TRANSDIGM GROUP INC. Forward-looking Statements The following discussion of the Company's financial condition and results of operations should be read together withTD Group's 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 toTD Group ,TransDigm Inc. andTransDigm Inc.'s subsidiaries, unless the context otherwise indicates. This Quarterly Report on Form 10-Q contains both historical and "forward-looking statements" within the meaning of Section 21E of the Exchange Act, and 27A of the Securities Act. All statements other than statements of historical fact included that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like "believe," "may," "will," "should," "expect," "intend," "plan," "predict," "anticipate," "estimate" or "continue" and other words and terms of similar meaning. These forward-looking statements may be contained throughout this Quarterly Report on Form 10-Q. These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to, among other things, our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q, including the risks outlined under "Risk Factors," will be important in determining future results. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described under "Risk Factors" in the Quarterly Report on Form 10-Q. Since our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events anticipated by these forward-looking statements will occur or, if any of them does occur, what impact they will have on our business, results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. We do not undertake any obligation to update these forward-looking statements or the risk factors contained in this Quarterly Report on Form 10-Q to reflect new information, future events or otherwise, except as may be required under federal securities laws. Important factors that could cause actual results to differ materially from the forward-looking statements made in this Quarterly Report on Form 10-Q include but are not limited to: the impact that the COVID-19 pandemic has on our business, results of operations, financial condition and liquidity; the sensitivity of our business to the number of flight hours that our customers' planes spend aloft and our customers' profitability, both of which are affected by general economic conditions; future geopolitical or other worldwide events; cyber-security threats and natural disasters; our reliance on certain customers; theU.S. defense budget and risks associated with being a government supplier including government audits and investigations; failure to maintain government or industry approvals; failure to complete or successfully integrate acquisitions, including our acquisition of Esterline; our indebtedness; potential environmental liabilities; liabilities arising in connection with litigation; increases in raw material costs, taxes and labor costs that cannot be recovered in product pricing; risks and costs associated with our international sales and operations; and other factors. Please refer to the other information included in this Quarterly Report on Form 10-Q and to Item 1A of the Annual Report on Form 10-K for additional information regarding the foregoing factors that may affect our business. Overview We believe we are a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly every commercial and military aircraft in service today. Our business is well diversified due to the broad range of products we offer to our customers. Some of our more significant product offerings, substantially all of which are ultimately provided to end-users in the aerospace industry, include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, NiCad batteries and chargers, engineered latching and locking devices, rods and locking devices, engineered connectors and elastomers, databus and power controls, cockpit security components and systems, specialized cockpit displays, aircraft audio systems, specialized lavatory components, seat belts and safety restraints, engineered interior surfaces and related components, advanced sensor products, switches and relay panels, advanced displays, thermal protection and insulation, lighting and control technology, military personnel parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer. For the second quarter of fiscal year 2020, we generated net sales of$1,443 million and net income attributable toTD Group of$319 million . This included net income from continuing operations attributable toTD Group of$323 million and loss from discontinued operations, net of tax, of$4 million . EBITDA As Defined was$675 million , or 46.8% of net sales. See the "Non-GAAP Financial Measures" section for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to net income and net cash provided by operating activities. 36
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InDecember 2019 , a novel strain of coronavirus ("COVID-19") surfaced inWuhan, China , and has since spread to other countries, includingthe United States . InMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. The pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. The airline industry, in particular, has been significantly disrupted, both domestically and internationally. Our results for the second quarter of fiscal 2020 were modestly adversely impacted by decreases in sales in our commercial aftermarket and commercial OEM channels during approximately the last three weeks of the second quarter of fiscal 2020 due to the impact of the COVID-19 pandemic on our non-defense customers and their demand for our products and services. Because the duration and severity of the pandemic is uncertain at this time, it is difficult to forecast any precise impact on the Company's future results. However, the Company currently expects the COVID-19 pandemic to have a significant adverse impact on our sales, net income and EBITDA as Defined for the remainder of fiscal 2020 under the assumption that the COVID-19 pandemic will adversely affect our non-defense customers and their demand for our products and services, particularly in the commercial aftermarket. Longer term, the impact of the COVID-19 pandemic is fluid and continues to evolve, and because both the duration and severity of the outbreak are unclear, it is difficult to forecast any precise impact on the Company's future results. Beginning in the third quarter of fiscal 2020, as part of the Company's response to the impact of the COVID-19 pandemic on its business, the Company is taking cost reduction measures such as: (1) reducing its workforce by up to 15% to align operations with customer demand. These actions are in addition to the cost mitigation efforts implemented earlier this calendar year in response to the 737 MAX production rate changes; (2) implementing one to eight-week unpaid furloughs at many businesses over approximately the next six months in response to business specific situations; (3)TransDigm's senior management team will substantially reduce their cash compensation for the balance of fiscal 2020; (4) members ofTransDigm's Board of Directors will forgo their annual retainer fees; and, (5) the Company has reassessed capital expenditure projects planned and are prioritizing only those projects that are deemed essential in the near term. The Company continues to analyze its cost structure and may implement additional cost reduction measures as may be necessary due to the ongoing business challenges resulting from the COVID-19 pandemic. The impact of the COVID-19 pandemic is fluid and continues to evolve, and therefore, we cannot currently predict the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. Withinthe United States , our business has been designated an essential business, which allows us to continue to serve our customers, however, the COVID-19 pandemic has also disrupted our operations. The outbreak of COVID-19 has heightened the risk that a significant portion of our workforce will suffer illness or otherwise be unable to work. Furthermore, in light of our determination that planned reductions in our workforce will be necessary as a result of declines in our business caused by the COVID-19 pandemic, we cannot assure that we will be able to rehire our workforce once our business has recovered. Certain of our facilities have experienced temporary disruptions as a result of the COVID-19 pandemic, and we cannot predict whether our facilities will experience more significant disruptions in the future. Finally, our acquisition strategy, which is a key element of our overall business strategy, may be impacted by our efforts to maintain the Company's liquidity position in response to the COVID-19 pandemic. Critical Accounting Policies and Estimates The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in accordance withU.S. generally accepted accounting principles for interim financial statements and contain certain amounts that were based upon management's best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. On an ongoing basis, we evaluate the accounting policies and estimates used to prepare financial statements. Estimates are based on historical experience, judgments and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management. A comprehensive discussion of the Company's critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Item 7 of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Other than the adoption of ASC 842, "Leases," there have been no significant changes in critical accounting policies, management estimates or accounting policies since the fiscal year endedSeptember 30, 2019 . Refer to Note 4, "Recent Accounting Pronouncements," and Note 16, "Leases," for further information of accounting standards recently adopted or required to be adopted in the future. Acquisitions and Divestitures Recent acquisitions and divestitures are described in Note 3, "Acquisitions and Divestitures," to the condensed consolidated financial statements. 37
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Results of Operations
The following table sets forth, for the periods indicated, certain operating
data of the Company, including presentation of the amounts as a percentage of
net sales (amounts in millions):
Thirteen Week Periods Ended
March 28, 2020 % of Sales March 30, 2019 % of Sales
Net sales $ 1,443 100.0 % $ 1,168 100.0 %
Cost of sales 625 43.3 % 518 44.3 %
Selling and administrative expenses 180 12.5 % 160 13.7 %
Amortization of intangible assets 46 3.2 % 22 1.9 %
Income from operations 592 41.0 % 468 40.1 %
Interest expense, net 252 17.5 % 202 17.3 %
Refinancing costs 3 0.2 % 3 0.3 %
Income tax provision 14 1.0 % 63 5.4 %
Income from continuing operations 323 22.4 % 200 17.1 %
Less: Net income attributable to
noncontrolling interests - - % - - %
Income from continuing operations
attributable to TD Group 323 22.4 % 200 17.1 %
(Loss) Income from discontinued
operations, net of tax (4 ) (0.3 )% 2 0.2 %
Net income attributable to
202 17.3 %
Twenty-Six Week Periods Ended
March 28, 2020 % of Sales March 30, 2019 % of Sales
Net sales $ 2,908 100.0 % $ 2,161 100.0 %
Cost of sales 1,288 44.3 % 947 43.8 %
Selling and administrative expenses 381 13.1 % 282 13.0 %
Amortization of intangible assets 86 3.0 % 42 1.9 %
Income from operations 1,153 39.6 % 890 41.2 %
Interest expense, net 501 17.2 % 374 17.3 %
Refinancing costs 26 0.9 % 3 0.1 %
Other income (3 ) (0.1 )% - - %
Income tax provision 73 2.5 % 117 5.4 %
Income from continuing operations 556 19.1 % 396 18.3 %
Less: Net income attributable to
noncontrolling interests (1 ) - % - - %
Income from continuing operations
attributable to TD Group 555 19.1 % 396 18.3 %
Income from discontinued operations,
net of tax 68 2.3 % 2 0.1 %
Net income attributable to
398 18.4 %
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Changes in Results of Operations Thirteen week period endedMarch 28, 2020 compared with the thirteen week period endedMarch 30, 2019 Total Company •Net Sales . Net organic sales and acquisition sales and the related dollar and
percentage changes for the thirteen week periods ended
March 30, 2019 were as follows (amounts in millions): Thirteen Week Periods Ended % Change March 28, 2020 March 30, 2019 Change Total Sales Organic sales $ 1,128 $ 1,072$ 56 4.8 % Acquisition sales 315 96 219 18.8 % $ 1,443 $ 1,168$ 275 23.5 % The increase in organic sales for the thirteen week period endedMarch 28, 2020 compared to the thirteen week period endedMarch 30, 2019 , is primarily related to an increase in defense sales ($31 million , an increase of 7.3%), commercial OEM sales ($18 million , an increase of 5.9%) and commercial aftermarket sales ($2 million , an increase of 0.6%). Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their respective acquisition date. The acquisition sales in the table above for the thirteen week periods endedMarch 28, 2020 andMarch 30, 2019 were attributable to the sales recorded by the Esterline businesses acquired byTransDigm inMarch 2019 for the thirteen week periods endedMarch 28, 2020 andMarch 30, 2019 . For the quarter endedMarch 28, 2020 , the businesses acquired through the Esterline acquisition generated total sales of$372 million . AsTransDigm completed the acquisition of Esterline onMarch 14, 2019 , the amount attributed to Acquisition sales in the table above has been adjusted to reflect eleven weeks of sales from the Esterline businesses during the thirteen week period endedMarch 28, 2020 . These eleven weeks of sales represent the incremental sales not captured in the comparable quarter of the prior year period arising fromTransDigm's acquisition of Esterline. • Cost of Sales and Gross Profit. Cost of sales increased by$107 million , or
20.7%, to
compared to
Cost of sales and the related percentage of total sales for the thirteen week
periods ended March 28, 2020 and March 30, 2019 were as follows (amounts in
millions):
Thirteen Week Periods Ended
March 28, 2020 March 30, 2019 Change % Change
Cost of sales - excluding costs below $ 646 $ 502 $ 144 28.7 %
% of total sales 44.8 % 43.0 %
Acquisition integration costs 2 1 1 100.0 %
% of total sales 0.1 % 0.1 %
Stock compensation expense 1 2 (1 ) (50.0 )%
% of total sales 0.1 % 0.2 %
Inventory acquisition accounting adjustments - 16 (16 ) (100.0 )%
% of total sales - % 1.4 %
Loss contract amortization (11 ) (2 ) (9 ) (450.0 )%
% of total sales (0.8 )% (0.2 )%
Foreign currency gain (13 ) (1 ) (12 ) (1,200.0 )%
% of total sales (0.9 )% (0.1 )%
Total cost of sales $ 625 $ 518 $ 107 20.7 %
% of total sales 43.3 % 44.3 %
Gross profit $ 818 $ 650 $ 168 25.8 %
Gross profit percentage 56.7 % 55.7 %
The increase in the dollar amount of cost of sales during the thirteen week
period ended March 28, 2020 was primarily due to increased sales volume as a
result of the Esterline businesses acquired in March 2019 . This was slightly
offset by a decrease in inventory acquisition accounting costs as they were
fully amortized by fiscal 2020, foreign currency gains and amortization of loss
contract reserves primarily related to the Esterline businesses.
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Gross profit as a percentage of sales increased by 1.0 percentage point to 56.7% for the thirteen week period endedMarch 28, 2020 from 55.7% for the thirteen week period endedMarch 30, 2019 . This increase was driven by the application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure, and providing highly engineered value-added products to customers). Although gross profit as a percentage of sales continues to improve for the Esterline businesses as the integration activities continue, the gross profits earned by the Esterline businesses have a dilutive effect onTransDigm's gross profit percentage for the thirteen week period endedMarch 28, 2020 . • Selling and Administrative Expenses. Selling and administrative expenses
increased by
week period ended
the thirteen week period ended
expenses and the related percentage of total sales for the thirteen week
periods ended March 28, 2020 and March 30, 2019 were as follows (amounts in
millions):
Thirteen Week Periods Ended
March 28, 2020 March 30, 2019 Change % Change
Selling and administrative expenses -
excluding costs below $ 163 $ 121 $ 42 34.7 %
% of total sales 11.3 % 10.4 %
Stock compensation expense 10 18 (8 ) (44.4 )%
% of total sales 0.7 % 1.5 %
Acquisition-related expenses 7 21 (14 ) (66.7 )%
% of total sales 0.5 % 1.8 %
Total selling and administrative
expenses $ 180 $ 160 $ 20 12.5 %
% of total sales 12.5 % 13.7 %
The increase in the dollar amount of selling and administrative expenses during
the thirteen week period ended March 28, 2020 is primarily due to increased
sales volume as a result of the Esterline businesses acquired in March 2019 ,
partially offset by decreases in acquisition-related expenses of $14 million and
stock compensation expense of $8 million . The decrease in stock compensation
expense is attributable to a cumulative adjustment to expense under US GAAP for
a change in the expected vesting percentage of the fiscal 2020 stock option
grants.
• Amortization of Intangible Assets. Amortization of intangible assets was $46 million for the thirteen week period ended
million in the thirteen week period ended
amortization expense of
the definite-lived intangible assets recorded in connection with the fiscal
2019 acquisition of Esterline.
• Refinancing Costs. Refinancing costs of $3 million were recorded for the
thirteen week period ended
fees incurred to refinance its term loans in
• Interest Expense-net. Interest expense-net includes interest on borrowings
outstanding, amortization of debt issuance costs, original issue discount
and premium and revolving credit facility fees; slightly offset by interest
income. Interest expense-net increased
million for the thirteen week period ended
for the comparable thirteen week period last year. The net increase in
interest expense-net was primarily due to an increase in the weighted
average level of outstanding borrowings, which was approximately
billion for the thirteen week period ended
increase in weighted average level of borrowings was primarily due to the
activity in the first and second quarter of fiscal 2020 consisting of the
issuance of
the revolving credit facility. The increases in new debt described above
were slightly offset by the redemption of
in the first quarter of fiscal 2020. The weighted average interest rate for
cash interest payments on total borrowings outstanding for the thirteen week
period ended March 28, 2020 was 5.31%.
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• Income Taxes. Income tax expense as a percentage of income before income
taxes was approximately 4.2% for the thirteen week period ended
2020 compared to 24.2% for the thirteen week period ended
the COVID-19 pandemic. The CARES Act, among other things, includes
provisions relating to refundable payroll tax credits, deferment of employer
social security payments, net operating loss carryback periods, alternative
minimum tax credit refunds, and modifications to the net interest deduction
limitations. The most significant impact of the CARES Act for the Company is
an increase of the IRC 163(j) Interest Disallowance Limitations from 30% to
50% of adjusted taxable income which will allow the Company to deduct
additional interest for fiscal years 2020 (retroactive to
for the Company) and 2021. The Company's lower effective tax rate for the
thirteen week period ended
benefit recognized for excess tax benefits for share-based payments, in
addition to the modification of the interest expense limitation under IRCSection 163(j) enacted as part of the CARES Act. The Company's effective tax
rate for the thirteen week period ended
Federal statutory rate of 21% primarily due to a discrete benefit recognized
for excess tax benefits for share-based payments, partially offset by
foreign earnings taxed at rates higher than the
• (Loss) Income from Discontinued Operations. Discontinued operations for the
thirteen week period ended
of
Discontinued operations for the thirteen week period ended
include the results of the operations of the Souriau-Sunbank Connection
Technologies business and the Esterline Interface Technology ("EIT") group
of businesses. Both businesses were acquired by
acquisition of Esterline in
completed the divestiture of Souriau-Sunbank to Eaton Corporation plc
("Eaton") for approximately
completed the divestiture of EIT to an affiliate of
for approximately
Income from discontinued operations for the thirteen week period endedMarch 30, 2019 is$1 million and includes the results of operations of the Souriau-Sunbank and EIT businesses. • Net Income Attributable toTD Group . Net income attributable toTD Group
increased
period ended
of
as a result of the factors referred to above.
• Earnings per Share. Basic and diluted earnings per share was
thirteen week period ended
thirteen week period ended
per share from continuing operations and discontinued operations was
and $(0.07) , respectively, for the thirteen week period ended March 28,
2020 . Basic and diluted earnings per share from continuing operations and
discontinued operations was
week period ended
Business Segments
• Segment
March 28, 2020 andMarch 30, 2019 were as follows (amounts in millions): Thirteen Week Periods Ended March 28, 2020 % of Sales March 30, 2019 % of Sales Change % Change Power & Control $ 747 51.8 % $ 631 54.0 %$ 116 18.4 % Airframe 655 45.4 % 499 42.7 % 156 31.3 % Non-aviation 41 2.8 % 38 3.3 % 3 7.9 % $ 1,443 100.0 % $ 1,168 100.0 %$ 275 23.5 % Acquisition sales for the Power & Control segment increased$70 million , or an increase of 11.1%, resulting from the acquisition of Esterline. Organic sales for the Power & Control segment increased$46 million , an increase of 7.3%, for the thirteen week period endedMarch 28, 2020 compared to the thirteen week period endedMarch 30, 2019 . The organic sales increase resulted primarily from an increase in commercial aftermarket sales ($16 million , an increase of 9.0%), an increase in commercial OEM sales ($13 million , an increase of 9.5%) and an increase in defense sales ($12 million , an increase of 4.0%). Acquisition sales for the Airframe segment increased$146 million , or an increase of 29.3%, resulting from the acquisition of Esterline. Organic sales for the Airframe segment increased$10 million , an increase of 2.0%, for the thirteen week period endedMarch 28, 2020 compared to the thirteen week period endedMarch 30, 2019 . The organic sales increase resulted primarily from an increase in defense sales ($17 million , an increase of 13.8%) and commercial OEM sales ($5 million , an increase of 3.1%); partially offset by a decrease in commercial aftermarket sales ($14 million , a decrease of 6.9%). Acquisition sales for the Non-aviation segment increased$3 million , or an increase of 7.9%, resulting from the acquisition of Esterline. 41
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• EBITDA As Defined. EBITDA As Defined by segment for the thirteen week
periods ended March 28, 2020 and March 30, 2019 were as follows (amounts in
millions):
Thirteen Week Periods Ended
% of Segment % of Segment
March 28, 2020 Sales March 30, 2019 Sales Change % Change
Power & Control $ 381 55.2 % $ 329 56.3 % $ 52 15.8 %
Airframe 296 42.8 % 243 41.6 % 53 21.8 %
Non-aviation 14 2.0 % 12 2.1 % 2 16.7 %
$ 691 100.0 % $ 584 100.0 % $ 107 18.3 %
EBITDA As Defined for the Power & Control segment from the acquisition of
Esterline increased approximately $20 million for the thirteen week period ended
March 28, 2020 . Organic EBITDA As Defined for the Power & Control segment
increased approximately $32 million , an increase of 9.8%, resulting from organic
sales growth in defense, commercial OEM and commercial aftermarket, as well as
the application of our three core value-driven operating strategies, and
positive leverage on our fixed overhead costs spread over a higher production
volume.
EBITDA As Defined for the Airframe segment from the acquisition of Esterline
increased approximately $58 million for the thirteen week period ended March 28,
2020 . Organic EBITDA as Defined for the Airframe segment decreased approximately
$5 million , a decrease of 1.9%, resulting from an organic sales decrease in the
commercial aftermarket, partially offset by organic sales increases in defense
and commercial OEM and the application of our three core value-driven operating
strategies.
EBITDA As Defined for the Non-aviation segment from the acquisition of Esterline
increased approximately $1 million for the thirteen week period ended March 28,
2020 . Organic EBITDA As Defined for the Non-aviation segment increased
approximately $1 million , an increase of 9.2%.
Twenty-six week period ended March 28, 2020 compared with the twenty-six week
period ended March 30, 2019
Total Company
• Net Sales . Net organic sales and acquisition sales and the related dollar and
percentage changes for the twenty-six week periods ended
March 30, 2019 were as follows (amounts in millions): Twenty-Six Week Periods Ended % Change March 28, 2020 March 30, 2019 Change Total Sales Organic sales $ 2,209 $ 2,065$ 144 6.7 % Acquisition sales 699 96 603 27.9 % $ 2,908 $ 2,161$ 747 34.6 % The increase in organic sales for the twenty-six week period endedMarch 28, 2020 compared to the twenty-six week period endedMarch 30, 2019 , is primarily related to an increase in defense sales ($74 million , an increase of 9.5%), commercial aftermarket sales ($45 million , an increase of 6.3%) and commercial OEM sales ($17 million , an increase of 3.0%). Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their respective acquisition date. The acquisition sales in the table above for the twenty-six week periods endedMarch 28, 2020 andMarch 30, 2019 were attributable to the sales recorded by the Esterline businesses acquired byTransDigm inMarch 2019 for the twenty-six week periods endedMarch 28, 2020 andMarch 30, 2019 . For the twenty-six week period endedMarch 28, 2020 , the businesses acquired through the Esterline acquisition generated total sales of$756 million . AsTransDigm completed the acquisition of Esterline onMarch 14, 2019 , the amount attributed to Acquisition sales in the table above has been adjusted to reflect twenty-four weeks of sales from the Esterline businesses during the twenty-six week period endedMarch 28, 2020 . These twenty-four weeks of sales represent the incremental sales not captured in the comparable twenty-six week period of the prior year period arising fromTransDigm's acquisition of Esterline. 42
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• Cost of Sales and Gross Profit. Cost of sales increased by
36.0%, to
compared to
Cost of sales and the related percentage of total sales for the twenty-six
week periods ended March 28, 2020 and March 30, 2019 were as follows (amounts
in millions):
Twenty-Six Week Periods Ended
March 28, 2020 March 30, 2019 Change % Change
Cost of sales - excluding costs below $ 1,305 $ 928 $ 377 40.6 %
% of total sales 44.9 % 42.9 %
Stock compensation expense 4 4 - - %
% of total sales 0.1 % 0.2 %
Acquisition integration costs 3 3 - - %
% of total sales 0.1 % 0.1 %
Foreign currency loss (gain) 1 (3 ) 4 133.3 %
% of total sales - % (0.1 )%
Inventory acquisition accounting adjustments - 20 (20 ) (100.0 )%
% of total sales - % 0.9 %
Loss contract amortization (25 ) (5 ) (20 ) (400.0 )%
% of total sales (0.9 )% (0.2 )%
Total cost of sales $ 1,288 $ 947 $ 341 36.0 %
% of total sales 44.3 % 43.8 %
Gross profit $ 1,620 $ 1,214 $ 406 33.4 %
Gross profit percentage 55.7 % 56.2 %
The increase in the dollar amount of cost of sales during the twenty-six week
period ended March 28, 2020 was primarily due to increased sales volume as a
result of the Esterline businesses acquired in March 2019 compared to the
twenty-six week period ended March 30, 2019 . This was slightly offset by a
decrease in inventory acquisition accounting adjustments as they were fully
amortized prior to fiscal 2020 and amortization of loss contract reserves
primarily related to the Esterline acquisition.
Gross profit as a percentage of sales decreased by 0.5 points to 55.7% for the
twenty-six week period ended March 28, 2020 from 56.2% for the twenty-six week
period ended March 30, 2019 . The decrease in the gross profit percentage is
primarily driven by the dilutive effect of the Esterline businesses on the gross
profit percentage for the twenty-six week period ended March 28, 2020 . However,
the gross profit percentage continues to improve for the Esterline businesses as
integration activities continue including the application of our three core
value-driven operating strategies (obtaining profitable new business,
continually improving our cost structure, and providing highly engineered
value-added products to customers).
• Selling and Administrative Expenses. Selling and administrative expenses
increased by
twenty-six week period ended
sales, for the twenty-six week period ended
administrative expenses and the related percentage of total sales for the
twenty-six week periods ended March 28, 2020 and March 30, 2019 were as
follows (amounts in millions):
Twenty-Six Week Periods Ended
March 28, 2020 March 30, 2019 Change % Change
Selling and administrative expenses -
excluding costs below $ 335 $ 221 $ 114 51.6 %
% of total sales 11.5 % 10.2 %
Stock compensation expense 33 34 (1 ) (2.9 )%
% of total sales 1.1 % 1.6 %
Acquisition-related expenses 13 27 (14 ) (51.9 )%
% of total sales 0.4 % 1.2 %
Total selling and administrative
expenses $ 381 $ 282 $ 99 35.1 %
% of total sales 13.1 % 13.1 %
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The increase in the dollar amount of selling and administrative expenses during the twenty-six week period endedMarch 28, 2020 is primarily due to increased sales volume as a result of the Esterline businesses acquired inMarch 2019 , partially offset by decreases in acquisition-related expenses of$14 million and stock compensation expense of$1 million . The decrease in stock compensation expense is attributable to a cumulative adjustment to expense under US GAAP recorded in the second quarter of fiscal 2020 for a change in the expected vesting percentage of the fiscal 2020 stock option grants. • Amortization of Intangible Assets. Amortization of intangible assets was$86
million for the twenty-six week period ended
million in the twenty-six week period ended
amortization expense of
the definite-lived intangible assets recorded in connection with the fiscal
2019 acquisition of Esterline.
• Refinancing Costs. Refinancing costs of
twenty-six week period ended
fees incurred on the redemption of the 2022 Notes that occurred in the first
quarter of fiscal 2020 and certain fees incurred to refinance the term loans
in the second quarter of fiscal 2020.
• Other Income. Other income of
week period ended
related components of net periodic benefit costs on the Company's defined
benefit pension plans.
• Interest Expense-net. Interest expense-net includes interest on borrowings
outstanding, amortization of debt issuance costs, original issue discount
and premium and revolving credit facility fees slightly offset by interest
income. Interest expense-net increased $127 million , or 34.0%, to $501
million for the twenty-six week period ended March 28, 2020 from $374
million for the comparable twenty-six week period last year. The net
increase in interest expense-net was primarily due to an increase in theweighted average level of outstanding borrowings, which was approximately
approximately
2019. The increase in weighted average level of borrowings was primarily due
to the activity in the second quarter of fiscal 2019 consisting of the
issuance of
quarters of fiscal 2020 consisting of the issuance of
2027 Notes and the
increases in new debt described above were slightly offset by the
redemptions of
2022 Notes. The weighted average interest rate for cash interest payments on
total borrowings outstanding for the twenty-six week period ended
2020 was 5.20%.
• Income Taxes. Income tax expense as a percentage of income before income
taxes was approximately 11.6% for the twenty-six week period ended
2020 compared to 22.9% for the twenty-six week period ended
On
to the COVID-19 pandemic. The CARES Act, among other things, includes
provisions relating to refundable payroll tax credits, deferment of employer
social security payments, net operating loss carryback periods, alternative
minimum tax credit refunds, and modifications to the net interest deduction
limitations. The most significant impact of the CARES Act for the Company is
an increase of the IRC 163(j) Interest Disallowance Limitations from 30% to
50% of adjusted taxable income which will allow the Company to deduct
additional interest for fiscal years 2020 and 2021. The Company's lower
effective tax rate for the twenty-six week period ended March 28, 2020 was
primarily due to a discrete benefit recognized for excess tax benefits for
share-based payments, in addition to the modification of the interestexpense limitation under IRC Section 163(j) enacted as part of the CARES
Act. The Company's effective tax rate for the period ended
was lower than the Federal statutory rate of 21% primarily due to a discrete
benefit recognized for excess tax benefits for share-based payments,
partially offset by foreign earnings taxed at rates higher than the
statutory rate.
• Income from Discontinued Operations. Discontinued operations for the
twenty-six week period ended
operations of Souriau-Sunbank. Discontinued operations for the twenty-six
week period ended March 30, 2019 include the results of the operations of
Souriau-Sunbank and the Esterline Interface Technology ("EIT") group of
businesses. Both businesses were acquired by TransDigm as part of its
acquisition of Esterline in
completed the divestiture of Souriau-Sunbank to Eaton for approximately
million. On
to an affiliate of
Income from discontinued operations for the twenty-six week period endedMarch 28, 2020 is$68 million and includes$8 million from Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank, net of tax, of$60 million . Income from discontinued operations for the twenty-six week period endedMarch 30, 2019 is$1 million and includes the results of operations of the Souriau-Sunbank and EIT businesses. • Net Income Attributable toTD Group . Net income attributable toTD Group
increased
period ended
of $398 million for the twenty-six week period ended March 30, 2019 ,
primarily as a result of the factors referred to above.
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• Earnings per Share. Basic and diluted earnings per share was
twenty-six week period ended
twenty-six week period ended
share from continuing operations and discontinued operations was
Basic and diluted earnings per share from continuing operations and
discontinued operations was
twenty-six week period ended
Group for the twenty-six week period ended
was decreased by dividend equivalent payments paid of
per share, resulting in net income available to common shareholders of
million, or
of $24 million , or $0.43 per share, resulting in net income available to
common shareholders of $374 million , or $6.65 per share.
Business Segments
• Segment
ended March 28, 2020 and March 30, 2019 were as follows (amounts in
millions):
Twenty-Six Week Periods Ended
March 28, 2020 % of Sales March 30, 2019 % of Sales Change % Change Power & Control $ 1,499 51.5 % $ 1,192 55.2 %$ 307 25.8 % Airframe 1,329 45.7 % 898 41.5 % 431 48.0 % Non-aviation 80 2.8 % 71 3.3 % 9 12.7 % $ 2,908 100.0 % $ 2,161 100.0 %$ 747 34.6 % Acquisition sales for the Power & Control segment increased$196 million , or an increase of 16.4%, resulting from the acquisition of Esterline. Organic sales for the Power & Control segment increased$111 million , an increase of 9.3%, for the twenty-six week period endedMarch 28, 2020 compared to the twenty-six week period endedMarch 30, 2019 . The organic sales increase resulted primarily from an increase in defense sales ($50 million , an increase of 8.7%), an increase in commercial aftermarket sales ($45 million , an increase of 13.4%) and an increase in commercial OEM sales ($10 million , an increase of 4.0%). Acquisition sales for the Airframe segment increased$401 million , or an increase of 44.7%, resulting from the acquisition of Esterline. Organic sales for the Airframe segment increased$30 million , an increase of 3.3%, for the twenty-six week period endedMarch 28, 2020 compared to the twenty-six week period endedMarch 30, 2019 . The organic sales increase resulted primarily from an increase in defense sales ($22 million , an increase of 10.5%) and commercial OEM sales ($6 million , an increase of 2.1%). Acquisition sales for the Non-aviation segment increased$7 million , or an increase of 9.9%, resulting from the acquisition of Esterline. Organic sales for the Non-aviation segment increased by$2 million , an increase of 2.8%, for the twenty-six week period endedMarch 28, 2020 compared to the twenty-six week period endedMarch 30, 2019 . • EBITDA As Defined. EBITDA As Defined by segment for the twenty-six week periods endedMarch 28, 2020 andMarch 30, 2019 were as follows (amounts in millions): Twenty-Six Week Periods Ended % of Segment % of Segment March 28, 2020 Sales March 30, 2019 Sales Change % Change Power & Control $ 766 54.9 % $ 628 58.0 %$ 138 22.0 % Airframe 602 43.2 % 434 40.0 % 168 38.7 % Non-aviation 26 1.9 % 22 2.0 % 4 18.2 % $ 1,394 100.0 % $ 1,084 100.0 %$ 310 28.6 % EBITDA As Defined for the Power & Control segment from the acquisition of Esterline increased approximately$55 million for the twenty-six week period endedMarch 28, 2020 . Organic EBITDA As Defined for the Power & Control segment increased approximately$83 million , an increase of 13.2%, resulting from organic sales growth in defense, commercial OEM and commercial aftermarket, as well as the application of our three core value-driven operating strategies, and positive leverage on our fixed overhead costs spread over a higher production volume. EBITDA As Defined for the Airframe segment from the acquisition of Esterline increased approximately$153 million for the twenty-six week period endedMarch 28, 2020 . Organic EBITDA as Defined for the Airframe segment increased approximately$15 million , an increase of 3.5%, primarily resulting from organic sales growth in defense and commercial OEM as well as the application of our three core value-driven operating strategies. 45
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EBITDA As Defined for the Non-aviation segment from the acquisition of Esterline increased approximately$1 million for the twenty-six week period endedMarch 28, 2020 . Organic EBITDA As Defined for the Non-aviation segment increased approximately$3 million , an increase of 13.6%. Backlog As ofMarch 28, 2020 , the Company estimated its sales order backlog at$3,540 million compared to$2,188 million as ofMarch 30, 2019 . The sales order backlog associated with the acquired Esterline businesses was excluded in the sales order backlog total as ofMarch 30, 2019 as at the time it was being assessed byTransDigm management to ensure the reported backlog was in compliance withTransDigm policy and computed consistently with that of the existingTransDigm legacy businesses. Excluding the increase in the sales order backlog attributable to the Esterline businesses being included in the total as ofMarch 28, 2020 , backlog increased approximately$70 million compared toMarch 30, 2019 . The majority of the purchase orders outstanding as ofMarch 28, 2020 are scheduled for delivery within the next twelve months. Purchase orders may be subject to cancellation or deferral by the customer prior to shipment. The level of unfilled purchase orders at any given date during the year will be materially affected by the timing of the Company's receipt of purchase orders and the speed with which those orders are filled. Accordingly, the Company's backlog as ofMarch 28, 2020 may not necessarily represent the actual amount of shipments or sales for any future period. Foreign Operations Although we manufacture a significant portion of our products inthe United States , we manufacture certain products inEurope ,Asia ,Canada ,Mexico and other countries globally. We sell our products inthe United States as well as in foreign countries. Although the majority of sales of our products are made to customers (including distributors) located inthe United States , our products are ultimately sold to and used by customers, including airlines and other end users of aircraft, throughout the world. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including the COVID-19 pandemic, currency fluctuations, difficulties in staffing and managing multi-national operations, general economic and political uncertainties and potential for social unrest in countries in which we operate, limitations on our ability to enforce legal rights and remedies, restrictions on the repatriation of funds, change in trade policies, tariff regulation, difficulties in obtaining export and import licenses and the risk of government financed competition. There can be no assurance that foreign governments will not adopt regulations or take other action that would have a direct or indirect adverse impact on the business or market opportunities of the Company within such governments' countries. Furthermore, there can be no assurance that the political, cultural and economic climate outsidethe United States will be favorable to our operations and growth strategy. Liquidity and Capital Resources We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt. We continually evaluate our debt facilities to assess whether they most efficiently and effectively meet the current and future needs of our business. The Company evaluates from time to time the appropriateness of its current leverage, taking into consideration the Company's debt holders, equity holders, credit ratings, acquisition opportunities and other factors. If the Company has excess cash, it generally prioritizes allocating the excess cash in the following manner: (1) capital spending at existing businesses, (2) acquisitions of businesses, (3) payment of a special dividend and/or repurchases of our common stock and (4) prepayment of indebtedness or repurchase of debt. Whether the Company undertakes common stock repurchases or other aforementioned activities will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, the Company may issue additional debt if prevailing market conditions are favorable to doing so. The Company's ability to make scheduled interest payments on, or to refinance, the Company's indebtedness, or to fund non-acquisition related capital expenditures and research and development efforts, will depend on the Company's ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control, including the ongoing COVID-19 pandemic. AsTransDigm cannot predict the duration or scope of the COVID-19 pandemic and its impact on our customers and suppliers, the potential negative financial impact to its results cannot be reasonably estimated, but could be material. The Company is actively managing the business to maintain cash flow, including the cost reduction efforts described in Note 20, "Subsequent Events," to the condensed consolidated financial statements in response to the COVID-19 pandemic and are continuing to focus on the application of its three core value-driven operating strategies (obtaining profitable new business, continually improving its cost structure and providing highly engineered value-added products to customers). 46
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InMarch 2020 , the President ofthe United States signed the CARES Act, a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The most significant impact of the CARES Act for the Company is an increase of the IRC 163(j) Interest Disallowance Limitations from 30% to 50% of adjusted taxable income which will allow the Company to deduct additional interest for fiscal years 2020 and 2021. The Company continues to assess the impact of the CARES Act and ongoing government guidance related to COVID-19 that may be issued. InMarch 2020 , the Company drew$200 million on its revolving credit facility to increase the Company's liquidity as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic. Also, in further actions to increase the Company's liquidity, the Company executed two notes offerings inApril 2020 in which the proceeds received are for general Corporate purposes. OnApril 8, 2020 , the Company entered into a purchase agreement in connection with a private offering of$1,100 million in aggregate principal amount of 8.00% Senior Secured Notes due 2025 at an issue price of 100% of the principal amount. OnApril 17, 2020 , the Company entered into a purchase agreement in connection with a private offering of$400 million in aggregate principal amount of 6.25% Senior Secured Notes due 2026 at an issue price of 101% of the principal amount. As ofMarch 28, 2020 , the Company has significant liquidity as illustrated in the table presented below (in millions): As of March 28, 2020 Cash and cash equivalents $ 2,668 Availability on revolving credit facility 518 Liquidity (1) $ 3,186 (1) Excludes approximately$1,500 million in cash received from the April 2020 secured notes offerings. We believe our significant liquidity will allow us to meet our anticipated funding requirements. We expect to meet our short-term liquidity requirements (including interest obligations and capital expenditures) through net cash from operating activities, cash on hand and, if needed, additional draws on the revolving credit facility. Long-term liquidity requirements consist primarily of obligations under our long-term debt agreements. There is no maturity on any tranche of term loans or notes untilJuly 2024 . The Company's$350 million trade receivable securitization facility renews annually in July. Operating Activities. The Company generated$594 million of net cash from operating activities during the twenty-six week period endedMarch 28, 2020 compared to$453 million during the twenty-six week period endedMarch 30, 2019 . The increase is primarily attributable to the additional net operating cash inflows generated by the Esterline businesses. The change in accounts receivable during the twenty-six week period endedMarch 28, 2020 was a source of cash of$74 million compared to a use of cash of$7 million during the twenty-six week period endedMarch 30, 2019 . The increase in the source of cash of$81 million is primarily attributable to the timing of receipt of payment from customers as well as a slowdown in sales within the last few weeks of the second fiscal quarter due to the COVID-19 pandemic. The change in inventories during the twenty-six week period endedMarch 28, 2020 was a use of cash of$97 million compared to a use of cash of$45 million during the twenty-six week period endedMarch 30, 2019 . The increase in the use of cash is primarily driven by the slowdown in sales as a result of the COVID-19 pandemic, particularly within the last few weeks of the second fiscal quarter. The change in accounts payable during the twenty-six week period endedMarch 28, 2020 was a use of cash of$12 million compared to a source of cash of$1 million during the twenty-six week period endedMarch 30, 2019 . Investing Activities. Net cash provided by investing activities was$854 million during the twenty-six week period endedMarch 28, 2020 , consisting of proceeds of$904 million from the divestiture of Souriau-Sunbank and partially offset by capital expenditures of$50 million . Net cash used in investing activities was$3,613 million during the twenty-six week period endedMarch 30, 2019 , consisting of capital expenditures of$44 million and payments for acquisitions, net of cash acquired, of$3,569 million which is primarily comprised of the acquisition of Esterline for$3,536 million andNavCom for$27 million . Financing Activities. Net cash used by financing activities during the twenty-six week period endedMarch 28, 2020 was$248 million . The use of cash was primarily attributable to dividend equivalent payments of$1,928 million , the redemption of the 2022 Notes outstanding for$1,168 million , the purchase of treasury stock of$19 million and repayments on term loans of$19 million . The use of cash was partially offset by$2,625 million in net proceeds from the completion of the 2027 5.50% Notes offering,$200 million in proceeds from the revolving credit facility and$69 million in proceeds from stock option exercises. 47
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Net cash provided by financing activities during the twenty-six week period endedMarch 30, 2019 was$3,915 million . The source of cash was primarily attributable to$4,482 million in net proceeds from the completion of the 2026 Secured Notes and 2027 Notes offerings in the second quarter of fiscal 2019 and$47 million in proceeds from stock option exercises. Sources were partially offset by the cash tender and redemption of the 2020 Notes for$550 million , repayments on term loans of$38 million and the payment of$24 million in dividend equivalent payments. 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 twenty six week period endedMarch 28, 2020 , other than the debt financing transactions described below and in Note 9, "Debt," to the condensed consolidated financial statements, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . Description of Senior Secured Term Loans and Indentures Senior Secured Term Loans FacilityTransDigm has$7,505 million in fully drawn term loans (the "Term Loans Facility") and a$760 million revolving credit facility, on which the Company drew approximately$200 million onMarch 24, 2020 . The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as ofMarch 28, 2020 ): Term Loans Facility Aggregate Principal Maturity Date Interest Rate Tranche E$2,216 million May 30, 2025 LIBO rate + 2.25% Tranche F$3,515 million December 9, 2025 LIBO rate + 2.25% Tranche G$1,774 million August 22, 2024 LIBO rate + 2.25% The Term Loans Facility requires quarterly aggregate principal payments of$18.8 million . The revolving commitments consist of two tranches which includes up to$151.5 million of multicurrency revolving commitments. AtMarch 28, 2020 , the Company had$41.7 million in letters of credit outstanding and$518.3 million in borrowings available under the revolving commitments. The interest rates per annum applicable to the loans under the Credit Agreement are, atTransDigm's option, equal to either an alternate base rate or an adjusted LIBO rate for one, two, three or six-month (or to the extent agreed to by each relevant lender, nine or twelve-month) interest periods chosen byTransDigm , in each case plus an applicable margin percentage. The adjusted LIBO rate related to the tranche E, tranche F and tranche G term loans are not subject to a floor. For the twenty-six week period endedMarch 28, 2020 , the applicable interest rates ranged from approximately 3.9% to 4.3% on the existing term loans. Interest rate swaps and caps used to hedge and offset, respectively, the variable interest rates on the credit facility are described in Note 12, "Derivatives and Hedging Activities," to the condensed consolidated financial statements. Recent Amendments to the Credit Agreement OnFebruary 6, 2020 , the Company entered into Amendment No. 7 and Refinancing Facility Agreement (herein, "Amendment No. 7"). Under the terms of Amendment No. 7, the Company, among other things, (i) incurred new tranche E term loans in an aggregate principal amount equal to approximately$2,216 million , new tranche F term loans in an aggregate principal amount equal to approximately$3,515 million and new tranche G term loans, (collectively, the "New Term Loans") in an aggregate principal amount equal to approximately$1,774 million , (ii) repaid in full all of the existing tranche E term loans, tranche F term loans and tranche G term loans outstanding under the Credit Agreement immediately prior to the Amendment and (iii) extended the maturity date of the tranche F term loans toDecember 9, 2025 , (iv) modified the definition of consolidated EBITDA in the Credit Agreement to add back certain cost savings and non-recurring cost and expenses and (v) modified certain negative covenants to provide additional flexibility to enableTransDigm to incur additional debt and make additional investments and asset sales. The New Term Loans were fully drawn onFebruary 6, 2020 . The LIBOR interest rate per annum applicable to the New Term Loans is 2.25%, down from 2.50% prior to the Amendment. The other terms and conditions that apply to the New Term Loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to the Amendment. OnMarch 14, 2019 , the Company entered into Amendment No. 6 to the Second Amended and Restated Credit Agreement ("Amendment No. 6"). Under the terms of Amendment No. 6, the capacity of the revolving credit facility increased from$600 million to$760 million . The revolving credit facility consist of two tranches which include up to$151.5 million of multicurrency revolving commitments. The terms and conditions that apply to the revolving credit facility, other than the additional revolving credit commitments, are substantially the same as the terms and conditions that applied to the revolving credit facility immediately prior to Amendment No. 6. 48
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Indentures
The following table represents the notes outstanding as of
Description Aggregate Principal Maturity Date Interest Rate
2024 Notes $1,200 million July 15, 2024 6.50%
2025 Notes $750 million May 15, 2025 6.50%
2026 Secured Notes $4,000 million March 15, 2026 6.250%
6.875% 2026 Notes $500 million May 15, 2026 6.875%
6.375% 2026 Notes $950 million June 15, 2026 6.375%
7.50% 2027 Notes $550 million March 15, 2027 7.50%
5.50% 2027 Notes $2,650 million November 15, 2027 5.50%
The 2024 Notes, the 6.375% 2026 Notes, the 7.50% 2027 Notes and the 5.50% 2027
Notes (the "TransDigm Inc. Notes") were issued at a price of 100% of the
principal amount. The initial $450 million offering of the 2025 Notes (also
considered to be part of the "TransDigm Inc. Notes") were issued at a price of
100% of the principal amount and the subsequent $300 million offering of 2025
Notes in the second quarter of fiscal 2017 were issued at a price of 101.5% of
the principal amount, resulting in gross proceeds of $304.5 million . The 6.875%
2026 Notes (the "TransDigm UK Notes" and together with the TransDigm Inc. Notes,
the "Notes," are further described below) offered in May 2018 were issued at a
price of 99.24% of the principal amount, resulting in gross proceeds of $496.2
million . The initial $3,800 million offering of the 2026 Secured Notes (the
"Secured Notes") were issued at a price of 100% of their principal amount and
the subsequent $200 million offering of the 2026 Secured Notes in the second
quarter of fiscal 2019 were issued at a price of 101% of their principal amount,
resulting in gross proceeds of $4,002 million .
The Notes do not require principal payments prior to their maturity. Interest
under the Notes is payable semi-annually. The Notes represent our unsecured
obligations ranking subordinate to our senior debt, as defined in the applicable
indentures.
The Notes are subordinated to all of our existing and future senior debt, rank
equally with all of our existing and future senior subordinated debt and rank
senior to all of our future debt that is expressly subordinated to the Notes.
The TransDigm Inc. Notes are guaranteed on a senior subordinated unsecured basis
by TD Group and TransDigm Inc.'s domestic restricted subsidiaries. The TransDigm
UK Notes are guaranteed on a senior subordinated basis by TransDigm Inc. , TD
Group and TransDigm Inc.'s domestic restricted subsidiaries. The guarantees of
the Notes are subordinated to all of the guarantors' existing and future senior
debt, rank equally with all of their existing and future senior subordinated
debt and rank senior to all of their future debt that is expressly subordinated
to the guarantees of the Notes. The Notes are structurally subordinated to all
of the liabilities of TD Group's non-guarantor subsidiaries. The Notes contain
many of the restrictive covenants included in the Credit Agreement. TransDigm is
in compliance with all of the covenants contained in the Notes.
On January 30, 2019 , the Company entered into a purchase agreement in connection
with a private offering of $3.8 billion aggregate principal amount in 6.25%
senior secured notes due 2026. In addition, on February 1, 2019 , the Company
entered into a purchase agreement in connection with a private offering of $200
million aggregate principal amount of 6.25% senior secured notes due 2026. All
$4.0 billion aggregate principal amount of the secured notes will constitute a
single class and was issued under a single indenture (herein the "2026 Secured
Notes"). The notes in the first secured notes offering were issued at a price of
100% of their principal amount and the notes in the second secured notes
offering were issued at a price of 101% of their principal amount. The Notes are
guaranteed, with certain exceptions, by TransDigm Group , TransDigm UK and all of
TransDigm Inc.'s existing U.S. subsidiaries on a senior secured basis. The 2026
Secured Notes offerings closed on February 13, 2019 and mature on March 15,
2026 .
On February 13, 2019 , the Company announced a cash tender offer for any and all
of its outstanding 2020 Notes. On March 15, 2019 , the Company redeemed the
principal amount of $550 million in 2020 Notes, plus accrued and unpaid interest
of approximately $12.6 million . The Company recorded refinancing costs of $1.7
million during the thirteen and thirty-nine week periods ended March 28, 2020
representing unamortized debt issuance costs expensed in conjunction with the
redemption of the 2020 Notes.
On March 14, 2019 , in connection with the closing of the acquisition of
Esterline, the Company announced a cash tender offer for any and all of its
outstanding 2023 Notes. On April 15, 2019 , the Company redeemed the principal
amount of approximately $373.8 million (€330.0 million as the 2023 Notes were
denominated in Euros), plus accrued interest of approximately $6.8 million ,
early redemption premium of $6.8 million and fees of approximately $0.2 million .
On November 13, 2019 , the Company issued $2,650 million in aggregate principal
amount of 5.50% Senior Subordinated Notes due 2027 (herein the "5.50% 2027
Notes") at an issue price of 100% of the principal amount thereof in a private
offering. The 2027 Notes were issued pursuant to an indenture, dated as of
November 13, 2019 , among TransDigm , as issuer, TD Group , TD UK and the other
subsidiaries of TransDigm named therein, as guarantors.
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OnNovember 26, 2019 , the Company used a portion of the net proceeds from the offering of the 5.50% 2027 Notes to redeem all of its outstanding 6.00% 2022 Notes. The Company redeemed the principal amount of$1,150 million , plus accrued interest of approximately$25.5 million and early redemption premium of$17.3 million . InApril 2020 , the Company executed two notes offerings for general Corporate purposes, including increasing its liquidity as a result of the COVID-19 pandemic. OnApril 8, 2020 , the Company entered into a purchase agreement in connection with a private offering of$1,100 million in aggregate principal amount of 8.00% Senior Secured Notes due 2025 at an issue price of 100% of the principal amount. OnApril 17, 2020 , the Company entered into a purchase agreement in connection with a private offering of$400 million in aggregate principal amount of 6.25% Senior Secured Notes due 2026 at an issue price of 101% of the principal amount. Refer to Note 9, "Debt," to the condensed consolidated financial statements for further information. Certain Restrictive Covenants in Our Debt Documents The Credit Agreement and the Indentures governing the Notes contain restrictive covenants that, among other things, limit the incurrence of additional indebtedness, the payment of special dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances, and prepayments of certain other indebtedness. The restrictive covenants included in the Credit Agreement are subject to amendments executed periodically. The most recent amendment that impacted the restrictive covenants contained in the Credit Agreement is Amendment No. 7. The restrictive covenants are described above in the Recent Amendments to the Credit Agreement section. 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 7.25 to 1.00 and the consolidated secured net debt ratio would be no greater than 5.00 to 1.00, in each case, after giving effect to such incremental term loans or additional revolving commitments. If any such default occurs, the lenders under the Credit Agreement and the holders of the Notes may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the Credit Agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the Credit Agreement, the lenders thereunder will have the right to proceed against the collateral granted to them to secure the debt, which includes our available cash, and they will also have the right to prevent us from making debt service payments on the Notes. As ofMarch 28, 2020 , the Company was in compliance with all of its debt covenants. Trade Receivables Securitization 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. OnJuly 30, 2019 , the Company amended the Securitization Facility to extend the maturity date toJuly 28, 2020 . As ofMarch 28, 2020 , the Company has borrowed$350 million under the Securitization Facility, which bears interest at a rate of 0.9% plus LIBOR. AtMarch 28, 2020 , the applicable interest rate was 2.5%. The Securitization Facility is collateralized by substantially all of the Company's domestic operations' trade accounts receivable. Stock Repurchase Program OnNovember 8, 2017 , our Board of Directors, authorized a stock repurchase program permitting repurchases of our outstanding shares not to exceed$650 million in the aggregate, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes. DuringMarch 2020 , the Company repurchased 36,900 shares of its common stock at a gross cost of$18.9 million at the weighted average cost of$512.67 under the$650 million stock repurchase program. As ofMarch 28, 2020 , the remaining amount of repurchases allowable under the$650 million program was$631.1 million subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes. Off-Balance Sheet Arrangements The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company's revolving credit facility. As ofMarch 28, 2020 , the Company had$41.7 million in letters of credit outstanding. 50
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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 accounting principles generally accepted inthe United States of America ("US 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 US 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
US 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 US GAAP, and neither should be considered as an
alternative to net income or cash flow from operations determined in accordance
with US GAAP. Our calculation of EBITDA and EBITDA As Defined may not be
comparable to the calculation of similarly titled measures reported by other
companies.
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The following table sets forth a reconciliation of net income to EBITDA and EBITDA As Defined (in millions):
Thirteen Week Periods Ended Twenty-Six Week Periods Ended
March 28, 2020 March 30, 2019 March 28, 2020 March 30, 2019
Income from continuing operations $ 323 $ 200 $ 556 $ 396
Adjustments:
Depreciation and amortization expense 72 39 141 74 Interest expense, net 252 202 501 374 Income tax provision 14 63 73 117 EBITDA 661 504 1,271 961 Adjustments: Inventory acquisition accounting adjustments (1) - 16 - 20 Acquisition integration costs (2) 9 5 15 7 Acquisition transaction-related expenses (3) - 17 1 22 Non-cash stock compensation expense (4) 11 21 37 38 Refinancing costs (5) 3 3 26 3 Other, net (6) (9 ) - 6 2 EBITDA As Defined $ 675 $ 566 $ 1,356 $ 1,053
(1) Represents accounting adjustments to inventory associated with acquisitions
of businesses and product lines that were charged to cost of sales when the
inventory was sold.
(2) Represents costs incurred to integrate acquired businesses and product
lines into TD Group's operations, facility relocation costs and other
acquisition-related costs.
(3) Represents transaction-related costs comprising deal fees, legal, financial
and tax due diligence expenses, and valuation costs that are required to be
expensed as incurred.
(4) Represents the compensation expense recognized by
incentive plans.
(5) Represents costs expensed related to debt financing activities, including
new issuances, extinguishments, refinancings and amendments to existing
agreements.
(6) Primarily represents foreign currency transaction gain or loss, payroll
withholding taxes related to dividend equivalent payments and stock option
exercises, non-service related pension costs, deferred compensation, and
gain or loss on sale of fixed assets.
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The following table sets forth a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined (in millions):
Twenty-Six Week Periods Ended
March 28, 2020 March 30, 2019
Net cash provided by operating activities $ 594 $ 453
Adjustments:
Changes in assets and liabilities, net of effects from
acquisitions of businesses 173 64
Interest expense, net (1) 485 361
Income tax provision - current 82 124
Non-cash stock compensation expense (2) (37 ) (38 )
Refinancing costs (3) (26 ) (3 )
EBITDA 1,271 961
Adjustments:
Inventory acquisition accounting adjustments (4) - 20
Acquisition integration costs (5) 15 7
Acquisition transaction-related expenses (6) 1 22
Non-cash stock compensation expense (2) 37 38
Refinancing costs (3) 26 3
Other, net (7) 6 2
EBITDA As Defined $ 1,356 $ 1,053 (1) Represents interest expense excluding the amortization of debt issuance
costs and premium and discount on debt.
(2) Represents the compensation expense recognized by
incentive 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 the
inventory was sold.
(5) Represents costs incurred to integrate acquired businesses and product
lines into TD Group's operations, facility relocation costs and other
acquisition-related costs.
(6) Represents transaction-related costs comprising deal fees; legal, financial
and tax due diligence expenses, and valuation costs that are required to be
expensed as incurred.
(7) Primarily represents foreign currency transaction gain or loss, payroll
withholding taxes related to dividend equivalent payments and stock option
exercises, non-service related pension costs, deferred compensation, and
gain or loss on sale of fixed assets.
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