Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 1, 2023
☐
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 001-32833
TransDigm Group Incorporated
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
41-2101738
(I.R.S. Employer Identification No.)
1301 East 9th Street,
Suite 3000,
Cleveland,
Ohio
44114
(Address of principal executive offices)
(Zip Code)
(216) 706-2960
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
☐
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol:
Name of each exchange on which registered:
Common Stock, $0.01 par value
TDG
New York Stock Exchange
The number of shares outstanding of TransDigm Group Incorporated’s common stock, par value $.01 per share, was 55,183,160 as of July 31, 2023.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEK PERIODS ENDED JULY 1, 2023 AND JULY 2, 2022
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
TransDigm Group Incorporated (“TD Group”), through its wholly-owned subsidiary, TransDigm Inc., is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly every commercial and military aircraft in service today. TransDigm Inc., along with TransDigm Inc.’s direct and indirect wholly-owned operating subsidiaries (collectively, with TD Group, the “Company” or “TransDigm”), offers a broad range of proprietary aerospace products. TD Group has no significant assets or operations other than its 100% ownership of TransDigm Inc. TD Group’s common stock is listed on the New York Stock Exchange, or the NYSE, under the trading symbol “TDG.”
TransDigm's 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, cargo loading, handling and delivery systems and specialized flight, wind tunnel and jet engine testing services and equipment.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s condensed consolidated financial statements for the interim periods presented. These financial statements and notes should be read in conjunction with the financial statements and related notes for the fiscal year ended September 30, 2022 included in TD Group’s Form 10-K filed on November 10, 2022. As disclosed therein, the Company’s annual consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The September 30, 2022 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the thirty-nine week period ended July 1, 2023 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation, none of which are material.
3. ACQUISITIONS
Calspan Corporation – On March 14, 2023, the Company entered into a definitive agreement to acquire all the outstanding stock of Calspan Corporation (“Calspan”) for a total purchase price of $729 million. The acquisition was completed on May 8, 2023 and financed through existing cash on hand. Calspan operates from seven primary facilities within the United States and is a leading independent provider of proprietary highly engineered testing and technology development services and systems primarily for the aerospace and defense industry. Calspan’s state of the art transonic wind tunnel is used across a range of important aftermarket-focused development activities for both the commercial and defense aerospace end markets. The services and systems are primarily proprietary with significant aftermarket content. Calspan's operating results are included within TransDigm's Airframe segment.
The Company accounted for the Calspan acquisition using the acquisition method of accounting and included the results of operations of the acquisition in its condensed consolidated financial statements from the effective date of the acquisition. The purchase price was allocated to identifiable assets and liabilities based on information available at the date of acquisition. The allocation of the purchase price is preliminary and will likely change in future periods, perhaps materially, as fair value estimates of the assets acquired, particularly intangible assets and property, plant and equipment, and liabilities assumed are finalized. As of July 1, 2023, the measurement period (not to exceed one year) is open; therefore, the assets acquired and liabilities assumed related to the Calspan acquisition are subject to adjustment until the end of the respective measurement period. The Company is in the process of obtaining a third-party valuation of certain intangible assets and property, plant and equipment of Calspan. Pro forma net sales and results of operations for the acquisition had it occurred at the beginning of the thirty-nine week periods ended July 1, 2023 or July 2, 2022 are not material and, accordingly, are not provided.
The allocation of the estimated fair value of assets acquired and liabilities assumed in the Calspan acquisition as of the May 8, 2023 acquisition date is summarized in the table below (in millions):
Assets acquired (excluding cash):
Trade accounts receivable
$
39
Inventories
2
Prepaid expenses and other
40
Property, plant and equipment
105
Goodwill
367
(1)
Other intangible assets
243
(1)
Other non-current assets
7
Total assets acquired (excluding cash)
803
Liabilities assumed:
Accounts payable
10
Accrued and other current liabilities
50
Deferred income taxes
8
Other non-current liabilities
6
Total liabilities assumed
74
Net assets acquired
$
729
(1)Based on the preliminary allocation of the net assets acquired, the Company expects that at least 80% of both the approximately $367 million of goodwill and $243 million of other intangible assets recognized for the acquisition will be deductible for tax purposes. The goodwill and intangible assets will be deductible over 15 years.
DART Aerospace – On May 25, 2022, the Company acquired all the outstanding stock of DART Aerospace (“DART”) for a total purchase price of $359 million in cash, net of a working capital settlement received in the fourth quarter of fiscal 2022 of approximately $1 million. The acquisition was financed through existing cash on hand. DART operates from four primary facilities and is a leading provider of highly engineered, unique helicopter mission equipment solutions that predominantly service civilian aircraft. The products are primarily proprietary with significant aftermarket content. DART's operating results are included within TransDigm's Airframe segment.
The Company accounted for the DART acquisition using the acquisition method of accounting and third-party valuation appraisals and included the results of operations of the acquisition in its condensed consolidated financial statements from the effective date of the acquisition. The total purchase price of DART was allocated to the underlying assets acquired and liabilities assumed based upon the respective fair value at the date of acquisition. To the extent the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill. The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”), growth rates, royalty rates and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. Pro forma net sales and results of operations for the acquisition had it occurred at the beginning of the thirty-nine week period ended July 2, 2022 are not material and, accordingly, are not provided.
The final allocation of the fair value of assets acquired and liabilities assumed in the DART acquisition as of the acquisition date, as well as measurement period adjustments recorded within the permissible one year measurement period, are summarized in the table below (in millions):
Preliminary
Measurement Period
Final
Allocation
Adjustments (2)
Allocation
Assets acquired (excluding cash):
Trade accounts receivable
$
16
$
(2)
$
14
Inventories
33
(1)
32
Prepaid expenses and other
4
—
4
Property, plant and equipment
9
—
9
Goodwill
236
(31)
205
(1)
Other intangible assets
112
36
148
(1)
Other non-current assets
8
9
17
Total assets acquired (excluding cash)
418
11
429
Liabilities assumed:
Accounts payable
4
—
4
Accrued and other current liabilities
11
3
14
Deferred income taxes
35
—
35
Other non-current liabilities
8
9
17
Total liabilities assumed
58
12
70
Net assets acquired
$
360
$
(1)
$
359
(1)None of the approximately $205 million of goodwill and $148 million of other intangible assets recognized for the acquisition is deductible for tax purposes.
(2)Measurement period adjustments primarily relate to the adjustments in the fair values of the acquired other intangible assets from the third-party valuation. The principal offset was to goodwill.
Extant Aerospace Acquisitions – For the thirty-nine week period ended July 1, 2023, the Company's Extant Aerospace subsidiary, which is included within TransDigm’s Power & Control segment, completed an acquisition of substantially all of the assets and technical data rights of a certain product line, which met the definition of a business, for a total purchase price of $11 million. The allocation of the purchase price remains preliminary and will likely change in future periods up to the expiration of the respective one year measurement period as fair value estimates of the assets acquired and liabilities assumed are finalized. The Company expects that all of the approximately $6 million of goodwill and all of the approximately $4 million of other intangible assets recognized for the acquisition will be deductible for tax purposes over 15 years.
For the fiscal year ended September 30, 2022, the Company's Extant Aerospace subsidiary, completed a series of acquisitions of substantially all of the assets and technical data rights of certain product lines, each meeting the definition of a business, for a total purchase price of $88 million, of which $10 million was paid using existing cash on hand in the first quarter of fiscal 2023. The allocation of the purchase prices for certain acquisitions remains preliminary and will likely change in future periods up to the expiration of the respective one year measurement period as fair value estimates of the assets acquired and liabilities assumed are finalized. The Company expects that all of the approximately $61 million of goodwill and all of the approximately $37 million of other intangible assets recognized for the acquisitions will be deductible for tax purposes over 15 years.
Pro forma net sales and results of operations for the Extant Aerospace acquisitions had they occurred at the beginning of the thirty-nine week periods ended July 1, 2023 or July 2, 2022 are not material and, accordingly, are not provided.
The Calspan, DART and Extant Aerospace product line acquisitions strengthen and expand the Company’s position to design, produce and supply highly engineered proprietary aerospace components in niche markets with significant aftermarket content and provide opportunities to create value through the application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure, and providing highly engineered value-added products to customers). The purchase prices paid reflect the current EBITDA and cash flows, as well as the future EBITDA and cash flows expected to be generated by the businesses, which are driven in most cases by the recurring aftermarket consumption over the life of a particular aircraft, estimated to be approximately 25 to 30 years.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform.” Certain amendments were provided for in ASU 2021-01, “Reference Rate Reform (ASC 848): Scope,” which was issued in January 2021, and ASU 2022-06, “Reference Rate Reform (ASC 848): Deferral of the Sunset Date.” ASU 2021-01 provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as the London Interbank Offered Rate (“LIBOR”). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. As a result of ASU 2022-06 deferring the sunset date, ASC 848 is effective through December 31, 2024. During the second quarter of fiscal 2023, the Company entered into LIBOR to Term Secured Overnight Financing Rate (“Term SOFR”) basis interest rate swap and cap agreements to effectively convert its existing swaps and caps from LIBOR-based to Term SOFR-based. The practical expedients permissible under ASC 848 were applied and resulted in the Company preserving the presentation of its existing swaps and caps as qualifying cash flow hedges. Refer to Note 13, “Derivatives and Hedging Activities,” for further disclosure of the hedging transactions entered into during the second quarter of fiscal 2023. The application of this standard did not have a material impact on the Company's condensed consolidated financial statements and disclosures.
5. REVENUE RECOGNITION
TransDigm's sales are concentrated in the aerospace and defense industry. The Company’s customers include: distributors of aerospace components, commercial airlines, large commercial transport and regional and business aircraft original equipment manufacturers (“OEMs”), various armed forces of the United States (“U.S.”) and friendly foreign governments, defense OEMs, system suppliers, and various other industrial customers.
The Company recognizes revenue from contracts with customers using the five step model prescribed in ASC 606. The Company's revenue is primarily recorded at a point in time basis. Revenue is recognized from the sale of products or services when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to the customer. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. Revenue is measured at the amount of consideration the Company expects to be paid in exchange for goods or services.
In some contracts, control transfers to the customer over time, primarily in contracts where the customer is required to pay for the cost of both the finished and unfinished goods at the time of cancellation plus a reasonable profit relative to the work performed for products that were customized for the customer. Therefore, we recognize revenue over time for those agreements that have a right to margin and where the products being produced have no alternative use.
Based on our production cycle, it is generally expected that goods related to the revenue will be shipped and billed within 12 months. For revenue recognized over time, we estimate the amount of revenue attributable to a contract earned at a given point during the production cycle based on certain costs, such as materials and labor incurred to date, plus the expected profit, which is a cost-to-cost input method.
We consider the contractual consideration payable by the customer and assess variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.
When contracts are modified to account for changes in contract specifications and requirements, the Company considers whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original good or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification to an existing contract on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct and at relative stand-alone selling price, they are accounted for as a new contract and performance obligation, which are recognized prospectively.
The Company’s payment terms vary by the type and location of the customer and the products or services offered. The Company does not offer any payment terms that would meet the requirements for consideration as a significant financing component.
Shipping and handling fees and costs incurred in connection with products sold are recorded in cost of sales in the condensed consolidated statements of income, and are not considered a performance obligation to our customers.
The Company pays sales commissions that relate to contracts for products or services that are satisfied at a point in time or over a period of one year or less and are expensed as incurred. These costs are reported as a component of selling and administrative expenses in the condensed consolidated statements of income.
Contract Assets and Liabilities – Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing or reimbursable costs related to a specific contract. Contract liabilities (Deferred revenue) relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. The following table summarizes our contract assets and liabilities balances (in millions):
July 1, 2023
September 30, 2022
Contract assets, current (1)
$
185
$
119
Contract assets, non-current (2)
1
1
Total contract assets
186
120
Contract liabilities, current (3)
79
45
Contract liabilities, non-current (4)
8
9
Total contract liabilities
87
54
Net contract assets
$
99
$
66
(1)Included in prepaid expenses and other on the condensed consolidated balance sheets.
(2)Included in other non-current assets on the condensed consolidated balance sheets.
(3)Included in accrued and other current liabilities on the condensed consolidated balance sheets.
(4)Included in other non-current liabilities on the condensed consolidated balance sheets.
The increase in the Company's total contract assets at July 1, 2023 compared to September 30, 2022 is primarily due to the Calspan acquisition and also the timing and status of work in process and/or milestones of certain contracts. The increase in the Company's total contract liabilities at July 1, 2023 compared to September 30, 2022 is primarily due to the Calspan acquisition and also receipt of advance payments. For the thirty-nine week period ended July 1, 2023, the revenue recognized that was previously included in contract liabilities was not material.
Refer to Note 14, “Segments,” for disclosures related to the disaggregation of revenue.
Allowance for Credit Losses – The Company's allowance for credit losses is the allowance for uncollectible accounts. The allowance for uncollectible accounts reduces the trade accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected.
The Company’s method for developing its allowance for credit losses is based on historical write-off experience, the aging of receivables, an assessment of the creditworthiness of customers, economic conditions and other external market information and supportable forward-looking information. The allowance also incorporates a provision for the estimated impact of disputes with customers. All provisions for allowances for uncollectible accounts are included in selling and administrative expenses. The determination of the amount of the allowance for uncollectible accounts is subject to judgment and estimation by management. If circumstances change or economic conditions deteriorate or improve, the allowance for uncollectible accounts could increase or decrease.
As of July 1, 2023 and September 30, 2022, the allowance for uncollectible accounts was $34 million and $35 million, respectively. The allowance for uncollectible accounts is assessed individually at each operating unit by the operating unit’s management team.
The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data) using the two-class method:
Thirteen Week Periods Ended
Thirty-Nine Week Periods Ended
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Numerator for earnings per share:
Income from continuing operations
$
352
$
239
$
885
$
601
Less: Net income attributable to noncontrolling interests
(1)
(1)
(2)
(2)
Net income from continuing operations attributable to TD Group
351
238
883
599
Less: Dividends paid on participating securities
—
—
(38)
(46)
Income from discontinued operations, net of tax
—
—
—
1
Net income applicable to TD Group common stockholders—basic and diluted
$
351
$
238
$
845
$
554
Denominator for basic and diluted earnings per share under the two-class method:
Weighted-average common shares outstanding
55.0
54.4
54.7
55.0
Vested options deemed participating securities
2.2
3.6
2.4
3.7
Total shares for basic and diluted earnings per share
57.2
58.0
57.1
58.7
Earnings per share from continuing operations—basic and diluted
$
6.14
$
4.10
$
14.80
$
9.42
Earnings per share from discontinued operations—basic and diluted
—
—
—
0.02
Earnings per share
$
6.14
$
4.10
$
14.80
$
9.44
7. STOCK REPURCHASE PROGRAM
On January 27, 2022, the Board of Directors of the Company (the “Board”) authorized a new stock repurchase program to permit repurchases of its outstanding common stock not to exceed $2,200 million in the aggregate (the “$2,200 million stock repurchase program”), replacing the $650 million stock repurchase program previously authorized by the Board on November 8, 2017, subject to any restrictions specified in the Second Amended and Restated Credit Agreement dated as of June 4, 2014, and/or Indentures governing the Company's existing Notes. There is no expiration date for this program.
During the second and third quarters of fiscal 2022, the Company repurchased 1,490,413 shares of common stock at an average price of $612.13 per share for a total amount of $912 million. The repurchased shares of common stock are classified as treasury stock in the statement of changes in stockholders' deficit. No repurchases were made under the program during the thirty-nine week period ended July 1, 2023. As of July 1, 2023, $1,288 million remains available for repurchase under the $2,200 million stock repurchase program.
8. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost of inventories is generally determined by the average cost and the first–in, first–out (“FIFO”) methods and includes material, labor and overhead related to the manufacturing process.
Inventories consist of the following (in millions):
Other intangible assets–net in the condensed consolidated balance sheets consist of the following (in millions):
July 1, 2023
September 30, 2022
Gross Carrying Amount
Accumulated Amortization
Net
Gross Carrying Amount
Accumulated Amortization
Net
Trademarks & trade names
$
1,055
$
—
$
1,055
$
990
$
—
$
990
Technology
2,195
864
1,331
2,054
780
1,274
Order backlog
17
7
10
7
3
4
Customer relationships
674
130
544
580
104
476
Other
10
5
5
9
3
6
Total
$
3,951
$
1,006
$
2,945
$
3,640
$
890
$
2,750
The aggregate amortization expense on identifiable intangible assets is approximately $37 million and $33 million for the thirteen week periods ended July 1, 2023 and July 2, 2022, respectively, and $105 million and $102 million for the thirty-nine week periods ended July 1, 2023 and July 2, 2022, respectively.
As disclosed in Note 3, “Acquisitions,” the estimated fair value of the net identifiable tangible and intangible assets acquired is based on the acquisition method of accounting and is subject to adjustment upon completion of the third-party valuation for certain acquisitions. Material adjustments may occur. The fair value of the net identifiable tangible and intangible assets acquired will be finalized within the measurement period (not to exceed one year). Intangible assets acquired during the thirty-nine week period ended July 1, 2023 are summarized in the table below (in millions):
Gross Amount
Amortization Period
Intangible assets not subject to amortization:
Goodwill
$
373
Trademarks and trade names
53
426
Intangible assets subject to amortization:
Technology
108
20 years
Order backlog
10
1.5 years
Customer relationships
76
20 years
194
Total
$
620
The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2022 through July 1, 2023 (in millions):
Power & Control
Airframe
Non-aviation
Total
Balance at September 30, 2022
$
4,155
$
4,393
$
93
$
8,641
Goodwill acquired during the period (Note 3)
6
367
—
373
Purchase price allocation adjustments (1)
4
3
—
7
Currency translation adjustments and other
33
87
—
120
Balance at July 1, 2023
$
4,198
$
4,850
$
93
$
9,141
(1)Primarily related to opening balance sheet adjustments recorded from the series of acquisitions completed during fiscal year 2022 by the Company's Extant Aerospace subsidiary (Power & Control) and the acquisition of DART (Airframe). Refer to Note 3, “Acquisitions,” for further information.
The Company performs its annual impairment test for goodwill and other intangible assets as of the first day of the fourth fiscal quarter of each year, or more frequently, if events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We have assessed the changes in events and circumstances through the third quarter of fiscal 2023 and concluded that no triggering events occurred that required interim quantitative testing.
8.00% secured notes due 2025 (“2025 Secured Notes”)
1,100
(6)
—
1,094
6.375% 2026 Notes
950
(4)
—
946
6.875% 2026 Notes
500
(3)
(2)
495
2026 Secured Notes
4,400
(35)
3
4,368
7.50% 2027 Notes
550
(3)
—
547
5.50% 2027 Notes
2,650
(15)
—
2,635
4.625% 2029 Notes
1,200
(9)
—
1,191
4.875% 2029 Notes
750
(6)
—
744
Government refundable advances
23
—
—
23
Finance lease obligations
146
—
—
146
19,567
(110)
(12)
19,445
Less: current portion
77
(1)
—
76
Long-term debt
$
19,490
$
(109)
$
(12)
$
19,369
Accrued interest, which is classified as a component of accrued and other current liabilities on the condensed consolidated balance sheets, was $199 million and $170 million as of July 1, 2023 and September 30, 2022, respectively.
Amendment No. 10, Loan Modification Agreement and Refinancing Facility Agreement –On December 14, 2022, the Company entered into Amendment No. 10, Loan Modification Agreement and Refinancing Facility Agreement (herein, “Amendment No. 10”) to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the “Credit Agreement”). Under the terms of Amendment No. 10, the Company, among other things, repaid in full its existing approximately $1,725 million in Tranche G term loans maturing August 22, 2024 and replaced such loans with approximately $1,725 million in Tranche H term loans maturing February 22, 2027. The Tranche H term loans bear interest at Term SOFR plus 3.25% compared to the former Tranche G term loans which bore interest at LIBOR plus 2.25%. The Tranche H term loans were issued at a discount of 2.00%, or approximately $34.5 million. The Tranche H term loans were fully drawn on December 14, 2022 and the other terms and conditions that apply to the Tranche H term loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 10.
The Company expensed $4.6 million of refinancing costs associated with the refinancing during the thirty-nine week period ended July 1, 2023. Additionally, the Company wrote-off $0.2 million in unamortized debt issuance costs and $0.1 million of original issue discount related to the Tranche G terms loans during the thirty-nine week period ended July 1, 2023.
Amendment No. 11, Loan Modification Agreement and Refinancing Facility Agreement –On February 24, 2023, the Company entered into Amendment No. 11, Loan Modification Agreement and Refinancing Facility Agreement (herein, “Amendment No. 11”) to the Credit Agreement. Under the terms of Amendment No. 11, the Company, among other things, repaid in full its existing approximately $2,149 million in Tranche E term loans maturing May 30, 2025 and approximately $3,410 million in Tranche F term loans maturing December 9, 2025 and replaced such loans with approximately $4,559 million in Tranche I term loans maturing August 24, 2028 and the $1,000 million 2028 Secured Notes further described below. The Tranche I term loans bear interest at Term SOFR plus 3.25% compared to the former Tranche E and Tranche F term loans which bore interest at LIBOR plus 2.25%. The Tranche I term loans were issued at a discount of 0.25%, or approximately $11.4 million. The Tranche I term loans were fully drawn on February 24, 2023 and the other terms and conditions that apply to the Tranche I term loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 11.
The Company expensed $9.2 million of refinancing costs associated with the refinancing during the thirty-nine week period ended July 1, 2023. Additionally, the Company wrote-off $0.1 million in unamortized debt issuance costs and $0.1 million of original issue discount related to the Tranche I terms loans during the thirty-nine week period ended July 1, 2023.
Amendment No. 12 to the Second Amended and Restated Credit Agreement – On June 16, 2023, the Company entered into Amendment No. 12 to the Second Amended and Restated Credit Agreement (herein, “Amendment No. 12”). Under the terms of Amendment No. 12, the Company, among other things, removed the option to utilize LIBOR as a benchmark rate for any revolving loans and all future loans under the Credit Agreement and replaced such rate with Term SOFR for all dollar denominated loans and with Euro Interbank Offered Rate (“EURIBOR”) for all euro denominated revolving loans.
Issuance of $1,000 million Senior Secured Notes due 2028 –On February 24, 2023, the Company entered into a purchase agreement in connection with a private offering of $1,000 million in aggregate principal amount of 6.75% senior secured notes due 2028 (the “$1,000 million 2028 Secured Notes”) at an issue price of 100% of the principal amount. The $1,000 million 2028 Secured Notes were issued pursuant to an indenture, dated as of February 24, 2023, amongst TransDigm, as issuer, TransDigm Group, TransDigm UK and the other subsidiaries of TransDigm named therein, as guarantors. The $1,000 million 2028 Secured Notes are secured by a first-priority security interest in substantially all the assets of TransDigm, TransDigm Group, TransDigm UK and each other guarantor on an equal and ratable basis with any other existing and future senior secured debt, including indebtedness under the Company's senior secured credit facilities and 2026 Secured Notes. The proceeds were used, along with the proceeds from the Tranche I term loans further described above, to repurchase the Tranche E and Tranche F term loans.
The $1,000 million 2028 Secured Notes bear interest at a rate of 6.75% per annum, which accrues from February 24, 2023 and is payable semiannually in arrears on February 15th and August 15th of each year, commencing on August 15, 2023. The $1,000 million 2028 Secured Notes mature on August 15, 2028, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.
The Company capitalized $9.8 million in debt issuance costs associated with the $1,000 million 2028 Secured Notes during the thirty-nine week period ended July 1, 2023.
Issuance of $1,100 million Senior Secured Notes due 2028 – On March 9, 2023, the Company entered into a purchase agreement in connection with a private offering of $1,100 million in aggregate principal amount of 6.75% senior secured notes due 2028 (the “$1,100 million 2028 Secured Notes”) at an issue price of 99% of the principal amount, which represents an approximately $11.0 million discount. The $1,100 million 2028 Secured Notes are an additional issuance of the Company's existing $1,000 million 2028 Secured Notes (collectively, the “2028 Secured Notes”), and were issued under the indenture dated as of February 24, 2023 pursuant to which the Company previously issued $1,000 million 2028 Secured Notes and a supplemental indenture dated as of March 9, 2023. The $1,100 million 2028 Secured Notes are the same class and series as, and otherwise identical to, the $1,000 million 2028 Secured Notes other than with respect to the date of issuance and issue price.
The $1,100 million 2028 Secured Notes bear interest at a rate of 6.75% per annum, which accrues from February 24, 2023 and is payable semiannually in arrears on February 15th and August 15th of each year, commencing on August 15, 2023. The $1,100 million 2028 Secured Notes mature on August 15, 2028, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indentures.
The Company capitalized $11.5 million in debt issuance costs associated with the $1,100 million 2028 Secured Notes during the thirty-nine week period ended July 1, 2023.
Redemption of Senior Secured Notes due 2025 – On April 10, 2023, the Company redeemed all $1,100 million aggregate principal amount of its outstanding 2025 Secured Notes at a redemption price of 102.00% of the principal amount thereof, plus accrued and unpaid interest thereon to, but not including, the redemption date, using the net proceeds of the offering of the $1,100 million 2028 Secured Notes, together with cash on hand. In connection with the redemption of the 2025 Secured Notes, the Company paid accrued interest of approximately $1.7 million and an early redemption premium of $22.0 million associated with the 2025 Secured Notes.
The Company recorded refinancing costs of $27.0 million, consisting primarily of the $22.0 million early redemption premium and the write off of $4.8 million in unamortized debt issuance costs during the thirty-nine week period ended July 1, 2023 in conjunction with the redemption of the 2025 Secured Notes.
Subsequent Event – Trade Receivables Securitization Facility –On July 25, 2023, the Company amended the Trade Receivables Securitization Facility (“Securitization Facility”) to, among other things, increase the borrowing capacity from $350 million to $450 million and extend the maturity date to July 25, 2024 at an interest rate of Term SOFR plus 1.60%, compared to an interest rate of Term SOFR plus 1.30% that applied prior to the amendment. The total drawn on the Securitization Facility remains at $350 million. The Securitization Facility is collateralized by substantially all of the Company's domestic operations' trade accounts receivable.
Government Refundable Advances –Government refundable advances consist of payments received from the Canadian government to assist in research and development related to commercial aviation. The requirement to repay this advance is based on year-over-year commercial aviation revenue growth for certain product lines at CMC Electronics, which is a wholly-owned subsidiary of TransDigm. As of July 1, 2023 and September 30, 2022, the outstanding balance of these advances was $22 million and $23 million, respectively.
Obligations under Finance Leases –The Company leases certain buildings and equipment under finance leases. The present value of the minimum finance lease payments, net of the current portion, represents a balance of $195 million and $146 million at July 1, 2023 and September 30, 2022, respectively. The increase in the current fiscal year is attributable to certain new leases of facilities and amendments to previous agreements qualifying as lease modifications resulting in a change in classification from an operating lease to a finance lease. Refer to Note 17, “Leases,” for further disclosure of the Company's lease obligations.
At the end of each reporting period, TD Group makes an estimate of its annual effective income tax rate. The estimate used in the year-to-date period may change in subsequent periods.
During the thirteen week periods ended July 1, 2023 and July 2, 2022, the effective income tax rate was 24.9% and 23.4%, respectively. During the thirty-nine week periods ended July 1, 2023 and July 2, 2022, the effective income tax rate was 24.1% and 21.5%, respectively. The Company’s higher effective income tax rate for the thirteen and thirty-nine week period ended July 1, 2023, which was also higher than the federal statutory tax rate of 21%, was primarily due to an increase in the valuation allowance applicable to the Company's net interest deduction limitation carryforward, partially offset by the discrete impact of excess tax benefits associated with share-based payments.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company is no longer subject to U.S. federal examinations for years before fiscal 2017. The Company is currently under examination for its federal income taxes in Canada for fiscal years 2013 through 2019, and in Germany for fiscal years 2014 through 2017. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.
Unrecognized tax benefits at July 1, 2023 and September 30, 2022, the recognition of which would have an impact on the effective tax rate for each fiscal year, amounted to $14.9 million and $16.6 million, respectively. The Company classifies all income tax-related interest and penalties as income tax expense, which were not material for the thirteen and thirty-nine week periods ended July 1, 2023 and July 2, 2022. As of July 1, 2023 and September 30, 2022, the Company accrued $5.2 million and $4.5 million, respectively, for the potential payment of interest and penalties. Within the next 12 months, the Company does not anticipate a material increase or decrease in the amount of unrecognized tax benefits.
12. FAIR VALUE MEASUREMENTS
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
(1)Included in prepaid expenses and other on the condensed consolidated balance sheets.
(2)Included in other non-current assets on the condensed consolidated balance sheets.
(3)Included in accrued and other current liabilities on the condensed consolidated balance sheets.
(4)Included in other non-current liabilities on the condensed consolidated balance sheets.
(5)The carrying amount of the debt instrument is presented net of debt issuance costs, premium and discount. Refer to Note 10, “Debt,” for gross carrying amounts.
The Company values its financial instruments using an industry standard market approach, in which prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized or disclosed using unobservable inputs (i.e., Level 3).
The Company’s derivatives consist of interest rate swap, cap and collar agreements and foreign currency exchange contracts. The fair values of the interest rate swap, cap and collar agreements were derived by taking the net present value of the expected cash flows using observable market inputs (Level 2) such as LIBOR or SOFR rate curves, futures, volatilities and basis spreads (when applicable). The fair values of the foreign currency exchange contracts were derived by using Level 2 inputs based on observable spot and forward exchange rates in active markets. There has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any material impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.
The estimated fair value of the Company’s term loans was based on information provided by the agent under the Company’s Credit Agreement. The estimated fair values of the Company’s notes were based upon quoted market prices.
The fair value of cash and cash equivalents, trade accounts receivable-net and accounts payable approximated carrying value due to the short-term nature of these instruments at July 1, 2023 and September 30, 2022.
The Company is exposed to, among other things, the impact of changes in foreign currency exchange rates and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks and does not enter into such transactions for trading purposes. The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged. The Company has agreements with each of its swap, cap and collar counterparties that contain a provision whereby if the Company defaults on the Credit Agreement, the Company could also be declared in default on its swaps, cap and collars resulting in an acceleration of payment under the swaps, cap and collars.
All derivative financial instruments are recorded at fair value in the condensed consolidated balance sheets. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the condensed consolidated balance sheets in accumulated other comprehensive loss to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within accumulated other comprehensive loss is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.
Interest Rate Swap, Cap and Collar Agreements – Interest rate swap, cap and collar agreements are used to manage interest rate risk associated with floating rate borrowings (such as our term loans - see Note 10, “Debt”) under our Credit Agreement. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the term of the agreements without an exchange of the underlying principal amount. The agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s floating rate debt to a fixed rate basis from the effective date through the maturity date of the respective interest rate swap, cap and collar agreements, thereby reducing the impact of interest rate movements on future interest expense.
Prior to amending the Credit Agreement (as disclosed in Note 10, “Debt”), the Company was exposed to floating rates of LIBOR via the term loans' benchmark interest rate. During the second quarter of fiscal 2023, in connection with the amendment of the Credit Agreement impacting the term loans, we entered into LIBOR to Term SOFR basis interest rate swap and cap transactions to effectively convert our existing swaps and cap from LIBOR-based to Term SOFR-based. The basis swaps and cap offset the LIBOR exposure of the existing swaps and cap and effectively fix the Term SOFR rate for the notional amount.
We also entered into forward starting interest rate collar agreements during the second quarter of fiscal 2023. The interest rate collar agreements establish a range where we will pay the counterparties if the three-month Term SOFR rate falls below the established floor rate of 2.0%, and the counterparties will pay us if the three-month Term SOFR rate exceeds the ceiling rate of 3.5%. The collar will settle quarterly from the effective date through the maturity date. No payments or receipts will be exchanged on the interest rate collar contracts unless interest rates rise above or fall below the contracted ceiling or floor rates.
The tables below summarize the key terms of the swaps, cap and collars as of July 1, 2023 (aggregated by effective date).
Interest rate swap agreements:
Aggregate Notional Amount (in millions)
Effective Date
Maturity Date
Conversion of Related Variable Rate Debt subject to Term SOFR to Fixed Rate of:
$400
3/31/2023
6/28/2024
6.25% (3.0% plus the 3.25% margin percentage)
$900
3/31/2023
6/28/2024
6.35% (3.1% plus the 3.25% margin percentage)
$500
3/31/2023
3/31/2025
6.25% (3.0% plus the 3.25% margin percentage)
$1,500
3/31/2023
3/31/2025
6.35% (3.1% plus the 3.25% margin percentage)
$700
3/31/2023
9/30/2025
4.55% (1.3% plus the 3.25% margin percentage)
Interest rate cap agreement:
Aggregate Notional Amount (in millions)
Effective Date
Maturity Date
Offsets Variable Rate Debt Attributable to Fluctuations Above:
$700
3/31/2023
9/30/2025
Three-month Term SOFR rate of 1.25%
Interest rate collar agreements:
Aggregate Notional Amount (in millions)
Effective Date
Maturity Date
Offsets Variable Rate Debt Attributable to Fluctuations Below and Above:
$1,100
3/31/2025
9/30/2026
Three-month Term SOFR rate of 2.00% (floor) and 3.50% (cap)
$500
9/30/2025
9/30/2026
Three-month Term SOFR rate of 2.00% (floor) and 3.50% (cap)
These derivative instruments qualify as effective cash flow hedges under U.S. GAAP. For the LIBOR to Term SOFR basis interest rate swap and cap agreements referenced above, we applied the practical expedients permissible under ASC 848 to continue hedge accounting for our existing swaps and cap as effective cash flow hedges. For our cash flow hedges, the effective portion of the gain or loss from the financial instruments is initially reported as a component of accumulated other comprehensive loss in stockholders’ deficit and subsequently reclassified into earnings in the same line as the hedged item in the same period or periods during which the hedged item affects earnings. As the interest rate swap, cap and collar agreements are used to manage interest rate risk, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in interest expense-net in the condensed consolidated statements of income. Cash flows related to the derivative contracts are included in cash flows from operating activities on the condensed consolidated statements of cash flows.
Certain derivative asset and liability balances are offset where master netting agreements provide for the legal right of setoff. For classification purposes, we record the net fair value of each type of derivative position that is expected to settle in less than one year with each counterparty as a net current asset or liability and each type of long-term position as a net non-current asset or liability. The amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the condensed consolidated balance sheets and the net amounts of assets and liabilities presented therein (in millions):
July 1, 2023
September 30, 2022
Asset
Liability
Asset
Liability
Interest rate cap agreement
$
55
$
1
$
50
$
—
Interest rate collar agreements
10
—
—
—
Interest rate swap agreements
155
4
145
—
Net derivatives as classified in the condensed consolidated balance sheets (1)
$
220
$
5
$
195
$
—
(1)Refer to Note 12, “Fair Value Measurements,” for the condensed consolidated balance sheets classification of the Company's interest rate swap, cap and collar agreements.
Based on the fair value amounts determined as of July 1, 2023, the estimated net amount of existing (gains) and losses and caplet amortization expected to be reclassified into interest expense-net within the next 12 months is approximately $(107.3) million.
Foreign Currency Forward Exchange Contracts – The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At July 1, 2023, the Company has outstanding foreign currency forward exchange contracts to sell U.S. dollars with notional amounts of $218.4 million. The maximum duration of the Company’s foreign currency cash flow hedge contracts at July 1, 2023 is 15 months. These notional values consist of contracts for the Canadian dollar and the euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective trade dates. Amounts related to foreign currency forward exchange contracts included in accumulated other comprehensive loss in stockholders' deficit are reclassified into net sales when the hedged transaction settles.
During the thirty-nine week period ended July 1, 2023, the losses reclassified on settlements of foreign currency forward exchange contracts designated as cash flow hedges into net sales was approximately $2.4 million. The losses were previously recorded as a component of accumulated other comprehensive loss in stockholders' deficit.
As of July 1, 2023, the Company expects to record a net loss of approximately $0.9 million on foreign currency forward exchange contracts designated as cash flow hedges to net sales over the next 12 months.
14. SEGMENTS
The Company’s businesses are organized and managed in three reporting segments: Power & Control, Airframe and Non-aviation.
The Power & Control segment includes operations that primarily develop, produce and market systems and components that predominately provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies. Major product offerings 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, databus and power controls, advanced sensor products, switches and relay panels, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Primary customers of this segment are engine and power system and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.
The Airframe segment includes operations that primarily develop, produce and market systems and components that are used in non-power airframe applications utilizing airframe and cabin structure technologies. Major product offerings include engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, 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, thermal protection and insulation, lighting and control technology, parachutes and specialized flight, wind tunnel and jet engine testing services and equipment. Primary customers of this segment are airframe manufacturers and cabin system suppliers and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.
The Non-aviation segment includes operations that primarily develop, produce and market products for non-aviation markets. Major product offerings include seat belts and safety restraints for ground transportation applications, mechanical/electro-mechanical actuators and controls for space applications, hydraulic/electromechanical actuators and fuel valves for land-based gas turbines, and refueling systems for heavy equipment used in mining, construction and other industries and turbine controls for the energy and oil and gas markets. Primary customers of this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers, manufacturers of heavy equipment used in mining, construction and other industries and turbine original equipment manufacturers, gas pipeline builders and electric utilities.
The primary measurement used by management to review and assess the operating performance of each segment is EBITDA As Defined. The Company defines EBITDA As Defined as earnings before interest, taxes, depreciation and amortization plus certain non-operating items recorded as corporate expenses including non-cash compensation charges incurred in connection with the Company’s stock incentive or deferred compensation plans, foreign currency gains and losses, acquisition-integration costs, acquisition and divestiture transaction-related expenses, and refinancing costs. Acquisition and divestiture-related costs represent accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold; costs incurred to integrate acquired businesses and product lines into the Company’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs for both acquisitions and divestitures comprising deal fees; legal, financial and tax diligence expenses and valuation costs that are required to be expensed as incurred and other acquisition accounting adjustments.
EBITDA As Defined is not a measurement of financial performance under U.S. GAAP. Although the Company uses EBITDA As Defined to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with U.S. GAAP.
The Company’s segments are reported on the same basis used internally for evaluating performance and for allocating resources. The accounting policies for each segment are the same as those described in the summary of significant accounting policies in the Company’s condensed consolidated financial statements. Intersegment sales and transfers are recorded at values based on market prices, which creates intercompany profit on intersegment sales or transfers that is eliminated in consolidation. Intersegment sales were immaterial for the periods presented below. Corporate consists of our corporate offices. Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. Corporate assets consist primarily of cash and cash equivalents. Corporate expenses and assets reconcile reportable segment data to the consolidated totals. An immaterial amount of corporate expenses is allocated to the operating segments.
The following table presents net sales by reportable segment (in millions):
The Company maintains certain non-contributory defined benefit pension plans (collectively, referred to as the “pension plans”) covering eligible employees in the U.S. and in other certain countries such as Canada, France, Germany and the United Kingdom and also sponsors other post-retirement pension plans for its employees in the U.S. and in Canada (collectively, referred to as the “post-retirement pension plans”)
The components of net periodic pension benefit cost (income) for the pension plans consisted of the following (in millions):
Thirteen Week Periods Ended
Thirty-Nine Week Periods Ended
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
U.S. Pension Plans
Non-U.S. Pension Plans
U.S. Pension Plans
Non-U.S. Pension Plans
U.S. Pension Plans
Non-U.S. Pension Plans
U.S. Pension Plans
Non-U.S. Pension Plans
Service cost
$
—
$
1
$
—
$
1
$
—
$
2
$
—
$
3
Interest cost
—
2
1
1
—
6
4
3
Expected return on plan assets
—
(2)
(2)
(1)
—
(6)
(6)
(5)
Amortization of net loss
—
—
—
—
—
1
—
1
Settlement (gain) loss (1)
(9)
—
21
—
(8)
—
21
—
Net periodic pension benefit cost (income)
$
(9)
$
1
$
20
$
1
$
(8)
$
3
$
19
$
2
(1)Effective June 30, 2021, the Company terminated the Esterline Retirement Plan (the “ERP”) in accordance with regulatory requirements. During the third quarter of fiscal 2022, the Company transferred the remaining benefit obligations to an insurance company in order to purchase a group annuity contract. In connection with the transfer, a settlement loss of approximately $21 million was recorded as a component of other (income) expense in the condensed consolidated statements of income for the thirteen and thirty-nine week periods ended July 2, 2022. Upon the finalization of the group annuity purchase funding in fiscal 2023, a settlement (gain) of approximately $(9) million and $(8) million was recorded as a component of other (income) expense in the condensed consolidated statements of income for the thirteen and thirty-nine week periods ended July 1, 2023.
Net periodic pension benefit cost for the post-retirement pension plans was less than $1 million for the thirteen and thirty-nine week periods ended July 1, 2023 and July 2, 2022, respectively. The components of net periodic pension benefit cost other than service cost are included in other (income) expense in the condensed consolidated statements of income.
The following table presents the total changes by component in accumulated other comprehensive loss (“AOCI”), net of taxes, for the thirty-nine week periods ended July 1, 2023 and July 2, 2022 (in millions):
Unrealized gains (losses) on derivatives (1)
Pension and postretirement benefit plans adjustment (2)
Foreign currency translation adjustment (3)
Total
Balance at September 30, 2022
$
123
$
(10)
$
(380)
$
(267)
Net current-period other comprehensive income (4)
26
—
211
237
Balance at July 1, 2023
$
149
$
(10)
$
(169)
$
(30)
Balance at September 30, 2021
$
(229)
$
(18)
$
(1)
$
(248)
Net current-period other comprehensive income (loss) (4)
252
6
(208)
50
Balance at July 2, 2022
$
23
$
(12)
$
(209)
$
(198)
(1)Represents unrealized gains (losses) on derivatives designated and qualifying as cash flow hedges, net of taxes, of $10.9 million and $7.9 million for the thirteen week periods ended July 1, 2023 and July 2, 2022, respectively, and $9.7 million and $77.8 million for the thirty-nine week periods ended July 1, 2023 and July 2, 2022, respectively.
(2)For the thirteen and thirty-nine week periods ended July 2, 2022, pension liability adjustments, net of taxes, of $1.4 million represents unrecognized actuarial losses reclassified to other (income) expense upon the settlement of the ERP. There were no material pension liability adjustments, net of taxes, related to activity on the defined pension plan and postretirement benefit plan for the thirteen and thirty-nine week periods ended July 1, 2023.
(3)Represents gains (losses) resulting from foreign currency translation of financial statements, including gains (losses) from certain intercompany transactions, into U.S. dollars at the rates of exchange in effect at the balance sheet dates.
(4)Presented net of reclassifications out of AOCI into earnings, specifically interest expense - net, for realized gains (losses) on derivatives designated and qualifying as cash flow hedges of $41.9 million (net of taxes of $12.9 million) and $(64.7) million (net of taxes of $(19.9) million) for the thirty-nine week periods ended July 1, 2023 and July 2, 2022, respectively.
17. LEASES
The Company leases certain manufacturing facilities, offices, land, equipment and vehicles. Such leases, some of which are noncancellable and, in many cases, include renewals, expire at various dates. Such options to renew are included in the lease term when it is reasonably certain that the option will be exercised. The Company’s lease agreements typically do not contain any significant residual value guarantees or restrictive covenants, and payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on the lease term and the currency in which lease payments are made. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.
Maturities of lease liabilities at July 1, 2023 are as follows (in millions):
Operating Leases
Finance Leases
2023
$
5
$
4
2024
19
16
2025
17
17
2026
13
17
2027
10
17
Thereafter
19
315
Total future minimum lease payments
83
386
Less: imputed interest
14
191
Present value of lease liabilities reported
$
69
$
195
18. COMMITMENTS AND CONTINGENCIES
During the ordinary course of business, the Company is from time to time threatened with, or may become a party to, legal actions and other proceedings. While the Company is currently involved in certain legal proceedings, it believes the results of these proceedings will not have a material adverse effect on its financial condition, results of operations, or cash flows.
Litigation Claims – On November 1, 2021, a purported stockholder of the Company filed a derivative complaint, captionedSciabacucchi v Howley, et al.C.A. No. 2021-0938-LWW (the “Derivative Action”), in the Delaware Court ofChancery (the “Court”). The complaint, which names certain directors of the Company (the “Director Defendants”) as defendants, alleges that the Director Defendants awarded and received excessive compensation. The Director Defendants have denied, and continue to deny, any and all allegations of wrongdoing or liability asserted in the Derivative Action.
Nonetheless, solely to eliminate the uncertainty, distraction, disruption, burden, risk and expense of further litigation, the Company and the Director Defendants entered into a Stipulation and Agreement of Compromise, Settlement and Release (the “Stipulation”) with the plaintiff on August 19, 2022. Pursuant to the terms of the Stipulation, the Director Defendants have agreed to implement and maintain certain changes to the Company’s compensation policies and practices such as to the extent dividend equivalent payments are declared payable to any Company director, those DEPs will not be paid in cash, but instead will be paid via a reduction to the strike price of options that are issued to that director. Other corporate governance enhancements were also agreed to by the Company. The Company is also responsible for the payment of plaintiff’s attorneys’ fees. The proposed settlement as set forth in the Stipulation, other than the amount of the attorneys’ fees, was approved by the Court on November 10, 2022. On July 3, 2023, the settlement amount of the attorneys' fees was approved. The settlement (i) fully resolves the Derivative Action by dismissing all asserted claims with prejudice and (ii) releases all claims related to the allegations in the Derivative Action. The settlement did not have a material adverse impact on the Company’s financial statements.
DOD OIG Audit – TransDigm’s subsidiaries are periodically subject to pricing reviews and government buying agencies that purchase some of our subsidiaries’ products are periodically subject to audits by the Department of Defense (“DOD”) Office of Inspector General (“OIG”) with respect to prices paid for such products. In 2019, the DOD OIG received a congressional letter requesting a comprehensive review of TransDigm’s contracts with the DOD from January 2017 through June 2019 to identify whether TransDigm earned excess profits. This subsequently resulted in an audit by the DOD OIG in which the objective was to determine whether TransDigm’s business model impacted the DOD’s ability to pay fair and reasonable prices for spare parts. In December 2021, the OIG completed the audit and issued the related audit report. Despite the audit report making clear there was no wrongdoing by TransDigm, its businesses, or the DOD, the report recommended that TransDigm voluntarily refund at least $20.8 million in excess profit on 150 contracts subject to the audit.
TransDigm disagrees with many of the implications contained in the report, and objects to the use of arbitrary standards and analysis which render many areas of the report inaccurate and misleading. These include: (1) The report expressly acknowledges that it used arbitrary standards that are not applicable to the audited contracts and warns that its arbitrary standards should not be used in the future. The use of inapplicable standards results in flawed analysis and is misleading; (2) The report ignores significant real costs incurred by the business and contrary to law reports these costs as excess profit; (3) Despite data demonstrating that the DOD paid lower prices compared to the commercial prices for similar parts, the report did not conduct a price analysis and instead implies that the DOD negotiated prices were too high.
No loss contingency related to the voluntary refund request has been recorded as of July 1, 2023 as the Company has concluded that based on the current facts and circumstances, it's uncertain as to whether or not the requested voluntary refund will be made.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
The following discussion of the Company’s financial condition and results of operations should be read together with TD 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 to TD Group, TransDigm Inc. and TransDigm 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; current and future geopolitical or other worldwide events; cybersecurity threats, natural disasters and climate-change related events; our reliance on certain customers; the United States (“U.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; climate-related regulations; 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 Part II, Item 1A included in this Quarterly Report on Form 10-Q and to Part II, 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, cargo loading, handling, delivery systems and specialized flight, wind tunnel and jet engine testing services and equipment. Each of our product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer.
For the third quarter of fiscal year 2023, we generated net sales of $1,744 million and net income attributable to TD Group of $351 million. EBITDA As Defined was $915 million, or 52.5% of net sales. Refer to the “Non-GAAP Financial Measures” section for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to income from continuing operations and net cash provided by operating activities.
Throughout fiscal 2023, we have continued to see a rebound in our commercial aerospace end markets from the COVID-19 pandemic and are encouraged by the progression of the commercial aerospace market recovery to date. Commercial air travel in domestic markets continues to lead the air traffic recovery with most domestic markets nearing or achieving pre-pandemic air traffic levels. The pace of the international recovery has been slower than the domestic recovery and remains below pre-pandemic levels. However, international revenue passenger kilometers (“RPKs”), a metric used to measure air traffic demand, continues to make positive strides as most countries are now open to international travelers and there is pent-up demand for long-haul travel. The commercial original equipment manufacturer (“OEM”) market is continuing to recover with airlines returning to the commercial OEMs to place orders; however, the commercial OEM supply chain challenges impacting manufacturers such as Boeing and Airbus are slowing the pace of new aircraft manufacturing. Although the exact pace and timing of the commercial aerospace recovery, particularly internationally, remains uncertain and continues to evolve, we expect the Company's commercial aerospace end markets to continue progressing the remainder of fiscal 2023 barring any significant disruptions or setbacks.
The defense aerospace market has been impacted by the pandemic to a lesser extent than the commercial aerospace market with this impact arising primarily from supply chain shortages. Additionally, within the defense market, the pace of U.S. government defense spending outlays and government funding reprioritization provides for uncertainty.
The pandemic has also disrupted the global supply chain and labor markets. The disruption has resulted in delays in the availability of certain raw materials and increased freight costs, raw material costs and labor costs. Our business has been adversely affected, though not materially, and could continue to be adversely affected by disruptions in our ability to timely obtain raw materials and components from our suppliers in the quantities we require or on favorable terms. Although we believe in most cases that we could identify alternative suppliers, or alternative raw materials or component parts, the lengthy and expensive aviation authority and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part.
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 in the 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 Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed on November 10, 2022. Refer to Note 4, “Recent Accounting Pronouncements,” 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
Recent acquisitions are described in Note 3, “Acquisitions,” in the notes to the condensed consolidated financial statements included herein.
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, except per share data):
Thirteen Week Periods Ended
July 1, 2023
% of Net Sales
July 2, 2022
% of Net Sales
Net sales
$
1,744
100.0
%
$
1,398
100.0
%
Cost of sales
715
41.0
%
582
41.6
%
Selling and administrative expenses
209
12.0
%
184
13.2
%
Amortization of intangible assets
37
2.1
%
33
2.4
%
Income from operations
783
44.9
%
599
42.8
%
Interest expense-net
291
16.7
%
269
19.2
%
Refinancing costs
32
1.8
%
—
—
%
Other (income) expense
(9)
(0.5)
%
18
1.3
%
Income tax provision
117
6.7
%
73
5.2
%
Income from continuing operations
352
20.2
%
239
17.1
%
Less: Net income attributable to noncontrolling interests
(1)
(0.1)
%
(1)
(0.1)
%
Income from continuing operations attributable to TD Group
351
20.1
%
238
17.0
%
Income from discontinued operations, net of tax
—
—
%
—
—
%
Net income attributable to TD Group
$
351
20.1
%
$
238
17.0
%
Net income applicable to TD Group common stockholders
$
351
(1)
20.1
%
$
238
(1)
17.0
%
Earnings per share attributable to TD Group common stockholders:
Earnings per share from continuing operations—basic and diluted
$
6.14
(2)
$
4.10
(2)
Earnings per share from discontinued operations—basic and diluted
—
(2)
—
(2)
Earnings per share
$
6.14
$
4.10
Weighted-average shares outstanding—basic and diluted
57.2
58.0
Other Data:
EBITDA
$
830
(3)
$
643
(3)
EBITDA As Defined
$
915
(3)
52.5
%
$
696
(3)
49.8
%
(1)Net income applicable to TD Group common stockholders represents net income attributable to TD Group less special dividends paid on participating securities, including dividend equivalent payments. No special dividends were declared or paid on participating securities, including dividend equivalent payments, for the thirteen week periods ended July 1, 2023 and July 2, 2022.
(2)Earnings per share from continuing operations is calculated by dividing net income applicable to TD Group common stockholders, excluding income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding. Earnings per share from discontinued operations is calculated by dividing income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding. There were no earnings per share from discontinued operations for the thirteen week periods ended July 1, 2023 and July 2, 2022.
(3)Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure.
Less: Net income attributable to noncontrolling interests
(2)
—
%
(2)
(0.1)
%
Income from continuing operations attributable to TD Group
883
18.7
%
599
15.3
%
Income from discontinued operations, net of tax
—
—
%
1
—
%
Net income attributable to TD Group
$
883
18.7
%
$
600
15.3
%
Net income applicable to TD Group common stockholders
$
845
(1)
17.9
%
$
554
(1)
14.1
%
Earnings per share attributable to TD Group common stockholders:
Earnings per share from continuing operations—basic and diluted
$
14.80
(2)
$
9.42
(2)
Earnings per share from discontinued operations—basic and diluted
—
(2)
0.02
(2)
Earnings per share
$
14.80
$
9.44
Weighted-average shares outstanding—basic and diluted
57.1
58.7
Other Data:
EBITDA
$
2,237
(3)
$
1,753
(3)
EBITDA As Defined
$
2,432
(3)
51.4
%
$
1,894
(3)
48.3
%
(1)Net income applicable to TD Group common stockholders represents net income attributable to TD Group less special dividends declared or paid on participating securities, including dividend equivalent payments of $38 million and $46 million for the thirty-nine week periods ended July 1, 2023 and July 2, 2022, respectively.
(2)Earnings per share from continuing operations is calculated by dividing net income applicable to TD Group common stockholders, excluding income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding. Earnings per share from discontinued operations is calculated by dividing income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding.
(3)Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure.
Thirteen week period ended July 1, 2023 compared with the thirteen week period ended July 2, 2022
Total Company
•Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the thirteen week periods ended July 1, 2023 andJuly 2, 2022 were as follows (amounts in millions):
Thirteen Week Periods Ended
% Change Net Sales
July 1, 2023
July 2, 2022
Change
Organic sales
$
1,687
$
1,398
$
289
20.7
%
Acquisition sales
57
—
57
4.1
%
Net sales
$
1,744
$
1,398
$
346
24.7
%
Organic sales represent net sales from existing businesses owned by the Company, excluding sales from acquisitions. Acquisition sales represent net sales from acquired businesses for the period up to one year subsequent to their respective acquisition date. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Refer to Note 3, “Acquisitions,” in the notes to the condensed consolidated financial statements included herein for further information on the Company's recent acquisitions activity.
The increase in organic sales of $289 million for the thirteen week period ended July 1, 2023 compared to the thirteen week period ended July 2, 2022 is primarily related to increases in commercial aftermarket sales ($127 million, an increase of 30.9%), defense sales ($98 million, an increase of 16.7%) and commercial OEM sales ($72 million, an increase of 24.0%). The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in the third quarter of fiscal 2023 compared to fiscal 2022. The increase in defense sales is primarily attributable to improving U.S. government defense spend outlays (though, in management’s estimation, the current lag between spend authorizations and outlays remains longer than historical average levels, but has improved in the third quarter of fiscal 2023). The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries.
The acquisition sales for the thirteen week period ended July 1, 2023 are attributable to Calspan Corporation (“Calspan”), which was acquired in the third quarter of fiscal 2023 and DART Aerospace (“DART”), which was acquired in the third quarter of fiscal 2022.
•Cost of Sales and Gross Profit. Cost of sales increased by $133 million, or 22.9%, to $715 million for the thirteen week period ended July 1, 2023 compared to $582 million for the thirteen week period ended July 2, 2022. Cost of sales and the related percentage of net sales for the thirteen week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirteen Week Periods Ended
July 1, 2023
July 2, 2022
Change
% Change
Cost of sales - excluding costs below
$
719
$
605
$
114
18.8
%
% of net sales
41.2
%
43.3
%
Non-cash stock and deferred compensation expense
5
5
—
—
%
% of net sales
0.3
%
0.4
%
Foreign currency gains
(1)
(20)
19
95.0
%
% of net sales
(0.1)
%
(1.4)
%
Loss contract amortization
(8)
(8)
—
—
%
% of net sales
(0.5)
%
(0.6)
%
Total cost of sales
$
715
$
582
$
133
22.9
%
% of net sales
41.0
%
41.6
%
Gross profit (Net sales less Total cost of sales)
$
1,029
$
816
$
213
26.1
%
Gross profit percentage (Gross profit / Net sales)
The change in cost of sales during the thirteen week period ended July 1, 2023 decreased as a percentage of net sales despite increased inflationary pressures. This was primarily driven by the application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers) coupled with fixed overhead costs incurred being spread over a higher production volume. A favorable sales mix, specifically, higher commercial aftermarket sales as a percentage of net sales compared to commercial OEM net sales, also contributed to the gross profit as a percentage of net sales increasing by 0.6 percentage points to 59.0% for the thirteen week period ended July 1, 2023 from 58.4% for the thirteen week period ended July 2, 2022.
Regarding the specific components to cost of sales listed above, foreign exchange rates, particularly the U.S. dollar compared to the British pound and the euro, strengthened more significantly in the third quarter of fiscal 2022 compared to fiscal 2023 resulting in less favorable movement in the third quarter of fiscal 2023. No other material movement in the components to cost of sales were identified.
•Selling and Administrative Expenses. Selling and administrative expenses increased by $25 million to $209 million, or 12.0% of net sales, for the thirteen week period ended July 1, 2023 from $184 million, or 13.2% of net sales, for the thirteen week period ended July 2, 2022. Selling and administrative expenses and the related percentage of net sales for the thirteen week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirteen Week Periods Ended
July 1, 2023
July 2, 2022
Change
% Change
Selling and administrative expenses - excluding costs below
$
157
$
139
$
18
12.9
%
% of net sales
9.0
%
9.9
%
Non-cash stock and deferred compensation expense
48
42
6
14.3
%
% of net sales
2.8
%
3.0
%
Acquisition and divestiture transaction-related expenses
4
3
1
33.3
%
% of net sales
0.2
%
0.2
%
Total selling and administrative expenses
$
209
$
184
$
25
13.6
%
% of net sales
12.0
%
13.2
%
Selling and administrative expenses during the thirteen week period ended July 1, 2023 improved as a percentage of net sales compared to the thirteen week period ended July 2, 2022 as a result of higher net sales and our continued strategic cost mitigation efforts.
•Amortization of Intangible Assets. Amortization of intangible assets was $37 million for the thirteen week period ended July 1, 2023 compared to $33 million for the thirteen week period ended July 2, 2022. The increase in amortization expense of $4 million was primarily due to the amortization expense recognized on intangible assets from the third quarter of fiscal 2023 acquisition of Calspan and the third quarter of fiscal 2022 acquisition of DART.
•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, finance leases, interest income and the impact of interest rate swaps and caps designated and qualifying as cash flow hedges. Interest expense-net increased $22 million, or 8.2%, to $291 million for the thirteen week period ended July 1, 2023 from $269 million for the comparable thirteen week period in the prior fiscal year. The increase in interest expense-net was primarily due an increase in the base rates, i.e., Term Secured Overnight Financing Rate (“Term SOFR”) and London Interbank Offered Rate (“LIBOR”), to the portion of our variable rate debt that is not hedged via an interest rate swap or cap. This was partially offset by a $23 million increase in interest income. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirteen week period ended July 1, 2023 was 6.1% compared to 5.3% for the thirteen week period ended July 2, 2022.
•Refinancing Costs. Refinancing costs of $32 million incurred for the thirteen week period ended July 1, 2023 were primarily related to third party fees incurred for the refinancing activity completed during the third quarter of fiscal 2023, as summarized in Note 10, “Debt,” in the notes to the condensed consolidated financial statements included herein. No refinancing costs were incurred for the thirteen week period ended July 2, 2022.
•Other (Income) Expense. Other (income) expense was $(9) million for the thirteen week period ended July 1, 2023 compared to $18 million recorded for the thirteen week period ended July 2, 2022. Other (income) expense for the thirteen week period ended July 1, 2023 primarily related to a $(9) million cash refund received for the Esterline Retirement Plan (the “ERP”) upon the finalizing of the group annuity purchase funding. Other (income) expense for the thirteen week period ended July 2, 2022 was primarily driven by a pension settlement charge of approximately $21 million for the ERP. Partially offsetting this expense was a gain on sale of businesses of $(3) million.
•Income Tax Provision. Income tax expense as a percentage of income before income taxes was approximately 24.9% for the thirteen week period ended July 1, 2023 compared to 23.4% for the thirteen week period ended July 2, 2022. The Company’s higher effective tax rate for the thirteen week period ended July 1, 2023 was primarily due to an increase in the valuation allowance applicable to the Company's net interest deduction limitation carryforward, partially offset by the discrete impact of excess tax benefits associated with share-based payments.
•Net Income Attributable to TD Group. Net income attributable to TD Group increased $113 million, or 47.5%, to $351 million for the thirteen week period ended July 1, 2023 compared to net income attributable to TD Group of $238 million for the thirteen week period ended July 2, 2022, primarily as a result of the factors referenced above.
•Earnings per Share. Basic and diluted earnings per share from continuing operations was $6.14 for the thirteen week period ended July 1, 2023 and $4.10 for the thirteen week period ended July 2, 2022. There was no impact on earnings per share from discontinued operations for the thirteen week periods ended July 1, 2023 and July 2, 2022.
Business Segments
•Segment Net Sales. Net sales by segment for the thirteen week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirteen Week Periods Ended
July 1, 2023
% of Net Sales
July 2, 2022
% of Net Sales
Change
% Change
Power & Control
$
861
49.4
%
$
737
52.7
%
$
124
16.8
%
Airframe
835
47.9
%
620
44.4
%
215
34.7
%
Non-aviation
48
2.7
%
41
2.9
%
7
17.1
%
Net sales
$
1,744
100.0
%
$
1,398
100.0
%
$
346
24.7
%
Net sales for the Power & Control segment increased $124 million, an increase of 16.8%, for the thirteen week period ended July 1, 2023 compared to the thirteen week period ended July 2, 2022. The sales increase resulted primarily from increases in organic sales in the commercial aftermarket ($55 million, an increase of 26.2%), defense ($48 million, an increase of 13.4%) and commercial OEM ($25 million, an increase of 19.0%). The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in the third quarter of fiscal 2023 compared to fiscal 2022. The increase in defense sales is primarily attributable to slowly improving U.S. government defense spend outlays (though, in management’s estimation, the current lag between spend authorizations and outlays remains longer than historical average levels, but has improved in the third quarter of fiscal 2023). The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries.
Net sales for the Airframe segment increased $215 million, an increase of 34.7%, for the thirteen week period ended July 1, 2023 compared to the thirteen week period ended July 2, 2022. The sales increase resulted primarily from increases in organic sales in the commercial aftermarket ($72 million, an increase of 36.0%), defense ($49 million, an increase of 21.7%) and commercial OEM ($46 million, an increase of 28.7%). The increase in commercial aftermarket sales, defense sales and commercial OEM sales for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment. Acquisition sales increased approximately $57 million for the thirteen week period ended July 1, 2023 due to the impact of the Calspan and DART acquisitions. Acquisition sales represent net sales from acquired businesses for the period up to one year subsequent to their respective acquisition date.
The change in Non-aviation net sales compared to the thirteen week period in the prior fiscal year was not material.
•EBITDA As Defined. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure. EBITDA As Defined by segment for the thirteen week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirteen Week Periods Ended
July 1, 2023
% of Segment Net Sales
July 2, 2022
% of Segment Net Sales
Change
% Change
Power & Control
$
487
56.6
%
$
398
54.0
%
$
89
22.4
%
Airframe
417
49.9
%
292
47.1
%
125
42.8
%
Non-aviation
21
43.8
%
16
39.0
%
5
31.3
%
Total segment EBITDA As Defined
925
53.0
%
706
50.5
%
219
31.0
%
Less: Unallocated corporate EBITDA As Defined
10
0.5
%
(1)
10
0.7
%
(1)
—
—
%
Total Company EBITDA As Defined
$
915
52.5
%
(1)
$
696
49.8
%
(1)
$
219
31.5
%
(1)Calculated as a percentage of consolidated net sales.
EBITDA As Defined for the Power & Control segment increased approximately $89 million, an increase of 22.4%, resulting from higher organic sales in the commercial aftermarket, commercial OEM and defense channels. Also contributing to the increase in EBITDA As Defined was the application of our three core value-driven operating strategies and positive leverage on our fixed overhead costs spread over a higher production volume despite the ongoing inflationary environment for freight, labor and certain raw materials.
EBITDA As Defined for the Airframe segment increased approximately $125 million, an increase of 42.8%. The increase in EBITDA as Defined for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment. EBITDA As Defined for the Airframe segment from acquisitions increased by $19 million due to the impact of the Calspan and DART acquisitions. EBITDA As Defined from acquisitions represents EBITDA As Defined from acquired businesses for the period up to one year subsequent to the respective acquisition date.
EBITDA As Defined for the Non-aviation segment increased approximately $5 million, an increase of 31.3% to the comparable period from the prior fiscal year.
Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. An immaterial amount of corporate expenses is allocated to the operating segments.
Thirty-nine week period ended July 1, 2023 compared with the thirty-nine week period ended July 2, 2022
Total Company
•Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the thirty-nine week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
% Change Net Sales
July 1, 2023
July 2, 2022
Change
Organic sales
$
4,623
$
3,919
$
704
18.0
%
Acquisition sales
110
—
110
2.8
%
Net sales
$
4,733
$
3,919
$
814
20.8
%
Organic sales represent net sales from existing businesses owned by the Company, excluding sales from acquisitions. Acquisition sales represent net sales from acquired businesses for the period up to one year subsequent to their respective acquisition date. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. Refer to Note 3, “Acquisitions,” in the notes to the condensed consolidated financial statements included herein for further information on the Company's recent acquisitions activity.
The increase in organic sales of $704 million for the thirty-nine week period ended July 1, 2023 compared to the thirty-nine week period ended July 2, 2022 is primarily related to increases in commercial aftermarket sales ($385 million, an increase of 34.1%), commercial OEM sales ($193 million, an increase of 23.0%) and defense sales ($143 million, an increase of 8.6%). The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in fiscal 2023 compared to fiscal 2022. The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries. The increase in defense sales is primarily attributable to improving U.S. government defense spend outlays (though, in management’s estimation, the current lag between spend authorizations and outlays remains longer than historical average levels, but has improved in the third quarter of fiscal 2023).
The acquisition sales for the thirty-nine week period ended July 1, 2023 are attributable to Calspan, which was acquired in the third quarter of fiscal 2023, and DART, which was acquired in the third quarter of fiscal 2022.
•Cost of Sales and Gross Profit. Cost of sales increased by $277 million, or 16.2%, to $1,983 million for the thirty-nine week period ended July 1, 2023 compared to $1,706 million for the thirty-nine week period ended July 2, 2022. Cost of sales and the related percentage of net sales for the thirty-nine week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
July 1, 2023
July 2, 2022
Change
% Change
Cost of sales - excluding costs below
$
1,975
$
1,743
$
232
13.3
%
% of net sales
41.7
%
44.5
%
Foreign currency losses (gains)
21
(22)
43
195.5
%
% of net sales
0.4
%
(0.6)
%
Non-cash stock and deferred compensation expense
14
13
1
7.7
%
% of net sales
0.3
%
0.3
%
Loss contract amortization
(27)
(28)
1
3.6
%
% of net sales
(0.6)
%
(0.6)
%
Total cost of sales
$
1,983
$
1,706
$
277
16.2
%
% of net sales
41.9
%
43.5
%
Gross profit (Net sales less Total cost of sales)
$
2,750
$
2,213
$
537
24.3
%
Gross profit percentage (Gross profit / Net sales)
58.1
%
56.5
%
The change in cost of sales during the thirty-nine week period ended July 1, 2023 decreased as a percentage of net sales despite increased inflationary pressures. This was primarily driven by the application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers) coupled with fixed overhead costs incurred being spread over a higher production volume. A favorable sales mix, specifically, higher commercial aftermarket sales as a percentage of net sales compared to commercial OEM net sales also contributed to the gross profit as a percentage of net sales increasing by 1.6 percentage points to 58.1% for the thirty-nine week period ended July 1, 2023 from 56.5% for the thirty-nine week period ended July 2, 2022.
Regarding the specific components to cost of sales listed above, foreign exchange rates, particularly the U.S. dollar compared to the British pound and the euro, weakened particularly in the first half of fiscal 2023 resulting in unfavorable movement. No other material movement in the components to cost of sales were identified.
•Selling and Administrative Expenses. Selling and administrative expenses increased by $41 million to $578 million, or 12.2% of net sales, for the thirty-nine week period ended July 1, 2023 from $537 million, or 13.7% of net sales, for the thirty-nine week period ended July 2, 2022. Selling and administrative expenses and the related percentage of net sales for the thirty-nine week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
July 1, 2023
July 2, 2022
Change
% Change
Selling and administrative expenses - excluding costs below
$
454
$
406
$
48
11.8
%
% of net sales
9.6
%
10.4
%
Non-cash stock and deferred compensation expense
117
116
1
0.9
%
% of net sales
2.5
%
3.0
%
Acquisition integration costs
5
6
(1)
(16.7)
%
% of net sales
0.1
%
0.2
%
Acquisition and divestiture transaction-related expenses
5
4
1
25.0
%
% of net sales
0.1
%
0.1
%
Bad debt expense
(3)
5
(8)
(160.0)
%
% of net sales
(0.1)
%
0.1
%
Total selling and administrative expenses
$
578
$
537
$
41
7.6
%
% of net sales
12.2
%
13.7
%
Selling and administrative expenses during the thirty-nine week period ended July 1, 2023 improved as a percentage of net sales compared to the thirty-nine week period in the prior fiscal year as a result of higher net sales and our continued strategic cost mitigation efforts. The reversal of bad debt expense in fiscal 2023 relates to the improving market conditions within commercial aerospace and the resulting reduction in assessed risk associated with the collectability of certain trade accounts receivable.
•Amortization of Intangible Assets. Amortization of intangible assets was $105 million for the thirty-nine week period ended July 1, 2023 compared to $102 million for the thirty-nine week period ended July 2, 2022. The increase in amortization expense of $3 million was primarily due to the amortization expense recognized on intangible assets from the third quarter of fiscal 2023 acquisition of Calspan and the third quarter of fiscal 2022 acquisition of DART. The increase was partially offset by the Cobham Aero Connectivity acquisition backlog being fully amortized in fiscal 2022.
•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, finance leases, interest income and the impact of interest rate swaps and caps designated and qualifying as cash flow hedges. Interest expense-net increased $73 million, or 9.1%, to $872 million for the thirty-nine week period ended July 1, 2023 from $799 million for the comparable thirty-nine week period in the prior fiscal year. The increase in interest expense-net was primarily due an increase in the base rates, i.e., Term Secured Overnight Financing Rate (“Term SOFR”) and London Interbank Offered Rate (“LIBOR”), to the portion of our variable rate debt that is not hedged via an interest rate swap or cap. This was partially offset by a $69 million increase in interest income. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirty-nine week period ended July 1, 2023 was 6.1% compared to 5.3% for the thirty-nine week period ended July 2, 2022.
•Refinancing Costs. Refinancing costs of $41 million incurred for the thirty-nine week period ended July 1, 2023 were primarily related to third party fees incurred for the refinancing activity completed during the thirty-nine week period ended July 1, 2023 as summarized in Note 10, “Debt,” in the notes to the condensed consolidated financial statements included herein. No refinancing costs were incurred for the thirty-nine week period ended July 2, 2022.
•Other (Income) Expense. Other (income) expense was $(12) million for the thirty-nine week period ended July 1, 2023 compared to $9 million recorded for the thirty-nine week period ended July 2, 2022. Other (income) expense for the thirty-nine week period ended July 1, 2023 primarily related to a $(9) million cash refund received for the ERP upon the finalizing of the group annuity purchase funding. Other (income) expense for the thirty-nine week period ended July 2, 2022 was primarily driven by a pension settlement charge of approximately $21 million for the ERP. Partially offsetting this expense was a gain on sale of businesses of $(6) million and the non-service related components of benefit costs on the Company's benefit plans of $(3) million.
•Income Tax Provision. Income tax expense as a percentage of income before income taxes was approximately 24.1% for the thirty-nine week period ended July 1, 2023 compared to 21.5% for the thirty-nine week period ended July 2, 2022. The Company’s higher effective tax rate for the thirty-nine week period ended July 1, 2023 was primarily due to an increase in the valuation allowance applicable to the Company's net interest deduction limitation carryforward, partially offset by the discrete impact of excess tax benefits associated with share-based payments.
•Income from Discontinued Operations, net of tax. No income from discontinued operations, net of tax, was recorded for the thirty-nine week period ended July 1, 2023. Income from discontinued operations, net of tax, was $1 million for the thirty-nine week period ended July 2, 2022 and related to a final working capital settlement received on the divestiture of the Souriau-Sunbank Connection Technologies business.
•Net Income Attributable to TD Group. Net income attributable to TD Group increased $283 million, or 47.2%, to $883 million for the thirty-nine week period ended July 1, 2023 compared to net income attributable to TD Group of $600 million for the thirty-nine week period ended July 2, 2022, primarily as a result of the factors referenced above.
•Earnings per Share. Basic and diluted earnings per share from continuing operations was $14.80 for the thirty-nine week period ended July 1, 2023 and $9.42 for the thirty-nine week period ended July 2, 2022. Basic and diluted earnings per share from discontinued operations was $0.02 for the thirty-nine week period ended July 2, 2022. There was no impact on earnings per share from discontinued operations for the thirty-nine week period ended July 1, 2023. Net income attributable to TD Group for the thirty-nine week period ended July 1, 2023 of $883 million was decreased by dividend equivalent payments of $38 million, or $0.67 per share, resulting in net income applicable to TD Group common stockholders of $845 million. Net income attributable to TD Group for the thirty-nine week period ended July 2, 2022 of $600 million was decreased by dividend equivalent payments of $46 million, or $0.78 per share, resulting in net income applicable to TD Group common stockholders of $554 million.
Business Segments
•Segment Net Sales. Net sales by segment for the thirty-nine week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
July 1, 2023
% of Net Sales
July 2, 2022
% of Net Sales
Change
% Change
Power & Control
$
2,402
50.7
%
$
2,095
53.5
%
$
307
14.7
%
Airframe
2,204
46.6
%
1,705
43.5
%
499
29.3
%
Non-aviation
127
2.7
%
119
3.0
%
8
6.7
%
Net sales
$
4,733
100.0
%
$
3,919
100.0
%
$
814
20.8
%
Net sales for the Power & Control segment increased $307 million, an increase of 14.7%, for the thirty-nine week period ended July 1, 2023 compared to the thirty-nine week period ended July 2, 2022. The sales increase resulted primarily from increases in organic sales in the commercial aftermarket ($189 million, an increase of 32.2%), defense ($85 million, an increase of 8.3%) and commercial OEM ($55 million, an increase of 14.2%). The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand and the resulting higher flight hours and utilization of aircraft in fiscal 2023 compared to fiscal 2022. The increase in defense sales is primarily attributable to slowly improving U.S. government defense spend outlays (though, in management’s estimation, the current lag between spend authorizations and outlays remains longer than historical average levels, but has improved in the third quarter of fiscal 2023). The increase in commercial OEM sales is primarily attributable to the continued recovery in both narrow-body and wide-body aircraft production and deliveries.
Net sales for the Airframe segment increased $499 million, an increase of 29.3%, for the thirty-nine week period ended July 1, 2023 compared to the thirty-nine week period ended July 2, 2022. The sales increase resulted primarily from increases in organic sales in the commercial aftermarket ($197 million, an increase of 36.1%), commercial OEM ($136 million, an increase of 30.9%) and defense ($57 million, an increase of 8.9%). The increase in commercial aftermarket sales, commercial OEM sales and defense sales for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment. Acquisition sales increased by $110 million for the thirty-nine week period ended July 1, 2023 due to the impact of the Calspan and DART acquisitions. Acquisition sales represent net sales from acquired businesses for the period up to one year subsequent to their respective acquisition date.
The change in Non-aviation net sales compared to the thirty-nine week period in the prior fiscal year was not material.
•EBITDA As Defined. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable U.S. GAAP financial measure. EBITDA As Defined by segment for the thirty-nine week periods ended July 1, 2023 and July 2, 2022 were as follows (amounts in millions):
Thirty-Nine Week Periods Ended
July 1, 2023
% of Segment Net Sales
July 2, 2022
% of Segment Net Sales
Change
% Change
Power & Control
$
1,341
55.8
%
$
1,100
52.5
%
$
241
21.9
%
Airframe
1,101
50.0
%
791
46.4
%
310
39.2
%
Non-aviation
52
40.9
%
45
37.8
%
7
15.6
%
Total segment EBITDA As Defined
2,494
52.7
%
1,936
49.4
%
558
28.8
%
Less: Unallocated corporate EBITDA As Defined
62
1.3
%
(1)
42
1.1
%
(1)
20
47.6
%
Total Company EBITDA As Defined
$
2,432
51.4
%
(1)
$
1,894
48.3
%
(1)
$
538
28.4
%
(1)Calculated as a percentage of consolidated net sales.
EBITDA As Defined for the Power & Control segment increased approximately $241 million, an increase of 21.9%, resulting from higher organic sales in the commercial aftermarket, commercial OEM and defense channels. Also contributing to the increase in EBITDA As Defined was the application of our three core value-driven operating strategies and positive leverage on our fixed overhead costs spread over a higher production volume despite the ongoing inflationary environment for freight, labor and certain raw materials.
EBITDA As Defined for the Airframe segment increased approximately $310 million, an increase of 39.2%. The increase in EBITDA as Defined for the Airframe segment is attributable to the same factors described in the paragraph above for the Power & Control segment. EBITDA As Defined for the Airframe segment from acquisitions increased by $35 million due to the impact of the Calspan and DART acquisitions. EBITDA As Defined from acquisitions represents EBITDA As Defined from acquired businesses for the period up to one year subsequent to the respective acquisition date.
The change in Non-aviation EBITDA as Defined compared to the thirty-nine week period in the prior fiscal year was not material.
Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. An immaterial amount of corporate expenses is allocated to the operating segments. The increase compared to the thirty-nine week period in the prior fiscal year is primarily attributable to the deferred compensation plan adopted in the fourth quarter of fiscal 2022 for certain members of non-executive management and certain non-recurring transactions recorded in the first quarter of fiscal 2022.
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.
The following tables present selected balance sheet, cash flow and other financial data relevant to the liquidity or capital resources of the Company for the periods specified below (amounts in millions):
July 1, 2023
September 30, 2022
Selected Balance Sheet Data:
Cash and cash equivalents
$
3,071
$
3,001
Working capital (Total current assets less total current liabilities)
4,719
4,223
Total assets
19,555
18,107
Total debt (1)
19,765
19,795
TD Group stockholders’ deficit
(2,394)
(3,773)
(1)Includes debt issuance costs, original issue discount and premiums. Reference Note 10, “Debt,” in the notes to the condensed consolidated financial statements included herein for additional information.
(1)For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs, original issue discount and premium and the “interest component” of rental expense.
The Company continues to strategically manage its cash and cash equivalents. 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.
During the third quarter of fiscal 2023, we used existing cash on hand to fund the $729 million acquisition of Calspan, which was completed on May 8, 2023.
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 pandemic.
In the first half of fiscal 2023, the Company refinanced approximately $8,384 million of its gross debt to extend maturity dates, reduce interest rates (in the case of refinancing the $1,100 million of 2025 Secured Notes) and transition the benchmark rate of our variable rate debt from based on LIBOR to Term SOFR. As a result of the refinancing activity, the maturity dates of the impacted term loans and notes were extended until fiscal years 2027 and 2028.
In connection with the refinancing activity during the first half of fiscal 2023, we entered into forward starting interest rate collar agreements aggregating to a notional amount of $1,600 million. For the remaining $4,700 million notional amount of interest rate swaps and cap, we entered into LIBOR to Term SOFR basis interest rate swap and cap transactions to effectively convert our existing swaps and cap from LIBOR-based to Term SOFR-based. The basis swaps and cap offset the LIBOR exposure of the existing swaps and cap and effectively fix the Term SOFR rate for the notional amount.
The Company's objective is to maintain an allocation of at least 75% fixed rate and 25% variable rate debt thereby limiting its exposure to changes in near-term interest rates. Interest rate swaps, caps and collars used to hedge and offset, respectively, the variable interest rates on our term loans are further described in Note 13, “Derivatives and Hedging Activities,” in the notes to the condensed consolidated financial statements included herein. As of July 1, 2023, over 75% of our gross debt is at a fixed rate.
As of July 1, 2023, the Company has significant cash liquidity as illustrated in the table presented below (in millions):
As of July 1, 2023
Cash and cash equivalents
$
3,071
Availability on revolving credit facility
765
Cash liquidity
$
3,836
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, draws on the revolving credit facility. Long-term cash liquidity requirements consist primarily of obligations under our long-term debt agreements. There is no maturity on any tranche of term loans or notes until March 2026.
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 continue to have the financial flexibility to focus on effective capital allocation, which includes making strategic business acquisitions, pay dividends to our shareholders and make opportunistic investments in our own stock.
The Company may issue additional debt if prevailing market conditions are favorable to doing so. In addition, 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 common 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 $913 million of net cash from operating activities during the thirty-nine week period ended July 1, 2023 compared to $675 million during the thirty-nine week period ended July 2, 2022.
The change in accounts receivable during the thirty-nine week period ended July 1, 2023 was a use of cash of $134 million compared to a use of cash of $91 million during the thirty-nine week period ended July 2, 2022. The increase in the use of cash of $43 million is primarily attributable to the increase in sales volume and related timing of cash receipts. The Company continues to actively manage its accounts receivable, the related agings and collection efforts.
The change in inventories during the thirty-nine week period ended July 1, 2023 was a use of cash of $244 million compared to a use of cash of $108 million during the thirty-nine week period ended July 2, 2022. The increase in the use of cash of $136 million is primarily driven by increased purchasing from higher demand in fiscal 2023 as raw materials inventory increased approximately $194 million compared to as of July 2, 2022. The Company also continues to actively and strategically manage inventory levels in response to the ongoing supply chain challenges.
The change in accounts payable during the thirty-nine week period ended July 1, 2023 was a use of cash of $4 million compared to a source of cash of $23 million during the thirty-nine week period ended July 2, 2022. The change is due to the timing of payments to suppliers.
Investing Activities. Net cash used in investing activities was $852 million during the thirty-nine week period ended July 1, 2023, consisting of the acquisition of Calspan for $729 million, certain product line acquisitions aggregating to $21 million and capital expenditures of $102 million.
Net cash used in investing activities was $505 million during the thirty-nine week period ended July 2, 2022, consisting of the acquisition of DART for approximately $360 million, certain product line acquisitions aggregating to approximately $62 million and capital expenditures of $86 million. This was slightly offset by $3 million in proceeds received from the final working capital settlement for the ScioTeq and TREALITY divestiture.
Financing Activities. Net cash used in financing activities was $11 million during the thirty-nine week period ended July 1, 2023. The use of cash was primarily attributable to repayments on term loans of $7,318 million, which consists of the full repayment of the existing principal for the Tranche E, Tranche F and Tranche G term loans ($7,284 million), plus normal course principal payments on the Tranche E, Tranche F, Tranche H and Tranche I term loans ($34 million), the redemption of the 2025 Secured Notes for $1,122 million, dividend equivalent payments of $38 million and other financing fees of $18 million. This was primarily offset by the total net proceeds from the issuance of Tranche H and Tranche I term loans of $6,238 million, net proceeds of $2,068 million from the completion of the 2028 Secured Notes offering and $179 million in proceeds from stock option exercises.
Net cash used in financing activities was $1,116 million during the thirty-nine week period ended July 2, 2022. The use of cash was primarily attributable to $912 million in common stock repurchases, a $200 million repayment of a previous draw on the revolving credit facility, dividend equivalent payments of $46 million and repayment on term loans of $56 million. This was partially offset by $99 million in proceeds from stock option exercises.
Contractual Obligations
We have future obligations under various contracts relating to debt and interest payments, finance and operating leases, pension and postretirement benefit plans and purchase obligations. During the thirty-nine week period ended July 1, 2023, other than the refinancing activity further described in Note 10, “Debt,” in the notes to the condensed consolidated financial statements included herein, there were no material changes to these obligations as reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Description of Senior Secured Term Loans and Indentures
Senior Secured Credit Facilities
On December 14, 2022, the Company entered into Amendment No. 10, Loan Modification Agreement and Refinancing Facility Agreement (herein, “Amendment No. 10”) to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the “Credit Agreement”). Under the terms of Amendment No. 10, the Company, among other things, repaid in full its existing approximately $1,725 million in Tranche G term loans maturing August 22, 2024 and replaced such loans with approximately $1,725 million in Tranche H term loans maturing February 22, 2027. The Tranche H term loans bear interest at Term SOFR plus 3.25% compared to the former Tranche G term loans which bore interest at LIBOR plus 2.25%. The Tranche H term loans were issued at a discount of 2.00%, or approximately $34.5 million. The Tranche H term loans were fully drawn on December 14, 2022 and the other terms and conditions that apply to the Tranche H term loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 10.
On February 24, 2023, the Company entered into Amendment No. 11, Loan Modification Agreement and Refinancing Facility Agreement (herein, “Amendment No. 11”), to the Credit Agreement. Under the terms of Amendment No. 11, the Company, among other things, repaid in full its existing approximately $2,149 million in Tranche E term loans maturing May 30, 2025 and approximately $3,410 million in Tranche F term loans maturing December 9, 2025 and replaced such loans with approximately $4,559 million in Tranche I term loans maturing August 24, 2028 and the $1,000 million 2028 Secured Notes further described below. The Tranche I term loans bear interest at Term SOFR plus 3.25% compared to the former Tranche E and Tranche F term loans which bore interest at LIBOR plus 2.25%. The Tranche I term loans were issued at a discount of 0.25%, or approximately $11.4 million. The Tranche I term loans were fully drawn on February 24, 2023 and the other terms and conditions that apply to the Tranche I term loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 11.
On June 16, 2023, the Company entered into Amendment No. 12 to the Second Amended and Restated Credit Agreement (herein, “Amendment No. 12”). Under the terms of Amendment No. 12, the Company, among other things, removed the option to utilize LIBOR as a benchmark rate for any revolving loans and all future loans under the Credit Agreement and replaced such rate with Term SOFR for all dollar denominated loans and with Euro Interbank Offered Rate (“EURIBOR”) for all euro denominated revolving loans.
As of July 1, 2023, TransDigm has $6,263 million in fully drawn term loans (the “Term Loans Facility”) and an $810 million revolving credit facility. The Term Loans Facility consists of two tranches of term loans as follows (aggregate principal amount disclosed is as of July 1, 2023):
Term Loans Facility
Aggregate Principal
Maturity Date
Interest Rate
Tranche H
$1,716 million
February 22, 2027
Term SOFR plus 3.25%
Tranche I
$4,547 million
August 24, 2028
Term SOFR plus 3.25%
The Term Loans Facility requires quarterly aggregate principal payments of $16 million. The revolving commitments consist of two tranches which include up to $152 million of multicurrency revolving commitments. At July 1, 2023, the Company had $45 million in letters of credit outstanding and $765 million in borrowings available under the revolving commitments. Draws on the revolving commitments are subject to an interest rate of 2.50% per annum. The unused portion of the revolving commitments is subject to a fee of 0.5% per annum.
The interest rates per annum applicable to the Tranche H and Tranche I term loans under the Credit Agreement are, at TransDigm’s option, equal to either an alternate base rate or an adjusted Term SOFR for one, three or six-month interest periods chosen by TransDigm, in each case plus an applicable margin percentage. The adjusted Term SOFR related to the Tranche H and Tranche I term loans are not subject to a floor. Refer to Note 13, “Derivatives and Hedging Activities,” in the notes to the condensed consolidated financial statements included herein for information about how our interest rate swaps, cap and collar agreements are used to hedge and offset, respectively, the variable interest rate portion of our debt.
The following table represents the senior subordinated and secured notes outstanding as of July 1, 2023:
Description
Aggregate Principal
Maturity Date
Interest Rate
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%
2028 Secured Notes
$2,100 million
August 15, 2028
6.75%
4.625% 2029 Notes
$1,200 million
January 15, 2029
4.625%
4.875% 2029 Notes
$750 million
May 1, 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” which, along with the TransDigm Inc. Notes, are collectively referred to as the “Notes,” 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 million. The initial $3,800 million offering of the 2026 Secured Notes was issued at a price of 100% of its 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 $4,411 million. The initial $1,000 million offering of the 2028 Secured Notes and the subsequent $1,100 million offering of the 2028 Secured Notes (which, along with the 2026 Secured Notes, are collectively referred to as the “Secured Notes”) in the second quarter of fiscal 2023 were issued at a price of 100% and 99%, respectively, of their principal amount, resulting in gross proceeds of $2,089 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.
Guarantor Information
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 (as defined in the applicable Indentures). The TransDigm UK Notes are guaranteed on a senior subordinated basis by TransDigm Inc., TD Group and TransDigm Inc.'s Domestic Restricted Subsidiaries. The guarantees of the Notes are subordinated to all of the guarantors’ existing and future senior debt, rank equally with all of their existing and future senior subordinated debt and rank senior to all of their future debt that is expressly subordinated to the guarantees of the Notes. The Notes are structurally subordinated to all of the liabilities of TD Group’s non-guarantor subsidiaries.
The 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 Inc.’s Domestic Restricted 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.
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 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 1, 2023
Current assets
$
4,214
Goodwill
7,228
Other non-current assets
3,130
Current liabilities
862
Non-current liabilities
20,035
Amounts (from) due to subsidiaries that are non-issuers and non-guarantors - net
(1,628)
Thirty-Nine Week Period Ended
(in millions)
July 1, 2023
Net sales
$
3,714
Sales to subsidiaries that are non-issuers and non-guarantors
23
Cost of sales
1,449
Expense from subsidiaries that are non-issuers and non-guarantors - net
37
Income from continuing operations
611
Net income attributable to TD Group
611
Certain Restrictive Covenants in Our Debt Documents
The Credit Agreement and the Indentures governing the Notes and Secured 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. 11, executed on February 24, 2023.
Under the terms of the Credit Agreement, TransDigm is entitled, on one or more occasions, to request additional term loans or additional revolving commitments to the extent that the existing or new lenders agree to provide such incremental term loans or additional revolving commitments provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25x and the consolidated secured net debt ratio would be no greater than 5.00x, in each case, after giving effect to such incremental term loans or additional revolving commitments.
If any such default occurs, the lenders under the Credit Agreement and the holders of the Notes and Secured 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 and the holders of the Secured Notes 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 $284 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 1, 2023, 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 Receivable 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 25, 2022, the Company amended the Securitization Facility to, among other things, extend the maturity date to July 25, 2023 at an interest rate of Term SOFR plus 1.30%, compared to an interest rate of LIBOR plus 1.20% 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 1, 2023, the Company has borrowed $350 million under the Securitization Facility, which is fully drawn. For the thirty-nine week periods ended July 1, 2023 and July 2, 2022, the applicable interest rate was 6.37% and 2.23%, respectively.
On July 25, 2023, the Company amended the Securitization Facility to, among other things, increase the borrowing capacity from $350 million to $450 million and extend the maturity date to July 25, 2024 at an interest rate of Term SOFR plus 1.60%, compared to an interest rate of Term SOFR plus 1.30% that applied prior to the amendment. The total drawn on the Securitization Facility remains at $350 million.
Dividend and Dividend Equivalent Payments
No dividends were declared in the thirty-nine week period ended July 1, 2023. Pursuant to the Fourth Amended and Restated TransDigm Group Incorporated 2006 Stock Incentive Plan Dividend Equivalent Plan, the Amended and Restated 2014 Stock Option Plan Dividend Equivalent Plan and the 2019 Stock Option Plan Dividend Equivalent Plan, all of the options granted under the existing stock option plans, except for grants to the members of the Board of Directors, are entitled to certain dividend equivalent payments in the event of the declaration of a dividend by the Company. In August 2022, all members of the Board of Directors executed amendments to their option agreements resulting in the directors no longer receiving dividend equivalent payments in cash, but rather for dividends declared after June 1, 2022, dividends result in a reduction of strike price on the outstanding options held by the directors.
Dividend equivalent payments are made during the Company's first fiscal quarter each year and also upon payment of any dividends declared within the current fiscal year. Total dividend equivalent payments in the first quarter of fiscal 2023 were approximately $38 million.
Any future declaration of special cash dividends on our common stock will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions under the Credit Agreement and Indentures, the availability of surplus under Delaware law and other factors deemed relevant by our Board of Directors. TD Group is a holding company and conducts all of its operations through direct and indirect subsidiaries. Unless TD Group receives dividends, distributions, advances, transfers of funds or other payments from our subsidiaries, TD Group will be unable to pay any dividends on our common stock in the future. The ability of any subsidiaries to take any of the foregoing actions is limited by the terms of our Term Loans Facility and Indentures and may be limited by future debt or other agreements that we may enter into.
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 1, 2023, the Company had $45 million in letters of credit outstanding.
We present below certain financial information based on our EBITDA and EBITDA As Defined. References to “EBITDA” mean earnings before interest, taxes, depreciation and amortization, and references to “EBITDA As Defined” mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of income from continuing operations to EBITDA and EBITDA As Defined and the reconciliations of net cash provided by operating activities to EBITDA and EBITDA As Defined presented below.
Neither EBITDA nor EBITDA As Defined is a measurement of financial performance 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, 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 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.
The following table sets forth a reconciliation of income from continuing operations to EBITDA and EBITDA As Defined (in millions):
Thirteen Week Periods Ended
Thirty-Nine Week Periods Ended
July 1, 2023
July 2, 2022
July 1, 2023
July 2, 2022
Income from continuing operations
$
352
$
239
$
885
$
601
Adjustments:
Depreciation and amortization expense
70
61
199
188
Interest expense, net
291
269
872
799
Income tax provision
117
74
281
165
EBITDA
830
643
2,237
1,753
Adjustments:
Acquisition and divestiture transaction-related expenses and adjustments (1)
6
5
12
13
Non-cash stock and deferred compensation expense (2)
53
47
131
129
Refinancing costs (3)
32
—
41
—
Other, net (4)
(6)
1
11
(1)
EBITDA As Defined
$
915
$
696
$
2,432
$
1,894
(1)
Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when inventory was sold; costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs for both acquisitions and divestitures comprising deal fees, legal, financial and tax due diligence expenses, and valuation costs that are required to be expensed as incurred.
(2)
Represents the compensation expense recognized by TD Group under our stock incentive plans and deferred compensation plans.
(3)
Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(4)
Primarily represents foreign currency transaction (gains) or losses, payroll withholding taxes related to dividend equivalent payments and stock option exercises, deferred compensation payments, non-service related pension costs including the pension settlement (gain) loss for the ERP (further disclosed in Note 15, “Retirement Plans” in the notes to the condensed consolidated financial statements included herein), and for fiscal 2022, proceeds received from a final working capital settlement for the ScioTeq and TREALITY divestiture.
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 1, 2023
July 2, 2022
Net cash provided by operating activities
$
913
$
675
Adjustments:
Changes in assets and liabilities, net of effects from acquisitions of businesses
345
240
Interest expense, net (1)
842
773
Income tax provision - current
282
166
Loss contract amortization
27
28
Non-cash stock and deferred compensation expense (2)
(131)
(129)
Refinancing costs (3)
(41)
—
EBITDA
2,237
1,753
Adjustments:
Acquisition and divestiture transaction-related expenses and adjustments (4)
12
13
Non-cash stock and deferred compensation expense (2)
131
129
Refinancing costs (3)
41
—
Other, net (5)
11
(1)
EBITDA As Defined
$
2,432
$
1,894
(1)
Represents interest expense, net of interest income, excluding the amortization of debt issuance costs and premium and discount on debt.
(2)
Represents the compensation expense recognized by TD Group under our stock incentive plans and deferred compensation plans.
(3)
Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(4)
Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when inventory was sold; costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs for both acquisitions and divestitures comprising deal fees, legal, financial and tax due diligence expenses, and valuation costs that are required to be expensed as incurred.
(5)
Primarily represents foreign currency transaction (gains) or losses, payroll withholding taxes related to dividend equivalent payments and stock option exercises, deferred compensation payments, non-service related pension costs including the pension settlement (gain) loss for the ERP (further disclosed in Note 15, “Retirement Plans” in the notes to the condensed consolidated financial statements included herein), and for fiscal 2022, proceeds received from a final working capital settlement for the ScioTeq and TREALITY divestiture.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information called for by this item is provided under the caption “Description of Senior Secured Term Loans and Indentures” in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Market risks are described more fully within Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of our most recent Form 10-K (for the fiscal year ended September 30, 2022, filed on November 10, 2022). These market risks have not materially changed for the third quarter of fiscal year 2023.
ITEM 4. CONTROLS AND PROCEDURES
As of July 1, 2023, TD Group carried out an evaluation, under the supervision and with the participation of TD Group’s management, including its President, Chief Executive Officer and Director (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of TD Group’s disclosure controls and procedures. Based upon that evaluation, the President, Chief Executive Officer and Director and Chief Financial Officer concluded that TD Group’s disclosure controls and procedures are effective to ensure that information required to be disclosed by TD Group in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to TD Group’s management, including its President, Chief Executive Officer and Director and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, TD Group’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures.
During the fiscal quarter ended July 1, 2023, the Company completed the acquisition of Calspan. The Company is currently integrating the acquisition into its operations, compliance programs and internal control processes. As permitted by SEC rules and regulations, the Company has excluded the acquisition from management's evaluation of internal controls over financial reporting as of July 1, 2023. The acquisition constituted approximately 4.2% of the Company's total assets (inclusive of acquired intangible assets) as of July 1, 2023, and approximately 2.2% and 1.7% of the Company's net sales and income from continuing operations before income taxes, respectively, in the fiscal quarter ended July 1, 2023.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended July 1, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company is involved in various claims and legal actions arising in the ordinary course of business. SEC regulations require us to disclose certain information about environmental proceedings when a governmental authority is a party to the proceedings if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to such regulations, the Company uses a threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required as we believe matters under this threshold are not material to the Company. While the Company is currently involved in certain legal proceedings, it believes the results of these proceedings will not have a material adverse effect on its financial condition, results of operations, or cash flows.
Information with respect to our legal proceedings is contained in Note 18, “Commitments and Contingencies,” in the notes to the condensed consolidated financial statements included herein and Note 15, “Commitments and Contingencies,” in Part IV, Item 15. Exhibits and Financial Statement Schedules, of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed on November 10, 2022. There have been no material changes to this information.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed on November 10, 2022. There have been no material changes to the risk factors described in the Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS: PURCHASES OF EQUITY SECURITIES BY THE ISSUER
On January 27, 2022, the Board of Directors of the Company authorized a new stock repurchase program to permit repurchases of its outstanding common stock not to exceed $2,200 million in the aggregate (the “$2,200 million stock repurchase program”), replacing the $650 million stock repurchase program previously authorized by the Board on November 8, 2017, subject to any restrictions specified in the Second Amended and Restated Credit Agreement dated as of June 4, 2014, and/or Indentures governing the Company's existing Notes. There is no expiration date for this program. During the second and third quarters of fiscal 2022, the Company repurchased 1,490,413 shares of common stock at an average price of $612.13 per share for a total amount of $912 million. The repurchased shares of common stock are classified as treasury stock in the statement of changes in stockholders' deficit.
No repurchases were made under the program during the thirty-nine week period ended July 1, 2023. As of July 1, 2023, $1,288 million remains available for repurchase under the $2,200 million stock repurchase program.
ITEM 5. OTHER INFORMATION
On June 2, 2023, Sarah Wynne, the Company’s Chief Financial Officer, terminated a “Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K) for the sale of 5,420 shares of common stock issuable upon the exercise of vested options. On June 8, 2023, Ms. Wynne entered into a new Rule 10b5-1 trading arrangement for the sale of 5,420 shares of common stock issuable upon the exercise of vested options intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act, which Rule 10b5-1 trading arrangement is scheduled to terminate no later than October 31, 2024.
Certificate of Amendment of the Certificate of Incorporation, filed July 15, 2020, of Calspan Technology Acquisition Company (now known as Calspan Technology Acquisition Corporation)
Fifteenth Amendment to the Receivables Purchase Agreement dated as of July 25, 2023, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as Purchaser Agent for its Purchaser Group and as Administrator, and Wells Fargo Bank, National Association, as a Committed Purchaser and as Purchaser Agent for its Purchaser Group*
Amendment No. 12 to the Second Amended and Restated Credit Agreement, dated June 16, 2023, to the Second Amended and Restated Credit Agreement, dated June 4, 2014, among TransDigm Inc., TransDigm Group Incorporated, each subsidiary of TransDigm Inc. party thereto, the lenders party thereto, and Goldman Sachs Bank USA, as administrative agent and collateral agent for the lenders*
Certification by Principal Executive Officer of TransDigm Group Incorporated pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer of TransDigm Group Incorporated pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Executive Officer of TransDigm Group Incorporated pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer of TransDigm Group Incorporated pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Inline XBRL Instance Document: The XBRL Instance Document does not appear in the Inveractive Data File because its XBRL tags are embedded within the Inline XBRL document
Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101
Filed Herewith
*
Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish on a supplemental basis a copy of any omitted schedule or exhibit upon request by the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRANSDIGM GROUP INCORPORATED
SIGNATURE
TITLE
DATE
/s/ Kevin Stein
President, Chief Executive Officer and Director (Principal Executive Officer)
