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(Exact name of registrant as specified in its charter)
iDelaware
(State or other jurisdiction of incorporation or organization)
i41-2101738
(I.R.S. Employer Identification No.)
i1301 East 9th Street,
iSuite
3000,
iCleveland,
iOhio
i44114
(Address
of principal executive offices)
(Zip Code)
(i216) i706-2960
(Registrants’ telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of exchange on which registered
iCommon
Stock, $0.01 par value
iTDG
iNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. iYesx No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨iNox
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. iYesx No ¨
Indicate by check mark
whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYesx No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company or an 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.
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging
Growth Company
i☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
i☒
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of March 31, 2021, based upon the last sale price of such voting and non-voting common stock on that date, was $i32,940,645,808.
The
number of shares outstanding of TransDigm Group Incorporated’s common stock, par value $.01 per share, was i55,248,901 as of November 3, 2021.
This Annual Report on Form 10-K contains both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 27A of the Securities Act of 1933, as amended. 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K, 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 this Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K include but are not limited to: the impact that the COVID-19 pandemic has on our business, results of operations, financial condition and liquidity; the sensitivity of our business to the number of flight hours that our customers’ planes spend aloft and our customers’ profitability, both of which are affected by general economic conditions; future geopolitical or other worldwide events; cyber-security threats, 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.
In this report, the term “TD Group” refers to TransDigm Group Incorporated, which holds all of the outstanding capital stock of TransDigm Inc. The terms “Company,”“TransDigm,”“we,”“us,”“our” and similar terms, unless the context otherwise requires, refer to TD Group, together with TransDigm Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest. References to “fiscal year” mean the year ending or ended September 30. For example, “fiscal year 2021” or “fiscal 2021” means the period from October 1, 2020
to September 30, 2021.
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 all commercial and military aircraft in service today. Our business is well diversified due to the broad range of products we offer to our customers. We estimate that approximately 90% of our net
sales for fiscal year 2021 were generated by proprietary products. For fiscal year 2021, we estimate that we generated approximately 80% of our net sales from products in which we are the sole source provider.
Most of our products generate significant aftermarket revenue. Once our parts are designed into and sold on a new aircraft, we generate net sales from aftermarket consumption over the life of that aircraft, which is generally estimated to be approximately 25 to 30 years. A typical platform can be produced for 20 to 30 years, giving us an estimated product life cycle in excess of 50 years. We estimate that approximately 50% of our net sales in fiscal year 2021 were generated from aftermarket net sales, the vast majority of which come from the commercial and military aftermarkets. Historically, these aftermarket revenues have produced a higher gross profit and have been more stable than net sales to original equipment manufacturers
(“OEMs”).
We primarily design, produce and supply highly engineered proprietary aerospace components with significant aftermarket content. We seek to develop highly customized products to solve specific needs for aircraft operators and manufacturers. We attempt to differentiate ourselves based on engineering, service and manufacturing capabilities. We typically choose not to compete for non-proprietary “build to print” business because it frequently offers lower margins than proprietary products. We believe that our products have strong brand names within the industry and that we have a reputation
for high quality, reliability and strong customer support.
Our business is well diversified due to the broad range of products that we offer to our customers. Our major product offerings, substantially all of which are ultimately provided to end-users in the aerospace industry, include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, databus and power controls, cockpit security components and systems, specialized and advanced cockpit displays, engineered audio, radio and antenna systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products,
switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer.
COVID-19 Pandemic
The COVID-19 pandemic has continued to cause a significant adverse impact on our net sales, net income and EBITDA As Defined when compared to pre-pandemic levels. COVID-19 was first reported in December 2019 and, since being declared as a pandemic by the World Health Organization in March 2020, has dramatically impacted the global health and economic environment, including millions of confirmed cases, business slowdowns or shutdowns, government challenges and market volatility. The commercial
aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the pandemic. The pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a rapid pace beginning in the second half of fiscal 2020 and has remained depressed compared to pre-pandemic levels. However, commercial air travel has increasingly shown signs of recovery in recent months with increasing air traffic, primarily in certain domestic markets. The recovery in international commercial air travel has been slower with international travel only slightly recovered from COVID-19 pandemic lows. The exact pace and timing of the commercial air travel recovery remains uncertain and is expected to continue to be
uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 resurfacing), the continued efficacy of vaccines (particularly against any newly-emerging variants of COVID-19) and easing of quarantines and travel restrictions, among other factors. We currently expect COVID-19 to continue to cause an adverse impact on our net sales, net income and EBITDA as Defined compared to pre-pandemic levels into fiscal 2022.
Within the United States, our business has been designated as “essential,” which has allowed us to continue to serve our customers throughout the COVID-19 pandemic; nonetheless, the pandemic has disrupted our operations. Our ability to continue to manufacture products is highly dependent on our ability to maintain the safety and health of our factory employees. The ability of our employees to work has been, and may again, be significantly impacted by
individuals contracting or being exposed to COVID-19. While we are following the requirements of governmental authorities and taking preventative and protective measures to prioritize the safety of our employees, these measures are not always successful, and we have been required at times to temporarily close facilities or take other partial shutdown measures. Furthermore, in light of enacted and any additional reductions in our workforce as a result of declines in our business caused by the COVID-19 pandemic, we cannot assure that we will be able to rehire our workforce as our business continues to recover. Finally, though this appears to be lower risk at the present time, our acquisition strategy, which is a key element of our overall business strategy, may be impacted by our efforts to maintain the Company’s cash liquidity position in response to the COVID-19 pandemic depending
on the duration of the pandemic and its impact on our cash flows.
Although we remain cautiously optimistic that the global vaccination efforts will continue to progress and positively influence the markets we serve, the magnitude of the impact of COVID-19 remains unpredictable and we continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer-term, because of these factors, it is difficult to forecast a precise impact on the Company’s future results.
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 and parachutes. 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 plans, restructuring costs related to the
Company's cost reduction measures in response to the COVID-19 pandemic, foreign currency gains and losses, acquisition-integration costs, acquisition and divestiture transaction-related expenses, and refinancing costs. COVID-19 restructuring costs represent actions taken by the Company to reduce its workforce to align with customer demand, as well as incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment). 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.
For financial information about our segments, refer to Note 17, “Segments,” in the notes to the consolidated financial statements included herein.
Sales and Marketing
Consistent with our overall strategy, our sales and marketing organization is structured to continually develop technical solutions that meet customer needs. In particular, we attempt to focus on products and programs
that will lead to high-margin, repeatable sales in the aftermarket.
We have structured our sales efforts along our major product offerings, assigning a business unit manager to certain products. Each business unit manager is expected to grow the sales and profitability of the products for which he or she is responsible and to achieve the targeted annual level of bookings, net sales, new business and profitability for such products. The business unit managers are assisted by account managers and sales engineers who are responsible for covering major OEM and aftermarket accounts. Account managers and sales engineers are expected to be familiar with the personnel, organization and needs of specific customers to achieve total bookings and new business goals for each account and, together with the business unit managers, to determine when additional resources are required at customer locations. Most of our sales personnel are evaluated,
in part, on their bookings and their ability to identify and obtain new business opportunities.
Though typically performed by employees, the account manager function may be performed by independent representatives depending on the specific customer, product and geographic location. We also use a number of distributors to provide logistical support as well as serve as a primary customer contact with certain smaller accounts. Boeing Distribution Services, Inc., Satair A/S (a subsidiary of Airbus S.A.S.) and Seal Dynamics (a subsidiary of HEICO Corporation), among others, are our major distributors.
Manufacturing and
Engineering
We maintain approximately 100 manufacturing facilities. Most of our manufacturing facilities are comprised of manufacturing, distribution and engineering functions, and most facilities have certain administrative functions, including management, sales and finance. We continually strive to improve productivity and reduce costs, including rationalization of operations, developing improved control systems that allow for accurate accounting and reporting, investing in equipment, tooling, information systems and implementing broad-based employee training programs. Management believes that our manufacturing systems and equipment contribute to our ability to compete by permitting us to meet the rigorous tolerances and cost sensitive price structure of aircraft component customers.
We attempt to differentiate ourselves from our competitors by producing uniquely engineered products
with high quality and timely delivery. Our engineering costs are recorded in cost of sales and in selling and administrative expenses within our consolidated statements of income. Research and development costs are recorded in selling and administrative expenses within our consolidated statements of income. The aggregate of engineering expense and research and development expense represents approximately 11% of our operating units’ aggregate costs, or approximately 6% of our consolidated net sales for fiscal year 2021. Our proprietary products, and particularly our new product initiatives, are designed by our engineers and are intended to serve the needs of the aircraft component industry. These proprietary designs must withstand the extraordinary conditions and stresses that will be endured by products during use and meet the rigorous demands of our customers’ tolerance and quality requirements.
We use sophisticated equipment
and procedures to comply with quality requirements, specifications and Federal Aviation Administration (“FAA”) and OEM requirements. We perform a variety of testing procedures as required by our customers, such as testing under different temperature, humidity and altitude levels, flammability testing, shock and vibration testing and X-ray fluorescent measurement. These procedures, together with other customer approved techniques for document, process and quality control, are used throughout our manufacturing facilities. Refer to Note 3, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements included herein with respect to the total costs of research and development.
Customers
We predominantly serve customers in the commercial, regional, business jet and general aviation aftermarket, which accounted for approximately 23% of
our net sales for fiscal year 2021; the commercial aerospace OEM market, comprising large commercial transport manufacturers and regional and business jet manufacturers, which accounted for approximately 20% of our net sales for fiscal year 2021; and the defense market, which accounted for approximately 50% of our net sales for fiscal year 2021. Non-aerospace net sales comprised approximately 7% of our net sales for fiscal year 2021.
As a result of the COVID-19 pandemic and its adverse impact on air travel worldwide, the commercial aerospace industry has been significantly disrupted. The defense aerospace market has been impacted by the COVID-19 pandemic to a lesser extent than the commercial aerospace market due to certain supply chain disruptions as well as “stay at home” orders, quarantines, etc. impacting the government procurement workforce which has slowed production and/or orders. The significant adverse impact
of the COVID-19 pandemic on the commercial aerospace market channels has led to the defense market comprising a greater percentage of our net sales in fiscal years 2021 and 2020 compared to pre-pandemic historical levels. In fiscal years 2015 through 2019, representing the five fiscal years prior to the pandemic, defense market net sales ranged from 29% to 37% of total net sales. As the commercial aerospace industry recovers from the disruption caused by the COVID-19 pandemic, we would expect defense market net sales to account for a percentage of total net sales that is relatively in line with our historical levels prior to the COVID-19 pandemic.
Our customers include: (1) distributors of aerospace components; (2) worldwide commercial airlines, including national and regional airlines; (3) large commercial transport and regional and business aircraft OEMs; (4) various armed forces of the United States and friendly foreign
governments; (5) defense OEMs; (6) system suppliers; and (7) various other industrial customers. Our top ten customers for fiscal year 2021 accounted for approximately 42% of our net sales. Products supplied to many of our customers are used on multiple platforms. None of our customers individually accounted for greater than 10% of our net sales for fiscal year 2021.
The markets in which we sell our products are, to varying degrees, cyclical and have experienced upswings and downturns. The demand for our commercial aftermarket parts and services depends on, among other things, the breadth of our installed OEM base, revenue passenger miles (“RPMs”), the size and age of the worldwide aircraft fleet, the percentage of the worldwide fleet that is in warranty, and airline profitability. The demand for defense products is specifically dependent on government budget trends, military campaigns and political pressures.
The niche markets within the aerospace industry that we serve are relatively fragmented and we face several competitors for many of the products and services we provide. Due to the global nature of the commercial aircraft industry, competition in these categories comes from both U.S. and foreign companies. Competitors in our product offerings range in size from divisions of large public corporations to small privately-held entities with only one or two components in their entire product portfolios.
We compete on the basis of engineering, manufacturing and marketing high quality products, which we believe meet or exceed the performance and maintenance requirements of our customers, consistent and timely delivery, and superior customer service and support. The industry’s stringent regulatory, certification
and technical requirements and the investments necessary in the development and certification of products may create disincentives for potential new competitors for certain products. If customers receive products that meet or exceed expectations and performance standards, we believe that they will have a reduced incentive to certify another supplier because of the cost and time of the technical design and testing certification process. In addition, we believe that the availability, dependability and safety of our products are reasons for our customers to continue long-term supplier relationships.
Companies engaged in supplying defense-related equipment and services to United States Government (“U.S. Government”) agencies are subject to business risks specific to
the defense industry. These risks include the ability of the U.S. Government to unilaterally: (1) suspend us from receiving new contracts; (2) terminate existing contracts; (3) reduce the value of existing contracts; (4) audit our contract-related costs and fees, including allocated indirect costs; (5) control and potentially prohibit the export of our products; and (6) seek repayment of contract related payments under certain circumstances. Violations of government procurement laws could result in civil or criminal
penalties.
Governmental Regulation
The commercial aircraft component industry is highly regulated by the FAA in the United States and by the Joint Aviation Authorities in Europe and other agencies throughout the world, while the military aircraft component industry is governed by military quality specifications. We, and the components we manufacture, are required to be certified by one or more of these entities or agencies, and, in many cases, by individual OEMs, in order to engineer and service parts and components used in specific aircraft models.
We must also satisfy the requirements of our customers, including OEMs and airlines that are subject to FAA regulations, and provide these customers with products and services that comply with the government regulations applicable to commercial flight operations. In addition, the FAA requires
that various maintenance routines be performed on aircraft components. We believe that we currently satisfy or exceed these maintenance standards in our repair and overhaul services. We also maintain several FAA-approved repair stations.
In addition, our businesses are subject to many other laws and requirements typically applicable to manufacturers and exporters. Without limiting the foregoing, sales of many of our products that will be used on aircraft owned by foreign entities are subject to compliance with export control laws and the manufacture of our products and the operations of our businesses, including the disposal of hazardous wastes, are subject to compliance with applicable environmental laws.
Market Channels
The commercial aerospace industry, including the aftermarket and OEM markets, is impacted by the health of the global
economy and geopolitical events around the world. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the pandemic. The commercial aerospace industry experienced a steep decline in RPMs beginning in the second half of our fiscal 2020 due to the pandemic’s impact on worldwide air travel demand and RPMs remained depressed in fiscal 2021 when compared to pre-pandemic levels. Also, as a result of the pandemic and decreased demand in commercial air travel, the commercial OEM sector has experienced reductions in commercial OEM production rates, including reductions at the two largest commercial OEMs, The Boeing Company (“Boeing”) and Airbus S.A.S. (“Airbus”). Although the commercial aerospace industry has shown signs of recovery in recent months, with increasing commercial air travel demand and both Boeing and Airbus disclosing potential OEM production rate increases for calendar 2022,
the impact of COVID-19 continues to be fluid and the shape and speed of the recovery for the commercial aerospace industry remains uncertain.
The defense aerospace market is dependent on government budget constraints, the timing of orders, political pressures and the extent of global conflicts. It is not necessarily affected by general economic conditions that affect the commercial aerospace industry. The defense aerospace market has been impacted by the COVID-19 pandemic to a lesser extent than the commercial aerospace market due to certain supply chain disruptions as well as “stay at home” orders, quarantines, etc. impacting the government procurement workforce which has slowed production and/or orders. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for uncertainty.
Historically, our presence in both the commercial aerospace and military sectors of the aerospace industry has served to mitigate the impact on our business of any specific industry risk. We service a diversified customer base in the commercial and military aerospace industry, and we provide components to a diverse installed base of aircraft, which mitigates our exposure to any individual airframe platform. At times, declines in net sales in one channel have been offset by increased net sales in another channel. However, due to differences between the profitability of our products sold to OEM and aftermarket customers, variation in product mix can cause variation in gross profit.
Outside of the significant market disruption caused by COVID-19, there are many short-term factors (including customer inventory level adjustments, unannounced changes in order patterns,
strikes, facility shutdowns caused by fires, hurricanes, health crises or other incidents and mergers and acquisitions) that can cause short-term disruptions in our quarterly shipment patterns as compared to previous quarters and the same periods in prior years. As such, it can be difficult to determine longer-term trends in our business based on quarterly comparisons. To normalize for short-term fluctuations, we tend to look at our performance over several quarters or years of activity rather than discrete short-term periods. There are also fluctuations in OEM and aftermarket ordering and delivery requests from quarter-to-quarter, as well as variations in product mix from quarter-to-quarter, that may cause positive or negative variations in gross profit since commercial aftermarket net sales have historically produced a higher gross profit than net sales to commercial OEMs. Again, in many instances these are timing events between quarters and must be balanced with macro
aerospace industry indicators.
Commercial Aftermarket
The key market factors in the commercial aftermarket include worldwide RPMs and the size and activity level of the worldwide fleet of aircraft and the percentage of the fleet that is in warranty. As a result of the COVID-19 pandemic and the stringent measures implemented to help control the spread of the virus, demand for air travel declined at a rapid pace and has remained depressed compared to pre-pandemic levels. The reduced demand has led to a significant reduction in flights and an increase in parked aircraft. Certain airlines have also retired a portion of their fleets. Certain markets have reopened, some of which have experienced a resurgence of COVID-19 cases, while others, particularly international markets, remain closed or are enforcing extended quarantines. Although worldwide RPMs are still significantly lower than
pre-pandemic levels, worldwide RPMs have been steadily recovering. Commercial air travel has increasingly shown signs of recovery in recent months with increasing air traffic, primarily in certain domestic markets, and parked aircraft returning to service. The pace of the international air travel traffic recovery has been slower and international RPMs have only slightly recovered from pandemic lows. There is potential for improved international recovery moving forward as vaccinations increase worldwide and government-imposed travel restrictions are eased. Current industry consensus indicates that worldwide RPMs will continue to recover in 2022. However, the impact of COVID-19 on the commercial aerospace market is fluid and continues to evolve. Overall, the timing and pace of the commercial aftermarket recovery remains uncertain and may not return to pre-pandemic levels until 2023 or beyond.
Commercial OEM Market
The
commercial OEM market declined in fiscal 2021 primarily due to the continued impact of the COVID-19 pandemic. Our commercial transport OEM shipments and revenues generally run ahead of Boeing and Airbus airframe delivery schedules. As a result, and consistent with prior years, our fiscal 2022 shipments will be a function of, among other things, the estimated 2022 and 2023 commercial airframe production rates. We have been experiencing decreased net sales across the commercial OEM sector driven primarily by the decrease in production rates by Boeing and Airbus related to reduced demand in the commercial air travel from the COVID-19 pandemic. We expect demand for our commercial OEM products to continue to be reduced in the short-term. However, the commercial OEM market is showing initial signs of recovery with airlines returning to the commercial OEMs to take planes or place orders, along with Boeing and Airbus disclosing potential OEM production rate increases for calendar
2022. Current industry consensus indicates production rates will continue to be lower than pre-pandemic historic levels but are expected to gradually increase over the next several years. However, the duration of the pandemic is unclear and the pace of the recovery of the commercial OEM market remains uncertain and continues to evolve.
Our businesses continually seek to provide solutions for our customers and others in the commercial aerospace industry. For example, as a result of the COVID-19 pandemic, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from the pandemic and providing product offerings that could help the industry recover. Product solutions currently developed or being explored include anti-viral or antimicrobial technology, air purification, and touchless technologies, among others.
Our military business fluctuates from year-to-year, and is dependent, to a degree, on government budget constraints, the timing of orders, macro and micro dynamics with respect to the U.S. Department of Defense (“DOD”) procurement policy and the extent of global conflicts. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for further unpredictability in the military spending outlook. The defense aerospace market has been impacted by the COVID-19 pandemic to a lesser extent than the commercial aerospace market. Any unfavorable impact on our defense aerospace business related to the COVID-19 pandemic was primarily during fiscal 2020 due to certain supply chain disruptions as well as “stay at home” orders, quarantines, etc. impacting the government procurement workforce
which slowed production and/or orders. Uncertainty remains in the COVID-19 pandemic recovery, but we do not currently expect any significant unfavorable impact on our defense aerospace business related to the COVID-19 pandemic. For a variety of reasons, the military spending outlook is very uncertain. For planning purposes, we assume that military-related net sales of our types of products to be flatter in future years over the recent higher levels.
In fiscal years 2021 and 2020, the defense market channel comprises a greater percentage of net sales than historical comparisons due to the significant adverse impact of the COVID-19 pandemic on our commercial aftermarket channel and commercial OEM market channel. In fiscal years 2015 through 2019, representing the five fiscal years prior to the pandemic, defense market net sales ranged from 29% to 37% of total net sales. As the commercial aerospace industry recovers from the disruption
caused by the COVID-19 pandemic, we would expect defense market net sales to account for a percentage of total net sales that is relatively in line with our historical levels prior to the COVID-19 pandemic.
Raw Materials
We require the use of various raw materials in our manufacturing processes. We purchase a variety of manufactured component parts from various suppliers. We also purchase replacement parts, which are utilized in our various repair and overhaul operations. At times, we concentrate our orders among a few suppliers in order to strengthen our supplier relationships. Most of our raw materials and component parts are generally available from multiple suppliers at competitive prices.
The COVID-19 pandemic has disrupted the global supply chain to a certain extent and availability of raw materials, particularly electronic parts.
Because we strive to limit the volume of raw materials and component parts on hand, our business could be adversely affected if we were unable to obtain these 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 FAA and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part.
Intellectual Property
We have various trade secrets, proprietary information, trademarks, trade names, patents, copyrights and other intellectual property rights, which we believe, in the aggregate but not individually, are important to our business. The
Company's products are manufactured, marketed and sold using a portfolio of patents, trademarks, licenses, and other forms of intellectual property, some of which expire in the future. The Company develops and acquires new intellectual property on an ongoing basis. Based on the broad scope of the Company’s product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on our consolidated financial statements.
Environmental Matters
Our operations and facilities are subject to a number of federal, state, local and foreign environmental laws and regulations that govern, among other things, discharges of pollutants into the air and water,
the generation, handling, storage and disposal of hazardous materials and wastes, the remediation of contamination and the health and safety of our employees. Environmental laws and regulations may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Certain facilities and third-party sites utilized by the Company have been identified as potentially responsible parties under the federal superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under applicable laws.
For information regarding
environmental accruals, refer to Note 15, “Commitments and Contingencies,” in the notes to the consolidated financial statements included herein. Compliance with federal, state, local and foreign environmental laws during fiscal 2021 had no material impact on our capital expenditures or results of operations. Based upon consideration of currently available information, we believe liabilities for environmental matters will not have a material adverse impact on our consolidated financial statements, but we cannot assure that material environmental liabilities may not arise in the future. For further information on environmental-related risks, including climate change, refer to Item 1A. “Risk Factors.”
Employees
As of September 30, 2021, we had approximately 13,300 full-time, part-time and temporary employees. Approximately
16% of our full-time and part-time employees are represented by labor unions. Collective bargaining agreements between us and these labor unions expire at various dates ranging from December 2021 to December 2024.
We consider our employees to be our most valuable asset. The development, attraction and retention of employees is a critical success factor for TransDigm and its operating units for succession planning and sustaining our three core value drivers (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers).
To support the advancement of our employees, we offer training and development programs encouraging advancement from within and continue to fill our team with strong and experienced management talent. We leverage both formal and informal programs to identify, foster, and retain top talent at both the corporate and operating unit level.
We have established TransDigm University, a formal mentoring and education program with a curated curriculum and established leadership serving as mentors. Participants in the program learn and develop more advanced skills leading to higher contribution and satisfaction within their roles, while mentors enhance their leadership capabilities by helping others progress. This program helps identify top performers, improving employee performance and retention, increasing our organizational learning and supporting the promotion of our current employees.
The
Company’s Management Development Program (“MDP”) identifies new talent and prepares them for success within our organization. The Company actively recruits for MDP candidates at colleges and universities across the U.S. to ensure we are reaching a large and diverse pool of candidates. The program hires recent Master of Business Administration graduates who work for three eight-month stints at a selection of operating units. Program participants gain experience in developing, manufacturing, and selling aerospace components with the intent of becoming fully immersed in the operations of our business. Once the program is complete, MDP participants are better equipped with the knowledge and experience needed to excel as a manager at the Company. Our goal for successful MDP participants is
to hire them on a full-time basis at an operating unit upon completion of the program.
TransDigm’s executive team also mentors rising talent on a more informal basis. This informal mentorship achieves a number of goals, including accelerating the development of top performers, increasing organizational learning, and improving employee performance and retention. The executive team also commits substantial time to evaluating the bench strength of our leadership and working with our leadership to improve their performance.
TransDigm University, MDP, various internship programs and informal mentoring demonstrates the Company’s ongoing commitment and initiatives towards accelerating the development of our future leaders.
Benefits
We
are proud to offer attractive benefits packages that attract, retain, motivate and reward our talent, and we are committed to providing our employees and their families with programs that support their health and overall well-being. To assist employees with financial empowerment, we offer 401(k) programs and various legacy defined benefit pension plans. We also offer members the ability to save money on a tax-free basis through flexible spending accounts and health savings accounts. TransDigm offers competitive compensation programs to our employees that includes base pay, bonus programs and equity programs. TransDigm employees also receive paid time off and holidays.
We understand the value in furthering the knowledge and education of our current employee base. In addition to formal and informal employee development programs within TransDigm and our operating units, employees can expand their careers by accessing tuition
reimbursement programs. Some operating units also partner with local colleges to provide training courses to TransDigm employees. Access to programs such as these enhance our employees’ value to the Company, our customers and our communities.
TransDigm’s equity compensation plans are designed to assist in attracting, retaining, motivating and rewarding key employees and directors, and promoting the creation of long-term value for our stockholders by closely aligning the interests of these individuals with those of our stockholders. TransDigm’s equity compensation plans provide for the granting of performance-based stock options. Equity compensation, and specifically stock options, is a significant component of TransDigm’s equity-based compensation strategy and value-based culture. Our approach to equity has a track record of success and
we believe that the continued use of performance-based stock options will help retain the Company’s key employees and recruit the talented minds of the future.
Diversity
At TransDigm, we value new ideas, different experiences and fresh perspectives, and we firmly believe this is enhanced by a more diverse workforce throughout all levels of our organization. Diversity and inclusion make us stronger as a company – it is critical to innovation, provides a competitive advantage, yields better outcomes, and in turn, enables us to better deliver for all of our stakeholders.
We are committed to diversity at all levels of management and leadership, and our leadership team and Board of Directors are committed to improving diversity throughout the
Company and fostering a more inclusive and open environment. We recognize that a company’s commitment to diversity and inclusion must come from the top, and we are focused on continuing to improve diversity within our leadership team, and at the Board of Directors level. Diversity and inclusion make us stronger as a business so we can effectively serve all our stakeholders. Our workforce includes talented people from many backgrounds.
Discrimination is not tolerated at TransDigm. We are committed to high ethical standards and equal employment opportunities in all personnel actions without regard to race, color, religion, gender, national origin, citizenship
status, age, marital status, gender identity or expression, sexual orientation, physical or mental disability, or veteran status.
Health and Safety
Our commitment to manufacturing the safest, highest quality products is matched by our commitment to keeping our employees healthy and safe as they work to produce these products. We are dedicated to building, designing, maintaining, and operating our facilities to effectively manage process safety and other hazards, and to minimize risks. We also seek to empower and support our employees to prevent accidents and promote a safe environment. We expect personnel to report and communicate risks, potential hazards, incidents and near hits so that they can be investigated, and appropriate action can be taken to prevent future issues. To elevate the importance of this, we began to require our operating units to individually report on Environmental
Health and Safety matters monthly to the executive team.
Since the early days of the COVID-19 pandemic, we have been following guidance from the World Health Organization and the U.S. Center for Disease Control to protect employees and prevent the spread of the virus within all of our facilities globally. The Company has taken various steps to facilitate access to vaccines for our employees in accordance with federal guidelines and state and local vaccination plans.
Seasonality
We do not believe our net sales are subject to significant seasonal variation; however, our net sales have generally been lower in the first quarter of our fiscal year compared to the subsequent quarters due to fewer working days resulting from the observance of various holidays.
Available Information
TD Group’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including any amendments, will be made available free of charge on the Company’s website, www.transdigm.com, as soon as reasonably practicable, following the filing of the reports with the Securities and Exchange Commission (“SEC”). In addition, the Company’s website
allows investors and other interested persons to sign up to automatically receive e-mail alerts when news releases and financial information is posted on the website. The SEC also maintains a website, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The information on or obtainable through our website is not incorporated into this Annual Report on Form 10-K.
ITEM 1A. RISK
FACTORS
Set forth below are material risks and uncertainties that could negatively affect our business and financial condition and could cause our actual results to differ materially from those expressed in forward-looking statements contained in this report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial condition.
Risks Related to our Strategy
We face risks related to the current COVID-19 pandemic and other health pandemics, epidemics and outbreaks.
The COVID-19 pandemic is continuing to cause an adverse impact on our employees, operations, supply chain and distribution system and the long-term impact to our business remains unknown. This is due to the numerous
uncertainties that have risen from the pandemic, including the severity of the disease, the duration of the outbreak, the likelihood of resurgences of the outbreak, including due to the emergence and spread of variants, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy and public acceptance of vaccines, and unintended consequences of the foregoing.
The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the pandemic. The pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a rapid pace beginning in the second half of fiscal 2020 and
has remained depressed compared to pre-pandemic levels. However, commercial air travel has increasingly shown signs of recovery in recent quarters with increasing air traffic, primarily in certain domestic markets. The recovery in international commercial air travel has been slower with international travel only slightly recovered from COVID-19 pandemic lows. The exact pace and timing of the commercial air travel recovery remains uncertain and is expected to continue to be uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 resurfacing), the timing, distribution, efficacy, and public acceptance of vaccines and easing of quarantines and travel restrictions, among other factors. We currently expect COVID-19 to continue to cause an adverse impact on our net sales, net income and EBITDA as Defined compared to pre-pandemic levels into
fiscal 2022. Longer-term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results.
The COVID-19 pandemic has disrupted the global supply chain to a certain extent and availability of raw materials, particularly electronic parts. Because we strive to limit the volume of raw materials and component parts on hand, our business could be adversely affected if we were unable to obtain these 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 FAA and OEM certification processes associated with aerospace products
could prevent efficient replacement of a supplier, raw material or component part.
Our ability to continue to manufacture products is highly dependent on our ability to maintain the safety and health of our factory employees. The ability of our employees to work has been, and may again be significantly impacted by individuals contracting or being exposed to COVID-19. While we are following the requirements of governmental authorities and taking preventative and protective measures to prioritize the safety of our employees, these measures are not always successful and we have been required to temporarily close facilities or take other measures. Furthermore, in light of enacted and any additional reductions in our workforce as a result of declines in our business caused by the COVID-19 pandemic, we cannot assure that we will be able to rehire our workforce as our business continues to recover. We believe the COVID-19 pandemic
has had, and may in the future again have, a material and adverse impact on our consolidated financial position, results of operations and cash flows. In addition, the impact of the COVID-19 pandemic and any future public health crises that arise could exacerbate the other risks we face.
Our business focuses almost exclusively on the aerospace and defense industry.
During a prolonged period of significant market disruption in the aerospace and defense industry, such as the adverse impact that the COVID-19 pandemic has had and is expected to continue to have on the commercial aerospace market, our business may be disproportionately impacted compared to peer companies that are more diversified in the industries they serve. In which case, a more diversified company may be able to recover more quickly from significant market disruptions such as the COVID-19
pandemic.
We rely heavily on certain customers for much of our sales.
In fiscal year 2021, no customer individually accounted for 10% or more of the Company’s net sales; however, our top ten customers for fiscal year 2021 accounted for approximately 42% of our net sales. In fiscal year 2020, no customer individually accounted for 10% or more of the Company’s net sales. In fiscal year 2019, one customer individually accounted for approximately 11% of the Company’s net sales. A material reduction in purchasing by one of our larger customers for any reason, including but not limited to the COVID-19 pandemic, general economic or
aerospace downturn, decreased production, strike or resourcing, could have a material adverse effect on results of operations, financial position and cash flows.
We generally do not have guaranteed future sales of our products. Further, when we enter into fixed price contracts with some of our customers, we take the risk for cost overruns.
As is customary in our business, we do not generally have long-term contracts with most of our aftermarket customers and, therefore, do not have guaranteed future sales. Although we have long-term contracts with many of our OEM customers, many of those customers may terminate
the contracts on short notice and, in most cases, our customers have not committed to buy any minimum quantity of our products. In addition, in certain cases, we must anticipate the future volume of orders based upon the historic purchasing patterns of customers and upon our discussions with customers as to their anticipated future requirements, and this anticipated future volume of orders may not materialize.
We also have entered into multi-year, fixed-price contracts with some of our customers, pursuant to which we have agreed to perform the work for a fixed price and, accordingly, realize all the benefit or detriment resulting from any decreases or increases in the costs of making these products. Sometimes we accept a fixed-price contract
for a product that we have not yet produced, and this increases the risk of cost overruns or delays in the completion of the design and manufacturing of the product. Most of our contracts do not permit us to recover increases in raw material prices, taxes or labor costs.
We intend to pursue acquisitions. Our business may be adversely affected if we cannot consummate acquisitions on satisfactory terms, or if we cannot effectively integrate acquired operations.
A significant portion of our growth has occurred through acquisitions. Any future growth through acquisitions will be partially dependent upon the continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. We intend to pursue acquisitions that we believe will present opportunities
consistent with our overall business strategy. However, we may not be able to find suitable acquisition candidates to purchase or may be unable to acquire desired businesses or assets on economically acceptable terms or may be unable to receive necessary regulatory approvals or support. In addition, we may not be able to raise the capital necessary to fund future acquisitions. Because we may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays, including regulatory complications or difficulties in employing sufficient staff and maintaining operational and management oversight.
We regularly
engage in discussions with respect to potential acquisition and investment opportunities. If we consummate an acquisition, our capitalization and results of operations may change significantly. Future acquisitions could result in margin dilution and further likely result in the incurrence of additional debt and contingent liabilities and an increase in interest and amortization expenses or periodic impairment charges related to goodwill and other intangible assets as well as significant charges relating to integration costs.
Acquisitions involve risks that the businesses acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect. In addition, we may not be able to successfully integrate any business we acquire into our existing business. The successful integration of new businesses, with the most significant
recent acquisition being the Cobham Aero Connectivity (“CAC”) acquisition in the second quarter of fiscal 2021, depends on our ability to manage these new businesses and cut excess costs. The successful integration of future acquisitions may also require substantial attention from our senior management and the management of the acquired business, which could decrease the time that they have to service, attract customers and develop new products and services or attend to other acquisition opportunities.
Our indebtedness could adversely affect our financial health and could harm our ability to react to changes to our business and prevent us from fulfilling our obligations under our indebtedness.
We have a significant amount of indebtedness. As of September 30, 2021, our total indebtedness, excluding approximately $31 million of
letters of credit outstanding, was approximately $20 billion, which was 117.1% of our total book capitalization.
In addition, we may be able to incur substantial additional indebtedness in the future. As of September 30, 2021, we had approximately $529 million of unused commitments under our revolving credit facility. On October 6, 2021, the Company repaid $200 million of the revolving credit facility drawn, increasing the borrowings available under the revolving commitments to $729 million. Although our senior secured credit facility and the indentures governing the various senior secured and senior subordinated notes outstanding (the “Indentures”)
contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these qualifications and exceptions could be substantial. A breach of any of the covenants or an inability to comply with the required leverage ratio could result in a default under the senior secured credit facility or the Indentures.
An increase in our indebtedness could also have other important consequences to investors. For example, it could:
•increase our vulnerability to general economic downturns and adverse competitive and industry conditions;
•increase the risk we are subjected to downgrade
or put on a negative watch by the ratings agencies;
•require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital requirements, capital expenditures, acquisitions, research and development efforts and other general corporate requirements;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•place us at a competitive disadvantage compared to competitors that have less debt; and
•limit, along with the financial and other restrictive covenants contained in the documents governing our indebtedness, among other things,
our ability to borrow additional funds, make investments and incur liens.
All of our debt under the senior secured credit facility, which includes $7.4 billion in term loans and a revolving credit facility of $760 million, bears interest at variable rates primarily based on the London interbank offered rate (“LIBOR”) for deposits of U.S. dollars. Accordingly, if LIBOR or other variable interest rates increase, our debt service expense will also increase. In order to mitigate the interest rate risk of these variable rate borrowings, we entered into interest rate swap and cap agreements that covers a significant portion of the existing variable rate debt. 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. As of
September 30, 2021, approximately 86% of our total debt was fixed rate debt. For information about our interest rate swap and cap agreements, refer to Note 21, “Derivatives and Hedging Instruments,” in the notes to the consolidated financial statements included herein.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts,
including loans, debt and derivatives. However, for U.S dollar LIBOR, the relevant date has been deferred to at least June 30, 2023 for certain tenors, at which time the LIBOR administrator has indicated that it intends to cease publication of U.S. dollar LIBOR. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. These actions indicate that the continuation of U.S. dollar LIBOR on the current basis cannot and will not be guaranteed after June 30, 2023. Moreover, it is possible that U.S. dollar LIBOR will be discontinued or modified prior to June 30, 2023. In February 2020, in connection
with Amendment No. 7 to the Credit Agreement, we amended our Credit Agreement to include a provision for the determination of an alternative reference interest rate. The discontinuation of LIBOR will also require our derivative agreements to be amended. Once the alternative interest rate has replaced LIBOR, our future interest expense could be impacted.
Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness, including the Indentures. We cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the senior secured credit facility or otherwise in amounts sufficient to enable us to service our indebtedness. If we cannot service
our debt, we will have to take actions such as reducing or delaying capital investments, selling assets, restructuring or refinancing our debt or seeking additional equity capital.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.
Our ability to make payments on and to refinance our indebtedness, including the Indentures, amounts borrowed under the senior secured credit facility, amounts due under our trade receivable securitization facility (“Securitization Facility”), and to fund our operations, will depend on our ability to generate cash in the future, which, to a
certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule, or at all, or that future borrowings will be available to us under the senior secured credit facility or otherwise in amounts sufficient to enable us to service our indebtedness, including the amounts borrowed under the senior secured credit facility, amounts borrowed under our Securitization Facility and the Indentures, or to fund our other liquidity needs. If we cannot service our debt, we will have to take actions such as reducing or delaying capital investments, selling assets, restructuring or refinancing our
debt or seeking additional equity capital. We cannot assure that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, the Securitization Facility, the Indentures and the senior secured credit facility may restrict us from adopting any of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional
indebtedness on acceptable terms and would otherwise adversely affect the Indentures.
The terms of the senior secured credit facility and Indentures may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
Our senior secured credit facility and the Indentures contain a number of restrictive covenants that impose significant operating and financial restrictions on TD Group, TransDigm Inc. and its subsidiaries (in the case of the senior secured credit facility) and
TransDigm Inc. and its subsidiaries (in the case of the Indentures) and may limit their ability to engage in acts that may be in our long-term best interests. The senior secured credit facility and Indentures include covenants restricting, among other things, the ability of TD Group, TransDigm Inc. and its subsidiaries (in the case of the senior secured credit facility) and TransDigm Inc. and its subsidiaries (in the case of the Indentures)
to:
•incur or guarantee additional indebtedness or issue preferred stock;
•pay distributions on, redeem or repurchase our capital stock or redeem or repurchase our subordinated debt;
•make investments;
•sell assets;
•enter into agreements that restrict distributions or other payments from our restricted subsidiaries to us;
•incur or allow to exist liens;
•consolidate, merge or transfer all or substantially all
of our assets;
A breach of any of these covenants could result in a default under the senior secured credit facility or the Indentures. If any such default occurs,
the lenders under the senior secured credit facility and the holders of the senior secured and senior subordinated 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 senior secured credit facility 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 senior secured credit facility, the lenders under that facility 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 senior subordinated notes. If the debt under the senior secured credit facility or the senior secured or subordinated notes were to be accelerated, we cannot assure that our assets would be sufficient to repay
in full our debt.
We are dependent on our executive officers, senior management team and highly trained employees and any work stoppage, difficulty hiring similar employees, or ineffective succession planning could adversely affect our business.
Because our products are complicated and highly engineered, we depend on an educated and trained workforce. Historically, there has been substantial competition for skilled personnel in the aerospace and defense industry, and we could be adversely affected by a shortage of skilled employees. We may not be able to fill new positions or vacancies created by expansion or turnover or attract and retain qualified personnel.
Reduction in force actions, such as the actions taken to reduce our workforce to align operations with customer demand as a result of the COVID-19 pandemic, could result in difficulty
in rehiring capable employees to refill the positions eliminated as needed once business recovers.
Although we believe that our relations with our employees are satisfactory, we cannot assure that we will be able to negotiate a satisfactory renewal of collective bargaining agreements or that our employee relations will remain stable. Because we strive to limit the volume of finished goods inventory, any work stoppage could materially and adversely affect our ability to provide products to our customers.
In addition, our success depends in part on our ability to attract and motivate our senior management and key employees. Achieving this objective may be difficult due to a variety of factors, including fluctuations in economic and industry conditions, competitors’ hiring practices, and the effectiveness of our compensation programs. Competition for qualified personnel can be intense.
If we are unable to effectively provide for the succession of key personnel, senior management and our executive officers, including our President, Chief Executive Officer and Director, our business, results of operations, cash flows and financial condition may be adversely affected. The Company’s Board of Directors continually monitors this risk and we believe that the Company’s succession plan, together with our straightforward strategy, clear value drivers, decentralized nature and the quality of managers running our operating units helps to mitigate this risk.
Risks Related to our Operations
Our sales to manufacturers of aircraft are cyclical, and a downturn
in sales to these manufacturers may adversely affect us.
Our sales to manufacturers of large commercial aircraft, such as Boeing, Airbus, and related OEM suppliers, as well as manufacturers of business jets have historically experienced periodic downturns. In the past, these sales have been affected by airline profitability, which is impacted by, among other things, fuel and labor costs, price competition, interest rates, downturns in the global economy and national and international events. In addition, sales of our products to manufacturers of business jets are impacted by, among other things, downturns in the global economy. In recent years, we have been experiencing decreased sales across the commercial OEM sector driven primarily by the decrease in production by Boeing and Airbus related to reduced demand in the commercial aerospace industry from the COVID-19 pandemic, and also in Boeing’s case, the 737 MAX’s grounding
and subsequent production slowdown, and airlines deferring or cancelling orders. Downturns adversely affect our results of operations, financial position and cash flows.
Our business is dependent on the availability of certain components and raw materials from suppliers.
Our business is affected by the price and availability of the raw materials and component parts that we use to manufacture our components. Our business, therefore, could be adversely impacted by factors affecting our suppliers (such as the destruction of our suppliers’ facilities or their distribution infrastructure, a work stoppage or strike by our suppliers’ employees or the failure of our suppliers to provide materials of the requisite quality), or by increased costs of such raw materials or components if we were unable to pass along such price increases to our customers.
The COVID-19 pandemic has continued to disrupt the global supply chain. We currently are experiencing supply shortages and inflationary pressures for certain components and raw materials that are important to our manufacturing process, particularly electronic parts. Expected growth in the global economy may exacerbate these pressures on us and our suppliers, and we expect these supply chain challenges and cost impacts to continue for the foreseeable future. Because we strive to limit the volume of raw materials and component parts on hand, our business could be adversely affected if we were unable to obtain these 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 FAA and OEM certification processes associated
with aerospace products could prevent efficient replacement of a supplier, raw material or component part.
We face significant competition.
We operate in a highly competitive global industry and compete against a number of companies. Competitors in our product lines are both U.S. and foreign companies and range in size from divisions of large public corporations to small privately-held entities. We believe that our ability to compete depends on high product performance, consistent high quality, short lead-time and timely delivery, competitive pricing, superior customer service and support and continued certification under customer quality requirements and assurance programs. We may have to adjust the prices of some of our products to stay competitive.
Climate-related regulations designed to address climate change may result in additional
compliance costs.
Our operations and the products we sell are currently subject to rules limiting emissions and to other climate-related regulations in certain jurisdictions where we operate. The increased prevalence of global climate change concerns may result in new regulations that may negatively impact us, our suppliers and customers. We are continuing to evaluate short-, medium- and long-term risks related to climate change. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers, in which case, the costs of raw materials and component parts could increase.
As
a whole, because our manufacturing facilities primarily engage in assembly and light manufacturing and because we do not maintain any transportation infrastructure, our emissions primarily fall into Scope 2 and Scope 3 emissions. Accordingly, we do not anticipate any material adverse impact from increased carbon regulation. Further, because of our wide portfolio of hundreds of thousands of products, we do not anticipate any material adverse impact from the reliance on a supplier or group of suppliers that may be subject to climate risks. However, given the political significance and uncertainty around these issues, we cannot predict how legislation, regulation, and increased awareness of these issues will affect our operations and financial condition. We continue to evaluate ways to reduce our energy and water consumption and lower our greenhouse gas emissions through energy efficiency measures, the purchase of green power and other actions.
Our
operations depend on our manufacturing facilities, which are subject to physical and other risks that could disrupt production.
Our operations and those of our customers and suppliers have been and may again be subject to natural disasters, climate change-related events, pandemics or other business disruptions, which could seriously harm our results of operation and increase our costs and expenses. Some of our manufacturing facilities are located in regions that may be impacted by severe weather events, such as increased storm frequency or severity in the Atlantic and fires in hotter and drier climates. These could result in potential damage to our physical assets as well as disruptions in manufacturing activities. Some of our manufacturing facilities are located in areas that may be at risk due to rising sea levels. Moreover, some of our manufacturing facilities are located in areas that could experience decreased access to
water due to climate issues.
We are also vulnerable to damage from other types of disasters, including power loss, fire, explosions, floods, communications failures, terrorist attacks and similar events. Disruptions could also occur due to health-related outbreaks and crises, cyber-attacks, computer or equipment malfunction (accidental or intentional), operator error or process failures. Should insurance or other risk transfer mechanisms, such as our existing disaster recovery and business continuity plans, be insufficient to recover all costs, we could experience a material adverse effect on our business, results of operations, financial position and cash flows.
Operations and sales outside of the United States may be subject to additional risks.
Our net sales to foreign customers were approximately $1.7 billion for the fiscal years ended September 30, 2021 and 2020, respectively. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including global health crises, Brexit, currency fluctuations, difficulties in staffing and managing multinational operations, general economic and political uncertainties and potential for social unrest in countries in which we operate, limitations on our ability to enforce legal rights and remedies, restrictions on the repatriation of funds, change in trade policies, tariff regulation, difficulties in obtaining export and
import licenses and the risk of government financed competition. Issues with the global supply chain can also rise due to some of the aforementioned risks as well as global health crises, such as the COVID-19 pandemic. Furthermore, the Company is subject to laws and regulations, such as the Foreign Corrupt Practices Act, UK Bribery Act and similar local anti-bribery laws, which generally prohibit companies and their employees, agents and contractors from making improper payments for the purpose of obtaining or retaining business. Failure to comply with these laws could subject the Company to civil and criminal penalties that could materially adversely affect the Company’s results of operations, financial position
and cash flows.
We are subject to certain unique business risks as a result of supplying equipment and services to the U.S. Government.
Companies engaged in supplying defense-related equipment and services to U.S. Government agencies, whether through direct contracts with the U.S. Government or as a subcontractor to customers contracting with the U.S. Government, are subject to business risks specific to the defense industry. These risks include the ability of the U.S. Government to unilaterally:
•suspend us from receiving new contracts based on alleged violations of procurement laws or regulations;
•audit our contract-related costs and fees, including allocated indirect costs.
Most of our U.S. Government contracts can be terminated by the U.S. Government at its convenience without significant notice. Termination for convenience provisions provide only for
our recovery of costs incurred or committed, settlement expenses and profit on the work completed prior to termination.
On contracts for which the price is based on cost, the U.S. Government may review our costs and performance, as well as our accounting and general business practices. Based on the results of such audits, the U.S. Government may adjust our contract-related costs and fees, including allocated indirect costs. In addition, under U.S. Government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of research and development costs, and certain marketing expenses may not be subject to reimbursement.
Furthermore, even where
the price is not based on cost, the U.S. Government may seek to review our costs to determine whether our pricing is “fair and reasonable.” Our 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 DOD Office of Inspector General (“OIG”) with respect to prices paid for such products. In the third quarter of fiscal 2019, we voluntarily refunded $16 million to the U.S. Government following an OIG audit, and another OIG audit is underway. In addition, our defense-related business has been the subject of an ongoing Congressional inquiry by the House Oversight Committee and release of the current OIG audit report may prompt further Congressional inquiries.
Pricing reviews and government audits, including the audit underway, and the Congressional inquiries are costly and time consuming for our management and could distract from our ability to effectively manage the business. As a result of these reviews, audits and inquiries, we could be subject to providing further refunds to the U.S. Government, we could be asked to enter into an arrangement whereby our prices would be based on cost, the DOD could seek to pursue alternative sources of supply for our parts, or the U.S. Government could take other adverse actions with respect to our contracts. Any of those occurrences could lead to a reduction in our revenue from, or the profitability of certain of our supply arrangements with, certain agencies and buying organizations of the U.S. Government. Further, negative publicity relating to the results of any audit, inquiry or subsequent
hearing or the like could negatively impact our stock price.
If a government inquiry or investigation uncovers improper or illegal activities, we could be subject to civil or criminal penalties or administrative sanctions, including contract termination, fines, forfeiture of fees, suspension of payment and suspension or debarment from doing business with U.S. Government agencies, any of which could materially adversely affect our reputation, business, financial condition, results of operations and cash flows.
Moreover, U.S. Government purchasing regulations contain a number of additional operational requirements, which do not apply to entities not engaged in government contracting. Failure to comply with such government contracting requirements could result in civil and criminal penalties
that could have a material adverse effect on the Company’s results of operations.
Our business may be adversely affected if we would lose our government or industry approvals or if more stringent government regulations are enacted or if industry oversight is increased.
The aerospace industry is highly regulated in the U.S. and in other countries. In order to sell our products, we and the products we manufacture must be certified by the FAA, the DOD and similar agencies in foreign countries and by individual manufacturers. If new
and more stringent government regulations are adopted or if industry oversight increases, we might incur significant expenses to comply with any new regulations or heightened industry oversight. In addition, if material authorizations or approvals were revoked or suspended, our business would be adversely affected.
In addition to the aviation approvals, we are at times required to obtain approval from U.S. Government agencies to export our products. U.S. laws and regulations applicable to us include the Arms Export Control Act, the International Traffic in Arms Regulations ("ITAR"), the Export Administration Regulations ("EAR") and the trade sanctions laws and regulations administered by the United States Department of the Treasury's Office of Foreign Assets Control ("OFAC"). EAR restricts the export of dual-use products and technical data to certain countries, while ITAR restricts the export of defense
products, technical data and defense services.
Failure to obtain approval to export or determination by the U.S. Government that we failed to receive required approvals or licenses could eliminate or restrict our ability to sell our products outside the United States, and the penalties that could be imposed by the U.S. Government for failure to comply with these laws could be significant.
We could incur substantial costs as a result of data protection concerns.
The interpretation and application of data protection laws in the U.S., Europe, including but not limited to the General Data Protection Regulation (the “GDPR”) and the California Consumer Privacy Act (the “CCPA”), and elsewhere are uncertain and evolving. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices.
Complying with these various laws is difficult and could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Further, although we have implemented internal controls and procedures designed to ensure compliance with the GDPR, CCPA and other privacy-related laws, rules and regulations (collectively, the “Data Protection Laws”), there can be no assurance that our controls and procedures will enable us to be fully compliant with all Data Protection Laws.
Despite our efforts to protect sensitive information and confidential and personal data, comply with applicable laws, rules and regulations and implement data security measures, our facilities, and systems may be vulnerable to security breaches and other data loss, including cyber-attacks and, in fact, we have experienced data security incidents that have not had a material impact on our financial results.
In addition, it is not possible to predict the impact on our business of the future loss, alteration or misappropriation of information in our possession related to us, our employees, former employees, customers, suppliers or others. This could lead to negative publicity, legal claims, theft, modification or destruction of proprietary information or key information, damage to or inaccessibility of critical systems, manufacture of defective products, production downtimes, operational disruptions and other significant costs, which could adversely affect our reputation, results of operations, financial condition and cash flows.
Risks Related to Legal and Regulatory Matters
We could incur substantial costs as a result of violations of or liabilities under environmental laws and regulations.
Our operations and facilities are subject to a number
of federal, state, local and foreign environmental laws and regulations that govern, among other things, discharges of pollutants into the air and water, the generation, handling, storage and disposal of hazardous materials and wastes, the remediation of contamination and the health and safety of our employees. Environmental laws and regulations may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Certain facilities and third-party sites utilized by subsidiaries of the Company have been identified as potentially responsible parties under the federal superfund laws and comparable state laws. The
Company is currently involved in the investigation and remediation of a number of sites under applicable laws.
Estimates of the Company’s environmental liabilities are based on current facts, laws, regulations and technology. These estimates take into consideration the Company’s prior experience and professional judgment of the Company’s environmental advisors. Estimates of the Company’s environmental liabilities are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards,
imprecise engineering evaluations and cost estimates, the extent of corrective actions that may be required and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.
Accordingly, as investigations and remediations proceed, it is likely that adjustments in the Company’s accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company’s results of operations or cash flows in a given period. Based on currently available information, however, the Company does not believe that future environmental costs in excess
of those accrued with respect to sites for which the Company has been identified as a potentially responsible party are likely to have a material adverse effect on the Company’s financial condition.
We may be subject to periodic litigation and regulatory proceedings, including Fair Labor Standards Act and state wage and hour class action lawsuits, which may adversely affect our business and financial performance.
From time to time, we are involved
in lawsuits and regulatory actions brought or threatened against us in the ordinary course of business. These actions and proceedings may involve claims for, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, or breach of contract. In addition, we may be subject to class action lawsuits, including those involving allegations of violations of consumer product statutes or the Fair Labor Standards Act and state wage and hour laws. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such actions or proceedings. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify, as plaintiffs may seek recovery of very large or indeterminate amounts in these types of lawsuits, and the magnitude of the potential loss
may remain unknown for substantial periods of time. In addition, plaintiffs in many types of actions may seek punitive damages, civil penalties, consequential damages or other losses, or injunctive or declaratory relief. These proceedings could result in substantial cost and may require us to devote substantial resources to defend ourselves. The ultimate resolution of these matters through settlement, mediation, or court judgment could have a material impact on our financial condition, results of operations, and cash flows.
We could be adversely affected if one of our products cause an aircraft to crash.
Our operations expose us to potential liabilities for personal injury or death as a result of the failure of an aircraft product that we have designed, manufactured or serviced. While we maintain liability insurance to protect us from future product liability claims, in the event
of product liability claims our insurers may attempt to deny coverage or any coverage we have may not be adequate. We also may not be able to maintain insurance coverage in the future at an acceptable cost. Any liability not covered by insurance or for which third party indemnification is not available could result in significant liability to us.
In addition, a crash caused by one of our products could damage our reputation for quality products. We believe our customers consider safety and reliability as key criteria in selecting a provider of aircraft products. If a crash were to be caused by one of our products, or if we were to otherwise fail to maintain a satisfactory record of safety and reliability, our ability to retain and attract customers may be materially adversely affected.
Risks Related to Financial Matters
We have recorded
a significant amount of intangible assets, which may never generate the returns we expect.
Mergers and acquisitions have resulted in significant increases in identifiable intangible assets and goodwill. Identifiable intangible assets, which primarily include trademarks, trade names, customer relationships, and technology, were approximately $2.8 billion at September 30, 2021, representing approximately 14% of our total assets. Goodwill recognized in accounting for the mergers and acquisitions was approximately $8.6 billion at September 30, 2021, representing approximately 44% of our total assets. We may never realize the full value of our identifiable intangible assets and goodwill, and to the extent we were to determine that our identifiable intangible assets or our goodwill were impaired within the meaning of applicable accounting
standards, we would be required to write-off the amount of any impairment.
We may be subject to risks relating to changes in our tax rates or exposure to additional income tax liabilities.
We are subject to income taxes in the U.S. and various non-U.S. jurisdictions. The Company’s domestic and international tax liabilities are dependent upon the location of earnings among these different jurisdictions. The Company’s future results of operations could be adversely affected by changes in the Company’s effective tax rate as a result of changes in the mix of earnings in countries with differing statutory tax rates, changes in the
valuation of deferred tax assets, challenges by tax authorities or changes in tax laws or regulations. In addition, the amount of income taxes paid by the Company is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to the Company’s tax liabilities, which could have a material adverse effect on the Company’s results of operations.
We do not regularly declare and pay quarterly or annual cash dividends on our stock.
Notwithstanding special
cash dividends, of which the most recent declaration by the Company’s Board of Directors occurred on December 20, 2019 in the amount of $32.50 per outstanding share of common stock and cash dividend equivalent payments on options granted under its equity compensation plans, we do not anticipate declaring regular quarterly or annual cash dividends on our common stock or any other equity security in the foreseeable future.
The amounts that may be available to us to pay future special cash dividends are restricted under our debt and other agreements. Any payment of special cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend on our results of operations, earnings, capital requirements, financial condition, future prospects, contractual
restrictions and other factors deemed relevant by our Board of Directors. Therefore, shareholders should not rely on regular quarterly or annual dividend income from shares of our common stock and should not rely on special dividends with any regularity or at all.
Our commercial business is sensitive to the number of flight hours that our customers’ planes spend aloft, the size and age of the worldwide aircraft fleet and our customers’ profitability. These items are, in turn, affected by general economic and geopolitical and other worldwide conditions.
Our
commercial business is directly affected by, among other factors, changes in RPMs, the size and age of the worldwide aircraft fleet, the percentage of the fleet that is out-of-warranty and changes in the profitability of the commercial airline industry. RPMs and airline profitability have historically been correlated with the general economic environment, although national and international events also play a key role. For example, in addition to the current COVID-19 pandemic and the adverse impact it has had on the airline industry, past examples in which the airline industry has been negatively affected include downturns in the global economy, higher fuel prices, increased security concerns among airline customers following the events of September 11, 2001, the Severe Acute Respiratory Syndrome (“SARS”) epidemic, and conflicts abroad. Additional examples include future geopolitical or other worldwide events,
such as war, terrorist acts, or additional worldwide infectious disease outbreaks.
In addition, global market and economic conditions have been challenging due to turbulence in the U.S. and international markets and economies and have prolonged declines in business and consumer spending. As a result of the substantial reduction in airline traffic resulting from the aforementioned events, the airline industry incurred large losses and financial difficulties. Some carriers have also parked or retired a portion of their fleets and have reduced workforces and flights. During periods of reduced airline profitability, some airlines may delay purchases of spare parts, preferring instead to deplete existing inventories, and delay refurbishments and discretionary spending. If demand for spare parts decreases, there would be a decrease in demand for certain of our products. An adverse change in demand could impact our results of operations,
collection of accounts receivable and our expected cash flow generation from current and acquired businesses which may adversely impact our financial condition and access to capital markets.
U.S. military spending is dependent upon the U.S. defense budget.
The military and defense market is significantly dependent upon government budget trends, particularly the DOD budget. In addition to normal business risks, our supply of products to the U.S. Government is subject to unique risks largely beyond our control. DOD budgets could be negatively impacted by several factors, including, but not limited to, a change in defense spending policy as a result of the presidential election or otherwise, the U.S. Government’s budget deficits, spending priorities (e.g., allocating more spending to combat the effects of the COVID-19 pandemic), the cost of sustaining the U.S. military presence internationally
and possible political pressure to reduce U.S. Government military spending, each of which could cause the DOD budget to remain unchanged or to decline. A significant decline in U.S. military expenditures could result in a reduction in the amount of our products sold to the various agencies and buying organizations of the U.S. Government.
Our stock price may be volatile, and an investment in our common stock could suffer a decline in value.
There has been significant volatility in the market price and trading volume of equity securities, which is unrelated to the operating performance of the companies issuing the securities. These market fluctuations may negatively affect the market price of our common stock. Shareholders may not be able to sell their shares at or above the purchase price due to fluctuations in the market price of our common stock. Such changes could be caused by
changes in our operating performance or prospects, including possible changes due to the cyclical nature of the aerospace industry and other factors such as fluctuations in OEM and aftermarket ordering, which could cause short-term swings in profit margins. Or such changes could be unrelated to our operating performance, such as changes in market conditions affecting the stock market generally or the stocks of aerospace companies or changes in the outlook for our common stock, such as changes to or the confidence in our business strategy, changes to or confidence in our management, or expectations for future growth of the Company. Global health crises such as the COVID-19 pandemic could also cause significant volatility in the market price.
TransDigm’s principal owned properties (defined as greater than 20,000 square feet or related to a principal operation) as of September 30, 2021 are as follows:
Location
Reporting Segment
Square Footage
Brea,
CA (1)
Airframe
315,000
Stillington, United Kingdom
Airframe
274,800
Montreal, Canada
Airframe
271,700
Miesbach, Germany
Power
& Control
242,000
Liberty, SC (1)
Power & Control
219,000
Waco, TX
Power & Control
218,800
Liverpool, NY
Power & Control
197,100
Ingolstadt,
Germany
Airframe
191,900
Kent, OH (1)
Airframe
185,000
Bridport, United Kingdom
Airframe
174,700
Union Gap, WA (1)
Airframe
142,000
Coachella,
CA (1)
Power & Control
140,000
Phoenix, AZ
Airframe
138,700
Paks, Hungary
Airframe
137,800
Los Angeles, CA
Power &
Control
131,000
Bohemia, NY (1)
Power & Control
124,000
Buena Park, CA
Power & Control
115,000
Llangeinor, United Kingdom
Airframe
110,000
Bourges,
France
Power & Control
109,400
Westbury, NY
Power & Control
106,800
Kent, WA (1)
Airframe
100,000
Painesville, OH
Power
& Control
94,200
Valencia, CA (1)
Airframe
88,400
Letchworth, United Kingdom
Airframe
88,200
Placentia, CA
Airframe
86,600
Addison,
IL (1)
Power & Control
83,300
Sarralbe, France
Power & Control
77,900
Niort, France
Power & Control
69,000
Clearwater, FL
Power
& Control
64,200
Prescott, AZ
Airframe
62,400
South Euclid, OH
Power & Control
60,000
Wichita, KS
Power & Control
57,000
Branford,
CT
Airframe
52,000
Avenel, NJ
Power & Control
48,500
Rancho Cucamonga, CA (1)
Power & Control
47,000
Pennsauken, NJ
Airframe
38,000
Ryde,
United Kingdom
Power & Control
33,200
Rancho Cucamonga, CA
Airframe
32,700
Melaka, Malaysia
Power & Control
24,800
Cheveley, United Kingdom
Airframe
24,000
Deerfield
Beach, FL
Non-aviation
20,000
(1)Subject to mortgage liens under our senior secured credit facility, our 6.25% senior secured notes due March 15, 2026 and our 8.00% senior secured notes due December 15, 2025.
TransDigm’s principal leased properties (defined as greater than 20,000 square feet or related to a principal operation) as of September 30, 2021 are as follows:
Location
Reporting Segment
Square Footage
Everett, WA
Airframe
337,000
East
Camden, AR
Power & Control
276,000
Whippany, NJ
Power & Control
229,600
Nittambuwa, Sri Lanka
Airframe
168,000
Santa Ana, CA
Airframe
159,200
Holmestrand,
Norway
Airframe
144,700
Dayton, NV
Airframe
144,000
Tijuana, Mexico
Airframe
141,000
Anaheim, CA
Airframe
138,900
Marlow,
United Kingdom
Airframe
116,100
Melbourne, FL
Power & Control
107,000
Farnborough, United Kingdom
Power & Control
103,400
Goldsboro, NC
Power &
Control
101,000
Fullerton, CA
Airframe
100,000
Kunshan, China
Airframe
95,200
Sylmar, CA
Airframe
93,000
Elkhart,
IN
Non-aviation
91,500
Davis Junction, IL
Airframe
84,500
Miesbach, Germany
Power & Control
80,800
Kunshan, China
Non-aviation
75,300
Camarillo,
CA
Power & Control
70,000
Gloucestor, United Kingdom
Airframe
67,800
Tijuana, Mexico
Power & Control
63,500
Matamoros, Mexico
Power & Control
60,500
Tijuana,
Mexico
Power & Control
49,300
Lillington, NC
Power & Control
48,800
Sugar Grove, IL
Airframe
45,000
Zunyi, China
Power & Control
43,000
Tempe,
AZ
Power & Control
40,200
Collegeville, PA
Airframe
37,000
Chongqing, China
Airframe
36,300
Rancho Santa Margarita, CA
Airframe
35,200
Joensuu,
Finland
Airframe
32,300
Ashford, United Kingdom
Power & Control
28,000
Nogales, Mexico
Airframe
27,000
Bridgend, United Kingdom
Airframe
24,800
Ravenna,
OH
Airframe
22,500
Pennsauken, NJ
Airframe
20,500
Cleveland, OH
Corporate
20,100
Our Cleveland, OH and Pasadena, CA corporate facilities house our principal executive offices, and we currently lease approximately 20,100 square feet and
5,300 square feet, respectively, for those purposes. TransDigm also leases certain of its other non-material facilities. Management believes that our machinery, plants and offices are in satisfactory operating condition and that it will have sufficient capacity to meet foreseeable future needs without incurring significant additional capital expenditures.
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 15, “Commitments and Contingencies,” within the notes to the consolidated financial statements included herein.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the New York Stock Exchange, or NYSE, under the ticker symbol “TDG.”
Holders
As
of October 13, 2021, there were 33 stockholders of record of our common stock and approximately 194,000 beneficial stockholders, which includes an estimated number of stockholders who have their shares held in their accounts by banks and brokers.
Dividends
No dividends were declared during fiscal 2021. During fiscal 2020, TD Group’s Board of Directors declared a special cash dividend of $32.50 (in December 2019) on each outstanding share of common stock and cash dividend equivalent payments under options granted under its equity compensation plans.
Performance Graph
Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in the shares of common stock of TD Group with the cumulative total return of a
hypothetical investment in each of the S&P 500 Index and the S&P Aerospace & Defense Select Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on September 30, 2016, and its relative performance is tracked through September 30, 2021.
The following performance graph and related information shall not be deemed “soliciting material” nor to be “filed” with the SEC, nor shall such information be incorporated
by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among TransDigm Group Inc., the S&P 500 Index and S&P Aerospace & Defense Select Index
*$100 invested on 9/30/16 in stock or index, including reinvestment of dividends.
Copyright 2021 Standard & Poor’s, a division of S&P Global. All rights reserved.
9/30/16
9/30/17
9/30/18
9/30/19
9/30/20
9/30/21
TransDigm
Group Inc.
100.00
104.73
152.52
225.70
217.82
286.34
S&P 500 Index
100.00
118.61
139.85
145.80
167.89
218.27
S&P
Aerospace & Defense Select Index
100.00
139.21
175.93
191.20
157.98
218.45
Purchases of Equity Securities by the Issuer or Affiliated Purchaser
On November 8, 2017, our Board of Directors, authorized a stock
repurchase program permitting repurchases of our outstanding shares not to exceed $650 million in the aggregate, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes as described within the Liquidity and Capital Resources section of Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”
No repurchases were made under the program during the fiscal year ended September 30, 2021. During the fiscal year ended September 30, 2020, the Company repurchased 36,900
shares of its common stock at a gross cost of $18.9 million at the weighted average cost of $512.67 under the repurchase program. As of September 30, 2021, the remaining amount of repurchases allowable under the program was $631.1 million subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read together with TD Group’s consolidated financial statements and the related notes included elsewhere in this report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under the heading entitled “Risk Factors” included elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested below.
Overview
For
fiscal year 2021, we generated net sales of $4,798 million, gross profit of $2,513 million or 52.4% of net sales, and net income attributable to TD Group of $680 million. The COVID-19 pandemic has continued to cause a significant adverse impact on our net sales, net income and EBITDA As Defined when compared to pre-pandemic levels. Historically and as our business continues to recover from the pandemic, we believe we have achieved steady, long-term growth in sales and improvements in operating performance since our formation in 1993 due to our competitive strengths and through execution of our value-driven operating strategy. More specifically, focusing our businesses on our value-driven operating strategy of obtaining profitable new business, carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit
and income from operations over the long-term.
Our selective acquisition strategy has also contributed to the growth of our business. The integration of certain acquisitions into our existing businesses combined with implementing our proven operating strategy has historically resulted in improvements in the financial performance of the acquired business.
We believe our key competitive strengths include:
Large and Growing Installed Product Base with Aftermarket Revenue Stream. We provide components to a large and growing installed base of aircraft to which we supply aftermarket products. We estimate that our products are installed on over 100,000 commercial transport, regional transport, military and general aviation fixed wing turbine aircraft and rotary wing aircraft.
Diversified
Revenue Base. We believe that our diversified revenue base reduces our dependence on any particular product, platform or market channel and has been a significant factor in maintaining our financial performance. Our products are installed on almost all of the major commercial aircraft platforms now in production. We expect to continue to develop new products for military and commercial applications. As a result of the COVID-19 pandemic, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from the pandemic. Product solutions currently being explored include anti-viral or antimicrobial technology, air purification, and touchless technologies, among others.
Barriers to Entry. We believe that the niche nature of our markets, the industry’s stringent regulatory and certification
requirements, the large number of products that we sell and the investments necessary to develop and certify products create potential disincentives to competition for certain products.
Our business strategy is made up of two key elements: (1) a value-driven operating strategy focused around our three core value drivers and (2) a selective acquisition strategy.
Value-Driven Operating Strategy. Our three core value drivers are:
•Obtaining Profitable New Business. We attempt to obtain profitable new business by using our technical expertise and application skill and our detailed knowledge of our customer base and the individual niche markets in which we operate. We have regularly been successful in identifying and developing both aftermarket and OEM products to drive our
growth.
•Improving Our Cost Structure. We are committed to maintaining and continuously improving our lean cost structure through detailed attention to the cost of each of the products that we offer and our organizational structure, with a focus on reducing the cost of each.
•Providing Highly Engineered Value-Added Products to Customers. We focus on the engineering, manufacturing and marketing of a broad range of highly engineered niche products that we believe provide value to our customers. We believe we have been consistently successful in communicating to our customers the value of our products. This has generally enabled us to price our products to fairly reflect the value we provide and the resources required to do so.
Selective Acquisition Strategy. We selectively pursue the acquisition of proprietary aerospace component businesses when we see an opportunity to create value through the application of our three core value-driven operating strategies. The aerospace industry, in particular, remains highly fragmented, with many of the companies in the industry being small private businesses or small non-core operations of larger businesses. We have significant experience among our management team in executing acquisitions and integrating acquired businesses into our company and culture. As of the date of this report, we have successfully acquired approximately 86 businesses and product lines since our formation in 1993. Many of these acquisitions have been integrated into an existing TransDigm production facility,
which enables a higher production capacity utilization, which in turn improves gross profit levels due to the ability to spread the fixed manufacturing overhead costs over higher production volume. In the case of larger acquisitions that consists of multiple business units (such as the Esterline acquisition), we may pursue opportunities to divest certain acquired business units that are not in line with our long-term acquisition strategy.
Acquisitions and divestitures during the most recent three fiscal years are described in Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic is continuing to cause an adverse impact on our employees, operations, supply chain and distribution system and the long-term impact to our business
remains unknown. This is due to the numerous uncertainties that have risen from the pandemic, including the severity of the disease, the duration of the outbreak, the likelihood of resurgences of the outbreak, including due to the emergence and spread of variants, actions that may be taken by governmental authorities in response to the disease, the continued efficacy and public acceptance of vaccines, and unintended consequences of the foregoing.
The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the pandemic. The pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a rapid pace beginning in
the second half of fiscal 2020 and has remained depressed compared to pre-pandemic levels. However, commercial air travel has increasingly shown signs of recovery in recent months with increasing air traffic, primarily in certain domestic markets. The recovery in international commercial air travel has been slower with international travel only slightly recovered from COVID-19 pandemic lows. The exact pace and timing of the commercial air travel recovery remains uncertain and is expected to continue to be uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 resurfacing), the continued efficacy and public acceptance of vaccines and easing of quarantines and travel restrictions, among other factors. We currently expect COVID-19 to continue to cause an adverse impact on our net sales, net income and EBITDA as Defined compared to pre-pandemic levels into fiscal 2022. Longer-term, because the duration of
the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results.
The Company took immediate and aggressive action to minimize the spread of COVID-19 in our workplaces and reduce costs. Since the early days of the pandemic, we have been following guidance from the World Health Organization and the U.S. Center for Disease Control to protect employees and prevent the spread of the virus within all of our facilities globally.
For the fiscal year ended September 30, 2021, COVID-19 restructuring costs incurred were approximately $36 million, of which $26 million was recorded in cost of sales and $10 million was recorded in selling
and administrative expenses. These were costs related to the Company's actions to reduce its workforce to align with customer demand. Additionally, the Company incurred approximately $4 million in incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment).
As of September 30, 2021, the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was approximately $19 million. In fiscal 2022, the
Company may incur additional restructuring and incremental costs related to the COVID-19 pandemic though at a reduced level in comparison to fiscal 2021 and 2020.
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):
Less:
Net income attributable to noncontrolling interests
(1)
—
%
(1)
—
%
Income from continuing operations attributable to TD Group
680
14.2
%
652
12.8
%
Income
from discontinued operations, net of tax
—
—
%
47
0.9
%
Net income attributable to TD Group
$
680
14.2
%
$
699
13.7
%
Net
income applicable to TD Group common stockholders
$
607
(1)
12.7
%
$
514
(1)
10.1
%
Earnings per share:
Earnings
per share from continuing operations—basic and diluted
$
10.41
(2)
$
8.14
(2)
Earnings per share from discontinued operations—basic and diluted
—
(2)
0.82
(2)
Earnings per share
$
10.41
$
8.96
Cash
dividends paid per common share
$
—
$
32.50
Weighted-average shares outstanding—basic and diluted
58.4
57.3
Other Data:
EBITDA
$
2,027
(3)
$
2,052
(3)
EBITDA
As Defined
$
2,189
(3)
45.6
%
$
2,278
(3)
44.6
%
(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 $73 million and $185 million for the fiscal years ended September 30, 2021 and 2020.
(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 GAAP financial measure.
•Net Sales. Net organic sales and acquisition and divestiture sales and the related dollar and percentage changes for the fiscal years ended September 30,
2021 and 2020 were as follows (amounts in millions):
Organic sales represent sales from existing businesses owned by the Company, excluding sales from acquisitions and divestitures. Acquisition sales represent sales from acquired businesses for the period up to one year subsequent to their respective acquisition date. Divestiture sales represent
sales from businesses divested in fiscal 2021. Acquisition and divestiture sales are excluded from organic sales due to the variability in the nature, timing and extent of acquisitions and divestitures and resulting variable impact on underlying trends.
The decrease in organic sales of $380 million for the fiscal year ended September 30, 2021 compared to the fiscal year ended September 30, 2020, is primarily related to decreases in commercial OEM sales ($315 million, a decrease of 25.6%) and commercial aftermarket sales ($233 million, a decrease of 18.1%); partially offset by increases in defense sales ($115 million, an increase of 5.4%) and non-aerospace sales ($53 million, an increase of 19.8%). The decreases in the commercial OEM market and commercial aftermarket are primarily attributable to the adverse impact that the COVID-19
pandemic has had on the customer demand for air travel worldwide particularly in the first half of fiscal 2021 and build rate reductions by aircraft OEMs. Both commercial OEM and aftermarket sales increased in the second half of fiscal 2021 compared to the previous year’s comparable period. The increase in defense sales and non-aerospace sales in fiscal 2021 is primarily driven by the OEM market.
The increase in acquisition and divestiture sales for the fiscal year ended September 30, 2021 is primarily attributable to the acquisition of Cobham Aero Connectivity (“CAC”) in the second quarter of fiscal 2021 and the divestitures of ScioTeq and TREALITY Simulation Visual Systems ("ScioTeq and TREALITY") and Technical Airborne Components (“TAC”), all of which were completed in the third quarter of fiscal 2021. Refer to Note 2, “Acquisitions and Divestitures,”
in the notes to the consolidated financial statements included herein for further information on the businesses acquired and divested by the Company in fiscal years 2020 and 2021.
•Cost of Sales and Gross Profit. Cost of sales decreased by $171 million, or 7.0%, to $2,285 million for the fiscal year ended September 30, 2021 compared to $2,456 million for the fiscal year ended September 30, 2020. Cost of
sales and the related percentage of net sales for the fiscal years ended September 30, 2021 and 2020 were as follows (amounts in millions):
The decrease in the dollar amount of cost of sales during the fiscal year ended September 30, 2021 was primarily due to lower sales volume from decreased customer demand due to the COVID-19 pandemic and the other factors summarized above, including those factors that partially offset the decrease in cost of sales.
Gross profit as a percentage of net sales increased by 0.5 percentage points to 52.4% for the fiscal year ended September 30,
2021 from 51.9% for the fiscal year ended September 30, 2020. In addition to the factors summarized above, the increase in the gross profit percentage is primarily driven by the realization of the cost mitigation measures that began to be enacted in the second half of fiscal 2020 in response to the COVID-19 pandemic. The material cost mitigation measures enacted are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic," in the notes to the consolidated financial statements included herein. Partially offsetting were higher material costs due to inflationary effects and shortages in the global supply chain for certain raw materials and component parts. Also partially offsetting were fixed overhead costs spread over a lower production volume during the fiscal year ended September 30, 2021.
•Selling and Administrative Expenses. Selling and administrative expenses decreased by $42 million to $685 million, or 14.3% of sales, for the fiscal year ended September 30, 2021 from $727 million, or 14.2% of sales, for the comparable period in the prior year. Selling and administrative expenses and the related percentage of total sales for the fiscal years ended September 30, 2021 and 2020 were as follows (amounts in millions):
Selling and administrative expenses - excluding costs below
$
534
$
592
$
(58)
(9.8)
%
%
of net sales
11.1
%
11.6
%
Non-cash stock compensation expense
116
84
32
38.1
%
% of net sales
2.4
%
1.6
%
Acquisition
and divestiture transaction-related expenses
15
1
14
1,400.0
%
% of net sales
0.3
%
—
%
Acquisition integration
costs
10
20
(10)
(50.0)
%
% of net sales
0.2
%
0.4
%
COVID-19 pandemic restructuring costs
10
9
1
11.1
%
%
of net sales
0.2
%
0.2
%
Bad debt expense
—
21
(21)
(100.0)
%
% of net sales
—
%
0.4
%
Total
selling and administrative expenses
$
685
$
727
$
(42)
(5.8)
%
% of net sales
14.3
%
14.2
%
The
decrease in total selling and administrative expenses during the fiscal year ended September 30, 2021 is primarily due to the realization of the cost mitigation measures that began to be enacted in the second half of fiscal 2020 in response to the COVID-19 pandemic, partially offset by the other factors summarized above. The material cost mitigation measures enacted are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic," in the notes to the consolidated financial statements included herein. The increase in non-cash stock compensation expense is attributable to the new stock option grants awarded in fiscal 2021 and the impact of the Black-Scholes fair value on certain fiscal 2021 stock option grant modifications and on the fiscal 2020 grants in connection with the change in vesting terms approved by the Compensation Committee of the Board of Directors in the first quarter of fiscal
2021. The decrease in bad debt expense for the fiscal year ended September 30, 2021 is primarily driven by a decrease in estimated losses from certain commercial aerospace customers that were more adversely affected by the COVID-19 pandemic.
•Amortization of Intangible Assets. Amortization of intangible assets was $137 million for the fiscal year ended September 30, 2021 compared to $169 million for the fiscal year ended September 30, 2020. The decrease in amortization expense of $32 million was primarily due to the amortization expense on sales order backlog recorded in fiscal 2020 in connection with the acquisition of Esterline that did not occur in fiscal 2021 as sales order backlog was fully amortized by the end of fiscal 2020.
This was partially offset by amortization expense on intangible assets related to the CAC acquisition in the second quarter of fiscal 2021.
•Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, revolving credit facility fees and interest on finance leases; slightly offset by interest income. Interest expense-net increased $30 million, or 2.9%, to $1,059 million for the fiscal year ended September 30, 2021 from $1,029 million for the comparable period in the prior year. The increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $20.0 billion for the fiscal year ended September 30, 2021
compared to approximately $19.1 billion for the fiscal year ended September 30, 2020. The weighted average interest rate for cash interest payments on total borrowings outstanding for the fiscal year ended September 30, 2021 was 5.03%.
•Refinancing Costs. Refinancing costs of $37 million were recorded for the fiscal year ended September 30, 2021 compared to $28 million recorded for the fiscal year ended September 30, 2020. The refinancing costs are primarily related to fees incurred on the early redemptions of the 6.50% Senior Subordinated Notes due 2024 (the "2024 Notes") and the 2025 Notes that occurred in the second and third quarters of fiscal 2021, respectively.
•Other Income. Other income of $51 million was recorded for the fiscal year ended September 30, 2021 compared to $46 million recorded for the fiscal year ended September 30, 2020. Other income for the fiscal year ended September 30, 2021 was primarily driven by $24 million recorded for the settlement of the insurance claim for Leach International Europe’s Niort, France operating facility fire in August 2019. This primarily represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory and proceeds from the business interruption settlement. The remaining $27 million is primarily driven by non-service related components of net periodic benefit costs on the
Company's defined benefit pension plans ($14 million), receipt of payment of Canadian governmental subsidies ($7 million) and the release of a litigation reserve ($3 million). Other income for the fiscal year ended September 30, 2020 was primarily driven by proceeds or proceeds receivable from business interruption insurance settlements ($34 million) and non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($12 million).
•Gain on Sale of Businesses-net. Gain on sale of businesses-net of $69 million was recorded for the fiscal year ended September 30, 2021, and is primarily related to the net gain on sale recognized during the third quarter
of fiscal 2021 as a result of the ScioTeq and TREALITY and TAC divestitures. There was no gain on sale of businesses-net recorded for the fiscal year ended September 30, 2020.
•Income Taxes. Income tax expense as a percentage of income before income taxes was approximately 4.7% for the fiscal year ended September 30, 2021 compared to 11.7% for the fiscal year ended September 30, 2020. The Company’s lower effective tax rate for the fiscal year ended September 30, 2021 was primarily due to the Company's ability
to utilize its net interest deduction limitation carryforward pursuant to IRC Section 163(j) resulting in the release of the valuation allowance applicable to such carryforward and the discrete impact of excess tax benefits associated with share-based compensation.
•Income from Discontinued Operations, net of tax. There were no discontinued operations for the fiscal year ended September 30, 2021. Income from discontinued operations, net of tax, for the fiscal year ended September 30, 2020 was $47 million and consisted of $7 million from the results of operations of Souriau-Sunbank and a gain on the sale of Souriau-Sunbank, net of tax, of $40 million.
•Net Income Attributable to TD Group.
Net income attributable to TD Group decreased $19 million, or 2.7%, to $680 million for the fiscal year ended September 30, 2021 compared to net income attributable to TD Group of $699 million for the fiscal year ended September 30, 2020.
•Earnings per Share. Basic and diluted earnings per share was $10.41 for the fiscal year ended September 30, 2021. There was no impact on earnings per share from discontinued operations for the fiscal year ended September 30, 2021. Basic and diluted earnings per share from continuing operations and discontinued operations were $8.14 and $0.82, respectively, for the fiscal year ended September 30,
2020. Net income attributable to TD Group for the fiscal year ended September 30, 2021 of $680 million was decreased by dividend equivalent payments of $73 million, or $1.24 per share, resulting in net income applicable to TD Group common stockholders of $607 million, or $10.41 per share. Net income attributable to TD Group for the fiscal year ended September 30, 2020 of $699 million was decreased by dividend equivalent payments of $185 million, or $3.22 per share, resulting in net income applicable to TD Group common stockholders of $514 million, or $8.96 per share. The increase of $1.45 per share is primarily a result of the factors referred to above.
Business Segments
•Segment Net Sales. Net sales by segment
for the fiscal years ended September 30, 2021 and 2020 were as follows (amounts in millions):
Fiscal
Years Ended September 30,
Change
% Change
2021
% of Net Sales
2020
% of Net Sales
Power & Control
$
2,550
53.2
%
$
2,695
52.8
%
$
(145)
(5.4)
%
Airframe
2,083
43.4
%
2,253
44.2
%
(170)
(7.5)
%
Non-aviation
165
3.4
%
155
3.0
%
10
6.5
%
Net
sales
$
4,798
100.0
%
$
5,103
100.0
%
$
(305)
(6.0)
%
Net sales for the Power & Control segment decreased $145 million, a decrease of 5.4%, for the fiscal
year ended September 30, 2021. The sales decrease resulted primarily from decreases in organic sales in commercial OEM ($101 million, a decrease of 18.5%) and commercial aftermarket ($81 million, a decrease of 12.7%); partially offset by an increase in organic defense sales ($44 million, an increase of 3.2%). The decreases in commercial OEM and commercial aftermarket sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector, particularly in the first half of fiscal 2021, and build rate reductions by aircraft OEMs. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. The change in acquisition and divestiture sales was immaterial for the fiscal year ended September 30, 2021.
Net sales for the Airframe segment decreased $170 million, a decrease of 7.5%, for the fiscal year ended September 30, 2021. The sales decrease resulted primarily from decreases in organic sales in commercial OEM ($214 million, a decrease of 31.8%) and commercial aftermarket ($151 million, a decrease of 23.4%); partially offset by an increase in organic defense sales ($72 million, an increase of 10.4%). The decreases in commercial OEM and commercial aftermarket sales are attributable to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector, particularly in the first half of fiscal 2021. The increase in defense sales is primarily attributable to the rebound in demand from the temporary pandemic-induced decline for certain platforms in fiscal 2020. Acquisition and divestiture sales increased $85 million, primarily due to the acquisition
of CAC in the second quarter of fiscal 2021.
Net sales for the Non-aviation segment increased by $10 million, an increase of 6.5%, for the fiscal year ended September 30, 2021. The sales increase resulted primarily from an increase in organic sales in non-aerospace ($21 million, an increase of 18.7%). Acquisition and divestiture sales decreased by $9 million.
•EBITDA As Defined. Refer to the “Non-GAAP Financial Measures” section within Item 7 for further information on EBITDA as Defined. EBITDA As Defined by segment for the fiscal years ended September 30, 2021 and 2020 were as follows (amounts in millions):
Fiscal
Years Ended September 30,
Change
% Change
2021
% of Segment Net Sales
2020
% of Segment Net Sales
Power & Control
$
1,319
51.7
%
$
1,345
49.9
%
$
(26)
(1.9)
%
Airframe
878
42.2
%
955
42.4
%
(77)
(8.1)
%
Non-aviation
62
37.6
%
54
34.8
%
8
14.8
%
$
2,259
47.1
%
$
2,354
46.1
%
$
(95)
(4.0)
%
Organic
EBITDA As Defined represents EBITDA As Defined from existing businesses owned by the Company as of September 30, 2021, excluding EBITDA As Defined from acquisitions and divestitures. EBITDA As Defined from acquisitions and divestitures represents EBITDA As Defined from acquired businesses up to one year subsequent to the respective acquisition date and from businesses divested by the Company during the fiscal year ended September 30, 2021.
EBITDA As Defined for the Power & Control segment decreased approximately $26 million, a decrease of 1.9%, primarily as a result of lower organic sales in the commercial OEM market and commercial aftermarket due to
the COVID-19 pandemic and its adverse impact on the commercial aerospace sector, particularly in the first half of fiscal 2021, and build rate reductions by aircraft OEMs. The change in EBITDA As Defined for the Power & Control segment from acquisitions and divestitures was immaterial for the fiscal year ended September 30, 2021.
EBITDA As Defined for the Airframe segment decreased approximately $77 million, a decrease of 8.1%, primarily as a result of lower organic sales in the commercial OEM market and commercial aftermarket due to the COVID-19 pandemic and its adverse impact on the commercial aerospace sector, particularly in the first half of fiscal 2021, and build rate reductions by aircraft OEMs. EBITDA As Defined for the Airframe segment from acquisitions and divestitures increased by $27 million, primarily due to the acquisition of CAC in the second quarter of fiscal
2021.
EBITDA As Defined for the Non-aviation segment increased approximately $8 million, an increase of 14.8%, primarily as a result of favorable organic sales mix specifically from other non-aerospace sales. The change in EBITDA As Defined for the Non-aviation segment from acquisitions and divestitures was immaterial for the fiscal year ended September 30, 2021.
For our results of operations for fiscal 2020 compared with fiscal 2019, refer to the discussion in Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of Form 10-K for the fiscal year ended September 30,
2020, as filed with the Securities and Exchange Commission on November 12, 2020.
The following table presents selected balance sheet, cash flow and other financial data relevant to the liquidity or capital resources of the Company for the periods specified below (in millions):
Selected Balance Sheet, Cash Flow and Other Financial Data:
Cash and cash equivalents
$
4,787
$
4,717
Working capital
5,367
5,344
Total
assets
19,315
18,395
Total debt (1)
19,998
20,009
TD Group stockholders’ deficit
(2,916)
(3,972)
Cash flows provided by (used in):
Operating
activities
$
913
913
1,213
Investing activities
(785)
(785)
799
Financing activities
(70)
(70)
1,230
Capital
expenditures
105
105
105
Ratio of earnings to fixed charges (2)
1.7x
1.7x
1.7x
(1)Includes debt issuance costs and original issue discount and premiums. Reference Note
12, “Debt,” in the notes to the consolidated financial statements included herein for additional information.
(2)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.
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
If
the Company has excess cash, it generally prioritizes allocating the excess cash in the following manner: (1) capital spending at existing businesses, (2) acquisitions of businesses, (3) payment of a special dividend and/or repurchases of our common stock and (4) prepayment of indebtedness or repurchase of debt. Whether the Company undertakes common stock repurchases or other aforementioned activities will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, the Company may issue additional debt if prevailing
market conditions are favorable to doing so.
The Company’s ability to make scheduled interest payments on, or to refinance, the Company’s indebtedness, or to fund non-acquisition related capital expenditures and research and development efforts, will depend on the Company’s ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control, including the ongoing COVID-19 pandemic.
The Company is continuing to strategically manage the
Company’s cash and cash equivalents in response to the ongoing COVID-19 pandemic and related uncertainty of the duration and impact of the pandemic on the Company’s business in fiscal 2022 and beyond. For instance, due to favorable market conditions in the high yield bond market, the Company refinanced $1,950 of its senior subordinated notes in fiscal 2021 resulting in a reduced interest rate (estimated $35 million reduction in annual interest payments) and an extended maturity date.
As of September 30, 2021, the Company has significant cash liquidity as illustrated in the table presented below (in millions):
(1)On
October 6, 2021, the Company repaid $200 million drawn on the revolving credit facility using existing cash on hand, increasing the borrowings available under the revolving credit facility to $728.9 million.
We believe our significant cash liquidity will allow us to meet our anticipated funding requirements. We expect to meet our short-term cash liquidity requirements (including interest obligations and capital expenditures) through net cash from operating activities, cash on hand and, if needed, additional draws on the
revolving credit facility. Long-term cash liquidity requirements consist primarily of obligations under our long-term debt agreements. There is no maturity on any tranche of term loans or notes until August 2024.
In connection with the continued application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers), we expect our efforts will continue to generate strong margins and provide sufficient cash provided by operating activities to meet our interest obligations and liquidity needs. We believe our cash provided by operating activities and available borrowing capacity will enable us to make strategic business acquisitions (such as the CAC acquisition completed in the second quarter of fiscal 2021 for an enterprise value of $965 million using existing cash on hand), pay dividends to
our shareholders and make opportunistic investments in our own stock, subject to any restrictions in our existing credit agreement and market conditions in consideration of the ongoing COVID-19 pandemic.
In the future, the Company may increase its borrowings in connection with acquisitions, if cash flow from operating activities becomes insufficient to fund current operations or for other short-term cash needs or for stock repurchases or dividends. Our future leverage will also be impacted by the then current conditions of the credit markets.
Operating Activities. The Company generated $913 million of net cash from operating activities during fiscal 2021 compared to $1,213 million during
fiscal 2020. The change from prior year is primarily driven by changes in working capital as further described below.
The change in trade accounts receivable during fiscal 2021 was a use of cash of $78 million in cash compared to a source of cash of $352 million in fiscal 2020. The increase in the use of cash of $430 million is primarily attributable to the decrease in accounts receivable from lower sales due to the COVID-19 pandemic. The Company continues to actively manage its accounts receivable, the related agings and collection efforts in response to the COVID-19 pandemic.
The change in inventories during fiscal 2021 was a source of cash of $79 million compared to a use of cash of $62 million in fiscal 2020. The increase in the source of cash is primarily driven by decreased purchasing of raw
materials particularly in the first half of fiscal 2021 from lower demand as a result of the COVID-19 pandemic and actively managing inventory levels.
The change in accounts payable during fiscal 2021 was a source of cash of $3 million compared to a use of cash of $62 million in fiscal 2020 primarily due to timing of payments to suppliers.
Investing Activities. Net cash used in investing activities was $785 million during fiscal 2021, consisting primarily of $945 million from the acquisition of CAC in the second quarter of fiscal 2021 and capital expenditures of $105 million. This was partially offset by proceeds of $259 million from the completion of the divestitures of certain businesses, and $24 million of insurance proceeds received from the Leach International Europe facility fire claim. The
Company estimates its capital expenditures in fiscal year 2022 to be between $135 million and $155 million with the increase from prior year attributable to projects that were delayed into fiscal 2022 as a result of the COVID-19 pandemic. The Company’s capital expenditures incurred from year-to-year are primarily for projects that are consistent with 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).
Financing Activities. Net cash used in financing activities during fiscal 2021 was $70 million. The use of cash was primarily attributable to the redemptions of the 2024 Notes and 2025 Notes for $1,220 million and $762 million, respectively, repayment on term loans of $75 million
and dividend equivalent payments of $73 million. This was partially offset by $1,189 million in net proceeds from the completion of the 4.625% 2029 Notes offering, $743 million in net proceeds from the completion of the 4.875% 2029 Notes offering and $128 million in proceeds from stock option exercises.
Description of Senior Secured Term Loans and Indentures
Senior Secured Credit Facilities
TransDigm has $7,374 million in fully drawn term loans (the “Term Loans Facility”) and a $760 million revolving credit facility. The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as of September 30, 2021):
The Term Loans Facility requires quarterly aggregate principal payments of $18.8 million. The revolving credit facility consists
of two tranches which include up to $151.5 million of multicurrency revolving credit. At September 30, 2021, the Company had $31 million in letters of credit outstanding, $200 million drawn and outstanding, and $529 million in borrowings available under the revolving credit facility. On October 6, 2021, the Company repaid the $200 million drawn using existing cash on hand.
The interest rates per annum applicable to the loans under the Credit Agreement are, at TransDigm’s option, equal to either an alternate base rate or an adjusted LIBOR for one, two, three or six-month (or to the extent agreed to by each relevant lender, nine or twelve-month) interest periods
chosen by TransDigm, in each case plus an applicable margin percentage. The adjusted LIBOR related to tranche E, tranche F and tranche G term loans are not subject to a floor. For the fiscal year ended September 30, 2021, the applicable interest rate was approximately 2.33% on the existing term loans. Interest rate swaps and caps used to hedge and offset, respectively, the variable interest rates on the credit facility are described in Note 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein.
Fiscal 2021 Amendment to the Credit Agreement
On May 24, 2021, the Company entered into Amendment No. 8 and Loan Modification Agreement (herein,
"Amendment No. 8"). Under the terms of Amendment No. 8, the Company, among other things, (i) extends the maturity date of the revolving credit commitments and revolving loans under its existing Credit Agreement to May 24, 2026, and (ii) the LIBOR interest rate per annum applicable to the revolving loans under its existing Credit Agreement is 2.50%, a decrease from the 3.00% rate that applied previous to the amendment. The other terms and conditions that apply to the revolving loans are substantially the same as the terms and conditions that applied to the revolving loans immediately prior to Amendment No. 8.
Refer to Note 12, "Debt," in the notes to the consolidated financial statements included herein for information over the Company’s issuances and redemptions of senior subordinated notes executed during fiscal year 2021.
The 6.375% 2026 Notes, the 7.50% 2027 Notes, the 5.50% 2027 Notes, the 4.625% 2029 Notes and the 4.875% 2029 Notes (collectively, the “TransDigm Inc. Notes”) were issued at a price of 100% of the principal amount. The 6.875% 2026 Notes (the "TransDigm UK Notes" and together with the TransDigm Inc. Notes, the "Notes," are further described below) offered in May 2018 were issued at a price of 99.24% of the principal amount, resulting
in gross proceeds of $496.2 million. The 2025 Secured Notes (the "Secured Notes") were issued at a price 100% of the principal amount. The initial $3,800 million offering of the 2026 Secured Notes (the "Secured Notes") were issued at a price of 100% of their principal amount and the subsequent $200 million and $400 million offerings of the 2026 Secured Notes in the second quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively, were issued at a price of 101% of their principal amount, resulting in gross proceeds of $4,410.5 million.
The Notes do not require principal payments prior to their maturity. Interest under the Notes is payable semi-annually. The Notes represent our unsecured obligations ranking subordinate to our senior debt, as defined in the applicable indentures. The Notes contain many of the
restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Notes.
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. 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’s wholly-owned U.S. subsidiaries named in the Secured Notes Indentures. 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 Inc. are not presented because the TransDigm Inc. Notes are fully and unconditionally
guaranteed on a senior subordinated basis by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.
Separate financial statements of TransDigm UK are not presented because TransDigm UK's 6.875% 2026 Notes, issued in May 2018, are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.
The financial information presented is that of TD Group and the Guarantors, which includes TransDigm
Inc. and TransDigm UK, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between TD Group and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.
Summarized Balance Sheet Information (in millions):
Sales
to subsidiaries that are non-issuers and non-guarantors
37
Cost of sales
1,442
Expense from subsidiaries that are non-issuers and non-guarantors - net
39
Income from continuing operations
456
Net
income attributable to TD Group
456
Certain Restrictive Covenants in Our Debt Documents
The Credit Agreement and the Indentures governing the Notes contain restrictive covenants that, among other things, limit the incurrence of additional indebtedness, the payment of special dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances, and prepayments of certain other indebtedness.
The restrictive covenants included in the Credit Agreement are subject to amendments executed periodically. The most recent amendment that impacted the restrictive covenants contained in the
Credit Agreement is Amendment No. 7.
Under the terms of the Credit Agreement, TransDigm is entitled, on one or more occasions, to request additional term loans or additional revolving commitments to the extent that the existing or new lenders agree to provide such incremental term loans or additional revolving commitments provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25x and the consolidated secured net debt ratio would be no greater than 5.00x, in each case, after giving effect to such incremental term loans or additional revolving commitments.
If any such
default occurs, the lenders under the Credit Agreement and the holders of the Notes may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the Credit Agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the Credit Agreement, the lenders thereunder will have the right to proceed against the collateral granted to them to secure the debt, which includes our available cash, and they will also have the right to prevent us from making debt service payments on the Notes.
With the exception of the revolving credit facility, the Company has no maintenance covenants in its existing term loan and indenture
agreements. Under the Credit Agreement, if the usage of the revolving credit facility exceeds 35%, or $266 million, of the total revolving commitments, the Company is required to maintain a maximum consolidated net leverage ratio of net debt to trailing four-quarter EBITDA As Defined of 7.25x as of the last day of the fiscal quarter.
As of September 30, 2021, the Company was in compliance with all of its debt covenants and expects to remain in compliance with its debt covenants in subsequent periods.
Trade Receivables Securitization
During fiscal 2014, the
Company established a trade receivable securitization facility (the “Securitization Facility”). The Securitization Facility effectively increases the Company’s borrowing capacity depending on the amount of the domestic operations’ trade accounts receivable. The Securitization Facility includes the right for the Company to exercise annual one year extensions as long as there have been no termination events as defined by the agreement. The Company uses the proceeds from the Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs.
On July 27, 2021, the
Company amended the Securitization Facility to, among other things, (i) extend the maturity date to July 26, 2022, and (ii) bear interest at a rate of 1.20% plus three month LIBOR, compared to the interest rate of 1.35% plus 0.50% or three-month LIBOR, whichever is greater, that applied prior to the amendment. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable. As of September 30, 2021, the Company has borrowed $350 million under the Securitization Facility, which is fully drawn.
Dividend and Dividend Equivalent Payments
No dividends
were declared or paid in fiscal 2021. We do not anticipate declaring regular quarterly or annual cash dividends on our common stock in the near future. Any declaration of special cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions under the senior secured credit facility and Indentures, the availability of surplus 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 senior secured credit facility and Indentures and may be limited by future debt or other agreements that we may enter into.
Dividend equivalent payments made in fiscal 2021 were $73 million. Pursuant to the Third Amended and Restated TransDigm Group Incorporated 2003 Stock Option Plan Dividend Equivalent Plan, the Second Amended and Restated TransDigm Group Incorporated 2006 Stock Incentive Plan Dividend Equivalent Plan and the 2014 Stock Option Plan Dividend Equivalent
Plan, all of the options granted under the existing stock option plans are entitled to certain dividend equivalent payments in the event of the declaration of a dividend by the Company.
Stock Repurchase Program
On November 8, 2017, our Board of Directors, authorized a stock repurchase program permitting repurchases of our outstanding shares not to exceed $650 million in the aggregate, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
No repurchases were made under the program during
the fiscal year ended September 30, 2021. During the fiscal year ended September 30, 2020, the Company repurchased 36,900 shares of its common stock at a gross cost of $18.9 million at the weighted average cost of $512.67 under the repurchase program. As of September 30, 2021, the remaining amount of repurchases allowable under the program was $631.1 million subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
The following table summarizes the Company’s cash requirements from all significant contractual obligations as of September 30, 2021 (in millions):
Total
Payment
Due by Period
Contractual
Less than
Between
Between
Over
Obligations
1 Year
1-3 Years
3-5 Years
5
Years
Senior Subordinated and Secured Notes (1)
$
12,100
$
—
$
—
$
6,950
$
5,150
Senior Secured Term Loans (2)
7,374
75
1,840
5,459
—
Scheduled
Interest Payments (3)
4,966
1,034
2,088
1,440
404
Pension Funding Minimums (4)
464
350
24
25
65
Securitization
Facility
350
350
—
—
—
Revolving Credit Facility (5)
200
—
—
200
—
Finance
Leases
215
8
18
18
171
Operating Leases
127
24
35
23
45
Total
Contractual Cash Obligations
$
25,796
$
1,841
$
4,005
$
14,115
$
5,835
(1)Represents
principal maturities which excludes interest, debt issuance costs, original issue discount and premiums.
(2)The tranche E term loans mature in May 2025, the tranche F term loans mature in December 2025 and the tranche G term loans mature in August 2024. The term loans require quarterly principal payments totaling $18.8 million.
(3)Assumes that the variable interest rate on our tranche E, tranche F and tranche G term loans under our Senior Secured Term Loans range from approximately 2.38% to 3.94% based on anticipated movements in the LIBOR. In addition, interest payments include the impact of the existing interest rate swap and cap agreements described in Note 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein.
(4)Represents
future benefit payments expected to be paid from the pension and post-retirement benefit plans or from the Company’s assets. Expected benefit payments in fiscal year 2022 primarily relates to the termination of the Esterline Retirement Plan (“ERP”), effective June 30, 2021. The Company anticipates the termination process to be completed within the next 12 months, with the ERP expected to be fully liquidated by the end of fiscal year 2022.
(5)On October 6, 2021, the Company repaid the $200 million drawn on the revolving credit facility using
existing cash on hand.
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 September 30, 2021, the Company had $31 million in letters of credit outstanding.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which often requires
the judgment of management in the selection and application of certain accounting principles and methods. Management believes that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations. However, investors are cautioned that the sensitivity of financial statements to these methods, assumptions and estimates could create materially different results under different conditions or using different assumptions.
Below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions. For additional significant accounting policies, see Note 3, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements included herein.
Revenue Recognition – Revenue is recognized from the sale of products when control transfers to the customer, which is demonstrated by our right to payment, a transfer of title, a transfer of the risk and rewards of ownership, or the customer acceptance, but most frequently upon shipment where the customer obtains physical possession of the goods. The majority of the Company's revenue is recorded at a point in time. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required
to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes based on the standalone selling price of each performance obligation. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. We consider the contractual consideration payable by the customer and assesses 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.
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. Because the Company sells products that are installed on airframes that can be in-service for 25 or more years, it must keep a supply of such products on hand while the airframes are in use. Where management estimated that the net realizable value was below cost or determined that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the
current economic conditions, a reduction in inventory cost to estimated net realizable value was made by recording a provision included in cost of sales. Additionally, management believes that the Company’s estimates of excess and obsolete inventory are reasonable and material changes in future estimates or assumptions used to calculate our estimate is unlikely. However, actual results may differ materially from the estimates and additional provisions may be required in the future. A 10% change in our excess and obsolete inventory reserve at September 30, 2021 would not have a material impact on our results. In accordance with industry practice, all inventories are classified as current assets as all inventories are available and necessary to support current sales, even though a portion of the inventories may not be sold within one
year.
Goodwill and Other Intangible Assets – In accordance with ASC 805, “Business Combinations,”the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed are recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates
and EBITDA margins, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors.Fair value adjustments to the Company’s assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the merger or acquisition.
Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the
Company’s intent to do so. Goodwill and identifiable intangible assets are recorded at their estimated fair value on the date of acquisition and are reviewed at least annually for impairment based on cash flow projections and fair value estimates.
U.S. GAAP requires that the annual, and any interim, goodwill impairment assessment be performed at the reporting unit level. The reporting unit level is one level below an operating segment. Substantially all goodwill was determined and recognized for each reporting unit pursuant to the accounting for the merger or acquisition as of the date of each transaction. With respect to acquisitions integrated into an existing reporting unit, any acquired goodwill is combined with the goodwill of the reporting unit.
At the time of goodwill impairment testing, the
Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the quantitative goodwill impairment test. The quantitative test is required only if the Company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit. For the quantitative test, management determines the estimated fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit. If the calculated estimated fair value is less than the current carrying value, impairment
of goodwill of the reporting unit may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing. The key assumptions used in the discounted cash flow valuation model for impairment testing includes discount rates, revenue growth rates and EBITDA margins, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital (“WACC”) methodology. The WACC methodology considers market and industry data as well as company specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business.
Management, considering industry and company-specific historical and projected data, develops growth rates, sales projections and cash flow projections for each reporting unit. Terminal value rate determination follows a common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.
Management tests indefinite-lived intangible assets for impairment at the asset level, as determined by appropriate asset valuation at the time of acquisition. The impairment test for indefinite-lived intangible assets consists of a comparison between the estimated fair values and carrying values. If the carrying amounts of intangible assets that have indefinite useful lives exceed their estimated fair values, an impairment loss will be recognized in an amount equal to the
difference. Management utilizes the royalty savings valuation method to determine the estimated fair value for each indefinite-lived intangible asset. In this method, management estimates the royalty savings arising from the ownership of the intangible asset. The key assumptions used in estimating the royalty savings for impairment testing include discount rates, royalty rates, growth rates, sales projections and terminal value rates. Discount rates used are similar to the rates developed by the WACC methodology considering any differences in company-specific risk factors between reporting units and the indefinite-lived intangible assets. Royalty rates are established by management with the advice of valuation experts. Management, considering industry and company-specific historical and projected data, develops growth rates and sales projections for each significant intangible asset. Terminal value rate determination follows common methodology of capturing the present
value of perpetual sales estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.
The discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions.
Given the continued adverse global economic and market conditions attributable to the COVID-19 pandemic, particularly as it pertains to the commercial aerospace sector, the Company continues to monitor for any indicators of impairment of goodwill and indefinite-lived
intangible assets. For certain reporting units that have higher commercial aerospace content and potentially present a higher risk for impairment, the Company performed a quantitative impairment test using an income approach in the prior year annual impairment assessment. In the second quarter of fiscal 2021, the Company reviewed the key assumptions used within the models to identify if any changes were necessary. Key assumptions reviewed included revenue growth rates and EBITDA margins, available industry data and management’s determination of the prospective financial information with consideration of the estimated length of time for the commercial aerospace sector to rebound to pre-pandemic levels. The Company
also utilized a third party valuation firm to assist in the determination of the WACC. As a result of the interim impairment testing performed as of April 3, 2021, no goodwill or indefinite-lived intangible assets were determined to be impaired. We updated our assessment during the third quarter of fiscal 2021 and validated that the assumptions used in the analyses performed as of April 3, 2021 and the resulting conclusions remain appropriate as of July 3, 2021.
The Company had 46 reporting units with goodwill and 43 reporting units with indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2021, the date of the annual impairment test. Based on its initial qualitative
assessment over each of the reporting units, the Company identified 16 reporting units to test for impairment using a quantitative test for both goodwill and indefinite-lived intangible assets. The estimated fair value of each of these reporting units was in excess of its respective carrying value, and therefore, no impairment was recorded on goodwill or indefinite-lived intangible assets. The Company performed a sensitivity analysis on the discount rate, which is a significant assumption in the calculation of fair values. With a one percentage point increase in the discount rate, all of the reporting units would continue to have fair values in excess of their respective carrying values.
Stock-Based Compensation – The cost of the
Company’s stock-based compensation is recorded in accordance with ASC 718, “Stock Compensation.”The Company uses a Black-Scholes pricing model to estimate the grant-date fair value of the stock options awarded. The Black-Scholes pricing model requires assumptions regarding the expected volatility of the Company’s common shares, the risk-free interest rate, the expected life of the stock options award and the Company’s dividend yield. The Company utilizes historical data in determining the assumptions. An increase or decrease in the assumptions or economic events outside of management’s control could have an impact
on the Black-Scholes pricing model. The Company estimates stock option forfeitures based on historical data. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative adjustment in the period of change. The Company also evaluates any subsequent changes to the respective option holders terms under the modification rules of ASC 718. If determined to be a modification, the Black-Scholes pricing model is updated as of the date of the modification resulting in a cumulative catch-up to expense.
Income Taxes – The Company estimates income
taxes in each jurisdiction in which it operates. This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits. To the extent these estimates change, adjustments to deferred and accrued income taxes are made in the period in which the changes occur. Historically, such adjustments have not been significant.
For information about new accounting standards, see Note 4, “Recent Accounting Pronouncements,” in the notes to the
consolidated financial statements included herein.
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.
Acquisition and divestiture transaction-related expenses (3)
15
1
Non-cash
stock compensation expense (4)
129
93
Refinancing costs (5)
37
28
COVID-19 pandemic restructuring costs (6)
40
54
Gain on sale
of businesses, net (7)
(69)
—
Other, net (8)
(10)
20
EBITDA As Defined
$
2,189
$
2,278
(1)Represents
accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.
(2)Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.
(3)Represents transaction-related costs 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.
(4)Represents the compensation expense recognized by TD Group under our stock incentive plans.
(5)Represents costs expensed related to debt financing activities,
including new issuances, extinguishments, refinancings and amendments to existing agreements.
(6)Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic for the fiscal years ended September 30, 2021 and 2020 of $36 million and $46 million, respectively, and also includes restructuring costs related to the 737 MAX production rate change for the fiscal year ended September 30, 2020 of $3 million. These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer
demand. This also includes incremental costs related to the pandemic for the fiscal years ended September 30, 2021 and 2020 of $4 million and $5 million, respectively, which are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment).
(7)Represents the net gain on completed divestitures. Refer to Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein for further details.
(8)Primarily represents the gain on insurance proceeds from the Leach International Europe facility fire (refer to Note
15, “Commitments and Contingencies” in the notes to the consolidated financial statements included herein for further details), foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation and gain or loss on sale of fixed assets.
Acquisition and divestiture transaction-related expenses (7)
15
1
Non-cash
stock compensation expense (2)
129
93
Refinancing costs (3)
37
28
COVID-19 pandemic restructuring costs (8)
40
54
Gain on sale
of businesses, net (4)
(69)
—
Other, net (9)
(10)
20
EBITDA As Defined
$
2,189
$
2,278
(1)Represents
interest expense excluding the amortization of debt issuance costs and premium and discount on debt.
(2)Represents the compensation expense recognized by TD Group under our stock incentive plans.
(3)Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(4)Represents the net gain on completed divestitures. Refer to Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein for further details.
(5)Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales
when the inventory was sold.
(6)Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.
(7)Represents 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.
(8)Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic for the fiscal years ended September 30, 2021 and 2020
of $36 million and $46 million, respectively, and also includes restructuring costs related to the 737 MAX production rate change for the fiscal year ended September 30, 2020 of $3 million. These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. This also includes incremental costs related to the pandemic for the fiscal years ended September 30, 2021 and 2020 of $4 million and $5 million, respectively, which are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment).
(9)Primarily
represents the gain on insurance proceeds from the Leach International Europe facility fire (refer to Note 15, “Commitments and Contingencies” in the notes to the consolidated financial statements included herein for further details), foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, deferred compensation and gain or loss on sale of fixed assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
Our main exposure to market risk relates to interest rates. Our financial instruments that are subject to interest rate risk is principally our variable rate debt. In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate LIBOR and other interbank offered rates, which have been widely used as reference rates for various securities and financial contracts, including loans, debt and derivatives. However, for U.S dollar LIBOR, the relevant date has been deferred to at least June 30, 2023 for certain tenors, at which time the LIBOR administrator has indicated that it intends to cease
publication of U.S. dollar LIBOR. Despite this deferral, the LIBOR administrator has advised that no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. These actions indicate that the continuation of U.S. LIBOR on the current basis cannot and will not be guaranteed after June 30, 2023. Moreover, it is possible that U.S. LIBOR will be discontinued or modified prior to June 30, 2023. In February 2020, in connection with Amendment No. 7 to the Credit Agreement, we amended our Credit Agreement to include a provision for the determination of an alternative reference interest rate. The discontinuation of LIBOR will also require our derivative agreements to be amended. Once the alternative interest rate
has replaced LIBOR, our future interest expense could be impacted.
At September 30, 2021, we had borrowings under our term loans of approximately $7,374 million that were subject to interest rate risk. Borrowings under our term loans bear interest, at our option, at a rate equal to either an alternate base rate or an adjusted LIBOR for a one-, two-, three- or six-month (or to the extent available to each lender, nine- or twelve-month) interest period chosen by us, in each case, plus an applicable margin percentage. Accordingly, the Company’s cash flows and earnings will be exposed to the market risk of interest rate changes resulting from variable rate borrowings under our term loans. 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. As of September 30, 2021, approximately 86% of our total debt was fixed rate debt. The effect of a hypothetical one percentage point increase in interest rates would increase the annual interest costs under our term loans by approximately $75 million based on the amount of outstanding borrowings at September 30, 2021. The weighted average interest rate on the $7,374 million of borrowings under our term loans on September 30, 2021 was 3.4%.
Interest rate swaps and caps used to hedge and offset, respectively, the variable interest rates on the credit facility are described in Note 21, “Derivatives and Hedging Activities,”
in the notes to the consolidated financial statements included herein. We do not hold or issue derivative instruments for speculative purposes.
For information about the fair value of the aggregate principal amount of borrowings under our term loans and the fair value of the Notes, refer to Note 20, “Fair Value Measurements,” in the notes to the consolidated financial statements included herein.
Foreign Currency Risk
Certain of our foreign subsidiaries’ sales and results of operations are subject to the impact of foreign currency fluctuations. Because our consolidated financial statements are presented in U.S. dollars, increases or decreases in the value of the U.S. dollar relative to other currencies in which we
transact business could materially adversely affect our net sales, net income and the carrying values of our assets located outside the U.S. global economic uncertainty continues to exist. Strengthening of the U.S. dollar relative to other currencies may adversely affect our operating results. 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. The foreign currency forward exchange contracts entered into by the Company are described in
Note 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein.
If the U.S. dollar were to strengthen, our foreign results of operations would be unfavorably impacted, but the effect is not expected to be material. A 10% change in foreign currency exchange rates would not have resulted in a material impact to net income for the fiscal year ended September 30, 2021.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained on pages F-1
through F-46 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
As of September 30, 2021, 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 April 3, 2021, the Company completed the acquisition of CAC. 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 September 30, 2021. The Company’s total assets, net sales and income from continuing operations before income taxes for the fiscal year ended September 30, 2021 for the acquisition of CAC constituted approximately 6%, 3% and (1)%, respectively, of each of these key measures as reported in our consolidated financial statements.
Management’s Report on Internal Control Over
Financial Reporting
The management of TD Group is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Using criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“COSO”) in Internal Control-Integrated Framework, TransDigm’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021. Based on our assessment, management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2021.
The
effectiveness of the Company’s internal control over financial reporting as of September 30, 2021 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included elsewhere in this Annual Report on Form 10-K and is incorporated herein by reference.
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 fourth quarter of fiscal 2021 that materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
TransDigm Group Incorporated
Opinion on Internal Control over Financial Reporting
We
have audited TransDigm Group Incorporated’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)(the COSO criteria). In our opinion, TransDigm Group Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control
over financial reporting did not include the internal controls of Cobham Aero Connectivity (CAC), which is included in the 2021 consolidated financial statements of the Company and constituted 6% of total assets as of September 30, 2021 and 3% and (1%) of net sales and income from continuing operations before income taxes, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of CAC.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the
Company as of September 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ deficit and cash flows for each of the three years in the period ended September 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated November 16, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
On November 16, 2021, the Company and Jorge Valladares, Chief Operating Officer, entered into an amendment to Mr. Valladares’ employment agreement. The amendment (1) modified the severance provisions in the event of a termination without cause or for good reason or by reason of death or disability from providing for 90 day notice of termination and severance of one times annual salary and one times the greater of last year’s annual incentive or the current year target to no notice of termination and severance of 1.25 times annual salary and the greater of last year’s annual incentive or current year target, consistent with other officers of the
Company; Mr. Valladares also would receive as severance 18 times the difference between the rate of health plan coverage on the date of termination and the COBRA rate of such coverage, but this provision was not changed; (2) eliminated Mr. Valladares’ opportunity to cure a default in the event of a potential termination for cause; and (3) added a requirement for Mr. Valladares to execute a release as a condition to receiving severance.
On November 15, 2021, the Company and Michael Lisman, Chief Financial Officer, and the Company and Sarah Wynne, Chief
Accounting Officer, entered into respective amendments to Mr. Lisman’s and Ms. Wynne’s employment agreements. The amendment modified the severance provisions in the event of a termination without cause or for good reason or by reason of death or disability from providing 15 times the difference between the rate of health plan coverage on the date of termination and the COBRA rate of such coverage to 18 times such difference, consistent with other officers of the Company. Mr. Lisman and Ms. Wynne would also receive as severance 1.25 times annual salary and the greater of last year’s annual incentive or current year target, but those provisions were not changed.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
Information regarding TD Group’s directors will be set forth under the caption “Proposal One: Election of Directors” in our Proxy Statement, which is incorporated herein by reference. The following table sets forth certain information concerning TD Group’s executive officers:
General Counsel, Chief Compliance Officer & Secretary
Mr. Stein was appointed President, Chief Executive Officer and Director in April 2018. Prior to that, Mr. Stein served as President and Chief Operating Officer from January 2017 through March 2018 and Chief Operating Officer—Power and Control from October
2014 to December 2016. Prior to joining TransDigm, Mr. Stein served as Executive Vice President and President of the Structurals division of Precision Castparts Corp. from November 2011 to October 2014 and Executive Vice President and President of the Fasteners division of Precision Castparts Corp. from January 2009 through November 2011.
Mr. Henderson was appointed Vice Chairman in January 2017. Prior to that, Mr. Henderson served as Chief Operating Officer—Airframe from October 2014 to December 2016. Mr. Henderson also previously served as Executive Vice President from December 2005 to October 2014, and as President of the AdelWiggins Group, a division of TransDigm Inc., from August 1999 to April 2008.
Mr. Valladares was appointed Chief Operating Officer in April 2019. Prior to that, Mr. Valladares served as Chief Operating Officer — Power & Control from June 2018 to March
2019, Executive Vice President from October 2013 to May 2018, as President of AvtechTyee, Inc. (formerly Avtech Corporation), a wholly-owned subsidiary of TransDigm Inc., from August 2009 to September 2013, and as President of AdelWiggins Group, a division of TransDigm Inc., from April 2008 to July 2009.
Mr. Lisman was appointed Chief Financial Officer in July 2018. Prior to that, Mr. Lisman served as Vice President—Mergers and Acquisitions from January 2018 through June 2018, Business Unit Manager for the Air & Fuel Valves business unit at Aero Fluid Products, a wholly-owned subsidiary of TransDigm Inc., from January 2017 to January 2018 and Director of Mergers and Acquisitions of TransDigm from November 2015 to January 2017.
Ms. Wynne was appointed Chief Accounting Officer in November 2018. Prior to that, Ms. Wynne served as Group Controller from April 2015 to October 2018,
as Controller of the Aero Fluid Products division of AeroControlex Group, Inc., a wholly-owned subsidiary of TransDigm Inc., from October 2009 to March 2015, and previously in other accounting roles with the Company.
Ms. Martin was appointed General Counsel and Chief Compliance Officer in March 2012 and Secretary in May 2015. Prior to that, Ms. Martin was a partner at BakerHostetler LLP.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics, which applies to all of our directors,
officers, and employees and a Code of Ethics for Senior Financial Officers which includes additional ethical obligations for our senior financial management (which includes our president and chief executive officer, chief operating officer, chief financial officer, chief accounting officer, treasurer, vice president of finance, director of internal audit, general counsel, operating unit presidents and operating unit vice presidents of finance). Please refer to the information set forth in our Proxy Statement, which is incorporated herein by reference. Our Code of Business Conduct and Ethics and our Code of Ethics for Senior Financial Officers is available on our website at www.transdigm.com.
Any person may receive a copy without charge by writing to us at TransDigm Group Incorporated, 1301 East 9th Street, Suite 3000, Cleveland, Ohio44114. We intend to disclose on our website any amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics that applies to directors and executive officers and that is required to be disclosed pursuant to the rules of the Securities and Exchange Commission.
Nominations of Directors
The
procedure by which stockholders may recommend nominees to our Board of Directors will be set forth under the caption “Directors” in our Proxy Statement, which is incorporated herein by reference.
Audit Committee
The information regarding the audit committee of our Board of Directors and audit committee financial experts will be set forth under the caption “Corporate Governance” in our Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth under the captions “Executive Compensation”
and “Director Compensation” in our Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners and management will be set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in our Proxy Statement, which is incorporated herein by reference.
Equity Compensation Plan Information
Plan
category
Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders (1)
5,751,528
(2)
$
344.58
4,626,294
(3)
(1)Includes
information related to the 2003 stock option plan, the 2006 stock incentive plan and the 2014 stock option plan.
(2)This amount represents 1,548,605 and 4,202,923 shares subject to outstanding stock options under our 2006 stock incentive plan and 2014 stock option plan, respectively. No further grants may be made under our 2003 stock incentive plan and no shares are subject to outstanding stock options under our 2003 stock incentive plan. No further grants may be made under our 2006 stock incentive plan, although outstanding stock options continue in force in accordance with their terms.
(3)This amount represents remaining shares available for award under our 2014 stock option plan and 2019 stock option plan. In August 2019, the 2019 stock option plan was adopted by the Board of Directors of TD Group and was subsequently approved by
stockholders on October 3, 2019. The 2019 stock option plan permits TD Group to award stock options to our key employees, directors or consultants. The total number shares of TD Group common stock reserved for issuance or delivery under the 2019 stock option plan is 4,000,000, subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate transaction or event. No grants have been made under TD Group’s 2019 stock option plan as of September 30, 2021.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth under the captions entitled “Certain Relationships and Related Transactions,”“Director Compensation,” and “Independence of Directors” in our Proxy Statement, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth under the captions “Audit Fees,”“Audit-Related Fees,”“Tax Fees,” and “All Other Fees,” in our Proxy Statement, which
is incorporated herein by reference.
Certificate of Amendment, filed September 12, 1986, of the Articles of Incorporation of ARP Acquisition Corporation (now known as Adams Rite Aerospace, Inc.)
Certificate of Amendment, filed August 11, 1997, of the Articles of Incorporation of Adams Rite Sabre International, Inc. (now known as Adams Rite Aerospace, Inc.)
Certificate of Amendment of Certificate of Incorporation, filed June 2, 1989, of Irvin Industries (Del), Inc. (now known as Airborne Systems North America of CA Inc.)
Certificate of Merger, filed February
9, 1995, of Para-Flite Inc. with and into Wardle Storeys (Parachutes) Inc. (now known as Airborne Systems North America of NJ Inc.)
Certificate of Amendment of Certificate of Incorporation, filed December 1, 1977, of Transformer Technology Corporation (now known as Beta Transformer Technology Corporation)
Indenture,
dated as of June 9, 2016, among TransDigm Inc., as issuer, TransDigm Group Incorporated, as a guarantor, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to TransDigm Inc.’s 6.375% Senior Subordinated Notes due 2026
Indenture,
dated as of May 8, 2018, among TransDigm UK Holdings plc, as issuer, TransDigm Group Incorporated and TransDigm Inc., as guarantors, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to TransDigm UK Holdings plc’s 6.875% Senior Subordinated Notes due 2026
Indenture,
dated as of February 13, 2019, among TransDigm Inc., as issuer, TransDigm Group Incorporated, as a guarantor, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to TransDigm Inc.’s 7.50% Senior Subordinated Notes due 2027
Indenture,
dated as of February 13, 2019, among TransDigm Inc., as issuer, TransDigm Group Incorporated, as a guarantor, the subsidiary guarantors party thereto, The Bank of New York Mellon Trust Company, N.A., as trustee and US collateral agent, and The Bank of New York Mellon, as UK collateral agent, relating to TransDigm Inc.’s 6.25% Senior Secured Notes due 2026
Indenture,
dated as of November 13, 2019, among TransDigm Inc., as issuer, TransDigm Group Incorporated, as a guarantor, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to TransDigm Inc.’s 5.50% Senior Subordinated Notes due 2027
Indenture,
dated as of April 8, 2020, among TransDigm Inc., as issuer, TransDigm Group Incorporated, as a guarantor, the subsidiary guarantors party thereto, The Bank of New York Mellon Trust Company, N.A., as trustee and US collateral agent, and The Bank of New York Mellon, as UK collateral agent, relating to TransDigm Inc.’s 8.00% Senior Secured Notes due 2025
Indenture,
dated as of January 20, 2021, among TransDigm Inc., as issuer, TransDigm Group Incorporated, as a guarantor, the subsidiary guarantors party thereto, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to TransDigm Inc.’s 4.625% Senior Subordinated Notes due 2029
Indenture,
dated as of April 21, 2021, among TransDigm Inc., as issuer, TransDigm Group Incorporated, as a guarantor, the subsidiary guarantors party thereto, and The Bank of New York Mellon Trust Company, N.A., as trustee, relating to TransDigm Inc.’s 4.875% Senior Subordinated Notes due 2029
Amendment and Restatement Agreement, and Second Amendment and Restated Credit Agreement, dated as of June 4,
2014, among TransDigm Inc., TransDigm Group Incorporated, the subsidiaries of TransDigm Inc. from time to time party thereto, the lenders party thereto, as lenders, and Credit Suisse AG, as administrative agent
Incremental
Assumption and Refinancing Facility Agreement, dated as of May 14, 2015, among TransDigm Inc., TransDigm Group Incorporated, the subsidiary guarantors party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other agents and lenders named therein
Loan
Modification Agreement, dated as of May 20, 2015, among TransDigm Inc., TransDigm Group Incorporated, the subsidiary guarantors party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other agents and lenders party thereto
Incremental
Revolving Credit Assumption and Refinancing Facility Agreement, dated as of May 20, 2015, among TransDigm Inc., TransDigm Group Incorporated, the subsidiary guarantors party thereto, Credit Suisse AG, as administrative agent and collateral agent and the other agents and lenders party thereto
Incremental
Term Loan Assumption Agreement dated October 14, 2016 among TransDigm Inc., TransDigm Group Incorporated, the subsidiaries of TransDigm Inc. party thereto, the lenders party thereto and Credit Suisse AG, as administrative and collateral agent
Amendment
No. 2 to the Second Amended and Restated Credit Agreement, dated as of March 6, 2017, among TransDigm Inc., as borrower, TransDigm Group Incorporated, as guarantor, the subsidiary guarantors party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other agents and lenders named therein
Amendment
No. 3 to the Second Amended and Restated Credit Agreement, dated as of August 22, 2017, among TransDigm Inc., as borrower, TransDigm Group Incorporated, as guarantor, the subsidiary guarantors party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other agents and lenders named therein
Amendment
No. 4 to the Second Amended and Restated Credit Agreement, dated as of November 30, 2017, among TransDigm Inc., as borrower, TransDigm Group Incorporated, as guarantor, the subsidiary guarantors party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other agents and lenders named therein
Refinancing
Facility Agreement to the Second Amended and Restated Credit Agreement, dated as of February 22, 2018, among TransDigm Inc., as borrower, TransDigm Group Incorporated, as guarantor, the subsidiary guarantors party thereto, Credit Suisse AG, as administrative agent and collateral agent, and the other agents and lenders named therein
Amendment
No. 5, Incremental Assumption Agreement and Refinancing Facility Agreement, dated as of May 30, 2018, relating to the Second Amended and Restated Credit Agreement, dated as of June 4, 2014, among TransDigm Inc., TransDigm Group Incorporated, each subsidiary of TransDigm Inc. party thereto, the lenders party thereto, and Credit Suisse AG, as administrative agent and collateral agent for the lenders
Amendment
No. 6 and Incremental Revolving Credit Assumption Agreement, dated as of March 14, 2019, to the Second Amended and Restated Credit Agreement, dated as of June 4, 2014, among TransDigm Inc., TransDigm Group Incorporated, each subsidiary of TransDigm Inc. party thereto, the lenders party thereto, and Credit Suisse AG, as administrative agent and collateral agent for the lenders
Amendment
No. 7 and Refinancing Facility Agreement, dated as of February 6, 2020, to the Second Amended and Restated Credit Agreement, dated as of June 4, 2014, among TransDigm Inc., TransDigm Group Incorporated, each subsidiary of TransDigm Inc. party thereto, the lenders party thereto, and Credit Suisse AG, as administrative agent and collateral agent for the lenders
Amendment
No. 8 and Loan Modification Agreement, dated as of May 24, 2021, to the Second Amended and Restated Credit Agreement, dated as of June 4, 2014, among TransDigm Inc., TransDigm Group Incorporated, each subsidiary of TransDigm Inc. party thereto, the lenders party thereto, and Credit Suisse AG, as administrative agent and collateral agent for the lenders
Guarantee
and Collateral Agreement, dated as of June 23, 2006, as amended and restated as of December 6, 2010, as further amended and restated as of February 14, 2011 and February 28, 2013, among TransDigm Inc., TransDigm Group Incorporated, the subsidiaries of TransDigm Inc. named therein and Credit Suisse AG as administrative agent and collateral agent
Receivables
Purchase Agreement, dated October 21, 2013, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association as a Purchaser and a Purchaser Agent, the various other Purchasers and Purchaser Agents from time to time party thereto, and PNC National Association as Administrator**
First
Amendment to the Receivables Purchase Agreement, dated March 25, 2014, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association as a Purchaser, Purchaser Agent for its Purchaser Group and as Administrator
Second Amendment to the Receivables Purchase Agreement, dated August 8, 2014, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as a Purchaser Agent for its Purchaser Group and Administrator, and Credit Agricole Corporate and Investment Bank, as a Committed Purchaser and as a Purchase Agent for its Purchaser Group
Third Amendment to the Receivables Purchase Agreement, dated March 20, 2015, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as a Purchaser Agent for its Purchaser Group and Administrator, Atlantic Asset Securitization LLC, as a Conduit Purchaser, and Credit Agricole Corporate and Investment Bank, as a Committed
Purchaser and as a Purchase Agent for its and Atlantic’s Purchaser Group
Fourth Amendment to the Receivables Purchase Agreement dated as of August
4, 2015, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as a Purchaser Agent for its Purchaser Group and Administrator, Atlantic Asset Securitization LLC, as a Conduit Purchaser, and Credit Agricole Corporate and Investment Bank, as a Committed Purchaser and as a Purchaser Agent for its and Atlantic’s Purchaser Group**
Ninth
Amendment to the Receivables Purchase Agreement dated as of August 1, 2017, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as Purchaser Agent for its Purchaser Group and as Administrator, Atlantic Asset Securitization LLC, as a Conduit Purchaser, Credit Agricole Corporate and Investment Bank, as a Committed Purchaser and as a Purchaser Agent for its and Atlantic’s Purchaser Group, and Fifth Third Bank, as a Committed Purchaser and as Purchaser Agent for its Purchaser Group**
Tenth
Amendment to the Receivables Purchase Agreement dated as of July 31, 2018, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as Purchaser Agent for its Purchaser Group and as Administrator, Atlantic Asset Securitization LLC, as a Conduit Purchaser, Credit Agricole Corporate and Investment Bank, as a Committed Purchaser and as a Purchaser Agent for its and Atlantic’s Purchaser Group, and Fifth Third Bank, as a Committed Purchaser and as Purchaser Agent for its Purchaser Group**
Eleventh
Amendment to the Receivables Purchase Agreement dated as of July 30, 2019, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as Purchaser Agent for its Purchaser Group and as Administrator, Atlantic Asset Securitization LLC, as a Conduit Purchaser, Credit Agricole Corporate and Investment Bank, as a Committed Purchaser and as a Purchaser Agent for its and Atlantic’s Purchaser Group, and Fifth Third Bank, as a Committed Purchaser and as Purchaser Agent for its Purchaser Group**
Twelfth
Amendment to the Receivables Purchase Agreement dated as of July 22, 2020, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as Purchaser Agent for its Purchaser Group and as Administrator, Atlantic Asset Securitization LLC, as a Conduit Purchaser, Credit Agricole Corporate and Investment Bank, as a Committed Purchaser and as a Purchaser Agent for its and Atlantic’s Purchaser Group, and Fifth Third Bank, as a Committed Purchaser and as Purchaser Agent for its Purchaser Group**
Thirteenth
Amendment to the Receivables Purchase Agreement dated as of July 26, 2021, 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 Fifth Third Bank, as a Committed Purchaser and as Purchaser Agent for its Purchaser Group**
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 Interactive Data File because
its XBRL tags are embedded within the Inline XBRL document
Indicates management contract or compensatory plan contract or arrangement.
**
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 Section 13 or 15(d) 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 on November 16, 2021.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.
Report of Independent Registered Public Accounting Firm
To
the Shareholders and the Board of Directors of
TransDigm Group Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TransDigm Group Incorporated (the Company) as of September 30, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ deficit and cash flows for each of the three years in the period ended September 30, 2021, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of September
30, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)and our report dated November 16, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Valuation
of goodwill and indefinite-lived intangible assets
Description of the Matter
At September 30, 2021, the Company had goodwill and indefinite-lived intangible assets of $8.6 billion and $983 million, respectively. As discussed in Note 3 to the consolidated financial statements, goodwill and indefinite-lived intangible assets are tested for impairment annually as of the first day of the fourth quarter or more frequently if indicators of impairment exist. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. The
Company’s indefinite-lived intangible assets consist of acquired trademarks and trade names. Management performs an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying amount. If management concludes the qualitative assessment is not sufficient to conclude on whether it is more likely than not that the fair value is less than the carrying amount, a quantitative impairment test is performed. Management performed a quantitative assessment on the goodwill and indefinite-lived intangible assets at 16 of its reporting units. As part of the quantitative assessment, the Company determines the fair value of the reporting units and indefinite-lived intangible assets through the use of a discounted cash flow valuation model.
Auditing
management’s quantitative impairment assessment was complex and judgmental for certain of the 16 reporting units and their indefinite-lived intangible assets due to the significant estimation required to determine fair value. In particular, the fair value estimates were sensitive to significant assumptions, such as changes in the discount rate, revenue growth rates and EBITDA margins, which are affected by expectations about future market or economic conditions.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s impairment process, including controls over management’s review of the valuation model and the significant assumptions underlying the fair value determination, as described above.
Totest the fair values of the Company’s reporting units and indefinite-lived intangible assets, our audit procedures included, among others, assessing the use of the discounted cash flow valuation model and testing the significant assumptions discussed above and underlying
data used by the Company in its analyses for certain of the 16 reporting units and their indefinite-lived intangible assets evaluated using the quantitative assessment. We utilized internal valuation specialists in assessing the fair value methodologies applied and evaluating the reasonableness of certain assumptions selected by management in the determination of the fair values of certain of the 16 reporting units and their indefinite-lived intangible assets. We compared the significant assumptions used by management to current industry and economic trends, recent historical performance, and other relevant factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in fair values that would result from changes in the assumptions.
Valuation
of intangible assets and loss contract reserves in the Acquisition of Cobham Aero Connectivity
Description of the Matter
As discussed in Note 2 to the consolidated financial statements, during the second quarter of fiscal 2021, the Company completed the acquisition of the Cobham Aero Connectivity business (“CAC”) for a total purchase price of $945 million. The acquisition was accounted for using the acquisition method of accounting. The Company made an initial allocation of the purchase price at the date of acquisition based upon
its understanding of the fair value of the acquired assets and assumed liabilities resulting in the recognition of customer relationships and technology intangible assets of $101 million and $178 million, respectively, and loss contract reserves of $80.6 million for acquired ongoing long-term contracts with customers that were incurring losses.
Auditing management’s accounting for its acquisition of CAC was complex because the customer relationships and technology intangible assets and loss contract reserves recognized were material to the consolidated financial statements and the estimates of fair value involved subjectivity. The subjectivity was primarily
due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The Company used discounted cash flow models to measure the intangible assets and loss contract reserves. The significant assumptions used to estimate the fair value of the intangible assets included discount rates and certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates and EBITDA margins). The significant assumptions used to estimate the fair value of the loss contract reserves included discount rates and forecasted costs to be incurred under the long-term contracts
and at-market bid prices for respective contracts. These significant assumptions are forward looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for the acquisition of CAC, including recognition and measurement of the intangible assets acquired and loss contract reserves assumed. For example, we tested controls over the recognition and measurement
of customer relationships, technology, and loss contract reserves, including management’s review of the methods and significant assumptions used to develop such fair value estimates.
To test the estimated fair values of the customer relationships and technology intangible assets and the loss contract reserves, our audit procedures included, among others, evaluating the Company’s selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company’s valuation specialist, and evaluating the completeness and accuracy of the underlying
data supporting the significant assumptions and estimates. We also performed sensitivity analyses to evaluate the changes in the fair value of such intangible assets and loss contract reserves that would result from changes in the significant assumptions. We involved valuation and contract specialists to assist with our evaluation of the methodology used by the Company and certain significant assumptions included in the fair value estimates. For example, when evaluating the assumptions related to the revenue growth rates and EBITDA margins, we compared the assumptions to the past performance of CAC and current industry trends. When evaluating the assumptions used to determine the fair value of the loss
contract reserves, we evaluated at-market bid prices, historical costs incurred under the long-term contract and forecasted costs to be incurred. Furthermore, we evaluated the Company’s disclosures in the consolidated financial statements in relation to the CAC acquisition.
Common stock - $i.01 par value; authorized i224,400,000
shares; issued i59,403,100 and i58,612,028 at September 30, 2021 and September 30, 2020,
respectively
1.iDESCRIPTION
OF THE BUSINESS AND IMPACT OF COVID-19 PANDEMIC
Description of the Business – 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 i100%
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, and cargo loading, handling and delivery systems.
COVID-19 Pandemic Restructuring Costs – The commercial aerospace industry continues to be significantly disrupted, both domestically and internationally, by the COVID-19 pandemic resulting in ongoing business challenges. While global vaccination efforts are underway and commercial air travel demand has shown slight signs of recovery in recent months, the continued impact of COVID-19, including any increases in infection rates, new variants, vaccination efficacy and renewed governmental action to slow the spread of COVID-19 cannot be estimated. Material actions to reduce costs in response to the impact that the pandemic has had on operating results include: (1) reducing the
Company's workforce to align operations with customer demand through a reduction in force or through a realignment of certain business units; (2) implementing unpaid furloughs and salary reductions; (3) delaying non-essential capital projects and (4) minimizing discretionary spending.
For the fiscal year ended September 30, 2021, COVID-19 restructuring costs of approximately $i36 million were incurred, of which $i26 million
was recorded in cost of sales and $i10 million was recorded in selling and administrative expenses on the consolidated statements of income. For the fiscal year ended September 30, 2020, COVID-19 restructuring costs of approximately $i46 million
were incurred, of which $i37 million was recorded in cost of sales and $i9 million was recorded in selling and administrative expenses in the consolidated statements of income. These costs are primarily
related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand.
Additionally, for the fiscal years ended September 30, 2021 and September 30, 2020, the Company incurred approximately $i4 million and $i5 million,
respectively, in incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment).
As of September 30, 2021 and September 30, 2020, the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was approximately $i19 million
and $i13 million, respectively. This accrual is recorded as a component of accrued and other current liabilities on the consolidated balance sheets and payment is expected within the next twelve months. The increase in the accrual is primarily driven by costs to reduce its workforce that have been incurred but not paid; partially offset by payments against the accrual. The Company may incur additional restructuring and incremental costs related
to the COVID-19 pandemic though at a reduced level in comparison to fiscal 2021 and 2020.
Cobham Aero Connectivity – On November 24, 2020, the Company entered into a definitive agreement to acquire all the outstanding stock of Chelton Limited, Chelton Avionics Holdings, Inc. and Mastsystem Int'l Oy, collectively, Cobham Aero Connectivity (“CAC”),
for a total purchase price of $i945 million. The acquisition was substantially completed on January 5, 2021 and financed through existing cash on hand. The Company completed the remainder of the acquisition of CAC on February 12, 2021, also through existing cash on hand. CAC operates from two primary facilities (Marlow, United Kingdom and
Prescott, Arizona) and is a leading provider of highly engineered antennas and radios for the aerospace end market. The products are primarily proprietary with significant aftermarket content and have a strong presence across major defense platforms as well as select commercial applications. CAC's operating results are included in TransDigm's Airframe segment.
The acquisition strengthens and expands 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 price paid for
the acquisition reflects the current earnings before interest, taxes, depreciation and amortization ("EBITDA") and cash flows, as well as the future EBITDA and cash flows expected to be generated by the business, which are driven in most cases by the recurring aftermarket consumption over the life of a particular aircraft, estimated to be approximately i25 to i30
years.
The Company accounted for the CAC acquisition using the acquisition method and included the results of operations of the acquisition in its consolidated financial statements from the effective dates of the acquisition. The Company made an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. As of September 30, 2021, the measurement period (not to exceed one year) is open; therefore, the assets acquired and liabilities assumed related to the CAC acquisition are subject to adjustment until the end of the measurement period. 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 and liabilities assumed are finalized during the allowable one year measurement period. The Company is in the process of finalizing a third-party valuation of certain intangible assets, tangible assets and liabilities of CAC. The fair values of acquired intangibles and certain liabilities, such as loss contract reserves, are determined based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions used to determine the fair values of acquired intangible assets include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business
including revenue growth rates, EBITDA margins, royalty rates and technology obsolescence rates. Significant assumptions used to determine the fair value of the loss contract reserves using the discounted cash flow model include discount rates and forecasted costs to be incurred under the long-term contracts and at-market bid prices for respective contracts. 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 applicable the fiscal years ended September 30, 2021 or September 30,
2020 are not material and, accordingly, are not provided.
The preliminary allocation of the estimated fair value of assets acquired and liabilities assumed in the CAC acquisition as of the acquisition date, as well as measurement period adjustments recorded as of September 30, 2021, are summarized in the table below (in millions):
Preliminary
Measurement
Period
Adjusted Preliminary
Allocation
Adjustments
Allocation
Assets acquired (excluding cash):
Trade accounts receivable
$
i31
$
i1
$
i32
Inventories
i27
i2
i29
Prepaid
expenses and other
i10
(i3)
i7
Property,
plant and equipment
i18
i3
i21
Goodwill
i636
i58
i694
(1)
Other
intangible assets
i309
i16
i325
(1)
Other
i34
(i2)
i32
Total
assets acquired (excluding cash)
i1,065
i75
i1,140
Liabilities
assumed:
Accounts payable
i15
i3
i18
Accrued
and other current liabilities
i38
i5
(2)
i43
Deferred
income taxes
i38
(i7)
i31
Other
non-current liabilities
i29
i74
(2)
i103
Total
liabilities assumed
i120
i75
i195
Net
assets acquired
$
i945
$
i—
$
i945
(1)The
Company expects that of the approximately $i694 million of goodwill recognized for the acquisition, approximately $i57 million will be deductible for tax purposes. The
Company also expects that of the approximately $i325 million of other intangible assets recognized for the acquisition, approximately $i108
million will be deductible for tax purposes. The goodwill and intangible assets will be deductible over i15 years.
(2)Primarily relates to the recording of loss contract reserves associated with acquired ongoing long-term contracts with customers that were incurring negative gross margins as of the date of acquisition. Based on our review of these contracts,
we concluded that the terms of certain contracts were unfavorable when compared to market terms as of the acquisition date. The loss contract reserves are preliminarily estimated to be $i80.6 million and will be released over a three to five year period.
Esterline Technologies Corporation – On March
14, 2019, TransDigm completed the acquisition of all the outstanding stock of Esterline Technologies Corporation (“Esterline”) for $i122.50 per share in cash, plus the repayment of Esterline debt. The purchase price, net of cash acquired of approximately $i398.2
million, totaled approximately $i3,923.9 million. Of the $i3,923.9
million purchase price, $i3,536.3 million was paid at closing and the remaining $i387.6 million was classified as restricted cash for the redemption
of Esterline’s senior notes outstanding due 2023 (the "2023 Notes"). The 2023 Notes were redeemed on April 15, 2019. Esterline, through its subsidiaries, was an industry leader in specialized manufacturing for the aerospace and defense industry primarily within three core disciplines: advanced materials, avionics and controls and sensors and systems. The acquisition of Esterline expands TransDigm's platform of proprietary and sole source content for the aerospace and defense industry. TransDigm evaluated the strategic fit and description of each Esterline reporting unit to determine the appropriate business segment for the reporting unit. Each Esterline reporting unit is included in one of TransDigm's segments: Power and Control, Airframe, or Non-aviation.
The total purchase price
of Esterline 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. Allocations were based on the acquisition method of accounting and third-party valuation appraisals.
The allocation of the fair value of the assets acquired and liabilities assumed in the Esterline acquisition as of the acquisition date of March 14, 2019 is summarized in the table below (in millions):
Adjusted
Final
Allocation
Assets acquired (excluding cash):
Trade accounts receivable
$
i384
Inventories
i583
Prepaid
expenses and other
i423
Property, plant and equipment
i469
Goodwill
i2,256
Other
intangible assets
i1,301
Other
i20
Total
assets acquired (excluding cash)
i5,436
Liabilities assumed:
Accounts payable
i146
Accrued
and other current liabilities
i751
Deferred income taxes
i181
Other
non-current liabilities
i434
Total liabilities assumed
i1,512
Net
assets acquired
$
i3,924
Of the approximately $i2.3
billion of goodwill recognized for the acquisition, approximately $i25.6 million is deductible for tax purposes. Also, of the approximately $i1.3
billion of other intangible assets recognized for the acquisition, approximately $i48.9 million is deductible for tax purposes.
In connection with the Esterline acquisition, we acquired existing long-term contracts with customers that were incurring negative gross margins as of the date of acquisition. Based on our review of these contracts,
we concluded that the terms of certain of these loss-making contracts were unfavorable when compared to market terms as of the acquisition date. As a result, we recognized loss contract reserves of $i267.9 million as of the acquisition date based on the present value of the difference between the contractual cash flows of the existing long-term contracts
and the estimated cash flows had the contracts been executed at market terms as of the acquisition date. These adjustments applied only to contracts generating a negative margin as of the date of acquisition. Significant assumptions used to determine the fair value of the loss contract reserves using the discounted cash flow model include discount rates, forecasted quantities of products to be sold under the long-term contracts and market prices for respective products. These were forward looking assumptions and could be affected by future economic and market conditions. Loss contract
reserves are amortized and recorded as an offset to cost of sales over the life of the contracts as actual sales occur under the long-term contracts. The remaining loss contract reserves related to the Esterline acquisition were $i160.1 million and $i201.3
million at September 30, 2021 and 2020, respectively, of which $i14.5 million and $i31.9
million was classified in accrued and other current liabilities and $i145.6 million and $i169.4 million
was classified in other non-current liabilities in the consolidated balance sheets at September 30, 2021 and 2020, respectively.
Loss contract reserves of approximately $i41.8 million, $i29.5
million and $i27.3 million were amortized and recorded as an offset to cost of sales in the consolidated statements of income for the fiscal years ended September 30, 2021, 2020 and 2019, respectively. Esterline acquisition costs were expensed as incurred and totaled $i26.9 million
and $i85.1 million for the fiscal years ended September 30, 2020 and 2019, respectively.
Divestitures
Third Quarter Fiscal 2021
ScioTeq and TREALITY Simulation Visual Systems – On June 30, 2021, TransDigm completed the divestiture
of its ScioTeq and TREALITY Simulation Visual Systems businesses (“ScioTeq and TREALITY”) to OpenGate Capital for approximately $i200 million in cash. ScioTeq and TREALITY were acquired by TransDigm as part of its acquisition of Esterline in March 2019 and were included in TransDigm’s Airframe segment.
Technical Airborne Components – On April 27, 2021, TransDigm completed the divestiture of the Technical Airborne Components business (“TAC”) to Searchlight Capital
Partners for approximately $i40 million in cash. TAC was included in TransDigm’s Airframe segment.
The net gain on sale recognized in fiscal 2021 as a result of the ScioTeq and TREALITY and TAC divestitures was approximately $i68 million,
which is classified as a component of gain on sale of businesses-net within the consolidated statements of income.
Second Quarter Fiscal 2021
Racal Acoustics – On January 29, 2021, TransDigm completed the divestiture of the Racal Acoustics business (“Racal”) to Invisio Communications AB ("Invisio") for approximately $i20 million in cash. The gain on sale recognized as a result of the divestiture was immaterial and
classified as a component of gain on sale of businesses-net within the consolidated statements of income. Racal was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Non-aviation segment.
First Quarter Fiscal 2021
Avista Inc. – On November 17, 2020, TransDigm completed the divestiture of the Avista, Inc. business ("Avista") to Belcan, LLC ("Belcan") for approximately $i8 million
in cash. Avista was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Airframe segment. The gain on sale recognized as a result of the divestiture was immaterial and classified as a component of gain on sale of businesses-net within the consolidated statements of income. During the fourth quarter of fiscal 2020, the Company determined Avista met the criteria to be classified as held for sale. Therefore, the assets and liabilities of Avista, which were not material, have been presented as held for sale in other assets, accrued and other current liabilities and other non-current liabilities, respectively, in the consolidated balance sheets as of September 30, 2020.
Fiscal 2020
Souriau-Sunbank
Connection Technologies – On December 20, 2019, TransDigm completed the divestiture of the Souriau-Sunbank Connection Technologies business (“Souriau-Sunbank”) to Eaton Corporation plc (“Eaton”) for approximately $i920 million. Souriau-Sunbank was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Non-aviation segment. The results of operations of Souriau-Sunbank are presented in discontinued operations in the accompanying consolidated financial
statements for all periods presented since the date acquired. Refer to Note 23, “Discontinued Operations” for additional information.
Fiscal 2019
Esterline Interface Technology Group – On September 20, 2019, TransDigm completed the divestiture of its EIT group of businesses to an affiliate of KPS Capital Partners, LP for approximately $i190 million. EIT was acquired by TransDigm as part of its acquisition of Esterline in
March 2019. The results of operations of EIT are presented in discontinued operations in the accompanying consolidated financial statements for all periods presented since the date acquired. Refer to Note 23, “Discontinued Operations” for additional information.
Each divestiture was executed with unrelated third parties.
3. iSUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
iBasis of Presentation and Consolidation—The accompanying consolidated financial statements were prepared in conformity with U.S. GAAP and include the accounts of TD Group and subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation, none of which
are material.
i
Revenue Recognition—Revenue is recognized from the sale of products when control transfers to the customer, which is demonstrated by our right to payment, a transfer of title, a transfer of the risk and rewards of ownership, or the customer acceptance, but most frequently upon shipment where the customer obtains physical possession of the goods. The majority of the Company's revenue is recorded at a point in time. Sales recognized over time
are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. Refer to Note 5, “Revenue Recognition,” for further details.
Shipping and Handling Costs—Shipping and handling costs are included in cost of sales in the consolidated statements of income.
iResearch and Development Costs—The
Company expenses research and development costs as incurred and classifies such amounts in selling and administrative expenses. The expense recognized for research and development costs for the fiscal years ended September 30, 2021, 2020 and 2019 was approximately $i105.6 million, $i130.9
million, and $i116.8 million, respectively./
iCash
Equivalents—The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
iAllowance
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. 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. Refer to Note 7, “Trade Accounts Receivable,” for further details.
iInventories—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. Provision for potentially
obsolete or slow-moving inventory is made based on management’s analysis of inventory levels and future sales forecasts. Refer to Note 8, “Inventories,” for further details.
i
Property, Plant and Equipment—Property, plant and equipment are stated at cost and include improvements which significantly increase capacities or extend the useful lives of existing plant and equipment. Depreciation is computed using the straight-line method over the following estimated useful lives: land improvements from i10
to i20 years, buildings and improvements from i5 to i30
years, machinery and equipment from i2 to i10 years and furniture and fixtures from i3
to i10 years. Net gains or losses related to asset dispositions are recognized in earnings in the period in which dispositions occur. Routine maintenance, repairs and replacements are expensed as incurred. Amortization expense of assets accounted for as finance leases is included within depreciation expense.
Property, plant and equipment is assessed for potential impairment whenever indicators of impairment are present by determining whether the carrying value of the property can be recovered through projected, undiscounted cash flows from future operations over the property’s
remaining estimated useful life. Any impairment recognized is the amount by which the carrying amount exceeds the fair value of the asset. Fair value is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. Refer to Note 9, “Property, Plant and Equipment,” for further details.
/
iDebt Issuance
Costs, Premiums and Discounts—The cost of obtaining financing as well as premiums and discounts are amortized using the effective interest method over the terms of the respective obligations as a component of interest expense within the consolidated statements of income. Debt issuance costs are presented in the consolidated balance sheets as a direct reduction from the carrying amount of the related debt liabilities. Refer to Note 12, “Debt,” for further details.
i
Financial Instruments—Interest rate swap and cap agreements are used to manage interest
rate risk associated with floating-rate borrowings under our credit facility. The interest rate swap and cap agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s variable rate debt to a fixed rate basis through the expiration date of the interest rate swap and cap agreements, thereby reducing the impact of interest rate volatility on future interest expense. These agreements involve the receipt of variable rate amounts in exchange for fixed rate interest payments over the term of the agreements without an exchange of the underlying principal amount. These derivative instruments qualify as effective cash flow hedges under U.S.
GAAP.
The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and results of operations 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.
For
the interest rate swap and cap agreements and the foreign currency forward contracts designated as cash flow hedges, the effective portion of the gain or loss from the financial instruments is 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 affected earnings. As the interest rate swap and cap 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 consolidated statements of income. As the foreign currency forward exchange contracts are used to manage foreign currency exposure primarily
arising from purchases or sales from third parties, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in cost of sales or net sales in the consolidated statements of income. Refer to Note 21, “Derivatives and Hedging Activities,” for further details.
Goodwill
and Other Intangible Assets—In accordance with ASC 805, “Business Combinations,”the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed were recognized as goodwill. The valuations of the acquired assets and liabilities assumed will impact the determination of future operating results. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates and EBITDA margins, discount rates, customer attrition
rates, royalty rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. Fair value adjustments to the Company’s assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the merger or acquisition. Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so.
Goodwill is the excess of the purchase price paid over the
estimated fair value of the net assets of a business acquired. Other intangible assets consist of identifiable intangibles acquired or recognized in accounting for the acquisitions (trademarks, trade names, technology, customer relationships, order backlog and other intangible assets). Goodwill and intangible assets that have indefinite useful lives (i.e., trademarks and trade names) are subject to annual impairment testing. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. The Company performs an 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 an event occurs or circumstances change that would more likely than not reduce fair value below carrying value.
At the time of goodwill
impairment testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, and whether it is therefore necessary to perform the quantitative goodwill impairment test. If, after considering all events and circumstances that support a qualitative evaluation the Company determines that it is not more-likely-than-not that the goodwill and/or indefinite-lived intangible assets are impaired, then performing the single-step quantitative analysis to determine if there is impairment would be unnecessary. Conversely, if it is more-likely-than-not that the goodwill and/or indefinite-lived intangible assets are impaired, then the
Company would proceed with the single-step quantitative analysis to determine if there is a goodwill and/or indefinite-lived intangible asset impairment loss. In this application, the definition of “more-likely-than-not” is interpreted as a likelihood of more than 50%.
U.S. GAAP requires that the annual, and any interim, impairment assessment be performed at the reporting unit level. The reporting unit level is one level below an operating segment. Substantially all goodwill was determined and recognized for each reporting unit pursuant to the accounting for the merger or acquisition as of the date of each transaction. With respect to acquisitions integrated into an existing reporting unit, any acquired goodwill is combined with the goodwill of the reporting unit.
The impairment test for indefinite lived intangible assets consists of a comparison between their fair values
and carrying values. If the carrying amounts of intangible assets that have indefinite useful lives exceed their fair values, an impairment loss will be recognized in an amount equal to the sum of any such excesses.
The Company had 46 reporting units with goodwill and 43 reporting units with indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2021, the date of the annual impairment test. Based on its initial qualitative assessment over each of the reporting units, the Company identified 16 reporting units to test for impairment using a quantitative test for both goodwill and indefinite-lived intangible assets. In addition to the key assumptions reviewed summarized above, a key assumption used in response to the COVID-19
pandemic was the estimated length of time for the commercial aerospace sector to rebound to pre-pandemic levels. The estimated fair value of each of these reporting units was in excess of its respective carrying value, and therefore, no impairment was recorded on goodwill or indefinite-lived intangible assets. The Company performed a sensitivity analysis on the discount rate, which is a significant assumption in the calculation of fair values. With a one percentage point increase in the discount rate, all of the reporting units would continue to have fair values in excess of their respective carrying values. As a result of the impairment testing performed as of the first day of the fourth quarter, no indefinite-lived intangible assets or goodwill was determined to be impaired. As economic and market conditions have not changed significantly since the first day of the fourth quarter,
this conclusion remains appropriate as of September 30, 2021.
The Company assesses the recoverability of its amortizable intangible assets only when indicators of impairment are present by determining whether the amortization over their remaining lives can be recovered through projected, undiscounted cash flows from future operations. Amortization of amortizable intangible assets is computed using the straight-line method over the following estimated useful lives: technology from i20
to i22 years, order backlog from i1 to i1.5
years, customer relationships over i20 years and other intangible assets over i20 years. No indicators of impairment on the amortizable intangible assets were identified in fiscal 2021.
iStock-Based
Compensation—The Company records stock-based compensation expense using the Black-Scholes pricing model based on certain valuation assumptions. Compensation expense is recorded over the vesting periods of the stock options, adjusted for expected forfeitures. The Company has classified stock-based compensation primarily within selling and administrative expenses to correspond with the classification of employees that receive stock option grants. The Company also evaluates any subsequent changes to the respective option holders terms under the modification rules of ASC 718. If determined to be a modification, the Black-Scholes pricing model is updated as of the date of the modification resulting
in a cumulative catch up to expense, if necessary. Refer to Note 18, “Stock-Based Compensation,” for further details.
iIncome Taxes—The provision for income taxes is calculated using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax effect of temporary differences between the financial statement carrying amount of assets and liabilities and the amounts used for income tax purposes and for certain changes in valuation allowances. Valuation allowances are recorded to reduce certain deferred tax assets when, in
our estimation, it is more likely than not that a tax benefit will not be realized. We recognize uncertain tax positions when we have determined it is more likely than not that a tax position will be sustained upon examination. However, new information may become available, or applicable laws or regulations may change, thereby resulting in a favorable or unfavorable adjustment to amounts recorded. Refer to Note 14, “Income Taxes,” for further details.
iEstimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
iComprehensive Income (Loss)—The term “comprehensive income (loss)” represents the change in stockholders’ equity (deficit) from transactions and other events and circumstances resulting from non-stockholder sources. The
Company’s accumulated other comprehensive income or loss, consisting principally of fair value adjustments to its interest rate swap and cap agreements (net of tax), cumulative foreign currency translation adjustments and pension liability adjustments (net of tax), is reported separately in the accompanying consolidated statements of comprehensive income.
iForeign Currency Translation and Transactions—The assets and liabilities of subsidiaries
located outside the United States are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Revenue and expense items are translated at the average monthly exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income, and those resulting from translation of financial statements are accumulated as a separate component of other comprehensive income (loss) for the period. Foreign currency gains or losses recognized currently in income from changes in exchange rates were immaterial to our results of operations.
iEarnings
per Share—Earnings per share information is determined using the two-class method, which includes the weighted-average number of common shares outstanding during the period and other securities that participate in dividends (“participating securities”). Our vested stock options are considered “participating securities” because they include non-forfeitable rights to dividends. In applying the two-class method, earnings are allocated to both common stock shares and participating securities based on their respective weighted-average shares outstanding for the period. Diluted earnings per share information may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated using the treasury stock method. Contingently issuable shares are not included in earnings per share until the period in which the contingency is satisfied. Refer to Note 6, “Earnings Per Share,”
for further details.
iPension Benefits—The Company accounts for net periodic pension benefit cost using the end of the fiscal year as our measurement date. Management selects appropriate assumptions including the discount rate, rate of increase in future compensation levels and assumed long-term rate of return on plan assets. The assumptions are based upon historical results, the current economic environment and reasonable expectations of future events. Actual results
which vary from our assumptions are accumulated and amortized over future periods, and accordingly, are recognized in expense in these periods. Significant differences between the assumptions and actual experience or significant changes in assumptions could impact the pension costs and the pension obligation. Refer to Note 13, “Retirement Plans,” for further details.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)," which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which generally results in earlier recognition of allowances for losses. The Company adopted ASU 2016-13 on October 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures. Refer to Note 5, “Revenue Recognition,” for additional disclosures.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” to eliminate Step 2 from
the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The Company adopted ASU 2017-04 on October 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) - Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The adoption of this standard is not expected to have a material impact on our consolidated financial statements and disclosures. We will adopt as required on October 1, 2021.
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. This ASU 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. The amendments in this ASU are effective through December 31, 2022. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements and disclosures.
5. iREVENUE
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 OEMs, various armed forces of the United States and friendly foreign governments, defense OEMs, system suppliers, and various other industrial customers.
The majority of the Company's revenue is recorded at a point in time. Revenue is recognized from the sale of products when control transfers to the customer, which is demonstrated by our right to payment, a transfer of title, a transfer of the risk and rewards of ownership, or the customer acceptance, but most frequently
upon shipment where the customer obtains physical possession of the goods.
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 the current year. 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 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 consolidated statements of income.
In fiscal 2021 and 2020, no customer individually accounted for i10% or more of the Company’s net sales. In fiscal 2019, one customer accounted for approximately i11%
of the Company’s net sales, which were split approximately i60% and i40% between the Airframe and Power & Control segments, respectively.
Net sales to foreign customers, primarily in Western Europe, Canada and Asia, were $i1.7 billion during the fiscal years ended 2021 and 2020, respectively, and $i1.8 billion during the fiscal year ended
2019.
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 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.
iThe following table summarizes our contract assets and liabilities balances (in millions):
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:
At
September 30, 2021, one customer individually accounted for approximately i10% of the Company’s trade accounts receivable-gross. In addition, approximately i38%
of the Company’s trade accounts receivable-gross was due from entities that operate principally outside of the United States. Credit is extended based on an evaluation of each customer’s financial condition and collateral is generally not required.
The decrease in the allowance for uncollectible accounts for the fiscal year ended September 30, 2021 is primarily driven by a decrease in estimated losses from certain commercial aerospace customers that were more adversely affected by the COVID-19 pandemic. The allowance for uncollectible accounts is assessed individually at each operating unit by the operating unit’s management team.
Refer to Note 3, “Summary of Significant Accounting Policies,” for additional information regarding the
Company’s allowance for uncollectible accounts.
8. iINVENTORIES
i
Inventories
consist of the following (in millions):
Other intangible assets - net in the consolidated balance sheets consist of the following at September 30 (in millions):
2021
2020
Gross Carrying Amount
Accumulated Amortization
Net
Gross Carrying Amount
Accumulated Amortization
Net
Trademarks
& trade names
$
i983
$
i—
$
i983
$
i958
$
i—
$
i958
Technology
i2,009
i679
i1,330
i1,842
i589
i1,253
Order
backlog (1)
i16
i11
i5
i93
i93
i—
Customer
relationships
i545
i78
i467
i443
i52
i391
Other
i18
i12
i6
i18
i10
i8
Total
$
i3,571
$
i780
$
i2,791
$
i3,354
$
i744
$
i2,610
(1)Fully
amortized order backlog associated with the Esterline acquisition was written down from the gross carrying amount and accumulated amortization in the second quarter of fiscal 2021 due to being fully amortized. There was no impact on the net balance.
/
As disclosed in Note 2, "Acquisitions and Divestitures," 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. 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). iIntangible
assets acquired during the fiscal year ended September 30, 2021 are summarized in the table below (in millions), principally all relate to the CAC acquisition:
The
following is a summary of changes in the carrying value of goodwill by segment for ithe fiscal years ended September 30, 2020 and 2021 were as follows (in millions):
(1)Primarily
relates to opening balance sheet adjustments recorded by the reporting units acquired from Esterline up to the expiration of the one year measurement period in March 2020.
11. iACCRUED AND OTHER CURRENT LIABILITIES
i
Accrued
and other current liabilities consist of the following (in millions):
Issuance of 4.625% Senior Subordinated Notes due 2029 – On January 14, 2021, the Company entered into a purchase agreement in connection with a private offering of $i1,200 million of i4.625%
Senior Subordinated Notes due 2029 at an issue price of i100% of the principal amount. The i4.625% 2029 Notes were issued pursuant to an indenture,
dated January 20, 2021, among TransDigm Inc., as issuer, TransDigm Group, TransDigm UK and the other subsidiaries of TransDigm Inc. named therein, as guarantors.
The i4.625% 2029 Notes bear interest at the rate of i4.625%
per annum, which accrues from January 14, 2021 and is payable in arrears on January 15th and July 15th of each year, commencing on July 15, 2021. The i4.625% 2029 Notes mature on January 15, 2029, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.
The
Company capitalized $i11.3 million and expensed $i0.1 million representing debt issuance costs associated with the i4.625%
2029 Notes during the fiscal year ended September 30, 2021.
Repurchase of 6.50% Senior Subordinated Notes due 2024 – On January 14, 2021, the Company announced a cash tender offer for any and all of its outstanding i6.50% Senior Subordinated Notes due 2024. On February 16, 2021,
the Company redeemed the principal amount of $i1,200 million, plus accrued interest of approximately $i6.3
million and early redemption premium of $i19.5 million.
The Company expensed refinancing costs of $i23.6
million, consisting of the $i19.5 million early redemption premium and the write off of $i4.1 million in unamortized debt issuance costs during the fiscal year
ended September 30, 2021 in conjunction with the redemption of the 2024 Notes.
Issuance of 4.875% Senior Subordinated Notes due 2029 – On April 12, 2021, the Company entered into a purchase agreement in connection with a private offering of $i750 million in i4.875%
Senior Subordinated Notes due 2029 at an issue price of i100% of the principal amount. The i4.875% 2029 Notes were issued pursuant to an indenture,
dated April 21, 2021, among TransDigm Inc., as issuer, TransDigm Group, TransDigm UK and the other subsidiaries of TransDigm Inc. named therein, as guarantors.
The i4.875% 2029 Notes bear interest at a rate of i4.875%
per annum, which accrues from April 12, 2021 and is payable in arrears on May 1st and November 1st of each year, commencing on November 1, 2021. The i4.875% 2029 Notes mature on May 1, 2029, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.
The
Company capitalized $i7.1 million representing debt issuance costs associated with the i4.875% 2029 Notes during the fiscal year ended September
30, 2021.
Repurchase of 6.50% Senior Subordinated Notes due 2025 – On April 12, 2021, the Company announced a cash tender offer for any and all of its outstanding i6.50% Senior Subordinated Notes due 2025. On May 14, 2021, the Company
redeemed the principal amount of $i750 million, plus accrued interest of approximately $i24.4 million and an early redemption premium of $i12.2
million.
The Company expensed refinancing costs of $i12.1 million, consisting of the $i12.2
million early redemption premium and the write off of $i2.1 million in unamortized debt issuance costs, offset by the write off of $i2.2 million
in unamortized premiums during the fiscal year ended September 30, 2021 in conjunction with the redemption of the 2025 Notes.
Amendment No. 8 and Loan Modification Agreement – On May 24, 2021, the Company entered into Amendment No. 8 and Loan Modification Agreement (herein, "Amendment No. 8") to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the "Credit Agreement").
Amendment No. 8, among other things, (i) extends the maturity date of the revolving credit commitments and revolving loans under its existing Credit Agreement to May
24, 2026, and (ii) the LIBOR interest rate per annum applicable to the revolving loans under its existing Credit Agreement is i2.50%, a decrease from the i3.00%
rate that applied previously to the amendment. The other terms and conditions that apply to the revolving loans are substantially the same as the terms and conditions that applied to the revolving loans immediately prior to Amendment No. 8.
The Company expensed $i0.7 million in refinancing costs associated with Amendment No. 8 during the fiscal year ended September
30, 2021.
Revolving Credit Facility
The revolving credit facility bears interest at a rate of i2.50% plus LIBOR. At September 30, 2021, the applicable interest rate was i2.58%.
As of September 30, 2021, the Company had $i31.1 million in letters of credit outstanding and $i528.9
million of borrowings available under the revolving credit facility. On October 6, 2021, the Company repaid $i200 million of the revolving credit facility, in addition to $i0.1 million
of accrued interest, increasing the borrowings available under the revolving commitments to $i728.9 million.
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 ione year extensions as long as there have been
no termination events as defined by the agreement. The Company uses the proceeds from the Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs.
On July 27, 2021, the Company amended the Securitization Facility to extend the maturity date to July 26, 2022. As of September 30, 2021, the Company has borrowed $i350
million under the Securitization Facility, which bears interest at a rate of i1.20% plus LIBOR. At September 30, 2021, the applicable interest rate was i1.33%.
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 September 30, 2021 and 2020, the outstanding balance of these advances were $i28.9
million and $i28.4 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 $i100.4
million and $i56.8 million at September 30, 2021 and 2020, respectively. Refer to Note 19, “Leases,” for further disclosure of the Company’s lease obligations.
Term Loans
i
As
of September 30, 2021 and 2020, TransDigm had $i7,374 million and $i7,449
million in fully drawn term loans and $i760 million in revolving commitments, of which $i529 million
and $i521 million was available to the Company as of September 30, 2021 and 2020, respectively. The term loans consist of three tranches as follows (in millions):
The
interest rates per annum applicable to all of the existing tranches of term loans are, at TransDigm’s option, equal to either an alternate base rate or an adjusted LIBOR for one, two, three or six-month (or to the extent agreed to by each relevant lender, nine or twelve-month) interest periods chosen by TransDigm, in each case plus an applicable margin percentage. The adjusted LIBOR is not subject to a floor. At September 30, 2021 and 2020, the applicable interest rates for all existing tranches were i2.33%
and i2.41%, respectively.
/
Refinancing Costs
During the fiscal year ended September 30, 2021, the Company expensed refinancing costs of $i37
million, primarily representing the early redemption premium paid in connection with the repurchase of the $i1,200 million i6.50% 2024 Notes and $i750
million i6.50% 2025 Notes, and also the execution of Amendment No. 8 and Loan Modification Agreement. During the fiscal year ended September 30, 2020, the Company expensed refinancing costs of $i28
million primarily representing the early redemption premium paid in connection with the repurchase of the $i1,150 million i6.00% 2022 Notes, and also the execution
of Amendment No. 7 and the Refinancing Facility Agreement. During the fiscal year ended September 30, 2019, the Company expensed refinancing costs of $i3 million representing the early redemption premium paid in connection with the repurchase of the $i550
million 2020 Senior Subordinated Notes and issuance of the $i4.0 billion 2026 Senior Secured Notes.
Interest Rate Swap and Cap Agreements
Refer to Note 21, “Derivatives and Hedging Activities,” for information about how our interest rate swap and cap agreements are used to manage interest rate risk associated with floating-rate borrowings under our credit facilities.
TransDigm Inc.’s 2025 Secured Notes and 2026 Secured Notes jointly and severally guaranteed, on a senior basis, by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indentures. The Secured Notes contain many of the restrictive covenants included in the Credit
Agreement. TransDigm is in compliance with all the covenants contained in the notes.
Subordinated Notes
TransDigm Inc.'s i6.375% 2026 Notes, i7.50%
2027 Notes, i5.50% 2027 Notes, i4.625% 2029 Notes, and i4.875%
2029 Notes are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indenture. TransDigm UK's i6.875% 2026 Notes are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries,
as defined in the applicable Indenture. The Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all the covenants contained in the notes.
/
Debt Repayment Schedule
i
At September 30,
2021, future maturities of long-term debt (includes finance leases) are as follows (in millions):
The Company maintains certain non-contributory defined benefit pension plans (collectively, referred to as the “pension plans”). The pension plans provide benefits of stated amounts for each year of service. The Company’s funding policy is to contribute actuarially determined amounts allowable under tax and statutory regulations for the qualified plans. The Company uses a September 30th measurement date for its defined benefit pension plans. In addition, the Company makes actuarially computed contributions to these plans as necessary to adequately fund benefits.
The Company’s funding policy is consistent with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”).
The Company sponsors a number of U.S. defined benefit pension plans (collectively, referred to as the “U.S. plans”), with the largest plan being the Esterline Technologies Retirement Plan (the “ERP”). The ERP’s pension benefits are primarily earned under a cash balance formula with annual pay credits ranging from 2% to 6%. During the first quarter of fiscal 2021, the Company announced of its intent to freeze the ERP effective December 31, 2020, and amended
the plan to, among other things, close participation by new or rehired employees and freeze all future benefit accruals as of the effective date. On March 30, 2021, the Company approved an amendment of its intent to terminate the ERP effective June 30, 2021. The weighted-average interest crediting rate decreased from i5.50%
in fiscal year 2020 to a fixed rate of i4.71% as of the Plan’s effective termination date, in accordance with IRS regulations. The Company anticipates the termination process to be completed within the next 12 months, with the ERP expected to be fully liquidated by the end of fiscal year 2022.
As of September 30,
2021, the ERP’s pension obligation decreased by lump-sum settlement payments of $i7.9 million that were distributed to participants from pension plan assets. As a result of the settlement, we were required to remeasure the ERP’s pension obligation. In connection with the remeasurement, we updated the effective discount rate assumption for the ERP’s pension obligation from i2.47%
to i2.56% as of September 30, 2021. The increase in unrecognized actuarial losses from the remeasurement due to settlement payments that occurred during fiscal year 2021 was offset by increases to unrecognized actuarial gains from the freezing of all future benefit accruals of the ERP. During fiscal year 2021, the net amount of unrecognized actuarial losses recorded in accumulated other comprehensive loss on the
Company’s consolidated balance sheets reclassified to other (income) expense on the consolidated statements of income related to the remeasurement was immaterial.
The Company also sponsors a number of non-U.S. defined benefit pension plans (collectively, referred to as the “non-U.S. plans”), primarily in Canada, France, Germany and the United Kingdom. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings. The
Company also sponsors other retirement benefit plans for its employees in Canada. Other retirement benefit plans are non-contributory health care and life insurance plans.
The accumulated benefit obligation and projected benefit obligation for the U.S. plans are $i350.6 million and $i350.9 million,
respectively, with plan assets of $i341.1 million as of September 30, 2021. The underfunded status for the Company’s U.S. plans is $i9.8
million at September 30, 2021. As of September 30, 2021, a $i7.9 million decrease to the projected benefit obligation resulted from settlements that occurred in fiscal 2021. Contributions to the Company’s qualified U.S. plans totaled $i1.4
million in fiscal 2021. No contributions were made to non-qualified U.S. plans in fiscal 2021. Contributions to the Company’s qualified and non-qualified U.S. plans totaled $i1.7 million and $i19.8 million,
respectively, in fiscal 2020. There is an expected funding requirement of $i0.6 million in fiscal 2022 for the qualified U.S. pension plans maintained by the Company.
The accumulated benefit obligation and projected benefit obligation for the non-U.S. plans are $i217.2
million and $i224.1 million, respectively, with plan assets of $i205.9
million as of September 30, 2021. The underfunded status for these non-U.S. plans is $i18.2 million at September 30, 2021. As of September 30, 2021, a $i20.4 million
decrease to the projected benefit obligation is due to divestitures that occurred in fiscal 2021. Contributions to the non-U.S. plans totaled $i8.6 million and $i8.3
million in fiscal 2021 and 2020, respectively. The expected funding requirement for fiscal 2022 for the non-U.S. plans is $i2.3 million.
i
U.S.
Defined Benefit Pension Plans
Non-U.S. Defined Benefit Pension Plans
Principal assumptions as of year end
2021
2020
2021
2020
Discount rate
i2.56%
i2.47%
i2.40%
i1.90%
Rate
of increase in future compensation levels
N/A (i1)
i4.45%
i3.06%
i2.90%
Assumed
long-term rate of return on plan assets
i5.74%
i5.99%
i3.20%
i3.69%
(1)As
a result of the plan freeze to the ERP for all future benefit accruals and participation by new or rehired employees on or after January 1, 2021, the assumed rate of increase in future compensation levels is not applicable as of September 30, 2021, as pay increases are not valued once a defined benefit pension plan is frozen.
U.S.
Post-Retirement Pension Plans
Non-U.S. Post-Retirement Pension Plans
Principal assumptions as of year end
2021
2020
2021
2020
Discount rate
i2.36%
i1.99%
i2.87%
i2.28%
Initial
weighted average health care trend rate
i7.30%
i7.27%
i5.70%
i5.50%
Ultimate
weighted average health care trend rate
i6.00%
i6.00%
i4.20%
i4.10%
/
The
Company uses discount rates developed from a yield curve established from high-quality corporate bonds and matched to plan-specific projected benefit payments. Although future changes to the discount rate are unknown, had the discount rate increased or decreased by 25 basis points, pension liabilities in total would have decreased $i8.4 million or increased $i9.0
million, respectively. Had the discount rate increased or decreased by 25 basis points, fiscal 2021 net periodic benefit income for the pension plans would have decreased $i0.4 million or increased $i0.6
million, respectively. In determining the expected long-term rate of return on the defined benefit pension plans’ assets, the Company considers the historical rates of return, the nature of investments, the asset allocation, and expectations of future investment strategies. Had the expected return on assets increased or decreased by 25 basis points, fiscal 2021 net periodic benefit income would have increased $i1.3
million or decreased $i1.4 million, respectively. Other than the expected settlement of the ERP in fiscal 2022, management is not aware of any legislative or other initiatives or circumstances that will significantly impact the Company’s pension obligations in fiscal 2022.
Plan
assets are invested in a diversified portfolio of equity and debt securities consisting primarily of common stocks, bonds and government securities. The objective of these investments is to maintain sufficient liquidity to fund current benefit payments and achieve targeted risk-adjusted returns. Management periodically reviews allocations of plan assets by investment type and evaluates external sources of information regarding the long-term historical returns and expected future returns for each investment type.
Due to the freeze and subsequent termination of the ERP that occurred during fiscal 2021, management
approved changes to the Plan’s investment policy to align our pension plan assets with our projected benefit obligation to reduce volatility by targeting an investment strategy of approximately 85 to 95% in fixed-income securities and up to approximately 20% in return-seeking assets, consisting of primarily equity securities and real estate.
i
Allocations by investment type are as follows:
Actual
Plan
assets allocation as of fiscal year end:
Target
2021
2020
Return-seeking assets (e.g., equity securities and real estate)
i0%-i20%
i20.7%
i39.1%
Fixed-income
securities (e.g., debt securities)
i85%- i95%
i78.3%
i57.0%
Cash
i—%
i1.0%
i3.9%
Total
i100.0%
i100.0%
/i
The
following table presents the fair value of the Company’s pension plan assets as of September 30, 2021, by asset category segregated by level within the fair value hierarchy, as described in Note 20, “Fair Value Measurements” (in millions):
Fair Value Hierarchy
Level
1
Level 2
Total
Investments measured at fair value by category: (5)
Return-seeking assets: (1)
U.S. equity securities
$
i6
$
i—
$
i6
Non-U.S.
equity securities
i34
i—
i34
Fixed-income
securities: (2)
Non-U.S. foreign commercial and government bonds
i—
i53
i53
Cash
and cash equivalents (3)
i5
i—
i5
$
i45
$
i53
$
i98
Investments
measured at net asset value by category: (4)
The following table presents the fair value of the Company’s pension plan assets as of September 30, 2020, by asset category segregated by level within the fair value hierarchy, as described in Note 20, “Fair Value Measurements” (in millions):
Fair
Value Hierarchy
Level 1
Level 2
Total
Investments measured at fair value by category: (5)
Return-seeking assets: (1)
U.S.
equity securities
$
i4
$
i—
$
i4
Non-U.S.
equity securities
i48
i—
i48
Fixed-income
securities: (2)
Non-U.S. foreign commercial and government bonds
i—
i58
i58
Cash
and cash equivalents (3)
i22
i—
i22
$
i74
$
i58
$
i132
Investments
measured at net asset value by category: (4)
Return-seeking assets: (1)
Commingled trust funds - Non-U.S. securities
i153
Non-U.S.
equity securities
i9
Fixed-income securities: (2)
U.S.
government bonds and securities
i80
U.S corporate bonds
i123
Non-U.S.
corporate bonds
i18
Non-U.S. foreign commercial and government bonds
i31
Total
$
i546
(1)
Level 1 return-seeking assets, which are primarily equity securities and real estate, are actively traded on U.S. and non-U.S. exchanges and are either valued using the market approach at quoted market prices on the measurement date or at the net asset value of the shares held by the plan on the measurement date based on quoted market prices.
(2) Level 2 fixed-income securities, which are primarily debt securities, are primarily valued using the market approach at either quoted market prices, pricing models that use observable market data, or bids provided by independent investment brokerage firms.
(3) Cash and cash equivalents include cash which is used to pay benefits and cash invested in a short-term investment fund that holds securities with values based on quoted market prices, but for which the funds are not valued
on quoted market basis.
(4) These investments are valued at the net asset value (“NAV”) of units held. The NAV is used to estimate fair value and is based on the fair value of the underlying investments held by the fund less its liability.
(5) No investments measured using Level 3 inputs.
i
Net periodic pension benefit (income) cost for the
Company’s U.S. and non-U.S. defined benefit pension plans at the end of each fiscal year consisted of the following (in millions):
Net periodic pension benefit cost for the Company’s U.S. and non-U.S. post-retirement pension plans was less than $i1 million for each of the fiscal years ended 2021, 2020 and 2019. The components of net periodic pension benefit cost other than service cost are included in other (income) expense in the consolidated statements of income.
i
The
funded status of the defined benefit pension and post-retirement plans at the end of fiscal 2021 and 2020 were as follows (in millions):
Amounts
Recognized in Accumulated Other Comprehensive Income
Net actuarial loss (gain)
$
i10
$
i14
$
i12
$
i35
$
(i1)
$
(i2)
$
i—
$
i2
Prior
service cost
i1
i1
i1
i1
i1
i—
i—
i—
Ending
balance
$
i11
$
i15
$
i13
$
i36
$
i—
$
(i2)
$
i—
$
i2
/
The
accumulated benefit obligation for all pension plans was $i567.8 million and $i595.3 million
as of September 30, 2021 and September 30, 2020, respectively.
Estimated future benefit payments expected to be paid from the pension and post-retirement benefit plans or from the
Company’s assets are as follows (in millions):
(1) Expected benefit payments in fiscal year 2022 primarily
relates to the expected liquidation of the ERP.
/
Defined Contribution Plans
The Company sponsors certain defined contribution employee savings plans that cover substantially all of the Company’s U.S. employees. Under certain plans, the Company contributes a percentage of employee compensation and matches a portion of employee contributions. The cost recognized for such contributions for the fiscal years ended September 30, 2021,
2020 and 2019 was approximately $i28.3 million, $i25.3 million
and $i24.5 million, respectively.
14. iINCOME
TAXES
i
The Company’s income from continuing operations before income taxes includes the following components for the periods shown below (in millions):
Remeasurement
of deferred tax assets and liabilities related to enacted statutory rate changes
i2.1
%
i0.4
%
(i0.5)
%
Gain
on sale of businesses
i1.4
%
i—
%
i—
%
Global
intangible low-taxed income
i1.3
%
i0.4
%
i1.0
%
Foreign
tax credits
(i1.2)
%
(i0.6)
%
(i1.7)
%
Research
and development credits
(i1.2)
%
(i0.6)
%
(i0.6)
%
Foreign-derived
intangible income
(i1.5)
%
(i2.8)
%
(i1.5)
%
Resolution
and settlements to uncertain tax positions
(i3.2)
%
(i0.3)
%
(i0.3)
%
Changes
in valuation allowances impacting results (1)
(i8.2)
%
i4.2
%
i6.2
%
Stock
compensation
(i8.7)
%
(i10.7)
%
(i5.4)
%
Other—net
i0.7
%
i1.1
%
i3.0
%
Effective
income tax rate
i4.7
%
i11.7
%
i20.9
%
/
(1)Primarily relates to the Company’s business interest expense limitation pursuant to IRC §163(j) as modified by the Tax Cuts and Jobs Act. Such provision, as modified, was effective for the Company beginning in fiscal 2019. In general, the deduction for interest expense is limited to 30% (50% as modified by the CARES Act for the Company’s fiscal 2020 and 2021) of the sum of the Company’s adjusted taxable income (“ATI”) and its business interest income. Interest expense disallowed by such limitation, in a taxable year, may be carried forward indefinitely. Based upon available
evidence, a valuation allowance was recorded for the resulting carryforward to reflect the Company’s belief that it is more likely than not that such deferred tax assets will not be realized. In fiscal 2021, the Company made a tax election on its most recently filed U.S. federal income tax return allowing for the utilization of its net interest limitation carryforward. The Company recognized approximately $i69.0 million
of benefit from the release of the valuation allowance, applicable to such carryforward, for the fiscal year ended September 30, 2021.
i
The components of the deferred taxes consist of the following (in millions):
At September 30, 2021, the Company has state net operating loss carryforwards of approximately $i1,491.8 million, German net operating loss carryforwards of $i41.2
million and United Kingdom net operating loss carryforwards of approximately $i39.6 million that expire in various tax years from i2021 to i2039.
The Company has U.S. and non-U.S. tax credit carryforwards of $i50.7 million that expire beginning in i2025.
The deferred tax assets for
the interest expense limitation, net operating losses, and tax credit carryforwards are reduced by a valuation allowance for the amount of such assets that the Company believes will not be realized.
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, in France for fiscal years 2018 through 2019 and in Germany for fiscal years 2014 through 2017. The Company expects the examinations in France to be completed during fiscal 2022. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.
i
A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows (in millions):
2021
2020
Balance at October 1
$
i41
$
i37
Additions
based on tax positions related to the prior year
i—
i7
Additions
based on tax positions related to the current year
i2
i2
Reductions
based on tax positions related to the prior year
(i18)
(i1)
Settlement
with tax authorities
(i4)
(i2)
Lapse
in statute of limitations
(i2)
(i2)
Balance
at September 30
$
i19
$
i41
/
Unrecognized
tax benefits at September 30, 2021 and 2020, the recognition of which would have an effect on the effective tax rate for each fiscal year, amounted to $i19.1 million and $i40.9
million, respectively. The Company classifies all income tax-related interest and penalties as income tax expense, which were not significant for the years ended September 30, 2021 and 2020. As of September 30, 2021 and 2020, the Company accrued $i4.9
million and $i8.7 million, respectively, for the potential payment of interest and penalties. Within the next 12 months, it is reasonably possible that unrecognized tax benefits could be reduced by approximately $i3.0
million resulting from the resolution or closure of tax examinations. Any increase in the amount of unrecognized tax benefits within the next 12 months is not expected to be material.
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 – We, as a nominal defendant, and certain of our current or former directors, are defendants in a shareholder derivative action captioned Sciabacucchi v Howley, et al. (Del. Chancery Court). The case was filed
on November 1, 2021. The plaintiff alleges that the defendants breached their fiduciary duties, that the directors engaged in corporate waste and that the directors and our former Executive Chair and Chief Executive Officer were unjustly enriched in connection with the compensation paid to them. The plaintiff seeks attorney fees and equitable remedies such as rescission of compensation and changes in corporate policies, as well as unspecified monetary damages. Although we are only a nominal defendant in the derivative action, we could have indemnification obligations and/or be required to advance the costs and expenses of the officer and director defendants in the action. We do not expect this matter to have a material adverse impact on our financial condition or results of operations.
Environmental Liabilities – Our operations
and facilities are subject to a number of federal, state, local and foreign environmental laws and regulations that govern, among other things, discharges of pollutants into the air and water, the generation, handling, storage and disposal of hazardous materials and wastes, the remediation of contamination and the health and safety of our employees. Environmental laws and regulations may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Certain facilities and third-party sites utilized by the Company have been identified as potentially responsible parties under the federal superfund laws and comparable state laws. The
Company is currently involved in the investigation and remediation of a number of sites under applicable laws.
Estimates of the Company’s environmental liabilities are based on current facts, laws, regulations and technology. These estimates take into consideration the Company’s prior experience and professional judgment of the Company’s environmental advisors. Estimates of the Company’s environmental liabilities are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards,
imprecise engineering evaluations and cost estimates, the extent of corrective actions that may be required and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.
Accordingly, as investigation and remediation proceed, it is likely that adjustments in the Company’s accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company’s results of operations or cash flows in a given period. Based on currently available information, however, the Company does not believe that future environmental costs in excess
of those accrued with respect to sites for which the Company has been identified as a potentially responsible party are likely to have a material adverse effect on the Company’s financial condition or results of operations.
Environmental liabilities are recorded when the liability is probable and the costs are reasonably estimable, which generally is not later than at completion of a feasibility study or when the Company has recommended a remedy or has committed to an appropriate plan of action. The Company also takes into consideration the estimated period of time in which payments
will be required. The liabilities are reviewed periodically and, as investigation and remediation proceed, adjustments are made as necessary. Liabilities for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value. The liabilities are not offset by possible recoveries from insurance carriers or other third parties, but do reflect anticipated allocations among potentially responsible parties at federal superfund sites or similar state-managed sites, third party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.
The Company’s consolidated balance sheets includes current environmental remediation obligations at September 30,
2021 and 2020 of $i8.2 million and $i7.9 million classified
as a component of accrued and other current liabilities, respectively, and non-current environmental remediation obligations at September 30, 2021 and 2020 of $i40.7 million and $i43.1
million classified as a component of other non-current liabilities, respectively.
Leach International Europe (Facility Fire) – On August 8, 2019, a fire caused significant damage to the Niort, France operating facility of the Leach International Europe subsidiary, which is reported within the Company’s Power & Control segment. The facility as well as certain machinery, equipment and inventory sustained damage. The Company suspended operations at the Niort facility as a result of the fire; however, had transferred certain operations to temporary facilities until operations were fully restored at the rebuilt facility. The new facility was completed in December
2020 and was fully operational as of March 2021.
The Company’s insurance covers damage to the facility, equipment, inventory, and other assets, at replacement cost, as well as business interruption losses and other incremental costs resulting from the disruption of operations caused by the fire, subject to a $i1 million
deductible and certain sub-limits based on the nature of the covered item. Anticipated insurance recoveries related to losses and incremental costs incurred were recognized when receipt was probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory were recorded once all contingencies relating to the claim had been resolved.
During fiscal 2021, the insurance claim, inclusive of property, business interruption and incremental costs of working, was settled for $i88 million,
net of the $i1 million deductible. A gain of $i24 million was recorded to other income during fiscal 2021, of which $i19 million
represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory and $i5 million represents the insurance proceeds received in excess of previously recorded receivables for business interruption and incremental costs of working.
Of the approximately $i58 million
in cash proceeds received in fiscal 2021 relating to the insurance claim and final settlement of the claim, $i24 million was included in net cash used in investing activities and $i34 million
was included in net cash provided by operating activities within the consolidated statements of cash flows based on the nature of the insurance reimbursements. In fiscal 2020, approximately $i28 million in cash proceeds was received as an initial advance under the property insurance claim. All of the proceeds received in fiscal 2020 were included in net cash provided by operating activities within the consolidated statements of cash flows based on the nature of the insurance reimbursements.
16. CAPITAL
STOCK
iTD Group consists of i224,400,000 shares of $i.01
par value common stock and i149,600,000 shares of $i.01 par value preferred stock. The total number of shares of common stock issued at September 30,
2021 and 2020 was i59,403,100 and i58,612,028, respectively. The total number of shares held in treasury was i4,198,226
at September 30, 2021 and 2020. There were ino shares of preferred stock outstanding at September 30, 2021 and 2020. The terms of the preferred stock have not been established./
On
November 8, 2017, our Board of Directors, authorized a stock repurchase program permitting repurchases of our outstanding shares not to exceed $i650 million in the aggregate, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes. During March 2020, the Company repurchased
i36,900 shares of its common stock at a gross cost of $i18.9 million at the weighted average cost of
$i512.67 under the program. No repurchases were made under the program during the fiscal year ended September 30, 2021. As of September 30, 2021, the remaining amount of repurchases allowable under the program was $i631.1 million
subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.
17. iSEGMENTS
The Company’s businesses are organized and managed in ithree
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 and parachutes. 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 plans, restructuring costs
related to the Company's cost reduction measures in response to the COVID-19 pandemic, foreign currency gains and losses, acquisition-integration costs, acquisition and divestiture transaction-related expenses, and refinancing costs. COVID-19 restructuring costs represent actions taken by the Company to reduce its workforce to align with customer demand, as well as incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment). 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 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 office 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 are allocated to the operating segments.
Net sales are measured based on the geographic destination of sales. Long-lived assets consist of property, plant and equipment - net and operating lease right-of-use assets. Net sales and long-lived assets of individual countries outside of the United States are not material.
The following table presents net sales by geographic area (in millions):
The Company’s equity compensation plans are designed to assist the Company in attracting, retaining, motivating and rewarding key employees, directors or consultants, and promoting the creation of
long-term value for stockholders by closely aligning the interests of these individuals with those of the Company’s stockholders. The Company’s equity compensation plans provide for the granting of stock options.
Non-cash stock compensation expense recognized by the Company during the fiscal years ended September 30, 2021, 2020 and 2019 was $i128.9
million, $i92.7 million and $i93.4 million, respectively.
The weighted-average grant date fair value of options
granted during the fiscal years ended September 30, 2021, 2020 and 2019 was $i193.47, $i157.41
and $i114.43, respectively.
Compensation expense is recognized based upon probability assessments of awards that are expected to vest in future periods, adjusted for expected forfeitures. Such probability assessments are subject to revision and, therefore, unrecognized compensation expense is subject to future changes in estimate. As of September 30,
2021, there was approximately $i55.0 million of total unrecognized compensation expense related to non-vested awards expected to vest, which is expected to be recognized over a weighted-average period of i1.3
years.
On September 25, 2020, the Compensation Committee of the Board of Directors determined to allow the portion of options granted in fiscal 2020 with a scheduled vesting date in 2020 to vest, effective September 30, 2020, notwithstanding that performance criteria for such options would not be met. This action impacted options granted to approximately i85
individuals, including all of the independent directors and certain executive officers. This action was treated as a modification for accounting purposes under ASC 718. An additional $i2.5 million of stock compensation expense for fiscal 2020 resulted from this modification.
On November 10, 2020, the Compensation
Committee of the Board of Directors approved the Company’s established performance criteria required to be achieved for the options granted in fiscal 2020 and in fiscal 2021 with a scheduled vesting date of September 30, 2021. This action resulted in a modification for accounting purposes under ASC 718 for the options granted in fiscal 2020, consisting of i64
individuals, including all of the independent directors and certain executive officers. An additional $i8.5 million of stock compensation expense for fiscal 2021 resulted from this modification.
i
The
fair value of the Company’s employee stock options was estimated at the date of grant or modification using a Black-Scholes option-pricing model with the following weighted average assumptions for all options granted during the fiscal years ended:
The
risk-free interest rate is based upon the U.S. Treasury bond rates as of the grant or modification date. The average expected life of stock-based awards is based on the Company’s actual historical exercise experience. Expected volatility of stock was calculated using a rate based upon the historical volatility of TransDigm’s common stock up to the date of grant or date of modification. The Company estimates stock option forfeitures based on historical data. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative adjustment in the period of change. Notwithstanding the special cash dividends declared and paid from time to time, the
Company historically has not declared and paid regular cash dividends and does not anticipate declaring and paying regular cash dividends in future periods; thus, no dividend rate assumption is used.
The total fair value of options vested during fiscal years ended September 30, 2021, 2020 and 2019 was $i92.0
million, $i97.2 million and $i37.7
million, respectively. The significant increase in the total fair value of options vested during fiscal years 2021 and 2020 compared to fiscal year 2019 resulted from substantially more options vesting and increase in the grant date fair value, particularly between fiscal 2019 and fiscal 2020.
2019 Stock Option Plan
In August 2019, the Board of Directors of TD Group adopted a new stock option plan, which was subsequently approved by stockholders on October 3, 2019. The 2019 stock option plan permits TD Group to award stock options to our key employees, directors or consultants. The total number shares of TD Group common stock reserved for issuance or delivery under the 2019 stock option plan is i4,000,000,
subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate transaction or event. No grants have been made from TD Group’s 2019 stock option plan as of September 30, 2021.
In July 2014, the Board of Directors of TD Group adopted the 2014 stock option plan, which was subsequently approved by stockholders on October 2, 2014. The 2014 stock option plan permits TD Group to award our key employees, directors
or consultants stock options. The total number of shares of TD Group common stock reserved for issuance or delivery under the 2014 stock option plan is i5,000,000, subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate transaction or event.
Performance Vested Stock Options—Generally all of the options granted through September 30,
2021 under the 2014 stock option plan have been pursuant to an equity incentive program adopted by the Company in 2008. Under the 2008 equity incentive program, generally all of the options granted will vest based on the Company’s achievement of established operating performance goals. As of September 30, 2021, the operating performance goals have not been determined on the portion of options granted in fiscal 2021 and 2020 with a scheduled vesting date of September 30, 2022 and beyond due to the uncertainty on the Company’s financial results from the COVID-19 pandemic. iThe
following table summarizes the activity, pricing and other information for the Company’s performance vested stock-based award activity during the fiscal year ended September 30, 2021:
At September 30, 2021, there were i626,294
remaining shares available for award under TD Group’s 2014 stock option plan.
2006 Stock Incentive Plan
In conjunction with the consummation of the Company’s initial public offering, a 2006 stock incentive plan was adopted by TD Group. In July 2008 and March 2011, the plan was amended to increase the number of shares available for issuance thereunder. TD Group reserved i8,119,668
shares of its common stock for issuance to key employees, directors or consultants under the plan. Awards under the plan were in the form of options, restricted stock or other stock-based awards. Options granted under the plan expire no later than the tenth anniversary of the applicable date of grant of the options, and have an exercise price of not less than the fair market value of our common stock on the date of grant. Restricted stock granted under the plan vested over ithree years. No restricted stock units remained
outstanding as of September 30, 2018.
Performance Vested Stock Options—All of the options granted under the 2006 stock incentive plan have been pursuant to an equity incentive program adopted by the Company in 2008. Under the 2008 equity incentive program, all of the options granted vest based on the Company’s achievement of established operating performance goals. The following table summarizes the activity, pricing and other information for the Company’s performance vested stock-based award activity during the fiscal year ended September 30, 2021:
Certain executives and key employees of the Company were granted stock options under TD Group’s 2003 stock option plan. All shares had been issued as of September 30, 2013. As of September 30, 2020, i829
options were outstanding and exercisable at a weighted average price per option of $i130.09. As of September 30, 2021, no shares were outstanding or exercisable under our 2003 stock incentive plan.
The total intrinsic value of performance options exercised during the fiscal years ended September 30,
2021, 2020 and 2019 was $i355.3 million, $i394.2
million and $i240.2 million, respectively.
Dividend Equivalent Plans
Pursuant to the Third Amended and Restated TransDigm Group Incorporated 2003 Stock Option Plan Dividend Equivalent Plan, the Second Amended and Restated TransDigm Group Incorporated 2006 Stock Incentive Plan Dividend Equivalent Plan and the 2014
Stock Option Plan Dividend Equivalent Plan, all of the options granted under the existing stock option plans are entitled to certain dividend equivalent payments in the event of the declaration of a dividend by the Company.
Dividend equivalent payments on vested options were $i72.5 million, $i184.9
million and $i111.0 million during the fiscal years ended September 30, 2021, 2020 and 2019, respectively. At September 30, 2021, there was $i45.9 million
recorded in accrued and other current liabilities and $i30.9 million accrued in other non-current liabilities on the consolidated balance sheets related to future dividend equivalent payments.
19. iLEASES
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.
i
The components of lease expense for the fiscal years ended September 30, 2021 and 2020 are as follows (in millions):
Fiscal
Years Ended September 30,
Classification
2021
2020
Operating lease cost
Cost of Sales or Selling and Administrative Expenses
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.
The following summarizes the carrying amounts and fair values of financial iinstruments
(in millions):
(1)Included
in other assets on the consolidated balance sheets.
(2)Included in accrued and other current liabilities on the consolidated balance sheets.
(3)Included in other non-current liabilities on the consolidated balance sheets.
(4)The carrying amount of the debt instrument is presented net of the debt issuance costs, premium and discount. Refer to Note 12, “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).
Interest rate swaps were measured at fair value using quoted market prices for the swap interest rate indexes over the term of the swap discounted to present value versus the fixed rate of the contract. The interest rate caps were measured at fair value using implied volatility rates of each individual caplet and the yield curve for the related periods.
The Company’s
derivative contracts consist of foreign currency exchange contracts and interest rate swap and cap agreements. These derivative contracts are over-the-counter, and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates. These contracts are categorized as Level 2 in the fair value hierarchy.
The estimated fair value of the Company’s term loans was based on information provided by the agent
under the Company’s senior secured credit facility. The estimated fair values of the Company’s notes were based upon quoted market prices. 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 significant impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.
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 September 30,
2021 and 2020.
21. iDERIVATIVES AND HEDGING ACTIVITIES
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 and cap counterparties that contain a provision whereby if the Company defaults on the credit facility the Company could also be declared in default on its swaps and caps, resulting in an acceleration of payment under the swaps and caps.
All
derivative financial instruments are recorded at fair value in the 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 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 and Cap Agreements – Interest rate swap and cap agreements are used to manage interest rate risk associated with floating-rate borrowings under our credit facility. The interest rate swap and cap 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 through the expiration date of the interest rate swap and cap agreements, thereby reducing the impact of interest rate
changes on future interest expense. 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. These derivative instruments qualify as effective cash flow hedges under U.S. GAAP. For these cash flow hedges, the effective portion of the gain or loss from the financial instruments was 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 affected earnings. As the interest rate swap and cap 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 consolidated statements of income.
The following table summarizes the Company’s interest rate swap agreements:
Aggregate
Notional Amount (in millions)
Start Date
End Date
Related Term Loans
Conversion of Related Variable Rate Debt to Fixed Rate of:
$i500
6/29/2018
3/31/2025
Tranche
E
i5.25% (i3.0% plus the i2.25%
margin percentage)
$i750
6/30/2020
6/30/2022
Tranche E
i4.75%
(i2.5% plus the i2.25% margin percentage)
$i1,500
6/30/2022
3/31/2025
Tranche
E
i5.35% (i3.1% plus the i2.25%
margin percentage)
$i700
3/31/2023
9/30/2025
Tranche F
i3.55%
(i1.3% plus the i2.25% margin percentage)
$i1,400
6/30/2021
3/31/2023
Tranche
F
i5.25% (i3.0% plus the i2.25%
margin percentage)
$i500
12/30/2016
12/31/2021
Tranche G
i4.15%
(i1.9% plus the i2.25% margin percentage)
$i400
9/30/2017
9/30/2022
Tranche
G
i4.15% (i1.9% plus the i2.25%
margin percentage)
$i900
12/31/2021
6/28/2024
Tranche G
i5.35%
(i3.1% plus the i2.25% margin percentage)
$i400
9/30/2022
6/28/2024
Tranche
G
i5.25% (i3.0% plus the i2.25%
margin percentage)
The following table summarizes the Company’s interest rate cap agreements:
Aggregate Notional Amount (in millions)
Start
Date
End Date
Related Debt
Offsets Variable Rate Debt Attributable to Fluctuations Above:
$i750
6/30/2020
6/30/2022
Tranche
E
Three month LIBOR rate of i2.50%
$i700
3/31/2023
9/30/2025
Tranche
F
Three month LIBOR rate of i1.25%
$i400
12/30/2016
12/31/2021
Tranche
G
Three month LIBOR rate of i2.50%
/
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. iThe amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the consolidated balance sheets and the net amounts of assets and liabilities presented therein (in millions):
Net
derivatives as classified in the consolidated balance sheet (1)
$
i8
$
(i280)
$
i—
$
(i384)
(1)Refer
to Note 20, "Fair Value Measurements," for the consolidated balance sheets classification of our interest rate swap agreements.
Based on the fair value amounts of the interest rate swap and cap agreements determined as of September 30, 2021, 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 $i101.8
million.
On June 18, 2021, the Company entered into two interest rate cap agreements and one interest rate swap agreement. The agreements each have an effective date of March 31, 2023 and mature on September 30, 2025. The two interest rate cap agreements will offset the variable interest rates on the Company's floating rate debt exposures based on an aggregate notional amount of $i700
million. The two interest rate caps offset the variability in expected future cash flows on the Company's variable rate debt attributable to fluctuations above the three month LIBOR of i1.25%. The interest rate swap agreement hedges the variable interest rates on the Company's floating rate debt exposures for a fixed rate based on a notional amount of $i700
million. The interest rate swap agreement converts the variable interest rate on the aggregate notional amount of the Company's floating rate debt to a fixed rate of i3.55% (i1.3%
plus the i2.25% margin percentage) over the term of the interest rate swap agreement.
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 September 30, 2021, the Company had outstanding foreign
currency forward exchange contracts to sell U.S. dollars with notional amounts of $i125.7 million. The maximum duration of the Company’s foreign currency cash flow hedge contracts at September 30, 2021 is 12 months. These notional values consist of contracts
for the Canadian dollar and the European 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 fiscal year ended September 30, 2021, the gains reclassified on settlements of foreign currency forward exchange contracts designated as cash flow hedges into net sales in the consolidated statements of income was $i3.6
million. The gains were previously recorded as a component of accumulated other comprehensive loss in stockholders' deficit. During the fiscal year ended September 30, 2021, the gains recorded as a component of other (income) expense related to the ineffective portion of the foreign currency forward exchange contracts designated as cash flow hedges were immaterial.
As of September 30, 2021, the Company expects to record a net loss of approximately $i3.6
million on foreign currency forward exchange contracts designated as cash flow hedges to net sales over the next i12 months.
22. iACCUMULATED
OTHER COMPREHENSIVE LOSS
i
The following table presents the components of accumulated other comprehensive loss, net of taxes, for the fiscal years ended September 30, 2021, 2020 and 2019 (in millions):
Unrealized
(losses) gains on derivatives designated and qualifying as cash flow hedges (1)
(1)Represents
unrealized (losses) gains on derivatives designated and qualifying as cash flow hedges, net of tax (benefit) expense of $(i23) million, $i36
million and $i70 million for the fiscal years ended September 30, 2021, 2020 and 2019, respectively.
(2)Defined benefit pension plan and other post-retirement plan activity represents pension liability adjustments, net of
tax (benefit) expense of $(i8) million, $(i1)
million and $i9 million for the fiscal years ended September 30, 2021, 2020 and 2019, respectively. Amounts reclassified from AOCI related to defined benefit pension plan and other post-retirement plan activity were immaterial for the fiscal year ended September 30, 2021.
/i
A
summary of reclassifications out of accumulated other comprehensive loss for the fiscal year ended September 30, 2021 is provided below (in millions):
Description of reclassifications out of accumulated other comprehensive loss
Amount Reclassified
Amortization from redesignated interest rate swap and cap agreements (1)
$
i2
Gains
from settlement of foreign currency forward exchange contracts(2)
i4
Deferred tax expense on reclassifications out of accumulated other comprehensive loss
(i1)
Amounts
reclassified into earnings, net of tax
$
i5
(1)This
component of accumulated other comprehensive loss is included in interest expense-net. Refer to Note 21, “Derivatives and Hedging Activities,” for additional information.
(2)This component of accumulated other comprehensive loss is included in net sales. Refer to Note 21, “Derivatives and Hedging Activities,” for additional information.
Income
from discontinued operations, before income taxes
i11
i—
Income
tax provision (benefit)
i4
(i13)
Income
from discontinued operations, net of tax
i7
i13
Gain
from sale of discontinued operations, net of tax
i40
i38
Income
from discontinued operations, net of tax (1)
$
i47
$
i51
(1)No
divestitures occurring in the fiscal year ended September 30, 2021 met the criteria to qualify as discontinued operations under U.S. GAAP as none represented a strategic shift that has or will have a major affect on TransDigm's operations and financial results. Refer to Note 2, "Acquisitions and Divestitures," for additional disclosures on the Company's fiscal 2021 divestitures.
/
Fiscal Year 2020 Divestitures & Discontinued Operations – On December 20, 2019, TransDigm completed the
divestiture of Souriau-Sunbank to Eaton for approximately $i920 million. Souriau-Sunbank was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm’s Non-aviation segment. The divestiture represented a strategic shift in TransDigm’s business and, in accordance with U.S. GAAP, qualified as discontinued operations. Therefore, the results of operations of Souriau-Sunbank are presented in discontinued operations in the accompanying consolidated financial statements for all periods presented since the
date acquired.
Income from discontinued operations, net of tax, for the fiscal year ended September 30, 2020 was $i47 million and included $i7
million from the results of operations of Souriau-Sunbank and a gain on the sale of Souriau-Sunbank, net of tax, of $i40 million.
Fiscal Year 2019 Divestitures & Discontinued Operations – On September 20, 2019, TransDigm completed the divestiture of its EIT group of businesses to an affiliate of KPS Capital Partners, LP for approximately $i190 million.
EIT was acquired by TransDigm as part of its acquisition of Esterline Technologies Corporation in March 2019 and was included in TransDigm’s Non-aviation segment. The divestiture represented a strategic shift in TransDigm’s business and, in accordance with U.S. GAAP, qualified as discontinued operations. Therefore, the results of operations of EIT were presented in discontinued operations in the accompanying consolidated financial statements for all periods presented since the date acquired.
Income from discontinued operations, net of tax, for the fiscal year ended September 30, 2019 was $i51
million and included $i13 million from the results of operations of Souriau-Sunbank and the EIT group of businesses and a gain on the sale of the EIT group of businesses, net of tax, of $i38
million.
Souriau-Sunbank’s net sales, (loss) from discontinued operations, before income taxes, and income tax (benefit) were $i199 million, $(i17) million
and $(i14) million, respectively, for the fiscal year ended September 30, 2019. The EIT group of businesses net sales, income from discontinued operations, before income taxes, and income tax expense were $i95 million,
$i17 million and $i1 million,
respectively, for the fiscal year ended September 30, 2019.
Cash related to discontinued operations, which was excluded from the consolidated statement of cash flows, included net cash provided by operating activities of $i35 million and net cash used in investing activities of $i11 million.
(1)The
amounts in this column represent the impact from divestitures, charge-offs net of recoveries and the impact of foreign currency translation adjustments.
Cover
Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101
*
Indicates management contract or compensatory plan contract or arrangement.
**
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.
Dates Referenced Herein and Documents Incorporated by Reference
