Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - TransDigm Group INC | exhibit312tdg2017q1.htm |
EX-32.2 - EXHIBIT 32.2 - TransDigm Group INC | exhibit322tdg2017q1.htm |
EX-32.1 - EXHIBIT 32.1 - TransDigm Group INC | exhibit321tdg2017q1.htm |
EX-31.1 - EXHIBIT 31.1 - TransDigm Group INC | exhibit311tdg2017q1.htm |
EX-10.8 - EXHIBIT 10.8 - TransDigm Group INC | exhibit108nickoptionsalary.htm |
EX-10.7 - EXHIBIT 10.7 - TransDigm Group INC | exhibit107nickoptionannual.htm |
EX-10.6 - EXHIBIT 10.6 - TransDigm Group INC | exhibit106formstockoptiona.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the quarterly period ended December 31, 2016.
¨ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-32833
TransDigm Group Incorporated
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
41-2101738
(I.R.S. Employer Identification No.)
1301 East 9th Street, Suite 3000, Cleveland, Ohio | 44114 | |
(Address of principal executive offices) | (Zip Code) |
(216) 706-2960
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
LARGE ACCELERATED FILER | ý | ACCELERATED FILER | ¨ | |
NON-ACCELERATED FILER | ¨ | SMALLER REPORTING COMPANY | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO ý
The number of shares outstanding of TransDigm Group Incorporated’s common stock, par value $.01 per share, was 52,844,515 as of January 30, 2017.
INDEX
Page | |||
Part I | FINANCIAL INFORMATION | ||
Item 1 | Financial Statements | ||
Condensed Consolidated Balance Sheets – December 31, 2016 and September 30, 2016 | |||
Condensed Consolidated Statements of Income – Thirteen Week Periods Ended December 31, 2016 and January 2, 2016 | |||
Condensed Consolidated Statements of Comprehensive Income – Thirteen Week Periods Ended December 31, 2016 and January 2, 2016 | |||
Condensed Consolidated Statement of Changes in Stockholders’ Deficit – Thirteen Week Period Ended December 31, 2016 | |||
Condensed Consolidated Statements of Cash Flows – Thirteen Week Periods Ended December 31, 2016 and January 2, 2016 | |||
Notes to Condensed Consolidated Financial Statements | |||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3 | Quantitative and Qualitative Disclosure About Market Risk | ||
Item 4 | Controls and Procedures | ||
Part II | OTHER INFORMATION | ||
Item 1A | Risk Factors | ||
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | ||
Item 6 | Exhibits | ||
SIGNATURES |
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share amounts)
(Unaudited)
December 31, 2016 | September 30, 2016 | ||||||
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 972,360 | $ | 1,586,994 | |||
Trade accounts receivable - Net | 512,784 | 576,339 | |||||
Inventories - Net | 715,381 | 724,011 | |||||
Prepaid expenses and other | 34,893 | 43,353 | |||||
Total current assets | 2,235,418 | 2,930,697 | |||||
PROPERTY, PLANT AND EQUIPMENT - Net | 314,557 | 310,580 | |||||
GOODWILL | 5,687,248 | 5,679,452 | |||||
OTHER INTANGIBLE ASSETS - Net | 1,735,331 | 1,764,343 | |||||
OTHER | 64,568 | 41,205 | |||||
TOTAL ASSETS | $ | 10,037,122 | $ | 10,726,277 | |||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
CURRENT LIABILITIES: | |||||||
Current portion of long-term debt | $ | 64,157 | $ | 52,645 | |||
Short-term borrowings - trade receivable securitization facility | 199,840 | 199,771 | |||||
Accounts payable | 129,510 | 156,075 | |||||
Accrued liabilities | 305,411 | 344,112 | |||||
Total current liabilities | 698,918 | 752,603 | |||||
LONG-TERM DEBT | 10,555,947 | 9,943,191 | |||||
DEFERRED INCOME TAXES | 515,666 | 492,255 | |||||
OTHER NON-CURRENT LIABILITIES | 141,216 | 189,718 | |||||
Total liabilities | 11,911,747 | 11,377,767 | |||||
STOCKHOLDERS’ DEFICIT: | |||||||
Common stock - $.01 par value; authorized 224,400,000 shares; issued 55,839,100 and 55,767,767 at December 31, 2016 and September 30, 2016, respectively | 558 | 558 | |||||
Additional paid-in capital | 1,042,640 | 1,028,972 | |||||
Accumulated deficit | (2,394,489 | ) | (1,146,963 | ) | |||
Accumulated other comprehensive loss | (139,064 | ) | (149,787 | ) | |||
Treasury stock, at cost; 2,433,035 shares at December 31, 2016 and September 30, 2016 | (384,270 | ) | (384,270 | ) | |||
Total stockholders’ deficit | (1,874,625 | ) | (651,490 | ) | |||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 10,037,122 | $ | 10,726,277 |
See notes to condensed consolidated financial statements.
1
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEK PERIODS ENDED
DECEMBER 31, 2016 AND JANUARY 2, 2016
(Amounts in thousands, except per share amounts)
(Unaudited)
Thirteen Week Periods Ended | ||||||||
December 31, 2016 | January 2, 2016 | |||||||
NET SALES | $ | 814,018 | $ | 701,695 | ||||
COST OF SALES | 369,763 | 327,128 | ||||||
GROSS PROFIT | 444,255 | 374,567 | ||||||
SELLING AND ADMINISTRATIVE EXPENSES | 101,715 | 82,203 | ||||||
AMORTIZATION OF INTANGIBLE ASSETS | 25,531 | 16,323 | ||||||
INCOME FROM OPERATIONS | 317,009 | 276,041 | ||||||
INTEREST EXPENSE - Net | 146,004 | 111,983 | ||||||
REFINANCING COSTS | 32,084 | — | ||||||
INCOME BEFORE INCOME TAXES | 138,921 | 164,058 | ||||||
INCOME TAX PROVISION | 20,050 | 34,617 | ||||||
NET INCOME | $ | 118,871 | $ | 129,441 | ||||
NET INCOME APPLICABLE TO COMMON STOCK | $ | 22,900 | $ | 126,441 | ||||
Net earnings per share - see Note 5: | ||||||||
Basic and diluted | $ | 0.41 | $ | 2.23 | ||||
Cash dividends paid per common share | $ | 24.00 | $ | — | ||||
Weighted-average shares outstanding: | ||||||||
Basic and diluted | 56,524 | 56,805 |
See notes to condensed consolidated financial statements.
2
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEK PERIODS ENDED
DECEMBER 31, 2016 AND JANUARY 2, 2016
(Amounts in thousands)
(Unaudited)
Thirteen Week Periods Ended | ||||||||
December 31, 2016 | January 2, 2016 | |||||||
Net income | $ | 118,871 | $ | 129,441 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Foreign currency translation adjustments | (28,052 | ) | (8,950 | ) | ||||
Interest rate swap and cap agreements | 38,775 | 8,858 | ||||||
Other comprehensive income (loss), net of tax | 10,723 | (92 | ) | |||||
TOTAL COMPREHENSIVE INCOME | $ | 129,594 | $ | 129,349 |
See notes to condensed consolidated financial statements.
3
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THIRTEEN WEEK PERIOD ENDED DECEMBER 31, 2016
(Amounts in thousands, except share amounts)
(Unaudited)
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Treasury Stock | ||||||||||||||||||||||||||
Number of Shares | Par Value | Accumulated Deficit | Number of Shares | Value | Total | ||||||||||||||||||||||||
BALANCE, OCTOBER 1, 2016 | 55,767,767 | $ | 558 | $ | 1,028,972 | $ | (1,146,963 | ) | $ | (149,787 | ) | (2,433,035 | ) | $ | (384,270 | ) | $ | (651,490 | ) | ||||||||||
Dividends paid | — | — | — | (1,280,070 | ) | — | — | — | (1,280,070 | ) | |||||||||||||||||||
Unvested dividend equivalents | — | — | — | (86,327 | ) | — | — | — | (86,327 | ) | |||||||||||||||||||
Compensation expense recognized for employee stock options | — | — | 10,020 | — | — | — | — | 10,020 | |||||||||||||||||||||
Exercise of employee stock options | 71,333 | — | 3,648 | — | — | — | — | 3,648 | |||||||||||||||||||||
Net income | — | — | — | 118,871 | — | — | — | 118,871 | |||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (28,052 | ) | — | — | (28,052 | ) | |||||||||||||||||||
Interest rate swaps and caps, net of tax | — | — | — | — | 38,775 | — | — | 38,775 | |||||||||||||||||||||
BALANCE, DECEMBER 31, 2016 | 55,839,100 | $ | 558 | $ | 1,042,640 | $ | (2,394,489 | ) | $ | (139,064 | ) | (2,433,035 | ) | $ | (384,270 | ) | $ | (1,874,625 | ) |
See notes to condensed consolidated financial statements.
4
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Thirteen Week Periods Ended | |||||||
December 31, 2016 | January 2, 2016 | ||||||
OPERATING ACTIVITIES: | |||||||
Net income | $ | 118,871 | $ | 129,441 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation | 12,284 | 9,700 | |||||
Amortization of intangible assets and product certification costs | 25,764 | 16,501 | |||||
Amortization of debt issuance costs and original issue discount | 4,620 | 3,832 | |||||
Refinancing costs | 32,084 | — | |||||
Non-cash equity compensation | 10,020 | 10,681 | |||||
Deferred income taxes | (493 | ) | 601 | ||||
Other, net | (4,563 | ) | — | ||||
Changes in assets/liabilities, net of effects from acquisitions of businesses: | |||||||
Trade accounts receivable | 59,812 | 14,368 | |||||
Inventories | 8,365 | (14,108 | ) | ||||
Income taxes receivable/payable | 21,148 | 15,803 | |||||
Other assets | (4,826 | ) | 917 | ||||
Accounts payable | (26,200 | ) | (28,160 | ) | |||
Accrued interest | (2,550 | ) | 29,939 | ||||
Accrued and other liabilities | (28,545 | ) | (10,846 | ) | |||
Net cash provided by operating activities | 225,791 | 178,669 | |||||
INVESTING ACTIVITIES: | |||||||
Capital expenditures | (21,807 | ) | (10,172 | ) | |||
Payments made in connection with acquisitions - see Note 3 | (30,002 | ) | — | ||||
Net cash used in investing activities | (51,809 | ) | (10,172 | ) | |||
FINANCING ACTIVITIES: | |||||||
Proceeds from exercise of stock options | 3,648 | 8,892 | |||||
Special dividend and dividend equivalent payments | (1,375,998 | ) | (3,000 | ) | |||
Treasury stock purchased | — | (70,775 | ) | ||||
Proceeds from 2017 term loans, net | 1,132,774 | — | |||||
Repayment on term loans | (16,151 | ) | (10,960 | ) | |||
Cash tender and redemption of the 2021 Notes, including premium | (528,847 | ) | — | ||||
Other | (143 | ) | (87 | ) | |||
Net cash used in financing activities | (784,717 | ) | (75,930 | ) | |||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | (3,899 | ) | (1,309 | ) | |||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (614,634 | ) | 91,258 | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 1,586,994 | 714,033 | |||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 972,360 | $ | 805,291 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||
Cash paid during the period for interest | $ | 143,702 | $ | 78,733 | |||
Cash (refunded) paid during the period for income taxes | $ | (956 | ) | $ | 884 |
See notes to condensed consolidated financial statements.
5
TRANSDIGM GROUP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEK PERIODS ENDED DECEMBER 31, 2016 AND JANUARY 2, 2016
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Description of the Business – TransDigm Group Incorporated (“TD Group”), through its wholly-owned subsidiary, TransDigm Inc., is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all 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 components. TD Group has no significant assets or operations other than its 100% ownership of TransDigm Inc. TD Group’s common stock is listed on the New York Stock Exchange, or the NYSE, under the trading symbol “TDG.”
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, NiCad batteries and chargers, engineered latching and locking devices, rods and locking devices, engineered connectors and elastomers, databus and power controls, cockpit security components and systems, specialized cockpit displays, aircraft audio systems, specialized lavatory components, seat belts and safety restraints, engineered interior surfaces and related components, lighting and control technology, military personnel parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information included herein is unaudited; however, the information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations and cash flows for the interim periods presented. These financial statements and notes should be read in conjunction with the financial statements and related notes for the year ended September 30, 2016 included in TD Group’s Form 10-K filed on November 15, 2016. As disclosed therein, the Company’s annual consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“GAAP”). The September 30, 2016 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the thirteen week period ended December 31, 2016 are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the prior year condensed consolidated financial statements to conform to current year classifications related to the adoption of ASU 2016-09 during the fourth quarter of fiscal 2016 impacting the classification of excess tax benefits for share-based payments which are recognized as a component of the income tax provision rather than a component of additional paid-in capital. The accounting pronouncement and impact of the fiscal year 2016 adoption of the pronouncement on the condensed consolidated financial statements is summarized in Note 4, "Recent Accounting Pronouncements."
3. ACQUISITIONS
During the fiscal year ended September 30, 2016, the Company completed the acquisitions of Young & Franklin Inc. / Tactair Fluid Controls Inc. (“Y&F/Tactair”), Data Device Corporation ("DDC") and Breeze-Eastern Corporation ("Breeze-Eastern"). The Company accounted for the acquisitions using the acquisition method and included the results of operations of the acquisitions in its consolidated financial statements from the effective date of each acquisition. As of December 31, 2016, the purchase price allocations for Y&F/Tactair and DDC remain preliminary as the Company completes its assessments under the acquisition method during the measurement period. Pro forma net sales and results of operations for the acquisitions had they occurred at the beginning of the applicable thirteen week periods ended December 31, 2016 or January 2, 2016 are not material and, accordingly, are not provided.
The acquisitions strengthen and expand the Company’s position to design, produce and supply highly engineered proprietary aerospace components in niche markets with significant aftermarket content and provide opportunities to create value through the application of our three core value-driven operating strategies (obtaining profitable new business, improving our cost structure, and providing highly engineered value-added products to customers). The purchase price paid for each 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 25 to 30 years.
6
Y&F/Tactair – On September 23, 2016, the Company acquired all of the outstanding stock of Young & Franklin, Inc., the parent company of Tactair Fluid Controls, Inc., for approximately $258.8 million in cash, which includes a working capital adjustment of $2.7 million paid in the first quarter of fiscal 2017. Y&F/Tactair manufactures proprietary, highly engineered valves and actuators. These products fit well with TransDigm’s overall business direction. Y&F/Tactair is included in TransDigm’s Power & Control segment. The purchase price includes approximately $74.5 million of tax benefits being realized by the Company over a 15-year period that began in the first quarter of fiscal 2017. The Company expects that approximately $133.1 million of goodwill recognized for the acquisition will be deductible for tax purposes and approximately $10.5 million of goodwill recognized for the acquisition will not be deductible for tax purposes.
DDC – On June 23, 2016, the Company acquired all of the outstanding stock of ILC Holdings, Inc., the parent company of Data Device Corporation, from Behrman Capital for a total purchase price of approximately $997.7 million in cash, which includes a working capital settlement of $1.4 million received in the first quarter of fiscal 2017. TransDigm financed the acquisition of DDC with cash proceeds from the issuance of senior subordinated notes due in June 2026 and term loans. DDC is a supplier of databus and power controls and related products that are used primarily in military avionics, commercial aerospace and space applications. These products fit well with TransDigm’s overall business direction. DDC is included in TransDigm's Power & Control segment.
The total purchase price of DDC was allocated to the underlying assets acquired and liabilities assumed based upon management’s estimated fair values at the date of acquisition. To the extent the purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill. The following table summarizes the purchase price allocation of the estimated fair values of the assets acquired and liabilities assumed at the transaction date (in thousands).
Assets acquired: | |||
Current assets, excluding cash acquired | $ | 100,647 | |
Property, plant, and equipment | 20,818 | ||
Intangible assets | 229,300 | ||
Goodwill | 765,113 | ||
Other | 2,036 | ||
Total assets acquired | $ | 1,117,914 | |
Liabilities assumed: | |||
Current liabilities | $ | 19,472 | |
Other noncurrent liabilities | 100,787 | ||
Total liabilities assumed | $ | 120,259 | |
Net assets acquired | $ | 997,655 |
The Company expects that all of the approximately $765.1 million of goodwill recognized for the acquisition will not be deductible for tax purposes.
Breeze-Eastern – On January 4, 2016, the Company completed the tender offer for all of the outstanding stock of Breeze-Eastern for $19.61 per share in cash. The purchase price was approximately $205.9 million, of which $146.4 million (net of cash acquired of $30.8 million) was paid at closing and $34.9 million was accrued for payment to dissenting shareholders. Of the accrual, $28.7 million related to the original merger consideration and $6.2 million represented the settlement reached with the dissenting shareholders resolving the dispute over the dissenting shareholders’ statutory appraisal action. Of the $6.2 million settlement, $4.9 million was recorded as selling and administrative expense and $1.3 million was recorded as interest expense for statutory interest arising under Delaware General Corporation Law. On October 20, 2016, the Company paid the $34.9 million settlement to the dissenting shareholders and the dissenting stockholders fully released their claims against the Company. Breeze-Eastern manufactures high performance lifting and pulling devices for military and civilian aircraft, including rescue hoists, winches and cargo hooks, and weapons-lifting systems. These products fit well with TransDigm’s overall business direction. Breeze-Eastern is included in TransDigm’s Power & Control segment. All of the approximately $115.1 million of goodwill recognized for the acquisition is not deductible for tax purposes.
The Breeze-Eastern acquisition includes environmental reserves recorded at a fair value of approximately $25.0 million. Of the $25.0 million in environmental reserves, $4.8 million is included in accrued liabilities and $20.2 million is included in other non-current liabilities on the condensed consolidated balance sheet. The estimated $25.0 million fair value of the environmental reserves for Breeze-Eastern are recorded at the probable and estimable amount.
7
The environmental matters relate to soil and groundwater contamination and other environmental matters at several former facilities unrelated to Breeze-Eastern’s current operations.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09 which creates a new topic in the Accounting Standards Codification (“ASC”) 606, “Revenue From Contracts With Customers.” In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model; changes the basis for deciding when revenue is recognized over time or at a point in time; provides new and more detailed guidance on specific topics; and expands and improves disclosures about revenue. The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The guidance is effective for the Company for annual reporting periods, including interim periods therein, beginning October 1, 2018. We have performed a preliminary review of the new guidance as compared to our current accounting policies. We have also commenced a review of a representative sample of contracts and other agreements with our customers and are evaluating the provisions contained within these contracts and agreements in consideration of the five step model specified within ASC 606. The Company is currently evaluating the impact that adopting the standard, along with the subsequent updates and clarifications, will have on its consolidated financial statements and disclosures. During fiscal 2017, we plan to finalize our review and determine our date and method of adoption.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments," a new standard intended to simplify the accounting for measurement period adjustments in a business combination. Measurement period adjustments are changes to provisional amounts recorded when the accounting for a business combination is incomplete as of the end of a reporting period. The measurement period can extend for up to a year following the transaction date. During the measurement period, companies may make adjustments to provisional amounts when information necessary to complete the measurement is received. The new guidance requires companies to recognize these adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined. Companies are no longer required to retroactively apply measurement period adjustments to all periods presented. The guidance was effective for the Company on October 1, 2016. However, as early adoption was permissible, the Company adopted the pronouncement beginning October 1, 2015. The adoption of this pronouncement did not have a significant impact on the Company's consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (ASC 842),” which will require that a lessee recognize assets and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition of a right of use asset and a lease liability. The guidance is effective for the Company for annual reporting periods, including interim periods therein, beginning October 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The guidance is effective for the Company for annual reporting periods, including interim periods therein, beginning October 1, 2017, with early adoption permitted. As early adoption is permissible, the Company adopted this standard in the fourth quarter of fiscal 2016. As a result of adopting the standard in the fourth quarter of fiscal 2016, the condensed consolidated financial statements and earnings per share for the quarter ended January 2, 2016 were recasted where presented within this Form 10-Q to reflect the impact of this standard if the Company had adopted as of the beginning of fiscal 2016. Therefore, approximately $14.5 million in year-to-date excess tax benefits as of January 2, 2016 were reclassified from a component of additional paid-in-capital to a component of the income tax provision with a year-to-date favorable impact to basic and diluted earnings per common share of $0.26. The corresponding cash flows are reflected in cash provided by operating activities instead of financing activities, as required. In addition, the Company continued to account for forfeitures on an estimated basis.
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 will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and disclosures.
8
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments," which clarifies existing guidance related to accounting for cash receipts and cash payments and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
5. EARNINGS PER SHARE (TWO-CLASS METHOD)
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Thirteen Week Periods Ended | |||||||
December 31, 2016 | January 2, 2016 | ||||||
Numerator for earnings per share: | |||||||
Net income | $ | 118,871 | $ | 129,441 | |||
Less dividends paid on participating securities | (95,971 | ) | (3,000 | ) | |||
Net income applicable to common stock - basic and diluted | $ | 22,900 | $ | 126,441 | |||
Denominator for basic and diluted earnings per share under the two-class method: | |||||||
Weighted average common shares outstanding | 53,365 | 53,706 | |||||
Vested options deemed participating securities | 3,159 | 3,099 | |||||
Total shares for basic and diluted earnings per share | 56,524 | 56,805 | |||||
Basic and diluted earnings per share | $ | 0.41 | $ | 2.23 |
6. INVENTORIES
Inventories are stated at the lower of cost or market. Cost of inventories is generally determined by the average cost and the first-in, first-out (FIFO) methods and includes material, labor and overhead related to the manufacturing process.
Inventories consist of the following (in thousands):
December 31, 2016 | September 30, 2016 | ||||||
Raw materials and purchased component parts | $ | 485,842 | $ | 464,410 | |||
Work-in-progress | 181,676 | 188,417 | |||||
Finished goods | 135,271 | 153,253 | |||||
Total | 802,789 | 806,080 | |||||
Reserves for excess and obsolete inventory | (87,408 | ) | (82,069 | ) | |||
Inventories - Net | $ | 715,381 | $ | 724,011 |
7. INTANGIBLE ASSETS
Other intangible assets - net in the condensed consolidated balance sheets consist of the following (in thousands):
December 31, 2016 | September 30, 2016 | ||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
Trademarks and trade names | $ | 718,176 | $ | — | $ | 718,176 | $ | 720,263 | $ | — | $ | 720,263 | |||||||||||
Technology | 1,277,928 | 304,238 | 973,690 | 1,279,335 | 288,429 | 990,906 | |||||||||||||||||
Order backlog | 55,341 | 38,791 | 16,550 | 55,341 | 29,641 | 25,700 | |||||||||||||||||
Other | 43,347 | 16,432 | 26,915 | 43,331 | 15,857 | 27,474 | |||||||||||||||||
Total | $ | 2,094,792 | $ | 359,461 | $ | 1,735,331 | $ | 2,098,270 | $ | 333,927 | $ | 1,764,343 |
The aggregate amortization expense on identifiable intangible assets for the thirteen week periods ended December 31, 2016 and January 2, 2016 was approximately $25.5 million and $16.3 million, respectively. The estimated amortization expense is $91.2 million for fiscal year 2017, $65.5 million for fiscal year 2018 and $65.5 million for each of the four succeeding fiscal years 2019 through 2022.
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The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2016 through December 31, 2016 (in thousands):
Power & Control | Airframe | Non- aviation | Total | ||||||||||||
Balance, September 30, 2016 | $ | 3,247,490 | $ | 2,376,593 | $ | 55,369 | $ | 5,679,452 | |||||||
Goodwill acquired during the year | — | — | — | — | |||||||||||
Purchase price allocation adjustments | 15,334 | — | — | 15,334 | |||||||||||
Currency translation adjustment | — | (7,538 | ) | — | (7,538 | ) | |||||||||
Balance, December 31, 2016 | $ | 3,262,824 | $ | 2,369,055 | $ | 55,369 | $ | 5,687,248 |
8. DEBT
The Company’s debt consists of the following (in thousands):
December 31, 2016 | |||||||||||||||
Gross Amount | Debt Issuance Costs | Original Issue Discount | Net Amount | ||||||||||||
Short-term borrowings—trade receivable securitization facility | $ | 200,000 | $ | (160 | ) | $ | — | $ | 199,840 | ||||||
Term loans | $ | 6,422,557 | $ | (51,446 | ) | $ | (16,519 | ) | $ | 6,354,592 | |||||
5 1/2% senior subordinated notes due 2020 (2020 Notes) | 550,000 | (4,035 | ) | — | 545,965 | ||||||||||
7 1/2% senior subordinated notes due 2021 (2021 Notes) | — | — | — | — | |||||||||||
6% senior subordinated notes due 2022 (2022 Notes) | 1,150,000 | (8,021 | ) | — | 1,141,979 | ||||||||||
6 1/2% senior subordinated notes due 2024 (2024 Notes) | 1,200,000 | (8,924 | ) | — | 1,191,076 | ||||||||||
6 1/2% senior subordinated notes due 2025 (2025 Notes) | 450,000 | (4,024 | ) | — | 445,976 | ||||||||||
6 3/8% senior subordinated notes due 2026 (2026 Notes) | 950,000 | (9,484 | ) | — | 940,516 | ||||||||||
10,722,557 | (85,934 | ) | (16,519 | ) | 10,620,104 | ||||||||||
Less current portion | 64,603 | (446 | ) | — | 64,157 | ||||||||||
Long-term debt | $ | 10,657,954 | $ | (85,488 | ) | $ | (16,519 | ) | $ | 10,555,947 |
September 30, 2016 | |||||||||||||||
Gross Amount | Debt Issuance Costs | Original Issue Discount | Net Amount | ||||||||||||
Short-term borrowings—trade receivable securitization facility | $ | 200,000 | $ | (229 | ) | $ | — | $ | 199,771 | ||||||
Term loans | $ | 5,288,708 | $ | (42,662 | ) | $ | (11,439 | ) | $ | 5,234,607 | |||||
2020 Notes | 550,000 | (4,299 | ) | — | 545,701 | ||||||||||
2021 Notes | 500,000 | (3,141 | ) | — | 496,859 | ||||||||||
2022 Notes | 1,150,000 | (8,381 | ) | — | 1,141,619 | ||||||||||
2024 Notes | 1,200,000 | (9,218 | ) | — | 1,190,782 | ||||||||||
2025 Notes | 450,000 | (4,144 | ) | — | 445,856 | ||||||||||
2026 Notes | 950,000 | (9,588 | ) | — | 940,412 | ||||||||||
10,088,708 | (81,433 | ) | (11,439 | ) | 9,995,836 | ||||||||||
Less current portion | 53,074 | (429 | ) | — | 52,645 | ||||||||||
Long-term debt | $ | 10,035,634 | $ | (81,004 | ) | $ | (11,439 | ) | $ | 9,943,191 |
Repurchase of Senior Subordinated Notes due 2021 - On October 13, 2016, the Company announced a cash tender offer for any and all of its outstanding 2021 Notes. On October 27, 2016, the Company redeemed a principal amount of approximately $158 million in 2021 Notes outstanding for total consideration of $1,060.50 (plus accrued and unpaid interest) for each $1,000 aggregate principal amount. The total consideration included an early tender premium of $30.00 per $1,000 principal amount of 2021 Notes payable only with respect to each note validly tendered and not revoked on or before October 26, 2016. On November 28, 2016, pursuant to the terms of the indenture governing the 2021 Notes, the Company redeemed the remaining principal of $342 million in 2021 Notes outstanding at a redemption price of 105.625% of the principal amount (plus accrued and unpaid interest).
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The Company recorded refinancing costs of $31.9 million during the thirteen week period ended December 31, 2016 representing debt issuance costs expensed in conjunction with the redemption of the 2021 Notes. The costs consisted of the premium of $28.8 million paid to redeem the $500 million of 2021 Notes and the write-off of $3.1 million in unamortized debt issuance costs.
Incremental Term Loan Assumption Agreement - On October 14, 2016, the Company entered into an Incremental Term Loan Assumption Agreement (the “Assumption Agreement”) with Credit Suisse AG, as administrative agent and collateral agent, and as a lender, in connection with the 2016 Term Loans. The Assumption Agreement, among other things, provides for (i) additional tranche F term loans in an aggregate principal amount equal to $650 million, which were fully drawn on October 14, 2016 (the “Initial Additional Tranche F Term Loans”), and (ii) additional delayed draw tranche F term loans in an aggregate principal amount not to exceed $500 million, which were fully drawn on October 27, 2016 (the “Delayed Draw Additional Tranche F Term Loans”, and together with the Initial Additional Tranche F Term Loans, the “Additional Tranche F Term Loans”), the proceeds of which were used to repurchase the Company's 2021 Notes. The terms and conditions that apply to the Additional Tranche F Term Loans are substantially the same as the terms and conditions that apply to the Tranche F Term Loans under the 2016 Term Loans immediately prior to the Assumption Agreement.
The Company recorded refinancing costs of $0.2 million during the thirteen week period ended December 31, 2016 representing debt issuance costs expensed in conjunction with the Assumption Agreement.
9. INCOME TAXES
At the end of each reporting period, TD Group makes an estimate of its annual effective income tax rate. The estimate used in the year-to-date period may change in subsequent periods. During the thirteen week periods ended December 31, 2016 and January 2, 2016, the effective income tax rate was 14.4% and 21.1%, respectively. The Company’s lower effective tax rate for the thirteen week period was primarily due to a higher discrete adjustment from excess tax benefits for share-based payments. The Company’s effective tax rate for these periods was less than the Federal statutory tax rate primarily due to excess tax benefits from share based payments, the domestic manufacturing deduction and foreign earnings taxed at rates lower than the U.S. statutory rate.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various state and local jurisdictions as well as foreign jurisdictions located in Belgium, Canada, China, France, Germany, Hong Kong, Hungary, Malaysia, Mexico, Norway, Singapore, Sri Lanka, Sweden and the United Kingdom. The Company is no longer subject to U.S. federal examinations for years before fiscal 2014. The Company is currently under U.S. federal examination for its fiscal 2014 and under examination in Belgium for its fiscal years of 2013 and 2014. In addition, the Company is subject to state income tax examinations for fiscal years 2009 and later.
At December 31, 2016 and September 30, 2016, TD Group had $7.4 million and $8.7 million in unrecognized tax benefits, the recognition of which would have an effect of approximately $7.2 million and $8.5 million on the effective tax rate at December 31, 2016 and September 30, 2016, respectively. The Company believes the tax positions that comprise the unrecognized tax benefits will be reduced by approximately $1.3 million over the next 12 months. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.
10. FAIR VALUE MEASUREMENTS
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
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The following summarizes the carrying amounts and fair values of financial instruments (in thousands):
December 31, 2016 | September 30, 2016 | |||||||||||||||||
Level | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||
Assets: | ||||||||||||||||||
Cash and cash equivalents | 1 | $ | 972,360 | $ | 972,360 | $ | 1,586,994 | $ | 1,586,994 | |||||||||
Interest rate cap agreements (1) | 2 | 19,879 | 19,879 | 4,232 | 4,232 | |||||||||||||
Interest rate swap agreements (1) | 2 | 7,110 | 7,110 | — | — | |||||||||||||
Liabilities: | ||||||||||||||||||
Interest rate swap agreements (2) | 2 | 28,168 | 28,168 | 29,191 | 29,191 | |||||||||||||
Interest rate swap agreements (3) | 2 | 11,232 | 11,232 | 53,824 | 53,824 | |||||||||||||
Short-term borrowings - trade receivable securitization facility (4) | 1 | 199,840 | 199,840 | 199,771 | 199,771 | |||||||||||||
Long-term debt, including current portion: | ||||||||||||||||||
Term loans (4) | 2 | 6,354,592 | 6,447,080 | 5,234,607 | 5,284,037 | |||||||||||||
2020 Notes (4) | 1 | 545,965 | 563,750 | 545,701 | 566,500 | |||||||||||||
2021 Notes (4) | 1 | — | — | 496,859 | 530,000 | |||||||||||||
2022 Notes (4) | 1 | 1,141,979 | 1,190,250 | 1,141,619 | 1,214,688 | |||||||||||||
2024 Notes (4) | 1 | 1,191,076 | 1,254,000 | 1,190,782 | 1,266,000 | |||||||||||||
2025 Notes (4) | 1 | 445,976 | 468,000 | 445,856 | 469,125 | |||||||||||||
2026 Notes (4) | 1 | 940,516 | 978,500 | 940,412 | 985,625 |
(1) | Included in other non-current assets on the condensed consolidated balance sheet. |
(2) | Included in accrued liabilities on the condensed consolidated balance sheet. |
(3) | Included in other non-current liabilities on the condensed consolidated balance sheet. |
(4) | The carrying amount of the debt instrument is presented net of the debt issuance costs in connection with the Company's adoption of ASU 2015-03. Refer to Note 8, "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 using unobservable inputs.
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 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 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 book value due to the short-term nature of these instruments at December 31, 2016 and September 30, 2016.
11. DERIVATIVES AND HEDGING ACTIVITIES
The Company is exposed to, among other things, the impact of changes in 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. 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.
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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 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.
The following table summarizes the Company's interest rate swap agreements:
Aggregate Notional Amount (in millions) | Start Date | End Date | Related Debt | Conversion of Related Variable Rate Debt to Fixed Rate of: |
$500 | 12/30/2016 | 12/31/2021 | Tranche F Term Loans | 4.9% (1.9% plus the 3% margin percentage) |
$1,000 | 6/28/2019 | 6/30/2021 | Tranche F Term Loans | 4.8% (1.8% plus the 3% margin percentage) |
$750 | 3/31/2016 | 6/30/2020 | Tranche D Term Loans | 5.8% (2.8% plus the 3% margin percentage) |
$1,000 | 9/30/2014 | 6/30/2019 | Tranche C Term Loans | 5.4% (2.4% plus the 3% 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: |
$400 | 12/30/2016 | 12/31/2021 | Tranche F Term Loans | Three month LIBO rate of 2.5% |
$400 | 6/30/2016 | 6/30/2021 | Tranche F Term Loans | Three month LIBO rate of 2.0% |
$750 | 9/30/2015 | 6/30/2020 | Tranche E Term Loans | Three month LIBO rate of 2.5% |
All interest rate swap and cap agreements are recognized in our condensed consolidated balance sheets at fair value. In accordance with GAAP, 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 long-term asset or liability. The amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the condensed consolidated balance sheet and the net amounts of assets and liabilities presented therein. As of December 31, 2016 and January 2, 2016, there were no amounts subject to an enforceable master netting arrangement or similar agreement that have not been offset in the condensed consolidated balance sheet.
December 31, 2016 | September 30, 2016 | |||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||
Interest rate cap agreements | $ | 19,879 | $ | — | $ | 4,232 | $ | — | ||||||||
Interest rate swap agreements | 15,213 | (47,503 | ) | — | (83,015 | ) | ||||||||||
Total | 35,092 | (47,503 | ) | 4,232 | (83,015 | ) | ||||||||||
Effect of counterparty netting | (8,103 | ) | 8,103 | — | — | |||||||||||
Net derivatives as classified in the balance sheet (1) | $ | 26,989 | $ | (39,400 | ) | $ | 4,232 | $ | (83,015 | ) |
(1) | Refer to Note 10, "Fair Value Measurements," for the condensed consolidated balance sheet classification of our interest rate swap and cap agreements. |
Based on the fair value amounts of the interest rate swap and cap agreements determined as of December 31, 2016, the estimated net amount of existing gains and losses and caplet amortization expected to be reclassified into interest expense within the next twelve months is approximately $32.0 million.
Effective September 30, 2016, the Company redesignated the interest rate cap agreements related to the $400 million and the $750 million aggregate notional amount with cap rates of 2.0% and 2.5%, respectively, based on the expected probable cash flows associated with the 2016 term loans and 2015 term loans in consideration of the Company’s ability to select one month, two month, three month, or six month LIBO rate set forth in the Credit Agreement. Accordingly, amounts previously recorded as a component of accumulated other comprehensive loss in stockholder’s
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deficit amortized into interest expense was $1.0 million for the thirteen week period ended December 31, 2016. The accumulated other comprehensive loss to be reclassified into interest expense over the remaining term of the cap agreements was $13.7 million with a related tax benefit of $5.1 million as of December 31, 2016.
12. SEGMENTS
The Company’s businesses are organized and managed in three reporting segments: Power & Control, Airframe and Non-aviation.
The Power & Control segment includes operations that primarily develop, produce and market systems and components that predominately provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies. Major product offerings include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, databus and power controls, high performance hoists, winches and lifting devices, and cargo loading and handling 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, rods and locking devices, cockpit security components and systems, aircraft audio systems, specialized lavatory components, seat belts and safety restraints, engineered interior surfaces and related components, lighting and control technology, military personnel parachutes, and cargo delivery systems. 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, and refueling systems for heavy equipment used in mining, construction and other industries. Primary customers of this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers and manufacturers of heavy equipment used in mining, construction and other industries.
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 including refinancing costs, acquisition-related costs, transaction-related costs and non-cash compensation charges incurred in connection with the Company’s stock incentive plans. Acquisition-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 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 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 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. Certain corporate-level expenses are allocated to the operating segments.
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The following table presents net sales by reportable segment (in thousands):
Thirteen Week Periods Ended | ||||||||
December 31, 2016 | January 2, 2016 | |||||||
Net sales to external customers | ||||||||
Power & Control | $ | 441,074 | $ | 347,209 | ||||
Airframe | 348,664 | 331,138 | ||||||
Non-aviation | 24,280 | 23,348 | ||||||
$ | 814,018 | $ | 701,695 |
The following table reconciles EBITDA As Defined by segment to consolidated income before income taxes (in thousands):
Thirteen Week Periods Ended | ||||||||
December 31, 2016 | January 2, 2016 | |||||||
EBITDA As Defined | ||||||||
Power & Control | $ | 216,782 | $ | 161,776 | ||||
Airframe | 170,511 | 155,088 | ||||||
Non-aviation | 8,602 | 6,386 | ||||||
Total segment EBITDA As Defined | 395,895 | 323,250 | ||||||
Unallocated corporate expenses | 10,945 | 3,837 | ||||||
Total Company EBITDA As Defined | 384,950 | 319,413 | ||||||
Depreciation and amortization expense | 38,048 | 26,201 | ||||||
Interest expense - net | 146,004 | 111,983 | ||||||
Acquisition-related costs | 18,568 | 7,225 | ||||||
Stock compensation expense | 10,020 | 10,681 | ||||||
Refinancing costs | 32,084 | — | ||||||
Other, net | 1,305 | (735 | ) | |||||
Income before income taxes | $ | 138,921 | $ | 164,058 |
The following table presents total assets by segment (in thousands):
December 31, 2016 | September 30, 2016 | ||||||
Total assets | |||||||
Power & Control | $ | 5,112,841 | $ | 5,184,303 | |||
Airframe | 3,862,912 | 3,922,532 | |||||
Non-aviation | 130,918 | 131,319 | |||||
Corporate | 930,451 | 1,488,123 | |||||
$ | 10,037,122 | $ | 10,726,277 |
The Company’s sales principally originate from the United States, and the Company’s long-lived assets are principally located in the United States.
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13. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the components of accumulated other comprehensive loss, net of taxes, for the thirteen week period ended December 31, 2016 (in thousands):
Unrealized (loss) gains on derivatives designated and qualifying as cash flow hedges (1) | Defined benefit pension plan activity | Currency translation adjustment | Total | ||||||||||||
Balance at September 30, 2016 | $ | (61,140 | ) | $ | (24,297 | ) | $ | (64,350 | ) | $ | (149,787 | ) | |||
Current-period other comprehensive gain (loss) | 38,176 | — | (28,052 | ) | 10,124 | ||||||||||
Amounts reclassified from AOCI related to interest rate cap agreements | 599 | — | — | 599 | |||||||||||
Balance at December 31, 2016 | $ | (22,365 | ) | $ | (24,297 | ) | $ | (92,402 | ) | $ | (139,064 | ) |
(1) | Unrealized loss represents interest rate swap and cap agreements, net of taxes of $(23,117) and $(5,092) for the thirteen week periods ended December 31, 2016 and January 2, 2016, respectively. |
A summary of reclassifications out of accumulated other comprehensive loss for the thirteen week period ended December 31, 2016 is provided below (in thousands):
Description of reclassifications out of accumulated other comprehensive loss | Amount reclassified | |||
Amortization from redesignated interest rate cap agreements (1) | $ | 956 | ||
Deferred tax benefit from redesignated interest rate cap agreements | (357 | ) | ||
Losses reclassified into earnings, net of tax | $ | 599 |
(1) | This component of accumulated other comprehensive loss is included in interest expense (see Note 11, “Derivatives and Hedging Activity,” for additional information). |
14. SPECIAL DIVIDEND AND DIVIDEND EQUIVALENT PAYMENTS
On October 14, 2016, the Company's Board of Directors authorized and declared a special cash dividend of $24.00 on each outstanding share of common stock and cash dividend equivalent payments on options granted under its stock option plans. The record date for the special dividend was October 24, 2016, and the payment date for the dividend was November 1, 2016. The total cash payment related to the special dividend and related dividend equivalent payments in the first quarter of fiscal 2017 was approximately $1,280.1 million and $76.4 million, respectively. For the thirteen week period ended December 31, 2016, dividend equivalent payments related to dividends declared in fiscal 2013 and fiscal 2014 totaled $19.5 million.
15. SUBSEQUENT EVENTS
On January 26, 2017, our Board of Directors increased the authorized amount of repurchases allowable under the stock program from $450 million to $472 million. The $22 million increase in the repurchases allowable under the stock repurchase program aligns the program with the restricted payments allowable under the Credit Agreement.
During January 2017, Company repurchased 666,755 shares of its common stock at a gross cost of approximately $150.0 million at the weighted-average price per share of $224.97 under the $472 million stock repurchase program. As of February 8, 2017, the remaining amount of repurchases allowable under the $472 million program was $212.9 million subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing notes.
16. SUPPLEMENTAL GUARANTOR INFORMATION
TransDigm’s 2020 Notes, 2022 Notes, 2024 Notes, 2025 Notes and 2026 Notes are jointly and severally guaranteed, on a senior subordinated basis, by TD Group and TransDigm Inc.’s 100% Domestic Restricted Subsidiaries, as defined in the Indentures. The following supplemental condensed consolidating financial information presents, in separate columns, the balance sheets of the Company as of December 31, 2016 and September 30, 2016 and its statements of income and comprehensive income and cash flows for the thirteen week periods ended December 31, 2016 and January 2, 2016 for (i) TransDigm Group on a parent only basis with its investment in subsidiaries recorded under the equity method, (ii) TransDigm Inc. including its directly owned operations and non-operating entities, (iii) the
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Subsidiary Guarantors on a combined basis, (iv) Non-Guarantor Subsidiaries and (v) the Company on a consolidated basis.
Separate financial statements of TransDigm Inc. are not presented because TransDigm Inc.’s 2020 Notes, 2022 Notes, 2024 Notes, 2025 Notes and 2026 Notes are fully and unconditionally guaranteed on a senior subordinated basis by TD Group and all existing 100% owned domestic subsidiaries of TransDigm Inc. and because TD Group has no significant operations or assets separate from its investment in TransDigm Inc.
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TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2016
(Amounts in thousands)
TransDigm Group | TransDigm Inc. | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total Consolidated | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 5,890 | $ | 811,204 | $ | 5,511 | $ | 149,755 | $ | — | $ | 972,360 | |||||||||||
Trade accounts receivable - Net | — | — | — | 519,637 | (6,853 | ) | 512,784 | ||||||||||||||||
Inventories - Net | — | 42,967 | 568,563 | 105,026 | (1,175 | ) | 715,381 | ||||||||||||||||
Prepaid expenses and other | — | 4,271 | 22,852 | 7,770 | — | 34,893 | |||||||||||||||||
Total current assets | 5,890 | 858,442 | 596,926 | 782,188 | (8,028 | ) | 2,235,418 | ||||||||||||||||
INVESTMENT IN SUBSIDIARIES AND INTERCOMPANY BALANCES | (1,880,515 | ) | 9,624,981 | 6,454,771 | 874,346 | (15,073,583 | ) | — | |||||||||||||||
PROPERTY, PLANT AND EQUIPMENT -Net | — | 15,775 | 254,907 | 43,875 | — | 314,557 | |||||||||||||||||
GOODWILL | — | 68,593 | 4,968,284 | 650,371 | — | 5,687,248 | |||||||||||||||||
OTHER INTANGIBLE ASSETS - Net | — | 24,927 | 1,459,995 | 250,409 | — | 1,735,331 | |||||||||||||||||
OTHER | — | 33,079 | 24,525 | 6,964 | — | 64,568 | |||||||||||||||||
TOTAL ASSETS | $ | (1,874,625 | ) | $ | 10,625,797 | $ | 13,759,408 | $ | 2,608,153 | $ | (15,081,611 | ) | $ | 10,037,122 | |||||||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | |||||||||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||||||||
Current portion of long-term debt | $ | — | $ | 64,157 | $ | — | $ | — | $ | — | $ | 64,157 | |||||||||||
Short-term borrowings - trade receivable securitization facility | — | — | — | 199,840 | — | 199,840 | |||||||||||||||||
Accounts payable | — | 12,730 | 91,691 | 32,282 | (7,193 | ) | 129,510 | ||||||||||||||||
Accrued liabilities | — | 125,976 | 126,990 | 52,445 | 305,411 | ||||||||||||||||||
Total current liabilities | — | 202,863 | 218,681 | 284,567 | (7,193 | ) | 698,918 | ||||||||||||||||
LONG-TERM DEBT | — | 10,555,947 | — | — | — | 10,555,947 | |||||||||||||||||
DEFERRED INCOME TAXES | — | 457,699 | (544 | ) | 58,511 | — | 515,666 | ||||||||||||||||
OTHER NON-CURRENT LIABILITIES | — | 40,023 | 66,615 | 34,578 | — | 141,216 | |||||||||||||||||
Total liabilities | — | 11,256,532 | 284,752 | 377,656 | (7,193 | ) | 11,911,747 | ||||||||||||||||
STOCKHOLDERS’ (DEFICIT) EQUITY | (1,874,625 | ) | (630,735 | ) | 13,474,656 | 2,230,497 | (15,074,418 | ) | (1,874,625 | ) | |||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | (1,874,625 | ) | $ | 10,625,797 | $ | 13,759,408 | $ | 2,608,153 | $ | (15,081,611 | ) | $ | 10,037,122 |
18
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2016
(Amounts in thousands)
TransDigm Group | TransDigm Inc. | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total Consolidated | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||||||
Cash and cash equivalents | $ | 13,560 | $ | 1,421,251 | $ | 8,808 | $ | 143,375 | $ | — | $ | 1,586,994 | |||||||||||
Trade accounts receivable - Net | — | — | 26,210 | 561,124 | (10,995 | ) | 576,339 | ||||||||||||||||
Inventories - Net | — | 42,309 | 586,648 | 96,229 | (1,175 | ) | 724,011 | ||||||||||||||||
Prepaid expenses and other | — | 8,209 | 27,381 | 7,763 | — | 43,353 | |||||||||||||||||
Total current assets | 13,560 | 1,471,769 | 649,047 | 808,491 | (12,170 | ) | 2,930,697 | ||||||||||||||||
INVESTMENT IN SUBSIDIARIES AND INTERCOMPANY BALANCES | (665,050 | ) | 9,671,019 | 6,182,809 | 861,647 | (16,050,425 | ) | — | |||||||||||||||
PROPERTY, PLANT AND EQUIPMENT - Net | — | 15,991 | 250,544 | 44,045 | — | 310,580 | |||||||||||||||||
GOODWILL | — | 68,593 | 4,952,950 | 657,909 | — | 5,679,452 | |||||||||||||||||
OTHER INTANGIBLE ASSETS - Net | — | 24,801 | 1,483,285 | 256,257 | — | 1,764,343 | |||||||||||||||||
OTHER | — | 10,319 | 24,063 | 6,823 | — | 41,205 | |||||||||||||||||
TOTAL ASSETS | $ | (651,490 | ) | $ | 11,262,492 | $ | 13,542,698 | $ | 2,635,172 | $ | (16,062,595 | ) | $ | 10,726,277 | |||||||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | |||||||||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||||||||
Current portion of long-term debt | $ | — | $ | 52,645 | $ | — | $ | — | $ | — | $ | 52,645 | |||||||||||
Short-term borrowings - trade receivable securitization facility | — | — | — | 199,771 | — | 199,771 | |||||||||||||||||
Accounts payable | — | 15,347 | 120,455 | 31,560 | (11,287 | ) | 156,075 | ||||||||||||||||
Accrued liabilities | — | 159,909 | 123,646 | 60,557 | 344,112 | ||||||||||||||||||
Total current liabilities | — | 227,901 | 244,101 | 291,888 | (11,287 | ) | 752,603 | ||||||||||||||||
LONG-TERM DEBT | — | 9,943,191 | — | — | — | 9,943,191 | |||||||||||||||||
DEFERRED INCOME TAXES | — | 434,013 | (544 | ) | 58,786 | — | 492,255 | ||||||||||||||||
OTHER NON-CURRENT LIABILITIES | — | 82,677 | 70,124 | 36,917 | — | 189,718 | |||||||||||||||||
Total liabilities | — | 10,687,782 | 313,681 | 387,591 | (11,287 | ) | 11,377,767 | ||||||||||||||||
STOCKHOLDERS’ (DEFICIT) EQUITY | (651,490 | ) | 574,710 | 13,229,017 | 2,247,581 | (16,051,308 | ) | (651,490 | ) | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | $ | (651,490 | ) | $ | 11,262,492 | $ | 13,542,698 | $ | 2,635,172 | $ | (16,062,595 | ) | $ | 10,726,277 |
19
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEK PERIOD ENDED DECEMBER 31, 2016
(Amounts in thousands)
TransDigm Group | TransDigm Inc. | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total Consolidated | ||||||||||||||||||
NET SALES | $ | — | $ | 30,617 | $ | 682,919 | $ | 115,766 | $ | (15,284 | ) | $ | 814,018 | ||||||||||
COST OF SALES | — | 17,253 | 299,661 | 68,133 | (15,284 | ) | 369,763 | ||||||||||||||||
GROSS PROFIT | — | 13,364 | 383,258 | 47,633 | — | 444,255 | |||||||||||||||||
SELLING AND ADMINISTRATIVE EXPENSES | — | 24,320 | 62,699 | 14,696 | — | 101,715 | |||||||||||||||||
AMORTIZATION OF INTANGIBLE ASSETS | — | 189 | 23,308 | 2,034 | — | 25,531 | |||||||||||||||||
(LOSS) INCOME FROM OPERATIONS | — | (11,145 | ) | 297,251 | 30,903 | — | 317,009 | ||||||||||||||||
INTEREST EXPENSE (INCOME) - Net | — | 148,188 | 137 | (2,321 | ) | — | 146,004 | ||||||||||||||||
REFINANCING COSTS | — | 32,084 | — | — | — | 32,084 | |||||||||||||||||
EQUITY IN INCOME OF SUBSIDIARIES | (118,871 | ) | (294,988 | ) | — | — | 413,859 | — | |||||||||||||||
INCOME BEFORE INCOME TAXES | 118,871 | 103,571 | 297,114 | 33,224 | (413,859 | ) | 138,921 | ||||||||||||||||
INCOME TAX (BENEFIT) PROVISION | — | (15,300 | ) | 34,606 | 744 | — | 20,050 | ||||||||||||||||
NET INCOME | $ | 118,871 | $ | 118,871 | $ | 262,508 | $ | 32,480 | $ | (413,859 | ) | $ | 118,871 | ||||||||||
OTHER COMPREHENSIVE LOSS, NET OF TAX | 10,723 | 38,772 | 14,619 | (69,304 | ) | 15,913 | 10,723 | ||||||||||||||||
TOTAL COMPREHENSIVE INCOME | $ | 129,594 | $ | 157,643 | $ | 277,127 | $ | (36,824 | ) | $ | (397,946 | ) | $ | 129,594 |
20
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THIRTEEN WEEK PERIOD ENDED JANUARY 2, 2016
(Amounts in thousands)
TransDigm Group | TransDigm Inc. | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total Consolidated | ||||||||||||||||||
NET SALES | $ | — | $ | 26,689 | $ | 576,421 | $ | 104,280 | $ | (5,695 | ) | $ | 701,695 | ||||||||||
COST OF SALES | — | 15,265 | 252,748 | 64,810 | (5,695 | ) | 327,128 | ||||||||||||||||
GROSS PROFIT | — | 11,424 | 323,673 | 39,470 | — | 374,567 | |||||||||||||||||
SELLING AND ADMINISTRATIVE EXPENSES | — | 12,816 | 53,940 | 15,447 | — | 82,203 | |||||||||||||||||
AMORTIZATION OF INTANGIBLE ASSETS | — | 363 | 13,463 | 2,497 | — | 16,323 | |||||||||||||||||
(LOSS) INCOME FROM OPERATIONS | — | (1,755 | ) | 256,270 | 21,526 | — | 276,041 | ||||||||||||||||
INTEREST EXPENSE (INCOME) - Net | — | 115,391 | (555 | ) | (2,853 | ) | — | 111,983 | |||||||||||||||
REFINANCING COSTS | — | — | — | — | — | — | |||||||||||||||||
EQUITY IN INCOME OF SUBSIDIARIES | (129,441 | ) | (205,973 | ) | — | — | 335,414 | — | |||||||||||||||
INCOME BEFORE INCOME TAXES | 129,441 | 88,827 | 256,825 | 24,379 | (335,414 | ) | 164,058 | ||||||||||||||||
INCOME TAX (BENEFIT) PROVISION | — | (40,614 | ) | 78,532 | (3,301 | ) | — | 34,617 | |||||||||||||||
NET INCOME | $ | 129,441 | $ | 129,441 | $ | 178,293 | $ | 27,680 | $ | (335,414 | ) | $ | 129,441 | ||||||||||
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX | (92 | ) | 6,241 | (3,564 | ) | (11,758 | ) | 9,081 | (92 | ) | |||||||||||||
TOTAL COMPREHENSIVE INCOME | $ | 129,349 | $ | 135,682 | $ | 174,729 | $ | 15,922 | $ | (326,333 | ) | $ | 129,349 |
21
TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEK PERIOD ENDED DECEMBER 31, 2016
(Amounts in thousands)
TransDigm Group | TransDigm Inc. | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Total Consolidated | ||||||||||||||||||
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | $ | — | $ | (208,567 | ) | $ | 364,105 |