|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2021
|
|
September 30, 2020
|
|
|
Asset
|
|
Liability
|
|
Asset
|
|
Liability
|
Interest rate cap agreements
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
—
|
|
|
(304)
|
|
|
—
|
|
|
(384)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivatives as classified in the balance sheet (1)
|
|
$
|
8
|
|
|
$
|
(304)
|
|
|
$
|
—
|
|
|
$
|
(384)
|
|
(1)Refer to Note 11, "Fair Value Measurements," for the condensed consolidated balance sheets classification of our interest rate swap agreements.
Based on the fair values of the interest rate swap and cap agreements determined as of July 3, 2021, the estimated net amount of existing gains and losses and caplet amortization expected to be reclassified into interest expense within the next 12 months is approximately $33.0 million.
On June 18, 2021, the Company entered into two interest rate cap agreements and one interest rate swap agreement. The agreements each have an effective date of March 31, 2023 and mature on September 30, 2025. The two interest rate cap agreements will offset the variable interest rates on the Company's floating rate debt exposures based on an aggregate notional amount of $700 million. The two interest rate caps offset the variability in expected future cash flows on the Company's variable rate debt attributable to fluctuations above the three month LIBOR of 1.25%. The interest rate swap agreement hedges the variable interest rates on the Company's floating rate debt exposures for a fixed rate based on a notional amount of $700 million. The interest rate swap agreement converts the variable interest rate on the aggregate notional amount of the Company's floating rate debt to a fixed rate of 3.55% (1.3% plus the 2.25% margin percentage) over the term of the interest rate swap agreement.
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 July 3, 2021, the Company had outstanding foreign currency forward exchange contracts to sell U.S. dollars with notional amounts of $165.2 million. The maximum duration of the Company’s foreign currency cash flow hedge contracts at July 3, 2021 is 15 months. These notional values consist of contracts for the Canadian dollar and the European euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective 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 thirty-nine week period ended July 3, 2021, the gains reclassified on foreign currency forward exchange contracts designated as cash flow hedges into net sales in the condensed consolidated statements of income (loss) was immaterial. The gains were previously recorded as a component of accumulated other comprehensive loss in stockholders' deficit. As of July 3, 2021, the unrealized gains classified in other comprehensive income that the Company expects to reclassify into net sales over the next 12 months are less than $1 million.
During the thirty-nine week period ended July 3, 2021, the gains recorded as a component of other income related to the ineffective portion of the foreign currency forward exchange contracts designated as cash flow hedges were immaterial.
13. SEGMENTS
The Company’s businesses are organized and managed in three reporting segments: Power & Control, Airframe and Non-aviation.
The Power & Control segment includes operations that primarily develop, produce and market systems and components that predominately provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies. Major product offerings include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, databus and power controls, advanced sensor products, switches and relay panels, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Primary customers of this segment are engine and power system and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.
The Airframe segment includes operations that primarily develop, produce and market systems and components that are used in non-power airframe applications utilizing airframe and cabin structure technologies. Major product offerings include engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, cockpit security components and systems, specialized and advanced cockpit displays, 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 headsets for high-noise, medium-noise, and dismounted applications, seat belts and safety restraints for ground transportation applications, mechanical/electro-mechanical actuators and controls for space applications, hydraulic/electromechanical actuators and fuel valves for land based gas turbines, and refueling systems for heavy equipment used in mining, construction and other industries and turbine controls for the energy and oil and gas markets. Primary customers of this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers, manufacturers of heavy equipment used in mining, construction and other industries and turbine original equipment manufacturers, gas pipeline builders and electric utilities.
The 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 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 transaction-related expenses, and refinancing costs. COVID-19 restructuring costs represent actions taken by the Company 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-related costs represent accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold; costs incurred to integrate acquired businesses and product lines into the Company’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs comprising deal fees; legal, financial and tax diligence expenses and valuation costs that are required to be expensed as incurred and other acquisition accounting adjustments.
EBITDA As Defined is not a measurement of financial performance under 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. Certain corporate-level expenses are allocated to the operating segments.
The following table presents net sales by reportable segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
July 3, 2021
|
|
June 27, 2020
|
|
July 3, 2021
|
|
June 27, 2020
|
Net sales to external customers
|
|
|
|
|
|
|
|
Power & Control
|
|
|
|
|
|
|
|
Commercial and Non-Aerospace OEM
|
$
|
135
|
|
|
$
|
118
|
|
|
$
|
388
|
|
|
$
|
493
|
|
Commercial and Non-Aerospace Aftermarket
|
139
|
|
|
112
|
|
|
419
|
|
|
557
|
|
Defense
|
354
|
|
|
326
|
|
|
1,063
|
|
|
1,006
|
|
Total Power & Control
|
628
|
|
|
556
|
|
|
1,870
|
|
|
2,056
|
|
|
|
|
|
|
|
|
|
Airframe
|
|
|
|
|
|
|
|
Commercial and Non-Aerospace OEM
|
158
|
|
|
155
|
|
|
441
|
|
|
628
|
|
Commercial and Non-Aerospace Aftermarket
|
149
|
|
|
107
|
|
|
390
|
|
|
571
|
|
Defense
|
243
|
|
|
172
|
|
|
696
|
|
|
563
|
|
Total Airframe
|
550
|
|
|
434
|
|
|
1,527
|
|
|
1,762
|
|
|
|
|
|
|
|
|
|
Total Non-aviation
|
40
|
|
|
32
|
|
|
122
|
|
|
112
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$
|
1,218
|
|
|
$
|
1,022
|
|
|
$
|
3,519
|
|
|
$
|
3,930
|
|
The following table reconciles EBITDA As Defined by segment to consolidated income from continuing operations before income taxes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
July 3, 2021
|
|
June 27, 2020
|
|
July 3, 2021
|
|
June 27, 2020
|
|
|
EBITDA As Defined
|
|
|
|
|
|
|
|
|
|
Power & Control
|
$
|
331
|
|
|
$
|
270
|
|
|
$
|
944
|
|
|
$
|
1,036
|
|
|
|
Airframe
|
233
|
|
|
166
|
|
|
618
|
|
|
767
|
|
|
|
Non-aviation
|
14
|
|
|
12
|
|
|
45
|
|
|
39
|
|
|
|
Total segment EBITDA As Defined
|
578
|
|
|
448
|
|
|
1,607
|
|
|
1,842
|
|
|
|
Less: Unallocated corporate expenses
|
19
|
|
|
24
|
|
|
55
|
|
|
62
|
|
|
|
Total Company EBITDA As Defined
|
559
|
|
|
424
|
|
|
1,552
|
|
|
1,780
|
|
|
|
Depreciation and amortization expense
|
65
|
|
|
70
|
|
|
188
|
|
|
211
|
|
|
|
Interest expense, net
|
263
|
|
|
262
|
|
|
798
|
|
|
762
|
|
|
|
Acquisition-related costs
|
6
|
|
|
3
|
|
|
24
|
|
|
19
|
|
|
|
Non-cash stock compensation expense
|
35
|
|
|
21
|
|
|
105
|
|
|
59
|
|
|
|
Refinancing costs
|
13
|
|
|
1
|
|
|
36
|
|
|
27
|
|
|
|
COVID-19 pandemic restructuring costs
|
1
|
|
|
30
|
|
|
40
|
|
|
30
|
|
|
|
Gain on sale of businesses, net
|
(68)
|
|
|
—
|
|
|
(69)
|
|
|
—
|
|
|
|
Other, net
|
—
|
|
|
3
|
|
|
2
|
|
|
8
|
|
|
|
Income from continuing operations before income taxes
|
$
|
244
|
|
|
$
|
34
|
|
|
$
|
428
|
|
|
$
|
664
|
|
|
|
The following table presents total assets by segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
July 3, 2021
|
|
September 30, 2020
|
Total assets
|
|
|
|
Power & Control
|
$
|
6,983
|
|
|
$
|
7,005
|
|
Airframe
|
7,510
|
|
|
6,575
|
|
Non-aviation
|
220
|
|
|
251
|
|
Corporate
|
4,376
|
|
|
4,564
|
|
|
|
|
|
Total assets
|
$
|
19,089
|
|
|
$
|
18,395
|
|
14. RETIREMENT PLANS
The components of net periodic pension (benefit) cost for the Company's defined benefit plans were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
July 3, 2021
|
|
June 27, 2020
|
|
July 3, 2021
|
|
June 27, 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
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
Service cost
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
3
|
|
Interest cost
|
2
|
|
|
1
|
|
|
3
|
|
|
1
|
|
|
5
|
|
|
3
|
|
|
8
|
|
|
4
|
|
Expected return on plan assets
|
(5)
|
|
|
(1)
|
|
|
(5)
|
|
|
(2)
|
|
|
(14)
|
|
|
(5)
|
|
|
(14)
|
|
|
(6)
|
|
Amortization
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Net periodic pension (benefit) cost
|
$
|
(3)
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(7)
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
2
|
|
The net periodic pension (benefit) cost for the Company's post-retirement pension plans was immaterial for the thirteen and thirty-nine week periods ended July 3, 2021 and June 27, 2020. The components of the defined benefit plans net periodic pension (benefit) cost, other than service cost, are included in other (income) expense in the Company's condensed consolidated statements of income (loss).
On December 31, 2020, the Company approved an amendment and provided notice to participants, in accordance with regulatory requirements, of its intent to freeze the Esterline Retirement Plan (the "Plan"). The amendment, among other things, froze the Plan to all future benefit accruals and participation by new or rehired employees on or after January 1, 2021. On March 30, 2021, the Company approved an amendment of its intent to terminate the Plan effective June 30, 2021 and provided notice to participants, in accordance with regulatory requirements. The Company anticipates the termination process will take approximately 18 to 24 months to complete. Upon settlement of the pension obligations, the Company will reclassify unrecognized actuarial gains or losses, currently recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets, to the Company's condensed consolidated statements of income (loss) as settlement gains or charges in the fourth quarter of fiscal 2021.
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the components of accumulated other comprehensive loss, net of taxes, for the thirty-nine week periods ended July 3, 2021 and June 27, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on derivatives designated and qualifying as cash flow hedges (1)
|
|
Defined benefit pension plan activity (2)
|
|
Currency translation adjustment
|
|
Total
|
Balance at September 30, 2020
|
$
|
(302)
|
|
|
$
|
(8)
|
|
|
$
|
(91)
|
|
|
$
|
(401)
|
|
|
|
|
|
|
|
|
|
Current-period other comprehensive income, net of tax, attributable to TD Group
|
58
|
|
|
—
|
|
|
121
|
|
|
179
|
|
|
|
|
|
|
|
|
|
Balance at July 3, 2021
|
$
|
(244)
|
|
|
$
|
(8)
|
|
|
$
|
30
|
|
|
$
|
(222)
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
(172)
|
|
|
$
|
(40)
|
|
|
$
|
(167)
|
|
|
$
|
(379)
|
|
|
|
|
|
|
|
|
|
Current-period other comprehensive (loss) income, net of tax, attributable to TD Group
|
(136)
|
|
|
6
|
|
|
19
|
|
|
(111)
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 2020
|
$
|
(308)
|
|
|
$
|
(34)
|
|
|
$
|
(148)
|
|
|
$
|
(490)
|
|
(1)Represents unrealized (losses) gains on derivatives designated and qualifying as cash flow hedges, net of taxes of $0.4 million and $(6.0) million for the thirteen week periods ended July 3, 2021 and June 27, 2020, respectively, and $18.9 million and $(40.0) million for the thirty-nine week periods ended July 3, 2021 and June 27, 2020, respectively.
(2)There were no material pension liability adjustments, net of taxes, for the thirteen and thirty-nine week periods ended July 3, 2021 and June 27, 2020.
Reclassifications out of accumulated other comprehensive loss for the thirteen and thirty-nine week periods ended July 3, 2021 and June 27, 2020 were not material.
16. LEASES
The Company leases certain manufacturing facilities, offices, land, equipment and vehicles. Such leases, some of which are noncancelable and, in many cases, include renewals, expire at various dates. Such options to renew are included in the lease term when it is reasonably certain that the option will be exercised. The Company’s lease agreements typically do not contain any significant residual value guarantees or restrictive covenants, and payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on the lease term and the currency in which lease payments are made. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.
The components of lease expense for the are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
Classification
|
|
July 3, 2021
|
|
June 27, 2020
|
|
July 3, 2021
|
|
June 27, 2020
|
Operating lease cost
|
Cost of sales or selling and administrative expenses
|
|
$
|
9
|
|
|
$
|
7
|
|
|
$
|
23
|
|
|
$
|
21
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
Cost of sales
|
|
1
|
|
|
1
|
|
|
3
|
|
|
2
|
|
Interest on lease liabilities
|
Interest expense - net
|
|
2
|
|
|
1
|
|
|
4
|
|
|
3
|
|
Total lease cost
|
|
|
$
|
12
|
|
|
$
|
9
|
|
|
$
|
30
|
|
|
$
|
26
|
|
Supplemental cash flow information related to leases is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
July 3, 2021
|
|
June 27, 2020
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
23
|
|
|
$
|
21
|
|
Operating cash outflows from finance leases
|
|
4
|
|
|
3
|
|
Financing cash outflows from finance leases
|
|
1
|
|
|
1
|
|
|
|
|
|
|
Lease assets obtained in exchange for new lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
39
|
|
|
$
|
21
|
|
Financing leases
|
|
25
|
|
|
—
|
|
|
|
|
|
|
Supplemental balance sheet information related to leases is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
July 3, 2021
|
|
September 30, 2020
|
Operating Leases
|
|
|
|
|
|
Operating lease right-of-use assets
|
Other assets
|
|
$
|
98
|
|
|
$
|
102
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
Accrued and other current liabilities
|
|
20
|
|
|
22
|
|
Long-term operating lease liabilities
|
Other non-current liabilities
|
|
82
|
|
|
86
|
|
Total operating lease liabilities
|
|
|
$
|
102
|
|
|
$
|
108
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
|
Finance lease right-of-use assets, net
|
Property, plant and equipment - net
|
|
$
|
107
|
|
|
$
|
68
|
|
|
|
|
|
|
|
Current finance lease liabilities
|
Accrued and other current liabilities
|
|
2
|
|
|
2
|
|
Long-term finance lease liabilities
|
Other non-current liabilities
|
|
99
|
|
|
55
|
|
Total finance lease liabilities
|
|
|
$
|
101
|
|
|
$
|
57
|
|
As of July 3, 2021, the Company has the following remaining lease term and weighted average discount rates:
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
Operating leases
|
8.3 years
|
Finance leases
|
21.9 years
|
|
|
Weighted-average discount rate
|
|
Operating leases
|
6.0%
|
Finance leases
|
7.2%
|
Maturities of lease liabilities at July 3, 2021 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2021
|
$
|
7
|
|
|
$
|
2
|
|
2022
|
23
|
|
|
9
|
|
2023
|
18
|
|
|
9
|
|
2024
|
15
|
|
|
9
|
|
2025
|
13
|
|
|
9
|
|
Thereafter
|
55
|
|
|
180
|
|
Total future minimum lease payments
|
131
|
|
|
218
|
|
Less: imputed interest
|
29
|
|
|
117
|
|
Present value of lease liabilities reported
|
$
|
102
|
|
|
$
|
101
|
|
17. COMMITMENTS AND CONTINGENCIES
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 are recognized when receipt is probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory were not recorded until all contingencies relating to the claim had been resolved.
During the second quarter of fiscal 2021, the property insurance portion of the claim was settled for approximately $54 million, net of the $1 million deductible. For the thirty-nine week period ended July 3, 2021, approximately $24 million in cash has been received to fully resolve the property claim. The proceeds are included in net cash used for investing activities within the condensed consolidated statement of cash flows based on the nature of the reimbursement. As all contingencies related to the property claim were resolved during the second quarter of fiscal 2021, a gain of approximately $21 million has been recorded to other income for the thirty-nine week period ended July 3, 2021. The gain represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory. For the thirty-nine week period ended June 27, 2020, approximately $27 million in cash was received as an initial advance under the property insurance claim. The proceeds were included in net cash provided by operating activities within the condensed consolidated statement of cash flows based on the nature of the reimbursement.
Discussions are ongoing with the insurance carrier regarding the business interruption losses and other incremental costs resulting from the disruption of operations caused by the fire. The timing of and amount of insurance recoveries for these losses and incremental costs is expected to be substantially resolved by the end of fiscal 2021. Incremental costs incurred relating to the fire for the thirteen and thirty-nine week periods ended July 3, 2021 and June 27, 2020 were not material.
18. DISCONTINUED OPERATIONS
Prior Year Divestitures
On December 20, 2019, TransDigm completed the divestiture of Souriau-Sunbank to Eaton for approximately $920 million. Souriau-Sunbank was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm’s Non-aviation segment. The divestiture represented a strategic shift in TransDigm’s business and, in accordance with U.S. GAAP, qualified as discontinued operations.
Operating Results Summary
(Loss) Income from discontinued operations, net of tax, for the thirteen and thirty-nine week periods ended June 27, 2020 was $(1) million and $66 million, respectively. The following is the summarized operating results for Souriau-Sunbank for the thirteen and thirty-nine week periods ended June 27, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended
|
|
Thirty-Nine Week Period Ended
|
|
|
June 27, 2020
|
|
June 27, 2020
|
Net sales
|
|
$
|
—
|
|
|
$
|
79
|
|
(Loss) Income from discontinued operations before income taxes
|
|
(1)
|
|
|
12
|
|
Income tax expense
|
|
—
|
|
|
5
|
|
(Loss) Income from discontinued operations, net of tax
|
|
(1)
|
|
|
7
|
|
Gain from sale of discontinued operations, net of tax
|
|
—
|
|
|
59
|
|
(Loss) Income from discontinued operations, net of tax
|
|
$
|
(1)
|
|
|
$
|
66
|
|
Current Year Divestitures
No divestitures occurring in the thirty-nine week period ended July 3, 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 effect on TransDigm's operations and financial results. Refer to Note 3, "Acquisitions and Divestitures," for additional disclosures on the Company's fiscal 2021 divestitures.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
The following discussion of the Company’s financial condition and results of operations should be read together with TD Group’s condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. References in this section to “TransDigm,” “the Company,” “we,” “us,” “our,” and similar references refer to TD Group, TransDigm, Inc. and TransDigm, Inc.’s subsidiaries, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q contains both historical and “forward-looking statements” within the meaning of Section 21E of the Exchange Act, and 27A of the Securities Act. All statements other than statements of historical fact included that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained throughout this Quarterly Report on Form 10-Q. These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to, among other things, our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q, including the risks outlined under “Risk Factors,” will be important in determining future results. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described under “Risk Factors” in the Quarterly Report on Form 10-Q. Since our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events anticipated by these forward-looking statements will occur or, if any of them does occur, what impact they will have on our business, results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. We do not undertake any obligation to update these forward-looking statements or the risk factors contained in this Quarterly Report on Form 10-Q to reflect new information, future events or otherwise, except as may be required under federal securities laws.
Important factors that could cause actual results to differ materially from the forward-looking statements made in this Quarterly Report on Form 10-Q include but are not limited to: the impact that the COVID-19 pandemic has on our business, results of operations, financial condition and liquidity; the sensitivity of our business to the number of flight hours that our customers’ planes spend aloft and our customers’ profitability, both of which are affected by general economic conditions; future geopolitical or other worldwide events; cyber-security threats and natural disasters; our reliance on certain customers; the U.S. defense budget and risks associated with being a government supplier including government audits and investigations; failure to maintain government or industry approvals; failure to complete or successfully integrate acquisitions; our indebtedness; potential environmental liabilities; liabilities arising in connection with litigation; increases in raw material costs, taxes and labor costs that cannot be recovered in product pricing; risks and costs associated with our international sales and operations; and other factors. Refer to Item 1A included in this Quarterly Report on Form 10-Q and to Item 1A of the Annual Report on Form 10-K for additional information regarding the foregoing factors that may affect our business.
Overview
We believe we are a leading global designer, producer and supplier of highly engineered proprietary aerospace components with significant aftermarket content. We seek to develop highly customized products to solve specific needs for aircraft operators and manufacturers. We attempt to differentiate ourselves based on engineering, service and manufacturing capabilities. We typically choose not to compete for non-proprietary “build to print” business because it frequently offers lower margins than proprietary products. We believe that our products have strong brand names within the industry and that we have a reputation for high quality, reliability and strong customer support. Our business is well diversified due to the broad range of products that we offer to our customers. Our 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. Each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer.
For the third quarter of fiscal year 2021, we generated net sales of $1,218 million and net income attributable to TD Group of $317 million. EBITDA As Defined was $559 million, or 45.9% of net sales. Refer to the "Non-GAAP Financial Measures" section for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to income (loss) from continuing operations and net cash provided by operating activities.
COVID-19 was first reported in December 2019, and since being declared as a pandemic by the World Health Organization in March 2020, has dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the pandemic. The pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a rapid pace beginning in the second half of fiscal 2020 and has remained significantly depressed compared to pre-pandemic levels.
Although commercial air travel demand has shown slight signs of recovery in recent months, the recovery is expected to continue to be slow and uneven depending on factors such as the trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 surfacing), the rollout and effectiveness of the vaccine, and the eventual easing of quarantines and travel restrictions, among other factors. The exact timing and pace of the recovery is indeterminable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, and in recent months new variants of COVID-19 have been identified, resulting in additional restrictions put in place by certain governments around the world.
Within the United States, our business has been designated as "essential," which has allowed us to continue to serve our customers; nonetheless, the COVID-19 pandemic has significantly disrupted our operations. The outbreak of COVID-19 has heightened the risk that a portion of our workforce will suffer illness or otherwise be unable to work. Furthermore, in light of enacted and any additional reductions in our workforce as a result of declines in our business caused by the COVID-19 pandemic, we cannot assure that we will be able to rehire our workforce as our business begins to recover. Certain of our facilities have experienced temporary disruptions as a result of the COVID-19 pandemic, and we cannot predict whether our facilities will experience more significant disruptions in the future. Finally, our acquisition strategy, which is a key element of our overall business strategy, may be impacted by our efforts to maintain the Company’s cash liquidity position in response to the COVID-19 pandemic depending on the duration of the pandemic and its impact on our cash flows.
The COVID-19 pandemic has caused a significant adverse impact on our sales, net income and EBITDA As Defined and is expected to continue to do so for at least the remainder of fiscal 2021. This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer demand for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. The defense market channel is also impacted to a significantly lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for uncertainty. The magnitude of the impact of COVID-19 remains unpredictable and we continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results.
The Company took immediate and aggressive action to minimize the spread of COVID-19 in our workplaces and reduce costs. Since the early days of the pandemic, we have been following guidance from the World Health Organization and the U.S. Center for Disease Control to protect employees and prevent the spread of the virus within all of our facilities globally. Some of the actions implemented include: flexible work-from-home scheduling; alternate shift schedules; pre-shift temperature screenings, where allowed by law; social distancing; appropriate personal protective equipment; facility deep cleaning; and paid quarantine time for impacted employees. In recent months, the Company has taken various steps to facilitate access to vaccines for our employees in accordance with federal guidelines and state and local vaccination plans.
Material actions to reduce costs in response to the impact that the pandemic has had on operating results include: (1) reducing the Company's workforce to align operations with customer demand through a reduction in force or through a realignment of certain business units; (2) implementing unpaid furloughs and salary reductions; (3) delaying non-essential capital projects and (4) minimizing discretionary spending.
For the thirteen week period ended July 3, 2021, COVID-19 restructuring costs of less than $1 million were incurred, all of which was recorded in selling and administrative expenses on the condensed consolidated statements of income (loss). For the thirty-nine week period ended July 3, 2021, COVID-19 restructuring costs of approximately $36 million were incurred, of which $26 million was recorded in cost of sales and $10 million was recorded in selling and administrative expenses on the condensed consolidated statements of income (loss). For the thirteen and thirty-nine week periods ended June 27, 2020, COVID-19 restructuring costs of approximately $24 million were incurred, of which $19 million was recorded in cost of sales and $5 million was recorded in selling and administrative expenses on the condensed consolidated statement of income (loss). These costs are primarily related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand.
Additionally, for the thirteen and thirty-nine week periods ended July 3, 2021, the Company incurred approximately $1 million and $4 million, respectively, in incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment). For the thirteen and thirty-nine week periods ended June 27, 2020, the Company incurred approximately $3 million in incremental costs related to the pandemic.
As of July 3, 2021 and September 30, 2020, the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was approximately $26 million and $13 million, respectively. This accrual is recorded as a component of accrued and other current liabilities on the condensed consolidated balance sheets. The increase in the accrual is primarily driven by costs to reduce its workforce that have been incurred but not paid; partially offset by payments against the accrual. The Company expects to incur additional restructuring and incremental costs related to the COVID-19 pandemic though at a reduced level in comparison to fiscal 2020. The Company continues to analyze its cost structure and may implement additional cost reduction measures as necessary due to the ongoing business challenges resulting from the COVID-19 pandemic.
Critical Accounting Policies and Estimates
The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in conformity with generally accepted accounting principles in the United States ("U.S. GAAP") for interim financial statements and contain certain amounts that were based upon management’s best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. On an ongoing basis, we evaluate the accounting policies and estimates used to prepare financial statements. Estimates are based on historical experience, judgments and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management.
A comprehensive discussion of the Company’s critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. Other than the adoption of ASU 2016-13 “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,” there have been no significant changes in critical accounting policies, management estimates or accounting policies since the fiscal year ended September 30, 2020. Refer to Note 4, “Recent Accounting Pronouncements,” and Note 5, “Revenue Recognition,” in the notes to the condensed consolidated financial statements included herein for further disclosure of accounting standards recently adopted or required to be adopted in the future.
Acquisitions and Divestitures
Recent acquisitions and divestitures are described in Note 3, “Acquisitions and Divestitures,” in the notes to the condensed consolidated financial statements included herein.
Results of Operations
The following table sets forth, for the periods indicated, certain operating data of the Company, including presentation of the amounts as a percentage of net sales (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
July 3, 2021
|
|
% of Net Sales
|
|
June 27, 2020
|
|
% of Net Sales
|
Net sales
|
$
|
1,218
|
|
|
100.0
|
%
|
|
$
|
1,022
|
|
|
100.0
|
%
|
Cost of sales
|
563
|
|
|
46.2
|
%
|
|
531
|
|
|
52.0
|
%
|
Selling and administrative expenses
|
172
|
|
|
14.1
|
%
|
|
163
|
|
|
15.9
|
%
|
Amortization of intangible assets
|
36
|
|
|
3.0
|
%
|
|
42
|
|
|
4.1
|
%
|
Income from operations
|
447
|
|
|
36.7
|
%
|
|
286
|
|
|
28.0
|
%
|
Interest expense, net
|
263
|
|
|
21.6
|
%
|
|
262
|
|
|
25.6
|
%
|
Refinancing costs
|
13
|
|
|
1.1
|
%
|
|
1
|
|
|
0.1
|
%
|
Other income
|
(5)
|
|
|
(0.4)
|
%
|
|
(11)
|
|
|
(1.1)
|
%
|
Gain on sale of businesses, net
|
(68)
|
|
|
(5.6)
|
%
|
|
—
|
|
|
—
|
%
|
Income tax (benefit) provision
|
(73)
|
|
|
(6.0)
|
%
|
|
39
|
|
|
3.8
|
%
|
Income (loss) from continuing operations
|
317
|
|
|
26.0
|
%
|
|
(5)
|
|
|
(0.5)
|
%
|
Less: Net income attributable to noncontrolling interests
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Income (loss) from continuing operations attributable to TD Group
|
317
|
|
|
26.0
|
%
|
|
(5)
|
|
|
(0.5)
|
%
|
Loss from discontinued operations, net of tax
|
—
|
|
|
—
|
%
|
|
(1)
|
|
|
(0.1)
|
%
|
Net income (loss) attributable to TD Group
|
$
|
317
|
|
|
26.0
|
%
|
|
$
|
(6)
|
|
|
(0.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
July 3, 2021
|
|
% of Net Sales
|
|
June 27, 2020
|
|
% of Net Sales
|
Net sales
|
$
|
3,519
|
|
|
100.0
|
%
|
|
$
|
3,930
|
|
|
100.0
|
%
|
Cost of sales
|
1,731
|
|
|
49.2
|
%
|
|
1,819
|
|
|
46.3
|
%
|
Selling and administrative expenses
|
531
|
|
|
15.1
|
%
|
|
544
|
|
|
13.8
|
%
|
Amortization of intangible assets
|
101
|
|
|
2.9
|
%
|
|
128
|
|
|
3.3
|
%
|
Income from operations
|
1,156
|
|
|
32.9
|
%
|
|
1,439
|
|
|
36.6
|
%
|
Interest expense, net
|
798
|
|
|
22.7
|
%
|
|
762
|
|
|
19.4
|
%
|
Refinancing costs
|
36
|
|
|
1.0
|
%
|
|
27
|
|
|
0.7
|
%
|
Other income
|
(37)
|
|
|
(1.1)
|
%
|
|
(14)
|
|
|
(0.4)
|
%
|
Gain on sale of businesses, net
|
(69)
|
|
|
(2.0)
|
%
|
|
—
|
|
|
—
|
%
|
Income tax (benefit) provision
|
(45)
|
|
|
(1.3)
|
%
|
|
112
|
|
|
2.8
|
%
|
Income from continuing operations
|
473
|
|
|
13.4
|
%
|
|
552
|
|
|
14.0
|
%
|
Less: Net income attributable to noncontrolling interests
|
(2)
|
|
|
—
|
%
|
|
(1)
|
|
|
—
|
%
|
Income from continuing operations attributable to TD Group
|
471
|
|
|
13.4
|
%
|
|
551
|
|
|
14.0
|
%
|
Income from discontinued operations, net of tax
|
—
|
|
|
—
|
%
|
|
66
|
|
|
1.7
|
%
|
Net income attributable to TD Group
|
$
|
471
|
|
|
13.4
|
%
|
|
$
|
617
|
|
|
15.7
|
%
|
Changes in Results of Operations
Thirteen week period ended July 3, 2021 compared with the thirteen week period ended June 27, 2020
Total Company
•Net Sales. Net organic sales and acquisition and divestiture sales and the related dollar and percentage changes for the thirteen week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
% Change
Net Sales
|
|
July 3, 2021
|
|
June 27, 2020
|
|
Change
|
|
Organic sales
|
$
|
1,131
|
|
|
$
|
977
|
|
|
$
|
154
|
|
|
15.1
|
%
|
Acquisition and divestiture sales
|
87
|
|
|
45
|
|
|
42
|
|
|
4.1
|
%
|
Net sales
|
$
|
1,218
|
|
|
$
|
1,022
|
|
|
$
|
196
|
|
|
19.2
|
%
|
Organic sales represent sales from existing businesses owned by the Company, excluding sales from acquisitions and divestitures. Acquisition sales represent sales from acquired businesses for the period up to one year subsequent to their respective acquisition date. Divestiture sales represent sales from businesses divested subsequent to the period ended June 27, 2020. Acquisition and divestiture sales are excluded from organic sales due to the variability in the nature, timing and extent of acquisitions and divestitures and resulting variable impact on underlying trends.
The increase in organic sales of $154 million for the thirteen week period ended July 3, 2021 compared to the thirteen week period ended June 27, 2020, is primarily related to increases in commercial aftermarket sales ($68 million, an increase of 34.1%) and defense sales ($66 million, an increase of 13.7%); partially offset by a decrease in commercial OEM sales ($6 million, a decrease of 2.3%). The increase in commercial aftermarket sales is primarily attributable to the slight recovery in commercial air travel demand and related increase in the utilization of narrow-body aircraft in the third quarter of fiscal 2021. This is compared to the steep decline in demand during the third quarter of fiscal 2020 as a result of the COVID-19 pandemic and related supply chain disruptions, shutdowns and stay-at-home orders. The increase in defense sales (for both OEM and aftermarket) is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. The decrease in commercial OEM sales is attributable to build rate reductions by aircraft OEMs as a result of the COVID-19 pandemic.
The increase in acquisition and divestiture sales for the thirteen week period ended July 3, 2021 is primarily attributable to the acquisition of Cobham Aero Connectivity (“CAC”) in second quarter of fiscal 2021 and the divestitures of ScioTeq and TREALITY Simulation Visual Systems ("ScioTeq and TREALITY") completed at the end of the third quarter of fiscal 2021. Refer to Note 3, “Acquisitions and Divestitures,” for further information on the businesses acquired and divested by the Company in fiscal 2020 and 2021.
•Cost of Sales and Gross Profit. Cost of sales increased by $32 million, or 6.0%, to $563 million for the thirteen week period ended July 3, 2021 compared to $531 million for the thirteen week period ended June 27, 2020. Cost of sales and the related percentage of net sales for the thirteen week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
June 27, 2020
|
|
Change
|
|
% Change
|
Cost of sales - excluding costs below
|
$
|
581
|
|
|
$
|
511
|
|
|
$
|
70
|
|
|
13.7
|
%
|
% of net sales
|
47.7
|
%
|
|
50.0
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
4
|
|
|
2
|
|
|
2
|
|
|
100.0
|
%
|
% of net sales
|
0.3
|
%
|
|
0.2
|
%
|
|
|
|
|
Acquisition integration costs
|
2
|
|
|
—
|
|
|
2
|
|
|
100.0
|
%
|
% of net sales
|
0.2
|
%
|
|
—
|
%
|
|
|
|
|
COVID-19 pandemic restructuring costs
|
—
|
|
|
19
|
|
|
(19)
|
|
|
(100.0)
|
%
|
% of net sales
|
—
|
%
|
|
1.9
|
%
|
|
|
|
|
Foreign currency (gains) losses
|
(4)
|
|
|
5
|
|
|
(9)
|
|
|
(180.0)
|
%
|
% of net sales
|
(0.3)
|
%
|
|
0.5
|
%
|
|
|
|
|
Loss contract amortization
|
(20)
|
|
|
(6)
|
|
|
(14)
|
|
|
(233.3)
|
%
|
% of net sales
|
(1.6)
|
%
|
|
(0.6)
|
%
|
|
|
|
|
Total cost of sales
|
$
|
563
|
|
|
$
|
531
|
|
|
$
|
32
|
|
|
6.0
|
%
|
% of net sales
|
46.2
|
%
|
|
52.0
|
%
|
|
|
|
|
Gross profit
|
$
|
655
|
|
|
$
|
491
|
|
|
$
|
164
|
|
|
33.4
|
%
|
Gross profit percentage
|
53.8
|
%
|
|
48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the dollar amount of cost of sales during the thirteen week period ended July 3, 2021 was primarily due to higher sales volume from increased customer demand resulting from the slight recovery in commercial air travel, as well as the other factors summarized above, including those factors that partially offset the increase in cost of sales.
Gross profit as a percentage of net sales increased by 5.8 percentage points to 53.8% for the thirteen week period ended July 3, 2021 from 48.0% for the thirteen week period ended June 27, 2020. The increase in the gross profit percentage is primarily driven by a favorable sales mix, specifically, higher commercial aftermarket sales as a percentage of net sales, a decrease in COVID-19 pandemic restructuring costs, favorable movement in foreign currency rates and an increase in loss contract amortization. Additionally, fixed overhead costs incurred were spread over a higher production volume further contributing to a favorable impact to gross profit.
•Selling and Administrative Expenses. Selling and administrative expenses increased by $9 million to $172 million, or 14.1% of net sales, for the thirteen week period ended July 3, 2021 from $163 million, or 15.9% of net sales, for the thirteen week period ended June 27, 2020. Selling and administrative expenses and the related percentage of net sales for the thirteen week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
June 27, 2020
|
|
Change
|
|
% Change
|
Selling and administrative expenses - excluding costs below
|
$
|
136
|
|
|
$
|
128
|
|
|
$
|
8
|
|
|
6.3
|
%
|
% of net sales
|
11.2
|
%
|
|
12.5
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
32
|
|
|
19
|
|
|
13
|
|
|
68.4
|
%
|
% of net sales
|
2.6
|
%
|
|
1.9
|
%
|
|
|
|
|
Acquisition transaction-related expenses
|
2
|
|
|
—
|
|
|
2
|
|
|
100.0
|
%
|
% of net sales
|
0.2
|
%
|
|
—
|
%
|
|
|
|
|
Acquisition integration costs
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
%
|
% of net sales
|
0.2
|
%
|
|
0.2
|
%
|
|
|
|
|
Bad debt expense
|
—
|
|
|
9
|
|
|
(9)
|
|
|
(100.0)
|
%
|
% of net sales
|
—
|
%
|
|
0.9
|
%
|
|
|
|
|
COVID-19 pandemic restructuring costs
|
—
|
|
|
5
|
|
|
(5)
|
|
|
(100.0)
|
%
|
% of net sales
|
—
|
%
|
|
0.5
|
%
|
|
|
|
|
Total selling and administrative expenses
|
$
|
172
|
|
|
$
|
163
|
|
|
$
|
9
|
|
|
5.5
|
%
|
% of net sales
|
14.1
|
%
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in selling and administrative expenses during the thirteen week period ended July 3, 2021 is primarily due to the increase in non-cash stock compensation expense, partially offset by the realization of the cost mitigation measures that began to be enacted in the second half of fiscal 2020 in response to the COVID-19 pandemic, as well as the other factors summarized above. The material cost mitigation measures enacted to date are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic." The increase in non-cash stock compensation expense is attributable to the new stock option grants awarded in fiscal 2021 and the impact of the Black-Scholes fair value on certain fiscal 2021 stock option grant modifications and on the fiscal 2020 grants in connection with the change in vesting terms approved by the Compensation Committee of the Board of Directors in the first quarter of fiscal 2021.
•Amortization of Intangible Assets. Amortization of intangible assets was $36 million for the thirteen week period ended July 3, 2021 compared to $42 million for the thirteen week period ended June 27, 2020. The decrease in amortization expense of $6 million was due to amortization expense on sales order backlog recorded in fiscal 2020 in connection with the acquisition of Esterline Technologies Corporation ("Esterline") that did not occur in fiscal 2021 as sales order backlog was fully amortized by the end of fiscal 2020. This was partially offset by amortization expense of intangible assets related to the fiscal 2021 acquisition of CAC.
•Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, revolving credit facility fees and interest on finance leases; slightly offset by interest income. Interest expense-net increased $1 million, or 0.4%, to $263 million for the thirteen week period ended July 3, 2021 from $262 million for the comparable thirteen week period in the prior year. The increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $20.2 billion for the thirteen week period ended July 3, 2021 and approximately $19.9 billion for the thirteen week period ended June 27, 2020. The increase in the weighted average level of borrowings was primarily due to the activity in fiscal 2020 consisting of the issuance of the $2,650 million in 5.50% 2027 Notes, $1,100 million in 2025 Secured Notes, $400 million in 2026 New Secured Notes and $200 million drawn on the revolving credit facility; offset by the redemption of the $1,150 million in 6.00% 2022 Notes in the first quarter of fiscal 2020. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirteen week period ended July 3, 2021 was 5.0%.
•Refinancing Costs. Refinancing costs of $13 million were recorded for the thirteen week period ended July 3, 2021 compared to $1 million recorded for the thirteen week period ended June 27, 2020. The refinancing costs for the thirteen week period ended July 3, 2021 were primarily related to fees incurred on the early redemption of the $750 million in 6.50% 2025 Notes.
•Other Income. Other income was $5 million for the thirteen week period ended July 3, 2021 compared to $11 million recorded for the thirteen week period ended June 27, 2020. Other income for the thirteen week period ended July 3, 2021 is primarily driven by the release of a litigation reserve ($3 million) and the non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($2 million).
•Gain on Sale of Businesses-net. Gain on sale of businesses-net of $68 million was recorded for the thirteen week period ended July 3, 2021, and is primarily related to the net gain on sale recognized during the third quarter of fiscal 2021 as a result of the ScioTeq and TREALITY Simulation Visual Systems ("ScioTeq and TREALITY") and Technical Airborne Components ("TAC") divestitures.
•Income Tax (Benefit) Provision. Income tax (benefit) expense as a percentage of income before income taxes was approximately (30.0)% for the thirteen week period ended July 3, 2021 compared to 113.5% for the thirteen week period ended June 27, 2020. The Company's lower effective tax rate for the thirteen week period ended July 3, 2021 was primarily due to the Company's ability to utilize its net interest deduction limitation carryforward pursuant to IRC Section 163(j) resulting in the release of the valuation allowance applicable to such carryforward and the discrete impact of excess tax benefits associated with share-based compensation.
•Loss from Discontinued Operations. There were no discontinued operations for the thirteen week period ended July 3, 2021. Loss from discontinued operations for the thirteen week period ended June 27, 2020 was $1 million, which was driven by certain wind down activities associated with the divestiture of Souriau-Sunbank.
•Net Income (Loss) Attributable to TD Group. Net income (loss) attributable to TD Group increased $323 million, to $317 million for the thirteen week period ended July 3, 2021 compared to a net loss attributable to TD Group of $(6) million for the thirteen week period ended June 27, 2020, primarily due to the Company's lower effective tax rate, the adverse effects of the COVID-19 pandemic impacting the Company's financial results to a lesser extent versus the comparable thirteen week period in the prior year, as well as the other factors referenced above.
•Earnings (Loss) per Share. Basic and diluted earnings (loss) per share was $5.43 for the thirteen week period ended July 3, 2021 and $(0.10) per share for the thirteen week period ended June 27, 2020. There was no impact on earnings per share from discontinued operations for the thirteen week period ended July 3, 2021. Basic and diluted earnings (loss) per share from continuing operations and discontinued operations was $(0.09) and $(0.01), respectively, for the thirteen week period ended June 27, 2020.
Business Segments
•Segment Net Sales. Net sales by segment for the thirteen week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
% of Sales
|
|
June 27, 2020
|
|
% of Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
628
|
|
|
51.5
|
%
|
|
$
|
556
|
|
|
54.4
|
%
|
|
$
|
72
|
|
|
12.9
|
%
|
Airframe
|
550
|
|
|
45.2
|
%
|
|
434
|
|
|
42.5
|
%
|
|
116
|
|
|
26.7
|
%
|
Non-aviation
|
40
|
|
|
3.3
|
%
|
|
32
|
|
|
3.1
|
%
|
|
8
|
|
|
25.0
|
%
|
Net sales
|
$
|
1,218
|
|
|
100.0
|
%
|
|
$
|
1,022
|
|
|
100.0
|
%
|
|
$
|
196
|
|
|
19.2
|
%
|
Net sales for the Power & Control segment increased $72 million, an increase of 12.9%, for the thirteen week period ended July 3, 2021 compared to the thirteen week period ended June 27, 2020. The sales increase resulted primarily from increases in organic sales in commercial aftermarket ($32 million, an increase of 30.6%), defense ($27 million, an increase of 8.3%) and commercial OEM ($13 million an increase of 13.1%). The increase in commercial aftermarket sales is attributable to the COVID-19 pandemic impacting commercial aerospace to a lesser extent compared to the thirteen week period in the prior year, particularly related to the higher utilization of narrow-body aircraft. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. The increase in commercial OEM sales is attributable to a couple of specific businesses within the Power & Control segment that had significant sales increases. This was partially offset by lower commercial OEM sales due to build rate reductions by aircraft OEMs. The change in acquisition and divestiture sales was immaterial for the thirteen week period ended July 3, 2021.
Net sales for the Airframe segment increased $116 million, an increase of 26.7%, for the thirteen week period ended July 3, 2021 compared to the thirteen week period ended June 27, 2020. The sales increase resulted primarily from increases in organic sales in defense ($38 million, an increase of 24.9%) and commercial aftermarket ($36 million, an increase of 38.0%); partially offset by a decrease in organic commercial OEM sales ($18 million, a decrease of 13.6%). The increase in commercial aftermarket sales is attributable to the COVID-19 pandemic impacting commercial aerospace to a lesser extent compared to the thirteen week period in the prior year, particularly related to the higher utilization of narrow-body aircraft. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. The decrease in commercial OEM sales is primarily attributable to build rate reductions by aircraft OEMs. Acquisition and divestiture sales increased by $44 million, primarily due to the acquisition of CAC in the second quarter of fiscal 2021.
Net sales for the Non-aviation segment increased $8 million, an increase of 25.0%, for the thirteen week period ended July 3, 2021 compared to the thirteen week period ended June 27, 2020. The sales increase resulted primarily from an increase in organic sales in non-aerospace ($10 million, an increase of 48.7%). The change in acquisition and divestiture sales was immaterial for the thirteen week period ended July 3, 2021.
•EBITDA As Defined. EBITDA As Defined by segment for the thirteen week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
% of Segment
Sales
|
|
June 27, 2020
|
|
% of Segment
Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
331
|
|
|
52.7
|
%
|
|
$
|
270
|
|
|
48.6
|
%
|
|
$
|
61
|
|
|
22.6
|
%
|
Airframe
|
233
|
|
|
42.4
|
%
|
|
166
|
|
|
38.2
|
%
|
|
67
|
|
|
40.4
|
%
|
Non-aviation
|
14
|
|
|
35.0
|
%
|
|
12
|
|
|
37.5
|
%
|
|
2
|
|
|
16.7
|
%
|
|
$
|
578
|
|
|
47.5
|
%
|
|
$
|
448
|
|
|
43.8
|
%
|
|
$
|
130
|
|
|
29.0
|
%
|
Organic EBITDA As Defined represents EBITDA As Defined from existing businesses owned by the Company as of July 3, 2021, excluding EBITDA As Defined from acquisitions. EBITDA As Defined from acquisitions represents EBITDA As Defined from acquired businesses for the period up to one year subsequent to their respective acquisition date. EBITDA As Defined from divestitures represents EBITDA As Defined from businesses divested by the Company during the thirteen week period ended July 3, 2021.
EBITDA As Defined for the Power & Control segment increased approximately $61 million, an increase of 22.6%, resulting from higher organic sales, particularly in commercial aftermarket and defense, due to the adverse effects of the COVID-19 pandemic impacting commercial aerospace and defense demand to a lesser extent compared to the thirteen week period in the prior year. The change in EBITDA As Defined for the Power & Control segment from acquisitions and divestitures was immaterial for the thirteen week period ended July 3, 2021.
EBITDA As Defined for the Airframe segment increased approximately $67 million, an increase of 40.4%, resulting primarily from higher organic sales, particularly in commercial aftermarket and defense, due to the adverse affects of the COVID-19 pandemic impacting commercial aerospace and defense demand to a lesser extent compared to the thirteen week period in the prior year. EBITDA As Defined for the Airframe segment from acquisitions and divestitures increased by $11 million, primarily due to the acquisition of CAC in the second quarter of fiscal 2021.
EBITDA As Defined for the Non-aviation segment increased approximately $2 million, an increase of 16.7%, resulting primarily from a favorable organic sales mix from other non-aerospace sales. The change in EBITDA As Defined for the Non-aviation segment from acquisitions and divestitures was immaterial for the thirteen week period ended July 3, 2021.
Thirty-nine week period ended July 3, 2021 compared with the thirty-nine week period ended June 27, 2020
Total Company
•Net Sales. Net organic sales and acquisition and divestiture sales and the related dollar and percentage changes for the thirty-nine week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
% Change
Net Sales
|
|
July 3, 2021
|
|
June 27, 2020
|
|
Change
|
|
Organic sales
|
$
|
3,290
|
|
|
$
|
3,781
|
|
|
$
|
(491)
|
|
|
(12.5)
|
%
|
Acquisition and divestiture sales
|
229
|
|
|
149
|
|
|
80
|
|
|
2.0
|
%
|
Net sales
|
$
|
3,519
|
|
|
$
|
3,930
|
|
|
$
|
(411)
|
|
|
(10.5)
|
%
|
Organic sales represent sales from existing businesses owned by the Company, excluding sales from acquisitions and divestitures. Acquisition sales represent sales from acquired businesses for the period up to one year subsequent to their respective acquisition date. Divestiture sales represent sales from businesses divested subsequent to the period ended June 27, 2020. Acquisition and divestiture sales are excluded from organic sales due to the variability in the nature, timing and extent of acquisitions and divestitures and resulting variable impact on underlying trends.
The decrease in organic sales of $491 million for the thirty-nine week period ended July 3, 2021 compared to the thirty-nine week period ended June 27, 2020, is primarily related to decreases in commercial aftermarket sales ($323 million, a decrease of 30.1%) and commercial OEM sales ($322 million, a decrease of 32.4%); partially offset by an increase in defense sales ($106 million, an increase of 7.0%). The decreases in the commercial aftermarket and commercial OEM markets are attributable to the adverse impact that the COVID-19 pandemic has had on the customer demand for air travel worldwide and build rate reductions by aircraft OEMs as a result of the COVID-19 pandemic particularly in the first two quarters of fiscal 2021. The increase in defense sales is primarily driven by the OEM market.
The increase in acquisition and divestiture sales for the thirty-nine week period ended July 3, 2021 is primarily attributable to the acquisition of CAC and the divestitures of ScioTeq and TREALITY. Refer to Note 3, “Acquisitions and Divestitures,” for further information on the businesses acquired and divested by the Company in fiscal 2020 and 2021.
•Cost of Sales and Gross Profit. Cost of sales decreased by $88 million, or 4.8%, to $1,731 million for the thirty-nine week period ended July 3, 2021 compared to $1,819 million for the thirty-nine week period ended June 27, 2020. Cost of sales and the related percentage of net sales for the thirty-nine week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
June 27, 2020
|
|
Change
|
|
% Change
|
Cost of sales - excluding costs below
|
$
|
1,713
|
|
|
$
|
1,818
|
|
|
$
|
(105)
|
|
|
(5.8)
|
%
|
% of net sales
|
48.7
|
%
|
|
46.3
|
%
|
|
|
|
|
COVID-19 pandemic restructuring costs
|
26
|
|
|
19
|
|
|
7
|
|
|
36.8
|
%
|
% of net sales
|
0.7
|
%
|
|
0.5
|
%
|
|
|
|
|
Foreign currency losses
|
20
|
|
|
4
|
|
|
16
|
|
|
400.0
|
%
|
% of net sales
|
0.6
|
%
|
|
0.1
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
10
|
|
|
6
|
|
|
4
|
|
|
66.7
|
%
|
% of net sales
|
0.3
|
%
|
|
0.2
|
%
|
|
|
|
|
Inventory acquisition accounting adjustments
|
6
|
|
|
—
|
|
|
6
|
|
|
100.0
|
%
|
% of net sales
|
0.2
|
%
|
|
—
|
%
|
|
|
|
|
Acquisition integration costs
|
3
|
|
|
4
|
|
|
(1)
|
|
|
(25.0)
|
%
|
% of net sales
|
0.1
|
%
|
|
0.1
|
%
|
|
|
|
|
Loss contract amortization
|
(47)
|
|
|
(32)
|
|
|
(15)
|
|
|
(46.9)
|
%
|
% of net sales
|
(1.3)
|
%
|
|
(0.8)
|
%
|
|
|
|
|
Total cost of sales
|
$
|
1,731
|
|
|
$
|
1,819
|
|
|
$
|
(88)
|
|
|
(4.8)
|
%
|
% of net sales
|
49.2
|
%
|
|
46.3
|
%
|
|
|
|
|
Gross profit
|
$
|
1,788
|
|
|
$
|
2,111
|
|
|
$
|
(323)
|
|
|
(15.3)
|
%
|
Gross profit percentage
|
50.8
|
%
|
|
53.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the dollar amount of cost of sales during the thirty-nine week period ended July 3, 2021 was primarily due to lower sales volume from decreased customer demand due to the COVID-19 pandemic and the other factors summarized above, including those factors that partially offset the decrease in cost of sales.
Gross profit as a percentage of net sales decreased by 2.9 percentage points to 50.8% for the thirty-nine week period ended July 3, 2021 from 53.7% for the thirty-nine week period ended June 27, 2020. The dollar amount of gross profit decreased by $323 million, or 15.3%, for the thirty-nine week period ended July 3, 2021 compared to the thirty-nine week period in the prior year. The decrease in the gross profit percentage is primarily driven by higher COVID-19 pandemic restructuring costs, unfavorable movement in foreign currency rates (primarily the U.S. dollar weakening against the British pound and Euro) and unfavorable sales mix, specifically, lower commercial aftermarket sales as a percentage of total net sales. Also, fixed overhead costs incurred were spread over a lower production volume during the thirty-nine week period ended July 3, 2021 further contributing to an adverse impact to gross profit.
•Selling and Administrative Expenses. Selling and administrative expenses decreased by $13 million to $531 million, or 15.1% of net sales, for the thirty-nine week period ended July 3, 2021 from $544 million, or 13.8% of net sales, for the thirty-nine week period ended June 27, 2020. Selling and administrative expenses and the related percentage of net sales for the thirty-nine week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
June 27, 2020
|
|
Change
|
|
% Change
|
Selling and administrative expenses - excluding costs below
|
$
|
406
|
|
|
$
|
447
|
|
|
$
|
(41)
|
|
|
(9.2)
|
%
|
% of net sales
|
11.5
|
%
|
|
11.4
|
%
|
|
|
|
|
Non-cash stock compensation expense
|
95
|
|
|
53
|
|
|
42
|
|
|
79.2
|
%
|
% of net sales
|
2.7
|
%
|
|
1.3
|
%
|
|
|
|
|
COVID-19 pandemic restructuring costs
|
10
|
|
|
5
|
|
|
5
|
|
|
100.0
|
%
|
% of net sales
|
0.3
|
%
|
|
0.1
|
%
|
|
|
|
|
Acquisition transaction-related expenses
|
8
|
|
|
1
|
|
|
7
|
|
|
700.0
|
%
|
% of net sales
|
0.2
|
%
|
|
—
|
%
|
|
|
|
|
Acquisition integration costs
|
7
|
|
|
14
|
|
|
(7)
|
|
|
(50.0)
|
%
|
% of net sales
|
0.2
|
%
|
|
0.4
|
%
|
|
|
|
|
Bad debt expense
|
5
|
|
|
24
|
|
|
(19)
|
|
|
(79.2)
|
%
|
% of net sales
|
0.1
|
%
|
|
0.6
|
%
|
|
|
|
|
Total selling and administrative expenses
|
$
|
531
|
|
|
$
|
544
|
|
|
$
|
(13)
|
|
|
(2.4)
|
%
|
% of net sales
|
15.1
|
%
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the dollar amount of selling and administrative expenses during the thirty-nine week period ended July 3, 2021 is primarily due to the realization of the cost mitigation measures that began to be enacted in the second half of fiscal 2020 in response to the COVID-19 pandemic, partially offset by the other factors summarized above. The material cost mitigation measures enacted to date are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic." The increase in non-cash stock compensation expense is attributable to the new stock option grants awarded in fiscal 2021 and the impact of the Black-Scholes fair value on certain fiscal 2021 stock option grant modifications and on the fiscal 2020 grants in connection with the change in vesting terms approved by the Compensation Committee of the Board of Directors in the first quarter of fiscal 2021.
•Amortization of Intangible Assets. Amortization of intangible assets was $101 million for the thirty-nine week period ended July 3, 2021 compared to $128 million for the thirty-nine week period ended June 27, 2020. The decrease in amortization expense of $27 million was due to the amortization expense on sales order backlog recorded in fiscal 2020 in connection with the acquisition of Esterline that did not occur in fiscal 2021 as sales order backlog was fully amortized by the end of fiscal 2020. This was partially offset by amortization expense of intangible assets related to the CAC acquisition in the second quarter of fiscal 2021.
•Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, revolving credit facility fees and interest on finance leases; slightly offset by interest income. Interest expense-net increased $36 million, or 4.7%, to $798 million for the thirty-nine week period ended July 3, 2021 from $762 million for the comparable thirty-nine week period last year. The increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $20.0 billion for the thirty-nine week period ended July 3, 2021 and approximately $18.5 billion for the thirty-nine week period ended June 27, 2020. The increase in the weighted average level of borrowings was primarily due to the activity in fiscal 2020 consisting of the issuance of the $2,650 million in 5.50% 2027 Notes, $1,100 million in 2025 Secured Notes, $400 million in 2026 New Secured Notes and $200 million drawn on the revolving credit facility. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirty-nine week period ended July 3, 2021 was 5.1%.
•Refinancing Costs. Refinancing costs of $36 million were recorded for the thirty-nine week period ended July 3, 2021 compared to $27 million recorded for the thirty-nine week period ended June 27, 2020. The refinancing costs primarily related to fees incurred on the early redemptions of the 6.50% Senior Subordinated Notes due 2024 (the "2024 Notes") and the 2025 Notes that occurred in the second and third quarters of fiscal 2021, respectively, and on the early redemption of the 6.00% Senior Subordinated Notes due 2022 (the "2022 Notes") that occurred in the first quarter of fiscal 2020.
•Other Income. Other income of $37 million was recorded for the thirty-nine week period ended July 3, 2021 compared to $14 million recorded for the thirty-nine week period ended June 27, 2020. Other income for the thirty-nine week period July 3, 2021 was primarily driven by a $21 million gain on the settlement of the property insurance portion of the claim for Leach International Europe's Niort, France operating facility fire in August 2019. The gain represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory. The remaining $16 million is primarily driven by non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($9 million), the release of a litigation reserve ($3 million) and receipt of payment of a Canadian governmental subsidy ($4 million). Other income for the thirty-nine week period ended June 27, 2020 is primarily related to non-service related components of net periodic benefit costs on the Company's defined benefit pension plans.
•Gain on Sale of Businesses-net. Gain on sale of businesses-net of $69 million was recorded for the thirty-nine week period ended July 3, 2021, and is primarily related to the net gain on sale recognized during the third quarter of fiscal 2021 as a result of the ScioTeq and TREALITY and TAC divestitures. There was no gain on sale of businesses-net recorded for the thirty-nine week period ended June 27, 2020.
•Income Tax (Benefit) Provision. Income tax (benefit) expense as a percentage of income before income taxes was approximately (10.5)% for the thirty-nine week period ended July 3, 2021 compared to 16.9% for the thirty-nine week period ended June 27, 2020. The Company's lower effective tax rate for the thirty-nine week period ended July 3, 2021 was primarily due to the Company's ability to utilize its net interest deduction limitation carryforward pursuant to IRC Section 163(j) resulting in the release of the valuation allowance applicable to such carryforward and the discrete impact of excess tax benefits associated with share-based compensation.
•Income from Discontinued Operations. There were no discontinued operations for the thirty-nine week period ended July 3, 2021. Income from discontinued operations for the thirty-nine week period ended June 27, 2020 includes the results of the operations of Souriau-Sunbank. 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. The income from discontinued operations for the thirty-nine week period ended June 27, 2020 was $66 million and included $7 million from Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank, net of tax, of $59 million.
•Net Income Attributable to TD Group. Net income attributable to TD Group decreased $146 million, or 23.7%, to $471 million for the thirty-nine week period ended July 3, 2021 compared to net income attributable to TD Group of $617 million for the thirty-nine week period ended June 27, 2020, primarily as a result of the factors referenced above.
•Earnings per Share. Basic and diluted earnings per share was $6.83 for the thirty-nine week period ended July 3, 2021 and $7.53 per share for the thirty-nine week period ended June 27, 2020. There was no impact on earnings per share from discontinued operations for the thirty-nine week period ended July 3, 2021. Basic and diluted earnings per share from continuing operations and discontinued operations were $6.38 and $1.15, respectively, for the thirty-nine week period ended June 27, 2020.
Business Segments
•Segment Net Sales. Net sales by segment for the thirty-nine week period ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
% of Sales
|
|
June 27, 2020
|
|
% of Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
1,870
|
|
|
53.1
|
%
|
|
$
|
2,056
|
|
|
52.4
|
%
|
|
$
|
(186)
|
|
|
(9.0)
|
%
|
Airframe
|
1,527
|
|
|
43.4
|
%
|
|
1,762
|
|
|
44.8
|
%
|
|
(235)
|
|
|
(13.3)
|
%
|
Non-aviation
|
122
|
|
|
3.5
|
%
|
|
112
|
|
|
2.8
|
%
|
|
10
|
|
|
8.9
|
%
|
Net sales
|
$
|
3,519
|
|
|
100.0
|
%
|
|
$
|
3,930
|
|
|
100.0
|
%
|
|
$
|
(411)
|
|
|
(10.5)
|
%
|
Net sales for the Power & Control segment decreased $186 million, a decrease of 9.0%, for the thirty-nine week period ended July 3, 2021. The sales decrease resulted primarily from decreases in organic sales in commercial aftermarket ($129 million, a decrease of 24.3%) and commercial OEM ($111 million, a decrease of 25.5%); partially offset by an increase in organic defense sales ($54 million, an increase of 5.4%). The decreases in commercial aftermarket and commercial OEM sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. The change in acquisition and divestiture sales was immaterial for the thirty-nine week period ended July 3, 2021.
Net sales for the Airframe segment decreased $235 million, a decrease of 13.3%, for the thirty-nine week period ended July 3, 2021. The sales decrease resulted primarily from decreases in organic sales in commercial OEM ($210 million, a decrease of 38.5%) and commercial aftermarket ($194 million, a decrease of 35.9%); partially offset by an increase in organic defense sales ($53 million, an increase of 10.5%). The decreases in commercial aftermarket and commercial OEM sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. Acquisition and divestiture sales increased $88 million, primarily due to the acquisition of CAC in the second quarter of fiscal 2021.
Net sales for the Non-aviation segment increased by $10 million, an increase of 8.9%, for the thirty-nine week period ended July 3, 2021. The sales increase resulted primarily from an increase in organic sales in non-aerospace ($18 million, an increase of 21.3%). Acquisition and divestiture sales decreased by $6 million.
•EBITDA As Defined. EBITDA As Defined by segment for the thirty-nine week periods ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
|
|
|
July 3, 2021
|
|
% of Segment
Sales
|
|
June 27, 2020
|
|
% of Segment
Sales
|
|
Change
|
|
% Change
|
Power & Control
|
$
|
944
|
|
|
50.5
|
%
|
|
$
|
1,036
|
|
|
50.4
|
%
|
|
$
|
(92)
|
|
|
(8.9)
|
%
|
Airframe
|
618
|
|
|
40.5
|
%
|
|
767
|
|
|
43.5
|
%
|
|
(149)
|
|
|
(19.4)
|
%
|
Non-aviation
|
45
|
|
|
36.9
|
%
|
|
39
|
|
|
34.8
|
%
|
|
6
|
|
|
15.4
|
%
|
|
$
|
1,607
|
|
|
45.7
|
%
|
|
$
|
1,842
|
|
|
46.9
|
%
|
|
$
|
(235)
|
|
|
(12.8)
|
%
|
Organic EBITDA As Defined represents EBITDA As Defined from existing businesses owned by the Company as of July 3, 2021, excluding EBITDA As Defined from acquisitions. EBITDA As Defined from acquisitions represents EBITDA As Defined from acquired businesses for the period up to one year subsequent to their respective acquisition date. EBITDA As Defined from divestitures represents EBITDA As Defined from businesses divested by the Company during the thirty-nine week period ended July 3, 2021.
EBITDA As Defined for the Power & Control segment decreased approximately $92 million, a decrease of 8.9%, resulting from lower organic sales in the commercial aftermarket and commercial OEM market due to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. The change in EBITDA As Defined for the Power & Control segment from acquisitions and divestitures was immaterial for the thirty-nine week period ended July 3, 2021.
EBITDA As Defined for the Airframe segment decreased approximately $149 million, a decrease of 19.4%, primarily as a result of lower organic sales in the commercial aftermarket and commercial OEM market due to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. EBITDA As Defined for the Airframe segment from acquisitions and divestitures increased by $23 million, primarily due to the acquisition of CAC in the second quarter of fiscal 2021.
EBITDA As Defined for the Non-aviation segment increased approximately $6 million, an increase of 15.4%, resulting from a favorable organic sales mix specifically from other non-aerospace sales. The change in EBITDA As Defined for the Non-aviation segment from acquisitions and divestitures was immaterial for the thirty-nine week period ended July 3, 2021.
Backlog
As of July 3, 2021, the Company estimated its sales order backlog at $3,453 million compared to $3,425 million as of June 27, 2020. The uncertainty of the duration of the pandemic and its impact on the commercial aerospace industry is expected to continue to restrain sales order backlog growth in the commercial OEM and commercial aftermarket channels throughout fiscal 2021.
The majority of the purchase orders outstanding as of July 3, 2021 are scheduled for delivery within the next twelve months. Purchase orders may be subject to cancellation or deferral by the customer prior to shipment. The level of unfilled purchase orders at any given date during the year will be materially affected by the timing of the Company’s receipt of purchase orders and the speed with which those orders are filled. Accordingly, the Company’s backlog as of July 3, 2021 may not necessarily represent the actual amount of shipments or sales for any future period.
Foreign Operations
Although we manufacture a significant portion of our products in the United States, we manufacture certain products in Europe, Asia, Canada, Mexico and other countries globally. We sell our products in the United States as well as in foreign countries. Although the majority of sales of our products are made to customers (including distributors) located in the United States, our products are ultimately sold to and used by customers, including airlines and other end users of aircraft, throughout the world.
Sales to foreign customers are subject to numerous additional risks, including the COVID-19 pandemic, foreign currency fluctuations, the impact of foreign government regulations, political uncertainties and differences in business practices. There can be no assurance that foreign governments will not adopt regulations or take other action that would have a direct or indirect adverse impact on the business or market opportunities of the Company within such governments’ countries. Furthermore, there can be no assurance that the political, cultural and economic climate outside the United States will be favorable to our operations and growth strategy.
Liquidity and Capital Resources
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
If the Company has excess cash, it generally prioritizes allocating the excess cash in the following manner: (1) capital spending at existing businesses, (2) acquisitions of businesses, (3) payment of a special dividend and/or repurchases of our common stock and (4) prepayment of indebtedness or repurchase of debt. Whether the Company undertakes common stock repurchases or other aforementioned activities will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, the Company may issue additional debt if prevailing market conditions are favorable to doing so.
The Company’s ability to make scheduled interest payments on, or to refinance, the Company’s indebtedness, or to fund non-acquisition related capital expenditures and research and development efforts, will depend on the Company’s ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control, including the ongoing COVID-19 pandemic.
The COVID-19 pandemic has caused a significant adverse impact on our sales, net income and EBITDA As Defined during the thirty-nine week period ended July 3, 2021 and is expected to continue to do so for at least the remainder of fiscal 2021. This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer demand for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel demand worldwide. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce which has slowed production and/or orders. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for uncertainty.
Although commercial air travel demand has shown slight signs of recovery in recent months, the recovery is expected to continue to be slow and uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 surfacing), the rollout and effectiveness of the vaccine, and the eventual easing of quarantines and travel restrictions, among other factors. The exact timing and pace of the recovery is indeterminable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, and in recent months new variants of COVID-19 have been identified, resulting in additional restrictions put in place by certain governments around the world. The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results.
The Company is actively managing the business to maintain cash flow, including the cost mitigation efforts described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic," in the notes to the condensed consolidated financial statements included herein in response to the COVID-19 pandemic and is continuing to focus on the application of its three core value-driven operating strategies (obtaining profitable new business, continually improving its cost structure and providing highly engineered value-added products to customers).
In March 2020, the Company drew $200 million on its revolving credit facility to increase the Company's liquidity as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic. The $200 million drawn was subsequently repaid and redrawn within the first quarter of fiscal 2021. Also, in further action to increase the Company's liquidity, the Company executed two notes offerings in April 2020 in which the proceeds received were for general Corporate purposes. On April 8, 2020, the Company entered into a purchase agreement in connection with a private offering of $1,100 million of the 2025 Secured Notes at an issue price of 100% of the principal amount. On April 17, 2020, the Company entered into a purchase agreement in connection with a private offering of $400 million of the 2026 New Secured Notes at an issue price of 101% of the principal amount.
As of July 3, 2021, the Company has significant cash liquidity as illustrated in the table presented below (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of July 3, 2021
|
Cash and cash equivalents
|
|
$
|
4,529
|
|
Availability on revolving credit facility
|
|
524
|
|
Cash liquidity
|
|
$
|
5,053
|
|
Due to favorable market conditions in the high yield bond market, on January 14, 2021, the Company entered into a purchase agreement in connection with a private offering of $1,200 million of 4.625% Senior Subordinated Notes due 2029 (the “4.625% 2029 Notes”) at an issue price of 100% of the principal amount. The 4.625% 2029 Notes were issued pursuant to an indenture, dated January 20, 2021. The Company used the net proceeds from the offering of the 4.625% 2029 Notes to redeem all of its outstanding 6.50% Senior Subordinated Notes due 2024 (the “2024 Notes”), effectively resulting in a reduced interest rate and an extended maturity date of $1,200 million in senior subordinated notes. In addition, on April 12, 2021, the Company entered into a purchase agreement in connection with a private offering of $750 million of 4.875% Senior Subordinated Notes due 2029 (the “4.875% 2029 Notes”) at an issue price of 100% of the principal amount. The 4.875% 2029 Notes were issued pursuant to an indenture, dated April 21, 2021. The Company used the net proceeds from the offering of the 4.875% 2029 Notes to redeem all of its outstanding 6.50% Senior Subordinated Notes due 2025 (the “2025 Notes”), effectively resulting in a reduced interest rate and an extended maturity date of $750 million in senior subordinated notes.
We believe our significant cash liquidity will allow us to meet our anticipated funding requirements. We expect to meet our short-term cash liquidity requirements (including interest obligations and capital expenditures) through net cash from operating activities, cash on hand and, if needed, additional draws on the revolving credit facility. Long-term cash liquidity requirements consist primarily of obligations under our long-term debt agreements. There will be no maturity on any tranche of term loans or notes until August 2024.
In connection with the continued 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), we expect our efforts will continue to generate strong margins and provide sufficient cash provided by operating activities to meet our interest obligations and liquidity needs. We believe our cash provided by operating activities and available borrowing capacity will enable us to make strategic business acquisitions (such as the CAC acquisition completed in the second quarter of fiscal 2021 for an enterprise value of $965 million using existing cash on hand), pay dividends to our shareholders and make opportunistic investments in our own stock, subject to any restrictions in our existing credit agreement and market conditions in consideration of the ongoing COVID-19 pandemic.
In the future, the Company may increase its borrowings in connection with acquisitions, if cash flow from operating activities becomes insufficient to fund current operations or for other short-term cash needs or for stock repurchases or dividends. Our future leverage will also be impacted by the then current conditions of the credit markets.
Operating Activities. The Company generated $624 million of net cash from operating activities during the thirty-nine week period ended July 3, 2021 compared to $991 million during the thirty-nine week period ended June 27, 2020.
The change in accounts receivable during the thirty-nine week period ended July 3, 2021 was a source of cash of $23 million compared to a source of cash of $347 million during the thirty-nine week period ended June 27, 2020. The decrease in the source of cash of $324 million is primarily attributable to the decrease in accounts receivable from lower sales due to the COVID-19 pandemic. The Company continues to actively manage its accounts receivable, the related agings and collection efforts in response to the COVID-19 pandemic.
The change in inventories during the thirty-nine week period ended July 3, 2021 was a source of cash of $40 million compared to a use of cash of $126 million during the thirty-nine week period ended June 27, 2020. The increase in the source of cash is primarily driven by decreased purchasing from reduced demand as a result of the COVID-19 pandemic and actively managing inventory levels.
The change in accounts payable during the thirty-nine week period ended July 3, 2021 was a use of cash of $19 million compared to a use of cash of $48 million during the thirty-nine week period ended June 27, 2020 due to timing of payments to suppliers.
Investing Activities. Net cash used in investing activities was $748 million during the thirty-nine week period ended July 3, 2021, consisting primarily of $951 million from the acquisition of CAC in the second quarter of fiscal 2021 and capital expenditures of $80 million. This was partially offset by proceeds of $259 million from the completion of the divestitures of certain businesses, and $24 million of insurance proceeds received in the second quarter of fiscal 2021 from the Leach International Europe fire property claim.
Net cash provided by investing activities was $842 million during the thirty-nine week period ended June 27, 2020, consisting of proceeds of $904 million from the completion of the divestiture of Souriau-Sunbank. This was partially offset by capital expenditures of $62 million.
Financing Activities. Net cash used in financing activities during the thirty-nine week period ended July 3, 2021 was $74 million. The use of cash was primarily attributable to the redemptions of the 2024 Notes and 2025 Notes for $1,220 million and $762 million, respectively, dividend equivalent payments of $73 million and repayment on term loans of $56 million. This was partially offset by $1,189 million in net proceeds from the completion of the 4.625% 2029 Notes offering, $743 million in net proceeds from the completion of the 4.875% 2029 Notes offering and $106 million in proceeds from stock option exercises.
Net cash provided by financing activities during the thirty-nine week period ended June 27, 2020 was $1,245 million. The source of cash was primarily attributable to $2,625 million in net proceeds from the completion of the 5.50% 2027 Notes offering, $1,092 million in net proceeds from the completion of the 2025 Secured Notes offering, $401 million in net proceeds from the completion of the 2026 New Secured Notes offering, $200 million in proceeds from the revolving credit facility and $89 million in proceeds from stock option exercises. This was partially offset by dividend equivalent payments of $1,928 million, the redemption of the 2022 Notes for $1,168 million, repayments on term loans of $38 million and the purchase of treasury stock of $19 million.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments, finance and operating leases, pension and post-retirement benefit plans and purchase obligations. There were no material changes during the thirty-nine week period ended July 3, 2021 to these obligations as reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 other than the debt financing transactions that have occurred in fiscal 2021 (refer to Note 9, "Debt" in the notes to the condensed consolidated financial statements included herein) effectively resulting in a reduced interest rate and an extended maturity date for $1,950 million in senior subordinated notes and the revolving credit facility.
Description of Senior Secured Term Loans and Indentures
Senior Secured Term Loans Facility
TransDigm has $7,391 million in fully drawn term loans (the “Term Loans Facility”) and a $760 million revolving credit facility. The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as of July 3, 2021):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans Facility
|
|
Aggregate Principal
|
|
Maturity Date
|
|
Interest Rate
|
Tranche E
|
|
$2,182 million
|
|
May 30, 2025
|
|
LIBOR + 2.25%
|
Tranche F
|
|
$3,462 million
|
|
December 9, 2025
|
|
LIBOR + 2.25%
|
Tranche G
|
|
$1,747 million
|
|
August 22, 2024
|
|
LIBOR + 2.25%
|
The Term Loans Facility requires quarterly aggregate principal payments of $18.8 million. The revolving commitments consist of two tranches which include up to $151.5 million of multicurrency revolving commitments. At July 3, 2021, the Company had $35.8 million in letters of credit outstanding, $200.0 million drawn and outstanding and $524.2 million in borrowings available under the revolving commitments.
The interest rates per annum applicable to the loans under the Credit Agreement are, at TransDigm’s option, equal to either an alternate base rate or an adjusted 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. For the thirty-nine week period ended July 3, 2021, the applicable interest rate was approximately 2.35% on the existing term loans. Interest rate swaps and caps used to hedge and offset, respectively, the variable interest rates on the credit facility are described in Note 12, “Derivatives and Hedging Activities,” in the notes to the condensed consolidated financial statements included herein.
Recent Amendments to the Credit Agreement
On February 6, 2020, the Company entered into Amendment No. 7 and Refinancing Facility Agreement (herein, "Amendment No. 7"). Under the terms of Amendment No. 7, the Company, among other things, (i) incurred new tranche E term loans in an aggregate principal amount equal to approximately $2,216 million, new tranche F term loans in an aggregate principal amount equal to approximately $3,515 million and new tranche G term loans, (collectively, the "New Term Loans") in an aggregate principal amount equal to approximately $1,774 million, (ii) repaid in full all of the existing tranche E term loans, tranche F term loans and tranche G term loans outstanding under the Credit Agreement immediately prior to Amendment No. 7 and (iii) extended the maturity date of the tranche F term loans to December 9, 2025, (iv) modified the definition of consolidated EBITDA in the Credit Agreement to add back certain cost savings and non-recurring cost and expenses and (v) modified certain negative covenants to provide additional flexibility to enable TransDigm to incur additional debt and make additional investments and asset sales.
The New Term Loans were fully drawn on February 6, 2020. The LIBOR per annum applicable to the New Term Loans is 2.25%, a decrease from the previous rate of 2.50%. The other terms and conditions that apply to the New Term Loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 7.
On May 24, 2021, the Company entered into Amendment No. 8 and Loan Modification Agreement (herein, "Amendment No. 8"). Under the terms of Amendment No. 8, the Company, among other things, (i) extends the maturity date of the revolving credit commitments and revolving loans under its existing Credit Agreement to May 24, 2026, and (ii) the LIBOR interest rate per annum applicable to the revolving loans under its existing Credit Agreement is 2.50%, a decrease from the 3.00% rate that applied previous to the amendment. The other terms and conditions that apply to the revolving loans are substantially the same as the terms and conditions that applied to the revolving loans immediately prior to Amendment No. 8.
Indentures
The following table represents the notes outstanding as of July 3, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Aggregate Principal
|
|
Maturity Date
|
|
Interest Rate
|
2025 Secured Notes
|
|
$1,100 million
|
|
December 15, 2025
|
|
8.00%
|
2026 Secured Notes
|
|
$4,400 million
|
|
March 15, 2026
|
|
6.25%
|
6.875% 2026 Notes
|
|
$500 million
|
|
May 15, 2026
|
|
6.875%
|
6.375% 2026 Notes
|
|
$950 million
|
|
June 15, 2026
|
|
6.375%
|
7.50% 2027 Notes
|
|
$550 million
|
|
March 15, 2027
|
|
7.50%
|
5.50% 2027 Notes
|
|
$2,650 million
|
|
November 15, 2027
|
|
5.50%
|
4.625% 2029 Notes
|
|
$1,200 million
|
|
July 15, 2029
|
|
4.625%
|
4.875% 2029 Notes
|
|
$750 million
|
|
October 15, 2029
|
|
4.875%
|
The 6.375% 2026 Notes, the 7.50% 2027 Notes, the 5.50% 2027 Notes, the 4.625% 2029 Notes and the 4.875% 2029 Notes (collectively, the “TransDigm Inc. Notes”) were issued at a price of 100% of the principal amount. The 6.875% 2026 Notes (the "TransDigm UK Notes" and together with the TransDigm Inc. Notes, the "Notes," are further described below) offered in May 2018 were issued at a price of 99.24% of the principal amount, resulting in gross proceeds of $496.2 million. The 2025 Secured Notes (the "Secured Notes") were issued at a price 100% of the principal amount. The initial $3,800 million offering of the 2026 Secured Notes (the "Secured Notes") were issued at a price of 100% of their principal amount and the subsequent $200 million and $400 million offerings of the 2026 Secured Notes in the second quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively, were issued at a price of 101% of their principal amount, resulting in gross proceeds of $4,410.5 million.
The Notes do not require principal payments prior to their maturity. Interest under the Notes is payable semi-annually. The Notes represent our unsecured obligations ranking subordinate to our senior debt, as defined in the applicable indentures. The Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Notes.
The Notes are subordinated to all of our existing and future senior debt, rank equally with all of our existing and future senior subordinated debt and rank senior to all of our future debt that is expressly subordinated to the Notes. The TransDigm, Inc. Notes are fully and unconditionally guaranteed on a senior subordinated unsecured basis by TD Group and TransDigm, Inc.'s Domestic Restricted Subsidiaries. The TransDigm UK Notes are guaranteed on a senior subordinated basis by TransDigm, Inc., TD Group and TransDigm, Inc.'s Domestic Restricted Subsidiaries. The guarantees of the Notes are subordinated to all of the guarantors’ existing and future senior debt, rank equally with all of their existing and future senior subordinated debt and rank senior to all of their future debt that is expressly subordinated to the guarantees of the Notes. The Notes are structurally subordinated to all of the liabilities of TD Group’s non-guarantor subsidiaries.
The Secured Notes are senior secured obligations of TransDigm and rank equally in right of payment with all of TransDigm’s existing and future senior secured debt, including indebtedness under TransDigm’s existing senior secured credit facilities, and are senior in right of payment to all of TransDigm’s existing and future senior subordinated debt, including the Notes, TransDigm’s other outstanding senior subordinated notes and TransDigm’s guarantees in respect of TransDigm UK’s outstanding senior subordinated notes. The Secured Notes are guaranteed on a senior secured basis by TD Group, TransDigm UK and TransDigm’s wholly-owned U.S. subsidiaries named in the Secured Notes Indenture. The guarantees of the Secured Notes rank equally in right of payment with all of the guarantors’ existing and future senior secured debt and are senior in right of payment to all of their existing and future senior subordinated debt. The Secured Notes are structurally subordinated to all of the liabilities of TransDigm’s non-guarantor subsidiaries. The Secured Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Secured Notes.
Guarantor Information
Separate financial statements of TransDigm, Inc. are not presented because the Secured Notes are fully and unconditionally guaranteed on a senior secured basis by TD Group, TransDigm UK and all of TransDigm, Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm, Inc.
Separate financial statements of TransDigm, Inc. are not presented because the TransDigm, Inc. Notes are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm UK and all of TransDigm, Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm, Inc.
Separate financial statements of TransDigm UK are not presented because TransDigm UK's 6.875% 2026 Notes, issued in May 2018, are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm, Inc. and all of TransDigm, Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm, Inc.
The financial information presented is that of TD Group and the Guarantors, which includes TransDigm, Inc. and TransDigm UK, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between TD Group and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
July 3, 2021
|
|
September 30, 2020
|
Current assets
|
|
$
|
5,067
|
|
|
$
|
5,398
|
|
Non-current assets
|
|
9,491
|
|
|
9,157
|
|
Current liabilities
|
|
973
|
|
|
972
|
|
Non-current liabilities
|
|
20,183
|
|
|
20,423
|
|
Amounts due (from) to subsidiaries that are non-issuers and non-guarantors - net
|
|
(981)
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Period Ended
|
(in millions)
|
|
July 3, 2021
|
Net sales
|
|
$
|
2,661
|
|
Sales to subsidiaries that are non-issuers and non-guarantors
|
|
24
|
|
Cost of sales
|
|
1,196
|
|
Expense from subsidiaries that are non-issuers and non-guarantors - net
|
|
38
|
|
Income from continuing operations
|
|
463
|
|
Net income attributable to TD Group
|
|
463
|
|
Certain Restrictive Covenants in Our Debt Documents
The Credit Agreement and the Indentures governing the Notes contain restrictive covenants that, among other things, limit the incurrence of additional indebtedness, the payment of special dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances, and prepayments of certain other indebtedness.
The restrictive covenants included in the Credit Agreement are subject to amendments executed periodically. The most recent amendment that impacted the restrictive covenants contained in the Credit Agreement is Amendment No. 7.
Under the terms of the Credit Agreement, TransDigm is entitled, on one or more occasions, to request additional term loans or additional revolving commitments to the extent that the existing or new lenders agree to provide such incremental term loans or additional revolving commitments provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25x and the consolidated secured net debt ratio would be no greater than 5.00x, in each case, after giving effect to such incremental term loans or additional revolving commitments.
If any such default occurs, the lenders under the Credit Agreement and the holders of the Notes may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the Credit Agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the Credit Agreement, the lenders thereunder will have the right to proceed against the collateral granted to them to secure the debt, which includes our available cash, and they will also have the right to prevent us from making debt service payments on the Notes.
With the exception of the revolving credit facility, the Company has no maintenance covenants in its existing term loan and indenture agreements. Under the Credit Agreement, if the usage of the revolving credit facility exceeds 35%, or $266 million, of the total revolving commitments, the Company is required to maintain a maximum consolidated net leverage ratio of net debt to trailing four-quarter EBITDA As Defined of 7.25x as of the last day of the fiscal quarter.
As of July 3, 2021, the Company was in compliance with all of its debt covenants and expects to remain in compliance with its debt covenants in subsequent periods.
Trade Receivables Securitization Facility
During fiscal 2014, the Company established a trade receivable securitization facility (the “Securitization Facility”). The Securitization Facility effectively increases the Company’s borrowing capacity depending on the amount of the domestic operations’ trade accounts receivable. The Securitization Facility includes the right for the Company to exercise annual one year extensions as long as there have been no termination events as defined by the agreement. The Company uses the proceeds from the Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs.
On July 27, 2021, the Company amended the Securitization Facility to, among other things, (i) extend the maturity date to July 26, 2022, and (ii) bear interest at a rate of 1.20% plus three month LIBOR, compared to the interest rate of 1.35% plus 0.50% or three month LIBOR, whichever is greater, that applied prior to the amendment. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable. As of July 3, 2021, the Company has borrowed $350 million under the Securitization Facility, which is fully drawn.
Stock Repurchase Program
On November 8, 2017, our Board of Directors, authorized a stock repurchase program permitting repurchases of our outstanding shares not to exceed $650 million in the aggregate, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
No repurchases were made under the program during the fiscal quarter ended July 3, 2021. As of July 3, 2021, the remaining amount of repurchases allowable under the $650 million program was $631.1 million subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
Off-Balance Sheet Arrangements
The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company’s revolving credit facility. As of July 3, 2021, the Company had $35.8 million in letters of credit outstanding.
Non-GAAP Financial Measures
We present below certain financial information based on our EBITDA and EBITDA As Defined. References to “EBITDA” mean earnings before interest, taxes, depreciation and amortization, and references to “EBITDA As Defined” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of income (loss) from continuing operations to EBITDA and EBITDA As Defined and the reconciliations of net cash provided by operating activities to EBITDA and EBITDA As Defined presented below.
Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under U.S. GAAP. We present EBITDA and EBITDA As Defined because we believe they are useful indicators for evaluating operating performance and liquidity.
Our management believes that EBITDA and EBITDA As Defined are useful as indicators of liquidity because securities analysts, investors, rating agencies and others use EBITDA to evaluate a company’s ability to incur and service debt. In addition, EBITDA As Defined is useful to investors because the revolving credit facility under our senior secured credit facility requires compliance under certain circumstances, on a pro forma basis, with a financial covenant that measures the ratio of the amount of our secured indebtedness to the amount of our Consolidated EBITDA defined in the same manner as we define EBITDA As Defined herein.
In addition to the above, our management uses EBITDA As Defined to review and assess the performance of the management team in connection with employee incentive programs and to prepare its annual budget and financial projections. Moreover, our management uses EBITDA As Defined to evaluate acquisitions.
Although we use EBITDA and EBITDA As Defined as measures to assess the performance of our business and for the other purposes set forth above, the use of these non-GAAP financial measures as analytical tools has limitations, and you should not consider any of them in isolation, or as a substitute for analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:
•neither EBITDA nor EBITDA As Defined reflects the significant interest expense, or the cash requirements, necessary to service interest payments on our indebtedness;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor EBITDA As Defined reflects any cash requirements for such replacements;
•the omission of the substantial amortization expense associated with our intangible assets further limits the usefulness of EBITDA and EBITDA As Defined;
•neither EBITDA nor EBITDA As Defined includes the payment of taxes, which is a necessary element of our operations; and
•EBITDA As Defined excludes the cash expense we have incurred to integrate acquired businesses into our operations, which is a necessary element of certain of our acquisitions.
Because of these limitations, EBITDA and EBITDA As Defined should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA or EBITDA As Defined in isolation and specifically by using other U.S. GAAP measures, such as net income (loss), net sales and operating profit, to measure our operating performance. Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under U.S. GAAP, and neither should be considered as an alternative to net income (loss) or cash flow from operations determined in accordance with U.S. GAAP. Our calculation of EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.
The following table sets forth a reconciliation of income (loss) from continuing operations to EBITDA and EBITDA As Defined (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
July 3, 2021
|
|
June 27, 2020
|
|
July 3, 2021
|
|
June 27, 2020
|
Income (loss) from continuing operations
|
$
|
317
|
|
|
$
|
(5)
|
|
|
$
|
473
|
|
|
$
|
552
|
|
Adjustments:
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
65
|
|
|
70
|
|
|
188
|
|
|
211
|
|
Interest expense, net
|
263
|
|
|
262
|
|
|
798
|
|
|
762
|
|
Income tax (benefit) provision
|
(73)
|
|
|
39
|
|
|
(45)
|
|
|
112
|
|
EBITDA
|
572
|
|
|
366
|
|
|
1,414
|
|
|
1,637
|
|
Adjustments:
|
|
|
|
|
|
|
|
Inventory acquisition accounting adjustments (1)
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
Acquisition integration costs (2)
|
4
|
|
|
3
|
|
|
10
|
|
|
18
|
|
Acquisition transaction-related expenses (3)
|
2
|
|
|
—
|
|
|
8
|
|
|
1
|
|
Non-cash stock compensation expense (4)
|
35
|
|
|
21
|
|
|
105
|
|
|
59
|
|
Refinancing costs (5)
|
13
|
|
|
1
|
|
|
36
|
|
|
27
|
|
COVID-19 pandemic restructuring costs (6)
|
1
|
|
|
30
|
|
|
40
|
|
|
30
|
|
Gain on sale of businesses, net (7)
|
(68)
|
|
|
—
|
|
|
(69)
|
|
|
—
|
|
Other, net (8)
|
—
|
|
|
3
|
|
|
2
|
|
|
8
|
|
EBITDA As Defined
|
$
|
559
|
|
|
$
|
424
|
|
|
$
|
1,552
|
|
|
$
|
1,780
|
|
(1)Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.
(2)Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.
(3)Represents transaction-related costs comprising deal fees, legal, financial and tax due diligence expenses and valuation costs that are required to be expensed as incurred.
(4)Represents the compensation expense recognized by TD Group under our stock incentive plans.
(5)Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(6)Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic (less than $1 million and $36 million for the thirteen and thirty-nine week periods ended July 3, 2021, respectively, and $24 million for the thirteen and thirty-nine week periods ended June 27, 2020) and also includes restructuring costs related to the 737 MAX production rate change ($3 million for the thirteen and thirty-nine week periods ended June 27, 2020). These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. This also includes $1 million and $4 million for the thirteen and thirty-nine week periods ended July 3, 2021, respectively, and $3 million for the thirteen and thirty-nine week periods ended June 27, 2020 of incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment).
(7)Represents the gain or loss on sale of businesses, which is primarily attributable to the net gain on sale recognized as a result of the divestitures completed during the third quarter of fiscal 2021 (TAC, ScioTeq and TREALITY).
(8)Primarily represents the gain on insurance proceeds from the Leach International Europe fire (Note 17), foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation and gain or loss on sale of fixed assets.
The following table sets forth a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
July 3, 2021
|
|
June 27, 2020
|
Net cash provided by operating activities
|
$
|
624
|
|
|
$
|
991
|
|
Adjustments:
|
|
|
|
Changes in assets and liabilities, net of effects from acquisitions and sales of businesses
|
102
|
|
|
(166)
|
|
Interest expense, net (1)
|
772
|
|
|
737
|
|
Income tax (benefit) provision - current
|
(59)
|
|
|
129
|
|
Loss contract amortization
|
47
|
|
|
32
|
|
Non-cash stock compensation expense (2)
|
(105)
|
|
|
(59)
|
|
Refinancing costs (3)
|
(36)
|
|
|
(27)
|
|
Gain on sale of businesses, net (4)
|
69
|
|
|
—
|
|
EBITDA
|
1,414
|
|
|
1,637
|
|
Adjustments:
|
|
|
|
Inventory acquisition accounting adjustments (5)
|
6
|
|
|
—
|
|
Acquisition integration costs (6)
|
10
|
|
|
18
|
|
Acquisition transaction-related expenses (7)
|
8
|
|
|
1
|
|
Non-cash stock compensation expense (2)
|
105
|
|
|
59
|
|
Refinancing costs (3)
|
36
|
|
|
27
|
|
COVID-19 pandemic restructuring costs (8)
|
40
|
|
|
30
|
|
Gain on sale of businesses, net (4)
|
(69)
|
|
|
—
|
|
Other, net (9)
|
2
|
|
|
8
|
|
EBITDA As Defined
|
$
|
1,552
|
|
|
$
|
1,780
|
|
(1)Represents interest expense excluding the amortization of debt issuance costs and premium and discount on debt.
(2)Represents the compensation expense recognized by TD Group under our stock incentive plans.
(3)Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(4)Represents the gain or loss on sale of businesses, which is primarily attributable to the net gain on sale recognized as a result of the divestitures completed during the third quarter of fiscal 2021 (TAC, ScioTeq and TREALITY).
(5)Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.
(6)Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.
(7)Represents transaction-related costs comprising deal fees, legal, financial and tax due diligence expenses, and valuation costs that are required to be expensed as incurred.
(8)Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic ($36 million and $24 million for the thirty-nine week periods ended July 3, 2021 and June 27, 2020, respectively) and also includes restructuring costs related to the 737 MAX production rate change ($3 million for the thirty-nine week period ended June 27, 2020). These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. This also includes $4 million and $3 million for the thirty-nine week periods ended July 3, 2021 and June 27, 2020, respectively, of incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment).
(9)Primarily represents the gain on insurance proceeds from the Leach International Europe fire (Note 17), foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation and gain or loss on sale of fixed assets.