10-Q 1 tdg2016q310-q.htm 10-Q Document

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 July 2, 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 53,265,437 as of July 28, 2016.




INDEX
 
 
 
 
Page
Part I
 
FINANCIAL INFORMATION
 
 
Item 1
Financial Statements
 
 
 
Condensed Consolidated Balance Sheets – July 2, 2016 and September 30, 2015
 
 
Condensed Consolidated Statements of Income – Thirteen and Thirty-Nine Week Periods Ended July 2, 2016 and June 27, 2015
 
 
Condensed Consolidated Statements of Comprehensive Income – Thirteen and Thirty-Nine Week Periods Ended July 2, 2016 and June 27, 2015
 
 
Condensed Consolidated Statement of Changes in Stockholders’ Deficit – Thirty-Nine Week Period Ended July 2, 2016
 
 
Condensed Consolidated Statements of Cash Flows – Thirty-Nine Week Periods Ended July 2, 2016 and June 27, 2015
 
 
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)
 
July 2, 2016
 
September 30, 2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,666,695

 
$
714,033

Trade accounts receivable - Net
525,815

 
444,072

Inventories - Net
706,069

 
591,401

Prepaid expenses and other
33,555

 
37,081

Total current assets
2,932,134

 
1,786,587

PROPERTY, PLANT AND EQUIPMENT - Net
283,906

 
260,684

GOODWILL
5,536,768

 
4,686,220

OTHER INTANGIBLE ASSETS - Net
1,778,054

 
1,539,851

OTHER
39,607

 
30,593

TOTAL ASSETS
$
10,570,469

 
$
8,303,935

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
52,630

 
$
43,427

Short-term borrowings - trade receivable securitization facility
199,973

 
199,792

Accounts payable
135,078

 
142,822

Accrued liabilities
339,640

 
271,553

Total current liabilities
727,321

 
657,594

LONG-TERM DEBT
9,953,094

 
8,106,383

DEFERRED INCOME TAXES
513,742

 
404,997

OTHER NON-CURRENT LIABILITIES
184,560

 
173,267

Total liabilities
11,378,717

 
9,342,241

STOCKHOLDERS’ DEFICIT:
 
 
 
Common stock - $.01 par value; authorized 224,400,000 shares; issued 55,695,924 and 55,100,094 at July 2, 2016 and September 30, 2015, respectively
557

 
551

Additional paid-in capital
1,047,203

 
950,324

Accumulated deficit
(1,334,773
)
 
(1,717,232
)
Accumulated other comprehensive loss
(137,540
)
 
(96,009
)
Treasury stock, at cost; 2,430,487 and 1,415,100 shares at July 2, 2016 and September 30, 2015, respectively
(383,695
)
 
(175,940
)
Total stockholders’ deficit
(808,248
)
 
(1,038,306
)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
10,570,469

 
$
8,303,935

See notes to condensed consolidated financial statements.

1


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED
JULY 2, 2016 AND JUNE 27, 2015
(Amounts in thousands, except per share amounts)
(Unaudited) 
 
Thirteen Week Periods Ended
 
Thirty-Nine Week Periods Ended
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
NET SALES
$
797,692

 
$
691,395

 
$
2,296,188

 
$
1,897,323

COST OF SALES
354,177

 
331,940

 
1,052,444

 
875,078

GROSS PROFIT
443,515

 
359,455

 
1,243,744

 
1,022,245

SELLING AND ADMINISTRATIVE EXPENSES
94,244

 
81,849

 
271,511

 
223,354

AMORTIZATION OF INTANGIBLE ASSETS
18,629

 
13,910

 
53,474

 
37,966

INCOME FROM OPERATIONS
330,642

 
263,696

 
918,759

 
760,925

INTEREST EXPENSE - Net
120,812

 
106,796

 
344,083

 
305,623

REFINANCING COSTS
15,654

 
18,159

 
15,654

 
18,159

INCOME BEFORE INCOME TAXES
194,176

 
138,741

 
559,022

 
437,143

INCOME TAX PROVISION
53,579

 
39,629

 
164,896

 
131,604

NET INCOME
$
140,597

 
$
99,112

 
$
394,126

 
$
305,539

NET INCOME APPLICABLE TO COMMON STOCK
$
140,597

 
$
99,112

 
$
391,126

 
$
302,174

Net earnings per share - see Note 5:
 
 
 
 
 
 
 
Basic and diluted
$
2.52

 
$
1.75

 
$
6.95

 
$
5.34

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
55,832

 
56,608

 
56,263

 
56,605

See notes to condensed consolidated financial statements.

2


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED
JULY 2, 2016 AND JUNE 27, 2015
(Amounts in thousands)
(Unaudited)
 
Thirteen Week Periods Ended
 
Thirty-Nine Week Periods Ended
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Net income
$
140,597

 
$
99,112

 
$
394,126

 
$
305,539

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(20,257
)
 
17,042

 
(24,571
)
 
(21,838
)
Interest rate swap and cap agreements
(7,435
)
 
8,774

 
(16,960
)
 
(11,583
)
Other comprehensive loss, net of tax
(27,692
)
 
25,816

 
(41,531
)
 
(33,421
)
TOTAL COMPREHENSIVE INCOME
$
112,905

 
$
124,928

 
$
352,595

 
$
272,118

See notes to condensed consolidated financial statements.

3


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THIRTY-NINE WEEK PERIOD ENDED JULY 2, 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, 2015
55,100,094

 
$
551

 
$
950,324

 
$
(1,717,232
)
 
$
(96,009
)
 
(1,415,100
)
 
$
(175,940
)
 
$
(1,038,306
)
Unvested dividend equivalents

 

 

 
(11,667
)
 

 

 

 
(11,667
)
Compensation expense recognized for employee stock options

 

 
33,819

 

 

 

 

 
33,819

Excess tax benefits related to share-based payment arrangements

 

 
37,740

 

 

 

 

 
37,740

Exercise of employee stock options
595,830

 
6

 
25,320

 

 

 

 

 
25,326

Treasury stock purchased

 

 

 

 

 
(1,015,387
)
 
(207,755
)
 
(207,755
)
Net income

 

 

 
394,126

 

 

 

 
394,126

Foreign currency translation adjustments

 

 

 

 
(24,571
)
 

 

 
(24,571
)
Interest rate swaps and caps, net of tax

 

 

 

 
(16,960
)
 

 

 
(16,960
)
BALANCE, JULY 2, 2016
55,695,924

 
$
557

 
$
1,047,203

 
$
(1,334,773
)
 
$
(137,540
)
 
(2,430,487
)
 
$
(383,695
)
 
$
(808,248
)
See notes to condensed consolidated financial statements.

4


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Thirty-Nine Week Periods Ended
 
July 2, 2016
 
June 27, 2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
394,126

 
$
305,539

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
31,059

 
25,919

Amortization of intangible assets and product certification costs
54,042

 
41,848

Amortization of debt issuance costs and original issue discount
11,711

 
11,989

Refinancing costs
15,654

 
18,159

Non-cash equity compensation
33,819

 
23,435

Excess tax benefits related to share-based payment arrangements
(37,740
)
 
(50,580
)
Deferred income taxes
4,489

 
3,884

Changes in assets/liabilities, net of effects from acquisitions of businesses:
 
 
 
Trade accounts receivable
(37,348
)
 
(7,044
)
Inventories
(15,689
)
 
(27,997
)
Income taxes receivable/payable
(3,982
)
 
8,866

Other assets
1,778

 
153

Accounts payable
(27,103
)
 
(648
)
Accrued interest
34,918

 
47,426

Accrued and other liabilities
(15,298
)
 
(27,522
)
Net cash provided by operating activities
444,436

 
373,427

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(30,007
)
 
(40,299
)
Acquisition of businesses, net of cash acquired
(1,143,006
)
 
(1,293,498
)
Net cash used in investing activities
(1,173,013
)
 
(1,333,797
)
FINANCING ACTIVITIES:
 
 
 
Excess tax benefits related to share-based payment arrangements
37,740

 
50,580

Proceeds from exercise of stock options
25,320

 
52,982

Dividends paid
(3,000
)
 
(3,365
)
Treasury stock purchased
(207,755
)
 

Proceeds from 2016 term loans, net
1,712,244

 

Proceeds from 2015 term loans, net

 
1,516,653

Proceeds from revolving commitments

 
75,250

Repayment on term loans
(821,140
)
 
(1,003,398
)
Repayment on revolving commitments

 
(75,250
)
Proceeds from senior subordinated notes due 2026, net
939,935

 

Proceeds from senior subordinated notes due 2025, net

 
445,746

Other
(2,309
)
 
(949
)
Net cash provided by financing activities
1,681,035

 
1,058,249

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
204

 
(2,077
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
952,662

 
95,802

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
714,033

 
819,548

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,666,695

 
$
915,350

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for interest
$
295,374

 
$
229,627

Cash paid during the period for income taxes
$
145,074

 
$
130,735

See notes to condensed consolidated financial statements.

5


TRANSDIGM GROUP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEK PERIODS ENDED JULY 2, 2016 AND JUNE 27, 2015
(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, 2015 included in TD Group’s Form 10-K filed on November 13, 2015. 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, 2015 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the thirty-nine week period ended July 2, 2016 are not necessarily indicative of the results to be expected for the full year.
Certain reclassifications have been made to the prior year financial statements to conform to current year classifications related to the adoption of new accounting pronouncements during the thirty-nine week period ended July 2, 2016 impacting the classification of both debt issuance costs and deferred income taxes in the condensed consolidated balance sheets. The accounting pronouncements and impact of the adoption of the pronouncements are summarized in Note 4, "Recent Accounting Pronouncements" and Note 8, "Debt."

3.    ACQUISITIONS
During the thirty-nine week period ended July 2, 2016, the Company completed the acquisitions of Data Device Corporation ("DDC") and Breeze-Eastern Corporation ("Breeze-Eastern"). During the fiscal year ended September 30, 2015, the Company completed the acquisitions of PneuDraulics, Inc. ("PneuDraulics"), the assets of the aerospace business of Pexco LLC (“Pexco Aerospace”), the aerospace business of Franke Aquarotter GmbH (now named Adams Rite Aerospace GmbH) and the Telair Cargo Group (“Telair”). 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 July 2, 2016, the purchase price allocations for DDC, Breeze-Eastern and PneuDraulics 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 thirty-nine week periods ended July 2, 2016 or June 27, 2015 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

6


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.
Data Device Corporation – On June 23, 2016, the Company acquired all of the outstanding stock of ILC Holdings, Inc., the parent company of DDC, from Behrman Capital for a total purchase price of approximately $1.0 billion in cash, subject to a working capital adjustment. TransDigm financed the acquisition of DDC with cash proceeds from the issuance of senior subordinated notes due in June 2026 and recently completed 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
$
102,640

Property, plant, and equipment
12,828

Intangible assets
285,000

Goodwill
731,654

Other
2,036

Total assets acquired
$
1,134,158

Liabilities assumed:
 
Current liabilities
$
16,645

Other noncurrent liabilities
118,453

Total liabilities assumed
$
135,098

Net assets acquired
$
999,060

The Company expects that all of the approximately $731.7 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 $28.7 million is accrued for payment to dissenting stockholders. 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. The Company expects that all of the approximately $132.2 million of goodwill recognized for the acquisition will not be deductible for tax purposes.
The Breeze-Eastern acquisition includes environmental reserves recorded at a fair value of approximately $26.1 million. Of the $26.1 million in environmental reserves, $3.3 million is included in Accrued liabilities and $22.8 million is included in Other non-current liabilities in the condensed consolidated balance sheet. The estimated $26.1 million fair value of the environmental reserves for Breeze-Eastern is preliminary and recorded at the respective probable and estimable amount. The reserve is subject to change upon completion of the final valuation. The environmental matters relate to soil and groundwater contamination and other environmental matters at several former facilities unrelated to Breeze-Eastern’s current operations.
PneuDraulics – On August 19, 2015, the Company acquired all of the outstanding stock of PneuDraulics for approximately $321.5 million in cash. PneuDraulics manufactures proprietary, highly engineered aerospace pneumatic and hydraulic components and subsystems for commercial transport, regional, business jet and military applications. These products fit well with TransDigm’s overall business direction. PneuDraulics is included in TransDigm’s Power & Control segment. The purchase price includes approximately $100.7 million of tax benefits being realized by the Company over a 15-year period that began in the fourth quarter of fiscal 2015, and the Company expects that all of the approximately $222.6 million of goodwill recognized for the acquisition will be deductible for tax purposes.
Pexco Aerospace – On May 14, 2015, the Company acquired the assets of the aerospace business of Pexco LLC (“Pexco Aerospace”) for a total purchase price of approximately $496.4 million in cash. Pexco Aerospace

7


manufactures extruded plastic interior parts for use in the commercial aerospace industry. These products fit well with TransDigm’s overall business direction. Pexco Aerospace is included in TransDigm’s Airframe segment. The purchase price includes approximately $166.4 million of tax benefits being realized by TransDigm over a 15-year period that began in the third quarter of fiscal 2015. All of the approximately $405.7 million of goodwill recognized for the acquisition is deductible for tax purposes.
Adams Rite Aerospace GmbH – On March 31, 2015, the Company acquired the aerospace business of Franke Aquarotter GmbH (now known as Adams Rite Aerospace GmbH) for approximately $75.3 million in cash. Adams Rite Aerospace GmbH manufactures proprietary faucets and related products for use on commercial transports and regional jets. These products fit well with TransDigm’s overall business direction. Adams Rite Aerospace GmbH is included in TransDigm’s Airframe segment. All of the approximately $63.9 million of goodwill recognized for the acquisition is not deductible for tax purposes.
Telair Cargo Group – On March 26, 2015, the Company acquired all of the outstanding stock of Telair International GmbH ("Telair International"), all of the outstanding stock of Nordisk Aviation Products ("Nordisk") and the assets of the AAR Cargo business (collectively, "Telair Cargo Group"). The total purchase price was approximately $730.9 million in cash. Telair Cargo Group manufactures aerospace on-board cargo loading and handling, restraint systems and unit load devices for a variety of commercial and military platforms with positions on a wide range of new and existing aircraft. These products fit well with TransDigm’s overall business direction. The business consists of three major operating units: Telair International, Nordisk and Telair US. Telair International and Telair US are included in TransDigm’s Power & Control segment and Nordisk is included in TransDigm’s Airframe segment. Approximately $33.2 million of goodwill recognized for the acquisition is deductible for tax purposes and approximately $450.2 million of goodwill recognized for the acquisition is not deductible for tax purposes.

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 guidance is effective for the Company for annual reporting periods, including interim periods therein, beginning October 1, 2018. The Company is currently evaluating the impact that adopting the new standard will have on its consolidated financial statements and disclosures.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which expands upon the guidance on the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The guidance does not change the requirements surrounding the recognition and measurement of debt issuance costs, and the amortization of debt issuance costs will continue to be reported as interest expense. The guidance is effective for the Company beginning October 1, 2016. However, as early adoption is permissible, the Company adopted the pronouncement effective October 1, 2015. The adoption of this pronouncement did not have a significant impact on our consolidated financial position and results of operations, although it did change the financial statement classification of debt issuance costs. In connection with adopting the pronouncement beginning October 1, 2015, the Company reclassified $77.7 million in debt issuance costs as of September 30, 2015, to Current portion of long-term debt and Long-term debt in the liabilities section of the condensed consolidated balance sheet.
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 is effective for the Company on October 1, 2016. However, as early adoption is 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 November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. This guidance simplifies

8


the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and non-current in a classified balance sheet. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, and may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. As early adoption is permissible, the Company adopted this pronouncement beginning October 1, 2015 and applied this pronouncement retrospectively. In connection with adopting the pronouncement beginning October 1, 2015, the Company reclassified $45.4 million from current deferred income tax assets in the condensed consolidated balance sheet as of September 30, 2015 to non-current deferred income tax liabilities.
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.
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. The Company is planning to adopt this standard in the fourth quarter of fiscal 2016. If the Company adopted ASU 2016-09 as of July 2, 2016, approximately $36.0 million in year-to-date excess tax benefits would be reclassified from Additional paid-in-capital to the Income tax provision with a year-to-date favorable impact to operating cash flows of approximately $36.0 million. In addition, the Company will continue to account for forfeitures on an estimated basis. The impact of adopting this standard on our consolidated financial statements will be dependent upon the intrinsic value of the share-based compensation award exercises occurring during the fourth quarter of fiscal 2016.
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.

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
 
Thirty-Nine Week Periods Ended
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Numerator for earnings per share:
 
 
 
 
 
 
 
Net income
$
140,597

 
$
99,112

 
$
394,126

 
$
305,539

Less dividends paid on participating securities

 

 
(3,000
)
 
(3,365
)
Net income applicable to common stock - basic and diluted
$
140,597

 
$
99,112

 
$
391,126

 
$
302,174

Denominator for basic and diluted earnings per share under the two-class method:
 
 
 
 
 
 
 
Weighted average common shares outstanding
53,076

 
53,361

 
53,339

 
52,937

Vested options deemed participating securities
2,756

 
3,247

 
2,924

 
3,668

Total shares for basic and diluted earnings per share
55,832

 
56,608

 
56,263

 
56,605

Basic and diluted earnings per share
$
2.52

 
$
1.75

 
$
6.95

 
$
5.34


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.

9


Inventories consist of the following (in thousands):
 
July 2, 2016
 
September 30, 2015
Raw materials and purchased component parts
$
452,667

 
$
371,073

Work-in-progress
178,986

 
164,793

Finished goods
160,268

 
122,956

Total
791,921

 
658,822

Reserves for excess and obsolete inventory
(85,852
)
 
(67,421
)
Inventories - Net
$
706,069

 
$
591,401


7.    INTANGIBLE ASSETS
Other Intangible Assets - Net in the Condensed Consolidated Balance Sheets consist of the following (in thousands):
 
July 2, 2016
 
September 30, 2015
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Trademarks and trade names
$
735,782

 
$

 
$
735,782

 
$
634,504

 
$

 
$
634,504

Technology
1,273,191

 
273,115

 
1,000,076

 
1,100,317

 
233,434

 
866,883

Order backlog
36,085

 
21,903

 
14,182

 
19,501

 
10,709

 
8,792

Other
43,296

 
15,282

 
28,014

 
43,229

 
13,557

 
29,672

Total
$
2,088,354

 
$
310,300

 
$
1,778,054

 
$
1,797,551

 
$
257,700

 
$
1,539,851

Intangible assets acquired during the thirty-nine week period ended July 2, 2016 were as follows (in thousands):
 
Cost
 
Amortization
Period
Intangible assets not subject to amortization:
 
 
 
Goodwill
$
863,854

 
 
Trademarks and trade names
116,600

 
 
 
980,454

 
 
Intangible assets subject to amortization:
 
 
 
Technology
$
199,900

 
20 years
Order backlog
17,000

 
1 year
 
216,900

 
18.5 years
Total
$
1,197,354

 
 
The aggregate amortization expense on identifiable intangible assets for the thirty-nine week periods ended July 2, 2016 and June 27, 2015 was approximately $53.5 million and $38.0 million, respectively. The estimated amortization expense is $75.7 million for fiscal year 2016, $73.4 million for fiscal year 2017 and $64.2 million for each of the four succeeding fiscal years 2018 through 2021.
The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2015 through July 2, 2016 (in thousands):
 
Power &
Control
 
Airframe
 
Non-
aviation
 
Total
Balance, September 30, 2015
$
2,238,443

 
$
2,392,408

 
$
55,369

 
$
4,686,220

Goodwill acquired during the year
863,854

 

 

 
863,854

Purchase price allocation adjustments
408

 
(790
)
 

 
(382
)
Currency translation adjustment
119

 
(13,043
)
 

 
(12,924
)
Balance, July 2, 2016
$
3,102,824

 
$
2,378,575

 
$
55,369

 
$
5,536,768



10


8.    DEBT
The Company’s debt consists of the following (in thousands):
 
July 2, 2016
 
Gross Amount
 
Debt Issuance Costs
 
Original Issue Discount
 
Net Amount
Short-term borrowings—trade receivable securitization facility
$
200,000

 
$
(27
)
 
$

 
$
199,973

Term loans
$
5,301,977

 
$
(44,094
)
 
$
(11,896
)
 
$
5,245,987

5 1/2% senior subordinated notes due 2020 (2020 Notes)
550,000

 
(4,563
)
 

 
545,437

7 1/2% senior subordinated notes due 2021 (2021 Notes)
500,000

 
(3,303
)
 

 
496,697

6% senior subordinated notes due 2022 (2022 Notes)
1,150,000

 
(8,741
)
 

 
1,141,259

6 1/2% senior subordinated notes due 2024 (2024 Notes)
1,200,000

 
(9,512
)
 

 
1,190,488

6 1/2% senior subordinated notes due 2025 (2025 Notes)
450,000

 
(4,162
)
 

 
445,838

6 3/8% senior subordinated notes due 2026 (2026 Notes)
950,000

 
(9,982
)
 

 
940,018

 
10,101,977

 
(84,357
)
 
(11,896
)
 
10,005,724

Less current portion
53,074

 
(444
)
 

 
52,630

Long-term debt
$
10,048,903

 
$
(83,913
)
 
$
(11,896
)
 
$
9,953,094

 
September 30, 2015
 
Gross Amount
 
Debt Issuance Costs
 
Original Issue Discount
 
Net Amount
Short-term borrowings—trade receivable securitization facility
$
200,000

 
$
(208
)
 
$

 
$
199,792

Term loans
$
4,382,813

 
$
(43,660
)
 
$
(5,471
)
 
$
4,333,682

2020 Notes
550,000

 
(5,355
)
 

 
544,645

2021 Notes
500,000

 
(3,789
)
 

 
496,211

2022 Notes
1,150,000

 
(9,821
)
 

 
1,140,179

2024 Notes
1,200,000

 
(10,394
)
 

 
1,189,606

2025 Notes
450,000

 
(4,513
)
 

 
445,487

 
8,232,813

 
(77,532
)
 
(5,471
)
 
8,149,810

Less current portion
43,840

 
(413
)
 

 
43,427

Long-term debt
$
8,188,973

 
$
(77,119
)
 
$
(5,471
)
 
$
8,106,383

Amendment to the Restated Credit Agreement – On June 9, 2016, TransDigm Inc., TD Group and certain subsidiaries of TransDigm entered into Amendment No. 1 to the Second Amended and Restated Credit Agreement (the "Amendment to the Credit Agreement”) with Credit Suisse AG, as administrative agent and collateral agent (the “Agent”), and the other agents and lenders named therein. Pursuant to the Amendment to the Credit Agreement, TransDigm, among other things, incurred new tranche F term loans (the “New Tranche F Term Loans”) in an aggregate principal amount equal to $500 million, received commitments in respect of delayed draw tranche F term loans (the “Delayed Draw Tranche F Term Loans”) in an aggregate amount equal to $450 million, converted approximately $790 million of existing tranche C term loans into additional tranche F term loans (the “Converted Tranche F Term Loans” and together with the New Tranche F Term Loans and the Delayed Draw Tranche F Term Loans, the “Tranche F Term Loans”) and increased the margin applicable to the existing tranche E term loans to LIBO rate plus 3.0% per annum. The New Tranche F Term Loans and the Converted Tranche F Term Loans were fully drawn on June 9, 2016. Borrowing under the Delayed Draw Tranche F Term Loans was contingent upon the completion of the acquisition of DDC, which was completed on June 23, 2016, and the Delayed Draw Tranche F Term Loans were fully drawn thereafter. The Tranche F Term Loans mature on June 9, 2023. The terms and conditions (other than maturity date) that apply to the Tranche F Term Loans, including pricing, are substantially the same as the terms and conditions that apply to the tranche C term loans immediately prior to the Amendment to the Credit Agreement.
Under the terms of the Amendment to the Credit Agreement, certain existing revolving lenders increased the revolving commitments in an aggregate principal amount of $50 million (the “Extended Revolving Commitments”). The terms and conditions that apply to the Extended Revolving Commitments are the same as those of the existing US Dollar revolving credit commitments under the credit agreement. The Extended Revolving Commitments and existing revolving commitments consist of two tranches, of which approximately $53 million matures on February 28, 2018

11


and approximately $547 million matures on February 28, 2020. At July 2, 2016, the Company had $17 million in letters of credit outstanding and $583 million of borrowings available under the revolving commitments. During the thirteen week period ended July 2, 2016, the Company recorded refinancing costs of $15.7 million representing debt issuance costs expensed in conjunction with the refinancing of the term loans and revolving commitments.
Pursuant to the Amendment to the Credit Agreement and subject to certain conditions, TransDigm may make certain additional restricted payments, including to declare or pay dividends or repurchase stock, in an aggregate amount not to exceed $1,500 million on or prior to December 31, 2016.  Subsequent to December 31, 2016, the aggregate amount of restricted payments remaining, not to exceed $500 million, may be made solely to the extent that the proceeds are used to repurchase stock.
Under the terms of the Amendment to the Credit Agreement, TransDigm is entitled, on one or more occasions, to request additional term loans to the extent that the existing or new lenders agree to provide such incremental term loans provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25 to 1.00 and the consolidated secured net debt ratio would be no greater than 4.25 to 1.00, in each case, after giving effect to such incremental term loans.
Issuance of Senior Subordinated Notes On June 9, 2016, TransDigm Inc. issued $950 million in aggregate principal amount of its 2026 Notes at an issue price of 100% of the principal amount. The 2026 Notes bear interest at the rate of 6.375% per annum, which accrues from June 9, 2016 and is payable semiannually in arrears on June 15 and December 15 of each year, commencing on December 15, 2016. The 2026 Notes mature on June 15, 2026, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indentures governing the 2026 Notes (the “2026 Indentures”).
The 2026 Notes are subordinated to all of TransDigm’s existing and future senior debt, rank equally with all of its existing and future senior subordinated debt and rank senior to all of its future debt that is expressly subordinated to the 2026 Notes. The 2026 Notes are guaranteed on a senior subordinated unsecured basis by TD Group and its 100% owned domestic subsidiaries named in the 2026 Indentures. The guarantees of the 2026 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 2026 Notes. The 2026 Notes are structurally subordinated to all of the liabilities of TD Group’s non-guarantor subsidiaries.
The 2026 Indentures contain certain covenants that, among other things, limit the incurrence of additional indebtedness, the payment of dividends, transactions with affiliates, asset sales, acquisitions, mergers, and consolidations, liens and encumbrances, and prepayments of certain other indebtedness. The 2026 Indentures contain events of default customary for agreements of their type (with customary grace periods, as applicable) and provide that, upon the occurrence of an event of default arising from certain events of bankruptcy or insolvency, all outstanding 2026 Notes of each series will become due and payable immediately without further action or notice. If any other type of event of default occurs and is continuing, then the trustee or the holders of at least 25% in principal amount of the then outstanding 2026 Notes of a particular series may declare all such notes to be due and payable immediately.

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 July 2, 2016 and June 27, 2015, the effective income tax rate was 27.6% and 28.6%, respectively. During the thirty-nine week periods ended July 2, 2016 and June 27, 2015, the effective income tax rate was 29.5% and 30.1%, respectively. The Company’s lower effective tax rate for the thirteen week period ended July 2, 2016 was primarily due to foreign earnings taxed at rates lower than the U.S. statutory rate. The Company’s lower effective tax rate for the thirty-nine week period was primarily due to foreign earnings taxed at rates lower than the U.S. statutory rate partially offset by the prior year discrete adjustment related to the IRS examination results. The Company’s effective tax rate for these periods was less than the Federal statutory tax rate primarily due to 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 July 2, 2016 and September 30, 2015, TD Group had $7.7 million and $6.9 million in unrecognized tax benefits, the recognition of which would have an effect of approximately $7.5 million and $6.5 million on the effective tax rate at July 2, 2016 and September 30, 2015, respectively. The Company believes the tax positions that comprise the

12


unrecognized tax benefits will be reduced by approximately $2.3 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.
The following summarizes the carrying amounts and fair values of financial instruments (in thousands):
 
 
 
July 2, 2016
 
September 30, 2015
 
Level
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
1

 
$
1,666,695

 
$
1,666,695

 
$
714,033

 
$
714,033

        Interest rate cap agreements (1)
2

 
4,630

 
4,630

 
8,180

 
8,180

Liabilities:
 
 
 
 
 
 
 
 
 
Interest rate swap agreements (2)
2

 
30,530

 
30,530

 
24,770

 
24,770

Interest rate swap agreements (3)
2

 
63,060

 
63,060

 
49,730

 
49,730

Short-term borrowings - trade receivable securitization facility (4)
1

 
199,973

 
199,973

 
199,792

 
199,792

Long-term debt, including current portion:
 
 
 
 
 
 
 
 
 
Term loans (4)
2

 
5,245,987

 
5,219,000

 
4,333,682

 
4,344,000

2020 Notes (4)
1

 
545,437

 
558,250

 
544,645

 
520,000

2021 Notes (4)
1

 
496,697

 
526,250

 
496,211

 
524,000

2022 Notes (4)
1

 
1,141,259

 
1,161,500

 
1,140,179

 
1,081,000

2024 Notes (4)
1

 
1,190,488

 
1,221,000

 
1,189,606

 
1,119,000

2025 Notes (4)
1

 
445,838

 
454,500

 
445,487

 
417,000

2026 Notes (4)
1

 
940,018

 
947,625

 

 

(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 is 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 July 2, 2016 and September 30, 2015.


13


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.
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:
$1,000
6/28/2019
6/30/2021
2016 Term Loans
4.8% (1.8% plus the 3% margin percentage)
$750
3/31/2016
6/30/2020
2014 Term Loans
5.8% (2.8% plus the 3% margin percentage)
$1,000
9/30/2014
6/30/2019
2013 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
6/30/2016
6/30/2021
2016 Term Loans
Three month LIBO rate of 2.0%
$750
9/30/2015
6/30/2020
2015 Term Loans
Three month LIBO rate of 2.5%
In connection with the refinancing of the 2011 Term Loans, the Company no longer designated the interest rate swap agreements relating to the $353 million aggregate notional amount as cash flow hedges for accounting purposes. Accordingly, amounts previously recorded as a component of accumulated other comprehensive loss in stockholder’s deficit amortized into earnings totaled $2.1 million for the thirty-nine week period ended June 27, 2015. There was no remaining amortization for these dedesignated swap agreements as of September 30, 2015.
Based on the fair value amounts of the interest rate swap agreements determined as of July 2, 2016, the estimated net amount of existing gains and losses expected to be reclassified into interest expense within the next twelve months is approximately $33.1 million.

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

14


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.
The following table presents net sales by reportable segment (in thousands):
 
Thirteen Week Periods Ended
 
Thirty-Nine Week Periods Ended
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
Net sales to external customers
 
 
 
 
 
 
 
Power & Control
$
402,137

 
$
341,867

 
$
1,154,837

 
$
917,466

Airframe
370,414

 
325,250

 
1,067,301

 
909,820

Non-aviation
25,141

 
24,278

 
74,050

 
70,037

 
$
797,692

 
$
691,395

 
$
2,296,188

 
$
1,897,323


15


The following table reconciles EBITDA As Defined by segment to consolidated income before income taxes (in thousands):
 
Thirteen Week Periods Ended
 
Thirty-Nine Week Periods Ended
 
July 2, 2016
 
June 27, 2015
 
July 2, 2016
 
June 27, 2015
EBITDA As Defined
 
 
 
 
 
 
 
Power & Control
$
197,912

 
$
163,710

 
$
552,558

 
$
459,508

Airframe
185,333

 
150,200

 
520,878

 
415,293

Non-aviation
6,853

 
4,919

 
19,846

 
14,797

Total segment EBITDA As Defined
390,098

 
318,829

 
1,093,282

 
889,598

Unallocated corporate expenses
6,221

 
5,974

 
21,387

 
18,946

Total Company EBITDA As Defined
383,877

 
312,855

 
1,071,895

 
870,652

Depreciation and amortization expense
29,564

 
26,921

 
85,101

 
67,767

Interest expense - net
120,812

 
106,796

 
344,083

 
305,623

Acquisition-related costs
9,849

 
12,271

 
34,696

 
19,288

Stock compensation expense
11,371

 
9,841

 
33,819

 
23,435

Refinancing costs
15,654

 
18,159

 
15,654

 
18,159

Other, net
2,451

 
126

 
(480
)
 
(763
)
Income before income taxes
$
194,176

 
$
138,741

 
$
559,022

 
$
437,143

The following table presents total assets by segment (in thousands):
 
July 2, 2016
 
September 30, 2015
Total assets
 
 
 
Power & Control
$
4,953,436

 
$
3,550,866

Airframe
3,910,388

 
3,922,439

Non-aviation
127,483

 
129,935

Corporate
1,579,162

 
700,695

 
$
10,570,469

 
$
8,303,935

The Company’s sales principally originate from the United States, and the Company’s long-lived assets are principally located in the United States.

13.    ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the components of accumulated other comprehensive loss, net of taxes, for the thirty-nine week period ended July 2, 2016 (in thousands):
 
Unrealized loss on derivatives designated and qualifying as cash flow hedges (1)
 
Defined benefit pension plan activity
 
Currency translation adjustment
 
Total
Balance at September 30, 2015
$
(51,492
)
 
$
(12,013
)
 
$
(32,504
)
 
$
(96,009
)
Current-period other comprehensive loss
(16,960
)
 

 
(24,571
)
 
(41,531
)
Balance at July 2, 2016
$
(68,452
)
 
$
(12,013
)
 
$
(57,075
)
 
$
(137,540
)
(1)
Unrealized loss represents interest rate swap and cap agreements, net of taxes of $4,274 and $(4,118) for the thirteen week periods ended July 2, 2016 and June 27, 2015 and $9,749 and $(4,825) for the thirty-nine week periods ended July 2, 2016 and June 27, 2015, respectively.

14.    SUBSEQUENT EVENTS
In August 2016, the Company amended the trade receivable securitization facility to extend the maturity date to August 1, 2017. The borrowing capacity remains at $250 million and as of July 2, 2016, the Company has borrowed $200 million under the Securitization Facility.

16


 
15.    SUPPLEMENTAL GUARANTOR INFORMATION
TransDigm’s 2020 Notes, 2021 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 July 2, 2016 and September 30, 2015 and its statements of income and comprehensive income and cash flows for the thirty-nine week periods ended July 2, 2016 and June 27, 2015 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 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, 2021 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.


17


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JULY 2, 2016
(Amounts in thousands)
 
TransDigm
Group
 
TransDigm
Inc.
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
200

 
$
1,564,943

 
$
24,843

 
$
76,709

 
$

 
$
1,666,695

Trade accounts receivable - Net

 

 
38,093

 
498,974

 
(11,252
)
 
525,815

Inventories - Net

 
42,761

 
566,250

 
97,758

 
(700
)
 
706,069

Prepaid expenses and other

 
3,126

 
23,284

 
7,145

 

 
33,555

Total current assets
200

 
1,610,830

 
652,470

 
680,586

 
(11,952
)
 
2,932,134

INVESTMENT IN SUBSIDIARIES AND INTERCOMPANY BALANCES
(808,448
)
 
8,210,483

 
5,185,334

 
(94,277
)
 
(12,493,092
)
 

PROPERTY, PLANT AND 
EQUIPMENT -Net

 
16,139

 
224,372

 
43,395

 

 
283,906

GOODWILL

 
85,947

 
4,858,787

 
592,034

 

 
5,536,768

OTHER INTANGIBLE ASSETS - Net

 
36,031

 
1,489,817

 
252,206

 

 
1,778,054

OTHER

 
3,662

 
32,735

 
3,210

 

 
39,607

TOTAL ASSETS
$
(808,248
)
 
$
9,963,092

 
$
12,443,515

 
$
1,477,154

 
$
(12,505,044
)
 
$
10,570,469

LIABILITIES AND STOCKHOLDERS’
(DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$

 
$
52,630

 
$

 
$

 
$

 
$
52,630

Short-term borrowings - trade receivable securitization facility

 

 

 
199,973

 

 
199,973

Accounts payable

 
14,055

 
104,237

 
27,865

 
(11,079
)
 
135,078

Accrued liabilities

 
176,269

 
117,333

 
46,038

 


 
339,640

Total current liabilities

 
242,954

 
221,570

 
273,876

 
(11,079
)
 
727,321

LONG-TERM DEBT

 
9,953,094

 

 

 

 
9,953,094

DEFERRED INCOME TAXES

 
342,789

 
108,877

 
62,076

 

 
513,742

OTHER NON-CURRENT LIABILITIES

 
96,725

 
69,094

 
18,741

 

 
184,560

Total liabilities

 
10,635,562

 
399,541

 
354,693

 
(11,079
)
 
11,378,717

STOCKHOLDERS’ (DEFICIT) EQUITY
(808,248
)
 
(672,470
)
 
12,043,974

 
1,122,461

 
(12,493,965
)
 
(808,248
)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
(808,248
)
 
$
9,963,092

 
$
12,443,515

 
$
1,477,154

 
$
(12,505,044
)
 
$
10,570,469


18


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2015
(Amounts in thousands)
 
TransDigm
Group
 
TransDigm
Inc.
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,500

 
$
659,365

 
$
7,911

 
$
45,257

 
$

 
$
714,033

Trade accounts receivable - Net

 

 
48,369

 
413,380

 
(17,677
)
 
444,072

Inventories - Net

 
34,457

 
461,103

 
96,541

 
(700
)
 
591,401

Prepaid expenses and other

 
2,804

 
15,096

 
19,181

 

 
37,081

Total current assets
1,500

 
696,626

 
532,479

 
574,359

 
(18,377
)
 
1,786,587

INVESTMENT IN SUBSIDIARIES AND INTERCOMPANY BALANCES
(1,039,806
)
 
6,963,034

 
4,501,501

 
(33,208
)
 
(10,391,521
)
 

PROPERTY, PLANT AND EQUIPMENT - Net

 
16,565

 
201,499

 
42,620

 

 
260,684

GOODWILL

 
65,886

 
3,984,199

 
636,135

 

 
4,686,220

OTHER INTANGIBLE ASSETS - Net

 
38,621

 
1,236,376

 
266,315

 
(1,461
)
 
1,539,851

OTHER

 
13,712

 
14,528

 
2,353

 

 
30,593

TOTAL ASSETS
$
(1,038,306
)
 
$
7,794,444

 
$
10,470,582

 
$
1,488,574

 
$
(10,411,359
)
 
$
8,303,935

LIABILITIES AND STOCKHOLDERS’
(DEFICIT) EQUITY
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$

 
$
43,427

 
$

 
$

 
$

 
$
43,427

Short-term borrowings - trade receivable securitization facility

 

 

 
199,792

 

 
199,792

Accounts payable

 
16,826

 
102,968

 
37,556

 
(14,528
)
 
142,822

Accrued liabilities

 
97,045

 
117,243

 
57,265

 

 
271,553

Total current liabilities

 
157,298

 
220,211

 
294,613

 
(14,528
)
 
657,594

LONG-TERM DEBT

 
8,106,383

 

 

 

 
8,106,383

DEFERRED INCOME TAXES

 
334,848

 
2,410

 
67,739

 

 
404,997

OTHER NON-CURRENT LIABILITIES

 
99,743

 
35,222

 
38,302

 

 
173,267

Total liabilities

 
8,698,272

 
257,843

 
400,654

 
(14,528
)
 
9,342,241

STOCKHOLDERS’ (DEFICIT) EQUITY
(1,038,306
)
 
(903,828
)
 
10,212,739

 
1,087,920

 
(10,396,831
)
 
(1,038,306
)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
$
(1,038,306
)
 
$
7,794,444

 
$
10,470,582

 
$
1,488,574

 
$
(10,411,359
)
 
$
8,303,935


19


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THIRTY-NINE WEEK PERIOD ENDED JULY 2, 2016
(Amounts in thousands)
 
TransDigm
Group
 
TransDigm
Inc.
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
NET SALES
$

 
$
95,373

 
$
1,886,907

 
$
329,775

 
$
(15,867
)
 
$
2,296,188

COST OF SALES

 
53,973

 
810,289

 
204,049

 
(15,867
)
 
1,052,444

GROSS PROFIT

 
41,400

 
1,076,618

 
125,726

 

 
1,243,744

SELLING AND ADMINISTRATIVE EXPENSES

 
64,091

 
164,846

 
42,574

 

 
271,511

AMORTIZATION OF INTANGIBLE ASSETS

 
1,089

 
43,828

 
8,557

 

 
53,474

(LOSS) INCOME FROM OPERATIONS

 
(23,780
)
 
867,944

 
74,595

 

 
918,759

INTEREST EXPENSE (INCOME) - Net

 
354,524

 
(751
)
 
(9,690
)
 

 
344,083

REFINANCING COSTS

 
15,654

 

 

 

 
15,654

EQUITY IN INCOME OF SUBSIDIARIES
(394,126
)
 
(691,148
)
 

 

 
1,085,274

 

INCOME BEFORE INCOME TAXES
394,126

 
297,190

 
868,695

 
84,285

 
(1,085,274
)
 
559,022

INCOME TAX (BENEFIT) PROVISION

 
(96,936
)
 
259,383

 
2,449

 

 
164,896

NET INCOME
$
394,126

 
$
394,126

 
$
609,312

 
$
81,836

 
$
(1,085,274
)
 
$
394,126

OTHER COMPREHENSIVE LOSS, NET OF TAX
(41,531
)
 
(1,231
)
 
(449
)
 
(34,389
)
 
36,069

 
(41,531
)
TOTAL COMPREHENSIVE INCOME
$
352,595

 
$
392,895

 
$
608,863

 
$
47,447

 
$
(1,049,205
)
 
$
352,595


20


TRANSDIGM GROUP INCORPORATED
CONDENSED CONSOLIDATING STATEMENT OF INCOME AND COMPREHENSIVE INCOME
FOR THE THIRTY-NINE WEEK PERIOD ENDED JUNE 27, 2015
(Amounts in thousands)
 
TransDigm
Group
 
TransDigm
Inc.
 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Total
Consolidated
NET SALES
$

 
$
95,145

 
$
1,619,184

 
$
192,926

 
$
(9,932
)
 
$
1,897,323

COST OF SALES

 
57,550

 
700,720

 
126,740

 
(9,932
)
 
875,078

GROSS PROFIT

 
37,595

 
918,464

 
66,186

 

 
1,022,245

SELLING AND ADMINISTRATIVE EXPENSES

 
59,979

 
136,490

 
26,885

 

 
223,354

AMORTIZATION OF INTANGIBLE ASSETS

 
1,044

 
33,941

 
2,981

 

 
37,966

(LOSS) INCOME FROM OPERATIONS

 
(23,428
)
 
748,033

 
36,320

 

 
760,925

INTEREST EXPENSE (INCOME) - Net

 
313,706

 
(289
)
 
(7,794
)
 

 
305,623

REFINANCING COSTS

 
18,159

 

 

 

 
18,159

EQUITY IN INCOME OF SUBSIDIARIES
(305,539
)
 
(558,191
)
 

 

 
863,730

 

INCOME BEFORE INCOME TAXES
305,539

 
202,898

 
748,322

 
44,114

 
(863,730
)
 
437,143

INCOME TAX (BENEFIT) PROVISION

 
(102,641
)
 
226,369

 
7,876

 

 
131,604

NET INCOME
$
305,539

 
$
305,539

 
$
521,953

 
$
36,238

 
$
(863,730
)
 
$
305,539

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX
(33,421
)
 
(25,418
)
 
1,944

 
(22,825
)
 
46,299