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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 27A of the Securities Act of 1933, as amended. 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 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 this 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 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; supply chain constraints; increases in raw material costs, taxes and labor costs that cannot be recovered in product pricing; failure to complete or successfully integrate acquisitions; our indebtedness; current and future geopolitical or other worldwide events, including, without limitation, wars or conflicts and public health crises; cybersecurity threats; risks related to the transition or physical impacts of climate change and other natural disasters or meeting sustainability-related voluntary goals or regulatory requirements; our reliance on certain customers; the United States (“U.S.”) defense budget and risks associated with being a government supplier including government audits and investigations; failure to maintain government or industry approvals; risks related to changes in laws and regulations, including increases in compliance costs; potential environmental liabilities; liabilities arising in connection with litigation; risks and costs associated with our international sales and operations; and other factors. Refer to Part II, Item 1A included in this Quarterly Report on Form 10-Q and to Part II, 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. We believe we have achieved steady, long-term growth in sales and improvements in operating performance we believe that due to our competitive strengths and through execution of our value-driven operating strategy. More specifically, focusing our businesses on our value-driven operating strategy of obtaining profitable new business, carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit and income from operations over the long-term.
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/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, 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, cargo loading, handling and delivery systems, specialized flight, wind tunnel and jet engine testing services and equipment and electronic components used in the generation, amplification, transmission and reception of microwave signals. Each of our 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 2024, we generated net sales of $2,046 million and net income attributable to TD Group of $461 million. EBITDA As Defined was $1,091 million, or 53.3% 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 from operations and net cash provided by operating activities.
In the first three quarters of fiscal 2024, the rebound in our commercial aerospace end markets from the COVID-19 pandemic continued, and we remain encouraged by the progression of the commercial aerospace market recovery to date, building off the progress from fiscal 2023. Commercial air travel in domestic markets continues to lead the air traffic recovery with most domestic markets nearing, achieving or surpassing pre-pandemic air traffic levels. The pace of the international recovery has been slower than the domestic recovery; however, it has continued to make steady improvement. Since February 2024, both domestic and international revenue passenger kilometers (“RPKs”) have surpassed 2019 (i.e., pre-pandemic) levels. We expect the Company's commercial aerospace end markets to continue progressing the remainder of fiscal 2024 barring any significant disruptions or setbacks. In the first three quarters of fiscal 2024, we experienced improved sales in the commercial original equipment manufacturer (“OEM”) sector primarily due to increased aircraft production by Boeing and Airbus. Aircraft production rates still remain below pre-pandemic levels, mainly due to persisting, though improving, supply chain and production issues that are slowing the pace of new aircraft manufacturing. Airline demand for new aircraft is strong and both Boeing and Airbus have disclosed further planned OEM production rate increases for calendar 2024; however, we are continuing to monitor the Federal Aviation Administration's recent halting of Boeing's planned MAX production increase due to Boeing's ongoing quality control issues.
In the first three quarters of fiscal 2024, defense sales have increased compared to the comparable prior year period due to improving U.S. government defense spend outlays. Department of Defense (“DOD”) budgets have also trended upwards as geopolitical challenges such as the ongoing conflicts between Russia and Ukraine and Israel and Hamas, and military modernization efforts are driving demand. Historically, the inconsistent pace of U.S. government defense spending outlays and government funding reprioritization provides for uncertainty in the defense aerospace market.
The global supply chain and labor markets, though improving, continue to be disrupted. The disruption has resulted in delays in the availability of certain raw materials and increased freight costs, raw material costs and labor costs. Our business has been adversely affected, though not materially, and could continue to be adversely affected by disruptions in our ability to timely obtain raw materials and components from our suppliers in the quantities we require or on favorable terms. Although we believe in most cases that we could identify alternative suppliers, or alternative raw materials or component parts, the lengthy and expensive aviation authority and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part.
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 Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed on November 9, 2023. Refer to Note 1, “Basis of Presentation,” 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
Recent acquisitions are described in Note 2, “Acquisitions,” 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, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended |
| June 29, 2024 | | % of Net Sales | | July 1, 2023 | | % of Net Sales |
| Net sales | $ | 2,046 | | | 100.0 | % | | $ | 1,744 | | | 100.0 | % |
| Cost of sales | 826 | | | 40.4 | % | | 715 | | | 41.0 | % |
| Selling and administrative expenses | 248 | | | 12.1 | % | | 209 | | | 12.0 | % |
| Amortization of intangible assets | 38 | | | 1.8 | % | | 37 | | | 2.1 | % |
| Income from operations | 934 | | | 45.7 | % | | 783 | | | 44.9 | % |
| Interest expense-net | 316 | | | 15.4 | % | | 291 | | | 16.7 | % |
| Refinancing costs | 30 | | | 1.5 | % | | 32 | | | 1.8 | % |
| Other income | (14) | | | (0.7) | % | | (9) | | | (0.5) | % |
| Income tax provision | 141 | | | 6.9 | % | | 117 | | | 6.7 | % |
| Income from operations | 461 | | | 22.6 | % | | 352 | | | 20.2 | % |
| Less: Net income attributable to noncontrolling interests | — | | | — | % | | (1) | | | (0.1) | % |
| | | | | | | |
| | | | | | | |
| Net income attributable to TD Group | $ | 461 | | | 22.6 | % | | $ | 351 | | | 20.1 | % |
| Net income applicable to TD Group common stockholders | $ | 461 | | (1) | 22.6 | % | | $ | 351 | | (1) | 20.1 | % |
| Earnings per share attributable to TD Group common stockholders: | | | | | | | |
| | | | | |
| | | | | | |
| Basic and diluted | $ | 7.96 | (2) | | $ | 6.14 | (2) | |
| | | | | | | |
| Weighted-average shares outstanding—basic and diluted | 57.9 | | | | | 57.2 | | | |
| Other Data: | | | | | | | |
| EBITDA | $ | 995 | | (3) | | $ | 830 | | (3) |
| EBITDA As Defined | $ | 1,091 | | (3) | 53.3 | % | | $ | 915 | | (3) | 52.5 | % |
(1)Net income applicable to TD Group common stockholders represents net income attributable to TD Group less special dividends paid on participating securities, including dividend equivalent payments. No special dividends were declared or paid on participating securities, including dividend equivalent payments, for the thirteen week periods ended June 29, 2024 and July 1, 2023.
(2)Earnings per share is calculated by dividing net income applicable to TD Group common stockholders by the basic and diluted weighted average common shares outstanding.
(3)Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure.
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Periods Ended |
| June 29, 2024 | | % of Net Sales | | July 1, 2023 | | % of Net Sales |
| Net sales | $ | 5,754 | | | 100.0 | % | | $ | 4,733 | | | 100.0 | % |
| Cost of sales | 2,341 | | | 40.7 | % | | 1,983 | | | 41.9 | % |
| Selling and administrative expenses | 715 | | | 12.4 | % | | 578 | | | 12.2 | % |
| Amortization of intangible assets | 110 | | | 1.9 | % | | 105 | | | 2.2 | % |
| Income from operations | 2,588 | | | 45.0 | % | | 2,067 | | | 43.7 | % |
| Interest expense-net | 943 | | | 16.4 | % | | 872 | | | 18.4 | % |
| Refinancing costs | 59 | | | 1.0 | % | | 41 | | | 0.9 | % |
| Other income | (24) | | | (0.4) | % | | (12) | | | (0.3) | % |
| Income tax provision | 362 | | | 6.3 | % | | 281 | | | 5.9 | % |
| Income from operations | 1,248 | | | 21.7 | % | | 885 | | | 18.7 | % |
| Less: Net income attributable to noncontrolling interests | (2) | | | — | % | | (2) | | | — | % |
| | | | | | | |
| | | | | | | |
| Net income attributable to TD Group | $ | 1,246 | | | 21.7 | % | | $ | 883 | | | 18.7 | % |
| Net income applicable to TD Group common stockholders | $ | 1,145 | | (1) | 19.9 | % | | $ | 845 | | (1) | 17.9 | % |
| Earnings per share attributable to TD Group common stockholders: | | | | | | | |
| | | | | |
| | | | | | |
| Basic and diluted | $ | 19.81 | (2) | | $ | 14.80 | (2) |
| Cash dividends paid per common share | $ | 35.00 | | | | | $ | — | | | |
| Weighted-average shares outstanding—basic and diluted | 57.8 | | | | | 57.1 | | | |
| Other Data: | | | | | | | |
| EBITDA | $ | 2,772 | | (3) | | $ | 2,237 | | (3) |
| EBITDA As Defined | $ | 3,023 | | (3) | 52.5 | % | | $ | 2,432 | | (3) | 51.4 | % |
(1)Net income applicable to TD Group common stockholders represents net income attributable to TD Group less special dividends declared or paid on participating securities, including dividend equivalent payments of $101 million and $38 million for the thirty-nine week periods ended June 29, 2024 and July 1, 2023, respectively.
(2)Earnings per share is calculated by dividing net income applicable to TD Group common stockholders by the basic and diluted weighted average common shares outstanding.
(3)Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure.
Changes in Results of Operations
Thirteen week period ended June 29, 2024 compared with the thirteen week period ended July 1, 2023
Total Company
•Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the thirteen week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | | | % Change
Net Sales |
| June 29, 2024 | | July 1, 2023 | | Change | |
| Organic sales | $ | 1,988 | | | $ | 1,734 | | | $ | 254 | | | 14.6 | % |
| Acquisition sales | 58 | | | 10 | | | 48 | | | 2.8 | % |
| Net sales | $ | 2,046 | | | $ | 1,744 | | | $ | 302 | | | 17.3 | % |
Organic sales represent net sales from existing businesses owned by the Company, excluding sales from acquisitions. Acquisition sales represent net sales from acquired businesses for the period up to one year from the respective acquisition date. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Refer to Note 2, “Acquisitions,” in the notes to the condensed consolidated financial statements included herein for further information on the Company's recent acquisitions activity.
The increase in organic sales of $254 million for the thirteen week period ended June 29, 2024 compared to the thirteen week period ended July 1, 2023 is primarily related to increases in defense sales ($91 million, an increase of 13.3%), commercial OEM sales ($88 million, an increase of 23.2%) and commercial aftermarket sales ($61 million, an increase of 11.1%). The increase in defense sales is primarily attributable to improving U.S. government defense spend outlays. The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries. The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in the third quarter of fiscal 2024 compared to fiscal 2023, particularly internationally.
The increase in acquisition sales for the thirteen week period ended June 29, 2024 is primarily attributable to the third quarter fiscal 2024 acquisition of the Electron Device Business of Communications & Power Industries (“CPI's Electron Device Business”), the second quarter fiscal 2024 acquisition of FPT Industries LLC (“FPT”) and the third quarter fiscal 2023 acquisition of Calspan Corporation ("Calspan").
•Cost of Sales and Gross Profit. Cost of sales increased by $111 million, or 15.5%, to $826 million for the thirteen week period ended June 29, 2024 compared to $715 million for the thirteen week period ended July 1, 2023. Cost of sales and the related percentage of net sales for the thirteen week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | | | |
| June 29, 2024 | | July 1, 2023 | | Change | | % Change |
| Cost of sales - excluding costs below | $ | 825 | | | $ | 719 | | | $ | 106 | | | 14.7 | % |
| % of net sales | 40.3 | % | | 41.2 | % | | | | |
| Non-cash stock and deferred compensation expense | 5 | | | 5 | | | — | | | — | % |
| % of net sales | 0.2 | % | | 0.3 | % | | | | |
| Inventory acquisition accounting adjustments | 5 | | | — | | | 5 | | | 100.0 | % |
| % of net sales | 0.2 | % | | — | % | | | | |
| Foreign currency gains | (2) | | | (1) | | | (1) | | | 100.0 | % |
| % of net sales | (0.1) | % | | (0.1) | % | | | | |
| Loss contract amortization | (7) | | | (8) | | | 1 | | | 12.5 | % |
| % of net sales | (0.3) | % | | (0.5) | % | | | | |
| Total cost of sales | $ | 826 | | | $ | 715 | | | $ | 111 | | | 15.5 | % |
| % of net sales | 40.4 | % | | 41.0 | % | | | | |
| Gross profit (Net sales less Total cost of sales) | $ | 1,220 | | | $ | 1,029 | | | $ | 191 | | | 18.6 | % |
| Gross profit percentage (Gross profit / Net sales) | 59.6 | % | | 59.0 | % | | | | |
| | | | | | | |
Cost of sales during the thirteen week period ended June 29, 2024 decreased as a percentage of net sales. This was primarily driven by 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) coupled with fixed overhead costs incurred being spread over a higher production volume, which contributed to the gross profit as a percentage of net sales increasing by 0.6 percentage points to 59.6% for the thirteen week period ended June 29, 2024 from 59.0% for the thirteen week period ended July 1, 2023.
•Selling and Administrative Expenses. Selling and administrative expenses increased by $39 million to $248 million, or 12.1% of net sales, for the thirteen week period ended June 29, 2024 from $209 million, or 12.0% of net sales, for the thirteen week period ended July 1, 2023. Selling and administrative expenses and the related percentage of net sales for the thirteen week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | | | |
| June 29, 2024 | | July 1, 2023 | | Change | | % Change |
| Selling and administrative expenses - excluding costs below | $ | 184 | | | $ | 155 | | | $ | 29 | | | 18.7 | % |
| % of net sales | 9.0 | % | | 8.9 | % | | | | |
| Non-cash stock and deferred compensation expense | 43 | | | 48 | | | (5) | | | (10.4) | % |
| % of net sales | 2.1 | % | | 2.8 | % | | | | |
| Acquisition transaction-related expenses | 18 | | | 4 | | | 14 | | | 350.0 | % |
| % of net sales | 0.9 | % | | 0.2 | % | | | | |
| Acquisition integration costs | 3 | | | 2 | | | 1 | | | 50.0 | % |
| % of net sales | 0.1 | % | | 0.1 | % | | | | |
| Total selling and administrative expenses | $ | 248 | | | $ | 209 | | | $ | 39 | | | 18.7 | % |
| % of net sales | 12.1 | % | | 12.0 | % | | | | |
| | | | | | | |
Excluding certain costs specified above, selling and administrative expenses as a percentage of net sales, selling and administrative expenses as a percentage of net sales for the thirteen week period ended June 29, 2024 were in line as a percentage of net sales (slight increase of 0.1%) compared to the thirteen week period ended July 1, 2023. The decrease in non-cash stock and deferred compensation expense was due to a reduction in the stock compensation expense attributable to stock option liability awards. Acquisition-related expenses are higher due to the increase in acquisition activity compared to prior year.
•Amortization of Intangible Assets. Amortization of intangible assets was $38 million for the thirteen week period ended June 29, 2024 compared to $37 million for the thirteen week period ended July 1, 2023. The increase in amortization expense of $1 million was primarily due to the amortization expense recognized on intangible assets from the fiscal 2024 acquisitions. The intangible assets recognized in connection with the fiscal 2024 acquisitions are summarized in Note 6, “Intangible Assets,” to the condensed consolidated financial statements included herein.
•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, finance leases, interest income and the impact of interest rate swaps and caps designated and qualifying as cash flow hedges. Interest expense-net increased $25 million, or 8.6%, to $316 million for the thirteen week period ended June 29, 2024 from $291 million for the comparable thirteen week period in the prior fiscal year. The increase in interest expense-net was primarily due to an increase in outstanding borrowings (refer to Note 7, “Debt” in the notes to the condensed consolidated financial statements included herein for additional details). This was partially offset by a $20 million increase in interest income. The weighted average interest rate for cash interest payments on total borrowings outstanding was 6.2% for the thirteen week period ended June 29, 2024 compared to 6.1% for the thirteen week period ended July 1, 2023.
•Refinancing Costs. Refinancing costs of $30 million incurred for the thirteen week period ended June 29, 2024 were primarily related to the write-off of unamortized debt issuance costs recorded in conjunction with the redemption of the 7.50% senior subordinated notes due 2027 (the “7.50% 2027 Notes”) and the write-off of unamortized original issue discount and debt issuance costs in conjunction with Amendment No. 16 Loan Modification Agreement and Refinancing Facility Agreement (herein, “Amendment No. 16”) to the Second Amended and Restated Credit Agreement, dated June 4, 2014 (the “Credit Agreement”). Refer to Note 7, “Debt,” in the notes to the condensed consolidated financial statements included herein for additional details. Refinancing costs of $32 million incurred for the thirteen week period ended July 1, 2023 were primarily related to the redemption of the 8.00% secured notes due 2025 (the “2025 Secured Notes”).
•Other Income. Other income was $14 million for the thirteen week period ended June 29, 2024 compared to $9 million for the thirteen week period ended July 1, 2023. Other income for the thirteen week period ended June 29, 2024 primarily related to a gain on sale of business. Other income for the thirteen week period ended July 1, 2023 primarily related to a $9 million cash refund received for the Esterline Retirement Plan (the “ERP”) upon the finalizing of the group annuity purchase funding.
•Income Tax Provision. Income tax expense as a percentage of income before income taxes was approximately 23.4% for the thirteen week period ended June 29, 2024 compared to 24.9% for the thirteen week period ended July 1, 2023. The Company’s lower effective tax rate for the thirteen week period ended June 29, 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.
•Net Income Attributable to TD Group. Net income attributable to TD Group increased $110 million, or 31.3%, to $461 million for the thirteen week period ended June 29, 2024 compared to net income attributable to TD Group of $351 million for the thirteen week period ended July 1, 2023, primarily as a result of the factors referenced above.
•Earnings per Share. Basic and diluted earnings per share was $7.96 for the thirteen week period ended June 29, 2024 and $6.14 for the thirteen week period ended July 1, 2023.
Business Segments
•Segment Net Sales. Net sales by segment for the thirteen week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Week Periods Ended | | | | |
| June 29, 2024 | | % of Net Sales | | July 1, 2023 | | % of Net Sales | | Change | | % Change |
| Power & Control | $ | 1,023 | | | 50.0 | % | | $ | 861 | | | 49.4 | % | | $ | 162 | | | 18.8 | % |
| Airframe | 974 | | | 47.6 | % | | 835 | | | 47.9 | % | | 139 | | | 16.6 | % |
| Non-aviation | 49 | | | 2.4 | % | | 48 | | | 2.7 | % | | 1 | | | 2.1 | % |
| Net sales | $ | 2,046 | | | 100.0 | % | | $ | 1,744 | | | 100.0 | % | | $ | 302 | | | 17.3 | % |
Net sales for the Power & Control segment increased $162 million, an increase of 18.8%, for the thirteen week period ended June 29, 2024 compared to the thirteen week period ended July 1, 2023. The sales increase resulted primarily from increases in organic sales in defense ($65 million, an increase of 15.9%), commercial OEM ($42 million, an increase of 25.9%) and commercial aftermarket ($33 million, an increase of 12.5%). The increase in defense sales is primarily attributable to improving U.S. government defense spend outlays. The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries. The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in the third quarter of fiscal 2024 compared to fiscal 2023.
Net sales for the Airframe segment increased $139 million, an increase of 16.6%, for the thirteen week period ended June 29, 2024 compared to the thirteen week period ended July 1, 2023. The sales increase resulted primarily from increases in organic sales in commercial OEM ($45 million, an increase of 21.3%), commercial aftermarket ($28 million, an increase of 9.7%) and defense ($26 million, an increase of 9.4%). The increase in commercial OEM sales, commercial aftermarket sales and defense sales for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment.
Acquisition sales for the Power & Control and Airframe segments contributed approximately $48 million in aggregate to the increase in net sales. Acquisition sales represent net sales from acquired businesses for the period up to one year from the respective acquisition date.
The change in Non-aviation net sales compared to the thirteen week period in the prior fiscal year was not material.
•EBITDA As Defined. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure. EBITDA As Defined by segment for the thirteen week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Week Periods Ended | | | | |
| | June 29, 2024 | | % of Segment
Net Sales | | July 1, 2023 | | % of Segment
Net Sales | | Change | | % Change |
| Power & Control | $ | 587 | | | 57.4 | % | | $ | 487 | | | 56.6 | % | | $ | 100 | | | 20.5 | % |
| Airframe | 503 | | | 51.6 | % | | 417 | | | 49.9 | % | | 86 | | | 20.6 | % |
| Non-aviation | 22 | | | 44.9 | % | | 21 | | | 43.8 | % | | 1 | | | 4.8 | % |
| Total segment EBITDA As Defined | 1,112 | | | 54.3 | % | | 925 | | | 53.0 | % | | 187 | | | 20.2 | % |
| Less: Unallocated corporate EBITDA As Defined | 21 | | | 1.0 | % | (1) | 10 | | | 0.5 | % | (1) | 11 | | | 110.0 | % |
| Total Company EBITDA As Defined | $ | 1,091 | | | 53.3 | % | (1) | $ | 915 | | | 52.5 | % | (1) | $ | 176 | | | 19.2 | % |
(1)Calculated as a percentage of consolidated net sales.
EBITDA As Defined for the Power & Control segment increased approximately $100 million, an increase of 20.5%, resulting from higher organic sales in the defense, commercial OEM and commercial aftermarket channels. Also contributing to the increase in EBITDA As Defined was the application of our three core value-driven operating strategy and positive leverage on our fixed overhead costs spread over a higher production volume despite the ongoing inflationary environment for freight, labor and certain raw materials.
EBITDA As Defined for the Airframe segment increased approximately $86 million, an increase of 20.6%. The increase in EBITDA as Defined for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment.
EBITDA As Defined from acquisitions for the Power & Control and Airframe segments contributed approximately $17 million in aggregate to the increase in EBITDA As Defined. EBITDA As Defined from acquisitions represents EBITDA As Defined from acquired businesses for the period up to one year from the respective acquisition date.
The change in Non-aviation EBITDA As Defined compared to the thirteen week period in the prior fiscal year was not material.
Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. An immaterial amount of corporate expenses is allocated to the operating segments.
Thirty-nine week period ended June 29, 2024 compared with the thirty-nine week period ended July 1, 2023
Total Company
•Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the thirty-nine week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Periods Ended | | | | % Change
Net Sales |
| June 29, 2024 | | July 1, 2023 | | Change | |
| Organic sales | $ | 5,563 | | | $ | 4,723 | | | $ | 840 | | | 17.7 | % |
| Acquisition sales | 191 | | | 10 | | | 181 | | | 3.8 | % |
| Net sales | $ | 5,754 | | | $ | 4,733 | | | $ | 1,021 | | | 21.6 | % |
Organic sales represent net sales from existing businesses owned by the Company, excluding sales from acquisitions. Acquisition sales represent net sales from acquired businesses for the period up to one year from the respective acquisition date. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Refer to Note 2, “Acquisitions,” in the notes to the condensed consolidated financial statements included herein for further information on the Company's recent acquisitions activity.
The increase in organic sales of $840 million for the thirty-nine week period ended June 29, 2024 compared to the thirty-nine week period ended July 1, 2023 is primarily related to increases in defense sales ($367 million, an increase of 20.1%), commercial OEM sales ($243 million, an increase of 23.2%) and commercial aftermarket sales ($204 million, an increase of 13.1%). The increase in defense sales is primarily attributable to improving U.S. government defense spend outlays. The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries. The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in the first nine months of fiscal 2024 compared to fiscal 2023, particularly internationally.
The increase in acquisition sales for the thirty-nine week period ended June 29, 2024 is primarily attributable to the third quarter fiscal 2024 acquisition of CPI's Electron Device Business, the second quarter fiscal 2024 acquisition of FPT and the third quarter fiscal 2023 acquisition of Calspan.
•Cost of Sales and Gross Profit. Cost of sales increased by $358 million, or 18.1%, to $2,341 million for the thirty-nine week period ended June 29, 2024 compared to $1,983 million for the thirty-nine week period ended July 1, 2023. Cost of sales and the related percentage of net sales for the thirty-nine week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Periods Ended | | | | |
| June 29, 2024 | | July 1, 2023 | | Change | | % Change |
| Cost of sales - excluding costs below | $ | 2,338 | | | $ | 1,973 | | | $ | 365 | | | 18.5 | % |
| % of net sales | 40.6 | % | | 41.7 | % | | | | |
| Non-cash stock and deferred compensation expense | 16 | | | 14 | | | 2 | | | 14.3 | % |
| % of net sales | 0.3 | % | | 0.3 | % | | | | |
| Inventory acquisition accounting adjustments | 8 | | | 2 | | | 6 | | | 300.0 | % |
| % of net sales | 0.1 | % | | — | % | | | | |
| Foreign currency losses | 3 | | | 21 | | | (18) | | | (85.7) | % |
| % of net sales | 0.1 | % | | 0.4 | % | | | | |
| Loss contract amortization | (24) | | | (27) | | | 3 | | | 11.1 | % |
| % of net sales | (0.4) | % | | (0.6) | % | | | | |
| Total cost of sales | $ | 2,341 | | | $ | 1,983 | | | $ | 358 | | | 18.1 | % |
| % of net sales | 40.7 | % | | 41.9 | % | | | | |
| Gross profit (Net sales less Total cost of sales) | $ | 3,413 | | | $ | 2,750 | | | $ | 663 | | | 24.1 | % |
| Gross profit percentage (Gross profit / Net sales) | 59.3 | % | | 58.1 | % | | | | |
| | | | | | | |
Cost of sales during the thirty-nine week period ended June 29, 2024 decreased as a percentage of net sales despite increased inflationary pressures. This was primarily driven by 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) coupled with fixed overhead costs incurred being spread over a higher production volume, which contributed to the gross profit as a percentage of net sales increasing by 1.2 percentage points to 59.3% for the thirty-nine week period ended June 29, 2024 from 58.1% for the thirty-nine week period ended July 1, 2023.
Foreign exchange rates, particularly the U.S. dollar compared to the British pound and the euro, weakened at a more significant rate in the first three quarters of fiscal 2023 compared to fiscal 2024, resulting in a decrease in foreign currency losses in fiscal 2024.
•Selling and Administrative Expenses. Selling and administrative expenses increased by $137 million to $715 million, or 12.4% of net sales, for the thirty-nine week period ended June 29, 2024 from $578 million, or 12.2% of net sales, for the thirty-nine week period ended July 1, 2023. Selling and administrative expenses and the related percentage of net sales for the thirty-nine week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Periods Ended | | | | |
| June 29, 2024 | | July 1, 2023 | | Change | | % Change |
| Selling and administrative expenses - excluding costs below | $ | 537 | | | $ | 454 | | | $ | 83 | | | 18.3 | % |
| % of net sales | 9.3 | % | | 9.6 | % | | | | |
| Non-cash stock and deferred compensation expense | 142 | | | 117 | | | 25 | | | 21.4 | % |
| % of net sales | 2.5 | % | | 2.5 | % | | | | |
| Acquisition transaction-related expenses | 29 | | | 5 | | | 24 | | | 480.0 | % |
| % of net sales | 0.5 | % | | 0.1 | % | | | | |
| Acquisition integration costs | 5 | | | 5 | | | — | | | — | % |
| % of net sales | 0.1 | % | | 0.1 | % | | | | |
| Bad debt expense | 2 | | | (3) | | | 5 | | | 166.7 | % |
| % of net sales | — | % | | (0.1) | % | | | | |
| Total selling and administrative expenses | $ | 715 | | | $ | 578 | | | $ | 137 | | | 23.7 | % |
| % of net sales | 12.4 | % | | 12.2 | % | | | | |
| | | | | | | |
Excluding certain costs specified above, selling and administrative expenses as a percentage of net sales for the thirty-nine week period ended June 29, 2024 decreased compared to the thirty-nine week period ended July 1, 2023 despite the higher inflationary environment compared to a year ago due to continued strategic cost mitigation efforts. The increase in non-cash stock and deferred compensation expense is primarily attributable to the increase in the Black-Scholes fair value of the stock option grants impacting non-cash stock compensation expense. The increase in the Black-Scholes fair value is due to the appreciation of the stock price, which is a key assumption used to determine the Black-Scholes fair value. Acquisition-related expenses increased due to an increase in acquisition activity compared to prior year. Bad debt expense for the thirty-nine week period ended July 1, 2023 was favorably impacted by a reduction in the allowance for uncollectible accounts due to improving market conditions within commercial aerospace and the resulting reduction in assessed risk associated with the collectibility of certain trade accounts receivable.
•Amortization of Intangible Assets. Amortization of intangible assets was $110 million for the thirty-nine week period ended June 29, 2024 compared to $105 million for the thirty-nine week period ended July 1, 2023. The increase in amortization expense of $5 million was primarily due to the amortization expense recognized on intangible assets from the third quarter fiscal 2023 acquisition of Calspan and the fiscal 2024 acquisitions. The intangible assets recognized in connection with the fiscal 2024 acquisitions are summarized in Note 6, “Intangible Assets,” to the condensed consolidated financial statements included herein.
•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, finance leases, interest income and the impact of interest rate swaps and caps designated and qualifying as cash flow hedges. Interest expense-net increased $71 million, or 8.1%, to $943 million for the thirty-nine week period ended June 29, 2024 from $872 million for the comparable thirty-nine week period in the prior fiscal year. The increase in interest expense-net was primarily due to an increase in the base rate, Term Secured Overnight Financing Rate (“Term SOFR”), to the portion of our variable rate debt that is not hedged (refer to Note 10, “Derivatives and Hedging Activities” for information on our hedges), as well as an increase in outstanding borrowings (refer to Note 7, “Debt” in the notes to the condensed consolidated financial statements included herein for additional details). This was partially offset by a $54 million increase in interest income. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirty-nine week periods ended June 29, 2024 and July 1, 2023 was 6.1%.
•Refinancing Costs. Refinancing costs of $59 million incurred for the thirty-nine week period ended June 29, 2024 were primarily related to the third party fees and write-off of unamortized debt issuance costs and original issue discount recorded in conjunction with the amendments to the Credit Agreement and the third party fees and write-off of unamortized debt issuance costs recorded in conjunction with the notes redemptions completed during the thirty-nine week period ended June 29, 2024. Refer to Note 7, “Debt,” in the notes to the condensed consolidated financial statements included herein for additional details. Refinancing costs of $41 million incurred for the thirty-nine week period ended July 1, 2023 were primarily related to the redemption of the 2025 Secured Notes and third party fees incurred for the refinancing activity under the amendments to the Credit Agreement completed during the thirty-nine week period ended July 1, 2023.
•Other Income. Other income was $24 million for the thirty-nine week period ended June 29, 2024 compared to $12 million recorded for the thirty-nine week period ended July 1, 2023. Other income for the thirty-nine week period ended June 29, 2024 primarily related to a gain on sale of business, royalty and other income and the non-service related components of benefit costs on the Company's benefit plans. Other income for the thirty-nine week period ended July 1, 2023 primarily related to a $9 million cash refund received for the ERP upon the finalizing of the group annuity purchase funding.
•Income Tax Provision. Income tax expense as a percentage of income before income taxes was approximately 22.5% for the thirty-nine week period ended June 29, 2024 compared to 24.1% for the thirty-nine week period ended July 1, 2023. The Company’s lower effective tax rate for the thirty-nine week period ended June 29, 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.
•Net Income Attributable to TD Group. Net income attributable to TD Group increased $363 million, or 41.1%, to $1,246 million for the thirty-nine week period ended June 29, 2024 compared to net income attributable to TD Group of $883 million for the thirty-nine week period ended July 1, 2023, primarily as a result of the factors referenced above.
•Earnings per Share. Basic and diluted earnings per share from continuing operations was $19.81 for the thirty-nine week period ended June 29, 2024 and $14.80 for the thirty-nine week period ended July 1, 2023. Net income attributable to TD Group for the thirty-nine week period ended June 29, 2024 of $1,246 million was decreased by dividend equivalent payments of $101 million, or $1.75 per share, resulting in net income applicable to TD Group common stockholders of $1,145 million. Net income attributable to TD Group for the thirty-nine week period ended July 1, 2023 of $883 million was decreased by dividend equivalent payments of $38 million, or $0.67 per share, resulting in net income applicable to TD Group common stockholders of $845 million.
Business Segments
•Segment Net Sales. Net sales by segment for the thirty-nine week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Thirty-Nine Week Periods Ended | | | | |
| June 29, 2024 | | % of Net Sales | | July 1, 2023 | | % of Net Sales | | Change | | % Change |
| Power & Control | $ | 2,821 | | | 49.0 | % | | $ | 2,402 | | | 50.7 | % | | $ | 419 | | | 17.4 | % |
| Airframe | 2,795 | | | 48.6 | % | | 2,204 | | | 46.6 | % | | 591 | | | 26.8 | % |
| Non-aviation | 138 | | | 2.4 | % | | 127 | | | 2.7 | % | | 11 | | | 8.7 | % |
| Net sales | $ | 5,754 | | | 100.0 | % | | $ | 4,733 | | | 100.0 | % | | $ | 1,021 | | | 21.6 | % |
Net sales for the Power & Control segment increased $419 million, an increase of 17.4%, for the thirty-nine week period ended June 29, 2024 compared to the thirty-nine week period ended July 1, 2023. The sales increase resulted primarily from increases in organic sales in defense ($194 million, an increase of 17.4%), commercial OEM ($101 million, an increase of 22.8%) and commercial aftermarket ($99 million, an increase of 12.9%). The increase in defense sales is primarily attributable to improving U.S. government defense spend outlays. The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries. The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in the first three quarters of fiscal 2024 compared to fiscal 2023, particularly internationally.
Net sales for the Airframe segment increased $591 million, an increase of 26.8%, for the thirty-nine week period ended June 29, 2024 compared to the thirty-nine week period ended July 1, 2023. The sales increase resulted primarily from increases in organic sales in defense ($173 million, an increase of 24.4%), commercial OEM ($139 million, an increase of 23.6%) and commercial aftermarket ($105 million, an increase of 13.4%). The increase in defense sales, commercial OEM sales and commercial aftermarket sales for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment.
Acquisition sales for the Power & Control and Airframe segments contributed approximately $181 million in aggregate to the increase in net sales. Acquisition sales represent net sales from acquired businesses for the period up to one year from the respective acquisition date.
The change in Non-aviation net sales compared to the thirty-nine week period in the prior fiscal year was not material.
•EBITDA As Defined. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure. EBITDA As Defined by segment for the thirty-nine week periods ended June 29, 2024 and July 1, 2023 were as follows (amounts in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirty-Nine Week Periods Ended | | | | |
| | June 29, 2024 | | % of Segment
Net Sales | | July 1, 2023 | | % of Segment
Net Sales | | Change | | % Change |
| Power & Control | $ | 1,615 | | | 57.2 | % | | $ | 1,341 | | | 55.8 | % | | $ | 274 | | | 20.4 | % |
| Airframe | 1,443 | | | 51.6 | % | | 1,101 | | | 50.0 | % | | 342 | | | 31.1 | % |
| Non-aviation | 59 | | | 42.8 | % | | 52 | | | 40.9 | % | | 7 | | | 13.5 | % |
| Total segment EBITDA As Defined | 3,117 | | | 54.2 | % | | 2,494 | | | 52.7 | % | | 623 | | | 25.0 | % |
| Less: Unallocated corporate EBITDA As Defined | 94 | | | 1.7 | % | (1) | 62 | | | 1.3 | % | (1) | 32 | | | 51.6 | % |
| Total Company EBITDA As Defined | $ | 3,023 | | | 52.5 | % | (1) | $ | 2,432 | | | 51.4 | % | (1) | $ | 591 | | | 24.3 | % |
(1)Calculated as a percentage of consolidated net sales.
EBITDA As Defined for the Power & Control segment increased approximately $274 million, an increase of 20.4%, resulting from higher organic sales in the defense, commercial OEM and commercial aftermarket channels. Also contributing to the increase in EBITDA As Defined was the application of our three core value-driven operating strategy and positive leverage on our fixed overhead costs spread over a higher production volume despite the ongoing inflationary environment for freight, labor and certain raw materials.
EBITDA As Defined for the Airframe segment increased approximately $342 million, an increase of 31.1%. The increase in EBITDA As Defined for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment.
EBITDA As Defined from acquisitions for the Power & Control and Airframe segments contributed approximately $60 million in aggregate to the increase in EBITDA As Defined. EBITDA As Defined from acquisitions represents EBITDA As Defined from acquired businesses for the period up to one year from the respective acquisition date.
The change in Non-aviation EBITDA As Defined compared to the thirty-nine week period in the prior fiscal year was not material.
Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. An immaterial amount of corporate expenses is allocated to the operating segments. The increase compared to the thirty-nine week period in the prior fiscal year is primarily attributable to the current fiscal year portion of the deferred compensation plan adopted in the fourth quarter of fiscal 2022 for certain members of non-executive management.
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.
The following tables present selected balance sheet, cash flow and other financial data relevant to the liquidity or capital resources of the Company for the periods specified below (amounts in millions):
| | | | | | | | | | | |
| June 29, 2024 | | September 30, 2023 |
| Selected Balance Sheet Data: | | | |
| Cash and cash equivalents | $ | 3,360 | | | $ | 3,472 | |
| Working capital (Total current assets less total current liabilities) | 5,210 | | | 5,159 | |
| Total assets | 21,828 | | | 19,970 | |
Total debt (1) | 21,892 | | | 19,750 | |
| TD Group stockholders’ deficit | (2,518) | | | (1,984) | |
(1)Includes debt issuance costs, original issue discount and premiums. Reference Note 7, “Debt,” in the notes to the condensed consolidated financial statements included herein for additional information. | | | | | | | | | | | |
| Thirty-Nine Week Periods Ended |
| June 29, 2024 | | July 1, 2023 |
| Selected Cash Flow and Other Financial Data: | | | |
| Cash flows provided by (used in): | | | |
| Operating activities | $ | 1,473 | | | $ | 913 | |
| Investing activities | (1,739) | | | (852) | |
| Financing activities | 152 | | | (11) | |
| Capital expenditures | 124 | | | 102 | |
Ratio of earnings to fixed charges (1) | 2.7x | | 2.3x |
(1)For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings from operations before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs, original issue discount and premium and the “interest component” of rental expense.
Significant Transactions of Fiscal 2024
On November 27, 2023, the Company paid a special cash dividend of $35.00 on each outstanding share of common stock and cash dividend equivalent payments on eligible vested options outstanding under its stock option plans. Total cash payments, funded by existing cash on hand, of special dividend and dividend equivalents from this declaration were approximately $2,020 million.
On November 28, 2023, the Company completed the issuance of $2,000 million in new senior debt ($1,000 million in 7.125% senior secured notes due 2031 and $1,000 million in Tranche J term loans), which was used to fund the acquisition of CPI's Electron Device Business (completed in the third quarter of fiscal 2024) and for general corporate purposes.
On December 28, 2023, the Company drew the remaining $100 million available on its trade receivable securitization facility.
On February 27, 2024, the Company amended the terms under its revolving credit facility to, among other things, extend the maturity date from May 2026 to February 2029 and increase the total commitments capacity from $810 million to $910 million. Concurrently, the Company completed the issuance of $4,400 million in new secured debt ($2,200 million in 6.375% senior secured notes due 2029 and $2,200 million in 6.625% senior secured notes due 2032), which was used to redeem all of its outstanding $4,400 million in 6.25% senior secured notes due 2026.
On March 22, 2024, the Company repriced all of its $4,525 million in existing Tranche I term loans maturing August 2028 to bear interest at Term SOFR plus 2.75% (a decrease from Term SOFR plus 3.25% previously applicable) and replaced all of its $1,708 million in existing Tranche H term loans due February 2027 with new Tranche K term loans maturing March 2030 and bear interest at the same rate applied to the existing Tranche I term loans. Concurrently, the Company issued an additional $550 million in 6.375% senior secured notes due 2029 (tack-on to the $2,200 million issued during February 2024), which was used to redeem all of its outstanding $550 million in 7.50% senior subordinated notes due 2027 on April 22, 2024.
On May 21, 2024, the Company completed an acquisition of all the outstanding stock of SEI for approximately $170 million in cash, including certain tax benefits.
On June 4, 2024, the Company repriced all of its $997 million in existing Tranche J term loans to bear interest at Term SOFR plus 2.50% compared to Term SOFR plus 3.25% applicable prior to the transaction; and (ii) amended and extended $2,644 million in existing Tranche I term loans maturing August 24, 2028 and converting such loans into Tranche J term loans maturing February 28, 2031.
On June 6, 2024, the Company completed the acquisition of all the outstanding stock of CPI's Electron Device Business for approximately $1,385 million in cash. The acquisition was financed through existing cash on hand, inclusive of a portion of the cash proceeds from the $2,000 million in new senior debt issued in the first quarter of fiscal 2024.
* * * * *
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.
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.
The Company's objective is to maintain an allocation of at least 75% fixed rate and 25% variable rate debt thereby limiting its exposure to changes in near-term interest rates. Interest rate swaps, caps and collars used to hedge and offset, respectively, the variable interest rates on our term loans are further described in Note 10, “Derivatives and Hedging Activities,” in the notes to the condensed consolidated financial statements included herein. As of June 29, 2024, approximately 80% of our gross debt was fixed rate.
As of June 29, 2024, the Company has significant cash liquidity as illustrated in the table presented below (in millions):
| | | | | |
| As of June 29, 2024 |
| Cash and cash equivalents | $ | 3,360 | |
| Availability on revolving credit facility | 839 | |
| Cash liquidity | $ | 4,199 | |
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, draws on the revolving credit facility. Long-term cash liquidity requirements consist primarily of obligations under our long-term debt agreements. There is no maturity on any tranche of term loans or notes until November 2027.
In connection with the continued 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), 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, 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.
The Company may issue additional debt if prevailing market conditions are favorable to doing so. In addition, 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 common 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 $1,473 million of net cash from operating activities during the thirty-nine week period ended June 29, 2024 compared to $913 million during the thirty-nine week period ended July 1, 2023.
The change in accounts receivable during the thirty-nine week period ended June 29, 2024 was a use of cash of $22 million compared to a use of cash of $134 million during the thirty-nine week period ended July 1, 2023. The decrease in the use of cash of $112 million is primarily attributable to the timing of cash receipts. The Company continues to actively manage its accounts receivable, the related agings and collection efforts.
The change in inventories during the thirty-nine week period ended June 29, 2024 was a use of cash of $140 million compared to a use of cash of $244 million during the thirty-nine week period ended July 1, 2023. The decrease in the use of cash of $104 million is primarily driven by higher sales activity partially offset by increased purchasing from higher demand. The Company continues to actively and strategically manage inventory levels in response to the ongoing supply chain challenges.
The change in accounts payable during the thirty-nine week period ended June 29, 2024 was a use of cash of $9 million compared to a use of cash of $4 million during the thirty-nine week period ended July 1, 2023. The change is due to the timing of payments to suppliers.
Investing Activities. Net cash used in investing activities was $1,739 million during the thirty-nine week period ended June 29, 2024, consisting of $1,686 million from the acquisitions of CPI's Electron Device Business, SEI, FPT and certain product lines completed during the first nine months of fiscal 2024, capital expenditures of $124 million; partially offset by other investing transactions of $71 million.
Net cash used in investing activities was $852 million during the thirty-nine week period ended July 1, 2023, consisting of the acquisition of Calspan for $729 million, certain product line acquisitions aggregating to $21 million and capital expenditures of $102 million.
Financing Activities. Net cash provided by financing activities was $152 million during the thirty-nine week period ended June 29, 2024. The source of cash was primarily attributable to the net proceeds of short-term and long-term debt, including fees, of $1,977 million, plus proceeds from stock option exercises of $213 million, primarily offset by dividend and dividend equivalent payments of $2,038 million.
Net cash used in financing activities was $11 million during the thirty-nine week period ended July 1, 2023. The use of cash was primarily attributable to the net repayment of short-term and long-term debt, including fees, of $152 million, plus dividend and dividend equivalent payments of $38 million, primarily offset by proceeds from stock option exercises of $179 million.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments, finance and operating leases, pension and post-retirement benefit plans and purchase obligations. During the thirty-nine week period ended June 29, 2024, other than the financing activity further described in Note 7, “Debt,” in the notes to the condensed consolidated financial statements included herein, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Description of Senior Secured Term Loans and Indentures
Senior Secured Term Loans Facilities
On November 28, 2023, the Company entered into Amendment No. 13 and Incremental Term Loan Assumption Agreement (herein, “Amendment No. 13”) to 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 bore interest at a rate of 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.
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 interest rate for revolving credit loans to Term SOFR plus 2.25% compared to Term SOFR plus 2.50% applicable prior to Amendment No. 14.
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 $4.3 million, and bear interest at Term SOFR plus 2.75%. The Tranche K term loans were fully drawn on March 22, 2024 and the other terms and conditions that apply to the Tranche K term loans are substantially the same as the terms and conditions that apply to the term loans immediately prior to Amendment No. 15.
On June 4, 2024, the Company entered into Amendment No. 16 Loan Modification Agreement and Refinancing Facility Agreement (herein, “Amendment No. 16”) to the Credit Agreement. Under the terms of Amendment No. 16, the Company, among other things, (i) repriced the interest rate on $997 million of existing Tranche J term loans to bear interest at Term SOFR plus 2.50% compared to Term SOFR plus 3.25% applicable prior to Amendment No. 16; and (ii) amends and extends $2,644 million of existing Tranche I term loans maturing August 24, 2028 and converting such loans into Tranche J term loans maturing February 28, 2031. The other terms and conditions that apply to the Tranche I and Tranche J term loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 16.
As of June 29, 2024, TransDigm has $7,220 million in fully drawn term loans (the “Term Loans Facility”) and an $910 million revolving credit facility. The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as of June 29, 2024):
| | | | | | | | | | | | | | | | | | | | |
| Term Loans Facility | | Aggregate Principal | | Maturity Date | | Interest Rate |
| Tranche I | | $1,876 million | | August 24, 2028 | | Term SOFR plus 2.75% |
| Tranche J | | $3,641 million | | February 28, 2031 | | Term SOFR plus 2.50% |
| Tranche K | | $1,703 million | | March 22, 2030 | | Term SOFR plus 2.75% |
The Term Loans Facility requires quarterly aggregate principal payments of $18 million. The revolving commitments consist of two tranches which include up to $139 million of multicurrency revolving commitments. At June 29, 2024, the Company had $71 million in letters of credit outstanding and $839 million in borrowings available under the revolving commitments. Draws on the revolving commitments are subject to an interest rate of Term SOFR plus 2.25%. The unused portion of the revolving commitments is subject to a fee of 0.5% per annum. The maturity date of the revolving credit facility is February 27, 2029.
The interest rates per annum applicable to the Term Loans Facility under the Credit Agreement are, at TransDigm’s option, equal to either an alternate base rate or an adjusted Term SOFR for one, three or six-month interest periods chosen by TransDigm, in each case plus an applicable margin percentage. The adjusted Term SOFR related to the Term Loans Facility are not subject to a floor. Refer to Note 10, “Derivatives and Hedging Activities,” in the notes to the condensed consolidated financial statements included herein for information about how our interest rate swaps, cap and collar agreements are used to hedge and offset, respectively, the variable interest rate portion of our debt.
Indentures
The following table represents the senior subordinated and secured notes outstanding as of June 29, 2024:
| | | | | | | | | | | | | | | | | | | | |
| Description | | Aggregate Principal | | Maturity Date | | Interest Rate |
| 5.50% 2027 Notes | | $2,650 million | | November 15, 2027 | | 5.50% |
| 2028 Secured Notes | | $2,100 million | | August 15, 2028 | | 6.75% |
| 4.625% 2029 Notes | | $1,200 million | | January 15, 2029 | | 4.625% |
| 4.875% 2029 Notes | | $750 million | | May 1, 2029 | | 4.875% |
| 2029 Secured Notes | | $2,750 million | | March 1, 2029 | | 6.375% |
| 2030 Secured Notes | | $1,450 million | | December 15, 2030 | | 6.875% |
| 2031 Secured Notes | | $1,000 million | | December 1, 2031 | | 7.125% |
| 2032 Secured Notes | | $2,200 million | | March 1, 2032 | | 6.625% |
The 5.50% 2027 Notes, the 4.625% 2029 Notes and the 4.875% 2029 Notes (collectively, the “Subordinated Notes”) were issued at a price of 100.00% of the principal amount. The 2030 Secured Notes and 2032 Secured Notes (which, along with the 2028 Secured Notes, 2029 Secured Notes and 2031 Secured Notes, are collectively referred to as the “Secured Notes”) was issued at a price of 100.00% of its principal amount. The initial $1,000 million offering and the subsequent $1,100 million offering of the 6.75% senior secured notes due 2028 (collectively, the “2028 Secured Notes”) in the second quarter of fiscal 2023 were issued at a price of 100.00% and 99.00%, respectively, of their principal amount, resulting in gross proceeds of $2,089 million. The 2031 Secured Notes was issued in the first quarter of fiscal 2024 at a price of 99.25% of its principal amount, resulting in gross proceeds of $993 million. The initial $2,200 million offering and subsequent $550 million offering of the 6.375% senior secured notes due 2029 (collectively, the “2029 Secured Notes”) in the second quarter of fiscal 2024 were issued at a price of 100.00% and 99.75%, respectively, of their principal amount, resulting in gross proceeds of $2,749 million.
The Subordinated Notes and Secured Notes do not require principal payments prior to their maturity. Interest under the Subordinated Notes and Secured Notes are payable semi-annually. The Subordinated Notes represent our unsecured obligations ranking subordinate to our senior debt, as defined in the applicable indentures. The Secured Notes represent our secured obligations ranking equally to all existing and future senior debt, as defined in the applicable indentures. The Subordinated Notes and 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 Subordinated Notes and Secured Notes.
Guarantor Information
The Subordinated Notes are subordinated to all of our existing and future senior secured debt, including indebtedness under TransDigm’s existing senior secured credit facilities, 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 Subordinated Notes. The Subordinated Notes are fully and unconditionally guaranteed on a senior subordinated unsecured basis by TD Group, TransDigm UK and TransDigm Inc.’s Domestic Restricted Subsidiaries (as defined in the applicable indentures). The table set forth in Exhibit 22 filed with this Form 10-Q details the primary obligors and guarantors. The guarantees of the Subordinated 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 Subordinated Notes. The Subordinated Notes are structurally subordinated to all of the liabilities of TD Group’s non-guarantor subsidiaries.
The Secured Notes are senior secured debt 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 Subordinated Notes. The 2028 Secured Notes are guaranteed on a senior secured basis by TD Group, TransDigm UK and TransDigm Inc.’s Domestic Restricted Subsidiaries (as defined in the applicable indentures). The 2029 Secured Notes, 2030 Secured Notes, 2031 Secured Notes and 2032 Secured Notes are guaranteed on a senior secured basis by TD Group and each of TransDigm Inc.’s direct and indirect Restricted Subsidiaries (as defined in the applicable indenture) that is a borrower or guarantor under TransDigm’s senior secured credit facilities or that issues or guarantees any capital markets indebtedness of TransDigm Inc. or any of the guarantors in an aggregate principal amount of at least $200 million. As of the date of this Form 10-Q, the guarantors of the 2029 Secured Notes, 2030 Secured Notes, 2031 Secured Notes and 2031 Secured Notes are the same as the guarantors of the 2028 Secured Notes. The table set forth in Exhibit 22 filed with this Form 10-Q details the primary obligors and guarantors. 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.
Separate financial statements of TransDigm Inc. are not presented because the Subordinated Notes and Secured Notes are fully and unconditionally guaranteed on a senior subordinated unsecured basis (if Subordinated Notes) and senior secured basis (if Secured Notes) 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.
The financial information presented is that of TD Group, TransDigm Inc. and the other Guarantors, which includes 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, TransDigm Inc. and the other 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) | As of June 29, 2024 |
| Current assets | $ | 4,618 | |
| Goodwill | 7,863 | |
| Other non-current assets | 3,604 | |
| Current liabilities | 928 | |
| Non-current liabilities | 22,131 | |
| Amounts due (from) to subsidiaries that are non-issuers and non-guarantors-net | (2,360) | |
| | | | | |
| Thirty-Nine Week Period Ended |
| (in millions) | June 29, 2024 |
| Net sales | $ | 4,575 | |
| Sales to subsidiaries that are non-issuers and non-guarantors | 21 | |
| Cost of sales | 1,774 | |
| Expense from subsidiaries that are non-issuers and non-guarantors-net | 43 | |
| Income from operations | 912 | |
| Net income attributable to TD Group | 912 | |
Certain Restrictive Covenants in Our Debt Documents
The Credit Agreement and the Indentures governing the Notes and Secured 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. 15, executed on March 22, 2024.
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 and Secured 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 and the holders of the Secured Notes 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 40% (or, currently, $364 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 7.50x (or, solely with respect to the first four fiscal quarters ending after the consummation of any material acquisition, 8.00x) as of the last day of the fiscal quarter.
As of June 29, 2024, 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 Receivable 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 25, 2023, the Company amended the Securitization Facility to, among other things, increase the borrowing capacity from $350 million to $450 million and extend the maturity date to July 25, 2024. During the first quarter of fiscal 2024, the Company drew the remaining $100 million available under the Securitization Facility. As of June 29, 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 June 29, 2024, the applicable interest rate was 6.91%. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable.
On July 12, 2024, the Company amended the Securitization Facility to, among other things, (i) increase the borrowing capacity from $450 million to $650 million; and (ii) extend the maturity date to July 11, 2025 at an interest rate of Term SOFR plus 1.45% compared to an interest rate of Term SOFR plus 1.60% that applied prior to the amendment. The Company subsequently drew an additional $38 million available under the Securitization Facility in July 2024.
Dividend and Dividend Equivalent Payments
No dividends were declared in the third quarter of fiscal 2024. During the first quarter of fiscal 2024, the Company announced that TD Group's Board of Directors authorized and declared a special cash dividend of $35.00 on each outstanding share of common stock and cash dividend equivalent payments on eligible vested options outstanding under its stock option plans. Pursuant to the Fourth Amended and Restated TransDigm Group Incorporated 2006 Stock Incentive Plan Dividend Equivalent Plan, the Amended and Restated 2014 Stock Option Plan Dividend Equivalent Plan and the 2019 Stock Option Plan Dividend Equivalent Plan, all of the vested options granted under the existing stock option plans, except for grants to the members of the Board of Directors, are entitled to certain cash dividend equivalent payments in the event of the declaration of a dividend by the Company. In fiscal 2022, all members of the Board of Directors executed amendments to their option agreements in which future dividend declarations result in a reduction of the strike price of their existing options instead of receiving cash dividend equivalent payments.
On November 27, 2023, the Company paid the special cash dividend of $35.00 on each outstanding share of common stock, totaling $1,937 million. Dividend equivalent payments are made during the Company's first fiscal quarter each year and also upon payment of any dividends declared within the current fiscal year. Total dividend equivalent payments in the first quarter of fiscal 2024 and 2023 were 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.
Any future declaration of special cash dividends on our common stock will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions under the Credit Agreement and indentures governing the Notes, the availability of surplus under Delaware law and other factors deemed relevant by our Board of Directors. TD Group is a holding company and conducts all of its operations through direct and indirect subsidiaries. Unless TD Group receives dividends, distributions, advances, transfers of funds or other payments from our subsidiaries, TD Group will be unable to pay any dividends on our common stock in the future. The ability of any subsidiaries to take any of the foregoing actions is limited by the terms of our Term Loans Facility and indentures and may be limited by future debt or other agreements that we may enter into.
Off-Balance Sheet Arrangements
The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company’s revolving credit facility. As of June 29, 2024, the Company had $71 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 net income 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, 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 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 net income to EBITDA and EBITDA As Defined (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Week Periods Ended | | Thirty-Nine Week Periods Ended |
| | June 29, 2024 | | July 1, 2023 | | June 29, 2024 | | July 1, 2023 |
| Net Income | $ | 461 | | | $ | 352 | | | $ | 1,248 | | | $ | 885 | |
| Adjustments: | | | | | | | |
| Depreciation and amortization expense | 77 | | | 70 | | | 219 | | | 199 | |
| Interest expense-net | 316 | | | 291 | | | 943 | | | 872 | |
| Income tax provision | 141 | | | 117 | | | 362 | | | 281 | |
| EBITDA | 995 | | | 830 | | | 2,772 | | | 2,237 | |
| Adjustments: | | | | | | | |
Acquisition transaction-related expenses and adjustments (1) | 27 | | | 6 | | | 43 | | | 12 | |
Non-cash stock and deferred compensation expense (2) | 47 | | | 53 | | | 158 | | | 131 | |
Refinancing costs (3) | 30 | | | 32 | | | 59 | | | 41 | |
Other, net (4) | (8) | | | (6) | | | (9) | | | 11 | |
| EBITDA As Defined | $ | 1,091 | | | $ | 915 | | | $ | 3,023 | | | $ | 2,432 | |
| | | | | | | | |
| | |
(1) | | Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when inventory was sold; costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs for acquisitions comprising deal fees, legal, financial and tax due diligence expenses, and valuation costs that are required to be expensed as incurred. |
| | |
(2) | | Represents the compensation expense recognized by TD Group under our stock incentive plans and deferred compensation plans. |
| | |
(3) | | Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements. |
| | |
(4) | | Primarily represents foreign currency transaction (gains) or losses, payroll withholding taxes related to dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation payments and other miscellaneous (income) expense. |
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 |
| June 29, 2024 | | July 1, 2023 |
| Net cash provided by operating activities | $ | 1,473 | | | $ | 913 | |
| Adjustments: | | | |
| Changes in assets and liabilities, net of effects from acquisitions and sales of businesses | 218 | | | 345 | |
Interest expense-net (1) | 912 | | | 842 | |
| Income tax provision-current | 362 | | | 282 | |
| Loss contract amortization | 24 | | | 27 | |
Non-cash stock and deferred compensation expense (2) | (158) | | | (131) | |
Refinancing costs (3) | (59) | | | (41) | |
| EBITDA | 2,772 | | | 2,237 | |
| Adjustments: | | | |
Acquisition transaction-related expenses and adjustments (4) | 43 | | | 12 | |
Non-cash stock and deferred compensation expense (2) | 158 | | | 131 | |
Refinancing costs (3) | 59 | | | 41 | |
Other, net (5) | (9) | | | 11 | |
| EBITDA As Defined | $ | 3,023 | | | $ | 2,432 | |
| | | | | | | | |
| | |
(1) | | Represents interest expense, net of interest income, 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 and deferred compensation plans. |
| | |
(3) | | Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements. |
| | |
(4) | | Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when inventory was sold; costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs for acquisitions comprising deal fees, legal, financial and tax due diligence expenses, and valuation costs that are required to be expensed as incurred. |
| | |
(5) | | Primarily represents foreign currency transaction (gains) or losses, payroll withholding taxes related to dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation payments and other miscellaneous (income) expense. |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information called for by this item is provided under the caption “Description of Senior Secured Term Loans and Indentures” in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Market risks are described more fully within Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of our most recent Annual Report on Form 10-K (for the fiscal year ended September 30, 2023, filed on November 9, 2023). These market risks have not materially changed for the third quarter of fiscal year 2024.
ITEM 4. CONTROLS AND PROCEDURES
As of June 29, 2024, TD Group carried out an evaluation, under the supervision and with the participation of TD Group’s management, including its President, Chief Executive Officer and Director (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of TD Group’s disclosure controls and procedures. Based upon that evaluation, the President, Chief Executive Officer and Director and Chief Financial Officer concluded that TD Group’s disclosure controls and procedures are effective to ensure that information required to be disclosed by TD Group in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to TD Group’s management, including its President, Chief Executive Officer and Director and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, TD Group’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures.
During the fiscal quarter ended June 29, 2024, the Company completed the acquisitions of CPI's Electron Device Business and SEI. The Company is currently integrating the acquisitions into its operations, compliance programs and internal control processes. As permitted by SEC rules and regulations, the Company has excluded the acquisitions from management's evaluation of internal controls over financial reporting as of June 29, 2024. The acquisitions constituted approximately 8.0% of the Company's total assets (inclusive of acquired intangible assets) as of June 29, 2024, and approximately 0.4% and 0.0% of the Company's net sales and income from operations before income taxes, respectively, in the fiscal quarter ended June 29, 2024.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended June 29, 2024, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.