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. Refer to Item IA 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, batteries and chargers, engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, databus and power controls, cockpit security components and systems, specialized and advanced cockpit displays, aircraft audio systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products, switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer. 30 -------------------------------------------------------------------------------- Table of Contents For the third quarter of fiscal year 2020, we generated net sales of$1,022 million and a net loss attributable toTD Group of$(6) million . This included a net loss from continuing operations attributable toTD Group of$(5) million and a loss from discontinued operations, net of tax, of$(1) million . EBITDA As Defined was$424 million , or 41.5% 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 (loss) income from continuing operations and net cash provided by operating activities. InDecember 2019 , 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 stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a rapid pace and has remained depressed. The exact timing and pace of the recovery is indeterminable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines. Governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impact of COVID-19. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally. Since the early days of the pandemic, we have been following guidance from theWorld Health Organization and theU.S. Center for Disease Control to protect employees and prevent the spread of the virus within all of our facilities globally. Some of the actions implemented include: flexible work-from-home scheduling; alternate shift schedules; pre-shift temperature screenings, where allowed by law; social distancing; appropriate personal protective equipment; facility deep cleaning; and paid quarantine time for impacted employees. Withinthe United States , our business has been designated as "essential," which has allowed us to continue to serve our customers; nonetheless, the COVID-19 pandemic has significantly disrupted our operations. The outbreak of COVID-19 has heightened the risk that a significant portion of our workforce will suffer illness or otherwise be unable to work. Furthermore, in light of enacted and any additional reductions in our workforce as a result of declines in our business caused by the COVID-19 pandemic, we cannot assure that we will be able to rehire our workforce once our business has begun to recover. Certain of our facilities have experienced temporary disruptions as a result of the COVID-19 pandemic, and we cannot predict whether our facilities will experience more significant disruptions in the future. Finally, our acquisition strategy, which is a key element of our overall business strategy, may be impacted by our efforts to maintain the Company's cash liquidity position in response to the COVID-19 pandemic. The COVID-19 pandemic has caused a significant adverse impact on our sales, net income and EBITDA as Defined for the third quarter of fiscal 2020 and is expected to continue to do so for at least the remainder of fiscal 2020. This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer demand for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce. The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company's future results. As part of the Company's response to the impact of the COVID-19 pandemic on its business, the Company began taking certain cost reduction measures in the third quarter of fiscal 2020 such as: (1) reducing its workforce by at least 30% 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 unpaid furloughs of various lengths at many businesses over approximately the next six months in response to business specific situations; (3)TransDigm's senior management team substantially reducing its cash compensation for the balance of fiscal 2020; (4) members ofTransDigm's Board of Directors forgoing their annual retainer fees for fiscal 2020; and (5) delaying non-essential capital projects and minimizing discretionary spending to only those activities and projects deemed essential in the near term. 31 -------------------------------------------------------------------------------- Table of Contents For the thirteen and thirty-nine week periods endedJune 27, 2020 , COVID-19 restructuring costs incurred were approximately$24 million , of which$19 million is recorded in cost of sales and$5 million is recorded in selling and administrative expenses. These were costs related to the Company's actions to reduce its workforce to align with customer demand. Additionally, the Company incurred approximately$3 million in incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment, etc.). The Company expects to incur restructuring and incremental costs of between approximately$40 million to$60 million during fiscal 2020 related to the COVID-19 pandemic. The Company continues to analyze its cost structure and may implement additional cost reduction measures as necessary due to the ongoing business challenges resulting from the COVID-19 pandemic. The Company is continuing to focus on the application of its three core value-driven operating strategies (obtaining profitable new business, continually improving its cost structure and providing highly engineered value-added products to customers). 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 disclosure of accounting standards recently adopted or required to be adopted in the future. Acquisitions and Divestitures Recent acquisitions and divestitures are described in Note 3, "Acquisitions and Divestitures," 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
June 27, 2020 % of Sales June 29, 2019 % of Sales
Net sales $ 1,022 100.0 % $ 1,521 100.0 %
Cost of sales 531 52.0 % 808 53.1 %
Selling and administrative expenses 163 15.9 % 252 16.6 %
Amortization of intangible assets 42 4.1 % 38 2.5 %
Income from operations 286 28.0 % 423 27.8 %
Interest expense, net 262 25.6 % 241 15.8 %
Refinancing costs 1 0.1 % - - %
Other income (11) (1.1) % (1) (0.1) %
Income tax provision 39 3.8 % 55 3.6 %
(Loss) Income from continuing operations (5) (0.5) % 128 8.4 %
Less: Net income attributable to noncontrolling
interests - - % - - %
(Loss) Income from continuing operations
attributable to TD Group (5) (0.5) % 128 8.4 %
(Loss) Income from discontinued operations, net
of tax (1) (0.1) % 17 1.1 %
Net (loss) income attributable to TD Group $ (6) (0.6) % $ 145 9.5 %
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Thirty-Nine Week Periods Ended
June 27, 2020 % of Sales June 29, 2019 % of Sales
Net sales $ 3,930 100.0 % $ 3,682 100.0 %
Cost of sales 1,819 46.3 % 1,755 47.7 %
Selling and administrative expenses 544 13.8 % 535 14.5 %
Amortization of intangible assets 128 3.3 % 80 2.2 %
Income from operations 1,439 36.6 % 1,312 35.6 %
Interest expense, net 762 19.4 % 614 16.7 %
Refinancing costs 27 0.7 % 3 0.1 %
Other income (14) (0.4) % (1) - %
Income tax provision 112 2.8 % 172 4.7 %
Income from continuing operations 552 14.0 % 524 14.2 %
Less: Net income attributable to noncontrolling
interests (1) - % - - %
Income from continuing operations attributable
to TD Group 551 14.0 % 524 14.2 %
Income from discontinued operations, net of tax 66 1.7 % 19 0.5 %
Net income attributable to TD Group $ 617 15.7 % $ 543 14.7 %
Changes in Results of Operations
Thirteen week period ended June 27, 2020 compared with the thirteen week period
ended June 29, 2019
Total Company
•Net Sales. Net sales and the related dollar and percentage changes for the
thirteen week periods ended June 27, 2020 and June 29, 2019 were as follows
(amounts in millions):
Thirteen Week Periods Ended % Change
June 27, 2020 June 29, 2019 Change Total Sales
Organic sales $ 1,022 $ 1,521 $ (499) (32.8) %
Acquisition sales - - - - %
$ 1,022 $ 1,521 $ (499) (32.8) %
The decrease in organic sales for the thirteen week period ended June 27, 2020
compared to the thirteen week period ended June 29, 2019 , is primarily related
to a decrease in commercial aftermarket sales ($228 million , a decrease of
52.1%), commercial OEM sales ($178 million , a decrease of 41.6%), defense sales
($73 million , a decrease of 12.6%) and other non-aerospace sales ($20 million , a
decrease of 25.2%). The decreases in the commercial aftermarket and commercial
OEM markets are attributable to the adverse impact that the COVID-19 pandemic
had on customer demand for all market channels with commercial OEM and
commercial aftermarket being the most adversely impacted due to the pandemic's
impact on air travel worldwide. Commercial OEM was also impacted to a lesser
extent by the 737 MAX production stoppage. The defense market channel is also
impacted to a lesser extent due to certain supply chain disruptions as well as
the "stay at home" orders, quarantines, etc. impacting the government
procurement workforce.
Acquisition sales represent sales of acquired businesses for the period up to
one year subsequent to their respective acquisition date. There were no
acquisition sales for the thirteen week period ended June 27, 2020 as the
Esterline acquisition was completed on March 14, 2019 . All sales after the one
year measurement expired on March 14, 2020 are classified as organic sales.
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•Cost of Sales and Gross Profit. Cost of sales decreased by $277 million , or
34.3%, to $531 million for the thirteen week period ended June 27, 2020 compared
to $808 million for the thirteen week period ended June 29, 2019 . Cost of sales
and the related percentage of total sales for the thirteen week periods ended
June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
Thirteen Week Periods Ended
June 27, 2020 June 29, 2019 Change % Change
Cost of sales - excluding costs below $ 511 $ 708 $ (197) (27.8) %
% of total sales 50.0 % 46.5 %
COVID-19 restructuring costs 19 - 19 100.0 %
% of total sales 1.9 % - %
Foreign currency losses 5 5 - - %
% of total sales 0.5 % 0.3 %
Non-cash stock compensation expense 2 3 (1) (33.3) %
% of total sales 0.2 % 0.2 %
Acquisition integration costs - 8 (8) (100.0) %
% of total sales - % 0.5 %
Inventory acquisition accounting adjustments - 89 (89) (100.0) %
% of total sales - % 5.9 %
Loss contract amortization (6) (5) (1) (20.0) %
% of total sales (0.6) % (0.3) %
Total cost of sales $ 531 $ 808 $ (277) (34.3) %
% of total sales 52.0 % 53.1 %
Gross profit $ 491 $ 713 $ (222) (31.1) %
Gross profit percentage 48.0 % 46.9 %
The decrease in the dollar amount of cost of sales during the thirteen week
period ended June 27, 2020 was primarily due to lower sales volume from
decreased customer demand due to the COVID-19 pandemic and the other factors
summarized above. Also, fixed overhead costs incurred were spread over a lower
production volume because of the COVID-19 pandemic resulting in an adverse
impact to gross profit during the third quarter of fiscal 2020.
Gross profit as a percentage of sales increased by 1.1 percentage points to
48.0% for the thirteen week period ended June 27, 2020 from 46.9% for the
thirteen week period ended June 29, 2019 . The increase in the gross profit
percentage is driven by the lack of inventory acquisition accounting adjustments
during the thirteen week period ended June 27, 2020 . This was partially offset
by COVID-19 restructuring costs and fixed overhead costs incurred which were
spread over lower production volume.
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•Selling and Administrative Expenses. Selling and administrative expenses
decreased by $89 million to $163 million , or 15.9% of sales, for the thirteen
week period ended June 27, 2020 from $252 million , or 16.6% of sales, for the
thirteen week period ended June 29, 2019 . Selling and administrative expenses
and the related percentage of total sales for the thirteen week periods ended
June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
Thirteen Week Periods Ended
June 27, 2020 June 29, 2019 Change % Change
Selling and administrative expenses - excluding
costs below $ 128 $ 183 $ (55) (30.1) %
% of total sales 12.5 % 12.0 %
Non-cash stock compensation expense 19 29 (10) (34.5) %
% of total sales 1.9 % 1.9 %
Bad debt expense 9 2 7 350.0 %
% of total sales 0.9 % 0.1 %
COVID-19 restructuring costs 5 - 5 100.0 %
% of total sales 0.5 % - %
Acquisition-related expenses 2 38 (36) (94.7) %
% of total sales 0.2 % 2.5 %
Total selling and administrative expenses $ 163 $ 252 $ (89) (35.3) %
% of total sales 15.9 % 16.6 %
The decrease in selling and administrative expenses during the thirteen week
period ended June 27, 2020 is primarily due to lower sales volume and cost
mitigation measures enacted in response to the COVID-19 pandemic in addition to
the other factors summarized above. The cost mitigation measures enacted during
the third quarter of fiscal 2020 are described in Note 1, "Description of the
Business and Impact of COVID-19 Pandemic."
•Amortization of Intangible Assets. Amortization of intangible assets was $42
million for the thirteen week period ended June 27, 2020 compared to $38 million
in the thirteen week period ended June 29, 2019 . The increase in amortization
expense of $4 million was due to additional amortization expense on
definite-lived intangible assets recorded in connection with the acquisition of
Esterline based on the final third party valuation of intangible assets
completed in the second quarter of fiscal 2020.
•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 $21 million , or 8.7%, to $262 million for the
thirteen week period ended June 27, 2020 from $241 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 $19.9 billion for the thirteen week period
ended June 27, 2020 and approximately $17.0 billion for the thirteen week period
ended June 29, 2019 . The increase in the weighted average level of borrowings
was primarily due to the activity in fiscal 2020 consisting of the issuance of
$2.65 billion in 5.50% 2027 Notes, $1.1 billion in 2025 Secured Notes, $400
million in 6.25% 2026 New Notes and a $200 million draw on the revolving credit
facility. The increases in new debt described above were slightly offset by the
redemption of $1.15 billion in 6.00% 2022 Notes in the first quarter of fiscal
2020, as well as the attributable LIBO rate decrease, when comparing the period
ended June 27, 2020 to June 29, 2019 . The weighted average interest rate for
cash interest payments on total borrowings outstanding for the thirteen week
period ended June 27, 2020 was 5.03%.
•Refinancing Costs. Refinancing costs of $1 million were recorded for the
thirteen week period ended June 27, 2020 and primarily related to certain fees
incurred for the Company's fiscal 2020 financing activities described herein.
•Other Income. Other income of $11 million was recorded for the thirteen week
period ended June 27, 2020 and primarily related to proceeds received from a
business interruption insurance settlement and non-service related components of
net periodic benefit costs on the Company's defined benefit pension plans.
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•Income Taxes. Income tax expense as a percentage of income before income taxes
was approximately 113.5% for the thirteen week period ended June 27, 2020
compared to 30.0% for the thirteen week period ended June 29, 2019 . On March 27,
2020 , President Trump signed into law the CARES Act in response to the COVID-19
pandemic. The CARES Act was intended to infuse negatively affected companies
with various tax cash benefits to ease the impact of the pandemic and, 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 expense for fiscal years 2020 (retroactive to October
1, 2019 for the Company) and 2021. The Company's higher effective tax rate for
the thirteen week period ended June 27, 2020 , which also was higher than the
Federal statutory tax rate of 21%, was primarily due to the unfavorable economic
impact of the COVID-19 pandemic on the Company's net interest expense deduction
limitation, the associated valuation allowance and a resulting discrete
detriment recognized for a cumulative adjustment associated with excess tax
benefits for share-based payments. While the CARES Act increased the net
interest expense deduction limitation, the unfavorable economic impact of
COVID-19 decreased overall taxable income and therefore limited the amount of
deductible interest expense.
•(Loss) Income from Discontinued Operations. The loss from discontinued
operations for the thirteen week period ended June 27, 2020 is $(1) million and
is driven by certain wind down activity associated with the dispositions of the
Souriau-Sunbank Connection Technologies business and Esterline Interface
Technology ("EIT") group of businesses. Income from discontinued operations for
the thirteen week period ended June 29, 2019 is $17 million and includes the
results of operations of the Souriau-Sunbank and EIT businesses.
Both businesses were acquired by TransDigm as part of its acquisition of
Esterline in March 2019 . On December 20, 2019 , TransDigm completed the
divestiture of Souriau-Sunbank to Eaton Corporation plc ("Eaton") for
approximately $920 million . On September 20, 2019 , TransDigm completed the
divestiture of EIT to an affiliate of KPS Capital Partners, LP for approximately
$190 million .
•Net (Loss) Income Attributable to TD Group . Net income attributable to TD Group
decreased $151 million , or 104%, to a net loss of $(6) million for the thirteen
week period ended June 27, 2020 compared to net income attributable to TD Group
of $145 million for the thirteen week period ended June 29, 2019 , primarily due
to the adverse impact that the COVID-19 pandemic had on the Company's operations
as well as the other factors referred to above.
•(Loss) Earnings per Share. Basic and diluted (loss) earnings per share was
$(0.10) for the thirteen week period ended June 27, 2020 and $2.57 per share for
the thirteen week period ended June 29, 2019 . Basic and diluted (loss) earnings
per share from continuing operations and discontinued operations was $(0.09) and
$(0.01) , respectively, for the thirteen week period ended June 27, 2020 . Basic
and diluted earnings per share from continuing operations and discontinued
operations was $2.27 and $0.30 , respectively, for the thirteen week period ended
June 29, 2019 .
Business Segments
•Segment Net Sales . Net sales by segment for the thirteen week periods ended
June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
Thirteen Week Periods Ended
June 27, 2020 % of Sales June 29, 2019 % of Sales Change % Change
Power & Control $ 556 54.4 % $ 769 50.6 % $ (213) (27.7) %
Airframe 434 42.5 % 711 46.7 % (277) (39.0) %
Non-aviation 32 3.1 % 41 2.7 % (9) (22.0) %
$ 1,022 100.0 % $ 1,521 100.0 % $ (499) (32.8) %
Sales for the Power & Control segment decreased $213 million , a decrease of
27.7%, for the thirteen week period ended June 27, 2020 compared to the thirteen
week period ended June 29, 2019 . The sales decrease resulted primarily from
decreases in commercial aftermarket sales ($95 million , a decrease of 47.2%),
commercial OEM sales ($75 million , a decrease of 42.3%) and defense sales ($35
million , a decrease of 9.8%).
Sales for the Airframe segment decreased $277 million , a decrease of 39.0%, for
the thirteen week period ended June 27, 2020 compared to the thirteen week
period ended June 29, 2019 . The sales decrease resulted primarily from decreases
in commercial aftermarket sales ($132 million , a decrease of 56.4%), commercial
OEM sales ($105 million , an increase of 42.1%) and defense sales ($37 million ,
an increase of 17.6%).
Sales for the Non-aviation segment decreased $9 million , or a decrease of 22.0%,
for the thirteen week period ended June 27, 2020 compared to the thirteen week
period ended June 29, 2019 . The sales decrease resulted primarily from decreases
in other, non-aerospace sales ($9 million , a decrease of 29%).
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•EBITDA As Defined. EBITDA As Defined by segment for the thirteen week periods
ended June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
Thirteen Week Periods Ended
% of Segment % of Segment
June 27, 2020 Sales June 29, 2019 Sales Change % Change
Power & Control $ 270 48.6 % $ 378 49.2 % $ (108) (28.6) %
Airframe 166 38.2 % 306 43.0 % (140) (45.8) %
Non-aviation 12 37.5 % 13 31.7 % (1) (7.7) %
$ 448 43.8 % $ 697 45.8 % $ (249) (35.7) %
EBITDA As Defined for the Power & Control segment decreased approximately $108
million , a decrease of 28.6%, resulting from sales decreases in the commercial
aftermarket and commercial OEM markets as a result of COVID-19 pandemic and, to
a lesser extent, supply chain disruptions in the defense market and "stay at
home" orders, quarantines and other actions impacting the government procurement
workforce.
EBITDA as Defined for the Airframe segment decreased approximately $140 million ,
a decrease of 45.8%, resulting from sales decreases in the commercial
aftermarket and commercial OEM markets as a result of COVID-19 pandemic and, to
a lesser extent, supply chain disruptions in the defense market and "stay at
home" orders, quarantines and other actions impacting the government procurement
workforce.
EBITDA As Defined for the Non-aviation segment decreased approximately $1
million , a decrease of 7.7%, resulting from decreases in other, non-aerospace
sales as a result of the COVID-19 pandemic.
Thirty-nine week period ended June 27, 2020 compared with the thirty-nine week
period ended June 29, 2019
Total Company
•Net Sales. Net organic sales and acquisition sales and the related dollar and
percentage changes for the thirty-nine week periods ended June 27, 2020 and
June 29, 2019 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended % Change
June 27, 2020 June 29, 2019 Change Total Sales
Organic sales $ 3,231 $ 3,586 $ (355) (9.6) %
Acquisition sales 699 96 603 16.4 %
$ 3,930 $ 3,682 $ 248 6.7 %
The decrease in organic sales for the thirty-nine week period ended June 27,
2020 compared to the thirty-nine week period ended June 29, 2019 , is primarily
related to decreases in commercial aftermarket sales ($186 million , a decrease
of 16.2%), commercial OEM sales ($156 million , a decrease of 15.7%), other
non-aerospace sales ($13 million , a decrease of 7.2%) and defense sales ($1
million , a decrease of 0.1%). The decreases in the commercial aftermarket and
commercial OEM markets are attributable to the adverse impact that the COVID-19
pandemic had on customer demand beginning in March 2020 for all market channels
with commercial OEM and commercial aftermarket being the most adversely impacted
due to the pandemic's impact on air travel worldwide. Commercial OEM was also
impacted to a lesser extent by the 737 MAX production stoppage. The defense
market channel is also impacted to a lesser extent due to certain supply chain
disruptions as well as the "stay at home" orders, quarantines, etc. impacting
the government procurement workforce.
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 thirty-nine week period ended June 27, 2020 and
June 29, 2019 were attributable to the sales recorded by the Esterline
businesses between March 14, 2019 , which was the acquisition date by TransDigm ,
and March 14, 2020 in consideration of the respective thirty-nine week periods
ended June 27, 2020 and June 29, 2019 presented above.
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•Cost of Sales and Gross Profit. Cost of sales increased by $64 million , or
3.6%, to $1,819 million for the thirty-nine week period ended June 27, 2020
compared to $1,755 million for the thirty-nine week period ended June 29, 2019 .
Cost of sales and the related percentage of total sales for the thirty-nine week
periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in
millions):
Thirty-Nine Week Periods Ended
June 27, 2020 June 29, 2019 Change % Change
Cost of sales - excluding costs below $ 1,818 $ 1,635 $ 183 11.2 %
% of total sales 46.3 % 44.4 %
COVID-19 restructuring costs 19 - 19 100.0 %
% of total sales 0.5 % - %
Non-cash stock compensation expense 6 7 (1) (14.3) %
% of total sales 0.2 % 0.2 %
Foreign currency losses 4 3 1 (33.3) %
% of total sales 0.1 % 0.1 %
Acquisition integration costs 4 11 (7) (63.6) %
% of total sales 0.1 % 0.3 %
Inventory acquisition accounting adjustments - 109 (109) (100.0) %
% of total sales - % 3.0 %
Loss contract amortization (32) (10) (22) (220.0) %
% of total sales (0.8) % (0.3) %
Total cost of sales $ 1,819 $ 1,755 $ 64 3.6 %
% of total sales 46.3 % 47.7 %
Gross profit $ 2,111 $ 1,927 $ 184 9.5 %
Gross profit percentage 53.7 % 52.3 %
The increase in the dollar amount of cost of sales during the thirty-nine week
period ended June 27, 2020 was primarily due to the increase in sales from a
full fiscal year of ownership of the Esterline businesses in fiscal 2020 in
addition to the other factors summarized above. Partially offsetting the
increase in cost of sales is the lower sales volume since March 2020 from
decreased customer demand attributable to the COVID-19 pandemic.
Gross profit as a percentage of sales increased by 1.4 percentage points to
53.7% for the thirty-nine week period ended June 27, 2020 from 52.3% for the
thirty-nine week period ended June 29, 2019 . The increase in the gross profit
percentage is primarily driven by the increase in loss contract amortization and
the lack of inventory acquisition accounting adjustments during the thirty-nine
week period ended June 27, 2020 .
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•Selling and Administrative Expenses. Selling and administrative expenses
increased by $9 million to $544 million , or 13.8% of sales, for the thirty-nine
week period ended June 27, 2020 from $535 million , or 14.5% of sales, for the
thirty-nine week period ended June 29, 2019 . Selling and administrative expenses
and the related percentage of total sales for the thirty-nine week periods ended
June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
June 27, 2020 June 29, 2019 Change % Change
Selling and administrative expenses - excluding
costs below $ 447 $ 404 $ 43 10.6 %
% of total sales 11.4 % 11.0 %
Non-cash stock compensation expense 53 63 (10) (15.9) %
% of total sales 1.3 % 1.7 %
Bad debt expense 24 3 21 700.0 %
% of total sales 0.6 % 0.1 %
Acquisition-related expenses 15 65 (50) (76.9) %
% of total sales 0.4 % 1.8 %
COVID-19 restructuring costs 5 - 5 100.0 %
% of total sales 0.1 % - %
Total selling and administrative expenses $ 544 $ 535 $ 9 1.7 %
% of total sales 13.8 % 14.5 %
The increase in the dollar amount of selling and administrative expenses during
the thirty-nine week period ended June 27, 2020 is primarily due to the increase
in sales from a full fiscal year of ownership of the Esterline businesses in
fiscal 2020 in addition to the other factors summarized above. Partially
offsetting the increase in selling and administrative expenses is a reduction in
expenses as a result of the cost mitigation measures enacted during the third
quarter of fiscal 2020 in response to the COVID-19 pandemic. The cost mitigation
measures enacted during the third quarter of fiscal 2020 are described in Note
1, "Description of the Business and Impact of COVID-19 Pandemic."
•Amortization of Intangible Assets. Amortization of intangible assets was $128
million for the thirty-nine week period ended June 27, 2020 compared to $80
million in the thirty-nine week period ended June 29, 2019 . The increase in
amortization expense of $48 million was due to the amortization expense on the
definite-lived intangible assets recorded in connection with the acquisition of
Esterline.
•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 $148 million , or 24.1%, to $762 million for the
thirty-nine week period ended June 27, 2020 from $614 million for the comparable
thirty-nine 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 $18.5 billion for the thirty-nine week
period ended June 27, 2020 and approximately $15.1 billion for the thirty-nine
week period ended June 29, 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 $4.0 billion in 2026 Secured Notes and the
issuance of $550 million in 7.50% 2027 Notes and the activity in fiscal 2020
consisting of the issuance of $2.65 billion in 5.50% 2027 Notes, $1.1 billion in
2025 Secured Notes, $400 million 6.25% 2026 New Notes and a $200 million draw on
the revolving credit facility. The increases in new debt described above were
slightly offset by the redemptions of $550 million in 5.50% 2020 Notes and $1.15
billion in 6.00% 2022 Notes. The weighted average interest rate for cash
interest payments on total borrowings outstanding for the thirty-nine week
period ended June 27, 2020 was 4.93%.
•Refinancing Costs. Refinancing costs of $27 million were recorded for the
thirty-nine week period ended June 27, 2020 and primarily related to the fees
incurred on the redemption of the 2022 Notes that occurred in the first quarter
of fiscal 2020.
•Other Income. Other income of $14 million was recorded for the thirty-nine week
period ended June 27, 2020 and primarily relates to proceeds received from a
business interruption insurance settlement during the third quarter of fiscal
2020 and non-service related components of net periodic benefit costs on the
Company's defined benefit pension plans.
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•Income Taxes. Income tax expense as a percentage of income before income taxes
was approximately 16.9% for the thirty-nine week period ended June 27, 2020
compared to 24.9% for the thirty-nine week period ended June 29, 2019 . On March
27, 2020 , President Trump signed into law the CARES Act in response 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 expense for
fiscal years 2020 and 2021. The Company's lower effective tax rate for the
thirty-nine week period ended June 27, 2020 , which also was lower than the
Federal statutory tax rate of 21%, was primarily due to a discrete benefit
recognized for excess tax benefits for share-based payments, in addition to the
modification of the interest expense limitation under IRC Section 163(j) enacted
as part of the CARES Act.
•Income from Discontinued Operations. Discontinued operations for the
thirty-nine week period ended June 27, 2020 include the results of the
operations of Souriau-Sunbank. Discontinued operations for the thirty-nine week
period ended June 29, 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 March 2019 . On December 20, 2019 , TransDigm
completed the divestiture of Souriau-Sunbank to Eaton for approximately $920
million . On September 20, 2019 , TransDigm completed the divestiture of EIT to an
affiliate of KPS Capital Partners, LP for approximately $190 million .
Income from discontinued operations for the thirty-nine week period ended
June 27, 2020 was $66 million and included $7 million from Souriau-Sunbank's
operations and a gain on the sale of Souriau-Sunbank, net of tax, of $59
million . Income from discontinued operations for the thirty-nine week period
ended June 29, 2019 was $19 million and included the results of operations of
the Souriau-Sunbank and EIT group of businesses.
•Net Income Attributable to TD Group . Net income attributable to TD Group
increased $74 million , or 13.6%, to $617 million for the thirty-nine week period
ended June 27, 2020 compared to net income attributable to TD Group of $543
million for the thirty-nine week period ended June 29, 2019 , primarily as a
result of the factors referred to above. The COVID-19 pandemic has adversely
impacted the results of operations since March 2020 .
•Earnings per Share. Basic and diluted earnings per share was $7.53 for the
thirty-nine week period ended June 27, 2020 and $9.22 per share for the
thirty-nine week period ended June 29, 2019 . Basic and diluted earnings per
share from continuing operations and discontinued operations was $6.38 and
$1.15 , respectively, for the thirty-nine week period ended June 27, 2020 . Basic
and diluted earnings per share from continuing operations and discontinued
operations was $8.87 and $0.35 , respectively, for the thirty-nine week period
ended June 29, 2019 . Net income attributable to TD Group for the thirty-nine
week period ended June 27, 2020 of $617 million was decreased by special
dividend and dividend equivalent payments paid of $185 million , or $3.22 per
share, resulting in net income available to common shareholders of $432 million ,
or $7.53 per share. Net income for the thirty-nine week period ended June 29,
2019 of $543 million was decreased by dividend equivalent payments of $24
million , or $0.43 per share, resulting in net income available to common
shareholders of $519 million , or $9.22 per share.
Business Segments
•Segment Net Sales . Net sales by segment for the thirty-nine week periods ended
June 27, 2020 and June 29, 2019 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
June 27, 2020 % of Sales June 29, 2019 % of Sales Change % Change
Power & Control $ 2,056 52.4 % $ 1,960 53.2 % $ 96 4.9 %
Airframe 1,762 44.8 % 1,609 43.7 % 153 9.5 %
Non-aviation 112 2.8 % 113 3.1 % (1) (0.9) %
$ 3,930 100.0 % $ 3,682 100.0 % $ 248 6.7 %
Acquisition sales for the Power & Control segment increased $196 million , or an
increase of 10.0%, resulting from the acquisition of Esterline. Organic sales
for the Power & Control segment decreased $100 million , a decrease of 5.1%, for
the thirty-nine week period ended June 27, 2020 compared to the thirty-nine week
period ended June 29, 2019 . The organic sales decrease resulted primarily from
decreases in commercial OEM sales ($59 million , a decrease of 13.7%), a decrease
in commercial aftermarket sales ($54 million , a decrease of 10.0%); partially
offset by an increase in defense sales ($13 million , an increase of 1.4%). The
decreases in organic commercial OEM and aftermarket sales are attributable to
the COVID-19 pandemic.
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Acquisition sales for the Airframe segment increased $401 million , or an
increase of 24.9%, resulting from the acquisition of Esterline. Organic sales
for the Airframe segment decreased $248 million , a decrease of 15.4%, for the
thirty-nine week period ended June 27, 2020 compared to the thirty-nine week
period ended June 29, 2019 . The organic sales decrease resulted primarily from
decreases in commercial aftermarket sales ($132 million , a decrease of 21.5%),
commercial OEM sales ($98 million , a decrease of 17.9%), defense sales ($15
million , a decrease of 3.6%) and other non-aerospace sales ($3 million , a
decrease of 8.9%). The decreases in organic commercial OEM and aftermarket sales
are attributable to the COVID-19 pandemic.
Acquisition sales for the Non-aviation segment increased $7 million , or an
increase of 6.2%, resulting from the acquisition of Esterline. Organic sales for
the Non-aviation segment decreased by $8 million , a decrease of 7.1%, for the
thirty-nine week period ended June 27, 2020 compared to the thirty-nine week
period ended June 29, 2019 .
•EBITDA As Defined. EBITDA As Defined by segment for the thirty-nine week
periods ended June 27, 2020 and June 29, 2019 were as follows (amounts in
millions):
Thirty-Nine Week Periods Ended
% of Segment % of Segment
June 27, 2020 Sales June 29, 2019 Sales Change % Change
Power & Control $ 1,036 50.4 % $ 1,006 51.3 % $ 30 3.0 %
Airframe 767 43.5 % 740 46.0 % 27 3.6 %
Non-aviation 39 34.8 % 36 31.9 % 3 8.3 %
$ 1,842 46.9 % $ 1,782 48.4 % $ 60 3.4 %
EBITDA As Defined for the Power & Control segment from the acquisition of
Esterline increased approximately $55 million for the thirty-nine week period
ended June 27, 2020 . Organic EBITDA As Defined for the Power & Control segment
decreased approximately $25 million , a decrease of 2.5%, as a result of lower
sales volume in the commercial OEM and commercial aftermarket market channels as
a result of the COVID-19 pandemic.
EBITDA As Defined for the Airframe segment from the acquisition of Esterline
increased approximately $153 million for the thirty-nine week period ended
June 27, 2020 . Organic EBITDA as Defined for the Airframe segment decreased
approximately $126 million , a decrease of 17.0%, primarily as a result of lower
volume in the commercial OEM and commercial aftermarket channels as a result of
the COVID-19 pandemic.
EBITDA As Defined for the Non-aviation segment from the acquisition of Esterline
increased approximately $1 million for the thirty-nine week period ended
June 27, 2020 . Organic EBITDA As Defined for the Non-aviation segment increased
approximately $2 million , an increase of 5.6%.
Backlog
As of June 27, 2020 , the Company estimated its sales order backlog at $3,425
million compared to $3,856 million as of June 29, 2019 . The decrease in backlog
is due to the adverse impact that the COVID-19 pandemic has had on customer
demand, particularly our commercial customers, domestically and internationally.
The uncertainty of the duration of the pandemic and its impact on the aerospace
industry is expected to continue to inhibit sales order backlog growth in the
commercial OEM and commercial aftermarket channels for at least the remainder of
fiscal 2020.
The majority of the purchase orders outstanding as of June 27, 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 of
June 27, 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 in the United
States , we manufacture certain products in Europe , Asia , Canada , Mexico and
other countries globally. We sell our products in the United States as well as
in foreign countries. Although the majority of sales of our products are made to
customers (including distributors) located in the United States , our products
are ultimately sold to and used by customers, including airlines and other end
users of aircraft, throughout the world. 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.
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There can be no assurance that foreign governments will not adopt regulations or
take other action that would have a direct or indirect adverse impact on the
business or market opportunities of the Company within such governments'
countries. Furthermore, there can be no assurance that the political, cultural
and economic climate outside the United States will be favorable to our
operations and growth strategy.
Liquidity and Capital Resources
We have historically maintained a capital structure comprising a mix of equity
and debt financing. We vary our leverage both to optimize our equity return and
to pursue acquisitions. We expect to meet our current debt obligations as they
come due through internally generated funds from current levels of operations
and/or through refinancing in the debt markets prior to the maturity dates of
our debt.
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.
The COVID-19 pandemic has caused a significant adverse impact on our sales, net
income and EBITDA as Defined for the third quarter of fiscal 2020 and is
expected to continue to do so for at least the remainder of fiscal 2020. This is
under the assumption that the COVID-19 pandemic will continue to adversely
impact customer demand for all market channels with commercial OEM and
commercial aftermarket being the most adversely impacted due to the pandemic's
impact on air travel worldwide. The defense market channel is also impacted to a
lesser extent due to certain supply chain disruptions as well as the "stay at
home" orders, quarantines, etc. impacting the government procurement workforce.
The magnitude of the impact of COVID-19 remains unpredictable and we, therefore,
continue to anticipate potential supply chain disruptions, employee absenteeism
and short-term suspensions of manufacturing facilities, and additional health
and safety costs related to the COVID-19 pandemic that could unfavorably impact
our business. Longer term, because the duration of the pandemic is unclear, it
is difficult to forecast a precise impact on the Company's future results.
The Company is actively managing the business to maintain cash flow, including
the cost mitigation efforts described in Note 1, "Description of the Business
and Impact of COVID-19 Pandemic," 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).
In March 2020 , the President of the 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.
In March 2020 , the Company drew $200 million on its revolving credit facility to
increase the Company's liquidity as a precautionary response to macroeconomic
conditions caused by the COVID-19 pandemic. Also, in further actions to increase
the Company's liquidity, the Company executed two notes offerings in April 2020
in which the proceeds received are for general Corporate purposes. On April 8,
2020 , the Company entered into a purchase agreement in connection with a private
offering of $1,100 million in aggregate principal amount of 8.00% Senior Secured
Notes due 2025 at an issue price of 100% of the principal amount. On April 17,
2020 , the Company entered into a purchase agreement in connection with a private
offering of $400 million in aggregate principal amount of 6.25% Senior Secured
Notes due 2026 at an issue price of 101% of the principal amount.
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As of June 27, 2020 , the Company has significant cash liquidity as illustrated
in the table presented below (in millions):
As of June 27, 2020
Cash and cash equivalents $ 4,549
Availability on revolving credit facility 523
Cash liquidity $ 5,072
We believe our significant cash liquidity will allow us to meet our anticipated
funding requirements. We expect to meet our short-term cash liquidity
requirements (including interest obligations and capital expenditures) through
net cash from operating activities, cash on hand and, if needed, additional
draws on the revolving credit facility. Long-term cash liquidity requirements
consist primarily of obligations under our long-term debt agreements. There is
no maturity on any tranche of term loans or notes until July 2024 .
Operating Activities. The Company generated $991 million of net cash from
operating activities during the thirty-nine week period ended June 27, 2020
compared to $768 million during the thirty-nine week period ended June 29, 2019 .
The change in accounts receivable during the thirty-nine week period ended
June 27, 2020 was a source of cash of $347 million compared to a use of cash of
$65 million during the thirty-nine week period ended June 29, 2019 . The increase
in the source of cash of $412 million is primarily attributable to a decline in
sales, and the related accounts receivable, in the third quarter due to the
COVID-19 pandemic. The Company also continues to actively manage its accounts
receivable, the related agings and collection efforts.
The change in inventories during the thirty-nine week period ended June 27, 2020
was a use of cash of $126 million compared to a use of cash of $100 million
during the thirty-nine week period ended June 29, 2019 . The increase in the use
of cash is primarily driven by higher inventory levels due to reduced demand as
a result of the COVID-19 pandemic.
The change in accounts payable during the thirty-nine week period ended June 27,
2020 was a use of cash of $48 million compared to a use of cash of $7 million
during the thirty-nine week period ended June 29, 2019 . The increase in the use
of cash is primarily driven by a corresponding decline in accounts payable as
inventory and other purchases have slowed as a result of the COVID-19 pandemic.
Investing Activities. Net cash provided by investing activities was $842 million
during the thirty-nine week period ended June 27, 2020 , consisting of proceeds
of $904 million from the divestiture of Souriau-Sunbank and partially offset by
capital expenditures of $62 million . We do not expect to incur material capital
expenditures for the remainder of fiscal 2020 in response to the cost mitigation
measures enacted in response to the COVID-19 pandemic. Planned capital
expenditures for the remainder of the fiscal year are limited to those deemed to
be essential.
Net cash used in investing activities was $4,037 million during the thirty-nine
week period ended June 29, 2019 , consisting of capital expenditures of $80
million and payments for acquisitions, net of cash acquired, of $3,957 million
which is primarily comprised of the acquisitions of Esterline for $3,536 million
and NavCom for $27 million .
Financing Activities. Net cash provided by financing activities during the
thirty-nine week period ended June 27, 2020 was $1,245 million . The source of
cash was primarily attributable to $2,625 million in net proceeds from the
completion of the 5.50% 2027 Notes offering, $1,092 million in net proceeds from
the completion of the 2025 Secured Notes offering, $401 million in net proceeds
from the completion of the 6.25% 2026 New Notes offering, $200 million drawn
from the existing revolving credit facility and $89 million in proceeds from
stock option exercises. This was partially offset by special dividend and
dividend equivalent payments of $1,928 million , the redemption of the 2022 Notes
outstanding for $1,168 million , repayments on term loans of $38 million and the
purchase of treasury stock of $19 million .
Net cash provided by financing activities during the thirty-nine week period
ended June 29, 2019 was $3,912 million . The source of cash was primarily
attributable to $4,480 million in net proceeds from the completion of the 2026
Secured Notes and 2027 Notes offerings in the second quarter of fiscal 2019 and
$64 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 $57 million and dividend equivalent payments of $24
million .
Contractual Obligations
We have future obligations under various contracts relating to debt and interest
payments, finance and operating leases, pension and post-retirement benefit
plans and purchase obligations. During the thirty-nine week period ended
June 27, 2020 , other than the debt financing transactions described herein 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 ended September 30, 2019 .
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Description of Senior Secured Term Loans and Indentures
Senior Secured Term Loans Facility
TransDigm has $7,487 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 on March 24, 2020 . The Term Loans Facility
consists of three tranches of term loans as follows (aggregate principal amount
disclosed is as of June 27, 2020 ):
Term Loans Facility Aggregate Principal Maturity Date Interest Rate
Tranche E $2,210 million May 30, 2025 LIBO rate + 2.25%
Tranche F $3,507 million December 9, 2025 LIBO rate + 2.25%
Tranche G $1,770 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. At June 27, 2020 , the
Company had $36.8 million in letters of credit outstanding and $523.2 million in
borrowings available under the revolving commitments. The interest rates per
annum applicable to the loans under the Credit Agreement are, at TransDigm's
option, equal to either an alternate base rate or an adjusted 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 by TransDigm , 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
thirty-nine week period ended June 27, 2020 , the applicable interest rates
ranged from approximately 2.4% to 3.2% 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
On February 6, 2020 , the Company entered into Amendment No. 7 and Refinancing
Facility Agreement (herein, "Amendment No. 7"). Under the terms of Amendment No.
7, the Company, among other things, (i) incurred new tranche E term loans in an
aggregate principal amount equal to approximately $2,216 million , new tranche F
term loans in an aggregate principal amount equal to approximately $3,515
million and new tranche G term loans, (collectively, the "New Term Loans") in an
aggregate principal amount equal to approximately $1,774 million , (ii) repaid in
full all of the existing tranche E term loans, tranche F term loans and tranche
G term loans outstanding under the Credit Agreement immediately prior to
Amendment No. 7 and (iii) extended the maturity date of the tranche F term loans
to December 9, 2025 , (iv) modified the definition of consolidated EBITDA in the
Credit Agreement to add back certain cost savings and non-recurring cost and
expenses and (v) modified certain negative covenants to provide additional
flexibility to enable TransDigm to incur additional debt and make additional
investments and asset sales.
The New Term Loans were fully drawn on February 6, 2020 . The LIBO rate per annum
applicable to the New Term Loans is 2.25%, down from the previous rate of 2.50%.
The other terms and conditions that apply to the New Term Loans are
substantially the same as the terms and conditions that applied to the term
loans immediately prior to Amendment No. 7.
On March 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.
Indentures
The following table represents the notes outstanding as of June 27, 2020 :
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%
2025 Secured Notes $1,100 million December 15, 2025 8.00%
2026 Secured Notes $4,400 million March 15, 2026 6.25%
6.875% 2026 Notes $500 million May 15, 2026 6.875%
6.375% 2026 Notes $950 million June 15, 2026 6.375%
7.50% 2027 Notes $550 million March 15, 2027 7.50%
5.50% 2027 Notes $2,650 million November 15, 2027 5.50%
44-------------------------------------------------------------------------------- Table of Contents The 2024 Notes, the 6.375% 2026 Notes, the 2025 Secured 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 and$400 million offerings of the 2026 Secured Notes in the second quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively, were issued at a price of 101% of their principal amount, resulting in gross proceeds of$4,400 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 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. 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. 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 cash 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 (herein the "2025 Secured Notes") 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 (also considered to be part of the "2026 Secured Notes") at an issue price of 101% of the principal amount. Refer to Note 9, "Debt," to the condensed consolidated financial statements for further information.TransDigm Inc's 2024 Notes, 2025 Notes, 6.375% 2026 Notes, 2026 Secured Notes, 7.50% Notes 2027 Notes, 5.50% 2027 Notes and 2025 Secured Notes are jointly and severally guaranteed, on a senior subordinated basis, byTD Group ,TransDigm UK Holdings plc ("TransDigmUK ") andTransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indentures.TransDigm UK's 6.875% 2026 Notes are jointly and severally guaranteed, on a senior subordinated basis, byTD Group ,TransDigm Inc. andTransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indenture. Separate financial statements ofTransDigm Inc. are not presented becauseTransDigm Inc.'s 2024 Notes, 2025 Notes, 6.375% 2026 Notes, 2026 Secured Notes, 7.50% 2027 Notes, 5.50% 2027 Notes and 2025 Secured Notes are fully and unconditionally guaranteed on a senior subordinated basis byTD Group ,TransDigm UK and all ofTransDigm Inc.'s Domestic Restricted Subsidiaries and becauseTD Group has no significant operations or assets separate from its investment inTransDigm Inc. Separate financial statements ofTransDigm UK are not presented becauseTransDigm UK's 6.875% 2026 Notes, issued inMay 2018 , are fully and unconditionally guaranteed on a senior subordinated basis byTD Group ,TransDigm Inc. and all ofTransDigm Inc.'s Domestic Restricted Subsidiaries. The financial information presented is that ofTD Group and the Guarantors, which includesTransDigm Inc. andTransDigm UK , on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions betweenTD Group and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately. 45 -------------------------------------------------------------------------------- Table of Contents (in millions) June 27, 2020 September 30, 2019 Current assets $ 5,166 $ 2,458 Noncurrent assets 9,162 8,286 Current liabilities 966 742 Noncurrent liabilities 20,392 17,328 Amounts due to subsidiaries that are non-issuers and non-guarantors - net 55 171 Thirty-Nine Week Period Ended June 27, (in millions)
2020
Net sales $ 3,123 Sales to subsidiaries that are non-issuers and non-guarantors 24 Cost of products sold 1,371
Expense from subsidiaries that are non-issuers and non-guarantors - net
32
Income from continuing operations 499
Net income attributable to TD Group 613
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.
With the exception of the revolving credit facility, the Company has no
maintenance covenants in its existing term loan and indenture agreements. Under
the Credit Agreement, if the usage of the revolving credit facility exceeds 35%,
or $266 million , of the total revolving commitments, the Company is required to
maintain a maximum consolidated net leverage ratio of net debt to trailing
four-quarter EBITDA As Defined of 7.25x as of the last day of the fiscal
quarter.
As of June 27, 2020 , the Company was in compliance with its debt covenants and
expects to remain in compliance with its debt covenants in subsequent periods.
Trade Receivables Securitization Facility
During fiscal 2014, the Company established a trade receivable securitization
facility (the "Securitization Facility"). The Securitization Facility
effectively increases the Company's borrowing capacity depending on the amount
of the domestic operations' trade accounts receivable. The Securitization
Facility includes the right for the Company to exercise annual one year
extensions as long as there have been no termination events as defined by the
agreement. The Company uses the proceeds from the Securitization Facility as an
alternative to other forms of debt, effectively reducing borrowing costs.
On July 22, 2020 , the Company amended the Securitization Facility to extend the
maturity date to July 27, 2021 . As of June 27, 2020 , the Company has borrowed
$350 million under the Securitization Facility, which bears interest at a rate
of 0.9% plus LIBOR. At June 27, 2020 , the applicable interest rate was 1.1%. The
Securitization Facility is collateralized by substantially all of the Company's
domestic operations' trade accounts receivable.
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Stock Repurchase Program
On November 8, 2017 , our Board of Directors, authorized a stock repurchase
program permitting repurchases of our outstanding shares not to exceed $650
million in the aggregate, subject to any restrictions specified in the Credit
Agreement and/or Indentures governing the existing Notes.
During March 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 of June 27, 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 of June 27, 2020 ,
the Company had $36.8 million in letters of credit outstanding.
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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 (loss) income from continuing operations to EBITDA and
EBITDA As Defined and the reconciliations of net cash provided by operating
activities to EBITDA and EBITDA As Defined presented below.
Neither EBITDA nor EBITDA As Defined is a measurement of financial performance
under accounting principles generally accepted in the 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 (loss) income from continuing
operations to EBITDA and EBITDA As Defined (in millions):
Thirty-Nine Week Periods
Thirteen Week Periods Ended Ended
June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
(Loss) Income from continuing operations $ (5)
70 63 211 138
Interest expense, net 262 241 762 614
Income tax provision 39 55 112 172
EBITDA 366 487 1,637 1,448
Adjustments:
Inventory acquisition accounting adjustments (1) - 89 - 109
Acquisition integration costs (2) 3 41 18 49
Acquisition transaction-related expenses (3) - 5 1 27
Non-cash stock compensation expense (4) 21 32 59 70
Refinancing costs (5) 1 - 27 3
COVID-19 & 737 MAX restructuring costs (6) 30 - 30 -
Other, net (7) 3 5 8 6
EBITDA As Defined $ 424 $ 659 $ 1,780 $ 1,712
(1)Represents accounting adjustments to inventory associated with acquisitions
of businesses and product lines that were charged to cost of sales when the
inventory was sold.
(2)Represents costs incurred to integrate acquired businesses and product lines
into TD Group's operations, facility relocation costs and other
acquisition-related costs.
(3)Represents transaction-related costs comprising deal fees, legal, financial
and tax due diligence expenses and valuation costs that are required to be
expensed as incurred.
(4)Represents the compensation expense recognized by TD Group under our stock
incentive plans.
(5)Represents costs expensed related to debt financing activities, including new
issuances, extinguishments, refinancings and amendments to existing agreements.
(6)Represents restructuring costs related to the Company's cost reduction
measures in response to the COVID-19 pandemic ($24 million ) and 737 MAX
production rate changes ($3 million ). These were costs related to the Company's
actions to reduce its workforce to align with customer demand. This also
includes $3 million of incremental costs related to the pandemic that are not
expected to recur once the pandemic has subsided and are clearly separable from
normal operations (e.g., additional cleaning and disinfecting of facilities by
contractors above and beyond normal requirements, personal protective equipment,
etc.).
(7)Primarily represents foreign currency transaction gain or loss, payroll
withholding taxes related to special dividend and dividend equivalent payments
and stock option exercises, non-service related pension costs, deferred
compensation, and gain or loss on sale of fixed assets.
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Table of Contents The following table sets forth a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined (in millions):
Thirty-Nine Week Periods Ended
June 27, 2020 June 29, 2019
Net cash provided by operating activities $ 991 $ 768 Adjustments:
Changes in assets and liabilities, net of effects from acquisitions of businesses
(134) (8)
Interest expense, net (1) 737 594
Income tax provision - current 129 167
Non-cash stock compensation expense (2) (59) (70)
Refinancing costs (3) (27) (3)
EBITDA 1,637 1,448
Adjustments:
Inventory acquisition accounting adjustments (4) - 109
Acquisition integration costs (5) 18 49
Acquisition transaction-related expenses (6) 1 27
Non-cash stock compensation expense (2) 59 70
Refinancing costs (3) 27 3
COVID-19 & 737 MAX restructuring costs (7) 30 -
Other, net (8) 8 6
EBITDA As Defined $ 1,780 $ 1,712
(1)Represents interest expense excluding the amortization of debt issuance costs
and premium and discount on debt.
(2)Represents the compensation expense recognized by TD Group under our stock
incentive plans.
(3)Represents costs expensed related to debt financing activities, including new
issuances, extinguishments, refinancings and amendments to existing agreements.
(4)Represents 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)Represents restructuring costs related to the Company's cost reduction
measures in response to the COVID-19 pandemic ($24 million ) and 737 MAX
production rate changes ($3 million ). These were costs related to the Company's
actions to reduce its workforce to align with customer demand. This also
includes $3 million of incremental costs related to the pandemic that are not
expected to recur once the pandemic has subsided and are clearly separable from
normal operations (e.g., additional cleaning and disinfecting of facilities by
contractors above and beyond normal requirements, personal protective equipment,
etc.).
(8)Primarily represents foreign currency transaction gain or loss, payroll
withholding taxes related to special dividend and dividend equivalent payments
and stock option exercises, non-service related pension costs, deferred
compensation, and gain or loss on sale of fixed assets.
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