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TDG > SEC Filings for TDG > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for TRANSDIGM GROUP INC


7-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Company's financial condition and results of operations should be read together with TD Group's consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. References in this section to "TransDigm," "the Company," "we," "us," "our," and similar references refer to TD Group, TransDigm Inc. and TransDigm Inc.'s subsidiaries, unless the context otherwise indicates. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed in this report. These risks could cause our actual results to differ materially from any future performance suggested below.

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, the statements about the Company's plans, strategies and prospects under this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, the Company can give no assurance that such plans, intentions or expectations will be achieved. Many of the factors affecting these forward-looking statements are outside the control of the Company. Consequently, such forward-looking statements should be regarded solely as the Company's current plans, estimates and beliefs. The Company does not undertake, and specifically declines, any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, except as required by applicable law. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the foregoing cautionary statements.

Important factors that could cause actual results to differ materially from the forward-looking statements made in this Quarterly Report on Form 10-Q include but are not limited to: the sensitivity of our business to the number of flight hours that our customers' planes spend aloft and our customers' profitability, both of which are affected by general economic conditions; future terrorist attacks; our reliance on certain customers; the U.S. defense budget and risks associated with being a government supplier; failure to maintain government or industry approvals; failure to complete or successfully integrate acquisitions; our substantial indebtedness; potential environmental liabilities; and other factors. Please refer to the other information included in this Quarterly Report on Form 10-Q and to the Annual Report on Form 10-K for additional information regarding the foregoing factors that may affect our business.

Overview

We believe we are a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. Our business is well diversified due to the broad range of products we offer to our customers. Some of our more significant 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, cockpit security components and systems, specialized cockpit displays, aircraft audio systems, specialized lavatory components, seatbelts and safety restraints, engineered interior surfaces and lighting and control technology. Each of these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer.

For the third quarter of fiscal 2013, we generated net sales of $488.6 million and net income of $76.7 million. EBITDA As Defined was $231.9 million, or 47.5% of net sales. See below for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to net income and net cash provided by operating activities.

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Certain Acquisitions

Whippany Actuation Systems, LLC Acquisition

On June 28, 2013, Whippany Actuation Systems, LLC, a newly formed, wholly owned subsidiary of TransDigm Inc., acquired assets from GE Aviation's Electromechanical Actuation Division ("Whippany Actuation") for approximately $147.8 million in cash, subject to adjustments based on the level of working capital as of the closing date of the acquisition. Whippany Actuation manufactures proprietary, highly engineered aerospace electromechanical motion control subsystems for civil and military applications, with product offerings including control electronics, motors, high power mechanical transmissions and actuators. These products fit well with TransDigm's overall business direction. Whippany will be integrated into TransDigm's Power & Control segment. The Company is in the process of obtaining information to value certain tangible and intangible assets of Whippany Actuation, and therefore the condensed consolidated financial statements at June 29, 2013 reflect a preliminary purchase price allocation for the business.

Arkwin Industries, Inc. Acquisition

On June 5, 2013, TransDigm Inc. acquired all of the outstanding stock of Arkwin Industries, Inc. ("Arkwin"), for approximately $285.8 million in cash, subject to adjustments based on the level of working capital as of the closing date of the acquisition. Arkwin manufactures proprietary, highly engineered aerospace hydraulic and fuel system components for commercial and military aircraft, helicopters and other specialty applications. These products fit well with TransDigm's overall business direction. Arkwin will be integrated into TransDigm's Power & Control segment. The Company is in the process of obtaining information to value certain tangible and intangible assets of Arkwin, and therefore the condensed consolidated financial statements at June 29, 2013 reflect a preliminary purchase price allocation for the business.

Aerosonic Corporation Acquisition

On June 5, 2013, Buccaneer Acquisition Sub Inc., a subsidiary of TransDigm Inc., completed the tender offer of a majority of the outstanding stock of Aerosonic Corporation ("Aerosonic"). Buccaneer Acquisition Sub Inc. was subsequently merged into Aerosonic. The aggregate price paid in the tender offer and merger was approximately $39.8 million in cash. Aerosonic designs and manufactures proprietary, highly engineered mechanical and digital altimeters, airspeed indicators, rate of climb indicators, microprocessor controlled air data test sets, angle of attack stall warning systems, integrated air data sensors and other aircraft sensors, monitoring systems and flight instrumentation for use on commercial and military aircraft. These products fit well with TransDigm's overall business direction. Aerosonic will be integrated into TransDigm's Airframe segment. The Company is in the process of obtaining information to value certain tangible and intangible assets of Aerosonic, and therefore the condensed consolidated financial statements at June 29, 2013 reflect a preliminary purchase price allocation for the business.

Aero-Instruments Co., LLC Acquisition

On September 17, 2012, TransDigm Inc. acquired all of the outstanding equity interests in Aero-Instruments Co., LLC ("Aero-Instruments"), for approximately $34.6 million in cash, which includes a purchase price adjustment of $0.1 million received in the first quarter of fiscal 2013. Aero-Instruments designs and manufactures highly engineered air data sensors including pitot probes, pitot-static probes, static pressure ports, angle of attack, temperature sensors and flight test equipment for use primarily in the business jet and helicopter markets. These products fit well with TransDigm's overall business direction. Aero-Instruments will be integrated into TransDigm's Power & Control segment. The Company is in the process of obtaining information to value certain tangible and intangible assets of Aero-Instruments, and therefore the condensed consolidated financial statements at June 29, 2013 reflect a preliminary purchase price allocation for the business.

AmSafe Global Holdings, Inc. Acquisition

On February 15, 2012, TransDigm Inc. acquired all of the outstanding stock of AmSafe Global Holdings, Inc. ("AmSafe"), for approximately $749.7 million in cash, which includes a purchase price adjustment of $0.5 million paid in the third quarter of fiscal 2012. AmSafe is a leading supplier of innovative, highly engineered and proprietary safety and restraint equipment used primarily in the global aerospace industry. These products fit well with TransDigm's overall business direction. The majority of AmSafe product lines were integrated into TransDigm's Airframe segment, and the remaining product lines were integrated into the Non-aviation segment. The distribution business acquired as part of AmSafe was sold on August 16, 2012 for approximately $17.8 million in cash, which includes a working capital adjustment of $0.1 million received in the first quarter of fiscal 2013. The equity investment in C-Safe LLC acquired as part of AmSafe was sold in October 2012 for approximately $16.4 million, which consisted of $5.0 million in cash at closing and an $11.4 million short term note receivable, of which $5.5 million was collected in the second quarter of fiscal 2013.

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Harco Laboratories Acquisition

On December 9, 2011, TransDigm Inc. acquired all of the outstanding stock of Harco Laboratories, Incorporated ("Harco"), for approximately $83.3 million in cash, which includes a purchase price adjustment of $0.4 million paid in the second quarter of fiscal 2012. Harco designs and manufactures highly engineered thermocouples, sensors, engine cable assemblies and related products for commercial aircraft. These products fit well with TransDigm's overall business direction. Harco was integrated into TransDigm's Power & Control segment.

Non-GAAP Financial Measures

We present below certain financial information based on our EBITDA and EBITDA As Defined. References to "EBITDA" mean earnings before interest, taxes, depreciation and amortization, and references to "EBITDA As Defined" mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and EBITDA As Defined and the reconciliations of net cash provided by operating activities to EBITDA and EBITDA As Defined presented below.

Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under accounting principles generally accepted in the United States of America ("GAAP"). We present EBITDA and EBITDA As Defined because we believe they are useful indicators for evaluating operating performance and liquidity.

Our management believes that EBITDA and EBITDA As Defined are useful as indicators of liquidity because securities analysts, investors, rating agencies and others use EBITDA to evaluate a company's ability to incur and service debt. In addition, EBITDA As Defined is useful to investors because our revolving credit facility under our senior secured credit facility requires compliance, on a pro forma basis, with a financial covenant that measures the ratio of the amount of our secured indebtedness to the amount of our Consolidated EBITDA defined in the same manner as we define EBITDA As Defined herein. This financial covenant is a material term of our senior secured credit facility as the failure to comply with such financial covenant could result in an event of default in respect of the revolving credit facility (and such an event of default could, in turn, result in an event of default under the indentures governing our 7 3/4% Senior Subordinated Notes due 2018, 5 1/2% Senior Subordinated Notes due 2020 and our 7 1/2% Senior Subordinated Notes due 2021).

In addition to the above, our management uses EBITDA As Defined to review and assess the performance of the management team in connection with employee incentive programs and to prepare its annual budget and financial projections. Moreover, our management uses EBITDA As Defined to evaluate acquisitions.

Although we use EBITDA and EBITDA As Defined as measures to assess the performance of our business and for the other purposes set forth above, the use of these non-GAAP financial measures as analytical tools has limitations, and you should not consider any of them in isolation, or as a substitute for analysis of our results of operations as reported in accordance with GAAP. Some of these limitations are:

neither EBITDA nor EBITDA As Defined reflects the significant interest expense, or the cash requirements necessary to service interest payments, on our indebtedness;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor EBITDA As Defined reflects any cash requirements for such replacements;

the omission of the substantial amortization expense associated with our intangible assets further limits the usefulness of EBITDA and EBITDA As Defined;

neither EBITDA nor EBITDA As Defined includes the payment of taxes, which is a necessary element of our operations; and

EBITDA As Defined excludes the cash expense we have incurred to integrate acquired businesses into our operations, which is a necessary element of certain of our acquisitions.

Because of these limitations, EBITDA and EBITDA As Defined should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA or EBITDA As Defined in isolation and specifically by using other GAAP measures, such as net income, net sales and operating profit, to measure our operating performance. Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net income or cash flow from operations determined in accordance with GAAP. Our calculation of EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.

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The following table sets forth a reconciliation of net income to EBITDA and EBITDA As Defined (in thousands):

                                           Thirteen Week Periods Ended             Thirty-Nine Week Periods Ended
                                          June 29,             June 30,            June 29,              June 30,
                                            2013                 2012                2013                  2012
                                                 (in thousands)                            (in thousands)
Net income                             $       76,655       $       90,446      $       218,762       $       237,103
Adjustments:
Depreciation and amortization
expense                                        16,062               17,616               49,835                50,645
Interest expense, net                          62,469               55,393              189,439               156,754
Income tax provision                           37,600               40,025              105,200               114,500

EBITDA                                        192,786              203,480              563,236               559,002
Adjustments:
Inventory purchase accounting
adjustments(1)                                  1,067                4,274                1,957                12,733
Acquisition integration costs(2)                  874                2,458                3,820                 5,842
Acquisition transaction-related
expenses(3)                                     5,440                  611                6,779                 4,759
Other acquisition accounting
adjustments                                        -                    -                    -                 (2,792 )
Non-cash compensation costs(4)                 31,718                5,858               45,980                14,393
Refinancing costs(5)                               -                    -                30,281                    -

EBITDA As Defined                      $      231,885       $      216,681      $       652,053       $       593,937

(1) Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.

(2) Represents costs incurred to integrate acquired businesses and product lines into TD Group's operations, facility relocation costs and other acquisition-related costs.

(3) Represents transaction-related costs comprising deal fees; legal, financial and tax due diligence expenses; and valuation costs that are required to be expensed as incurred.

(4) Represents the compensation expense recognized by TD Group under our stock option plans.

(5) Represents debt issue costs expensed in conjunction with the refinancing of our 2010 Credit Facility and 2011 Credit Facility in February 2013.

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The following table sets forth a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined (in thousands):

                                                              Thirty-Nine Week Period
                                                                       Ended
                                                             June 29,           June 30,
                                                               2013               2012
                                                                   (in thousands)
Net Cash Provided by Operating Activities                  $    267,035         $ 257,823
Adjustments:
Changes in assets and liabilities, net of effects from
acquisitions of businesses                                       49,671            14,851
Interest expense, net (1)                                       180,582           147,610
Income tax provision - current                                   98,424           112,580
Non-cash equity compensation (2)                                (45,980 )         (14,393 )
Excess tax benefit from exercise of stock options                43,785            40,531
Refinancing costs (6)                                           (30,281 )              -

EBITDA                                                          563,236           559,002
Adjustments:
Inventory purchase accounting adjustments (3)                     1,957            12,733
Acquisition integration costs (4)                                 3,820             5,842
Acquisition transaction-related expenses (5)                      6,779             4,759
Other acquisition related expenses                                   -             (2,792 )
Stock option expense (2)                                         45,980            14,393
Refinancing costs (6)                                            30,281                -

EBITDA As Defined                                          $    652,053         $ 593,937

(1) Represents interest expense excluding the amortization of debt issue costs and note premium and discount.

(2) Represents the compensation expense recognized by TD Group under our stock option plans.

(3) Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.

(4) Represents costs incurred to integrate acquired businesses and product lines into TD Group's operations, facility relocation costs and other acquisition-related costs.

(5) Represents transaction-related costs comprising deal fees; legal, financial and tax due diligence expenses; and valuation costs that are required to be expensed as incurred.

(6) Represents debt issue costs expensed in conjunction with the refinancing of our 2010 Credit Facility and 2011 Credit Facility in February 2013.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with GAAP, which often requires the judgment of management in the selection and application of certain accounting principles and methods. Management believes that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations. However, investors are cautioned that the sensitivity of financial statements to these methods, assumptions and estimates could create materially different results under different conditions or using different assumptions.

A summary of our significant accounting policies and estimates is included in the Annual Report on Form 10-K for the year ended September 30, 2012. There have been no significant changes to our critical accounting policies during the thirty-nine week period ended June 29, 2013.

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Results of Operations

The following table sets forth, for the periods indicated, certain operating
data of the Company, including presentation of the amounts as a percentage of
net sales (amounts in thousands):



                                                             Thirteen Week Periods Ended
                                         June 29, 2013       % of Sales        June 30, 2012       % of Sales
Net sales                               $       488,636            100.0 %    $       461,660            100.0 %
Cost of sales                                   219,650             45.0              208,358             45.1
Selling and administrative expenses              82,773             16.9               56,097             12.2
Amortization of intangible assets                 9,489              1.9               11,341              2.5

Income from operations                          176,724             36.2              185,864             40.3
Interest expense, net                            62,469             12.8               55,393             12.0
Income tax provision                             37,600              7.7               40,025              8.7

Net income                              $        76,655             15.7 %    $        90,446             19.6 %

                                                            Thirty-Nine Week Periods Ended
                                         June 29, 2013       % of Sales        June 30, 2012       % of Sales
Net sales                               $     1,384,663            100.0 %    $     1,237,602            100.0 %
Cost of sales                                   617,820             44.6              548,705             44.3
Selling and administrative expenses             193,397             14.0              147,421             11.9
Amortization of intangible assets                29,764              2.1               33,119              2.7

Income from operations                          543,682             39.3              508,357             41.1
Interest expense, net                           189,439             13.7              156,754             12.7
Refinancing costs                                30,281              2.2                   -                -
Income tax provision                            105,200              7.6              114,500              9.3

Net income                              $       218,762             15.8 %    $       237,103             19.2 %

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Changes in Results of Operations

Thirteen week period ended June 29, 2013 compared with the thirteen week period ended June 30, 2012.

Total Company

Net Sales. Net organic sales, acquisition sales and sales of the AmSafe distribution business, which was acquired as part of AmSafe on February 15, 2012 and sold on August 16, 2012, and the related dollar and percentage changes for the thirteen week periods ended June 29, 2013 and June 30, 2012 were as follows (amounts in millions):

                                          Thirteen Week Periods Ended
                                         June 29,              June 30,                             % Change
                                           2013                  2012            Change           Total  Sales
Organic sales                         $         473.8        $      452.9       $    20.9                   4.5 %
Acquisition sales                                14.8                  -             14.8                   3.2 %
AmSafe distribution sales                          -                  8.8            (8.8 )                -1.9 %

                                      $         488.6        $      461.7       $    26.9                   5.8 %

Organic sales for the quarter ended June 29, 2013 includes a favorable commercial OEM retroactive contract pricing adjustment of approximately $2 million. Organic sales for the quarter ended June 30, 2012 includes a favorable commercial aftermarket retroactive contract pricing adjustment of approximately $6 million.

Excluding the impact of the retroactive contract pricing adjustments and the AmSafe distribution sales indicated above, commercial OEM sales increased $12.1 million, or an increase of 9.5%, commercial aftermarket sales increased $5.2 million, or an increase of 2.8%, and defense sales increased $9.2 million, or an increase of 8.7%, for the quarter ended June 29, 2013 compared to the quarter ended June 30, 2012.

Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their acquisition dates. The amount of acquisition sales shown in the table above was mainly attributable to the acquisitions of Arkwin and Aerosonic in fiscal 2013 and Aero-Instruments in fiscal 2012.

Cost of Sales and Gross Profit. Cost of sales increased by $11.3 million, or 5.4%, to $219.7 million for the quarter ended June 29, 2013 compared to $208.4 million for the quarter ended June 30, 2012. Cost of sales and the related percentage of total sales for the thirteen week periods ended June 29, 2013 and June 30, 2012 were as follows (amounts in millions):

                                             Thirteen Week Periods Ended
. . .
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