Forward-looking Statements The following discussion of the Company's financial condition and results of operations should be read together withTD Group's condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. References in this section to "TransDigm ," "the Company," "we," "us," "our," and similar references refer 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; 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 1A 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 proprietary aerospace components with significant aftermarket content. We seek to develop highly customized products to solve specific needs for aircraft operators and manufacturers. We attempt to differentiate ourselves based on engineering, service and manufacturing capabilities. We typically choose not to compete for non-proprietary "build to print" business because it frequently offers lower margins than proprietary products. We believe that our products have strong brand names within the industry and that we have a reputation for high quality, reliability and strong customer support. Our business is well diversified due to the broad range of products that we offer to our customers. Our major product offerings, substantially all of which are ultimately provided to end-users in the aerospace industry, include mechanical/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, engineered audio, radio and antenna systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products, switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, 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. 27 -------------------------------------------------------------------------------- Table of Contents For the second quarter of fiscal year 2021, we generated net sales of$1,194 million and net income attributable toTD Group of$104 million . EBITDA As Defined was$519 million , or 43.5% of net sales. Refer to the "Non-GAAP Financial Measures" section for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to income from continuing operations and net cash provided by operating activities. COVID-19 was first reported inDecember 2019 , and since being declared as a pandemic by theWorld Health Organization inMarch 2020 , has dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the 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 beginning in the second half of fiscal 2020 and has remained significantly depressed compared to pre-pandemic levels. Although commercial air travel demand has shown slight signs of recovery in recent months, the recovery is expected to continue to be slow and uneven depending on factors such as the trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 surfacing), the rollout and effectiveness of the vaccine, and the eventual easing of quarantines and travel restrictions, among other factors. 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, and in recent months new variants of COVID-19 have been identified, resulting in additional restrictions put in place by certain governments around the world. 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 depending on the duration of the pandemic and its impact on our cash flows. The COVID-19 pandemic has caused a significant adverse impact on our sales, net income and EBITDA as Defined and is expected to continue to do so for at least the remainder of fiscal 2021. 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 significantly lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for uncertainty. 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 took immediate and aggressive action to minimize the spread of COVID-19 in our workplaces and reduce costs. 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. In recent months, the Company has taken various steps to facilitate access to vaccines for our employees in accordance with federal guidelines and state and local vaccination plans. Material actions to reduce costs in response to the impact that the pandemic has had on operating results include: (1) reducing the Company's workforce to align operations with customer demand through a reduction in force or through a realignment of certain business units; (2) implementing unpaid furloughs and salary reductions; (3) delaying non-essential capital projects and (4) minimizing discretionary spending. 28 -------------------------------------------------------------------------------- Table of Contents For the thirteen week period endedApril 3, 2021 , COVID-19 restructuring costs of approximately$17 million were incurred, of which$14 million was recorded in cost of sales and$3 million was recorded in selling and administrative expenses on the condensed consolidated statements of income. For the twenty-six week period endedApril 3, 2021 , COVID-19 restructuring costs of approximately$36 million were incurred, of which$26 million was recorded in cost of sales and$10 million was recorded in selling and administrative expenses on the condensed consolidated statements of income. These costs are primarily related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. Additionally, for the thirteen and twenty-six week periods endedApril 3, 2021 , the Company incurred approximately$1 million and$3 million , respectively, 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.). For the thirteen and twenty-six week periods endedMarch 28, 2020 , the Company incurred approximately$1 million of restructuring costs. As ofApril 3, 2021 andSeptember 30, 2020 , the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was approximately$32 million and$13 million , respectively. This accrual is recorded as a component of accrued and other current liabilities on the condensed consolidated balance sheets. The increase in the accrual is primarily driven by costs to reduce its workforce that have been incurred but not paid; partially offset by payments against the accrual. The Company expects to incur additional restructuring and incremental costs related to the COVID-19 pandemic though at a reduced level in comparison to fiscal 2020. 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. Critical Accounting Policies and Estimates The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in conformity with generally accepted accounting principles inthe United States ("U.S. GAAP") for interim financial statements and contain certain amounts that were based upon management's best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. On an ongoing basis, we evaluate the accounting policies and estimates used to prepare financial statements. Estimates are based on historical experience, judgments and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management. A comprehensive discussion of the Company's critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Item 7 of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 . Other than the adoption of ASU 2016-13 "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments," there have been no significant changes in critical accounting policies, management estimates or accounting policies since the fiscal year endedSeptember 30, 2020 . Refer to Note 4, "Recent Accounting Pronouncements," and Note 5, "Revenue Recognition," in the notes to the condensed consolidated financial statements included herein for further disclosure of accounting standards recently adopted or required to be adopted in the future. Acquisitions and Divestitures Recent acquisitions and divestitures are described in Note 3, "Acquisitions and Divestitures," in the notes to the condensed consolidated financial statements included herein. 29 -------------------------------------------------------------------------------- Table of Contents 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
April 3, 2021 % of Sales March 28, 2020 % of Sales Net sales$ 1,194 100.0 %$ 1,443 100.0 % Cost of sales 602 50.4 % 625 43.3 % Selling and administrative expenses 162 13.6 % 180 12.5 % Amortization of intangible assets 36 3.0 % 46 3.2 % Income from operations 394 33.0 % 592 41.0 % Interest expense, net 268 22.4 % 252 17.5 % Refinancing costs 24 2.0 % 3 0.2 % Other income (28) (2.3) % - - % Income tax provision 25 2.1 % 14 1.0 % Income from continuing operations 105 8.8 % 323 22.4 % Less: Net income attributable to noncontrolling interests (1) (0.1) % - - % Income from continuing operations attributable to TD Group 104 8.7 % 323 22.4 % Loss from discontinued operations, net of tax - - % (4) (0.3) % Net income attributable to TD Group $ 104 8.7 % $ 319 22.1 %
Twenty-Six Week Periods Ended
April 3, 2021 % of Sales March 28, 2020 % of Sales Net sales$ 2,301 100.0 %$ 2,908 100.0 % Cost of sales 1,169 50.8 % 1,288 44.3 % Selling and administrative expenses 358 15.6 % 381 13.1 % Amortization of intangible assets 65 2.8 % 86 3.0 % Income from operations 709 30.8 % 1,153 39.6 % Interest expense, net 535 23.3 % 501 17.2 % Refinancing costs 24 1.0 % 26 0.9 % Other income (33) (1.4) % (3) (0.1) % Income tax provision 28 1.2 % 73 2.5 % Income from continuing operations 155 6.7 % 556 19.1 % Less: Net income attributable to noncontrolling interests (1) - % (1) - % Income from continuing operations attributable to TD Group 154 6.7 % 555 19.1 % Income from discontinued operations, net of tax - - % 68 2.3 % Net income attributable to TD Group $ 154 6.7 % $ 623 21.4 % 30
-------------------------------------------------------------------------------- Table of Contents Changes in Results of Operations Thirteen week period endedApril 3, 2021 compared with the thirteen week period endedMarch 28, 2020 Total Company •Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the thirteen week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Thirteen Week Periods Ended % Change April 3, 2021 March 28, 2020 Change Total Sales Organic sales$ 1,151 $ 1,443 $ (292) (20.3) % Acquisition sales 43 - 43 3.0 %$ 1,194 $ 1,443 $ (249) (17.3) % The decrease in organic sales of$292 million for the thirteen week period endedApril 3, 2021 , compared to the thirteen week period endedMarch 28, 2020 , is primarily related to decreases in commercial OEM sales ($170 million , a decrease of 37.2%) and commercial aftermarket sales ($170 million , a decrease of 37.4%); partially offset by an increase in defense sales ($48 million , an increase of 9.1%). The decreases in the commercial aftermarket and commercial OEM markets are attributable to the adverse impact that the COVID-19 pandemic has had on the customer demand for air travel worldwide. The increase in defense sales are primarily driven by the OEM market. Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their respective acquisition date. The acquisition sales in the table above for the thirteen week period endedApril 3, 2021 are primarily attributable to the acquisition of Cobham Aero Connectivity ("CAC"). •Cost of Sales and Gross Profit. Cost of sales decreased by$23 million , or 3.7%, to$602 million for the thirteen week period endedApril 3, 2021 compared to$625 million for the thirteen week period endedMarch 28, 2020 . Cost of sales and the related percentage of total sales for the thirteen week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Thirteen Week Periods
Ended
April 3, 2021 March 28, 2020 Change % Change Cost of sales - excluding costs below$ 585 $ 649$ (64) (9.9) % % of total sales 49.0 % 45.0 % COVID-19 pandemic restructuring costs 15 - 15 NM % of total sales 1.3 % - % Inventory acquisition accounting adjustments 6 - 6 NM % of total sales 0.5 % - % Acquisition integration costs 2 2 - - % % of total sales 0.2 % 0.1 % Non-cash stock compensation expense 2 1 1 100.0 % % of total sales 0.2 % 0.1 % Foreign currency losses (gains) 1 (13) 14 107.7 % % of total sales 0.1 % (0.9) % Loss contract amortization (9) (14) 5 35.7 % % of total sales (0.8) % (1.0) % Total cost of sales$ 602 $ 625$ (23) (3.7) % % of total sales 50.4 % 43.3 % Gross profit$ 592 $ 818$ (226) (27.6) % Gross profit percentage 49.6 % 56.7 % The decrease in the dollar amount of cost of sales during the thirteen week period endedApril 3, 2021 was primarily due to lower sales volume from decreased customer demand due to the COVID-19 pandemic and the other factors summarized above, including those factors that partially offset the decrease in cost of sales. 31 -------------------------------------------------------------------------------- Table of Contents Gross profit as a percentage of sales decreased by 7.1 percentage points to 49.6% for the thirteen week period endedApril 3, 2021 from 56.7% for the thirteen week period endedMarch 28, 2020 . The decrease in the gross profit percentage is primarily driven by COVID-19 pandemic restructuring costs, unfavorable movement in foreign currency rates (primarily theU.S. dollar weakening against the British pound), inventory acquisition accounting adjustments, lower loss contract amortization and sales mix, specifically, lower commercial aftermarket sales as a percentage of total net sales. Also, fixed overhead costs incurred were spread over a lower production volume during the thirteen week period endedApril 3, 2021 further contributing to an adverse impact to gross profit. •Selling and Administrative Expenses. Selling and administrative expenses decreased by$18 million to$162 million , or 13.6% of sales, for the thirteen week period endedApril 3, 2021 from$180 million , or 12.5% of sales, for the thirteen week period endedMarch 28, 2020 . Selling and administrative expenses and the related percentage of total sales for the thirteen week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Thirteen Week
Periods Ended
April 3, 2021 March 28, 2020 Change % Change Selling and administrative expenses - excluding costs below$ 132 $ 162$ (30) (18.5) % % of total sales 11.1 % 11.2 % Non-cash stock compensation expense 19 10 9 90.0 % % of total sales 1.6 % 0.7 % Acquisition transaction-related expenses 5 - 5 NM % of total sales 0.4 % - % Acquisition integration costs 3 7 (4) (57.1) % % of total sales 0.3 % 0.5 % COVID-19 pandemic restructuring costs 3 1 2 200.0 % % of total sales 0.3 % 0.1 % Total selling and administrative expenses$ 162 $ 180$ (18) (10.0) % % of total sales 13.6 % 12.5 % The decrease in selling and administrative expenses during the thirteen week period endedApril 3, 2021 is primarily due to the realization of the cost mitigation measures that began to be enacted in the second half of fiscal 2020 in response to the COVID-19 pandemic, partially offset by the other factors summarized above. The material cost mitigation measures enacted to date are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic." •Amortization of Intangible Assets. Amortization of intangible assets was$36 million for the thirteen week period endedApril 3, 2021 compared to$46 million for the thirteen week period endedMarch 28, 2020 . The decrease in amortization expense of$10 million was due to amortization expense on sales order backlog recorded in fiscal 2020 in connection with the acquisition ofEsterline Technologies Corporation ("Esterline") that did not occur in fiscal 2021 as sales order backlog related to the Esterline acquisition was fully amortized by the end of fiscal 2020. This was partially offset by amortization expense of intangible assets related to the CAC acquisition in the second quarter of fiscal 2021. •Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, revolving credit facility fees and interest on finance leases; slightly offset by interest income. Interest expense-net increased$16 million , or 6.3%, to$268 million for the thirteen week period endedApril 3, 2021 from$252 million for the comparable thirteen week period last year. The increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately$20.4 billion for the thirteen week period endedApril 3, 2021 and approximately$18.5 billion for the thirteen week period endedMarch 28, 2020 . The increase in the weighted average level of borrowings was primarily due to the activity in fiscal 2020 consisting of the issuance of$1,100 million in 8.00% Senior Secured Notes due 2025 (the "2025 Secured Notes"),$400 million in 6.25% Senior Secured Notes due 2026 (the "2026 New Secured Notes") and$200 million drawn on the revolving credit facility. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirteen week period endedApril 3, 2021 was 5.0%. •Refinancing Costs. Refinancing costs of$24 million were recorded for the thirteen week period endedApril 3, 2021 compared to$3 million recorded for the thirteen week period endedMarch 28, 2020 . The refinancing costs for the thirteen week period endedApril 3, 2021 were primarily related to fees incurred on the early redemption of the 2024 Notes. The refinancing costs for thirteen week period endedMarch 28, 2020 were primarily related to fees incurred to refinance the term loans inFebruary 2020 . 32 -------------------------------------------------------------------------------- Table of Contents •Other Income. Other income was$28 million for the thirteen week period endedApril 3, 2021 . There was no other income recorded for the thirteen week period endedMarch 28, 2020 . Other income for the thirteen week period endedApril 3, 2021 is primarily driven by a$22 million gain on the settlement of the property insurance portion of the claim forLeach International Europe's Niort,France operating facility fire inAugust 2019 . The gain represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory. The remaining$6 million is primarily driven by non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($3 million ), receipt of Canadian governmental subsidies for the pandemic ($2 million ) and a net gain on sale recorded on the completed divestitures of certain businesses ($1 million ). •Income Taxes. Income tax expense as a percentage of income before income taxes was approximately 19.6% for the thirteen week period endedApril 3, 2021 compared to 4.2% for the thirteen week period endedMarch 28, 2020 . The Company's higher effective tax rate for the thirteen week period endedApril 3, 2021 , was primarily due to the increase in the Company's net interest deduction limitation pursuant to IRC Section 163(j) partially offset by the discrete impact of excess tax benefits associated with share-based payments. •Income from Discontinued Operations. There were no discontinued operations for the thirteen week period endedApril 3, 2021 . Discontinued operations for the thirteen week period endedMarch 28, 2020 included an adjustment of$4 million to the gain recognized on the sale of the Souriau-Sunbank Connection Technologies business ("Souriau-Sunbank"). •Net Income Attributable toTD Group . Net income attributable toTD Group decreased$215 million , or 67.4%, to$104 million for the thirteen week period endedApril 3, 2021 compared to net income attributable toTD Group of$319 million for the thirteen week period endedMarch 28, 2020 , primarily due to the adverse impact that the COVID-19 pandemic had on the Company's operations as well as the other factors referenced above. •Earnings per Share. Basic and diluted earnings per share was$1.79 for the thirteen week period endedApril 3, 2021 and$5.56 per share for the thirteen week period endedMarch 28, 2020 . Basic and diluted earnings per share from continuing operations was$1.79 for the thirteen week period endedApril 3, 2021 . Basic and diluted earnings (loss) per share from continuing operations and discontinued operations was$5.63 and$(0.07) , respectively, for the thirteen week period endedMarch 28, 2020 . Business Segments •SegmentNet Sales . Net sales by segment for the thirteen week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Thirteen Week Periods Ended April 3, 2021 % of Sales March 28, 2020 % of Sales Change % Change Power & Control $ 641 53.7 % $ 747 51.8 %$ (106) (14.2) % Airframe 513 43.0 % 655 45.4 % (142) (21.7) % Non-aviation 40 3.3 % 41 2.8 % (1) (2.4) %$ 1,194 100.0 %$ 1,443 100.0 %$ (249) (17.3) % Sales for the Power & Control segment decreased$106 million , a decrease of 14.2%, for the thirteen week period endedApril 3, 2021 compared to the thirteen week period endedMarch 28, 2020 . The sales decrease resulted primarily from decreases in commercial aftermarket sales ($74 million , a decrease of 33.4%) and commercial OEM sales ($66 million , a decrease of 34.3%); partially offset by an increase in defense sales ($34 million , an increase of 10.3%). The decreases in commercial aftermarket and commercial OEM sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. Sales for the Airframe segment decreased$142 million , a decrease of 21.7%, for the thirteen week period endedApril 3, 2021 compared to the thirteen week period endedMarch 28, 2020 . The sales decrease resulted primarily from a decrease in organic sales of$184 million , a decrease of 28.1%; partially offset by acquisition sales related to CAC of$42 million , an increase of 6.4%. The organic sales decrease resulted primarily from decreases in commercial OEM sales ($107 million , a decrease of 44.2%) and commercial aftermarket sales ($95 million , a decrease of 43.4%); partially offset by an increase in defense sales ($18 million , an increase of 9.6%). The decreases in commercial aftermarket and commercial OEM sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. Sales for the Non-aviation segment decreased$1 million , a decrease of 2.4%, for the thirteen week period endedApril 3, 2021 compared to the thirteen week period endedMarch 28, 2020 . The sales decrease resulted primarily from a decrease in defense sales ($4 million , a decrease of 66.5%); partially offset by an increase in other non-aerospace sales ($3 million , an increase of 9.6%). 33 -------------------------------------------------------------------------------- Table of Contents •EBITDA As Defined. EBITDA As Defined by segment for the thirteen week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Thirteen Week Periods Ended % of Segment % of Segment April 3, 2021 Sales March 28, 2020 Sales Change % Change Power & Control$ 309 48.2 % $ 381 51.0 %$ (72) (18.9) % Airframe 208 40.5 % 296 45.2 % (88) (29.7) % Non-aviation 16 40.0 % 14 34.1 % 2 14.3 %$ 533 44.6 % $ 691 47.9 %$ (158) (22.9) % EBITDA As Defined for the Power & Control segment decreased approximately$72 million , a decrease of 18.9%, resulting from lower sales volume in the commercial aftermarket and commercial OEM markets due to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. Organic EBITDA as Defined for the Airframe segment decreased approximately$95 million , a decrease of 32.1%, primarily as a result of lower sales volume in the commercial aftermarket and commercial OEM markets due to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. EBITDA as Defined for the Airframe segment from the acquisition of CAC in fiscal year 2021 was$7 million . EBITDA As Defined for the Non-aviation segment increased approximately$2 million , an increase of 14.3%, resulting from a favorable sales mix specifically from other non-aerospace sales. Twenty-six week period endedApril 3, 2021 compared with the twenty-six week period endedMarch 28, 2020 Total Company •Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the twenty-six week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Twenty-Six Week Periods Ended % Change April 3, 2021 March 28, 2020 Change Total Sales Organic sales $ 2,258$ 2,908 $ (650) (22.4) % Acquisition sales 43 - 43 1.5 % $ 2,301$ 2,908 $ (607) (20.9) % The decrease in organic sales for the twenty-six week period endedApril 3, 2021 compared to the twenty-six week period endedMarch 28, 2020 , is primarily related to a decrease in commercial aftermarket sales ($389 million , a decrease of 41.9%) and commercial OEM sales ($313 million , a decrease of 35.0%); partially offset by an increase in defense sales ($52 million , an increase of 4.8%). The decreases in the commercial aftermarket and commercial OEM markets are attributable to the adverse impact that the COVID-19 pandemic has had on the customer demand for air travel worldwide. The increase in defense sales is primarily driven by the OEM market. 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 twenty-six week period endedApril 3, 2021 are primarily attributable to the acquisition of CAC. 34 -------------------------------------------------------------------------------- Table of Contents •Cost of Sales and Gross Profit. Cost of sales decreased by$119 million , or 9.2%, to$1,169 million for the twenty-six week period endedApril 3, 2021 compared to$1,288 million for the twenty-six week period endedMarch 28, 2020 . Cost of sales and the related percentage of total sales for the twenty-six week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Twenty-Six Week Periods Ended April 3, 2021 March 28, 2020 Change % Change Cost of sales - excluding costs below$ 1,130 $ 1,305 $ (175) (13.4) % % of total sales 49.1 % 44.9 % COVID-19 pandemic restructuring costs 28 - 28 NM % of total sales 1.2 % - % Foreign currency losses 23 1 22 NM % of total sales 1.0 % - % Non-cash stock compensation expense 7 4 3 75.0 % % of total sales 0.3 % 0.1 % Inventory acquisition accounting adjustments 6 - 6 NM % of total sales 0.3 % - % Acquisition integration costs 2 3 (1) (33.3) % % of total sales 0.1 % 0.1 % Loss contract amortization (27) (25) (2) (8.0) % % of total sales (1.2) % (0.9) % Total cost of sales$ 1,169 $ 1,288 $ (119) (9.2) % % of total sales 50.8 % 44.3 % Gross profit$ 1,132 $ 1,620 $ (488) (30.1) % Gross profit percentage 49.2 % 55.7 % The decrease in the dollar amount of cost of sales during the twenty-six week period endedApril 3, 2021 was primarily due to lower sales volume from decreased customer demand due to the COVID-19 pandemic and the other factors summarized above, including those factors that partially offset the decrease in cost of sales. Gross profit as a percentage of sales decreased by 6.5 percentage points to 49.2% for the twenty-six week period endedApril 3, 2021 from 55.7% for the twenty-six week period endedMarch 28, 2020 . The dollar amount of gross profit decreased by$488 million , or 30.1%, for the twenty-six week period endedApril 3, 2021 compared to the twenty-six week period in the prior year. The decrease in the gross profit percentage is primarily driven by COVID-19 pandemic restructuring costs, unfavorable movement in foreign currency rates (primarily theU.S. dollar weakening against the British pound and Euro) and sales mix, specifically, lower commercial aftermarket sales as a percentage of total net sales. Also, fixed overhead costs incurred were spread over a lower production volume during the twenty-six week periodApril 3, 2021 further contributing to an adverse impact to gross profit. 35 -------------------------------------------------------------------------------- Table of Contents •Selling and Administrative Expenses. Selling and administrative expenses decreased by$23 million to$358 million , or 15.6% of sales, for the twenty-six week period endedApril 3, 2021 from$381 million , or13.1% of sales, for the twenty-six week period endedMarch 28, 2020 . Selling and administrative expenses and the related percentage of total sales for the twenty-six week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Twenty-Six Week
Periods Ended
April 3, 2021 March 28, 2020 Change % Change Selling and administrative expenses - excluding costs below $ 274 $ 334$ (60) (18.0) % % of total sales 11.9 % 11.5 % Non-cash stock compensation expense 63 33 30 90.9 % % of total sales 2.7 % 1.1 % COVID-19 pandemic restructuring costs 10 1 9 NM % of total sales 0.4 % - % Acquisition transaction-related expenses 6 1 5 NM % of total sales 0.3 % - % Acquisition integration costs 5 12 (7) (58.3) % % of total sales 0.2 % 0.4 % Total selling and administrative expenses $ 358 $ 381$ (23) (6.0) % % of total sales 15.6 % 13.1 % The decrease in the dollar amount of selling and administrative expenses during the twenty-six week period endedApril 3, 2021 is primarily due to the realization of the cost mitigation measures that began to be enacted in the second half of fiscal 2020 in response to the COVID-19 pandemic, partially offset by the other factors summarized above. The material cost mitigation measures enacted to date are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic." The increase in non-cash stock compensation expense is attributable to the new stock option grants awarded in the first quarter of fiscal 2021 and the impact on the Black-Scholes fair value of the fiscal 2020 grants in connection with the change in vesting terms approved by the Compensation Committee of the Board of Directors in the first quarter of fiscal 2021. •Amortization of Intangible Assets. Amortization of intangible assets was$65 million for the twenty-six week period endedApril 3, 2021 compared to$86 million for the twenty-six week period endedMarch 28, 2020 . The decrease in amortization expense of$21 million was due to the amortization expense on sales order backlog recorded in fiscal 2020 in connection with the acquisition of Esterline that did not occur in fiscal 2021 as sales order backlog related to the Esterline acquisition was fully amortized by the end of fiscal 2020. This was partially offset by amortization expense of intangible assets related to the CAC acquisition in the second quarter of fiscal 2021. •Refinancing Costs. Refinancing costs of$24 million were recorded for the twenty-six week period endedApril 3, 2021 compared to$26 million recorded for the twenty-six week period endedMarch 28, 2020 . The refinancing costs primarily related to fees incurred on the early redemption of the 2024 Notes that occurred in the second quarter of fiscal 2021 and on the early redemption of the 6.00% Senior Subordinated Notes due 2022 (the "2022 Notes") that occurred in the first quarter of fiscal 2020. •Other Income. Other income of$33 million was recorded for the twenty-six week period endedApril 3, 2021 compared to$3 million recorded for the twenty-six week period endedMarch 28, 2020 . Other income for the twenty-six week periodApril 3, 2021 was primarily driven by a$22 million gain on the settlement of the property insurance portion of the claim forLeach International Europe's Niort,France operating facility fire inAugust 2019 . The gain represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory. The remaining$11 million is primarily driven by non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($6 million ), receipt of payment of a Canadian governmental subsidy ($4 million ) and a net gain on sale recorded on the completed divestitures of certain businesses ($1 million ). Other income for the twenty-six week period endedMarch 28, 2020 is primarily related to non-service related components of net periodic benefit costs on the Company's defined benefit pension plans. 36 -------------------------------------------------------------------------------- Table of Contents •Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, revolving credit facility fees and interest on finance leases; slightly offset by interest income. Interest expense-net increased$34 million , or 6.8%, to$535 million for the twenty-six week period endedApril 3, 2021 from$501 million for the comparable twenty-six week period last year. The increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately$20.2 billion for the twenty-six week period endedApril 3, 2021 and approximately$18.2 billion for the twenty-six week period endedMarch 28, 2020 . The increase in the weighted average level of borrowings was primarily due to the activity in fiscal 2020 consisting of the issuance of$1,100 million in 2025 Secured Notes,$400 million in 2026 New Secured Notes and$200 million drawn on the revolving credit facility. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirteen week period endedApril 3, 2021 was 5.1%. •Income Taxes. Income tax expense as a percentage of income before income taxes was approximately 15.5% for the twenty-six week period endedApril 3, 2021 compared to 11.6% for the twenty-six week period endedMarch 28, 2020 . The Company's higher effective tax rate for the twenty-six week period endedApril 3, 2021 was primarily due to the increase in the Company's net interest deduction limitation pursuant to IRC Section 163(j) partially offset by the discrete impact of excess tax benefits associated with share-based payments. •Income from Discontinued Operations. There were no discontinued operations for the twenty-six week period endedApril 3, 2021 . Discontinued operations for the twenty-six week period endedMarch 28, 2020 include the results of the operations of the Souriau-Sunbank. 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 inMarch 2019 . The income from discontinued operations for the twenty-six week period endedMarch 28, 2020 is$68 million and includes$8 million from Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank, net of tax, of$60 million . •Net Income Attributable toTD Group . Net income attributable toTD Group decreased$469 million , or 75.3%, to$154 million for the twenty-six week period endedApril 3, 2021 compared to net income attributable toTD Group of$623 million for the twenty-six week period endedMarch 28, 2020 , primarily as a result of the factors referenced above. •Earnings per Share. Basic and diluted earnings per share was$1.40 for the twenty-six week period endedApril 3, 2021 and$7.63 per share for the twenty-six week period endedMarch 28, 2020 . There was no impact on earnings per share from discontinued operations for the twenty-six week period endedApril 3, 2021 . Basic and diluted earnings per share from continuing operations and discontinued operations were$6.45 and$1.18 , respectively, for the twenty-six week period endedMarch 28, 2020 . Business Segments •SegmentNet Sales . Net sales by segment for the twenty-six week period endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions): Twenty-Six Week Periods Ended April 3, 2021 % of Sales March 28, 2020 % of Sales Change % Change Power & Control$ 1,242 54.0 %$ 1,499 51.5 %$ (257) (17.1) % Airframe 977 42.4 % 1,329 45.7 % (352) (26.5) % Non-aviation 82 3.6 % 80 2.8 % 2 2.5 %$ 2,301 100.0 %$ 2,908 100.0 %$ (607) (20.9) % Sales for the Power & Control segment decreased$257 million , a decrease of 17.1%, for the twenty-six week period endedApril 3, 2021 . The sales decrease resulted primarily from a decrease in commercial aftermarket sales ($161 million , a decrease of 36.5%) and a decrease in commercial OEM sales ($125 million , a decrease of 33.0%); partially offset by an increase in defense sales ($29 million , an increase of 4.4%). The decreases in commercial aftermarket and commercial OEM sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. Sales for the Airframe segment decreased$352 million , a decrease of 26.5%, for the twenty-six week period endedApril 3, 2021 . The sales decrease resulted primarily from a decrease in organic sales of$394 million , a decrease of 29.6%; partially offset by acquisition sales related to CAC of$42 million , an increase of 3.2%. The organic sales decrease resulted primarily from decreases in commercial aftermarket sales ($228 million , a decrease of 49.1%) and commercial aftermarket sales ($195 million , a decrease of 41.3%); partially offset by an increase in defense sales ($29 million , an increase of 7.5%). The decreases in commercial aftermarket and commercial OEM sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. 37 -------------------------------------------------------------------------------- Table of Contents Sales for the Non-aviation increased by$2 million , an increase of 2.5%, for the twenty-six week period endedApril 3, 2021 compared to the twenty-six week period endedMarch 28, 2020 . The sales increase resulted primarily from an increase in other non-aerospace sales ($6 million , an increase of 10.7%); partially offset by a decrease in defense sales ($4 million , a decrease of 36.1%). •EBITDA As Defined. EBITDA As Defined by segment for the twenty-six week periods endedApril 3, 2021 andMarch 28, 2020 were as follows (amounts in millions):
Twenty-Six Week Periods Ended
% of Segment % of Segment April 3, 2021 Sales March 28, 2020 Sales Change % Change Power & Control $ 613 49.4 % $ 766 51.1 %$ (153) (20.0) % Airframe 385 39.4 % 602 45.3 % (217) (36.0) % Non-aviation 31 37.8 % 26 32.5 % 5 19.2 %$ 1,029 44.7 %$ 1,394 47.9 %$ (365) (26.2) % EBITDA As Defined for the Power & Control segment decreased approximately$153 million , a decrease of 20.0%, resulting from lower sales volume in the commercial aftermarket and commercial OEM market due to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. Organic EBITDA as Defined for the Airframe segment decreased approximately$224 million , a decrease of 37.2%, primarily as a result of lower sales volume in the commercial aftermarket and commercial OEM markets due to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector. EBITDA as Defined for the Airframe segment from the acquisition of CAC in fiscal year 2021 was$7 million . EBITDA As Defined for the Non-aviation segment increased approximately$5 million , an increase of 19.2%, resulting from a favorable sales mix specifically from other non-aerospace sales. Backlog As ofApril 3, 2021 , the Company estimated its sales order backlog at$3,314 million compared to$3,579 million as ofMarch 28, 2020 . The decrease in backlog is attributable 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 commercial aerospace industry is expected to continue to restrain sales order backlog growth in the commercial OEM and commercial aftermarket channels throughout fiscal 2021. The majority of the purchase orders outstanding as ofApril 3, 2021 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 ofApril 3, 2021 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. Sales to foreign customers are subject to numerous additional risks, including the COVID-19 pandemic, foreign currency fluctuations, the impact of foreign government regulations, political uncertainties and differences in business practices. 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. 38 -------------------------------------------------------------------------------- Table of Contents 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 during the twenty-six week period endedApril 3, 2021 and is expected to continue to do so for at least the remainder of fiscal 2021. 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 demand 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 which has slowed production and/or orders. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for uncertainty. Although commercial air travel demand has shown slight signs of recovery in recent months, the recovery is expected to continue to be slow and uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 surfacing), the rollout and effectiveness of the vaccine, and the eventual easing of quarantines and travel restrictions, among other factors. 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, and in recent months new variants of COVID-19 have been identified, resulting in additional restrictions put in place by certain governments around the world. 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," in the notes to the condensed consolidated financial statements included herein in response to the COVID-19 pandemic and 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). InMarch 2020 , the Company drew$200 million on its revolving credit facility to increase the Company's liquidity as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic. The$200 million drawn was subsequently repaid and redrawn within the first quarter of fiscal 2021. Also, in further action to increase the Company's liquidity, the Company executed two notes offerings inApril 2020 in which the proceeds received were for general Corporate purposes. OnApril 8, 2020 , the Company entered into a purchase agreement in connection with a private offering of$1,100 million of 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 of the 2026 New Secured Notes at an issue price of 101% of the principal amount. As ofApril 3, 2021 , the Company has significant cash liquidity as illustrated in the table presented below (in millions): As of April 3, 2021 Cash and cash equivalents $ 4,072 Availability on revolving credit facility 520 Cash liquidity $ 4,592 39
-------------------------------------------------------------------------------- Table of Contents Due to favorable market conditions in the high yield bond market, onJanuary 14, 2021 , the Company entered into a purchase agreement in connection with a private offering of$1,200 million of 4.625% Senior Subordinated Notes due 2029 (the "4.625% 2029 Notes") at an issue price of 100% of the principal amount. The 4.625% 2029 Notes were issued pursuant to an indenture, datedJanuary 20, 2021 . The Company used the net proceeds from the offering of the 4.625% 2029 Notes to redeem all of its outstanding 6.50% Senior Subordinated Notes due 2024 (the "2024 Notes"), effectively resulting in a reduced interest rate and an extended maturity date of$1,200 million in senior subordinated notes. In addition, onApril 12, 2021 , the Company entered into a purchase agreement in connection with a private offering of$750 million of 4.875% Senior Subordinated Notes due 2029 (the "4.875% 2029 Notes") at an issue price of 100% of the principal amount. The 4.875% 2029 Notes were issued pursuant to an indenture, datedApril 21, 2021 . The Company expects to use the net proceeds from the offering of the 4.875% 2029 Notes to redeem all of its outstanding 6.50% Senior Subordinated Notes due 2025 (the "2025 Notes"), effectively resulting in a reduced interest rate and an extended maturity date of$750 million in senior subordinated notes. 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 will be no maturity on any tranche of term loans or notes untilAugust 2024 . 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 our efforts will continue to generate strong margins and provide sufficient cash provided by operating activities to meet our interest obligations and liquidity needs. We believe our cash provided by operating activities and available borrowing capacity will enable us to make strategic business acquisitions (such as the CAC acquisition completed in the second quarter of fiscal 2021 for an enterprise value of$965 million using existing cash on hand), pay dividends to our shareholders and make opportunistic investments in our own stock, subject to any restrictions in our existing credit agreement and market conditions in consideration of the ongoing COVID-19 pandemic. 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$372 million of net cash from operating activities during the twenty-six week period endedApril 3, 2021 compared to$594 million during the twenty-six week period endedMarch 28, 2020 . The change in accounts receivable during the twenty-six week period endedApril 3, 2021 was a source of cash of$39 million compared to a source of cash of$74 million during the twenty-six week period endedMarch 28, 2020 . The decrease in the source of cash of$35 million is primarily attributable to the decrease in accounts receivable from lower sales due to the COVID-19 pandemic. The Company continues to actively manage its accounts receivable, the related agings and collection efforts in response to the COVID-19 pandemic. The change in inventories during the twenty-six week period endedApril 3, 2021 was a source of cash of$32 million compared to a use of cash of$97 million during the twenty-six week period endedMarch 28, 2020 . The increase in the source of cash is primarily driven by decreased purchasing from reduced demand and actively managing inventory levels as a result of the COVID-19 pandemic. The change in accounts payable during the twenty-six week period endedApril 3, 2021 was a use of cash of$7 million compared to a use of cash of$12 million during the twenty-six week period endedMarch 28, 2020 . Investing Activities. Net cash used in investing activities was$952 million during the twenty-six week period endedApril 3, 2021 , consisting primarily of$951 million from the acquisition of CAC in the second quarter of fiscal 2021 and capital expenditures of$60 million . This was partially offset by proceeds of$35 million from the completion of the divestitures of certain businesses, and$24 million of insurance proceeds received from theLeach International Europe fire property claim. Net cash provided by investing activities was$854 million during the twenty-six week period endedMarch 28, 2020 , consisting of proceeds of$904 million from the completion of the divestiture of Souriau-Sunbank. This was partially offset by capital expenditures of$50 million . Financing Activities. Net cash used in financing activities during the twenty-six week period endedApril 3, 2021 was$73 million . The use of cash was primarily attributable to the redemption of the 2024 Notes for$1,220 million , dividend equivalent payments of$73 million and repayment on term loans of$38 million . This was partially offset by$1,189 million in net proceeds from the completion of the 4.625% 2029 Notes offering and$69 million in proceeds from stock option exercises. 40 -------------------------------------------------------------------------------- Table of Contents Net cash used in financing activities during the twenty-six week period endedMarch 28, 2020 was$248 million . The use of cash was primarily attributable to dividend equivalent payments of$1,928 million , the redemption of the 2022 Notes for$1,168 million , the purchase of treasury stock of$19 million and repayments on term loans of$19 million . The use of cash was partially offset by$2,625 million in net proceeds from the completion of the 5.50% Senior Subordinated Notes due 2027 (the "5.50% 2027 Notes") offering,$200 million in proceeds from the revolving credit facility and$69 million in proceeds from stock option exercises. 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. There were no material changes during the twenty-six week period endedApril 3, 2021 to these obligations as reported in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 other than the debt financing transactions that have occurred in fiscal 2021 (refer to Note 9, "Debt" in the notes to the condensed consolidated financial statements included herein) effectively resulting in a reduced interest rate and an extended maturity date for$1,950 million in senior subordinated notes. Description of Senior Secured Term Loans and Indentures Senior Secured Term Loans FacilityTransDigm has$7,411 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 ofApril 3, 2021 ): Term Loans Facility Aggregate Principal Maturity Date Interest Rate Tranche E$2,188 million May 30, 2025 LIBOR + 2.25% Tranche F$3,471 million December 9, 2025 LIBOR + 2.25% Tranche G$1,752 million August 22, 2024 LIBOR + 2.25% The Term Loans Facility requires quarterly aggregate principal payments of$18.8 million . The revolving commitments consist of two tranches which include up to$151.5 million of multicurrency revolving commitments. AtApril 3, 2021 , the Company had$39.7 million in letters of credit outstanding,$200.0 million drawn and outstanding and$520.3 million in borrowings available under the revolving commitments. The interest rates per annum applicable to the loans under the Credit Agreement are, atTransDigm's option, equal to either an alternate base rate or an adjusted LIBOR 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 LIBOR related to tranche E, tranche F and tranche G term loans are not subject to a floor. For the twenty-six week period endedApril 3, 2021 , the applicable interest rate was approximately 2.4% 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," in the notes to the condensed consolidated financial statements included herein. Recent Amendments to the Credit Agreement OnFebruary 6, 2020 , the Company entered into Amendment No. 7 and Refinancing Facility Agreement (herein, "Amendment No. 7"). Under the terms of Amendment No. 7, the Company, among other things, (i) incurred new tranche E term loans in an aggregate principal amount equal to approximately$2,216 million , new tranche F term loans in an aggregate principal amount equal to approximately$3,515 million and new tranche G term loans, (collectively, the "New Term Loans") in an aggregate principal amount equal to approximately$1,774 million , (ii) repaid in full all of the existing tranche E term loans, tranche F term loans and tranche G term loans outstanding under the Credit Agreement immediately prior to Amendment No. 7 and (iii) extended the maturity date of the tranche F term loans toDecember 9, 2025 , (iv) modified the definition of consolidated EBITDA in the Credit Agreement to add back certain cost savings and non-recurring cost and expenses and (v) modified certain negative covenants to provide additional flexibility to enableTransDigm to incur additional debt and make additional investments and asset sales. The New Term Loans were fully drawn onFebruary 6, 2020 . The LIBOR per annum applicable to the New Term Loans is 2.25%, a decrease 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. 41 -------------------------------------------------------------------------------- Table of Contents Indentures The following table represents the notes outstanding as ofApril 3, 2021 : Description Aggregate Principal Maturity Date Interest Rate 2025 Notes (1)$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% 4.625% 2029 Notes$1,200 million July 15, 2029 4.625% (1)OnApril 12, 2021 , the Company entered into a purchase agreement in connection with a private offering of the 4.875% 2029 Notes at an issue price of 100% of the principal amount. The Company expects to use the net proceeds from the offering of the 4.875% 2029 Notes to redeem all of its outstanding 2025 Notes. Refer to Note 9, "Debt," in the notes to the condensed consolidated financial statements included herein for additional details. The 6.375% 2026 Notes, the 7.50% 2027 Notes, the 5.50% 2027 Notes and the 4.625% 2029 Notes (collectively, 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 2025 Secured Notes (the "Secured Notes") were issued at a price 100% of the principal amount. 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$4,410.5 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 contain many of the restrictive covenants included in the Credit Agreement.TransDigm is in compliance with all of the covenants contained in the Notes. 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 fully and unconditionally guaranteed on a senior subordinated unsecured basis byTD Group and TransDigm, Inc.'s Domestic Restricted Subsidiaries. The TransDigmUK Notes are guaranteed on a senior subordinated basis byTransDigm, Inc. ,TD Group and TransDigm, Inc.'s Domestic Restricted Subsidiaries. The guarantees of the Notes are subordinated to all of the guarantors' existing and future senior debt, rank equally with all of their existing and future senior subordinated debt and rank senior to all of their future debt that is expressly subordinated to the guarantees of the Notes. The Notes are structurally subordinated to all of the liabilities ofTD Group's non-guarantor subsidiaries. The Secured Notes are senior secured obligations ofTransDigm and rank equally in right of payment with all ofTransDigm's existing and future senior secured debt, including indebtedness underTransDigm's existing senior secured credit facilities, and are senior in right of payment to all ofTransDigm's existing and future senior subordinated debt, including the Notes,TransDigm's other outstanding senior subordinated notes andTransDigm's guarantees in respect ofTransDigm UK's outstanding senior subordinated notes. The Secured Notes are guaranteed on a senior secured basis byTD Group ,TransDigm UK andTransDigm's wholly-ownedU.S. subsidiaries named in the Secured Notes Indenture. The guarantees of the Secured Notes rank equally in right of payment with all of the guarantors' existing and future senior secured debt and are senior in right of payment to all of their existing and future senior subordinated debt. The Secured Notes are structurally subordinated to all of the liabilities ofTransDigm's non-guarantor subsidiaries. The Secured Notes contain many of the restrictive covenants included in the Credit Agreement.TransDigm is in compliance with all of the covenants contained in the Secured Notes. 42 -------------------------------------------------------------------------------- Table of Contents Guarantor Information Separate financial statements ofTransDigm, Inc. are not presented because the Secured Notes are fully and unconditionally guaranteed on a senior secured basis byTD Group ,TransDigm UK and all ofTransDigm, Inc.'s Domestic Restricted Subsidiaries.TD Group has no significant operations or assets separate from its investment inTransDigm, Inc. Separate financial statements ofTransDigm, Inc. are not presented because theTransDigm, Inc. Notes are fully and unconditionally guaranteed on a senior subordinated basis byTD Group ,TransDigm UK and all ofTransDigm, Inc.'s Domestic Restricted Subsidiaries.TD 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.TD Group has no significant operations or assets separate from its investment inTransDigm, Inc. 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. (in millions) April 3, 2021 September 30, 2020 Current assets $ 4,651 $ 5,398 Non-current assets 9,281 9,157 Current liabilities 907 972 Non-current liabilities 20,304 20,423 Amounts due (from) to subsidiaries that are non-issuers and non-guarantors - net (1,014) 103 Twenty-Six Week Period Ended (in millions) April 3, 2021 Net sales $ 1,738 Sales to subsidiaries that are non-issuers and non-guarantors 12 Cost of sales 796
Expense from subsidiaries that are non-issuers and non-guarantors - net
22 Income from continuing operations 147 Net income attributable toTD Group 147 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. Under the terms of the Credit Agreement,TransDigm is entitled, on one or more occasions, to request additional term loans or additional revolving commitments to the extent that the existing or new lenders agree to provide such incremental term loans or additional revolving commitments provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25x and the consolidated secured net debt ratio would be no greater than 5.00x, in each case, after giving effect to such incremental term loans or additional revolving commitments. If any such default occurs, the lenders under the Credit Agreement and the holders of the Notes 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. 43 -------------------------------------------------------------------------------- Table of Contents 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 ofApril 3, 2021 , the Company was in compliance with all of its debt covenants and expects to remain in compliance with its debt covenants in subsequent periods. Trade 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. OnJuly 22, 2020 , the Company amended the Securitization Facility to extend the maturity date toJuly 27, 2021 . As ofApril 3, 2021 , the Company has borrowed$350 million under the Securitization Facility, which bears interest at a rate of 1.35%, plus 0.50% or LIBOR, whichever is greater. AtApril 3, 2021 , the applicable interest rate was 1.85%. 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 fiscal quarter endedApril 3, 2021 . As ofApril 3, 2021 , 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 ofApril 3, 2021 , the Company had$39.7 million in letters of credit outstanding. 44 -------------------------------------------------------------------------------- Table of Contents 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 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 underU.S. GAAP. We present EBITDA and EBITDA As Defined because we believe they are useful indicators for evaluating operating performance and liquidity. Our management believes that EBITDA and EBITDA As Defined are useful as indicators of liquidity because securities analysts, investors, rating agencies and others use EBITDA to evaluate a company's ability to incur and service debt. In addition, EBITDA As Defined is useful to investors because the revolving credit facility under our senior secured credit facility requires compliance under certain circumstances, on a pro forma basis, with a financial covenant that measures the ratio of the amount of our secured indebtedness to the amount of our Consolidated EBITDA defined in the same manner as we define EBITDA As Defined herein. In addition to the above, our management uses EBITDA As Defined to review and assess the performance of the management team in connection with employee incentive programs and to prepare its annual budget and financial projections. Moreover, our management uses EBITDA As Defined to evaluate acquisitions. Although we use EBITDA and EBITDA As Defined as measures to assess the performance of our business and for the other purposes set forth above, the use of these non-GAAP financial measures as analytical tools has limitations, and you should not consider any of them in isolation, or as a substitute for analysis of our results of operations as reported in accordance withU.S. GAAP. Some of these limitations are: •neither EBITDA nor EBITDA As Defined reflects the significant interest expense, or the cash requirements, necessary to service interest payments on our indebtedness; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor EBITDA As Defined reflects any cash requirements for such replacements; •the omission of the substantial amortization expense associated with our intangible assets further limits the usefulness of EBITDA and EBITDA As Defined; •neither EBITDA nor EBITDA As Defined includes the payment of taxes, which is a necessary element of our operations; and •EBITDA As Defined excludes the cash expense we have incurred to integrate acquired businesses into our operations, which is a necessary element of certain of our acquisitions. Because of these limitations, EBITDA and EBITDA As Defined should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA or EBITDA As Defined in isolation and specifically by using otherU.S. GAAP measures, such as net income, net sales and operating profit, to measure our operating performance. Neither EBITDA nor EBITDA As Defined is a measurement of financial performance underU.S. GAAP, and neither should be considered as an alternative to net income or cash flow from operations determined in accordance withU.S. GAAP. Our calculation of EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies. 45
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Table of Contents The following table sets forth a reconciliation of income from continuing operations to EBITDA and EBITDA As Defined (in millions):
Thirteen Week Periods Ended Twenty-Six Week Periods EndedApril 3, 2021
$ 105 $ 323 $ 155 $ 556
Adjustments:
Depreciation and amortization expense 66 72 124 141 Interest expense, net 268 252 535 501 Income tax provision 25 14 28 73 EBITDA 464 661 842 1,271 Adjustments: Inventory acquisition accounting adjustments (1) 6 - 6 - Acquisition integration costs (2) 5 9 7 15 Acquisition transaction-related expenses (3) 5 - 6 1 Non-cash stock compensation expense (4) 21 11 70 37 Refinancing costs (5) 24 3 24 26 COVID-19 pandemic restructuring costs (6) 18 1 39 1 Other, net (7) (24) (10) (1) 5 EBITDA As Defined $ 519 $ 675 $ 993$ 1,356 (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 intoTD 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 byTD 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 ($17 million and$36 million for the thirteen and twenty-six week periods endedApril 3, 2021 , respectively, and$1 million for the the thirteen and twenty-six week periods endedMarch 28, 2020 ). These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. This also includes$1 million and$3 million for the thirteen and twenty-six week periods endedApril 3, 2021 , respectively, 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 the gain on insurance proceeds from theLeach International Europe fire (Note 17), 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, gain or loss on sale of fixed assets and gain or loss on sale of businesses. 46
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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):
Twenty-Six Week Periods Ended
April 3, 2021 March 28, 2020 Net cash provided by operating activities $ 372 $ 594 Adjustments: Changes in assets and liabilities, net of effects from acquisitions of businesses (9) 148 Interest expense, net (1) 518 485 Income tax provision - current 28 82 Loss contract amortization 27 25 Non-cash stock compensation expense (2) (70) (37) Refinancing costs (3) (24) (26) EBITDA 842 1,271 Adjustments: Inventory acquisition accounting adjustments (4) 6 - Acquisition integration costs (5) 7 15 Acquisition transaction-related expenses (6) 6 1 Non-cash stock compensation expense (2) 70 37 Refinancing costs (3) 24 26 COVID-19 pandemic restructuring costs (7) 39 1 Other, net (8) (1) 5 EBITDA As Defined $ 993$ 1,356 (1)Represents interest expense excluding the amortization of debt issuance costs and premium and discount on debt. (2)Represents the compensation expense recognized byTD 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 intoTD 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 ($36 million and$1 million for the twenty-six week periods endedApril 3, 2021 andMarch 28, 2020 , respectively). These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. This also includes$3 million for the twenty-six week period endedApril 3, 2021 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 the gain on insurance proceeds from theLeach International Europe fire (Note 17), 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, gain or loss on sale of fixed assets and gain or loss on sale of businesses. 47
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