NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWENTY-SIX WEEK PERIODS ENDED MARCH 30, 2024 AND APRIL 1, 2023
(UNAUDITED)
1. BASIS OF PRESENTATION
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Company”, “TD Group”, “TransDigm”, “we” or “us” refer to TransDigm Group Incorporated and its subsidiaries.
Principles of Consolidation
The financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s condensed consolidated financial statements for the interim periods presented. These financial statements and notes should be read in conjunction with the financial statements and related notes for the fiscal year ended September 30, 2023 included in TD Group’s Annual Report on Form 10-K filed on November 9, 2023. As disclosed therein, the Company’s annual consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The September 30, 2023 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the twenty-six week period ended March 30, 2024 are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation, none of which are material.
New Accounting Pronouncements Issued
In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,” to amend certain disclosure and presentation requirements for a variety of topics within the ASC. These amendments align the requirements in the ASC to the removal of certain disclosure requirements set out in Regulation S-X and Regulation S-K, announced by the SEC. The effective date for each amended topic in the ASC is either the date on which the SEC’s removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or on June 30, 2027, if the SEC has not removed the requirements by that date. Early adoption is prohibited. The Company does not expect that the application of this standard will have an impact on our condensed consolidated financial statements and disclosures.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” ASU 2023-07 expands disclosures about a public business entity's reportable segments and provides for more detailed information about a reportable segment's expenses. Additionally, ASU 2023-07 requires all segment profit or loss and assets disclosures to be provided on an annual and interim basis. This standard is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning one year later. Early adoption is permitted. The Company is currently evaluating this standard to determine its impact on our disclosures.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” which requires a public business entity to disclose specific categories in its annual effective tax rate reconciliation and disaggregated information about significant reconciling items by jurisdiction and by nature. The ASU also requires entities to disclose their income tax payments (net of refunds) to international, federal, and state and local jurisdictions. The standard makes several other changes to income tax disclosure requirements. This standard is effective for annual periods beginning after December 15, 2024, and requires prospective application with the option to apply it retrospectively. Early adoption is permitted. The Company is currently evaluating this standard to determine its impact on our disclosures.
2. ACQUISITIONS
CPI Electron Device Business – On November 9, 2023, the Company entered into a definitive agreement to acquire all the outstanding stock of the Electron Device Business of Communications & Power Industries (“CPI”), a portfolio company of TJC, L.P., for approximately $1,385 million in cash. CPI’s Electron Device Business is a leading global manufacturer of electronic components and subsystems primarily serving the aerospace and defense market. Its products are highly engineered, proprietary components with significant aftermarket content and a strong presence across major aerospace and defense platforms. The acquisition is expected to close in fiscal 2024, subject to regulatory approval in the United States (“U.S.”) and customary closing conditions. In February 2024, TransDigm received regulatory approval from the United Kingdom. The acquisition is expected to be financed through existing cash on hand, inclusive of a portion of the cash proceeds from the new long-term debt issued in the first quarter of fiscal 2024. Refer to Note 7, “Debt,” for further disclosure of the aforementioned debt issuances.
Calspan Corporation – On May 8, 2023, the Company acquired all the outstanding stock of Calspan Corporation (“Calspan”) for approximately $730 million in cash, which includes a $1 million working capital settlement paid in the first quarter of fiscal 2024. The acquisition was financed through existing cash on hand. Calspan operates from seven primary facilities within the U.S. and is a leading independent provider of proprietary highly engineered testing and technology development services and systems primarily for the aerospace and defense industry. Calspan’s state of the art transonic wind tunnel is used across a range of important aftermarket-focused development activities for both the commercial and defense aerospace end markets. The services and systems are primarily proprietary with significant aftermarket content. Calspan's operating results are included within TransDigm's Airframe segment as of the May 8, 2023 acquisition date.
The Company accounted for the Calspan acquisition using the acquisition method of accounting and third-party valuation appraisals and included the results of operations of the acquisition in its condensed consolidated financial statements from the effective date of the acquisition. The total purchase price of Calspan was allocated to the underlying assets acquired and liabilities assumed based upon the respective fair value at the date of acquisition. To the extent the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill.
The Company utilized both the cost and market approaches to value property, plant and equipment, which consider external transactions and other comparable transactions, estimated replacement and reproduction costs, and estimated useful lives and consideration for physical, functional and economic obsolescence. The fair values of acquired intangibles are determined based on an income approach, using estimates and assumptions that are deemed reasonable by the Company. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”), growth rates, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions.
Pro forma net sales and results of operations for the Calspan acquisition had it occurred at the beginning of the twenty-six week period ended April 1, 2023 are not material and, accordingly, are not provided.
As of March 30, 2024, the measurement period (not to exceed one year) is open; therefore, the assets acquired and liabilities assumed related to the Calspan acquisition are subject to adjustment until the end of the respective measurement period, including those related to deferred taxes and income taxes.
The allocation of the estimated fair value of assets acquired and liabilities assumed in the Calspan acquisition as of the May 8, 2023 acquisition date, as well as measurement period adjustments recorded within the permissible one year measurement period, are summarized in the table below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Preliminary | | Measurement Period | | Adjusted Preliminary | |
| | Allocation | | Adjustments (2) | | Allocation | |
| Assets acquired (excluding cash): | | | | | | | |
| Trade accounts receivable | | $ | 39 | | | $ | — | | | $ | 39 | | |
| Inventories | | 2 | | | — | | | 2 | | |
| Prepaid expenses and other | | 40 | | | (3) | | | 37 | | |
| Property, plant and equipment | | 105 | | | 234 | | | 339 | | |
| Goodwill | | 367 | | | (87) | | | 280 | | (1) |
| Other intangible assets | | 243 | | | (142) | | | 101 | | (1) |
| Other non-current assets | | 7 | | | — | | | 7 | | |
| Total assets acquired (excluding cash) | | 803 | | | 2 | | | 805 | | |
| Liabilities assumed: | | | | | | | |
| Accounts payable | | 10 | | | (1) | | | 9 | | |
| Accrued and other current liabilities | | 50 | | | 4 | | | 54 | | |
| Deferred income taxes | | 8 | | | (3) | | | 5 | | |
| Other non-current liabilities | | 6 | | | 1 | | | 7 | | |
| Total liabilities assumed | | 74 | | | 1 | | | 75 | | |
| Net assets acquired | | $ | 729 | | | $ | 1 | | | $ | 730 | | |
(1)Of the approximately $280 million of goodwill recognized for the acquisition, the Company expects that approximately $222 million will be deductible for tax purposes. Of the approximately $101 million of other intangible assets recognized for the acquisition, the Company expects that approximately $86 million will be deductible for tax purposes. The goodwill and intangible assets are expected to be deductible over 15 years.
(2)Measurement period adjustments primarily related to the adjustments in the fair values of the acquired property, plant and equipment and other intangible assets from the third-party valuation. A substantial portion of the measurement period adjustments to property, plant and equipment relates to the fair value of the transonic wind tunnel. The offset to the measurement period adjustments was to goodwill.
DART Aerospace Acquisition – On March 1, 2024, the Company's DART Aerospace subsidiary (“DART”), which is included within TransDigm’s Airframe segment, completed an acquisition of all the outstanding stock of FPT Industries (“FPT”) for approximately $57 million in cash. The allocation of the purchase price remains preliminary and will likely change, though not materially, in future periods up to the expiration of the respective one year measurement period as fair value estimates of the assets acquired and liabilities assumed are finalized. The Company expects that all of the approximately $35 million of goodwill and $19 million of other intangible assets recognized for the acquisition will be deductible for tax purposes over 15 years.
Pro forma net sales and results of operations for the DART acquisition, had it occurred at the beginning of the twenty-six week periods ended March 30, 2024 or April 1, 2023 are not material and, accordingly, are not provided.
Extant Aerospace Acquisitions – For the twenty-six week period ended March 30, 2024, the Company's Extant Aerospace subsidiary, which is included within TransDigm’s Power & Control segment, completed a series of acquisitions of substantially all of the assets and technical data rights of certain product lines, each meeting the definition of a business, for a total purchase price of $29 million. The allocation of the purchase price remains preliminary and will likely change, though not materially, in future periods up to the expiration of the respective one year measurement period as fair value estimates of the assets acquired and liabilities assumed are finalized. The Company expects that all of the approximately $14 million of goodwill and $7 million of other intangible assets recognized for the acquisition will be deductible for tax purposes over 15 years.
For the fiscal year ended September 30, 2023, the Company's Extant Aerospace subsidiary, completed a series of acquisitions of substantially all of the assets and technical data rights of certain product lines, each meeting the definition of a business, for a total purchase price of $24 million. The allocation of the purchase price remains preliminary and will likely change, though not materially, in future periods up to the expiration of the respective one year measurement period as fair value estimates of the assets acquired and liabilities assumed are finalized. The Company expects that all of the approximately $12 million of goodwill and $6 million of other intangible assets recognized for the acquisitions will be deductible for tax purposes over 15 years.
Pro forma net sales and results of operations for the Extant Aerospace product line acquisitions, had they occurred at the beginning of the twenty-six week periods ended March 30, 2024 or April 1, 2023 are not material and, accordingly, are not provided.
The acquisitions completed by the Company strengthen and expand the Company’s position to design, produce and supply highly engineered proprietary aerospace components in niche markets with significant aftermarket content and provide opportunities to create value through the application of our three core value-driven operating strategy (obtaining profitable new business, continually improving our cost structure, and providing highly engineered value-added products to customers). The purchase prices paid reflect the current EBITDA and cash flows, as well as the future EBITDA and cash flows expected to be generated by the businesses, which are driven in most cases by the recurring aftermarket consumption over the life of a particular aircraft, estimated to be approximately 25 to 30 years.
3. REVENUE RECOGNITION
TransDigm's sales are concentrated in the aerospace and defense industry. The Company’s customers include: distributors of aerospace components, commercial airlines, large commercial transport and regional and business aircraft original equipment manufacturers (“OEMs”), various armed forces of the U.S. and friendly foreign governments, defense OEMs, system suppliers, and various other industrial customers.
The Company recognizes revenue from contracts with customers using the five step model prescribed in ASC 606. A substantial portion of the Company's revenue is recorded at a point in time basis. Revenue is recognized from the sale of products or services when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. Revenue is measured at the amount of consideration the Company expects to be paid in exchange for goods or services.
In certain contracts, control transfers to the customer over time, primarily in contracts where the customer is required to pay for the cost of both the finished and unfinished goods at the time of cancellation plus a reasonable profit relative to the work performed for products that were customized for the customer. Therefore, we recognize revenue over time for those agreements that have a right to margin and where the products being produced have no alternative use.
Based on our production cycle, it is generally expected that goods related to the revenue will be shipped and billed within twelve months. For revenue recognized over time, we estimate the amount of revenue attributable to a contract earned at a given point during the production cycle based on certain costs, such as materials and labor incurred to date, plus the expected profit, which is a cost-to-cost input method.
We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.
When contracts are modified to account for changes in contract specifications and requirements, the Company considers whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original good or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification to an existing contract on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct and at relative stand-alone selling price, they are accounted for as a new contract and performance obligation, which are recognized prospectively.
The Company’s payment terms vary by the type and location of the customer and the products or services offered. The Company does not offer any payment terms that would meet the requirements for consideration as a significant financing component.
Shipping and handling fees and costs incurred in connection with products sold are recorded in cost of sales in the condensed consolidated statements of income, and are not considered a performance obligation to our customers.
The Company pays sales commissions that relate to contracts for products or services that are satisfied at a point in time or over a period of one year or less and are expensed as incurred. These costs are reported as a component of selling and administrative expenses in the condensed consolidated statements of income.
Contract Assets and Liabilities – Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing or reimbursable costs related to a specific contract. Contract liabilities (Deferred revenue) relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. The following table summarizes our contract assets and liabilities balances (in millions):
| | | | | | | | | | | |
| March 30, 2024 | | September 30, 2023 |
Contract assets, current (1) | $ | 206 | | | $ | 191 | |
Contract assets, non-current (2) | — | | | 1 | |
| Total contract assets | 206 | | | 192 | |
Contract liabilities, current (3) | 114 | | | 79 | |
Contract liabilities, non-current (4) | 7 | | | 8 | |
| Total contract liabilities | 121 | | | 87 | |
| Net contract assets | $ | 85 | | | $ | 105 | |
(1)Included in prepaid expenses and other on the condensed consolidated balance sheets.
(2)Included in other non-current assets on the condensed consolidated balance sheets.
(3)Included in accrued and other current liabilities on the condensed consolidated balance sheets.
(4)Included in other non-current liabilities on the condensed consolidated balance sheets.
The increase in the Company's total contract assets at March 30, 2024 compared to September 30, 2023 is primarily due to the timing and status of work in process and/or milestones of certain contracts. The increase in the Company's total contract liabilities at March 30, 2024 compared to September 30, 2023 is primarily due to the receipt of advance payments. For the twenty-six week period ended March 30, 2024, the revenue recognized that was previously included in contract liabilities was approximately $19 million.
Refer to Note 11, “Segments,” for disclosures related to the disaggregation of revenue.
Allowance for Credit Losses – The Company's allowance for credit losses is the allowance for uncollectible accounts. The allowance for uncollectible accounts reduces the trade accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected.
The Company’s method for developing its allowance for credit losses is based on historical write-off experience, the aging of receivables, an assessment of the creditworthiness of customers, economic conditions and other external market information and supportable forward-looking information. The allowance also incorporates a provision for the estimated impact of disputes with customers. All provisions for allowances for uncollectible accounts are included in selling and administrative expenses. The determination of the amount of the allowance for uncollectible accounts is subject to judgment and estimation by management. If circumstances change or economic conditions deteriorate or improve, the allowance for uncollectible accounts could increase or decrease.
As of March 30, 2024 and September 30, 2023, the allowance for uncollectible accounts was $32 million and $31 million, respectively. The allowance for uncollectible accounts is assessed individually at each operating unit by the operating unit’s management team.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data) using the two-class method:
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended |
| March 30, 2024 | | April 1, 2023 | | March 30, 2024 | | April 1, 2023 |
| Numerator for earnings per share: | | | | | | | |
| Net income | $ | 404 | | | $ | 304 | | | $ | 786 | | | $ | 533 | |
| Less: Net income attributable to noncontrolling interests | (1) | | | — | | | (1) | | | (1) | |
| Net income attributable to TD Group | 403 | | | 304 | | | 785 | | | 532 | |
Less: Dividends paid on participating securities (1) | — | | | — | | | (101) | | | (38) | |
| | | | | | | |
| Net income applicable to TD Group common stockholders—basic and diluted | $ | 403 | | | $ | 304 | | | $ | 684 | | | $ | 494 | |
| Denominator for basic and diluted earnings per share under the two-class method: | | | | | | | |
| Weighted-average common shares outstanding | 55.7 | | | 54.7 | | | 55.6 | | | 54.6 | |
| Vested options deemed participating securities | 2.1 | | | 2.4 | | | 2.2 | | | 2.5 | |
| Total shares for basic and diluted earnings per share | 57.8 | | | 57.1 | | | 57.8 | | | 57.1 | |
| | | | | | | |
| | | | | | | |
| Earnings per share—basic and diluted | $ | 6.97 | | | $ | 5.32 | | | $ | 11.83 | | | $ | 8.65 | |
(1)Represents dividend equivalent payments of approximately $101 million, of which $18 million was accrued as of September 30, 2023 and the remaining $83 million was associated with the November 2023 $35.00 dividend declaration, and $38 million, respectively, for the twenty-six week periods ended March 30, 2024 and April 1, 2023. No special dividends were declared or paid on participating securities, including dividend equivalent payments, for the thirteen week periods ended March 30, 2024 and April 1, 2023.
5. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost of inventories is generally determined by the average cost and the first–in, first–out (“FIFO”) methods and includes material, labor and overhead related to the manufacturing process.
Inventories consist of the following (in millions):
| | | | | | | | | | | |
| March 30, 2024 | | September 30, 2023 |
| Raw materials and purchased component parts | $ | 1,222 | | | $ | 1,144 | |
| Work-in-progress | 512 | | | 455 | |
| Finished goods | 240 | | | 226 | |
| Total | 1,974 | | | 1,825 | |
| Reserves for excess and obsolete inventory | (221) | | | (209) | |
| Inventories—Net | $ | 1,753 | | | $ | 1,616 | |
6. INTANGIBLE ASSETS
Other intangible assets–net in the condensed consolidated balance sheets consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 30, 2024 | | September 30, 2023 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Trademarks and trade names | $ | 1,017 | | | $ | — | | | $ | 1,017 | | | $ | 1,019 | | | $ | — | | | $ | 1,019 | |
| Technology | 2,140 | | | 940 | | | 1,200 | | | 2,124 | | | 888 | | | 1,236 | |
| Order backlog | 5 | | | 3 | | | 2 | | | 7 | | | 6 | | | 1 | |
| Customer relationships | 639 | | | 153 | | | 486 | | | 623 | | | 136 | | | 487 | |
| Other | 9 | | | 5 | | | 4 | | | 9 | | | 5 | | | 4 | |
| Total | $ | 3,810 | | | $ | 1,101 | | | $ | 2,709 | | | $ | 3,782 | | | $ | 1,035 | | | $ | 2,747 | |
The aggregate amortization expense on identifiable intangible assets is approximately $37 million and $35 million for the thirteen week periods ended March 30, 2024 and April 1, 2023, respectively. The aggregate amortization expense on identifiable intangible assets is approximately $72 million and $68 million for the twenty-six week periods ended March 30, 2024 and April 1, 2023, respectively.
As disclosed in Note 2, “Acquisitions,” the estimated fair value of the net identifiable tangible and intangible assets acquired is based on the acquisition method of accounting. The fair value of the net identifiable tangible and intangible assets acquired will be finalized within the measurement period (not to exceed one year). Intangible assets acquired during the twenty-six week period ended March 30, 2024 are summarized in the table below (in millions):
| | | | | | | | | | | |
| Gross Amount | | Amortization Period |
| Intangible assets not subject to amortization: | | | |
| Goodwill | $ | 49 | | | |
| | | |
| 49 | | | |
| Intangible assets subject to amortization: | | | |
| Technology | 15 | | | 20 years |
| | | |
| Order backlog | 1 | | | 1.5 years |
| Customer relationships | 10 | | | 20 years |
| 26 | | | |
| Total | $ | 75 | | | |
The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2023 through March 30, 2024 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Power & Control | | Airframe | | Non-aviation | | Total |
| Balance at September 30, 2023 | $ | 4,194 | | | $ | 4,701 | | | $ | 93 | | | $ | 8,988 | |
| Goodwill acquired during the period (Note 2) | 14 | | | 35 | | | — | | | 49 | |
Purchase price allocation adjustments (1) | — | | | 35 | | | — | | | 35 | |
| Currency translation adjustments and other | 4 | | | (25) | | | — | | | (21) | |
| Balance at March 30, 2024 | $ | 4,212 | | | $ | 4,746 | | | $ | 93 | | | $ | 9,051 | |
(1)Related to the opening balance sheet adjustments recorded from the acquisition of Calspan completed during the third quarter of fiscal 2023, within the allowable measurement period (not to exceed one year). Refer to Note 2, “Acquisitions,” for further information.
The Company performs its annual impairment test for goodwill and other intangible assets as of the first day of the fourth fiscal quarter of each year, or more frequently, if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We have assessed the changes in events and circumstances through the second quarter of fiscal 2024 and concluded that no triggering events occurred that required interim quantitative testing.
7. DEBT
The Company’s debt consists of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 30, 2024 |
| Gross Amount | | Debt Issuance Costs | | Original Issue (Discount) or Premium | | Net Amount |
| Short-term borrowings—trade receivable securitization facility | $ | 450 | | | $ | — | | | $ | — | | | $ | 450 | |
| Term loans | $ | 7,230 | | | $ | (27) | | | $ | (46) | | | $ | 7,157 | |
| | | | | | | |
7.50% senior subordinated notes due 2027 (“7.50% 2027 Notes”) | 550 | | | (2) | | | — | | | 548 | |
5.50% senior subordinated notes due 2027 (“5.50% 2027 Notes”) | 2,650 | | | (11) | | | — | | | 2,639 | |
6.75% secured notes due 2028 (“2028 Secured Notes”) | 2,100 | | | (17) | | | (9) | | | 2,074 | |
4.625% senior subordinated notes due 2029 (“4.625% 2029 Notes”) | 1,200 | | | (7) | | | — | | | 1,193 | |
4.875% senior subordinated notes due 2029 (“4.875% 2029 Notes”) | 750 | | | (5) | | | — | | | 745 | |
6.375% secured notes due 2029 (“2029 Secured Notes”) | 2,750 | | | (25) | | | (1) | | | 2,724 | |
6.875% secured notes due 2030 (“2030 Secured Notes”) | 1,450 | | | (13) | | | — | | | 1,437 | |
7.125% secured notes due 2031 (“2031 Secured Notes”) | 1,000 | | | (9) | | | (8) | | | 983 | |
6.625% secured notes due 2032 (“2032 Secured Notes”) | 2,200 | | | (20) | | | | | 2,180 | |
| Government refundable advances | 17 | | | — | | | — | | | 17 | |
| Finance lease obligations | 259 | | | — | | | — | | | 259 | |
| 22,156 | | | (136) | | | (64) | | | 21,956 | |
| Less: current portion | 627 | | | (2) | | | — | | | 625 | |
| Long-term debt | $ | 21,529 | | | $ | (134) | | | $ | (64) | | | $ | 21,331 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 |
| Gross Amount | | Debt Issuance Costs | | Original Issue (Discount) or Premium | | Net Amount |
| Short-term borrowings—trade receivable securitization facility | $ | 350 | | | $ | (1) | | | $ | — | | | $ | 349 | |
| Term loans | $ | 6,249 | | | $ | (22) | | | $ | (48) | | | $ | 6,179 | |
| | | | | | | |
6.25% secured notes due 2026 (“2026 Secured Notes”) | 4,400 | | | (25) | | | 2 | | | 4,377 | |
7.50% 2027 Notes | 550 | | | (2) | | | — | | | 548 | |
5.50% 2027 Notes | 2,650 | | | (12) | | | — | | | 2,638 | |
| 2028 Secured Notes | 2,100 | | | (19) | | | (10) | | | 2,071 | |
4.625% 2029 Notes | 1,200 | | | (7) | | | — | | | 1,193 | |
4.875% 2029 Notes | 750 | | | (5) | | | — | | | 745 | |
| 2030 Secured Notes | 1,450 | | | (14) | | | — | | | 1,436 | |
| Government refundable advances | 21 | | | — | | | — | | | 21 | |
| Finance lease obligations | 193 | | | — | | | — | | | 193 | |
| 19,563 | | | (106) | | | (56) | | | 19,401 | |
| Less: current portion | 71 | | | — | | | — | | | 71 | |
| Long-term debt | $ | 19,492 | | | $ | (106) | | | $ | (56) | | | $ | 19,330 | |
Accrued interest, which is classified as a component of accrued and other current liabilities on the condensed consolidated balance sheets, was $186 million and $125 million as of March 30, 2024 and September 30, 2023, respectively.
First Quarter of Fiscal 2024 Activity
Amendment No. 13 and Incremental Term Loan Assumption Agreement – On November 28, 2023, the Company entered into Amendment No. 13 and Incremental Term Loan Assumption Agreement (herein, “Amendment No. 13”) to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the “Credit Agreement”). Under the terms of Amendment No. 13, the Company, among other things, issued $1,000 million in Tranche J term loans maturing February 28, 2031. The Tranche J term loans bear interest at a rate of adjusted Term Secured Overnight Financing Rate (“Term SOFR”) plus 3.25%. The Tranche J term loans were issued at a discount of 0.25%, or approximately $3 million. The Tranche J term loans were fully drawn on November 28, 2023 and the other terms and conditions that apply to the Tranche J term loans are substantially the same as the terms and conditions that apply to the term loans immediately prior to Amendment No. 13. Principal payments commence on March 31, 2024, in which $3 million will be paid on a quarterly basis up to the maturity date.
The Company capitalized $10 million in debt issuance costs associated with the Tranche J term loans during the twenty-six week period ended March 30, 2024.
Issuance of $1,000 million Senior Secured Notes due 2031 – On November 28, 2023, the Company entered into a purchase agreement in connection with a private offering of $1,000 million in aggregate principal amount of 7.125% senior secured notes due 2031 (the “2031 Secured Notes”) at an issue price of 99.25% of the principal amount, which represents an approximately $8 million discount. The 2031 Secured Notes were issued pursuant to an indenture, dated as of November 28, 2023, amongst TransDigm Inc., as issuer, TransDigm Group and the other subsidiaries of TransDigm Inc. named therein, as guarantors. The 2031 Secured Notes are guaranteed, on a senior secured basis, by TransDigm Group and each of TransDigm Inc.’s direct and indirect restricted subsidiaries that is a borrower or guarantor under TransDigm’s senior secured credit facilities or that issues or guarantees any capital markets indebtedness of TransDigm or any of the guarantors in an aggregate principal amount of at least $200 million. The 2031 Secured Notes and guarantees rank equally in right of payment with all of TransDigm’s and the guarantors’ existing and future senior indebtedness, senior in right of payment to any of TransDigm’s and the guarantors’ existing and future indebtedness that is, by its terms, expressly subordinated in right of payment to the 2031 Secured Notes and guarantees, and structurally subordinated to all of the liabilities of TransDigm’s non-guarantor subsidiaries. The Company expects to use the proceeds of the offering of the 2031 Secured Notes, along with the proceeds from the Tranche J term loans further described above, together with cash on hand, primarily to fund the acquisition the Electron Device Business of CPI (see Note 2, “Acquisitions,” for further information).
The 2031 Secured Notes bear interest at a rate of 7.125% per annum, which accrues from November 28, 2023 and is payable in arrears on June 1st and December 1st of each year, commencing on June 1, 2024. The 2031 Secured Notes mature on December 1, 2031, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.
The Company capitalized $10 million in debt issuance costs associated with the 2031 Secured Notes during the twenty-six week period ended March 30, 2024.
Trade Receivable Securitization Facility – The Company’s trade receivable securitization facility (the “Securitization Facility”) effectively increases the Company’s borrowing capacity depending on the amount of the domestic operations’ trade accounts receivable. The Securitization Facility includes the right for the Company to exercise annual one year extensions as long as there have been no termination events as defined by the agreement. The Company uses the proceeds from the Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable.
During the first quarter of fiscal 2024, the Company drew the remaining $100 million available under the Securitization Facility. As of March 30, 2024, the Company has borrowed $450 million under the Securitization Facility, which is fully drawn, and bears interest at a rate of Term SOFR plus 1.60%. At March 30, 2024, the applicable interest rate was 6.91%.
Second Quarter of Fiscal 2024 Activity
Amendment No. 14 and Incremental Revolving Credit Assumption Agreement – On February 27, 2024, the Company entered into Amendment No. 14 and Incremental Revolving Credit Assumption Agreement (herein, “Amendment No. 14”) to the Credit Agreement. Under the terms of Amendment No. 14, the Company, among other things, refinanced its revolving credit facility to (i) extend the maturity date from May 2026 to February 2029; (ii) increased the total commitments capacity thereunder from $810 million to $910 million; and (iii) decreased the applicable margin to Term SOFR plus 2.25% compared to Term SOFR plus 2.50% applicable prior to Amendment No. 14. As of March 30, 2024, the borrowings available under the revolving commitments were $847 million.
The Company capitalized $1 million in debt issuance costs and wrote-off $3 million in unamortized debt issuance costs associated with the refinancing during the twenty-six week period ended March 30, 2024.
Issuance of $4,400 million of Senior Secured Notes – On February 27, 2024, the Company entered into two separate purchase agreements in connection with private offerings of $2,200 million in aggregate principal amount of 6.375% senior secured notes due 2029 (the “$2,200 million 2029 Secured Notes”) at an issue price of 100% of the principal amount and $2,200 million in aggregate principal amount of 6.625% senior secured notes due 2032 (the “2032 Secured Notes”) at an issue price of 100% of the principal amount. The proceeds were used to repurchase the 2026 Secured Notes further described below.
The $2,200 million 2029 Secured Notes and 2032 Secured Notes bear interest at the rate of 6.375% per annum and 6.625% per annum, respectively, which accrues from February 27, 2024 and is payable in arrears on March 1st and September 1st of each year, commencing on September 1, 2024. The $2,200 million 2029 Secured Notes mature on March 1, 2029 and the 2032 Secured Notes mature on March 1, 2032, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the applicable indenture.
The $2,200 million 2029 Secured Notes and 2032 Secured Notes were issued pursuant to an indenture, dated as of February 27, 2024 in each case, amongst TransDigm Inc., as issuer, TD Group and the subsidiaries of TransDigm party thereto, as guarantors. The secured notes are guaranteed, on a senior secured basis, by TD Group and each of TransDigm’s direct and indirect restricted subsidiaries that is a borrower or guarantor under TransDigm’s senior secured credit facilities or that issues or guarantees any capital markets indebtedness of TransDigm or any of the guarantors in an aggregate principal amount of at least $200 million. The secured notes and the related guarantees rank equally in right of payment with all of TransDigm’s and the guarantors’ existing and future senior indebtedness, senior in right of payment to any of TransDigm’s and the guarantors’ existing and future indebtedness that is, by its terms, expressly subordinated in right of payment to the $2,200 million 2029 Secured Notes and 2032 Secured Notes and related guarantees, and structurally subordinated to all of the liabilities of TransDigm’s non-guarantor subsidiaries.
The Company capitalized approximately $20 million and $20 million in debt issuance costs associated with the $2,200 million 2029 Secured Notes and the 2032 Secured Notes, respectively, during the twenty-six week period ended March 30, 2024.
Amendment No. 15 Loan Modification Agreement and Refinancing Facility Agreement – On March 22, 2024, the Company entered into Amendment No. 15 Loan Modification Agreement and Incremental Term Loan Assumption Agreement (herein, “Amendment No. 15”) to the Credit Agreement. Under the terms of Amendment No. 15, the Company, among other things, (i) repriced all of its $4,525 million in existing Tranche I term loans maturing August 24, 2028 to bear interest at Term SOFR plus 2.75% compared to Term SOFR plus 3.25% applicable prior to Amendment No. 15; and (ii) repaid in full its existing approximately $1,708 million in Tranche H term loans maturing February 22, 2027 and replaced such loans with approximately $1,708 million in new Tranche K term loans maturing March 22, 2030. The Tranche K term loans were issued at a discount of 0.25%, or approximately $4 million, and bear interest at Term SOFR plus 2.75%. The Tranche K term loans were fully drawn on March 22, 2024.
The other terms and conditions that apply to the Tranche I and Tranche K term loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 15. Principal payments for the Tranche I and Tranche K term loans commence on June 30, 2024, in which $11 million and $4 million will be paid on a quarterly basis up to the maturity date of each respective tranche of term loans.
The Company expensed approximately $4 million in refinancing costs associated with Amendment No. 15 during the twenty-six week period ended March 30, 2024. Additionally, the Company wrote-off $2 million of original issue discount during the twenty-six week period ended March 30, 2024.
Redemption of $4,400 million 6.25% Senior Secured Notes due 2026 – On March 28, 2024, the Company redeemed all $4,400 million aggregate principal amount of its outstanding 2026 Secured Notes at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest thereon to, but not including, the redemption date, using the net proceeds of the offering of the $2,200 million 2029 Secured Notes and the 2032 Secured Notes, together with cash on hand. There was no early redemption premium.
The Company recorded refinancing costs of $19 million, consisting primarily of the write-off of $21 million in unamortized debt issuance costs, slightly offset by the write-off of unamortized premium of $2 million in conjunction with the redemption of the 2026 Secured Notes during the twenty-six week period ended March 30, 2024.
Issuance of $550 million Senior Secured Notes due 2029 – On March 22, 2024, the Company entered into a purchase agreement in connection with a private offering of $550 million in aggregate principal amount consisting of 6.375% senior secured notes due 2029 (the “$550 million 2029 Secured Notes”) at an issue price of 99.75% of the principal amount, which represents an approximately $1 million discount. The $550 million 2029 Secured Notes are an additional issuance of the Company's existing $2,200 million 2029 Secured Notes (as further described above) and were issued under a supplemental indenture dated as of March 22, 2024, pursuant to which the Company previously issued the $2,200 million 2029 Secured Notes. The $550 million 2029 Secured Notes are the same class and series as, and otherwise identical to, the $2,200 million 2029 Secured Notes other than with respect to the date of issuance and issue price. The proceeds are classified as restricted cash on the condensed consolidated balance sheet as of March 30, 2024 as they were committed to be used to redeem the 7.50% 2027 Notes further described below.
The Company capitalized $5 million in debt issuance costs associated with the $550 million 2029 Secured Notes during the twenty-six week period ended March 30, 2024.
Subsequent Event - Redemption of $550 million Senior Subordinated Notes due 2027 – On March 22, 2024, the Company called all of its outstanding 7.50% 2027 Notes. As the notification of redemption was made in March 2024, the 7.50% 2027 Notes obligation is classified as current portion of long-term debt on the condensed consolidated balance sheets as of March 30, 2024. On April 22, 2024, the Company redeemed the principal amount of $550 million. There was no early redemption premium.
Government Refundable Advances – Government refundable advances consist of payments received from the Canadian government to assist in research and development related to commercial aviation. The requirement to repay this advance is based on year-over-year commercial aviation revenue growth for certain product lines at CMC Electronics, which is a wholly-owned subsidiary of TransDigm. As of March 30, 2024 and September 30, 2023, the outstanding balance of these advances was $17 million and $21 million, respectively.
Obligations under Finance Leases – The Company leases certain buildings and equipment under finance leases. The present value of the minimum finance lease payments, net of the current portion, represents a balance of $259 million and $193 million at March 30, 2024 and September 30, 2023, respectively. The increase in the current fiscal year is attributable to certain new leases of facilities and amendments to previous agreements qualifying as lease modifications resulting in a change in classification from an operating lease to a finance lease. Refer to Note 13, “Leases,” for further disclosure of the Company's lease obligations.
8. INCOME TAXES
At the end of each reporting period, TD Group makes an estimate of its annual effective income tax rate. The estimate used in the year-to-date period may change in subsequent periods.
During the thirteen week periods ended March 30, 2024 and April 1, 2023, the effective income tax rate was 22.2% and 23.4%, respectively. During the twenty-six week periods ended March 30, 2024 and April 1, 2023, the effective income tax rate was 22.0% and 23.5%, respectively. The Company’s lower effective income tax rate for the thirteen and twenty-six week periods ended March 30, 2024, was primarily due to a less significant impact on the rate from the valuation allowance applicable to the Company's net interest deduction limitation carryforward. The Company's effective income tax rate for the thirteen and twenty-six week periods ended March 30, 2024 was slightly higher than the federal statutory tax rate of 21% primarily due to an increase in the valuation allowance applicable to the Company's net interest deduction limitation carryforward, offset by the discrete impact of excess tax benefits associated with share-based payments.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company is no longer subject to U.S. federal examinations for years before fiscal 2018. The Company is currently under examination for its federal income taxes in Canada for fiscal years 2013 through 2019, in France for fiscal years 2020 through 2022, and in Germany for fiscal years 2014 through 2019. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.
Unrecognized tax benefits at March 30, 2024 and September 30, 2023, the recognition of which would have an impact on the effective tax rate for each fiscal year, amounted to $17 million. The Company classifies all income tax-related interest and penalties as income tax expense, which were not significant for the thirteen and twenty-six week periods ended March 30, 2024 and April 1, 2023. As of March 30, 2024 and September 30, 2023, the Company accrued $6 million for the potential payment of interest and penalties. Within the next twelve months, it is reasonably possible that unrecognized tax benefits could be reduced by approximately $6 million resulting primarily from the resolution of tax examinations. Any increase in the amount of unrecognized tax benefits within the next twelve months is not expected to be material.
9. FAIR VALUE MEASUREMENTS
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following summarizes the carrying amounts and fair values of financial instruments (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 30, 2024 | | September 30, 2023 |
| Level | | Carrying
Amount | | Fair Value | | Carrying
Amount | | Fair Value |
| Assets: | | | | | | | | | |
| Cash and cash equivalents | 1 | | $ | 4,288 | | | $ | 4,288 | | | $ | 3,472 | | | $ | 3,472 | |
| Restricted cash | 1 | | 550 | | | 550 | | | — | | | — | |
Interest rate swap agreements (1) | 2 | | 76 | | | 76 | | | 103 | | | 103 | |
Interest rate swap agreements (2) | 2 | | 12 | | | 12 | | | 41 | | | 41 | |
Interest rate cap agreements (2) | 2 | | 38 | | | 38 | | | 53 | | | 53 | |
Interest rate collar agreements (2) | 2 | | 14 | | | 14 | | | 17 | | | 17 | |
| Liabilities: | | | | | | | | | |
Foreign currency forward exchange contracts (3) | 2 | | 2 | | | 2 | | | 5 | | | 5 | |
Interest rate swap agreements (4) | 2 | | 3 | | | 3 | | | 3 | | | 3 | |
Interest rate cap agreements (4) | 2 | | 1 | | | 1 | | | 1 | | | 1 | |
Short-term borrowings - trade receivable securitization facility (5) | 2 | | 450 | | | 450 | | | 349 | | | 349 | |
| Long-term debt, including current portion: | | | | | | | | | |
Term loans (5) | 2 | | 7,157 | | | 7,196 | | | 6,179 | | | 6,212 | |
2026 Secured Notes (5) | 1 | | — | | | — | | | 4,377 | | | 4,329 | |
7.50% 2027 Notes (5) | 1 | | 548 | | | 550 | | | 548 | | | 549 | |
5.50% 2027 Notes (5) | 1 | | 2,639 | | | 2,584 | | | 2,638 | | | 2,484 | |
2028 Secured Notes (5) | 1 | | 2,074 | | | 2,129 | | | 2,071 | | | 2,069 | |
4.625% 2029 Notes (5) | 1 | | 1,193 | | | 1,115 | | | 1,193 | | | 1,047 | |
4.875% 2029 Notes (5) | 1 | | 745 | | | 698 | | | 745 | | | 654 | |
2029 Secured Notes (5) | 1 | | 2,724 | | | 2,760 | | | — | | | — | |
2030 Secured Notes (5) | 1 | | 1,437 | | | 1,477 | | | 1,436 | | | 1,423 | |
2031 Secured Notes (5) | 1 | | 983 | | | 1,030 | | | — | | | — | |
2032 Secured Notes (5) | 1 | | 2,180 | | | 2,222 | | | — | | | — | |
| Government refundable advances | 2 | | 17 | | | 17 | | | 21 | | | 21 | |
| Finance lease obligations | 2 | | 259 | | | 259 | | | 193 | | | 193 | |
(1)Included in prepaid expenses and other on the condensed consolidated balance sheets.
(2)Included in other non-current assets on the condensed consolidated balance sheets.
(3)Included in accrued and other current liabilities on the condensed consolidated balance sheets.
(4)Included in other non-current liabilities on the condensed consolidated balance sheets.
(5)The carrying amount of the debt instrument is presented net of debt issuance costs, premium and discount. Refer to Note 7, “Debt,” for gross carrying amounts.
The Company values its financial instruments using an industry standard market approach, in which prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized or disclosed using unobservable inputs (i.e., Level 3).
The Company’s derivatives consist of interest rate swap, cap and collar agreements and foreign currency exchange contracts. The fair values of the interest rate swap, cap and collar agreements were derived by taking the net present value of the expected cash flows using observable market inputs (Level 2) such as SOFR rate curves, futures, volatilities and basis spreads (when applicable). The fair values of the foreign currency exchange contracts were derived by using Level 2 inputs based on observable spot and forward exchange rates in active markets. There has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any material impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.
The estimated fair value of the Company’s term loans was based on information provided by the agent under the Company’s Credit Agreement. The estimated fair values of the Company’s notes were based upon quoted market prices.
The fair value of cash and cash equivalents, restricted cash, trade accounts receivable-net and accounts payable approximated carrying value due to the short-term nature of these instruments at March 30, 2024 and September 30, 2023.
10. DERIVATIVES AND HEDGING ACTIVITIES
The Company is exposed to, among other things, the impact of changes in foreign currency exchange rates and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks and does not enter into such transactions for trading purposes. The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged. The Company has agreements with each of its swap, cap and collar counterparties that contain a provision whereby if the Company defaults on the Credit Agreement, the Company could also be declared in default on its swaps, cap and collars resulting in an acceleration of settlement under the swaps, cap and collars.
All derivative financial instruments are recorded at fair value in the condensed consolidated balance sheets. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the condensed consolidated balance sheets in accumulated other comprehensive loss to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within accumulated other comprehensive loss is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.
Interest Rate Swap, Cap and Collar Agreements – Interest rate swap, cap and collar agreements are used to manage interest rate risk associated with floating rate borrowings under our Credit Agreement. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the term of the agreements without an exchange of the underlying principal amount. The agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s floating rate debt to a fixed rate basis from the effective date through the maturity date of the respective interest rate swap, cap and collar agreements, thereby reducing the impact of interest rate movements on future interest expense.
During the second quarter of fiscal 2023, we entered into LIBOR to Term SOFR basis interest rate swap and cap transactions to effectively convert our existing swaps and cap from LIBOR-based to Term SOFR-based. The basis swaps and cap offset the LIBOR exposure of the existing swaps and cap and effectively fix the Term SOFR rate for the notional amount. We also entered into forward starting interest rate collar agreements during the second quarter of fiscal 2023. The interest rate collar agreements establish a range where we will pay the counterparties if the three-month Term SOFR rate falls below the established floor rate of 2.00%, and the counterparties will pay us if the three-month Term SOFR rate exceeds the ceiling rate of 3.50%. The collar will settle quarterly from the effective date through the maturity date. No payments or receipts will be exchanged on the interest rate collar contracts unless interest rates rise above or fall below the contracted ceiling or floor rates.
The tables below summarize the key terms of the swaps, cap and collars as of March 30, 2024 (aggregated by effective date).
Interest rate swap agreements:
| | | | | | | | | | | | | | | | | | | | |
| Aggregate Notional Amount (in millions) | | Effective Date | | Maturity Date | | Conversion of Related Variable Rate Debt subject to Term SOFR to Fixed Rate of: |
| $400 | | 3/31/2023 | | 6/28/2024 | | 6.25% (3.00% plus the 3.25% margin percentage) |
| $900 | | 3/31/2023 | | 6/28/2024 | | 6.35% (3.10% plus the 3.25% margin percentage) |
| $500 | | 3/31/2023 | | 3/31/2025 | | 6.25% (3.00% plus the 3.25% margin percentage) |
| $1,500 | | 3/31/2023 | | 3/31/2025 | | 6.35% (3.10% plus the 3.25% margin percentage) |
| $700 | | 3/31/2023 | | 9/30/2025 | | 4.55% (1.30% plus the 3.25% margin percentage) |
Interest rate cap agreement:
| | | | | | | | | | | | | | | | | | | | |
| Aggregate Notional Amount (in millions) | | Effective Date | | Maturity Date | | Offsets Variable Rate Debt Attributable to Fluctuations Above: |
| $700 | | 3/31/2023 | | 9/30/2025 | | Three-month Term SOFR rate of 1.25% |
Interest rate collar agreements:
| | | | | | | | | | | | | | | | | | | | |
| Aggregate Notional Amount (in millions) | | Effective Date | | Maturity Date | | Offsets Variable Rate Debt Attributable to Fluctuations Below and Above: |
| $1,100 | | 3/31/2025 | | 9/30/2026 | | Three-month Term SOFR rate of 2.00% (floor) and 3.50% (cap) |
| $500 | | 9/30/2025 | | 9/30/2026 | | Three-month Term SOFR rate of 2.00% (floor) and 3.50% (cap) |
These derivative instruments qualify as effective cash flow hedges under U.S. GAAP. For the LIBOR to Term SOFR basis interest rate swap and cap agreements referenced above, we applied the practical expedients permissible under ASC 848 to continue hedge accounting for our existing swaps and cap as effective cash flow hedges. For our cash flow hedges, the effective portion of the gain or loss from the financial instruments is initially reported as a component of accumulated other comprehensive loss in stockholders’ deficit and subsequently reclassified into earnings in the same line as the hedged item in the same period or periods during which the hedged item affects earnings. As the interest rate swap, cap and collar agreements are used to manage interest rate risk, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in interest expense-net in the condensed consolidated statements of income. Cash flows related to the derivative contracts are included in cash flows from operating activities on the condensed consolidated statements of cash flows.
Certain derivative asset and liability balances are offset where master netting agreements provide for the legal right of setoff. For classification purposes, we record the net fair value of each type of derivative position that is expected to settle in less than one year with each counterparty as a net current asset or liability and each type of long-term position as a net non-current asset or liability. The amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the condensed consolidated balance sheets and the net amounts of assets and liabilities presented therein (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 30, 2024 | | September 30, 2023 |
| | Asset | | Liability | | Asset | | Liability |
| Interest rate cap agreement | | $ | 38 | | | $ | 1 | | | $ | 53 | | | $ | 1 | |
| Interest rate collar agreements | | 14 | | | — | | | 17 | | | — | |
| Interest rate swap agreements | | 88 | | | 3 | | | 144 | | | 3 | |
Net derivatives as classified in the condensed consolidated balance sheets (1) | | $ | 140 | | | $ | 4 | | | $ | 214 | | | $ | 4 | |
(1)Refer to Note 9, “Fair Value Measurements,” for the condensed consolidated balance sheets classification of the Company's interest rate swap, cap and collar agreements.
Based on the fair value amounts determined as of March 30, 2024, the estimated net amount of existing (gains) losses and caplet amortization expected to be reclassified into interest expense-net within the next twelve months is approximately ($72) million.
Foreign Currency Forward Exchange Contracts – The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At March 30, 2024, the Company has outstanding foreign currency forward exchange contracts to sell U.S. dollars with notional amounts of $83 million. The maximum duration of the Company’s foreign currency cash flow hedge contracts at March 30, 2024 is six months. These notional values consist of contracts for the Canadian dollar and the euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective trade dates. Amounts related to foreign currency forward exchange contracts included in accumulated other comprehensive loss in stockholders' deficit are reclassified into net sales when the hedged transaction settles.
During the twenty-six week period ended March 30, 2024, the losses reclassified on settlements of foreign currency forward exchange contracts designated as cash flow hedges into net sales was approximately $2 million. The losses were previously recorded as a component of accumulated other comprehensive loss in stockholders' deficit. As of March 30, 2024, the Company expects to record a net loss of approximately $2 million on foreign currency forward exchange contracts designated as cash flow hedges to net sales over the next twelve months.
11. 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/electromechanical 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, parachutes and specialized flight, wind tunnel and jet engine testing services and equipment. Primary customers of this segment are airframe manufacturers and cabin system suppliers and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.
The Non-aviation segment includes operations that primarily develop, produce and market products for non-aviation markets. Major product offerings include seat belts and safety restraints for ground transportation applications, mechanical/electromechanical actuators and controls for space applications, hydraulic/electromechanical actuators and fuel valves for land-based gas turbines, and refueling systems for heavy equipment used in mining, construction and other industries and turbine controls for the energy and oil and gas markets. Primary customers of this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers, manufacturers of heavy equipment used in mining, construction and other industries and turbine original equipment manufacturers, gas pipeline builders and electric utilities.
The primary measurement used by management to review and assess the operating performance of each segment is EBITDA As Defined. The Company defines EBITDA As Defined as earnings before interest, taxes, depreciation and amortization plus certain non-operating items recorded as corporate expenses including non-cash compensation charges incurred in connection with the Company’s stock incentive or deferred compensation plans, foreign currency gains and losses, acquisition-integration costs, acquisition and divestiture transaction-related expenses, and refinancing costs. Acquisition and divestiture transaction-related costs represent accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold; costs incurred to integrate acquired businesses and product lines into the Company’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs for both acquisitions and divestitures comprising deal fees; legal, financial and tax diligence expenses and valuation costs that are required to be expensed as incurred and other acquisition accounting adjustments.
EBITDA As Defined is not a measurement of financial performance under U.S. GAAP. Although the Company uses EBITDA As Defined to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with U.S. GAAP.
The Company’s segments are reported on the same basis used internally for evaluating performance and for allocating resources. The accounting policies for each segment are the same as those described in the summary of significant accounting policies in the Company’s consolidated financial statements. Intersegment sales and transfers are recorded at values based on market prices, which creates intercompany profit on intersegment sales or transfers that is eliminated in consolidation. Intersegment sales were immaterial for the periods presented below. Corporate consists of our corporate offices. Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. Corporate assets consist primarily of cash and cash equivalents. Corporate expenses and assets reconcile reportable segment data to the consolidated totals. An immaterial amount of corporate expenses is allocated to the operating segments.
The following table presents net sales by reportable segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended |
| March 30, 2024 | | April 1, 2023 | | March 30, 2024 | | April 1, 2023 |
| Net sales to external customers | | | | | | | |
| Power & Control | | | | | | | |
| Commercial and non-aerospace OEM | $ | 202 | | | $ | 167 | | | $ | 379 | | | $ | 319 | |
| Commercial and non-aerospace aftermarket | 290 | | | 275 | | | 586 | | | 517 | |
| Defense | 422 | | | 374 | | | 833 | | | 705 | |
| Total Power & Control | 914 | | | 816 | | | 1,798 | | | 1,541 | |
| | | | | | | |
| Airframe | | | | | | | |
| Commercial and non-aerospace OEM | 308 | | | 230 | | | 580 | | | 430 | |
| Commercial and non-aerospace aftermarket | 336 | | | 267 | | | 660 | | | 505 | |
| Defense | 315 | | | 236 | | | 581 | | | 434 | |
| Total Airframe | 959 | | | 733 | | | 1,821 | | | 1,369 | |
| | | | | | | |
| Total Non-aviation | 46 | | | 43 | | | 89 | | | 79 | |
| | | | | | | |
| Net Sales | $ | 1,919 | | | $ | 1,592 | | | $ | 3,708 | | | $ | 2,989 | |
The following table reconciles EBITDA As Defined by segment to consolidated income from operations before income taxes (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended |
| March 30, 2024 | | April 1, 2023 | | March 30, 2024 | | April 1, 2023 |
| EBITDA As Defined | | | | | | | |
| Power & Control | $ | 519 | | | $ | 452 | | | $ | 1,028 | | | $ | 853 | |
| Airframe | 510 | | | 373 | | | 940 | | | 685 | |
| Non-aviation | 20 | | | 17 | | | 37 | | | 31 | |
| Total segment EBITDA As Defined | 1,049 | | | 842 | | | 2,005 | | | 1,569 | |
| Less: Unallocated corporate EBITDA As Defined | 28 | | | 25 | | | 72 | | | 53 | |
| Total Company EBITDA As Defined | 1,021 | | | 817 | | | 1,933 | | | 1,516 | |
| Depreciation and amortization expense | 74 | | | 65 | | | 143 | | | 129 | |
| Interest expense-net | 326 | | | 295 | | | 626 | | | 581 | |
| Acquisition and divestiture transaction-related expenses | 14 | | | 3 | | | 16 | | | 6 | |
| Non-cash stock and deferred compensation expense | 60 | | | 42 | | | 111 | | | 77 | |
| Refinancing costs | 28 | | | 5 | | | 28 | | | 9 | |
| Other, net | — | | | 10 | | | 1 | | | 17 | |
| Income from operations before income taxes | $ | 519 | | | $ | 397 | | | $ | 1,008 | | | $ | 697 | |
The following table presents total assets by segment (in millions):
| | | | | | | | | | | |
| March 30, 2024 | | September 30, 2023 |
| Total assets | | | |
| Power & Control | $ | 7,463 | | | $ | 7,315 | |
| Airframe | 9,214 | | | 8,972 | |
| Non-aviation | 230 | | | 234 | |
| Corporate | 4,670 | | | 3,449 | |
| $ | 21,577 | | | $ | 19,970 | |
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the total changes by component in accumulated other comprehensive loss (“AOCL”), net of taxes, for the twenty-six week periods ended March 30, 2024 and April 1, 2023 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized (losses) gains on derivatives (1) | | Pension and post-retirement benefit plans adjustment (2) | | Foreign currency translation adjustment (3) | | Total |
| Balance at September 30, 2023 | $ | 143 | | | $ | 2 | | | $ | (243) | | | $ | (98) | |
| | | | | | | |
| | | | | | | |
Net current-period other comprehensive (loss) income (4) | (51) | | | — | | | 31 | | | (20) | |
| Balance at March 30, 2024 | $ | 92 | | | $ | 2 | | | $ | (212) | | | $ | (118) | |
| | | | | | | |
| Balance at September 30, 2022 | $ | 123 | | | $ | (10) | | | $ | (380) | | | $ | (267) | |
| | | | | | | |
| | | | | | | |
Net current-period other comprehensive (loss) income (4) | (9) | | | — | | | 180 | | | 171 | |
| Balance at April 1, 2023 | $ | 114 | | | $ | (10) | | | $ | (200) | | | $ | (96) | |
(1)Represents unrealized (losses) gains on derivatives designated and qualifying as cash flow hedges, net of taxes, of ($1) million and $8 million for the thirteen week periods ended March 30, 2024 and April 1, 2023, respectively, and $17 million and $1 million for the twenty-six week periods ended March 30, 2024 and April 1, 2023, respectively.
(2)There were no material pension liability adjustments, net of taxes, related to activity on the defined pension plan and postretirement benefit plan for the thirteen and twenty-six week periods ended March 30, 2024 and April 1, 2023, respectively.
(3)Represents gains (losses) resulting from foreign currency translation of financial statements, including gains (losses) from certain intercompany transactions, into U.S. dollars at the rates of exchange in effect at the balance sheet dates.
(4)Presented net of reclassifications out of AOCL into earnings, specifically net sales and interest expense-net, for realized (losses) gains on derivatives designated and qualifying as cash flow hedges of ($2) million (net of taxes of ($0.5) million) and $55 million (net of taxes of $17 million), respectively, for the twenty-six week period ended March 30, 2024 and ($1) million (net of taxes of ($0.2) million) and $21 million (net of taxes of $6 million), respectively, for the twenty-six week period ended April 1, 2023.
13. LEASES
The Company leases certain manufacturing facilities, offices, land, equipment and vehicles. Such leases, some of which are noncancellable and, in many cases, include renewals, expire at various dates. Such options to renew are included in the lease term when it is reasonably certain that the option will be exercised. The Company’s lease agreements typically do not contain any significant residual value guarantees or restrictive covenants, and payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on the lease term and the currency in which lease payments are made. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of twelve 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 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Thirteen Week Periods Ended | | Twenty-Six Week Periods Ended |
| Classification | | March 30, 2024 | | April 1, 2023 | | March 30, 2024 | | April 1, 2023 |
| Operating lease cost | Cost of sales or selling and administrative expenses | | $ | 5 | | | $ | 5 | | | $ | 10 | | | $ | 10 | |
| Finance lease cost: | | | | | | | | | |
| Amortization of leased assets | Cost of sales | | 3 | | | 2 | | | 6 | | | 5 | |
| Interest on lease liabilities | Interest expense-net | | 4 | | | 3 | | | 7 | | | 6 | |
| Total lease cost | | | $ | 12 | | | $ | 10 | | | $ | 23 | | | $ | 21 | |
Supplemental cash flow information related to leases is as follows (in millions):
| | | | | | | | | | | | | | |
| | Twenty-Six Week Periods Ended |
| | March 30, 2024 | | April 1, 2023 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash outflows from operating leases | | $ | 10 | | | $ | 10 | |
| Operating cash outflows from finance leases | | 6 | | | 5 | |
| Financing cash outflows from finance leases | | 3 | | | 2 | |
| | | | |
| Lease assets obtained in exchange for new lease obligations: | | | | |
| Operating leases | | $ | 2 | | | $ | 5 | |
| Financing leases | | 65 | | | 48 | |
Supplemental balance sheet information related to leases is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Classification | | March 30, 2024 | | September 30, 2023 |
| Operating Leases | | | | | |
| Operating lease right-of-use assets | Other non-current assets | | $ | 56 | | | $ | 64 | |
| | | | | |
| Current operating lease liabilities | Accrued and other current liabilities | | 15 | | | 16 | |
| Long-term operating lease liabilities | Other non-current liabilities | | 44 | | | 51 | |
| Total operating lease liabilities | | | $ | 59 | | | $ | 67 | |
| | | | | |
| Finance Leases | | | | | |
| Finance lease right-of-use assets, net | Property, plant and equipment-net | | $ | 241 | | | $ | 176 | |
| | | | | |
| Current finance lease liabilities | Current portion of long-term debt | | 5 | | | 5 | |
| Long-term finance lease liabilities | Long-term debt | | 254 | | | 188 | |
| Total finance lease liabilities | | | $ | 259 | | | $ | 193 | |
As of March 30, 2024, the Company has the following remaining lease term and weighted average discount rates:
| | | | | |
| Weighted-average remaining lease term | |
| Operating leases | 5.4 years |
| Finance leases | 21.4 years |
| |
| Weighted-average discount rate | |
| Operating leases | 6.0% |
| Finance leases | 7.0% |
Maturities of lease liabilities at March 30, 2024 are as follows (in millions):
| | | | | | | | | | | |
| Operating Leases | | Finance Leases |
| 2024 | $ | 9 | | | $ | 9 | |
| 2025 | 18 | | | 20 | |
| 2026 | 13 | | | 20 | |
| 2027 | 10 | | | 22 | |
| 2028 | 6 | | | 22 | |
| Thereafter | 14 | | | 451 | |
| Total future minimum lease payments | 70 | | | 544 | |
| Less: imputed interest | 11 | | | 285 | |
| Present value of lease liabilities reported | $ | 59 | | | $ | 259 | |
14. COMMITMENTS AND CONTINGENCIES
During the ordinary course of business, the Company is from time to time threatened with, or may become a party to, legal actions and other proceedings. While the Company is currently involved in certain legal proceedings, it believes the results of these proceedings will not have a material adverse effect on its financial condition, results of operations, or cash flows.
DOD OIG Audit – TransDigm’s subsidiaries are periodically subject to pricing reviews and government buying agencies that purchase some of our subsidiaries’ products are periodically subject to audits by the Department of Defense (“DOD”) Office of Inspector General (“OIG”) with respect to prices paid for such products. In 2019, the DOD OIG received a congressional letter requesting a comprehensive review of TransDigm’s contracts with the DOD from January 2017 through June 2019 to identify whether TransDigm earned excess profits. This subsequently resulted in an audit by the DOD OIG in which the objective was to determine whether TransDigm’s business model impacted the DOD’s ability to pay fair and reasonable prices for spare parts. In December 2021, the OIG completed the audit and issued the related audit report. Despite the audit report making clear there was no wrongdoing by TransDigm, its businesses, or the DOD, the report recommended that TransDigm voluntarily refund at least $21 million in excess profit on 150 contracts subject to the audit.
TransDigm disagrees with many of the implications contained in the report, and objects to the use of arbitrary standards and analysis which render many areas of the report inaccurate and misleading. These include: (1) The report expressly acknowledges that it used arbitrary standards that are not applicable to the audited contracts and warns that its arbitrary standards should not be used in the future. The use of inapplicable standards results in flawed analysis and is misleading; (2) The report ignores significant real costs incurred by the business and contrary to law reports these costs as excess profit; (3) Despite data demonstrating that the DOD paid lower prices compared to the commercial prices for similar parts, the report did not conduct a price analysis and instead implies that the DOD negotiated prices were too high.
No loss contingency related to the voluntary refund request has been recorded as of March 30, 2024 as the Company has concluded that based on the current facts and circumstances, it's uncertain as to whether or not the requested voluntary refund will be made.
