fourth fiscal quarter of each year, or more frequently, if an event occurs or circumstances change that would more likely than not reduce fair value below carrying value.
At the time of goodwill impairment testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, and whether it is therefore necessary to perform the quantitative goodwill impairment test. If, after considering all events and circumstances that support a qualitative evaluation the Company determines that it is not more-likely-than-not that the goodwill and/or indefinite-lived intangible assets are impaired, then performing the single-step quantitative analysis to determine if there is impairment would be unnecessary. Conversely, if it is more-likely-than-not that the goodwill and/or indefinite-lived intangible assets are impaired, then the Company would proceed with the single-step quantitative analysis to determine if there is a goodwill and/or indefinite-lived intangible asset impairment loss. In this application, the definition of “more-likely-than-not” is interpreted as a likelihood of more than 50%.
U.S. GAAP requires that the annual, and any interim, impairment assessment be performed at the reporting unit level. Our reporting units have been identified at the operating unit level, which is one level below our operating segments. Substantially all goodwill was determined and recognized for each reporting unit pursuant to the accounting for the merger or acquisition as of the date of each transaction. With respect to acquisitions integrated into an existing reporting unit, any acquired goodwill is combined with the goodwill of the reporting unit.
The impairment test for indefinite lived intangible assets consists of a comparison between their fair values and carrying values. If the carrying amounts of intangible assets that have indefinite useful lives exceed their fair values, an impairment loss will be recognized in an amount equal to the sum of any such excesses.
The Company had 47 reporting units with goodwill and 44 reporting units with indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2022, the date of the annual impairment test. Based on its initial qualitative assessment over each of the reporting units, the Company identified 13 reporting units to test for impairment using a quantitative test for both goodwill and indefinite-lived intangible assets. The 13 reporting units selected for quantitative testing have higher commercial aerospace content and, as a result, have been more adversely impacted by the COVID-19 pandemic. The estimated fair values of each of these reporting units and other indefinite-lived intangible assets were in excess of their respective carrying values. The Company performed a sensitivity analysis on certain company-specific projected data, specifically earnings before taxes and net sales, which are significant assumptions in the discounted cash flow valuation model to determine estimated fair value. With a ten percentage point decrease in earnings before taxes and net sales data, all of the reporting units would continue to have fair values in excess of their respective carrying values of goodwill and other indefinite-lived intangible assets. As a result of the impairment testing performed as of the first day of the fourth quarter, no indefinite-lived intangible assets or goodwill was determined to be impaired. As economic and market conditions have not changed significantly since the first day of the fourth quarter, this conclusion remains appropriate as of September 30, 2022.
The Company assesses the recoverability of its amortizable intangible assets only when indicators of impairment are present by determining whether the carrying value can be recovered through projected, undiscounted cash flows from future operations over their remaining lives. Amortization of amortizable intangible assets is computed using the straight-line method over the following estimated useful lives: technology from 20 to 22 years, order backlog from 1 to 1.5 years, customer relationships over 20 years and other intangible assets over 20 years. No indicators of impairment on the amortizable intangible assets were identified in fiscal 2022.
Stock-Based Compensation – The Company records stock-based compensation expense using the Black-Scholes pricing model based on certain valuation assumptions. Compensation expense is recorded over the vesting periods of the stock options, adjusted for expected forfeitures. The Company has classified stock-based compensation primarily within selling and administrative expenses to correspond with the classification of employees that receive stock option grants. The Company also evaluates any subsequent changes to the respective option holders terms under the modification rules of ASC 718. If determined to be a modification, the Black-Scholes pricing model is updated as of the date of the modification resulting in a cumulative catch up to expense, if necessary. Refer to Note 18, “Stock-Based Compensation,” for further information.
Income Taxes – The provision for income taxes is calculated using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax effect of temporary differences between the financial statement carrying amount of assets and liabilities and the amounts used for income tax purposes and for certain changes in valuation allowances. Valuation allowances are recorded to reduce certain deferred tax assets when, in our estimation, it is more likely than not that a tax benefit will not be realized. We recognize uncertain tax positions when we have determined it is more likely than not that a tax position will be sustained upon examination. However, new information may become available, or applicable laws or regulations may change, thereby resulting in a favorable or unfavorable adjustment to amounts recorded. Refer to Note 14, “Income Taxes,” for further information.
Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Comprehensive Income (Loss) – The term “comprehensive income (loss)” represents the change in stockholders’ equity (deficit) from transactions and other events and circumstances resulting from non-stockholder sources. The Company’s accumulated other comprehensive income or loss, consisting principally of fair value adjustments to its interest rate swap and cap agreements (net of tax), cumulative foreign currency translation adjustments and pension liability adjustments (net of tax), is reported separately in the accompanying consolidated statements of comprehensive income.
Foreign Currency Translation and Transactions – The assets and liabilities of subsidiaries located outside the United States are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Revenue and expense items are translated at the average monthly exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income and those resulting from translation of financial statements, including gains and losses from certain intercompany transactions, are accumulated as a separate component of other comprehensive income (loss) for the period. Foreign currency (gains) or losses recognized in cost of sales on the consolidated statements of income from changes in exchange rates were ($39.7) million, $10.9 million and $22.0 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively.
Earnings per Share – Earnings per share information is determined using the two-class method, which includes the weighted-average number of common shares outstanding during the period and other securities that participate in cash dividends (“participating securities”). Our vested stock options are considered “participating securities” because they include non-forfeitable rights to cash dividends. In applying the two-class method, earnings are allocated to both common shares and participating securities based on their respective weighted-average shares outstanding for the period. Diluted earnings per share information may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated using the treasury stock method. Contingently issuable shares are not included in earnings per share until the period in which the contingency is satisfied. Refer to Note 6, “Earnings Per Share,” for further information.
Pension Benefits – The Company accounts for net periodic pension benefit cost (income) using the end of the fiscal year as our measurement date. Management selects appropriate assumptions including the discount rate, rate of increase in future compensation levels and assumed long-term rate of return on plan assets. The assumptions are based upon historical results, the current economic environment and reasonable expectations of future events. Actual results which vary from our assumptions are accumulated and amortized over future periods, and accordingly, are recognized in expense in these periods. Significant differences between the assumptions and actual experience or significant changes in assumptions could impact the pension costs and the pension obligation. Refer to Note 13, “Retirement Plans,” for further information.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Accounting Standards Codification (“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. The Company adopted ASU 2019-12 on October 1, 2021. The adoption of this standard did not have a material impact on our 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 evaluating the impact of reference rate reform on our existing Credit Agreement and our interest rate swap and cap agreements. To the extent that, prior to December 31, 2022, the Company enters into any transactions for which the optional practical expedients permissible under ASC 848 are applied, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements and disclosures. The Company continues to monitor for future amendments, such as the current proposal by the FASB to defer the sunset date of reference rate reform relief to December 31, 2024.
5. REVENUE RECOGNITION
TransDigm's sales are concentrated in the aerospace and defense 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 consolidated statements of income, and are not considered a performance obligation to our customers.
The Company pays sales commissions that relate to contracts for products or services that are satisfied at a point in time or over a period of one year or less and are expensed as incurred. These costs are reported as a component of selling and administrative expenses in the consolidated statements of income.
In fiscal 2022, 2021 and 2020, no customer individually accounted for 10% or more of the Company’s net sales.
Net sales to foreign customers, primarily in Western Europe, Canada and Asia, were $1.9 billion during the fiscal year ended 2022 and $1.7 billion during the fiscal years ended 2021 and 2020, respectively.
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 (Deferred revenue) 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):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Contract assets, current (1) | $ | 119 | | | $ | 70 | |
Contract assets, non-current (2) | 1 | | | 2 | |
Total contract assets | 120 | | | 72 | |
Contract liabilities, current (3) | 45 | | | 25 | |
Contract liabilities, non-current (4) | 9 | | | 5 | |
Total contract liabilities | 54 | | | 30 | |
Net contract assets | $ | 66 | | | $ | 42 | |
(1)Included in prepaid expenses and other on the consolidated balance sheets.
(2)Included in other non-current assets on the consolidated balance sheets.
(3)Included in accrued and other current liabilities on the consolidated balance sheets.
(4)Included in other non-current liabilities on the consolidated balance sheets.
The increase in the Company's total contract assets during fiscal 2022 primarily is due to the timing and status of work in process and/or milestones of certain contracts. The increase in the Company's total contract liabilities during fiscal 2022 primarily is due to the receipt of advance payments as well as the contract liabilities of DART, which was acquired in May 2022.
For the fiscal year ended September 30, 2022, the revenue recognized that was previously included in contract liabilities was not material.
Refer to Note 17, “Segments,” for disclosures related to the disaggregation of revenue.
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data) using the two-class method:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Numerator for earnings per share: | | | | | |
Income from continuing operations | $ | 866 | | | $ | 681 | | | $ | 653 | |
Less: Net income attributable to noncontrolling interests | (1) | | | (1) | | | (1) | |
Net income from continuing operations attributable to TD Group | 865 | | | 680 | | | 652 | |
Less: Dividends paid on participating securities | (86) | | | (73) | | | (185) | |
Income from discontinued operations, net of tax | 1 | | | — | | | 47 | |
Net income applicable to TD Group common stockholders—basic and diluted | $ | 780 | | | $ | 607 | | | $ | 514 | |
Denominator for basic and diluted earnings per share under the two-class method: | | | | | |
Weighted-average common shares outstanding | 54.8 | | | 54.8 | | | 53.9 | |
Vested options deemed participating securities | 3.4 | | | 3.6 | | | 3.4 | |
Total shares for basic and diluted earnings per share | 58.2 | | | 58.4 | | | 57.3 | |
| | | | | |
Earnings per share from continuing operations—basic and diluted | $ | 13.38 | | | $ | 10.41 | | | $ | 8.14 | |
Earnings per share from discontinued operations—basic and diluted | 0.02 | | | — | | | 0.82 | |
Earnings per share | $ | 13.40 | | | $ | 10.41 | | | $ | 8.96 | |
7. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consist of the following (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Trade accounts receivable—gross | $ | 1,002 | | | $ | 821 | |
Allowance for uncollectible accounts | (35) | | | (30) | |
Trade accounts receivable—Net | $ | 967 | | | $ | 791 | |
At September 30, 2022, one customer individually accounted for approximately 10% of the Company’s trade accounts receivable-gross. In addition, approximately 40% of the Company’s trade accounts receivable-gross was due from entities that operate principally outside of the United States - primarily in Western Europe, Canada and Asia. Credit is extended based on an evaluation of each customer’s financial condition and collateral is generally not required.
The increase in the allowance for uncollectible accounts for the fiscal year ended September 30, 2022 is primarily related to an increase in the estimate for credit losses on accounts receivable for certain non-U.S. customers and certain customers impacted by the Russia and Ukraine conflict. The allowance for uncollectible accounts is assessed individually at each operating unit by the operating unit’s management team.
Refer to Note 3, “Summary of Significant Accounting Policies,” for additional information regarding the Company’s allowance for uncollectible accounts.
8. INVENTORIES
Inventories consist of the following (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Raw materials and purchased component parts | $ | 959 | | | $ | 850 | |
Work-in-progress | 359 | | | 322 | |
Finished goods | 210 | | | 207 | |
Total | 1,528 | | | 1,379 | |
Reserves for excess and obsolete inventory | (196) | | | (194) | |
Inventories—Net | $ | 1,332 | | | $ | 1,185 | |
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Land and improvements | $ | 103 | | | $ | 103 | |
Buildings and improvements | 461 | | | 409 | |
Machinery, equipment and other | 945 | | | 832 | |
Construction-in-progress | 78 | | | 61 | |
Total | 1,587 | | | 1,405 | |
Accumulated depreciation | (780) | | | (635) | |
Property, plant and equipment—Net | $ | 807 | | | $ | 770 | |
10. INTANGIBLE ASSETS
Other intangible assets-net in the consolidated balance sheets consist of the following at September 30 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Trademarks & trade names | $ | 990 | | | $ | — | | | $ | 990 | | | $ | 983 | | | $ | — | | | $ | 983 | |
Technology | 2,054 | | | 780 | | | 1,274 | | | 2,009 | | | 679 | | | 1,330 | |
Order backlog | 7 | | | 3 | | | 4 | | | 16 | | | 11 | | | 5 | |
Customer relationships | 580 | | | 104 | | | 476 | | | 545 | | | 78 | | | 467 | |
Other | 9 | | | 3 | | | 6 | | | 18 | | | 12 | | | 6 | |
Total | $ | 3,640 | | | $ | 890 | | | $ | 2,750 | | | $ | 3,571 | | | $ | 780 | | | $ | 2,791 | |
As disclosed in Note 2, “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 for certain acquisitions. 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 fiscal year ended September 30, 2022 are summarized in the table below (in millions):
| | | | | | | | | | | |
| Gross Amount | | Amortization Period |
Intangible assets not subject to amortization: | | | |
Goodwill | $ | 259 | | | |
Trademarks and trade names | 26 | | | |
| 285 | | | |
Intangible assets subject to amortization: | | | |
Technology | 89 | | | 20 years |
Order backlog | 5 | | | 1.5 years |
Customer relationships | 65 | | | 20 years |
| 159 | | | |
Total | $ | 444 | | | |
Information regarding the amortization expense of amortizable intangible assets is detailed below (in millions):
Annual Amortization Expense:
| | | | | |
Fiscal Years Ended September 30, | |
2022 | $ | 136 | |
2021 | 137 | |
2020 | 169 | |
Estimated Amortization Expense:
| | | | | |
Fiscal Years Ended September 30, | |
2023 | $ | 137 | |
2024 | 135 | |
2025 | 134 | |
2026 | 134 | |
2027 | 134 | |
The following is a summary of changes in the carrying value of goodwill by segment for the fiscal years ended September 30, 2021 and 2022 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Power & Control | | Airframe | | Non-aviation | | Total |
Balance at September 30, 2020 | $ | 4,141 | | | $ | 3,647 | | | $ | 101 | | | $ | 7,889 | |
Goodwill acquired during the period | 9 | | | 694 | | | — | | | 703 | |
Goodwill divested during the period | (4) | | | (32) | | | (8) | | | (44) | |
Currency translation adjustments and other | 3 | | | 17 | | | — | | | 20 | |
Balance at September 30, 2021 | 4,149 | | | 4,326 | | | 93 | | | 8,568 | |
Goodwill acquired during the period | 57 | | | 202 | | | — | | | 259 | |
Purchase price allocation adjustments (1) | — | | | 3 | | | — | | | 3 | |
Currency translation adjustments and other | (51) | | | (138) | | | — | | | (189) | |
Balance at September 30, 2022 | $ | 4,155 | | | $ | 4,393 | | | $ | 93 | | | $ | 8,641 | |
(1)Primarily related to opening balance sheet adjustments recorded from the acquisition of CAC up to the expiration of the one year measurement period in January 2022.
11. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities consist of the following (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Interest | $ | 170 | | | $ | 191 | |
Compensation and related benefits | 168 | | | 167 | |
Contract liabilities, current (Note 5) | 45 | | | 25 | |
Loss contract reserves | 40 | | | 46 | |
Dividend equivalent payments, current (Note 18) | 39 | | | 46 | |
Product warranties | 26 | | | 29 | |
Environmental and other litigation reserves (Note 15) | 25 | | | 14 | |
Current operating lease liabilities (Note 19) | 18 | | | 20 | |
Foreign currency forward exchange contracts (Note 21) | 11 | | | 4 | |
Interest rate swap agreements (Note 21) | — | | | 100 | |
Other | 179 | | | 168 | |
Accrued and other current liabilities | $ | 721 | | | $ | 810 | |
12. DEBT
The Company’s debt consists of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Gross Amount | | Debt Issuance Costs | | Original Issue (Discount) or Premium | | Net Amount |
Short-term borrowings—trade receivable securitization facility | $ | 350 | | | $ | — | | | $ | — | | | $ | 350 | |
Term loans | $ | 7,298 | | | $ | (29) | | | $ | (13) | | | $ | 7,256 | |
8.00% senior secured notes due 2025 (“2025 Secured Notes”) | 1,100 | | | (6) | | | — | | | 1,094 | |
6.375% senior subordinated notes due 2026 (“6.375% 2026 Notes”) | 950 | | | (4) | | | — | | | 946 | |
6.875% senior subordinated notes due 2026 (“6.875% 2026 Notes”) | 500 | | | (3) | | | (2) | | | 495 | |
6.25% secured notes due 2026 (“2026 Secured Notes”) | 4,400 | | | (35) | | | 3 | | | 4,368 | |
7.50% senior subordinated notes due 2027 (“7.50% 2027 Notes”) | 550 | | | (3) | | | — | | | 547 | |
5.50% senior subordinated notes due 2027 (“5.50% 2027 Notes”) | 2,650 | | | (15) | | | — | | | 2,635 | |
4.625% senior subordinated notes due 2029 (“4.625% 2029 Notes”) | 1,200 | | | (9) | | | — | | | 1,191 | |
4.875% senior subordinated notes due 2029 (“4.875% 2029 Notes”) | 750 | | | (6) | | | — | | | 744 | |
Government refundable advances | 23 | | | — | | | — | | | 23 | |
Finance lease obligations | 146 | | | — | | | — | | | 146 | |
| 19,567 | | | (110) | | | (12) | | | 19,445 | |
Less: current portion | 77 | | | (1) | | | — | | | 76 | |
Long-term debt | $ | 19,490 | | | $ | (109) | | | $ | (12) | | | $ | 19,369 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Gross Amount | | Debt Issuance Costs | | Original Issue (Discount) or Premium | | Net Amount |
Short-term borrowings—trade receivable securitization facility | $ | 350 | | | $ | (1) | | | $ | — | | | $ | 349 | |
Term loans | $ | 7,374 | | | $ | (39) | | | $ | (17) | | | $ | 7,318 | |
Revolving credit facility | 200 | | | — | | | — | | | 200 | |
2025 Secured Notes | 1,100 | | | (7) | | | — | | | 1,093 | |
6.375% 2026 Notes | 950 | | | (5) | | | — | | | 945 | |
6.875% 2026 Notes | 500 | | | (4) | | | (2) | | | 494 | |
2026 Secured Notes | 4,400 | | | (45) | | | 4 | | | 4,359 | |
7.50% 2027 Notes | 550 | | | (4) | | | — | | | 546 | |
5.50% 2027 Notes | 2,650 | | | (18) | | | — | | | 2,632 | |
4.625% 2029 Notes | 1,200 | | | (10) | | | — | | | 1,190 | |
4.875% 2029 Notes | 750 | | | (7) | | | — | | | 743 | |
Government refundable advances | 29 | | | — | | | — | | | 29 | |
Finance lease obligations | 100 | | | — | | | — | | | 100 | |
| 19,803 | | | (139) | | | (15) | | | 19,649 | |
Less: current portion | 278 | | | (1) | | | — | | | 277 | |
Long-term debt | $ | 19,525 | | | $ | (138) | | | $ | (15) | | | $ | 19,372 | |
Amendment No. 9 and Loan Modification Agreement – On December 29, 2021, the Company entered into Amendment No. 9 and Incremental Revolving Credit Assumption Agreement (herein, “Amendment No. 9”) to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the “Credit Agreement”), which increases the capacity under the revolving credit facility from $760 million to $810 million. The terms and conditions that apply to Amendment No. 9 are the same as the terms and conditions that apply to the existing dollar revolving commitments and term loans under the Credit Agreement.
The Company capitalized $0.2 million representing debt issuance costs associated with Amendment No. 9 during the fiscal year ended September 30, 2022.
Trade Receivable Securitization Facility
The Company’s trade receivable 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 25, 2022, the Company amended the Securitization Facility to, among other things, extend the maturity date to July 25, 2023 and bear interest at a rate of SOFR plus 1.30%, compared to the interest rate of LIBOR plus 1.20% that applied prior to the amendment. As of September 30, 2022, the Company has borrowed $350 million under the Securitization Facility, which is fully drawn. At September 30, 2022, the applicable interest rate was 3.84%. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable.
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 based on year-over-year commercial aviation revenue growth for certain product lines at CMC Electronics, which is a wholly-owned subsidiary of TransDigm. As of September 30, 2022 and 2021, the outstanding balance of these advances were $23 million and $29 million, respectively.
Obligations under Finance Leases
The Company leases certain buildings and equipment under finance leases. The present value of the minimum finance lease payments, net of the current portion, represents a balance of $146 million and $100 million at September 30, 2022 and 2021, respectively. The increase in fiscal 2022 is attributable to certain lease renewals and amendments qualifying as lease modifications resulting in a change in classification from an operating lease to a finance lease. Refer to Note 19, “Leases,” for further disclosure of the Company’s lease obligations.
Senior Secured Term Loans Facility
As of September 30, 2022 and 2021, TransDigm had $7,298 million and $7,374 million in fully drawn term loans (the “Term Loans Facility”) and $810 million in revolving commitments, of which $779 million and $529 million was available to the Company as of September 30, 2022 and 2021, respectively, subject to an interest rate of 2.50% per annum. The unused portion of the revolving commitments is subject to a fee of 0.5% per annum. The increase in available revolving commitments is due to the Company’s October 2021 repayment of $200 million from a previous draw. The Term Loans Facility consists of three tranches of term loans as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Term Loans Facility | | Maturity Date | | Interest Rate | | Aggregate Principal as of September 30, |
| | | 2022 | | 2021 |
Tranche E | | May 30, 2025 | | LIBOR plus 2.25% | | $ | 2,155 | | | $ | 2,177 | |
Tranche F | | December 9, 2025 | | LIBOR plus 2.25% | | $ | 3,418 | | | $ | 3,454 | |
Tranche G | | August 22, 2024 | | LIBOR plus 2.25% | | $ | 1,725 | | | $ | 1,743 | |
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 LIBOR 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 LIBOR related to Tranche E, Tranche F and Tranche G term loans are not subject to a floor. At September 30, 2022 and 2021, the applicable interest rates for all existing tranches (which excludes the impact of our interest rate swaps and caps) were 5.92% and 2.33%, respectively, with the increase due to higher LIBOR particularly in the second half of fiscal 2022. Refer to Note 21, “Derivatives and Hedging Activities,” for information about how our interest rate swaps and cap agreements are used to hedge and offset, respectively, the variable interest rates on the credit facility.
Refinancing Costs
Refinancing costs were not material in fiscal 2022. During the fiscal year ended September 30, 2021, the Company expensed refinancing costs of $37 million, primarily representing the early redemption premium paid in connection with the repurchase of the $1,200 million 6.50% senior subordinated notes due 2024 (the “2024 Notes”) and $750 million 6.50% senior subordinated notes due 2025 (the “2025 Notes”), and also the execution of Amendment No. 8 and Loan Modification Agreement. During the fiscal year ended September 30, 2020, the Company expensed refinancing costs of $28 million primarily representing the early redemption premium paid in connection with the repurchase of the $1,150 million 6.00% senior subordinated notes due 2022 (the “2022 Notes”), and also the execution of Amendment No. 7 and the Refinancing Facility Agreement.
Secured Notes
TransDigm Inc.’s 2025 Secured Notes and 2026 Secured Notes (collectively, the “Secured Notes”) jointly and severally guaranteed, on a senior basis, by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indentures. The Secured Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all the covenants contained in the Secured Notes.
Subordinated Notes
TransDigm Inc.'s 6.375% 2026 Notes, 7.50% 2027 Notes, 5.50% 2027 Notes, 4.625% 2029 Notes, and 4.875% 2029 Notes (collectively, the “TransDigm Inc. Notes”) are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indenture. TransDigm UK's 6.875% 2026 Notes (along with the TransDigm Inc. Notes are referred to collectively as the “Notes”) are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indenture. The Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all the covenants contained in the Notes.
Debt Repayment Schedule
At September 30, 2022, future maturities of long-term debt (including finance leases) are as follows (in millions):
| | | | | |
Fiscal Years Ended September 30, | |
2023 | $ | 77 | |
2024 | 1,770 | |
2025 | 2,150 | |
2026 | 10,269 | |
2027 | 557 | |
Thereafter | 4,744 | |
Total | $ | 19,567 | |
13. RETIREMENT PLANS
The Company maintains certain non-contributory defined benefit pension plans (collectively, referred to as the “pension plans”) covering eligible employees in the U.S. and in other certain countries such as Canada, France, Germany and the United Kingdom. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings. The Company’s funding policy is to contribute actuarial-determined amounts allowable under tax and statutory regulations for the qualified plans. The Company uses a September 30th measurement date for its defined benefit pension plans. The Company also sponsors other post-retirement pension plans for its employees in the U.S. and in Canada (collectively, referred to as the “post-retirement pension plans”). Other post-retirement pension plans are non-contributory health care and life insurance plans.
Net periodic pension benefit cost (income) for the pension plans at the end of each fiscal year consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans |
| 2022 | | 2021 | | 2020 |
| 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 | $ | — | | | $ | 3 | | | $ | 2 | | | $ | 5 | | | $ | 9 | | | $ | 6 | |
Interest cost | 4 | | | 4 | | | 6 | | | 5 | | | 10 | | | 5 | |
Expected return on plan assets | (6) | | | (7) | | | (19) | | | (7) | | | (19) | | | (8) | |
Amortization of net loss | — | | | 1 | | | 1 | | | 2 | | | 1 | | | 1 | |
Curtailment/settlements loss (gain) (1) | 22 | | | — | | | — | | | (2) | | | (1) | | | (1) | |
Net periodic pension benefit cost (income) | $ | 20 | | | $ | 1 | | | $ | (10) | | | $ | 3 | | | $ | — | | | $ | 3 | |
(1)Effective June 30, 2021, the Company terminated the Esterline Technologies Retirement Plan (the “ERP”) in accordance with IRS regulations. Pension obligations were distributed through a combination of lump sum payments to eligible plan participants and the purchase of a group annuity contract. Approximately $107 million in lump sum payments (using existing plan assets) were made during the fiscal year ended September 30, 2022. During the third quarter of fiscal 2022, the Company transferred the remaining benefit obligations of approximately $188 million to an insurance company in order to purchase a group annuity contract which began paying plan benefits in September 2022. The Company made a final cash contribution of approximately $16 million during the third quarter of fiscal 2022 as part of the group annuity purchase. A settlement charge of approximately $22 million, which included $6 million in unrecognized actuarial losses previously recorded as a component of accumulated other comprehensive loss, net of tax, was recorded as a component of other expense (income) in the consolidated statements of income in fiscal 2022.
Net periodic pension benefit cost for the post-retirement pension plans was less than $1 million for each of the fiscal years ended 2022, 2021 and 2020. The components of net periodic pension benefit cost other than service cost are included in other expense (income) in the consolidated statements of income.
The changes in benefit obligations and plan assets, funded status and amounts recognized in the consolidated balance sheets and accumulated other comprehensive income for defined benefit pension and post-retirement plans at September 30, 2022 and 2021, were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Pension Plans | | Post-Retirement Pension Plans |
| September 30, 2022 | | September 30, 2021 | | September 30, 2022 | | September 30, 2021 |
| 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 |
Benefit Obligations | | | | | | | | | | | | | | | |
Beginning balance | $ | 351 | | | $ | 224 | | | $ | 366 | | | $ | 248 | | | $ | 2 | | | $ | 12 | | | $ | 1 | | | $ | 14 | |
Currency translation adjustment | — | | | (21) | | | — | | | 10 | | | — | | | (1) | | | — | | | 1 | |
Service cost | — | | | 3 | | | 2 | | | 5 | | | — | | | — | | | — | | | 1 | |
Interest cost | 4 | | | 4 | | | 6 | | | 5 | | | — | | | — | | | — | | | — | |
Plan participant contributions | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | — | |
Actuarial gain | (30) | | | (53) | | | — | | | (11) | | | — | | | (2) | | | — | | | (3) | |
Curtailments | — | | | — | | | — | | | (4) | | | — | | | — | | | — | | | — | |
Settlements | (295) | | | — | | | (8) | | | (1) | | | — | | | — | | | — | | | — | |
Divestitures | — | | | — | | | — | | | (20) | | | — | | | — | | | — | | | — | |
Other adjustments | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | |
Benefits paid | (15) | | | (9) | | | (16) | | | (9) | | | — | | | (1) | | | — | | | (1) | |
Ending balance | $ | 15 | | | $ | 148 | | | $ | 351 | | | $ | 224 | | | $ | 2 | | | $ | 8 | | | $ | 2 | | | $ | 12 | |
Plan Assets - Fair Value | | | | | | | | | | | | | | | |
Beginning balance | $ | 341 | | | $ | 206 | | | $ | 342 | | | $ | 204 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Currency translation adjustment | — | | | (18) | | | — | | | 9 | | | — | | | — | | | — | | | — | |
Realized and unrealized (loss) gain on plan assets | (39) | | | (49) | | | 22 | | | 14 | | | — | | | — | | | — | | | — | |
Plan participant contributions | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | — | |
Company contributions | 17 | | | 3 | | | — | | | 8 | | | — | | | 1 | | | — | | | 1 | |
Settlements | (295) | | | — | | | (8) | | | (1) | | | — | | | — | | | — | | | — | |
Divestitures | — | | | — | | | — | | | (20) | | | — | | | — | | | — | | | — | |
Other adjustments | — | | | — | | | 1 | | | — | | | — | | | — | | | — | | | — | |
Benefits paid | (15) | | | (9) | | | (16) | | | (9) | | | — | | | (1) | | | — | | | (1) | |
Ending balance | $ | 9 | | | $ | 133 | | | $ | 341 | | | $ | 206 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Funded Status | | | | | | | | | | | | | | | |
Fair value of plan assets | $ | 9 | | | $ | 133 | | | $ | 341 | | | $ | 206 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Benefit obligations | (15) | | | (148) | | | (351) | | | (224) | | | (2) | | | (8) | | | (2) | | | (12) | |
Net amount recognized | $ | (6) | | | $ | (15) | | | $ | (10) | | | $ | (18) | | | $ | (2) | | | $ | (8) | | | $ | (2) | | | $ | (12) | |
Amount Recognized on Consolidated Balance Sheets | | | | | | | | | | | | | | | |
Other assets | $ | — | | | $ | 6 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Accrued and other current liabilities | (1) | | | (1) | | | (3) | | | — | | | — | | | (1) | | | — | | | (1) | |
Other non-current liabilities | (5) | | | (20) | | | (7) | | | (24) | | | (2) | | | (7) | | | (2) | | | (11) | |
Net amount recognized | $ | (6) | | | $ | (15) | | | $ | (10) | | | $ | (18) | | | $ | (2) | | | $ | (8) | | | $ | (2) | | | $ | (12) | |
Amounts Recognized in Accumulated Other Comprehensive Loss (Income) | | | | | | | | | | | | | | | |
Net loss (gain) | $ | 3 | | | $ | 12 | | | $ | 10 | | | $ | 14 | | | $ | (1) | | | $ | (4) | | | $ | (1) | | | $ | (2) | |
Prior service cost | — | | | 2 | | | 1 | | | 1 | | | 1 | | | — | | | 1 | | | — | |
Ending balance | $ | 3 | | | $ | 14 | | | $ | 11 | | | $ | 15 | | | $ | — | | | $ | (4) | | | $ | — | | | $ | (2) | |
The accumulated benefit obligation for all pension plans was $157.8 million and $567.8 million as of September 30, 2022 and September 30, 2021, respectively. The decrease to the accumulated benefit obligation during the current year primarily relates to the settlement of the ERP.
Estimated future benefit payments expected to be paid from the pension and post-retirement pension plans or from the Company’s assets are as follows (in millions):
| | | | | | | | |
Fiscal Years Ended September 30, | | |
2023 | | $ | 12 | |
2024 | | 12 | |
2025 | | 12 | |
2026 | | 12 | |
2027 | | 13 | |
2028 - 2032 | | 66 | |
There is an expected funding requirement of $2.1 million in fiscal 2023 for the non-U.S. pension plans maintained by the Company. There is no expected funding requirement in fiscal 2023 for the U.S. pension plans.
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit Pension Plans | | Non-U.S. Defined Benefit Pension Plans |
Principal assumptions as of year end | 2022 | | 2021 | | 2022 | | 2021 |
Discount rate | 4.29% | | 2.56% | | 4.90% | | 2.40% |
Rate of increase in future compensation levels | N/A (1) | | N/A (1) | | 3.38% | | 3.06% |
Assumed long-term rate of return on plan assets | 2.64% | | 5.74% | | 3.55% | | 3.20% |
(1)As a result of the plan freeze to the ERP for all future benefit accruals and participation by new or rehired employees on or after January 1, 2021, the assumed rate of increase in future compensation levels was not applicable as of September 30, 2022 and 2021, as pay increases are not valued once a defined benefit pension plan is frozen. The ERP settlement occurred in fiscal 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Post-Retirement Pension Plans | | Non-U.S. Post-Retirement Pension Plans |
Principal assumptions as of year end | 2022 | | 2021 | | 2022 | | 2021 |
Discount rate | 3.94% | | 2.36% | | 5.06% | | 2.87% |
Initial weighted average health care trend rate | 6.00% | | 7.30% | | 5.60% | | 5.70% |
Ultimate weighted average health care trend rate | 6.00% | | 6.00% | | 4.20% | | 4.20% |
The Company uses discount rates developed from a yield curve established from high-quality corporate bonds and matched to plan-specific projected benefit payments. Although future changes to the discount rate are unknown, had the discount rate increased or decreased by 25 basis points, pension liabilities in total would have decreased $1.1 million or increased $8.4 million, respectively. Had the discount rate increased or decreased by 25 basis points, fiscal 2022 net periodic benefit cost for the pension plans would have increased $1.8 million or $2.1 million, respectively. In determining the expected long-term rate of return on the defined benefit pension plans’ assets, the Company considers the historical rates of return, the nature of investments, the asset allocation, and expectations of future investment strategies. Had the expected return on assets increased or decreased by 25 basis points, fiscal 2022 net periodic benefit cost would have increased $1.4 million or $2.5 million, respectively. Management is not aware of any legislative or other initiatives or circumstances that will significantly impact the Company’s pension obligations in fiscal 2023.
Plan assets are invested in a diversified portfolio of equity and debt securities consisting primarily of common stocks, bonds and government securities. The objective of these investments is to maintain sufficient liquidity to fund current benefit payments and achieve targeted risk-adjusted returns. Management periodically reviews allocations of plan assets by investment type and evaluates external sources of information regarding the long-term historical returns and expected future returns for each investment type.
Allocations by investment type are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | Actual |
Plan assets allocation as of fiscal year end: | | Target | | 2022 | | 2021 |
Return-seeking assets (e.g., equity securities and real estate) | | 35%-70% | | 42.0% | | 20.7% |
Fixed-income securities (e.g., debt securities) | | 30%- 65% | | 57.6% | | 78.3% |
Cash | | —% | | 0.4% | | 1.0% |
Total | | | | 100.0% | | 100.0% |
Due to the freeze and subsequent termination of the ERP that occurred during fiscal 2021, management approved changes to the Plan’s investment policy to align our pension plan assets with our projected benefit obligation to reduce volatility by targeting an investment strategy of approximately 85% to 95% in fixed-income securities and up to approximately 20% in return-seeking assets, consisting of primarily equity securities and real estate. Once the settlement of the ERP occurred, the targets were revised to be in line with those used prior to the termination of the ERP.
The following table presents the fair value of the Company’s pension plan assets as of September 30, 2022, by asset category segregated by level within the fair value hierarchy, as described in Note 20, “Fair Value Measurements” (in millions):
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy |
| Level 1 | | Level 2 | | Total |
Investments measured at fair value by category: (5) | | | | | |
Return-seeking assets: (1) | | | | | |
U.S. equity securities | $ | 4 | | | $ | — | | | $ | 4 | |
Non-U.S. equity securities | 21 | | | — | | | 21 | |
Fixed-income securities: (2) | | | | | |
Non-U.S. foreign commercial and government bonds | — | | | 41 | | | 41 | |
Cash and cash equivalents (3) | 1 | | | — | | | 1 | |
| $ | 26 | | | $ | 41 | | | $ | 67 | |
Investments measured at net asset value by category: (4) | | | | | |
Return-seeking assets: (1) | | | | | |
Commingled trust funds - Non-U.S. securities | | | | | 27 | |
Non-U.S. equity securities | | | | | 7 | |
Fixed-income securities: (2) | | | | | |
U.S corporate bonds | | | | | 2 | |
Non-U.S. corporate bonds | | | | | 18 | |
Non-U.S. foreign commercial and government bonds | | | | | 21 | |
Total | | | | | $ | 142 | |
The following table presents the fair value of the Company’s pension plan assets as of September 30, 2021, by asset category segregated by level within the fair value hierarchy, as described in Note 20, “Fair Value Measurements” (in millions):
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy |
| Level 1 | | Level 2 | | Total |
Investments measured at fair value by category: (5) | | | | | |
Return-seeking assets: (1) | | | | | |
U.S. equity securities | $ | 6 | | | $ | — | | | $ | 6 | |
Non-U.S. equity securities | 34 | | | — | | | 34 | |
Fixed-income securities: (2) | | | | | |
Non-U.S. foreign commercial and government bonds | — | | | 53 | | | 53 | |
Cash and cash equivalents (3) | 5 | | | — | | | 5 | |
| $ | 45 | | | $ | 53 | | | $ | 98 | |
Investments measured at net asset value by category: (4) | | | | | |
Return-seeking assets: (1) | | | | | |
Commingled trust funds - Non-U.S. securities | | | | | 65 | |
Non-U.S. equity securities | | | | | 9 | |
Fixed-income securities: (2) | | | | | |
U.S. government bonds and securities | | | | | 91 | |
U.S corporate bonds | | | | | 223 | |
Non-U.S. corporate bonds | | | | | 20 | |
Non-U.S. foreign commercial and government bonds | | | | | 41 | |
Total | | | | | $ | 547 | |
(1) Level 1 return-seeking assets, which are primarily equity securities and real estate, are actively traded on U.S. and non-U.S. exchanges and are either valued using the market approach at quoted market prices on the measurement date or at the net asset value of the shares held by the plan on the measurement date based on quoted market prices.
(2) Level 2 fixed-income securities, which are primarily debt securities, are primarily valued using the market approach at either quoted market prices, pricing models that use observable market data, or bids provided by independent investment brokerage firms.
(3) Cash and cash equivalents include cash which is used to pay benefits and cash invested in a short-term investment fund that holds securities with values based on quoted market prices, but for which the funds are not valued on quoted market basis.
(4) These investments are valued at the net asset value (“NAV”) of units held. The NAV is used to estimate fair value and is based on the fair value of the underlying investments held by the fund less its liability.
(5) No investments measured using Level 3 inputs.
Defined Contribution Plans
The Company sponsors certain defined contribution employee savings plans that cover substantially all of the Company’s U.S. employees. Under certain plans, the Company contributes a percentage of employee compensation and matches a portion of employee contributions. The cost recognized for such contributions for the fiscal years ended September 30, 2022, 2021 and 2020 was approximately $30.2 million, $28.3 million and $25.3 million, respectively.
14. INCOME TAXES
The Company’s income from continuing operations before income taxes includes the following components for the periods shown below (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
United States | $ | 882 | | | $ | 516 | | | $ | 635 | |
Foreign | 245 | | | 199 | | | 105 | |
| $ | 1,127 | | | $ | 715 | | | $ | 740 | |
The Company’s income tax provision (benefit) on income from continuing operations consists of the following for the periods shown below (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
Federal | $ | 194 | | | $ | (21) | | | $ | 26 | |
State | 27 | | | 14 | | | 3 | |
Foreign | 62 | | | 7 | | | 34 | |
| 283 | | | — | | | 63 | |
Deferred | | | | | |
Federal | (17) | | | 7 | | | 29 | |
State | (8) | | | (2) | | | 3 | |
Foreign | 3 | | | 29 | | | (8) | |
| (22) | | | 34 | | | 24 | |
| $ | 261 | | | $ | 34 | | | $ | 87 | |
A reconciliation of the federal statutory income tax rate to the effective income tax rate for the periods shown below is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Changes in valuation allowances impacting results (1) | 5.5 | % | | (8.2) | % | | 4.2 | % |
Federal deemed inclusion amounts | 1.5 | % | | 1.7 | % | | 0.4 | % |
Withholding taxes | 1.2 | % | | 0.2 | % | | 0.3 | % |
Gain on sale of businesses | (0.1) | % | | 1.4 | % | | — | % |
Resolution and settlements to uncertain tax positions | (0.1) | % | | (3.2) | % | | (0.3) | % |
Research and development credits | (0.6) | % | | (1.2) | % | | (0.6) | % |
Foreign tax credits | (0.8) | % | | (1.2) | % | | (0.6) | % |
Provision to return adjustments | (1.0) | % | | 2.2 | % | | (0.4) | % |
Foreign-derived intangible income | (2.0) | % | | (1.5) | % | | (2.8) | % |
Stock-based compensation | (2.8) | % | | (8.7) | % | | (10.7) | % |
Remeasurement of deferred tax assets and liabilities related to enacted statutory rate changes | — | % | | 2.1 | % | | 0.4 | % |
Other—net | 1.4 | % | | 0.2 | % | | 0.9 | % |
Effective income tax rate | 23.2 | % | | 4.8 | % | | 11.8 | % |
(1) Primarily relates to the Company’s business interest expense limitation pursuant to IRC §163(j) as modified by the Tax Cuts and Jobs Act. Such provision, as modified, was effective for the Company beginning in fiscal 2019. In general, the deduction for interest expense is limited to 30% (50% as modified by the CARES Act for the Company’s fiscal 2020 and 2021) of the sum of the Company’s adjusted taxable income (“ATI”) and its business interest income. Interest expense disallowed by such limitation, in a taxable year, may be carried forward indefinitely. Based upon available evidence, a valuation allowance is recorded for the resulting carryforward to reflect the Company’s belief that it is more likely than not that such deferred tax assets will not be realized. In fiscal 2021, the Company made a tax election on its U.S. federal income tax return allowing for the utilization of its net interest limitation carryforward. The Company recognized approximately $69.0 million of benefit from the release of the valuation allowance, applicable to such carryforward, for the fiscal year ended September 30, 2021.
The components of the deferred taxes consist of the following (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Deferred tax assets (liabilities): | | | |
Intangible assets | $ | (832) | | | $ | (814) | |
Interest rate swaps and caps | (42) | | | 69 | |
Property, plant and equipment | (23) | | | (32) | |
Employee benefits | 108 | | | 107 | |
Interest expense limitation | 87 | | | 28 | |
Inventories | 61 | | | 45 | |
Net operating losses | 52 | | | 58 | |
Loss contract reserves | 41 | | | 51 | |
U.S. income tax credits | 27 | | | 31 | |
Capitalized research and development costs | 24 | | | — | |
Non-U.S. income tax credits | 14 | | | 20 | |
Environmental reserves | 11 | | | 11 | |
Product warranty reserves | 6 | | | 7 | |
Other | 7 | | | 8 | |
Total | (459) | | | (411) | |
Add: Valuation allowance | (137) | | | (74) | |
Total net deferred tax assets (liabilities) | $ | (596) | | | $ | (485) | |
At September 30, 2022, the Company has state net operating loss carryforwards of approximately $1,679.7 million, German net operating loss carryforwards of $28.1 million and United Kingdom net operating loss carryforwards of approximately $26.6 million that expire in various fiscal years from 2023 to 2041. The Company has U.S. and non-U.S. tax credit carryforwards of $41.6 million that expire beginning in fiscal year 2025.
The deferred tax assets for the interest expense limitation, net operating losses, and tax credit carryforwards are reduced by a valuation allowance for the amount of such assets that the Company believes will not be realized.
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 2017. The Company is currently under examination for its federal income taxes in Canada for fiscal years 2013 through 2019, and in Germany for fiscal years 2014 through 2017. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance at October 1 | $ | 19 | | | $ | 41 | |
| | | |
Additions based on tax positions related to the prior year | 3 | | | — | |
Additions based on tax positions related to the current year | — | | | 2 | |
Reductions based on tax positions related to the prior year | (1) | | | (18) | |
Settlement with tax authorities | (1) | | | (4) | |
Lapse in statute of limitations | (3) | | | (2) | |
Balance at September 30 | $ | 17 | | | $ | 19 | |
Unrecognized tax benefits at September 30, 2022 and 2021, the recognition of which would have an effect on the effective tax rate for each fiscal year, amounted to $16.6 million and $19.1 million, respectively. The Company classifies all income tax-related interest and penalties as income tax expense, which were not significant for the years ended September 30, 2022 and 2021. As of September 30, 2022 and 2021, the Company accrued $4.5 million and $4.9 million, respectively, for the potential payment of interest and penalties. Within the next 12 months, the Company does not anticipate a material increase, or decrease, in the amount of unrecognized tax benefits.
15. COMMITMENTS AND CONTINGENCIES
During the ordinary course of business, the Company is from time to time threatened with, or may become a party to, legal actions and other proceedings. While the Company is currently involved in certain legal proceedings, it believes the results of these proceedings will not have a material adverse effect on its financial condition, results of operations, or cash flows.
Litigation Claims – On November 1, 2021, a purported stockholder of the Company filed a derivative complaint, captioned Sciabacucchi v Howley, et al. C.A. No. 2021-0938-LWW (the “Derivative Action”), in the Delaware Court of Chancery (the “Court”). The complaint, which names certain directors of the Company (the “Director Defendants”) as defendants, alleges that the Director Defendants awarded and received excessive compensation. The Director Defendants have denied, and continue to deny, any and all allegations of wrongdoing or liability asserted in the Derivative Action.
Nonetheless, solely to eliminate the uncertainty, distraction, disruption, burden, risk and expense of further litigation, the Company and the Director Defendants entered into a Stipulation and Agreement of Compromise, Settlement and Release (the “Stipulation”) with the plaintiff on August 19, 2022. Pursuant to the terms of the Stipulation, the Director Defendants have agreed to implement and maintain certain changes to the Company’s compensation policies and practices such as to the extent dividend equivalent payments are declared payable to any Company director, those DEPs will not be paid in cash, but instead will be paid via a reduction to the strike price of options that are issued to that director. Other corporate governance enhancements were also agreed to by the Company. The Company is also responsible for the payment of plaintiff’s attorneys’ fees. The proposed settlement as set forth in the Stipulation, other than the amount of the attorneys’ fees, was approved by the Court on November 10, 2022. The settlement (i) fully resolves the Derivative Action by dismissing all asserted claims with prejudice and (ii) releases all claims related to the allegations in the Derivative Action. The settlement is not expected to have a material adverse impact on the Company’s financial statements.
DOD OIG Audit – TransDigm’s subsidiaries are periodically subject to pricing reviews and government buying agencies that purchase some of our subsidiaries’ products are periodically subject to audits by the Department of Defense (“DOD”) Office of Inspector General (“OIG”) with respect to prices paid for such products. In 2019, the DOD OIG received a congressional letter requesting a comprehensive review of TransDigm’s contracts with the DOD from January 2017 through June 2019 to identify whether TransDigm earned excess profits. This subsequently resulted in an audit by the DOD OIG in which the objective was to determine whether TransDigm’s business model impacted the DOD’s ability to pay fair and reasonable prices for spare parts. In December 2021, the OIG completed the audit and issued the related audit report. Despite the audit report making clear there was no wrongdoing by TransDigm, its businesses, or the DOD, the report recommended that TransDigm voluntarily refund at least $20.8 million in excess profit on 150 contracts subject to the audit.
TransDigm disagrees with many of the implications contained in the report, and objects to the use of arbitrary standards and analysis which render many areas of the report inaccurate and misleading. These include: (1) The report expressly acknowledges that it used arbitrary standards that are not applicable to the audited contracts and warns that its arbitrary standards should not be used in the future. The use of inapplicable standards results in flawed analysis and is misleading; (2) The report ignores significant real costs incurred by the business and contrary to law reports these costs as excess profit; (3) Despite data demonstrating that the DOD paid lower prices compared to the commercial prices for similar parts, the report did not conduct a price analysis and instead implies that the DOD negotiated prices were too high.
No loss contingency related to the voluntary refund request has been recorded as of September 30, 2022 as the Company has concluded that based on the current facts and circumstances, it's uncertain as to whether or not the requested voluntary refund will be made.
Environmental Liabilities – Our operations and facilities are subject to a number of federal, state, local and foreign environmental laws and regulations that govern, among other things, discharges of pollutants into the air and water, the generation, handling, storage and disposal of hazardous materials and wastes, the remediation of contamination and the health and safety of our employees. Environmental laws and regulations may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Certain facilities and third-party sites utilized by the Company have been identified as potentially responsible parties under the federal superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under applicable laws.
Estimates of the Company’s environmental liabilities are based on current facts, laws, regulations and technology. These estimates take into consideration the Company’s prior experience and professional judgment of the Company’s environmental advisors. Estimates of the Company’s environmental liabilities are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and cost estimates, the extent of corrective actions that may be required and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.
Accordingly, as investigation and remediation proceed, it is likely that adjustments in the Company’s accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company’s results of operations or cash flows in a given period. Based on currently available information, however, the Company does not believe that future environmental costs in excess of those accrued with respect to sites for which the Company has been identified as a potentially responsible party are likely to have a material adverse effect on the Company’s financial condition or results of operations.
Environmental liabilities are recorded when the liability is probable and the costs are reasonably estimable, which generally is not later than at completion of a feasibility study or when the Company has recommended a remedy or has committed to an appropriate plan of action. The Company also takes into consideration the estimated period of time in which payments will be required. The liabilities are reviewed periodically and, as investigation and remediation proceed, adjustments are made as necessary. Liabilities for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value. The liabilities are not offset by possible recoveries from insurance carriers or other third parties, but do reflect anticipated allocations among potentially responsible parties at federal superfund sites or similar state-managed sites, third party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.
The Company’s consolidated balance sheets includes current environmental remediation obligations at September 30, 2022 and 2021 of $7.9 million and $8.2 million classified as a component of accrued and other current liabilities, respectively, and non-current environmental remediation obligations at September 30, 2022 and 2021 of $38.3 million and $40.7 million classified as a component of other non-current liabilities, respectively.
Leach International Europe (Facility Fire) – On August 8, 2019, a fire caused significant damage to the Niort, France operating facility of the Leach International Europe subsidiary, which is 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, had transferred certain operations to temporary facilities until operations were fully restored at the rebuilt facility. The new facility was completed in December 2020 and was fully operational as of March 2021.
The Company’s insurance covers damage to the facility, equipment, inventory, and other assets, at replacement cost, as well as business interruption losses and other incremental costs resulting from the disruption of operations 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 were recognized when receipt was probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory were recorded once all contingencies relating to the claim had been resolved.
During fiscal 2021, the insurance claim, inclusive of property, business interruption and incremental costs of working, was settled for $88 million, net of the $1 million deductible. A gain of $24 million was recorded to other income during fiscal 2021, of which $19 million represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory and $5 million represents the insurance proceeds received in excess of previously recorded receivables for business interruption and incremental costs of working.
Of the approximately $58 million in cash proceeds received in fiscal 2021 relating to the insurance claim and final settlement of the claim, $24 million was included in net cash used in investing activities and $34 million was included in net cash provided by operating activities within the consolidated statements of cash flows based on the nature of the insurance reimbursements. In fiscal 2020, approximately $28 million in cash proceeds was received as an initial advance under the property insurance claim. All of the proceeds received in fiscal 2020 were included in net cash provided by operating activities within the consolidated statements of cash flows based on the nature of the insurance reimbursements.
16. STOCK REPURCHASE PROGRAM
TD Group consists of 224,400,000 shares of $.01 par value common stock and 149,600,000 shares of $.01 par value preferred stock. The total number of shares of common stock issued at September 30, 2022 and 2021 was 60,049,685 and 59,403,100, respectively. The total number of shares held in treasury at September 30, 2022 and 2021 was 5,688,639 and 4,198,226, respectively. There were no shares of preferred stock outstanding at September 30, 2022 and 2021. The terms of the preferred stock have not been established.
Occasionally at management's discretion, the Company repurchases its common stock in the open market, depending on market conditions, stock price and other factors. On November 8, 2017, the Board of Directors of the Company (the “Board”), authorized a stock repurchase program to permit repurchases of its outstanding common stock not to exceed $650 million in the aggregate (the “$650 million stock repurchase program”), subject to any restrictions specified in the Company’s Credit Agreement and/or Indentures governing the Company's existing Notes.
During fiscal 2020, the Company repurchased 36,900 shares of common stock at an average price of $512.67 per share, for a total amount of $19 million. The repurchased shares of common stock are classified as treasury stock in the statement of changes in stockholders' deficit. No repurchases were made during the fiscal year ended September 30, 2021. The $650 million stock repurchase program was effective through January 26, 2022.
On January 27, 2022, the Board authorized a new stock repurchase program to permit repurchases of its outstanding common stock not to exceed $2,200 million in the aggregate (the “$2,200 million stock repurchase program”), replacing the $650 million stock repurchase program previously authorized by the Board on November 8, 2017, subject to any restrictions specified in the Credit Agreement, and/or Indentures governing the Company's existing Notes. There is no expiration date for this program.
During fiscal 2022, the Company repurchased 1,490,413 shares of common stock at an average price of $612.13 per share, for a total amount of $912 million. The repurchased shares of common stock are classified as treasury stock in the statement of changes in stockholders' deficit. As of September 30, 2022, $1,288 million remains available for repurchase under the $2,200 million stock repurchase program.
17. 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, engineered audio, radio and antenna 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 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 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 non-cash compensation charges incurred in connection with the Company’s stock incentive or deferred compensation plans, restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic, foreign currency gains and losses, acquisition-integration costs, acquisition and divestiture transaction-related expenses, and refinancing costs. COVID-19 restructuring costs represented actions primarily taken by the Company in fiscal 2021 and 2020 to reduce its workforce to align with customer demand, as well as 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). Acquisition and divestiture-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 for both acquisitions and divestitures 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 U.S. 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 U.S. 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. Corporate consists of our corporate offices. Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. Corporate assets consist primarily of cash and cash equivalents. Corporate expenses and assets reconcile reportable segment data to the consolidated totals. An immaterial amount of corporate expenses is allocated to the operating segments.
The following table presents net sales by reportable segment (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Net sales to external customers | | | | | |
Power & Control | | | | | |
Commercial and non-aerospace OEM | $ | 602 | | | $ | 524 | | | $ | 623 | |
Commercial and non-aerospace aftermarket | 846 | | | 573 | | | 673 | |
Defense | 1,425 | | | 1,453 | | | 1,399 | |
Total Power & Control | 2,873 | | | 2,550 | | | 2,695 | |
| | | | | |
Airframe | | | | | |
Commercial and non-aerospace OEM | 726 | | | 582 | | | 783 | |
Commercial and non-aerospace aftermarket | 779 | | | 553 | | | 689 | |
Defense | 886 | | | 948 | | | 781 | |
Total Airframe | 2,391 | | | 2,083 | | | 2,253 | |
| | | | | |
Total Non-aviation | 165 | | | 165 | | | 155 | |
| | | | | |
Net Sales | $ | 5,429 | | | $ | 4,798 | | | $ | 5,103 | |
The following table reconciles EBITDA As Defined by segment to consolidated income from continuing operations before income taxes (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
EBITDA As Defined | | | | | |
Power & Control | $ | 1,531 | | | $ | 1,319 | | | $ | 1,345 | |
Airframe | 1,121 | | | 878 | | | 955 | |
Non-aviation | 65 | | | 62 | | | 54 | |
Total segment EBITDA As Defined | 2,717 | | | 2,259 | | | 2,354 | |
Less: Unallocated corporate expenses | 71 | | | 70 | | | 76 | |
Total Company EBITDA As Defined | 2,646 | | | 2,189 | | | 2,278 | |
Depreciation and amortization expense | 253 | | | 253 | | | 283 | |
Interest expense, net | 1,076 | | | 1,059 | | | 1,029 | |
Acquisition and divestiture transaction-related expenses | 18 | | | 35 | | | 31 | |
Non-cash stock and deferred compensation expense | 184 | | | 130 | | | 93 | |
Refinancing costs | 1 | | | 37 | | | 28 | |
COVID-19 pandemic restructuring costs | — | | | 40 | | | 54 | |
Gain on sale of businesses, net | (7) | | | (69) | | | — | |
Other, net | (6) | | | (11) | | | 20 | |
Income from continuing operations before income taxes | $ | 1,127 | | | $ | 715 | | | $ | 740 | |
The following table presents capital expenditures and depreciation and amortization by segment (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Capital expenditures | | | | | |
Power & Control | $ | 63 | | | $ | 65 | | | $ | 89 | |
Airframe | 52 | | | 37 | | | 10 | |
Non-aviation | 3 | | | 2 | | | 4 | |
Corporate | 1 | | | 1 | | | 2 | |
| $ | 119 | | | $ | 105 | | | $ | 105 | |
Depreciation and amortization | | | | | |
Power & Control | $ | 109 | | | $ | 107 | | | $ | 117 | |
Airframe | 138 | | | 139 | | | 157 | |
Non-aviation | 5 | | | 6 | | | 7 | |
Corporate | 1 | | | 1 | | | 2 | |
| $ | 253 | | | $ | 253 | | | $ | 283 | |
The following table presents total assets by segment (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Total assets | | | |
Power & Control | $ | 6,994 | | | $ | 6,980 | |
Airframe | 7,781 | | | 7,472 | |
Non-aviation | 238 | | | 229 | |
Corporate | 3,094 | | | 4,634 | |
| $ | 18,107 | | | $ | 19,315 | |
Geographic Area Information
Net sales are measured based on the geographic destination of sales. Long-lived assets consist of property, plant and equipment - net and operating lease right-of-use assets. Net sales and long-lived assets of individual countries outside of the United States are not material.
The following table presents net sales by geographic area (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Net sales | | | | | |
United States | $ | 3,496 | | | $ | 3,096 | | | $ | 3,407 | |
Foreign Countries | 1,933 | | | 1,702 | | | 1,696 | |
| $ | 5,429 | | | $ | 4,798 | | | $ | 5,103 | |
The following table presents long-lived assets by geographic area (in millions):
| | | | | | | | | | | |
| September 30, 2022 | | September 30, 2021 |
Long-lived assets | | | |
United States | $ | 663 | | | $ | 608 | |
Foreign Countries | 229 | | | 256 | |
| $ | 892 | | | $ | 864 | |
18. STOCK-BASED COMPENSATION
The Company’s equity compensation plans are designed to assist the Company in attracting, retaining, motivating and rewarding key employees, directors or consultants, and promoting the creation of long-term value for stockholders by closely aligning the interests of these individuals with those of the Company’s stockholders. The Company’s equity compensation plans provide for the granting of stock options.
Non-cash stock compensation expense recognized by the Company during the fiscal years ended September 30, 2022, 2021 and 2020 was $152.7 million, $128.9 million and $92.7 million, respectively. The related tax benefit for the fiscal years ended September 30, 2022, 2021 and 2020 was $18.4 million, $20.9 million and $11.0 million, respectively. Of the non-cash stock compensation expense recorded in fiscal 2022, 2021 and 2020, $150.3 million, $121.0 million and $86.8 million was recorded as a component of additional paid in capital and $2.4 million, $7.9 million and $5.9 million was recorded as a component of other non-current liabilities. The liability awards relate to stock options granted between fiscal 2017 to fiscal 2020 from the 2014 stock option plan to certain employees in lieu of these individuals receiving salary and bonus compensation paid in cash. The vesting of the stock options are subject to the achievement of the same operating performance goals as other grants. The liability is remeasured each reporting period based on the market value of our common shares on the last day of the reported period. The other non-current liabilities related to stock-based compensation as of September 30, 2022 and 2021 was $25.5 million and $23.1 million, respectively.
The weighted-average grant date fair value of options granted during the fiscal years ended September 30, 2022, 2021 and 2020 was $254.21, $193.47 and $157.41, respectively. The total fair value of options vested during fiscal years ended September 30, 2022, 2021 and 2020 was $88.0 million, $92.0 million and $97.2 million, respectively.
Compensation expense is recognized based upon probability assessments of awards that are expected to vest in future periods, adjusted for expected forfeitures. Such probability assessments are subject to revision and, therefore, unrecognized compensation expense is subject to future changes in estimate. As of September 30, 2022, there was approximately $204.4 million of total unrecognized compensation expense related to non-vested awards expected to vest, which is expected to be recognized over a weighted-average period of 2.5 years.
On November 12, 2021, the Compensation Committee of the Board of Directors approved the Company’s established performance criteria required to be achieved for the options granted in fiscal 2020 and in fiscal 2021 with a scheduled vesting date of September 30, 2022. This action resulted in a modification for accounting purposes under ASC 718 for the options granted in fiscal years 2020 and 2021, consisting of 239 individuals, including all of the independent directors and certain executive officers. An additional $5.1 million of stock compensation expense for fiscal 2022 resulted from this modification.
The fair value of the Company’s employee stock options was estimated at the date of grant or modification using a Black-Scholes option-pricing model with the following weighted average assumptions for all options granted during the fiscal years ended:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended September 30, |
| 2022 | | 2021 | | 2020 |
Risk-free interest rate | 1.47% to 2.97% | | 0.42% to 0.86% | | 0.26% to 1.65% |
Expected life of options | 6.5 years | | 5.5 years | | 5 to 5.5 years |
Expected dividend yield of stock | — | | — | | — |
Expected volatility of stock | 37% to 38% | | 36% | | 25% to 39% |
The risk-free interest rate is based upon the U.S. Treasury bond rates as of the grant date or modification date. The average expected life of stock-based awards is based on the Company’s actual historical exercise experience. Expected volatility of stock was calculated using a rate based upon the historical volatility of TransDigm’s common stock up to the expected life of the options. The Company estimates stock option forfeitures based on historical data. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative adjustment in the period of change. Notwithstanding the special cash dividends declared and paid from time to time, the Company historically has not declared and paid regular cash dividends and does not anticipate declaring and paying regular cash dividends in future periods; thus, no dividend yield assumption is used.
2019 Stock Option Plan
In August 2019, the Board of Directors of TD Group adopted a new stock option plan, which was subsequently approved by stockholders on October 3, 2019. The 2019 stock option plan permits TD Group to award stock options to our key employees, directors or consultants. The total number shares of TD Group common stock reserved for issuance or delivery under the 2019 stock option plan is 4,000,000, subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate transaction or event. No grants have been made from TD Group’s 2019 stock option plan as of September 30, 2022.
2014 Stock Option Plan
In July 2014, the Board of Directors of TD Group adopted the 2014 stock option plan, which was subsequently approved by stockholders on October 2, 2014. The 2014 stock option plan permits TD Group to award stock options to our key employees, directors or consultants. The total number of shares of TD Group common stock reserved for issuance or delivery under the 2014 stock option plan is 5,000,000, subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate transaction or event.
Performance Vested Stock Options – Generally all of the options granted through September 30, 2022 under the 2014 stock option plan have been pursuant to an equity incentive program adopted by the Company in 2008. Under the 2008 equity incentive program, generally all of the options granted will vest based on the Company’s achievement of established operating performance goals. The following table summarizes the activity, pricing and other information for the Company’s performance vested stock-based award activity during the fiscal year ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise Price Per Option | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at September 30, 2021 | 4,202,923 | | | $ | 403.12 | | | | | |
Granted | 547,480 | | | 637.14 | | | | | |
Exercised | (180,060) | | | 328.14 | | | | | |
Forfeited | (262,537) | | | 496.16 | | | | | |
Expired | (5,100) | | | 592.48 | | | | | |
Outstanding at September 30, 2022 | 4,302,706 | | | $ | 424.54 | | | 6.5 years | | $ | 533,897,229 | |
Expected to vest | 1,138,982 | | | $ | 554.50 | | | 7.9 years | | $ | 27,283,129 | |
Exercisable at September 30, 2022 | 2,952,644 | | | $ | 361.43 | | | 5.8 years | | $ | 506,671,180 | |
At September 30, 2022, there were 346,451 remaining shares available for award under TD Group’s 2014 stock option plan.
2006 Stock Incentive Plan
In conjunction with the consummation of the Company’s initial public offering, a 2006 stock incentive plan was adopted by TD Group. In July 2008 and March 2011, the plan was amended to increase the number of shares available for issuance thereunder. TD Group reserved 8,119,668 shares of its common stock for issuance to key employees, directors or consultants under the plan. Awards under the plan were in the form of options, restricted stock or other stock-based awards. Options granted under the plan expire no later than the tenth anniversary of the applicable date of grant of the options, and have an exercise price of not less than the fair market value of our common stock on the date of grant. Restricted stock granted under the plan vested over three years. No restricted stock units remained outstanding as of September 30, 2018.
Performance Vested Stock Options – All of the options granted under the 2006 stock incentive plan have been pursuant to an equity incentive program adopted by the Company in 2008. Under the 2008 equity incentive program, all of the options granted vest based on the Company’s achievement of established operating performance goals. The following table summarizes the activity, pricing and other information for the Company’s performance vested stock-based award activity during the fiscal year ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted-Average Exercise Price Per Option | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at September 30, 2021 | 1,548,605 | | | $ | 185.71 | | | | | |
Granted | — | | | — | | | | | |
Exercised | (465,620) | | | 148.64 | | | | | |
Forfeited | — | | | — | | | | | |
Expired | — | | | — | | | | | |
Outstanding at September 30, 2022 | 1,082,985 | | | $ | 193.05 | | | 2.3 years | | $ | 359,303,394 | |
Exercisable at September 30, 2022 | 1,082,985 | | | $ | 193.05 | | | 2.3 years | | $ | 359,303,394 | |
The 2006 stock incentive plan expired on March 14, 2016 and no further shares were granted under the plan thereafter.
The total intrinsic value of performance options exercised during the fiscal years ended September 30, 2022, 2021 and 2020 was $279.4 million, $355.3 million and $394.2 million, respectively.
Dividend Equivalent Plans
Until August 5, 2022, pursuant to the 2014 Stock Option Plan Dividend Equivalent Plan and the Third Amended and Restated 2006 Stock Incentive Plan Dividend Equivalent Plan, all of the options granted under the existing stock option plans were entitled to certain dividend equivalent payments in the event of the declaration of a dividend by the Company.
On August 5, 2022, the Board of Directors adopted an Amended and Restated 2014 Stock Option Plan Dividend Equivalent Plan and a Fourth Amended and Restated 2006 Stock Incentive Plan Dividend Equivalent Plan clarifying the manner in which the Company pays dividend equivalents in cash. The amendments did not represent a change in the Company’s practice. Simultaneously, all members of the Board of Directors executed amendments to their option agreements resulting in the directors no longer receiving dividend equivalent payments in cash, but rather for dividends declared after July 27, 2022 (including the $18.50 per share special dividend declared and paid in August 2022), dividends will result in a reduction of strike price on the outstanding options held by the directors.
Dividend equivalent payments on vested options were $85.7 million, $72.5 million and $184.9 million during the fiscal years ended September 30, 2022, 2021 and 2020, respectively. At September 30, 2022, there was $38.6 million recorded in accrued and other current liabilities and $22.2 million accrued in other non-current liabilities on the consolidated balance sheets related to future dividend equivalent payments.
19. LEASES
The Company leases certain manufacturing facilities, offices, land, equipment and vehicles. Such leases, some of which are noncancellable 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 fiscal years ended September 30, 2022 and 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended September 30, |
| Classification | | 2022 | | 2021 |
Operating lease cost | Cost of sales or selling and administrative expenses | | $ | 24 | | | $ | 29 | |
Finance lease cost | | | | | |
Amortization of leased assets | Cost of sales | | 6 | | | 4 | |
Interest on lease liabilities | Interest expense - net | | 9 | | | 6 | |
Total lease cost | | | $ | 39 | | | $ | 39 | |
Supplemental cash flow information related to leases for the fiscal years ended September 30, 2022 and 2021 is as follows (in millions):
| | | | | | | | | | | | | | |
| | Fiscal Years Ended September 30, |
| | 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash outflows from operating leases | | $ | 24 | | | $ | 29 | |
Operating cash outflows from finance leases | | 8 | | | 6 | |
Financing cash outflows from finance leases | | 2 | | | 2 | |
| | | | |
Lease assets obtained in exchange for new lease obligations: | | | | |
Operating leases | | $ | 21 | | | $ | 41 | |
Financing leases | | 51 | | | 25 | |
Supplemental balance sheet information related to leases is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Classification | | September 30, 2022 | | September 30, 2021 |
Operating Leases | | | | | |
Operating lease right-of-use assets | Other assets | | $ | 85 | | | $ | 94 | |
| | | | | |
Current operating lease liabilities | Accrued and other current liabilities | | 18 | | | 20 | |
Long-term operating lease liabilities | Other non-current liabilities | | 71 | | | 79 | |
Total operating lease liabilities | | | $ | 89 | | | $ | 99 | |
| | | | | |
Finance Leases | | | | | |
Finance lease right-of-use assets, net | Property, plant and equipment - net | | $ | 137 | | | $ | 104 | |
| | | | | |
Current finance lease liabilities | Current portion of long-term debt | | 2 | | | 2 | |
Long-term finance lease liabilities | Long-term debt | | 144 | | | 98 | |
Total finance lease liabilities | | | $ | 146 | | | $ | 100 | |
As of September 30, 2022, the Company has the following remaining lease term and weighted average discount rates:
| | | | | |
Weighted-average remaining lease term | |
Operating leases | 7.8 years |
Finance leases | 20.0 years |
| |
Weighted-average discount rate | |
Operating leases | 5.9% |
Finance leases | 7.1% |
Maturities of lease liabilities at September 30, 2022 are as follows (in millions):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
2023 | $ | 21 | | | $ | 12 | |
2024 | 18 | | | 13 | |
2025 | 16 | | | 13 | |
2026 | 12 | | | 13 | |
2027 | 11 | | | 13 | |
Thereafter | 35 | | | 230 | |
Total future minimum lease payments | 113 | | | 294 | |
Less: imputed interest | 24 | | | 148 | |
Present value of lease liabilities reported | $ | 89 | | | $ | 146 | |
20. 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | September 30, 2021 |
| Level | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Assets: | | | | | | | | | |
Cash and cash equivalents | 1 | | $ | 3,001 | | | $ | 3,001 | | | $ | 4,787 | | | $ | 4,787 | |
Interest rate cap agreements (1) | 2 | | 50 | | | 50 | | | 8 | | | 8 | |
Interest rate swap agreements (1) | 2 | | 77 | | | 77 | | | — | | | — | |
Interest rate swap agreements (2) | 2 | | 68 | | | 68 | | | — | | | — | |
Liabilities: | | | | | | | | | |
Interest rate swap agreements (3) | 2 | | — | | | — | | | 100 | | | 100 | |
Interest rate swap agreements (4) | 2 | | — | | | — | | | 180 | | | 180 | |
Foreign currency forward exchange contracts (3) | 2 | | 11 | | | 11 | | | 4 | | | 4 | |
Short-term borrowings - trade receivable securitization facility (4) | 2 | | 350 | | | 350 | | | 349 | | | 349 | |
Long-term debt, including current portion: | | | | | | | | | |
Term loans (5) | 2 | | 7,256 | | | 6,976 | | | 7,318 | | | 7,268 | |
Revolving credit facility (5) | 2 | | — | | | — | | | 200 | | | 200 | |
2025 Secured Notes (5) | 1 | | 1,094 | | | 1,115 | | | 1,093 | | | 1,170 | |
6.375% 2026 Notes (5) | 1 | | 946 | | | 884 | | | 945 | | | 981 | |
6.875% 2026 Notes (5) | 1 | | 495 | | | 473 | | | 494 | | | 527 | |
2026 Secured Notes (5) | 1 | | 4,368 | | | 4,257 | | | 4,359 | | | 4,593 | |
7.50% 2027 Notes (5) | 1 | | 547 | | | 524 | | | 546 | | | 578 | |
5.50% 2027 Notes (5) | 1 | | 2,635 | | | 2,286 | | | 2,632 | | | 2,730 | |
4.625% 2029 Notes (5) | 1 | | 1,191 | | | 966 | | | 1,190 | | | 1,196 | |
4.875% 2029 Notes (5) | 1 | | 744 | | | 606 | | | 743 | | | 751 | |
Government refundable advances | 2 | | 23 | | | 23 | | | 29 | | | 29 | |
Finance lease obligations | 2 | | 146 | | | 146 | | | 100 | | | 100 | |
(1)Included in prepaid expenses and other on the consolidated balance sheets.
(2)Included in other assets on the consolidated balance sheets.
(3)Included in accrued and other current liabilities on the consolidated balance sheets.
(4)Included in other non-current liabilities on the consolidated balance sheets.
(5)The carrying amount of the debt instrument is presented net of the debt issuance costs, premium and discount. Refer to Note 12, “Debt,” for gross carrying amounts.
The Company values its financial instruments using an industry standard market approach, in which prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized or disclosed using unobservable inputs (i.e., Level 3).
Interest rate swaps were measured at fair value using quoted market prices for the swap interest rate indexes over the term of the swap discounted to present value versus the fixed rate of the contract. The interest rate caps were measured at fair value using implied volatility rates of each individual caplet and the yield curve for the related periods.
The Company’s derivative contracts consist of foreign currency exchange contracts and interest rate swap and cap agreements. These derivative contracts are over-the-counter, and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates. These contracts are categorized as Level 2 in the fair value hierarchy.
The estimated fair value of the Company’s term loans was based on information provided by the agent under the Company’s senior secured credit facility. The estimated fair values of the Company’s notes were based upon quoted market prices. There has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any significant impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.
The fair value of cash and cash equivalents, trade accounts receivable-net and accounts payable approximated carrying value due to the short-term nature of these instruments at September 30, 2022 and 2021.
21. DERIVATIVES AND HEDGING ACTIVITIES
The Company is exposed to, among other things, the impact of changes in foreign currency exchange rates and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks and does not enter into such transactions for trading purposes. The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged. The Company has agreements with each of its swap and cap counterparties that contain a provision whereby if the Company defaults on the credit facility the Company could also be declared in default on its swaps and caps, resulting in an acceleration of payment under the swaps and caps.
All derivative financial instruments are recorded at fair value in the consolidated balance sheets. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the consolidated balance sheets in accumulated other comprehensive loss to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within accumulated other comprehensive loss is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.
Interest Rate Swap and Cap Agreements – Interest rate swap and cap agreements are used to manage interest rate risk associated with floating-rate borrowings under our credit facility. The interest rate swap and cap agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s floating-rate debt to a fixed rate basis through the expiration date of the interest rate swap and cap agreements, thereby reducing the impact of interest rate changes on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the term of the agreements without an exchange of the underlying principal amount. These derivative instruments qualify as effective cash flow hedges under U.S. GAAP. For these cash flow hedges, the effective portion of the gain or loss from the financial instruments was initially reported as a component of accumulated other comprehensive loss in stockholders’ deficit and subsequently reclassified into earnings in the same line as the hedged item in the same period or periods during which the hedged item affected earnings. As the interest rate swap and cap agreements are used to manage interest rate risk, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in interest expense-net in the consolidated statements of income.
The following table summarizes the Company’s interest rate swap agreements:
| | | | | | | | | | | | | | | | | | | | |
Aggregate Notional Amount (in millions) | | Start Date | | End Date | | Conversion of Related Variable Rate Debt to Fixed Rate of: |
$500 | | 6/29/2018 | | 3/31/2025 | | 5.25% (3.0% plus the 2.25% margin percentage) |
$1,500 | | 6/30/2022 | | 3/31/2025 | | 5.35% (3.1% plus the 2.25% margin percentage) |
$700 | | 3/31/2023 | | 9/30/2025 | | 3.55% (1.3% plus the 2.25% margin percentage) |
$1,400 | | 6/30/2021 | | 3/31/2023 | | 5.25% (3.0% plus the 2.25% margin percentage) |
$900 | | 12/31/2021 | | 6/28/2024 | | 5.35% (3.1% plus the 2.25% margin percentage) |
$400 | | 9/30/2022 | | 6/28/2024 | | 5.25% (3.0% plus the 2.25% margin percentage) |
The following table summarizes the Company’s interest rate cap agreements:
| | | | | | | | | | | | | | | | | | | | |
Aggregate Notional Amount (in millions) | | Start Date | | End Date | | Offsets Variable Rate Debt Attributable to Fluctuations Above: |
$700 | | 3/31/2023 | | 9/30/2025 | | Three-month LIBOR rate of 1.25% |
Certain derivative asset and liability balances are offset where master netting agreements provide for the legal right of setoff. For classification purposes, we record the net fair value of each type of derivative position that is expected to settle in less than one year with each counterparty as a net current asset or liability and each type of long-term position as a net non-current asset or liability. The amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the consolidated balance sheets and the net amounts of assets and liabilities presented therein (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | September 30, 2021 |
| | Asset | | Liability | | Asset | | Liability |
Interest rate cap agreements | | $ | 50 | | | $ | — | | | $ | 8 | | | $ | — | |
Interest rate swap agreements | | 145 | | | — | | | — | | | 280 | |
| | | | | | | | |
| | | | | | | | |
Net derivatives as classified in the consolidated balance sheet (1) | | $ | 195 | | | $ | — | | | $ | 8 | | | $ | 280 | |
(1)Refer to Note 20, “Fair Value Measurements,” for the consolidated balance sheets classification of our interest rate swap and cap agreements. The change in the fair value of the interest rate swap and cap agreements is attributable to the upward trend in LIBOR during fiscal 2022.
Based on the fair value amounts of the interest rate swap and cap agreements determined as of September 30, 2022, the estimated net amount of existing (gains) and losses and caplet amortization expected to be reclassified into interest expense-net within the next 12 months is approximately $(76.3) 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 September 30, 2022, the Company has outstanding foreign currency forward exchange contracts to sell U.S. dollars with notional amounts of $165.6 million. The maximum duration of the Company’s foreign currency cash flow hedge contracts at September 30, 2022 is 12 months. These notional values consist of contracts for the Canadian dollar and the euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective trade dates. Amounts related to foreign currency forward exchange contracts included in accumulated other comprehensive loss in stockholders' deficit are reclassified into net sales when the hedged transaction settles.
During the fiscal year ended September 30, 2022, the losses reclassified on settlements of foreign currency forward exchange contracts designated as cash flow hedges into net sales was approximately $8.1 million. The losses were previously recorded as a component of accumulated other comprehensive loss in stockholders' deficit.
As of September 30, 2022, the Company expects to record a net loss of approximately $10.8 million on foreign currency forward exchange contracts designated as cash flow hedges to net sales over the next 12 months.
22. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the total changes by component in accumulated other comprehensive loss (“AOCI”), net of taxes, for the fiscal years ended September 30, 2022, 2021 and 2020 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized gains (losses) on derivatives (1) | | Pension and postretirement benefit plans adjustment (2) | | Foreign currency translation adjustment | | Total |
Balance at September 30, 2020 | $ | (302) | | | $ | (8) | | | $ | (91) | | | $ | (401) | |
Current-period other comprehensive income (loss) before reclassification | 68 | | | (10) | | | 90 | | | 148 | |
Amounts reclassified from AOCI | 5 | | | — | | | — | | | 5 | |
Net current-period other comprehensive income | 73 | | | (10) | | | 90 | | | 153 | |
Balance at September 30, 2021 | (229) | | | (18) | | | (1) | | | (248) | |
Current-period other comprehensive income (loss) before reclassification | 362 | | | 2 | | | (379) | | | (15) | |
Amounts reclassified from AOCI | (10) | | | 6 | | | — | | | (4) | |
Net current-period other comprehensive income | 352 | | | 8 | | | (379) | | | (19) | |
Balance at September 30, 2022 | $ | 123 | | | $ | (10) | | | $ | (380) | | | $ | (267) | |
(1)Represents unrealized gains (losses) on derivatives designated and qualifying as cash flow hedges, net of tax expense (benefit), of $112 million, $(23) million and $36 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively.
(2)Defined pension plan and postretirement benefit plan activity represents pension liability adjustments, net of tax. For the fiscal year ended September 30, 2022, pension liability adjustments, net of tax of $1 million, represents unrecognized actuarial losses reclassified to other expense (income) upon the settlement of the ERP. Refer to Note 13, “Retirement Benefits,” for additional information. Pension liability adjustments, net of taxes, for the fiscal years ended September 30, 2021 and 2020 were not material.
The following table presents a summary of reclassifications out of AOCI for the fiscal years ended September 30, 2022 and 2021. Reclassifications out of AOCI for the fiscal year ended September 30, 2020 were not material (in millions):
| | | | | | | | | | | | | | |
| | Fiscal Years Ended September 30, |
Description of reclassifications out of AOCI | | 2022 | | 2021 |
Amortization from redesignated interest rate swap and cap agreements (1) | | $ | 1 | | | $ | 2 | |
(Losses) gains from settlement of foreign currency forward exchange contracts (2) | | (8) | | | 4 | |
Settlement charges from termination of the ERP (3) | | 6 | | | — | |
Deferred tax expense on reclassifications out of AOCI | | (3) | | | (1) | |
Amounts reclassified into earnings, net of tax | | $ | (4) | | | $ | 5 | |
(1)This component of AOCI is included in interest expense-net. Refer to Note 21, “Derivatives and Hedging Activities,” for additional information.
(2)This component of AOCI is included in net sales. Refer to Note 21, “Derivatives and Hedging Activities,” for additional information.
(3)This component of AOCI is included in other expense (income). Refer to Note 13, “Retirement Plans,” for additional information.
23. DISCONTINUED OPERATIONS
No divestitures occurred during the fiscal year ended September 30, 2022. No divestitures occurring in the fiscal year ended September 30, 2021 met the criteria to qualify as discontinued operations under U.S. GAAP as none represented a strategic shift that has or will have a major affect on TransDigm's operations and financial results. Refer to Note 2, “Acquisitions and Divestitures,” for additional disclosures on the Company's fiscal 2021 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 U.S. GAAP, qualified as discontinued operations. Therefore, the results of operations of Souriau-Sunbank are presented in discontinued operations in the accompanying consolidated financial statements for the applicable periods.
The table below summarizes income from discontinued operations, net of tax, for the fiscal year ended September 30, 2020 (in millions):
| | | | | | | | |
| | Fiscal Year Ended |
| | September 30, 2020 |
Net sales | | $ | 79 | |
Income from discontinued operations, before income taxes | | 11 | |
Income tax provision | | 4 | |
Income from discontinued operations, net of tax | | 7 | |
Gain from sale of discontinued operations, net of tax | | 40 | |
Income from discontinued operations, net of tax | | $ | 47 | |
Income from discontinued operations, net of tax, for the fiscal year ended September 30, 2020 was $47 million and included $7 million from the results of operations of Souriau-Sunbank and a gain on the sale of Souriau-Sunbank, net of tax, of $40 million.
During the first quarter of fiscal 2022, the Company received approximately $1 million in cash proceeds related to a final working capital settlement for the Souriau-Sunbank divestiture. These proceeds are classified as income from discontinued operations, net of tax, in the consolidated statements of income.
TRANSDIGM GROUP INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2022, 2021, AND 2020
(Amounts in millions)
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Column A | | Column B | | Column C | | Column D | | Column E |
| | Balance at Beginning of Period | | Additions | | Divestitures & Deductions from Reserve (1) | | Balance at End of Period |
Description | | Charged to Costs and Expenses | | Acquisitions & Purchase Price Adjustments | |
Year Ended September 30, 2022 | | | | | | | | | | |
Allowance for uncollectible accounts | | $ | 30 | | | $ | 9 | | | $ | — | | | $ | (4) | | | $ | 35 | |
Inventory valuation reserves | | 194 | | | 21 | | | 3 | | | (22) | | | 196 | |
Valuation allowance for deferred tax assets | | 74 | | | 62 | | | 1 | | | — | | | 137 | |
Year Ended September 30, 2021 | | | | | | | | | | |
Allowance for uncollectible accounts | | $ | 37 | | | $ | — | | | $ | — | | | $ | (7) | | | $ | 30 | |
Inventory valuation reserves | | 178 | | | 42 | | | 10 | | | (36) | | | 194 | |
Valuation allowance for deferred tax assets | | 132 | | | (58) | | | — | | | — | | | 74 | |
Year Ended September 30, 2020 | | | | | | | | | | |
Allowance for uncollectible accounts | | $ | 17 | | | $ | 21 | | | $ | 3 | | | $ | (4) | | | $ | 37 | |
Inventory valuation reserves | | 124 | | | 34 | | | 37 | | | (17) | | | 178 | |
Valuation allowance for deferred tax assets | | 118 | | | 15 | | | (1) | | | — | | | 132 | |
(1)The amounts in this column represent the impact from divestitures, charge-offs net of recoveries and the impact of foreign currency translation adjustments.
EXHIBIT INDEX
TO FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2022
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Exhibit No. | | Description |
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101.INS | | Inline XBRL Instance Document: The XBRL Instance Document does not appear in the Inveractive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | Inline XBRL Taxonomy Extension Schema |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | | Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101 |
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* | Indicates management contract or compensatory plan contract or arrangement. |
** | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish on a supplemental basis a copy of any omitted schedule or exhibit upon request by the Securities and Exchange Commission. |
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