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 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 third quarter of fiscal year 2021, we generated net sales of$1,218 million and net income attributable toTD Group of$317 million . EBITDA As Defined was$559 million , or 45.9% 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 (loss) 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 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 as our business begins 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 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 endedJuly 3, 2021 , COVID-19 restructuring costs of less than$1 million were incurred, all of which was recorded in selling and administrative expenses on the condensed consolidated statements of income (loss). For the thirty-nine week period endedJuly 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 (loss). For the thirteen and thirty-nine week periods endedJune 27, 2020 , COVID-19 restructuring costs of approximately$24 million were incurred, of which$19 million was recorded in cost of sales and$5 million was recorded in selling and administrative expenses on the condensed consolidated statement of income (loss). 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 thirty-nine week periods endedJuly 3, 2021 , the Company incurred approximately$1 million and$4 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). For the thirteen and thirty-nine week periods endedJune 27, 2020 , the Company incurred approximately$3 million in incremental costs related to the pandemic. As ofJuly 3, 2021 andSeptember 30, 2020 , the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was approximately$26 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
July 3, 2021 % of Net Sales June 27, 2020 % of Net Sales
Net sales $ 1,218 100.0 % $ 1,022 100.0 %
Cost of sales 563 46.2 % 531 52.0 %
Selling and administrative expenses 172 14.1 % 163 15.9 %
Amortization of intangible assets 36 3.0 % 42 4.1 %
Income from operations 447 36.7 % 286 28.0 %
Interest expense, net 263 21.6 % 262 25.6 %
Refinancing costs 13 1.1 % 1 0.1 %
Other income (5) (0.4) % (11) (1.1) %
Gain on sale of businesses, net (68) (5.6) % - - %
Income tax (benefit) provision (73) (6.0) % 39 3.8 %
Income (loss) from continuing operations 317 26.0 % (5) (0.5) %
Less: Net income attributable to noncontrolling
interests - - % - - %
Income (loss) from continuing operations
attributable to TD Group 317 26.0 % (5) (0.5) %
Loss from discontinued operations, net of tax - - % (1) (0.1) %
Net income (loss) attributable to TD Group $ 317 26.0 % $ (6) (0.6) %
Thirty-Nine Week Periods Ended
July 3, 2021 % of Net Sales June 27, 2020 % of Net Sales
Net sales $ 3,519 100.0 % $ 3,930 100.0 %
Cost of sales 1,731 49.2 % 1,819 46.3 %
Selling and administrative expenses 531 15.1 % 544 13.8 %
Amortization of intangible assets 101 2.9 % 128 3.3 %
Income from operations 1,156 32.9 % 1,439 36.6 %
Interest expense, net 798 22.7 % 762 19.4 %
Refinancing costs 36 1.0 % 27 0.7 %
Other income (37) (1.1) % (14) (0.4) %
Gain on sale of businesses, net (69) (2.0) % - - %
Income tax (benefit) provision (45) (1.3) % 112 2.8 %
Income from continuing operations 473 13.4 % 552 14.0 %
Less: Net income attributable to noncontrolling
interests (2) - % (1) - %
Income from continuing operations attributable
to TD Group 471 13.4 % 551 14.0 %
Income from discontinued operations, net of tax - - % 66 1.7 %
Net income attributable to TD Group $ 471 13.4 % $ 617 15.7 %
Changes in Results of Operations
Thirteen week period ended July 3, 2021 compared with the thirteen week period
ended June 27, 2020
Total Company
•Net Sales. Net organic sales and acquisition and divestiture sales and the
related dollar and percentage changes for the thirteen week periods ended
July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
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Thirteen Week Periods Ended % Change
July 3, 2021 June 27, 2020 Change Net Sales
Organic sales $ 1,131 $ 977 $ 154 15.1 %
Acquisition and divestiture sales 87 45 42 4.1 %
Net sales $ 1,218 $ 1,022 $ 196 19.2 %
Organic sales represent sales from existing businesses owned by the Company,
excluding sales from acquisitions and divestitures. Acquisition sales represent
sales from acquired businesses for the period up to one year subsequent to their
respective acquisition date. Divestiture sales represent sales from businesses
divested subsequent to the period ended June 27, 2020 . Acquisition and
divestiture sales are excluded from organic sales due to the variability in the
nature, timing and extent of acquisitions and divestitures and resulting
variable impact on underlying trends.
The increase in organic sales of $154 million for the thirteen week period ended
July 3, 2021 compared to the thirteen week period ended June 27, 2020 , is
primarily related to increases in commercial aftermarket sales ($68 million , an
increase of 34.1%) and defense sales ($66 million , an increase of 13.7%);
partially offset by a decrease in commercial OEM sales ($6 million , a decrease
of 2.3%). The increase in commercial aftermarket sales is primarily attributable
to the slight recovery in commercial air travel demand and related increase in
the utilization of narrow-body aircraft in the third quarter of fiscal 2021.
This is compared to the steep decline in demand during the third quarter of
fiscal 2020 as a result of the COVID-19 pandemic and related supply chain
disruptions, shutdowns and stay-at-home orders. The increase in defense sales
(for both OEM and aftermarket) is primarily attributable to the rebound in
demand from the temporary pandemic-induced decline for certain platforms in
fiscal 2020. The decrease in commercial OEM sales is attributable to build rate
reductions by aircraft OEMs as a result of the COVID-19 pandemic.
The increase in acquisition and divestiture sales for the thirteen week period
ended July 3, 2021 is primarily attributable to the acquisition of Cobham Aero
Connectivity ("CAC") in second quarter of fiscal 2021 and the divestitures of
ScioTeq and TREALITY Simulation Visual Systems ("ScioTeq and TREALITY")
completed at the end of the third quarter of fiscal 2021. Refer to Note 3,
"Acquisitions and Divestitures," for further information on the businesses
acquired and divested by the Company in fiscal 2020 and 2021.
•Cost of Sales and Gross Profit. Cost of sales increased by $32 million , or
6.0%, to $563 million for the thirteen week period ended July 3, 2021 compared
to $531 million for the thirteen week period ended June 27, 2020 . Cost of sales
and the related percentage of net sales for the thirteen week periods ended
July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
Thirteen Week Periods Ended
July 3, 2021 June 27, 2020 Change % Change
Cost of sales - excluding costs below $ 581 $ 511 $ 70 13.7 %
% of net sales 47.7 % 50.0 %
Non-cash stock compensation expense 4 2 2 100.0 %
% of net sales 0.3 % 0.2 %
Acquisition integration costs 2 - 2 100.0 %
% of net sales 0.2 % - %
COVID-19 pandemic restructuring costs - 19 (19) (100.0) %
% of net sales - % 1.9 %
Foreign currency (gains) losses (4) 5 (9) (180.0) %
% of net sales (0.3) % 0.5 %
Loss contract amortization (20) (6) (14) (233.3) %
% of net sales (1.6) % (0.6) %
Total cost of sales $ 563 $ 531 $ 32 6.0 %
% of net sales 46.2 % 52.0 %
Gross profit $ 655 $ 491 $ 164 33.4 %
Gross profit percentage 53.8 % 48.0 %
The increase in the dollar amount of cost of sales during the thirteen week
period ended July 3, 2021 was primarily due to higher sales volume from
increased customer demand resulting from the slight recovery in commercial air
travel, as well as the other factors summarized above, including those factors
that partially offset the increase in cost of sales.
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Gross profit as a percentage of net sales increased by 5.8 percentage points to
53.8% for the thirteen week period ended July 3, 2021 from 48.0% for the
thirteen week period ended June 27, 2020 . The increase in the gross profit
percentage is primarily driven by a favorable sales mix, specifically, higher
commercial aftermarket sales as a percentage of net sales, a decrease in
COVID-19 pandemic restructuring costs, favorable movement in foreign currency
rates and an increase in loss contract amortization. Additionally, fixed
overhead costs incurred were spread over a higher production volume further
contributing to a favorable impact to gross profit.
•Selling and Administrative Expenses. Selling and administrative expenses
increased by $9 million to $172 million , or 14.1% of net sales, for the thirteen
week period ended July 3, 2021 from $163 million , or 15.9% of net sales, for the
thirteen week period ended June 27, 2020 . Selling and administrative expenses
and the related percentage of net sales for the thirteen week periods ended
July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
Thirteen Week Periods Ended
July 3, 2021 June 27, 2020 Change % Change
Selling and administrative expenses - excluding
costs below $ 136 $ 128 $ 8 6.3 %
% of net sales 11.2 % 12.5 %
Non-cash stock compensation expense 32 19 13 68.4 %
% of net sales 2.6 % 1.9 %
Acquisition transaction-related expenses 2 - 2 100.0 %
% of net sales 0.2 % - %
Acquisition integration costs 2 2 - - %
% of net sales 0.2 % 0.2 %
Bad debt expense - 9 (9) (100.0) %
% of net sales - % 0.9 %
COVID-19 pandemic restructuring costs - 5 (5) (100.0) %
% of net sales - % 0.5 %
Total selling and administrative expenses $ 172 $ 163 $ 9 5.5 %
% of net sales 14.1 % 15.9 %
The increase in selling and administrative expenses during the thirteen week
period ended July 3, 2021 is primarily due to the increase in non-cash stock
compensation expense, partially offset by 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, as well as 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 fiscal 2021 and the impact of the Black-Scholes fair value on
certain fiscal 2021 stock option grant modifications and on 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 $36
million for the thirteen week period ended July 3, 2021 compared to $42 million
for the thirteen week period ended June 27, 2020 . The decrease in amortization
expense of $6 million was due to amortization expense on sales order backlog
recorded in fiscal 2020 in connection with the acquisition of Esterline
Technologies Corporation ("Esterline") that did not occur in fiscal 2021 as
sales order backlog was fully amortized by the end of fiscal 2020. This was
partially offset by amortization expense of intangible assets related to the
fiscal 2021 acquisition of CAC.
•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 $1 million , or 0.4%,
to $263 million for the thirteen week period ended July 3, 2021 from $262
million for the comparable thirteen week period in the prior 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
thirteen week period ended July 3, 2021 and approximately $19.9 billion for the
thirteen week period ended June 27, 2020 . The increase in the weighted average
level of borrowings was primarily due to the activity in fiscal 2020 consisting
of the issuance of the $2,650 million in 5.50% 2027 Notes, $1,100 million in
2025 Secured Notes, $400 million in 2026 New Secured Notes and $200 million
drawn on the revolving credit facility; offset by the redemption of the $1,150
million in 6.00% 2022 Notes in the first quarter of fiscal 2020. The weighted
average interest rate for cash interest payments on total borrowings outstanding
for the thirteen week period ended July 3, 2021 was 5.0%.
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•Refinancing Costs. Refinancing costs of $13 million were recorded for the
thirteen week period ended July 3, 2021 compared to $1 million recorded for the
thirteen week period ended June 27, 2020 . The refinancing costs for the thirteen
week period ended July 3, 2021 were primarily related to fees incurred on the
early redemption of the $750 million in 6.50% 2025 Notes.
•Other Income. Other income was $5 million for the thirteen week period ended
July 3, 2021 compared to $11 million recorded for the thirteen week period ended
June 27, 2020 . Other income for the thirteen week period ended July 3, 2021 is
primarily driven by the release of a litigation reserve ($3 million ) and the
non-service related components of net periodic benefit costs on the Company's
defined benefit pension plans ($2 million ).
•Gain on Sale of Businesses-net. Gain on sale of businesses-net of $68 million
was recorded for the thirteen week period ended July 3, 2021 , and is primarily
related to the net gain on sale recognized during the third quarter of fiscal
2021 as a result of the ScioTeq and TREALITY Simulation Visual Systems ("ScioTeq
and TREALITY") and Technical Airborne Components ("TAC") divestitures.
•Income Tax (Benefit) Provision. Income tax (benefit) expense as a percentage of
income before income taxes was approximately (30.0)% for the thirteen week
period ended July 3, 2021 compared to 113.5% for the thirteen week period ended
June 27, 2020 . The Company's lower effective tax rate for the thirteen week
period ended July 3, 2021 was primarily due to the Company's ability to utilize
its net interest deduction limitation carryforward pursuant to IRC Section
163(j) resulting in the release of the valuation allowance applicable to such
carryforward and the discrete impact of excess tax benefits associated with
share-based compensation.
•Loss from Discontinued Operations. There were no discontinued operations for
the thirteen week period ended July 3, 2021 . Loss from discontinued operations
for the thirteen week period ended June 27, 2020 was $1 million , which was
driven by certain wind down activities associated with the divestiture of
Souriau-Sunbank.
•Net Income (Loss) Attributable to TD Group . Net income (loss) attributable to
TD Group increased $323 million , to $317 million for the thirteen week period
ended July 3, 2021 compared to a net loss attributable to TD Group of $(6)
million for the thirteen week period ended June 27, 2020 , primarily due to the
Company's lower effective tax rate, the adverse effects of the COVID-19 pandemic
impacting the Company's financial results to a lesser extent versus the
comparable thirteen week period in the prior year, as well as the other factors
referenced above.
•Earnings (Loss) per Share. Basic and diluted earnings (loss) per share was
$5.43 for the thirteen week period ended July 3, 2021 and $(0.10) per share for
the thirteen week period ended June 27, 2020 . There was no impact on earnings
per share from discontinued operations for the thirteen week period ended
July 3, 2021 . Basic and diluted earnings (loss) per share from continuing
operations and discontinued operations was $(0.09) and $(0.01) , respectively,
for the thirteen week period ended June 27, 2020 .
Business Segments
•Segment Net Sales . Net sales by segment for the thirteen week periods ended
July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
Thirteen Week Periods Ended
July 3, 2021 % of Sales June 27, 2020 % of Sales Change % Change
Power & Control $ 628 51.5 % $ 556 54.4 % $ 72 12.9 %
Airframe 550 45.2 % 434 42.5 % 116 26.7 %
Non-aviation 40 3.3 % 32 3.1 % 8 25.0 %
Net sales $ 1,218 100.0 % $ 1,022 100.0 % $ 196 19.2 %
Net sales for the Power & Control segment increased $72 million , an increase of
12.9%, for the thirteen week period ended July 3, 2021 compared to the thirteen
week period ended June 27, 2020 . The sales increase resulted primarily from
increases in organic sales in commercial aftermarket ($32 million , an increase
of 30.6%), defense ($27 million , an increase of 8.3%) and commercial OEM ($13
million an increase of 13.1%). The increase in commercial aftermarket sales is
attributable to the COVID-19 pandemic impacting commercial aerospace to a lesser
extent compared to the thirteen week period in the prior year, particularly
related to the higher utilization of narrow-body aircraft. The increase in
defense sales is primarily attributable to the rebound in demand from the
temporary pandemic-induced decline for certain platforms in fiscal 2020. The
increase in commercial OEM sales is attributable to a couple of specific
businesses within the Power & Control segment that had significant sales
increases. This was partially offset by lower commercial OEM sales due to build
rate reductions by aircraft OEMs. The change in acquisition and divestiture
sales was immaterial for the thirteen week period ended July 3, 2021 .
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Net sales for the Airframe segment increased $116 million , an increase of 26.7%,
for the thirteen week period ended July 3, 2021 compared to the thirteen week
period ended June 27, 2020 . The sales increase resulted primarily from increases
in organic sales in defense ($38 million , an increase of 24.9%) and commercial
aftermarket ($36 million , an increase of 38.0%); partially offset by a decrease
in organic commercial OEM sales ($18 million , a decrease of 13.6%). The increase
in commercial aftermarket sales is attributable to the COVID-19 pandemic
impacting commercial aerospace to a lesser extent compared to the thirteen week
period in the prior year, particularly related to the higher utilization of
narrow-body aircraft. The increase in defense sales is primarily attributable to
the rebound in demand from the temporary pandemic-induced decline for certain
platforms in fiscal 2020. The decrease in commercial OEM sales is primarily
attributable to build rate reductions by aircraft OEMs. Acquisition and
divestiture sales increased by $44 million , primarily due to the acquisition of
CAC in the second quarter of fiscal 2021.
Net sales for the Non-aviation segment increased $8 million , an increase of
25.0%, for the thirteen week period ended July 3, 2021 compared to the thirteen
week period ended June 27, 2020 . The sales increase resulted primarily from an
increase in organic sales in non-aerospace ($10 million , an increase of 48.7%).
The change in acquisition and divestiture sales was immaterial for the thirteen
week period ended July 3, 2021 .
•EBITDA As Defined. EBITDA As Defined by segment for the thirteen week periods
ended July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
Thirteen Week Periods Ended
% of Segment % of Segment
July 3, 2021 Sales June 27, 2020 Sales Change % Change
Power & Control $ 331 52.7 % $ 270 48.6 % $ 61 22.6 %
Airframe 233 42.4 % 166 38.2 % 67 40.4 %
Non-aviation 14 35.0 % 12 37.5 % 2 16.7 %
$ 578 47.5 % $ 448 43.8 % $ 130 29.0 %
Organic EBITDA As Defined represents EBITDA As Defined from existing businesses
owned by the Company as of July 3, 2021 , excluding EBITDA As Defined from
acquisitions. EBITDA As Defined from acquisitions represents EBITDA As Defined
from acquired businesses for the period up to one year subsequent to their
respective acquisition date. EBITDA As Defined from divestitures represents
EBITDA As Defined from businesses divested by the Company during the thirteen
week period ended July 3, 2021 .
EBITDA As Defined for the Power & Control segment increased approximately $61
million , an increase of 22.6%, resulting from higher organic sales, particularly
in commercial aftermarket and defense, due to the adverse effects of the
COVID-19 pandemic impacting commercial aerospace and defense demand to a lesser
extent compared to the thirteen week period in the prior year. The change in
EBITDA As Defined for the Power & Control segment from acquisitions and
divestitures was immaterial for the thirteen week period ended July 3, 2021 .
EBITDA As Defined for the Airframe segment increased approximately $67 million ,
an increase of 40.4%, resulting primarily from higher organic sales,
particularly in commercial aftermarket and defense, due to the adverse affects
of the COVID-19 pandemic impacting commercial aerospace and defense demand to a
lesser extent compared to the thirteen week period in the prior year. EBITDA As
Defined for the Airframe segment from acquisitions and divestitures increased by
$11 million , primarily due to the acquisition of CAC in the second quarter of
fiscal 2021.
EBITDA As Defined for the Non-aviation segment increased approximately $2
million , an increase of 16.7%, resulting primarily from a favorable organic
sales mix from other non-aerospace sales. The change in EBITDA As Defined for
the Non-aviation segment from acquisitions and divestitures was immaterial for
the thirteen week period ended July 3, 2021 .
Thirty-nine week period ended July 3, 2021 compared with the thirty-nine week
period ended June 27, 2020
Total Company
•Net Sales. Net organic sales and acquisition and divestiture sales and the
related dollar and percentage changes for the thirty-nine week periods ended
July 3, 2021 and June 27, 2020 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended % Change
July 3, 2021 June 27, 2020 Change Net Sales
Organic sales $ 3,290 $ 3,781 $ (491) (12.5) %
Acquisition and divestiture sales 229 149 80 2.0 %
Net sales $ 3,519 $ 3,930 $ (411) (10.5) %
34-------------------------------------------------------------------------------- Table of Contents Organic sales represent sales from existing businesses owned by the Company, excluding sales from acquisitions and divestitures. Acquisition sales represent sales from acquired businesses for the period up to one year subsequent to their respective acquisition date. Divestiture sales represent sales from businesses divested subsequent to the period endedJune 27, 2020 . Acquisition and divestiture sales are excluded from organic sales due to the variability in the nature, timing and extent of acquisitions and divestitures and resulting variable impact on underlying trends. The decrease in organic sales of$491 million for the thirty-nine week period endedJuly 3, 2021 compared to the thirty-nine week period endedJune 27, 2020 , is primarily related to decreases in commercial aftermarket sales ($323 million , a decrease of 30.1%) and commercial OEM sales ($322 million , a decrease of 32.4%); partially offset by an increase in defense sales ($106 million , an increase of 7.0%). 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 and build rate reductions by aircraft OEMs as a result of the COVID-19 pandemic particularly in the first two quarters of fiscal 2021. The increase in defense sales is primarily driven by the OEM market. The increase in acquisition and divestiture sales for the thirty-nine week period endedJuly 3, 2021 is primarily attributable to the acquisition of CAC and the divestitures ofScioTeq and TREALITY. Refer to Note 3, "Acquisitions and Divestitures," for further information on the businesses acquired and divested by the Company in fiscal 2020 and 2021. •Cost of Sales and Gross Profit. Cost of sales decreased by$88 million , or 4.8%, to$1,731 million for the thirty-nine week period endedJuly 3, 2021 compared to$1,819 million for the thirty-nine week period endedJune 27, 2020 . Cost of sales and the related percentage of net sales for the thirty-nine week periods endedJuly 3, 2021 andJune 27, 2020 were as follows (amounts in millions): Thirty-Nine Week Periods Ended July 3, 2021 June 27, 2020 Change % Change Cost of sales - excluding costs below$ 1,713 $ 1,818 $ (105) (5.8) % % of net sales 48.7 % 46.3 % COVID-19 pandemic restructuring costs 26 19 7 36.8 % % of net sales 0.7 % 0.5 % Foreign currency losses 20 4 16 400.0 % % of net sales 0.6 % 0.1 % Non-cash stock compensation expense 10 6 4 66.7 % % of net sales 0.3 % 0.2 % Inventory acquisition accounting adjustments 6 - 6 100.0 % % of net sales 0.2 % - % Acquisition integration costs 3 4 (1) (25.0) % % of net sales 0.1 % 0.1 % Loss contract amortization (47) (32) (15) (46.9) % % of net sales (1.3) % (0.8) % Total cost of sales$ 1,731 $ 1,819 $ (88) (4.8) % % of net sales 49.2 % 46.3 % Gross profit$ 1,788 $ 2,111 $ (323) (15.3) % Gross profit percentage 50.8 % 53.7 % The decrease in the dollar amount of cost of sales during the thirty-nine week period endedJuly 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 net sales decreased by 2.9 percentage points to 50.8% for the thirty-nine week period endedJuly 3, 2021 from 53.7% for the thirty-nine week period endedJune 27, 2020 . The dollar amount of gross profit decreased by$323 million , or 15.3%, for the thirty-nine week period endedJuly 3, 2021 compared to the thirty-nine week period in the prior year. The decrease in the gross profit percentage is primarily driven by higher COVID-19 pandemic restructuring costs, unfavorable movement in foreign currency rates (primarily theU.S. dollar weakening against the British pound and Euro) and unfavorable 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 thirty-nine week period endedJuly 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$13 million to$531 million , or 15.1% of net sales, for the thirty-nine week period endedJuly 3, 2021 from$544 million , or 13.8% of net sales, for the thirty-nine week period endedJune 27, 2020 . Selling and administrative expenses and the related percentage of net sales for the thirty-nine week periods endedJuly 3, 2021 andJune 27, 2020 were as follows (amounts in millions): Thirty-Nine Week Periods Ended July 3, 2021 June 27, 2020 Change % Change Selling and administrative expenses - excluding costs below $ 406$ 447 $ (41) (9.2) % % of net sales 11.5 % 11.4 % Non-cash stock compensation expense 95 53 42 79.2 % % of net sales 2.7 % 1.3 % COVID-19 pandemic restructuring costs 10 5 5 100.0 % % of net sales 0.3 % 0.1 % Acquisition transaction-related expenses 8 1 7 700.0 % % of net sales 0.2 % - % Acquisition integration costs 7 14 (7) (50.0) % % of net sales 0.2 % 0.4 % Bad debt expense 5 24 (19) (79.2) % % of net sales 0.1 % 0.6 % Total selling and administrative expenses $ 531$ 544 $ (13) (2.4) % % of net sales 15.1 % 13.8 % The decrease in the dollar amount of selling and administrative expenses during the thirty-nine week period endedJuly 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 fiscal 2021 and the impact of the Black-Scholes fair value on certain fiscal 2021 stock option grant modifications and on 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$101 million for the thirty-nine week period endedJuly 3, 2021 compared to$128 million for the thirty-nine week period endedJune 27, 2020 . The decrease in amortization expense of$27 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 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$36 million , or 4.7%, to$798 million for the thirty-nine week period endedJuly 3, 2021 from$762 million for the comparable thirty-nine 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$20.0 billion for the thirty-nine week period endedJuly 3, 2021 and approximately$18.5 billion for the thirty-nine week period endedJune 27, 2020 . The increase in the weighted average level of borrowings was primarily due to the activity in fiscal 2020 consisting of the issuance of the$2,650 million in 5.50% 2027 Notes,$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 thirty-nine week period endedJuly 3, 2021 was 5.1%. •Refinancing Costs. Refinancing costs of$36 million were recorded for the thirty-nine week period endedJuly 3, 2021 compared to$27 million recorded for the thirty-nine week period endedJune 27, 2020 . The refinancing costs primarily related to fees incurred on the early redemptions of the 6.50% Senior Subordinated Notes due 2024 (the "2024 Notes") and the 2025 Notes that occurred in the second and third quarters of fiscal 2021, respectively, 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. 36 -------------------------------------------------------------------------------- Table of Contents •Other Income. Other income of$37 million was recorded for the thirty-nine week period endedJuly 3, 2021 compared to$14 million recorded for the thirty-nine week period endedJune 27, 2020 . Other income for the thirty-nine week periodJuly 3, 2021 was primarily driven by a$21 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$16 million is primarily driven by non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($9 million ), the release of a litigation reserve ($3 million ) and receipt of payment of a Canadian governmental subsidy ($4 million ). Other income for the thirty-nine week period endedJune 27, 2020 is primarily related to non-service related components of net periodic benefit costs on the Company's defined benefit pension plans. •Gain on Sale of Businesses-net. Gain on sale of businesses-net of$69 million was recorded for the thirty-nine week period endedJuly 3, 2021 , and is primarily related to the net gain on sale recognized during the third quarter of fiscal 2021 as a result of theScioTeq and TREALITY and TAC divestitures. There was no gain on sale of businesses-net recorded for the thirty-nine week period endedJune 27, 2020 . •Income Tax (Benefit) Provision. Income tax (benefit) expense as a percentage of income before income taxes was approximately (10.5)% for the thirty-nine week period endedJuly 3, 2021 compared to 16.9% for the thirty-nine week period endedJune 27, 2020 . The Company's lower effective tax rate for the thirty-nine week period endedJuly 3, 2021 was primarily due to the Company's ability to utilize its net interest deduction limitation carryforward pursuant to IRC Section 163(j) resulting in the release of the valuation allowance applicable to such carryforward and the discrete impact of excess tax benefits associated with share-based compensation. •Income from Discontinued Operations. There were no discontinued operations for the thirty-nine week period endedJuly 3, 2021 . Income from discontinued operations for the thirty-nine week period endedJune 27, 2020 includes the results of the operations of Souriau-Sunbank. OnDecember 20, 2019 ,TransDigm completed the divestiture of Souriau-Sunbank to 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 thirty-nine week period endedJune 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 . •Net Income Attributable toTD Group . Net income attributable toTD Group decreased$146 million , or 23.7%, to$471 million for the thirty-nine week period endedJuly 3, 2021 compared to net income attributable toTD Group of$617 million for the thirty-nine week period endedJune 27, 2020 , primarily as a result of the factors referenced above. •Earnings per Share. Basic and diluted earnings per share was$6.83 for the thirty-nine week period endedJuly 3, 2021 and$7.53 per share for the thirty-nine week period endedJune 27, 2020 . There was no impact on earnings per share from discontinued operations for the thirty-nine week period endedJuly 3, 2021 . Basic and diluted earnings per share from continuing operations and discontinued operations were$6.38 and$1.15 , respectively, for the thirty-nine week period endedJune 27, 2020 . Business Segments •SegmentNet Sales . Net sales by segment for the thirty-nine week period endedJuly 3, 2021 andJune 27, 2020 were as follows (amounts in millions): Thirty-Nine Week Periods Ended July 3, 2021 % of Sales June 27, 2020 % of Sales Change % Change Power & Control$ 1,870 53.1 %$ 2,056 52.4 %$ (186) (9.0) % Airframe 1,527 43.4 % 1,762 44.8 % (235) (13.3) % Non-aviation 122 3.5 % 112 2.8 % 10 8.9 % Net sales$ 3,519 100.0 %$ 3,930 100.0 %$ (411) (10.5) % Net sales for the Power & Control segment decreased$186 million , a decrease of 9.0%, for the thirty-nine week period endedJuly 3, 2021 . The sales decrease resulted primarily from decreases in organic sales in commercial aftermarket ($129 million , a decrease of 24.3%) and commercial OEM ($111 million , a decrease of 25.5%); partially offset by an increase in organic defense sales ($54 million , an increase of 5.4%). 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. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. The change in acquisition and divestiture sales was immaterial for the thirty-nine week period endedJuly 3, 2021 . 37 -------------------------------------------------------------------------------- Table of Contents Net sales for the Airframe segment decreased$235 million , a decrease of 13.3%, for the thirty-nine week period endedJuly 3, 2021 . The sales decrease resulted primarily from decreases in organic sales in commercial OEM ($210 million , a decrease of 38.5%) and commercial aftermarket ($194 million , a decrease of 35.9%); partially offset by an increase in organic defense sales ($53 million , an increase of 10.5%). 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. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. Acquisition and divestiture sales increased$88 million , primarily due to the acquisition of CAC in the second quarter of fiscal 2021. Net sales for the Non-aviation segment increased by$10 million , an increase of 8.9%, for the thirty-nine week period endedJuly 3, 2021 . The sales increase resulted primarily from an increase in organic sales in non-aerospace ($18 million , an increase of 21.3%). Acquisition and divestiture sales decreased by$6 million . •EBITDA As Defined. EBITDA As Defined by segment for the thirty-nine week periods endedJuly 3, 2021 andJune 27, 2020 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
% of Segment % of Segment
July 3, 2021 Sales June 27, 2020 Sales Change % Change
Power & Control $ 944 50.5 % $ 1,036 50.4 % $ (92) (8.9) %
Airframe 618 40.5 % 767 43.5 % (149) (19.4) %
Non-aviation 45 36.9 % 39 34.8 % 6 15.4 %
$ 1,607 45.7 % $ 1,842 46.9 % $ (235) (12.8) %
Organic EBITDA As Defined represents EBITDA As Defined from existing businesses
owned by the Company as of July 3, 2021 , excluding EBITDA As Defined from
acquisitions. EBITDA As Defined from acquisitions represents EBITDA As Defined
from acquired businesses for the period up to one year subsequent to their
respective acquisition date. EBITDA As Defined from divestitures represents
EBITDA As Defined from businesses divested by the Company during the thirty-nine
week period ended July 3, 2021 .
EBITDA As Defined for the Power & Control segment decreased approximately $92
million , a decrease of 8.9%, resulting from lower organic sales in the
commercial aftermarket and commercial OEM market due to the COVID-19 pandemic
and its adverse impact on the commercial aerospace sector. The change in EBITDA
As Defined for the Power & Control segment from acquisitions and divestitures
was immaterial for the thirty-nine week period ended July 3, 2021 .
EBITDA As Defined for the Airframe segment decreased approximately $149 million ,
a decrease of 19.4%, primarily as a result of lower organic sales in the
commercial aftermarket and commercial OEM market due to the COVID-19 pandemic
and its adverse impact on the commercial aerospace sector. EBITDA As Defined for
the Airframe segment from acquisitions and divestitures increased by $23
million , primarily due to the acquisition of CAC in the second quarter of fiscal
2021.
EBITDA As Defined for the Non-aviation segment increased approximately $6
million , an increase of 15.4%, resulting from a favorable organic sales mix
specifically from other non-aerospace sales. The change in EBITDA As Defined for
the Non-aviation segment from acquisitions and divestitures was immaterial for
the thirty-nine week period ended July 3, 2021 .
Backlog
As of July 3, 2021 , the Company estimated its sales order backlog at $3,453
million compared to $3,425 million as of June 27, 2020 . 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 of July 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 of
July 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 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.
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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 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.
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 thirty-nine week period ended July 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).
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. 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 in April 2020 in which the proceeds received were 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 of the 2025
Secured Notes 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 of the 2026 New Secured Notes at an issue price of 101%
of the principal amount.
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As of July 3, 2021 , the Company has significant cash liquidity as illustrated in
the table presented below (in millions):
As of July 3, 2021
Cash and cash equivalents $ 4,529
Availability on revolving credit facility 524
Cash liquidity $ 5,053
Due to favorable market conditions in the high yield bond market, on January 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, dated January 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, on
April 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, dated April 21, 2021 .
The Company used 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 until August 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 $624 million of net cash from
operating activities during the thirty-nine week period ended July 3, 2021
compared to $991 million during the thirty-nine week period ended June 27, 2020 .
The change in accounts receivable during the thirty-nine week period ended
July 3, 2021 was a source of cash of $23 million compared to a source of cash of
$347 million during the thirty-nine week period ended June 27, 2020 . The
decrease in the source of cash of $324 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 thirty-nine week period ended July 3, 2021
was a source of cash of $40 million compared to a use of cash of $126 million
during the thirty-nine week period ended June 27, 2020 . The increase in the
source of cash is primarily driven by decreased purchasing from reduced demand
as a result of the COVID-19 pandemic and actively managing inventory levels.
The change in accounts payable during the thirty-nine week period ended July 3,
2021 was a use of cash of $19 million compared to a use of cash of $48 million
during the thirty-nine week period ended June 27, 2020 due to timing of payments
to suppliers.
Investing Activities. Net cash used in investing activities was $748 million
during the thirty-nine week period ended July 3, 2021 , consisting primarily of
$951 million from the acquisition of CAC in the second quarter of fiscal 2021
and capital expenditures of $80 million . This was partially offset by proceeds
of $259 million from the completion of the divestitures of certain businesses,
and $24 million of insurance proceeds received in the second quarter of fiscal
2021 from the Leach International Europe fire property claim.
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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 completion of the divestiture of Souriau-Sunbank. This was
partially offset by capital expenditures of $62 million .
Financing Activities. Net cash used in financing activities during the
thirty-nine week period ended July 3, 2021 was $74 million . The use of cash was
primarily attributable to the redemptions of the 2024 Notes and 2025 Notes for
$1,220 million and $762 million , respectively, dividend equivalent payments of
$73 million and repayment on term loans of $56 million . This was partially
offset by $1,189 million in net proceeds from the completion of the 4.625% 2029
Notes offering, $743 million in net proceeds from the completion of the 4.875%
2029 Notes offering and $106 million in proceeds from stock option exercises.
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 2026 New Secured Notes offering, $200 million in proceeds from the revolving
credit facility and $89 million in proceeds from stock option exercises. This
was partially offset by dividend equivalent payments of $1,928 million , the
redemption of the 2022 Notes for $1,168 million , repayments on term loans of $38
million and the purchase of treasury stock of $19 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. There were no material changes during the
thirty-nine week period ended July 3, 2021 to these obligations as reported in
our Annual Report on Form 10-K for the fiscal year ended September 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 and
the revolving credit facility.
Description of Senior Secured Term Loans and Indentures
Senior Secured Term Loans Facility
TransDigm has $7,391 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 of July 3, 2021 ):
Term Loans Facility Aggregate Principal Maturity Date Interest Rate
Tranche E $2,182 million May 30, 2025 LIBOR + 2.25%
Tranche F $3,462 million December 9, 2025 LIBOR + 2.25%
Tranche G $1,747 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. At July 3, 2021 , the
Company had $35.8 million in letters of credit outstanding, $200.0 million drawn
and outstanding and $524.2 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 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 by
TransDigm , 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 thirty-nine week period ended July 3, 2021 , the applicable
interest rate was approximately 2.35% 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.
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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 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.
On May 24, 2021 , the Company entered into Amendment No. 8 and Loan Modification
Agreement (herein, "Amendment No. 8"). Under the terms of Amendment No. 8, the
Company, among other things, (i) extends the maturity date of the revolving
credit commitments and revolving loans under its existing Credit Agreement to
May 24, 2026 , and (ii) the LIBOR interest rate per annum applicable to the
revolving loans under its existing Credit Agreement is 2.50%, a decrease from
the 3.00% rate that applied previous to the amendment. The other terms and
conditions that apply to the revolving loans are substantially the same as the
terms and conditions that applied to the revolving loans immediately prior to
Amendment No. 8.
Indentures
The following table represents the notes outstanding as of July 3, 2021 :
Description Aggregate Principal Maturity Date Interest Rate
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%
4.875% 2029 Notes $750 million October 15, 2029 4.875%
The 6.375% 2026 Notes, the 7.50% 2027 Notes, the 5.50% 2027 Notes, the 4.625%
2029 Notes and the 4.875% 2029 Notes (collectively, the "TransDigm Inc. Notes")
were issued at a price of 100% of the principal amount. The 6.875% 2026 Notes
(the "TransDigm UK Notes" and together with the TransDigm Inc. Notes, the
"Notes," are further described below) offered in May 2018 were issued at a price
of 99.24% of the principal amount, resulting in gross proceeds of $496.2
million . The 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.
The TransDigm, Inc. Notes are fully and unconditionally guaranteed on a senior
subordinated unsecured basis by TD Group and TransDigm, Inc.'s Domestic
Restricted Subsidiaries. The TransDigm UK Notes are guaranteed on a senior
subordinated basis by TransDigm, Inc. , TD Group and TransDigm, Inc.'s Domestic
Restricted Subsidiaries. The guarantees of the Notes are subordinated to all of
the guarantors' existing and future senior debt, rank equally with all of their
existing and future senior subordinated debt and rank senior to all of their
future debt that is expressly subordinated to the guarantees of the Notes. The
Notes are structurally subordinated to all of the liabilities of TD Group's
non-guarantor subsidiaries.
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The Secured Notes are senior secured obligations of TransDigm and rank equally
in right of payment with all of TransDigm's existing and future senior secured
debt, including indebtedness under TransDigm's existing senior secured credit
facilities, and are senior in right of payment to all of TransDigm's existing
and future senior subordinated debt, including the Notes, TransDigm's other
outstanding senior subordinated notes and TransDigm's guarantees in respect of
TransDigm UK's outstanding senior subordinated notes. The Secured Notes are
guaranteed on a senior secured basis by TD Group , TransDigm UK and TransDigm's
wholly-owned U.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 of
TransDigm'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.
Guarantor Information
Separate financial statements of TransDigm, Inc. are not presented because the
Secured Notes are fully and unconditionally guaranteed on a senior secured basis
by TD Group , TransDigm UK and all of TransDigm, Inc.'s Domestic Restricted
Subsidiaries. TD Group has no significant operations or assets separate from its
investment in TransDigm, Inc.
Separate financial statements of TransDigm, Inc. are not presented because the
TransDigm, Inc. Notes are fully and unconditionally guaranteed on a senior
subordinated basis by TD Group , TransDigm UK and all of TransDigm, Inc.'s
Domestic Restricted Subsidiaries. TD Group has no significant operations or
assets separate from its investment in TransDigm, Inc.
Separate financial statements of TransDigm UK are not presented because
TransDigm UK's 6.875% 2026 Notes, issued in May 2018 , are fully and
unconditionally guaranteed on a senior subordinated basis by TD Group ,
TransDigm, Inc. and all of TransDigm, Inc.'s Domestic Restricted Subsidiaries.
TD Group has no significant operations or assets separate from its investment in
TransDigm, Inc.
The financial information presented is that of TD Group and the Guarantors,
which includes TransDigm, Inc. and TransDigm UK , on a combined basis and the
financial information of non-issuer and non-guarantor subsidiaries has been
excluded. Intercompany balances and transactions between TD Group 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) July 3, 2021 September 30, 2020
Current assets $ 5,067 $ 5,398
Non-current assets 9,491 9,157
Current liabilities 973 972
Non-current liabilities 20,183 20,423
Amounts due (from) to subsidiaries that are
non-issuers and non-guarantors - net (981) 103
Thirty-Nine Week Period
Ended
(in millions) July 3, 2021
Net sales $ 2,661
Sales to subsidiaries that are non-issuers and non-guarantors 24
Cost of sales 1,196
Expense from subsidiaries that are non-issuers and non-guarantors - net
38
Income from continuing operations 463
Net income attributable to TD Group 463
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.
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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 July 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.
On July 27, 2021 , the Company amended the Securitization Facility to, among
other things, (i) extend the maturity date to July 26, 2022 , and (ii) bear
interest at a rate of 1.20% plus three month LIBOR, compared to the interest
rate of 1.35% plus 0.50% or three month LIBOR, whichever is greater, that
applied prior to the amendment. The Securitization Facility is collateralized by
substantially all of the Company's domestic operations' trade accounts
receivable. As of July 3, 2021 , the Company has borrowed $350 million under the
Securitization Facility, which is fully drawn.
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.
No repurchases were made under the program during the fiscal quarter ended July
3, 2021 . As of July 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 of July 3, 2021 ,
the Company had $35.8 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 income (loss) 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 U.S. GAAP. We present EBITDA and EBITDA As Defined because we believe they
are useful indicators for evaluating operating performance and liquidity.
Our management believes that EBITDA and EBITDA As Defined are useful as
indicators of liquidity because securities analysts, investors, rating agencies
and others use EBITDA to evaluate a company's ability to incur and service debt.
In addition, EBITDA As Defined is useful to investors because the revolving
credit facility under our senior secured credit facility requires compliance
under certain circumstances, on a pro forma basis, with a financial covenant
that measures the ratio of the amount of our secured indebtedness to the amount
of our Consolidated EBITDA defined in the same manner as we define EBITDA As
Defined herein.
In addition to the above, our management uses EBITDA As Defined to review and
assess the performance of the management team in connection with employee
incentive programs and to prepare its annual budget and financial projections.
Moreover, our management uses EBITDA As Defined to evaluate acquisitions.
Although we use EBITDA and EBITDA As Defined as measures to assess the
performance of our business and for the other purposes set forth above, the use
of these non-GAAP financial measures as analytical tools has limitations, and
you should not consider any of them in isolation, or as a substitute for
analysis of our results of operations as reported in accordance with U.S. GAAP.
Some of these limitations are:
•neither EBITDA nor EBITDA As Defined reflects the significant interest expense,
or the cash requirements, necessary to service interest payments on our
indebtedness;
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
neither EBITDA nor EBITDA As Defined reflects any cash requirements for such
replacements;
•the omission of the substantial amortization expense associated with our
intangible assets further limits the usefulness of EBITDA and EBITDA As Defined;
•neither EBITDA nor EBITDA As Defined includes the payment of taxes, which is a
necessary element of our operations; and
•EBITDA As Defined excludes the cash expense we have incurred to integrate
acquired businesses into our operations, which is a necessary element of certain
of our acquisitions.
Because of these limitations, EBITDA and EBITDA As Defined should not be
considered as measures of discretionary cash available to us to invest in the
growth of our business. Management compensates for these limitations by not
viewing EBITDA or EBITDA As Defined in isolation and specifically by using other
U.S. GAAP measures, such as net income (loss), net sales and operating profit,
to measure our operating performance. Neither EBITDA nor EBITDA As Defined is a
measurement of financial performance under U.S. GAAP, and neither should be
considered as an alternative to net income (loss) or cash flow from operations
determined in accordance with U.S. GAAP. Our calculation of EBITDA and EBITDA As
Defined may not be comparable to the calculation of similarly titled measures
reported by other companies.
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The following table sets forth a reconciliation of income (loss) from continuing
operations to EBITDA and EBITDA As Defined (in millions):
Thirteen Week Periods Ended Thirty-Nine Week Periods Ended
July 3, 2021
$ 317 $ (5) $ 473 $ 552
Adjustments:
Depreciation and amortization expense 65 70 188 211 Interest expense, net 263 262 798 762 Income tax (benefit) provision (73) 39 (45) 112 EBITDA 572 366 1,414 1,637
Adjustments:
Inventory acquisition accounting adjustments (1) - - 6 - Acquisition integration costs (2) 4 3 10 18 Acquisition transaction-related expenses (3) 2 - 8 1 Non-cash stock compensation expense (4) 35 21 105 59 Refinancing costs (5) 13 1 36 27 COVID-19 pandemic restructuring costs (6) 1 30 40 30 Gain on sale of businesses, net (7) (68) - (69) - Other, net (8) - 3 2 8 EBITDA As Defined $ 559 $ 424$ 1,552 $ 1,780 (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 (less than$1 million and$36 million for the thirteen and thirty-nine week periods endedJuly 3, 2021 , respectively, and$24 million for the thirteen and thirty-nine week periods endedJune 27, 2020 ) and also includes restructuring costs related to the 737 MAX production rate change ($3 million for the thirteen and thirty-nine week periods endedJune 27, 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$4 million for the thirteen and thirty-nine week periods endedJuly 3, 2021 , respectively, and$3 million for the thirteen and thirty-nine week periods endedJune 27, 2020 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). (7)Represents the gain or loss on sale of businesses, which is primarily attributable to the net gain on sale recognized as a result of the divestitures completed during the third quarter of fiscal 2021 (TAC,ScioTeq and TREALITY). (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 and gain or loss on sale of fixed assets. 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):
Thirty-Nine Week Periods Ended
July 3, 2021 June 27, 2020
Net cash provided by operating activities $ 624 $ 991
Adjustments:
Changes in assets and liabilities, net of effects from acquisitions and
sales of businesses 102 (166)
Interest expense, net (1) 772 737
Income tax (benefit) provision - current (59) 129
Loss contract amortization 47 32
Non-cash stock compensation expense (2) (105) (59)
Refinancing costs (3) (36) (27)
Gain on sale of businesses, net (4) 69 -
EBITDA 1,414 1,637
Adjustments:
Inventory acquisition accounting adjustments (5) 6 - Acquisition integration costs (6) 10 18 Acquisition transaction-related expenses (7) 8 1 Non-cash stock compensation expense (2) 105 59 Refinancing costs (3) 36 27 COVID-19 pandemic restructuring costs (8) 40 30 Gain on sale of businesses, net (4) (69) - Other, net (9) 2 8 EBITDA As Defined $ 1,552$ 1,780 (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 the gain or loss on sale of businesses, which is primarily attributable to the net gain on sale recognized as a result of the divestitures completed during the third quarter of fiscal 2021 (TAC,ScioTeq and TREALITY). (5)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. (6)Represents costs incurred to integrate acquired businesses and product lines intoTD Group's operations, facility relocation costs and other acquisition-related costs. (7)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. (8)Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic ($36 million and$24 million for the thirty-nine week periods endedJuly 3, 2021 andJune 27, 2020 , respectively) and also includes restructuring costs related to the 737 MAX production rate change ($3 million for the thirty-nine week period endedJune 27, 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$4 million and$3 million for the thirty-nine week periods endedJuly 3, 2021 andJune 27, 2020 , 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). (9)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 and gain or loss on sale of fixed assets. 47
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