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 includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, the statements about the Company's plans, strategies and prospects under this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." When used in this Quarterly Report on Form 10-Q, the words "believe," "may," "will," "should," "expect," "intend," "plan," "predict," "anticipate," "estimate" or "continue" and other words and terms of similar meaning are intended to identify forward-looking statements. Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, such forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from the forward-looking statements made in this report. Many such factors are outside the control of the Company. Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. The Company does not undertake, and specifically declines, any obligation, to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. 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; 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 first quarter of fiscal year 2020, we generated net sales of$1,465 million and net income attributable toTD Group of$304 million . This included net income from continuing operations attributable toTD Group of$233 million and income from discontinued operations, net of tax, of$71 million . EBITDA As Defined was$681 million , or 46.5% 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. 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 31
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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 a discussion of accounting standards recently adopted or required to be adopted in the future. Acquisitions and Divestitures Recent acquisitions, including the acquisition of Esterline inMarch 2019 , and divestitures are described in Note 3, "Acquisitions and Divestitures," to the condensed consolidated financial statements. 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 December 28, 2019 % of Sales December 29, 2018 % of Sales Net sales $ 1,465 100.0 % $ 993 100.0 % Cost of sales 664 45.3 % 429 43.2 % Selling and administrative expenses 201 13.7 % 122 12.3 % Amortization of intangible assets 40 2.7 % 20 2.1 % Income from operations 560 38.3 % 422 42.5 % Interest expense, net 248 16.8 % 172 17.3 % Refinancing costs 22 1.5 % - - % Other income (3 ) (0.2 )% - - % Income tax provision 59 4.0 % 54 5.4 % Income from continuing operations 234 16.0 % 196 19.7 % Less: Net income attributable to noncontrolling interests (1 ) (0.1 )% - - % Income from continuing operations attributable to TD Group 233 15.9 % 196 19.7 % Income from discontinued operations, net of tax 71 4.8 % - - % Net income attributable to TD Group $ 304 20.8 % $ 196 19.7 % Changes in Results of Operations Thirteen week period endedDecember 28, 2019 compared with the thirteen week period endedDecember 29, 2018 Total Company •Net Sales . Net organic sales and acquisition sales and the related dollar and
percentage changes for the thirteen week periods ended
December 29, 2018 were as follows (amounts in millions): Thirteen Week Periods Ended % Change December 28, 2019 December 29, 2018 Change Total Sales Organic sales $ 1,080 $ 993$ 87 8.7 % Acquisition sales 385 - 385 38.8 % $ 1,465 $ 993$ 472 47.5 % The increase in organic sales for the thirteen week period endedDecember 28, 2019 compared to the thirteen week period endedDecember 29, 2018 , is primarily related to an increase in commercial aftermarket sales ($43 million , an increase of 13.0%), defense sales ($40 million , an increase of 11.0%), and commercial OEM sales ($2 million , an increase of 0.9%). Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their respective acquisition dates. The acquisition sales displayed in the table above for the thirteen week period endedDecember 28, 2019 were attributable to the acquisition of Esterline. 32
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• Cost of Sales and Gross Profit. Cost of sales increased by
54.8%, to
compared to
2018. Cost of sales and the related percentage of total sales for the
thirteen week periods ended
follows (amounts in millions):
Thirteen Week Periods Ended
December 28, 2019 December 29, 2018 Change % Change
Cost of sales - excluding costs below $ 646 $ 423 $ 223 52.7 %
% of total sales 44.1 % 42.6 %
Foreign currency loss (gain) 14 (2 ) 16 800.0 %
% of total sales 1.0 % (0.2 )%
Stock compensation expense 3 2 1 50.0 %
% of total sales 0.2 % 0.2 %
Acquisition integration costs 1 2 (1 ) (50.0 )%
% of total sales 0.1 % 0.2 %
Inventory acquisition accounting adjustments - 4 (4 ) (100.0 )%
% of total sales - % 0.4 %
Total cost of sales $ 664 $ 429 $ 235 54.8 %
% of total sales 45.3 % 43.2 %
Gross profit $ 801 $ 564 $ 237 42.0 %
Gross profit percentage 54.7 % 56.8 %
The increase in the dollar amount of cost of sales during the thirteen week
period ended December 28, 2019 was primarily due to increased sales volume
through the acquisition of Esterline in March 2019 and organically, and negative
foreign currency impact. This was slightly offset by decreases in acquisition
integration costs and inventory acquisition accounting costs as presented in the
table above.
Gross profit as a percentage of sales decreased by 2.1 percentage points to
54.7% for the thirteen week period ended December 28, 2019 from 56.8% for the
thirteen week period ended December 29, 2018 . The dollar amount of gross profit
increased by $237 million , or 42.0%, for the thirteen week period ended
December 28, 2019 compared to the thirteen week period in the prior year due to
the following items:
• Gross profit on the sales from the acquisition of Esterline (excluding
acquisition-related costs) was approximately
week period ended December 28, 2019 , which represented gross profit of
approximately 44.5% of the acquisition sales.
• Organic sales growth described above, 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) and positive leverage on our fixed
overhead costs spread over a higher production volume resulted in an
increase in gross profit of approximately
period ended December 28, 2019 .
• Offsetting the increases in gross profit by $12 million compared to thesame period in the prior fiscal year was primarily attributable to negative
foreign currency impact, partially offset by decreases in inventory
acquisition accounting adjustments and acquisition integration costs.
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• Selling and Administrative Expenses. Selling and administrative expenses
increased by
thirteen week period ended
sales, for the thirteen week period ended
administrative expenses and the related percentage of total sales for the
thirteen week periods ended
follows (amounts in millions):
Thirteen Week Periods Ended
December 28, 2019 December 29, 2018 Change % Change
Selling and administrative expenses -
excluding costs below $ 173 $ 100 $ 73 73.0 %
% of total sales 11.8 % 10.1 %
Stock compensation expense 23 16 7 43.8 %
% of total sales 1.6 % 1.6 %
Acquisition-related expenses 5 6 (1 ) (16.7 )%
% of total sales 0.3 % 0.6 %
Total selling and administrative
expenses $ 201 $ 122 $ 79 64.8 %
% of total sales 13.7 % 12.3 %
The increase in the dollar amount of selling and administrative expenses during
the thirteen week period ended December 28, 2019 is primarily due to higher
stock compensation expense of $7 million . The increase in stock compensation
expense is primarily attributable to the stock option grants awarded to key
management at the Esterline reporting units.
• Amortization of Intangible Assets. Amortization of intangible assets was $40 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
thirteen week period ended
fees incurred on the redemption of the 2022 Notes that occurred in the first
quarter of fiscal 2020.
• Other Income. Other income of
period ended December 28, 2019 and primarily related to components of net
periodic pension benefit costs outside of service costs.
• 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
million 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
approximately
2018. 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 $4.0 billion in 6.25% 2026 Secured Notes and the issuance of
$550 million in 7.50% 2027 Notes and the activity in the first quarter of
fiscal 2020 consisting of the issuance of
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 at
• Income Taxes. Income tax expense as a percentage of income before income
taxes was approximately 20.1% for the thirteen week period ended
week period ended
recognized for excess tax benefits for share-based payments during the
thirteen week period ended
increase in the valuation allowance associated with our net interest expense
limitation under IRC Section 163(j) as described in Note 10, "Income Taxes."
• Income from Discontinued Operations. Discontinued operations for the
thirteen week period ended December 28, 2019 include the results of the
operations of the Souriau-Sunbank Connection Technologies business
("Souriau-Sunbank"). On December 20, 2019 , TransDigm completed the
divestiture of Souriau-Sunbank to Eaton Corporation plc ("Eaton") for
approximately $920 million . Souriau-Sunbank was acquired by TransDigm as
part of its acquisition of Esterline Technologies Corporation in
The income from discontinued operations for the thirteen week period ended
Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank, net
of tax, of $62 million . There were no discontinued operations for the
thirteen week period ended December 29, 2018 .
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• Net Income Attributable to
increased
period ended
Group of
primarily 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
share from continuing operations and discontinued operations was
There was no impact on earnings per share from discontinued operations for
the thirteen week period ended
million was decreased by dividend equivalent payments paid or declared of
common shareholders of
thirteen week period ended
by dividend equivalent payments of
resulting in net income available to common shareholders of
$3.05 per share.
Business Segments
• Segment
December 28, 2019 andDecember 29, 2018 were as follows (amounts in millions): Thirteen Week Periods Ended December 28, 2019 % of Sales December 29,
2018 % of Sales Change % Change Power & Control $ 752 51.3 % $ 560 56.4 %$ 192 34.3 % Airframe 674 46.0 % 399 40.2 % 275 68.9 % Non-aviation 39 2.7 % 34 3.4 % 5 14.7 % $ 1,465 100.0 % $ 993 100.0 %$ 472 47.5 % Acquisition sales for the Power & Control segment totaled$126 million , or an increase of 22.5%, resulting from the acquisition of Esterline. Organic sales for the Power & Control segment increased$66 million , an increase of 11.7%, for the thirteen week period endedDecember 28, 2019 compared to the thirteen week period endedDecember 29, 2018 . The organic sales increase resulted primarily from an increase in defense sales ($34 million , an increase of 12.4%), an increase in commercial aftermarket sales ($28 million , an increase of 18.6%), and an increase in commercial OEM sales ($1 million , an increase of 1.1%). Acquisition sales for the Airframe segment totaled$255 million , or an increase of 63.9%, resulting from the acquisition of Esterline. Organic sales for the Airframe business increased$20 million , an increase of 5.0%, for the thirteen week period endedDecember 28, 2019 compared to the thirteen week period endedDecember 29, 2018 . The organic sales increase resulted primarily from increases in commercial aftermarket sales ($15 million , an increase of 8.2%) and defense sales ($5 million , an increase of 6.1%). Acquisition sales for the Non-aviation segment totaled$4 million , or an increase of 10.8%, resulting from the acquisition of Esterline. Organic sales for the Non-aviation segment increased by$1 million , an increase of 4.5%, for the thirteen week period endedDecember 28, 2019 compared to the thirteen week period endedDecember 29, 2018 . • EBITDA As Defined. EBITDA As Defined by segment for the thirteen week periods endedDecember 28, 2019 andDecember 29, 2018 were as follows (amounts in millions): Thirteen Week Periods Ended December 28, % of Segment % of Segment 2019 Sales December 29, 2018 Sales Change % Change
Power & Control$ 385 51.2 % $ 300 53.5 %$ 85 28.3 % Airframe 305 45.3 % 191 48.0 % 114 59.7 % Non-aviation 13 33.3 % 11 31.4 % 2 18.2 %$ 703 48.0 % $ 502 50.6 %$ 201 40.0 % EBITDA As Defined for the Power & Control segment from the acquisition of Esterline was approximately$34.8 million for the thirteen week period endedDecember 28, 2019 . Organic EBITDA As Defined for the Power & Control segment increased approximately$50.2 million , an increase of 16.7%, 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 was approximately$95.0 million for the thirteen week period endedDecember 28, 2019 . Organic EBITDA as Defined for the Airframe segment increased approximately$19.0 million , an increase of 9.9%, resulting from organic sales growth in defense, commercial OEM, and commercial aftermarket, as 35
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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 Non-aviation segment from the acquisition of Esterline was approximately$0.4 million for the thirteen week period endedDecember 28, 2019 . Organic EBITDA As Defined for the Non-aviation segment increased approximately$1.6 million , an increase of 14.5%. Backlog As ofDecember 28, 2019 , the Company estimated its sales order backlog at$3,528 million compared to an estimated sales order backlog of$2,181 million as ofDecember 29, 2018 . The increase in backlog is due to growth from recent acquisitions, particularly the Esterline acquisition, and organic growth in the commercial aftermarket, commercial OEM and defense markets. The majority of the purchase orders outstanding as ofDecember 28, 2019 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 ofDecember 28, 2019 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 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. As a result of the debt financing activity in the first quarter of fiscal 2020, interest payments will increase going forward in accordance with the terms of the related indenture. However, in connection with the continued application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers), we expect to continue to generate strong margins and provide more than 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 opportunistic investments in our own stock, make strategic business combinations and/or pay dividends to our shareholders. 36
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OnDecember 20, 2019 ,TransDigm completed the divestiture of Souriau-Sunbank to Eaton Corporation plc ("Eaton") for approximately$920 million . Souriau-Sunbank was acquired byTransDigm as part of its acquisition of Esterline Technologies Corporation inMarch 2019 . Also onDecember 20, 2019 , the Company announced thatTD Group's Board of Directors authorized and declared a special cash dividend of$32.50 on each outstanding share of common stock and cash dividend equivalent payments on options granted under its stock incentive plans. The record date for the special dividend wasDecember 30, 2019 , and the payment date for the dividend wasJanuary 7, 2020 . The total cash payment related to the special dividend and dividend equivalent payments onJanuary 7, 2020 was approximately$1.9 billion , which was funded by existing cash on hand and the proceeds received from the completed Souriau-Sunbank divestiture. We do not anticipate declaring regular quarterly or annual cash dividends on our common stock in the near future. Any declaration of special cash dividends on our common stock in the future 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 senior secured credit facility and Indentures, the availability of surplus underDelaware 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. UnlessTD 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 senior secured credit facility and Indentures and may be limited by future debt or other agreements that we may enter into. In the future, the Company may increase its borrowings in connection with acquisitions, if cash flow from operating activities becomes insufficient to fund current operations or for other short-term cash needs or for stock repurchases or dividends. Our future leverage will also be impacted by the then current conditions of the credit markets. Operating Activities. The Company generated$433 million of net cash from operating activities during the thirteen week period endedDecember 28, 2019 compared to$330 million during the thirteen week period endedDecember 29, 2018 . The increase is primarily attributable to the additional net operating cash inflows generated by the Esterline businesses. The change in accounts receivable during the thirteen week period endedDecember 28, 2019 was a source of cash of$51 million compared to a source of cash of$45 million during the thirteen week period endedDecember 29, 2018 . The increase in the source of cash of$6 million is primarily attributable to an increase in sales and related timing of receipt of payment from customers. The change in inventories during the thirteen week period endedDecember 28, 2019 was a use of cash of$69 million compared to a use of cash of$29 million during the thirteen week period endedDecember 29, 2018 . The increase in the use of cash is related to an increase in backlog resulting in additional raw material purchases for expected order fulfillments in the second fiscal quarter. The change in accounts payable during the thirteen week period endedDecember 28, 2019 was a use of cash of$14 million compared to a source of cash of$3 million during the thirteen week period endedDecember 29, 2018 . Investing Activities. Net cash provided by investing activities was$877 million during the thirteen week period endedDecember 28, 2019 , consisting of proceeds of$904 million from the divestiture of Souriau-Sunbank and partially offset by capital expenditures of$27 million . Net cash used in investing activities was$53 million during the thirteen week period endedDecember 29, 2018 consisting of payments for acquisitions of$29 million , which primarily consisted of Extant's acquisition ofNavCom for approximately$27 million , and capital expenditures of$24 million . Financing Activities. Net cash provided by financing activities during the thirteen week period endedDecember 28, 2019 was$1,414 million . The source of cash was primarily attributable to$2,625 million in net proceeds from the completion of the 2027 5.50% Notes offering and$20 million in proceeds from stock option exercises. Sources were partially offset by the redemption of the 2022 Notes outstanding for$1,168 million and the payment of$64 million in dividend equivalent payments. In connection with the$32.50 special dividend declared onDecember 20, 2019 , approximately$1,864 million in special dividends and dividend equivalent payments were made in the second fiscal quarter of 2020. Net cash used in financing activities during the thirteen week period endedDecember 29, 2018 was$10 million . The use of cash was primarily attributable to the payment of$24 million in dividend equivalent payments partially offset by$14 million in proceeds from stock option exercises. 37
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Description of Senior Secured Term Loans and Indentures Senior Secured Term Loans FacilityTransDigm has$7,524 million in fully drawn term loans (the "Term Loans Facility") and a$760 million revolving credit facility. The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as ofDecember 28, 2019 ): Term Loans Facility Aggregate Principal Maturity Date Interest Rate Tranche E$2,221 million May 30, 2025 LIBO rate + 2.5% Tranche F$3,524 million June 9, 2023 LIBO rate + 2.5% Tranche G$1,779 million August 22, 2024 LIBO rate + 2.5% The Term Loans Facility requires quarterly aggregate principal payments of$19.1 million . The revolving commitments consist of two tranches which includes up to$151.5 million of multicurrency revolving commitments. AtDecember 28, 2019 , the Company had$41.8 million in letters of credit outstanding and$718.2 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 thirteen week period endedDecember 28, 2019 , the applicable interest rates ranged from approximately 4.2% to 4.5% 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 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 commitments 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. Indentures Senior Subordinated Notes 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 "TransDigmUK Notes" and together with theTransDigm Inc. Notes, the "Notes," are further described below) offered inMay 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. TheTransDigm Inc. Notes are guaranteed on a senior subordinated unsecured basis byTD Group andTransDigm Inc.'s domestic restricted subsidiaries. TheTransDigm UK Notes are guaranteed on a senior subordinated basis byTransDigm Inc. ,TD Group andTransDigm Inc.'s domestic 38
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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 ofTD 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. OnJanuary 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, onFebruary 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, byTransDigm Group ,TransDigm UK and all ofTransDigm Inc.'s existingU.S. subsidiaries on a senior secured basis. The 2026 Secured Notes offerings closed onFebruary 13, 2019 and mature onMarch 15, 2026 . OnFebruary 13, 2019 , the Company announced a cash tender offer for any and all of its outstanding 2020 Notes. OnMarch 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 endedDecember 28, 2019 representing unamortized debt issuance costs expensed in conjunction with the redemption of the 2020 Notes. OnMarch 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. OnApril 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 . OnNovember 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 ofNovember 13, 2019 , amongTransDigm , as issuer,TD Group , TDUK and the other subsidiaries ofTransDigm named therein, as guarantors, andThe Bank of New York Mellon Trust Company, N.A. , as trustee. 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 . 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. 6. 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. The Credit Agreement requires mandatory prepayments of principal based on certain percentages of Excess Cash Flow (as defined in the Credit Agreement), commencing 90 days after the end of each fiscal year, subject to certain exceptions. In addition, subject to certain exceptions (including, with respect to asset sales, the reinvestment in productive assets),TransDigm will be required to prepay the loans outstanding under the Credit Agreement at 100% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of certain asset sales and issuance or incurrence of certain indebtedness. No matters mandating prepayments occurred during the quarter endedDecember 28, 2019 . In addition, under the Credit Agreement, if the usage of the revolving credit facility exceeds 35% of the total revolving commitments, the Company will be required to maintain a maximum consolidated net leverage ratio of net debt, as defined, to trailing four-quarter EBITDA As Defined. A breach of any of the covenants or an inability to comply with the required leverage ratio could result in a default under the Credit Agreement or the Indentures. 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 39
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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 ofDecember 28, 2019 , 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 ofDecember 28, 2019 , the Company has borrowed$350 million under the Securitization Facility, which bears interest at a rate of 0.9% plus LIBOR. AtDecember 28, 2019 , the applicable interest rate was 2.6%. 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. No repurchases were made under the program during the quarter endedDecember 28, 2019 . As ofDecember 28, 2019 ,$650 million in repurchases are allowable under the program 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 ofDecember 28, 2019 , the Company had$41.8 million in letters of credit outstanding. 40
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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
December 28,
2019 December 29, 2018
Income from continuing operations $ 234 $ 196
Adjustments:
Depreciation and amortization expense 69 35 Interest expense, net 248 172 Income tax provision 59 54 EBITDA 610 457 Adjustments: Inventory acquisition accounting adjustments(1) - 4 Acquisition integration costs(2) 6 2 Acquisition transaction-related expenses(3) 1 5 Non-cash stock compensation expense(4) 26 18 Refinancing costs(5) 22 - Other, net(6) 16 1 EBITDA As Defined $ 681 $ 487
(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):
Thirteen Week Periods Ended
December 28, 2019 December 29, 2018
Net cash provided by operating activities $ 433 $ 330
Adjustments:
Changes in assets and liabilities, net of effects from acquisitions of businesses
(89 ) (75 )
Interest expense, net(1) 240 166
Income tax provision - current 87 54
Non-cash stock compensation expense(2) (26 ) (18 )
Refinancing costs(6) (22 ) -
EBITDA from discontinued operations(8) (13 ) -
EBITDA 610 457
Adjustments:
Inventory acquisition accounting adjustments(3) - 4 Acquisition integration costs(4) 6 2 Acquisition transaction-related expenses(5) 1 5 Non-cash stock compensation expense(2) 26 18 Refinancing costs(6) 22 - Other, net(7) 16 1 EBITDA As Defined $ 681 $ 487
(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 accounting adjustments to inventory associated with acquisitions
of businesses and product lines that were charged to cost of sales when the
inventory was sold.
(4) Represents costs incurred to integrate acquired businesses and product
lines into TD Group's operations, facility relocation costs and other
acquisition-related costs.
(5) 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.
(6) Represents costs expensed related to debt financing activities, including
new issuances, extinguishments, refinancings and amendments to existing
agreements.
(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.
(8) The fiscal 2020 results include the divestiture of Souriau-Sunbank. SeeNote 18, "Discontinued Operations," to the condensed consolidated financial
statements included herein for further information.
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