<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 2, 1999.
[ ] 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
------------------------------------------------------
TransDigm Inc. and TransDigm Holding Company
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(Exact name of registrant as specified in its charter)
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Delaware 13-3733378
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(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26380 Curtiss Wright Parkway, Richmond Heights, Ohio 44143
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(Address of principal executive offices) (Zip Code)
(216) 289-4939
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(Registrant's telephone number, including area code)
8233 Imperial Drive, Waco, Texas 76712
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES ___ No _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock of TransDigm Holding Company, $0.01 Par Value 119,925
- -------------------------------------------------------------------------------
(Class) (Outstanding at
April 30, 1999)
<PAGE>
INDEX
Page
Part I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets -- April 2, 1999 and
September 30, 1998 1
Consolidated Statements of Operations -- Thirteen and
Twenty-Six Weeks Ended April 2, 1999 and March 27, 1998 2
Consolidated Statement of Changes in Stockholders' Equity --
Twenty-Six Weeks Ended April 2, 1999 3
Consolidated Statements of Cash Flows -- Twenty-Six Weeks
Ended April 2, 1999 and March 27, 1998 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II: OTHER INFORMATION
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1
TRANSDIGM HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 2,
1999 SEPTEMBER 30,
(UNAUDITED) 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,555 $ 19,486
Accounts receivable, net 19,591 12,530
Inventories 18,337 18,280
Refundable income taxes 5,764 --
Deferred income taxes and other 3,942 3,964
----------- -------------
Total current assets 51,189 54,260
PROPERTY, PLANT AND EQUIPMENT -- Net 21,773 21,951
INTANGIBLE ASSETS -- Net 34,394 35,294
DEBT ISSUE COSTS -- Net 10,827 606
DEFERRED INCOME TAXES AND OTHER 4,350 3,674
----------- -------------
TOTAL $ 122,533 $115,785
----------- -------------
----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 6,062 $ 5,000
Accounts payable 3,837 5,667
Accrued liabilities 12,901 10,239
Put warrants 16,700
----------- -------------
Total current liabilities 22,800 37,606
LONG-TERM DEBT - Less current portion 229,738 40,000
OTHER LIABILITIES 2,430 1,752
----------- -------------
Total liabilities 254,968 79,358
----------- -------------
COMMITMENTS AND CONTINGENCIES -- --
----------- -------------
REDEEMABLE COMMON STOCK 800 --
----------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Capital stock 100,596 24,281
Retained earnings (deficit) (233,077) 12,900
Accumulated other comprehensive income (754) (754)
----------- -------------
Total stockholders' equity (deficit) (133,235) 36,427
----------- -------------
TOTAL $ 122,533 $115,785
----------- -------------
----------- -------------
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE>
TRANSDIGM HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
-------------------- -------------------
APRIL 2, MARCH 27, APRIL 2, MARCH 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET SALES $31,129 $27,253 $59,323 $53,357
COST OF SALES 15,993 14,022 30,930 28,729
-------- --------- -------- ---------
GROSS PROFIT 15,136 13,231 28,393 24,628
-------- --------- -------- ---------
OPERATING EXPENSES:
Selling and administrative 2,727 2,260 5,412 4,929
Amortization of intangibles 254 726 899 1,361
Research and development 566 494 1,014 833
Merger expenses 118 -- 39,711 --
-------- --------- -------- ---------
Total operating expenses 3,665 3,480 47,036 7,123
-------- --------- -------- ---------
INCOME (LOSS) FROM OPERATIONS 11,471 9,751 (18,643 ) 17,505
INTEREST EXPENSE -- Net 6,547 696 8,823 1,742
-------- --------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 4,924 9,055 (27,466 ) 15,763
INCOME TAX PROVISON (BENEFIT) 1,966 3,495 (5,600 ) 6,085
-------- --------- -------- ---------
NET INCOME (LOSS) $ 2,958 $ 5,560 $(21,866) $ 9,678
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
TRANSDIGM HOLDING COMPANY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWENTY-SIX WEEKS ENDED APRIL 2, 1999
(DOLLARS IN THOUSANDS)
UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER
CAPITAL EARNINGS COMPREHENSIVE
STOCK (DEFICIT) INCOME TOTAL
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1998 $24,281 $ 12,900 $(754) $ 36,427
ISSUANCE OF CAPITAL STOCK 100,200 100,200
PURCHASE OF CAPITAL STOCK (28) (28)
PAYMENT OF CONSIDERATION IN
RECAPITALIZATION (23,857) (224,111) (247,968)
NET LOSS (21,866) (21,866)
-------- --------- ----- ---------
BALANCE, APRIL 2, 1999 $100,596 $(233,077) $(754) $(133,235)
-------- --------- ----- ---------
-------- --------- ----- ---------
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
TRANSDIGM HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
UNAUDITED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
--------------------
APRIL 2, MARCH 27,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(21,866) $ 9,678
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,915 2,052
Amortization of intangibles 899 1,361
Amortization of debt issue costs 1,119 150
Interest deferral on Holdings PIK Notes 800 --
Changes in assets and liabilities:
Accounts receivable (7,061) (2,644)
Inventories (57) 74
Refundable income taxes (5,764) (55)
Prepaid expenses and other assets 22 139
Accounts payable (1,830) (1,824)
Accrued liabilities 2,662 (2,957)
-------- ---------
Net cash provided by (used in) operating activities (29,161) 5,974
-------- ---------
INVESTING ACTIVITIES:
Capital expenditures (1,727) (1,330)
Marathon acquisition, post-closing purchase price
adjustment -- 766
-------- ---------
Net cash used in investing activities (1,727) (564)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from subordinated notes, net of fees of $6,234 118,766 --
Proceeds from new credit facility, net of fees of $4,765 87,832 --
Proceeds from Holdings PIK Notes and common stock, net
of fees of $341 19,659 --
Payment of consideration in recapitalization - common
stock and warrants (263,875) --
Net repayments under revolving credit loans (2,597) --
Repayment of term notes (45,000) (5,000)
Proceeds from issuance of capital stock 100,200 --
Purchase of capital stock (28) (69)
-------- ---------
Net cash provided by (used in) financing activities 14,957 (5,069)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,931) 341
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,486 5,397
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,555 $ 5,738
-------- ---------
-------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 3,263 $ 1,843
-------- ---------
-------- ---------
Cash paid during the period for income taxes $ 544 $ 6,406
-------- ---------
-------- ---------
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
TRANSDIGM HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED APRIL 2, 1999 AND MARCH 27, 1998
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1. DESCRIPTION OF THE BUSINESS AND MERGER
TransDigm Holding Company ("Holdings"), through its wholly-owned
operating subsidiary, TransDigm Inc. ("TransDigm"), is a premier
supplier of proprietary mechanical components servicing the aircraft,
mining, marine and other manufacturing industries. TransDigm, along with
its wholly-owned subsidiary, Marathon Power Technologies Company
("Marathon"), offers a broad line of component products including tube
connectors, valves, batteries, static inverters, pumps, quick
disconnects, clamps and ball bearings and sliding controls.
On December 3, 1998, Phase II Acquisition Corp. ("Acquiror"), an entity
formed by affiliates of Odyssey Investment Partners, LP ("Odyssey"), and
Holdings consummated a definitive agreement and plan of merger (the
"Merger Agreement" or the "Merger"). Pursuant to the terms of the
Merger, Acquiror was merged with and into Holdings, with Holdings being
the surviving corporation in the Merger (the "Surviving Corporation").
In the Merger, owners of Holdings' outstanding common stock received, in
exchange for each outstanding share of common stock (except for shares
held directly or indirectly by Holdings or the Rolled Shares, as defined
below), the "Per Share Merger Consideration" as defined in the Merger
Agreement. The aggregate consideration payable pursuant to the Merger,
including amounts payable to holders of options and warrants, was
approximately $299.7 million.
In connection with the Merger, Kelso Investment Associates IV, LP and
Kelso Equity Partners II, LP (collectively, "Kelso") retained
approximately 15.4% of the Surviving Corporation's outstanding common
stock (the "Rolled Shares"). In addition, certain members of management
of Holdings agreed, in connection with and as a condition to entering
into the Merger Agreement, to rollover stock options with an estimated
gross and net value of approximately $17.2 million and $13.7 million,
respectively. The Merger was treated as a recapitalization (the
"Recapitalization") for financial reporting purposes, which had no
impact on the historical basis of Holdings' consolidated assets and
liabilities.
Simultaneously with the Merger, Holdings and TransDigm (collectively
with Marathon, the "Company") refinanced all of their existing debt. The
Merger, the refinancing, and payment of fees and expenses were funded by
(i) existing cash balances, (ii) investments by Odyssey of $100.2
million, (iii) funds from a new $120 million Senior Credit Facility,
(iv) funds from $125 million Senior Subordinated Notes and (v) Holdings
PIK Notes of $20 million issued to certain stockholders. At April 2,
1999, Holdings had $30 million available for working capital, certain
permitted acquisitions and general corporate purposes under the new
Senior Credit Facility.
Separate financial statements of TransDigm are not presented since the
Senior Subordinated Notes are guaranteed by Holdings and all direct and
indirect subsidiaries of TransDigm and since Holdings has no operations
or assets separate from its investment in TransDigm.
2. UNAUDITED FINANCIAL INFORMATION
Except for the September 30, 1998 consolidated balance sheet which was
derived from the Company's audited financial statements, 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. The results
of operations for the thirteen and twenty-six weeks ended April 2, 1999
are not necessarily indicative of the results to be expected for the
full year.
-5-
<PAGE>
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost of
inventories is determined by the average cost and the first-in,
first-out (FIFO) methods. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
APRIL 2, SEPTEMBER 30,
1999 1998
<S> <C> <C>
Work-in-progress and finished goods $ 9,499 $10,577
Raw materials and purchased component parts 13,162 12,038
-------- -------------
Total 22,661 22,615
Reserve for excess and obsolete inventory (4,324) (4,335)
-------- -------------
Inventories -- net $ 18,337 $18,280
-------- -------------
-------- -------------
</TABLE>
4. INCOME TAXES
Income tax expense (benefit) as a percentage of income (loss) before
income taxes was (20.4)% for the twenty-six weeks ended April 2, 1999
compared to 38.6% for the twenty-six weeks ended March 27, 1998. The tax
benefit recorded for the twenty-six weeks ended April 2, 1999 was
significantly impacted by the non-deductible expenses incurred in
connection with the Recapitalization.
5. REDEEMABLE COMMON STOCK
The redeemable common stock represents the estimated value of common
stock held by management shareholders that have certain put rights.
6. ENVIRONMENTAL CONTINGENCY
The soil and goundwater beneath the Company's facility in Waco, Texas
have been impacted by releases of hazardous materials. The resulting
contaminants of concern have been delineated and characterized. Because
the majority of these contaminants are presently below action levels
prescribed by the Texas Natural Resources Conservation Commission
("TNRCC"), and because an escrow was previously funded to cover the cost
of remediation that TNRCC might require for those contaminants currently
in excess of action limits, management does not believe the condition of
the soil and groundwater at the Waco facility will require incurrence of
material expenditures.
7. NEW ACCOUNTING STANDARD
The Company adopted the provisions of Statement No. 130 of the Financial
Accounting Standards Board, "Reporting Comprehensive Income," during the
first quarter of fiscal 1999. Accordingly, the Company's accumulated
other comprehensive income, consisting solely of its minimum pension
liability adjustment, is reported separately in the accompanying
consolidated balance sheets and statement of changes in stockholders'
equity. There were no changes in accumulated other comprehensive income
during the twenty-six weeks ended April 2, 1999 and March 27, 1998.
-6-
<PAGE>
8. SUBSEQUENT EVENT
On April 23, 1999, TransDigm acquired all of the outstanding common
stock of ZMP, Inc. ("ZMP"), the corporate parent of Adams Rite
Aerospace, Inc. ("Adams Rite Aerospace"), through a merger. Adams Rite
Aerospace manufactures mechanical hardware, fluid controls, lavatory
hardware, electromechanical controls and oxygen systems related
products. The purchase price for the acquisition was $41 million,
subject to adjustment for changes in working capital and other matters
as defined in the merger agreement. The acquisition was funded entirely
through additional borrowings under the Company's credit facility. As a
result of the acquisition, ZMP and Adams Rite Aerospace became
wholly-owned subsidiaries of TransDigm.
The Company will account for the acquisition as a purchase and will
include the results of operations of the acquired companies in the
Company's fiscal 1999 consolidated financial statements from the
effective date of the acquisition.
Unaudited pro forma combined net sales, operating loss and net loss for
the twenty-six weeks ended April 2, 1999, giving effect to the
acquisition as if it had occurred at the beginning of the period, would
have been $77.3 million, $19.9 million and $23.9 million, respectively.
This unaudited pro forma information includes adjustments resulting from
the allocation of the purchase price to the net assets acquired based on
a preliminary analysis of the fair value of assets and liabilities
assumed. The unaudited pro forma amounts do not include any potential
expense reductions from the consolidation of certain functions of the
acquired companies with the Company. In addition, the unaudited pro
forma financial information is not necessarily indicative of results of
operations had the acquisition been made at the beginning of the period
or of future results of operations.
-7-
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIS QUARTERLY STATEMENT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING, IN PARTICULAR, THE
STATEMENTS ABOUT OUR PLANS, STRATEGIES AND PROSPECTS UNDER THIS "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
SECTION. 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. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS MADE IN THIS
QUARTERLY STATEMENT ARE SET FORTH HEREIN AS WELL AS UNDER THE CAPTION "RISK
FACTORS" IN THE REGISTRATION STATEMENT FILED BY THE COMPANY ON FORM S-4 ON
JANUARY 29, 1999, AS AMENDED THROUGH APRIL 23, 1999. ALL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THOSE CAUTIONARY STATEMENTS.
OVERVIEW
The Company is a leading supplier of highly engineered aircraft components
for use on nearly all commercial and military aircraft. The Company sells its
products to commercial airlines and aircraft maintenance facilities in the
aftermarket, to most original equipment manufacturers ("OEMs") of aircraft
and to various agencies of the United States government. Sales of the
Company's products are made directly to these organizations as well as
through U.S. and international distributors who maintain inventories
throughout the world of products purchased from the Company and others.
In connection with the Recapitalization discussed in Note 1 to the
consolidated financial statements, including the financing and the
application of the proceeds thereof, the Company incurred certain
nonrecurring costs and charges, consisting primarily of compensation costs
for management bonuses and stock options that were canceled in conjunction
with the Recapitalization, the cost of terminating a financial advisory
services agreement with an affiliate of one of the Company's stockholders,
the write-off of deferred financing costs, and professional, advisory and
financing fees. A one-time charge of approximately $39.7 million ($28.9
million after tax) was recorded during the twenty-six weeks ended April 2,
1999. Because the cash costs included in this charge were funded principally
through the proceeds of the subordinated notes and borrowings under the new
Senior Credit Facility, this cost did not materially impact the Company's
liquidity, ongoing operations or market position. For a discussion of the
consequences of the incurrence of indebtedness in connection with the
Recapitalization, see the heading "Liquidity and Capital Resources" in this
section.
On April 23, 1999, the Company acquired ZMP, Inc. ("ZMP"), the corporate
parent of Adams Rite Aerospace, Inc. ("Adams Rite Aerospace"), under the
terms of an agreement and plan of reorganization, dated March 31, 1999. The
purchase price for the acquisition of ZMP was $41 million, subject to
post-closing purchase price adjustments. The acquisition of ZMP and the
related expenses were funded entirely through additional borrowings under the
Company's Senior Credit Facility. Adams Rite Aerospace is a well established
supplier of highly engineered aircraft components that will complement the
businesses of AdelWiggins, AeroControlex and Marathon. Through the
acquisition of ZMP, the Company acquired four additional major product lines
of Adams Rite Aerospace consisting of mechanical hardware, fluid control
products, electromechanical control products and oxygen system related
products. On an historical basis, Adams Rite Aerospace has realized a lower
gross profit as a percentage of net sales than that achieved by the Company.
Although management intends to take steps to increase the profitability of
Adams Rite Aerospace's business over the longer term, consolidation of the
financial results of Adams Rite Aerospace with those of the Company will
result in a lower profit margin for the Company as a whole, at least in the
near term. For its fiscal year ended June 26, 1998, Adams Rite Aerospace
generated net sales, operating income and net income, of $34.2 million, $3.6
million and $1.0 million, respectively.
-8-
<PAGE>
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated
financial statements. The Company's fiscal year ends on September 30.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
data of the Company as a percentage of net sales.
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
---------------------- ----------------------
APRIL 2, MARCH 27, APRIL 2, MARCH 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
----- ----- ----- -----
Gross profit 49 49 48 46
Selling and administrative 9 8 9 9
Amortization of intangibles 1 3 2 2
Research and development 2 2 2 2
Merger expenses -- -- 66 --
----- ----- ----- -----
Operating income (loss) 37 36 (31) 33
Interest expense -- net 21 3 15 3
Provision (benefit) for income
taxes 6 13 (9) 12
----- ----- ----- -----
Net income (loss) 10% 20% (37)% 18%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
CHANGES IN RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 2, 1999 COMPARED WITH THIRTEEN WEEKS ENDED MARCH 27,
1998.
- - NET SALES. Net sales increased by $3.8 million, or 13.9%, to $31.1 million
for the quarter ended April 2, 1999 from $27.3 million for the comparable
quarter last year. New business initiatives along with an increase in
demand in certain segments of the industry resulted in a $2.6 million
increase in aftermarket sales, principally for large commercial transport
and military aircraft, and a $1.2 million increase in sales to OEMs.
- - GROSS PROFIT. Gross profit (net sales less cost of sales) increased by $1.9
million, or 14.4%, to $15.1 million for the quarter ended April 2, 1999
from $13.2 million from the comparable quarter last year. This increase was
attributable to the higher sales discussed above. Gross profit as a
percentage of net sales was 49% during the second quarter of fiscal 1998
and the second quarter of fiscal 1999.
- - SELLING AND ADMINISTRATIVE. Selling and administrative expenses increased
by $.4 million, or 17.4%, to $2.7 million for the quarter ended April 2,
1999 from $2.3 million for the quarter ended March 27, 1998. This increase
principally resulted from the higher sales discussed previously. Selling
and administrative expenses as a percentage of net sales increased slightly
from 8% for the quarter ended March 27, 1998 to 9% for the quarter ended
April 2, 1999.
- - AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased by $.4
million, or 57.1%, to $.3 million for the quarter ended April 2, 1999 from
$.7 million for the quarter ended March 27, 1998 due to certain intangible
assets becoming fully amortized.
- - RESEARCH AND DEVELOPMENT. Research and development expense increased $.1
million, or 20%, to $.6 million for the quarter ended April 2, 1999 from
$.5 million for the comparable quarter last year. This increase was
primarily attributable to continued new product development. Research and
development expense, as a percentage of net sales, remained relatively
constant at 2% in both the second quarter of fiscal 1999 and 1998.
-9-
<PAGE>
- - MERGER EXPENSES. Additional merger costs totaling $.1 million were incurred
during the second quarter of fiscal 1999 in connection with the Merger and
Recapitalization.
- - OPERATING INCOME. Operating income increased from $9.8 million in the
second quarter of fiscal 1998 to $11.5 million in the second quarter of
fiscal 1999. Operating income increased by $1.7 million, or 17%. This
increase was primarily attributable to the increase in sales volume and
gross profits referred to above. As a percentage of net sales, operating
income increased to 37% for the thirteen weeks ended April 2, 1999 from 36%
for the thirteen weeks ended March 27, 1998.
- - INTEREST EXPENSE. Interest expense increased by $5.8 million to $6.5
million for the second quarter of fiscal 1999 from $.7 million for the
second quarter of fiscal 1998 as a result of the increase in the average
level of outstanding borrowings in connection with the Recapitalization.
- - INCOME TAXES. Income tax expense (benefit) as a percentage of income (loss)
before income taxes was consistent at 40% for the second quarter of fiscal
1999 compared to 39% for the second quarter of fiscal 1998.
- - NET INCOME. The Company earned $3.0 million for the second quarter of
fiscal 1999 compared to net income of $5.6 million for the second quarter
of fiscal 1998 primarily as a result of the factors referred to above.
TWENTY-SIX WEEKS ENDED APRIL 2, 1999 COMPARED WITH TWENTY-SIX WEEKS ENDED
MARCH 27, 1998.
- - NET SALES. Net sales increased by $5.9 million, or 11%, to $59.3 million
for the twenty-six weeks ended April 2, 1999 from $53.4 million for the
twenty-six weeks ended March 27, 1998. New business initiatives along with
an increase in demand in certain segments of the industry resulted in a
$4.2 million increase in aftermarket sales, principally for large
commercial transport aircraft, and a $1.7 million increase in sales to
OEMs.
- - GROSS PROFIT. Gross profit (net sales less cost of sales) increased by $3.8
million, or 15.5%, to $28.4 million for the twenty-six weeks ended April 2,
1999 from $24.6 million for the twenty-six weeks ended March 27, 1998. This
increase was attributable to the higher sales, especially after market
sales, discussed above and the larger gross margins that are associated
with such sales. Gross profit for the twenty-six weeks ended March 27, 1998
includes the effect of a non-cash charge of $.3 million due to a purchase
accounting adjustment to inventory associated with the acquisition of
Marathon.
- - SELLING AND ADMINISTRATIVE. Selling and administrative expenses increased
by $.5 million, or 10.2%, to $5.4 million for the twenty-six weeks ended
April 2, 1999 from $4.9 million for the twenty-six weeks ended March 27,
1998. This increase principally resulted from the higher sales discussed
previously.
- - AMORTIZATION OF INTANGIBLES. Amortization of intangibles decreased by $.5
million, or 35.7%, to $.9 million for the twenty-six weeks ended April 2,
1999 from $1.4 million for the twenty-six weeks ended March 27, 1998 due
to certain intangible assets becoming fully amortized.
- - RESEARCH AND DEVELOPMENT. Research and development expense increased $.2
million, or 25% to $1 million for the twenty-six weeks ended April 2, 1999
from $.8 million for the comparable period last year. This increase was
primarily attributable to continued new product development. Research and
development expense, as a percentage of net sales, remained constant at 2%
for both periods.
-10-
<PAGE>
- - MERGER EXPENSE. Merger costs totaling $39.7 million were incurred during
the twenty-six weeks ended April 2, 1999 in connection with the Merger and
Recapitalization. The nature of the merger-related charges is detailed
below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Compensation expense on stock options $19,437
Management bonuses 6,450
Termination of financial advisory services agreement 5,850
Professional fees and expenses 6,791
Write-off of deferred financing costs 552
Other 631
-------
$39,711
-------
-------
</TABLE>
- - OPERATING INCOME (LOSS). Operating income decreased from $17.5 million for
the twenty-six weeks ended March 27, 1998 to a loss of $18.6 million for
the twenty-six weeks ended April 2, 1999 due to the merger expenses
discussed above. Operating income, excluding merger-related expenses,
increased by $3.6 million, or 20.6%. As a percentage of net sales,
operating income before merger-related expenses increased to 35% for the
twenty-six weeks ended April 2, 1999 from 33% for the twenty-six weeks
ended March 27, 1998. This increase was primarily attributable to the
increase in sales volume and gross profit referred to above.
- - INTEREST EXPENSE. Interest expense increased by $7.1 million to $8.8
million for the twenty-six weeks ended April 2, 1999 from $1.7 million for
the twenty-six weeks ended March 27, 1998 as a result of the increase in
the average level of outstanding borrowings in connection with the
Recapitalization.
- - INCOME TAXES. Income tax expense (benefit) as a percentage of income (loss)
before income taxes was (20.4)% for the twenty-six weeks ended April 2,
1999 compared to 38.6% for the twenty-six weeks ended March 27, 1998. The
tax benefit recorded for the twenty-six weeks ended April 2, 1999 was
significantly impacted by the non-deductible expenses incurred in
connection with the Recapitalization.
- - NET INCOME (LOSS). The Company incurred a net loss of $21.9 million for the
twenty-six weeks ended April 2, 1999 compared to net income of $9.7 million
for the twenty-six weeks ended March 27, 1998 primarily as a result of the
factors referred to above.
BACKLOG
Management believes that sales order backlog (i.e. orders for products that
have not yet been shipped) is a useful indicator of sales to OEMs. As of
April 2, 1999, the Company estimated its sales order backlog at $47.1 million
compared to an estimated $45.1 million as of March 27, 1998. The majority of
the purchase orders outstanding as of April 2, 1999 are scheduled for
delivery within the next twelve months. Purchase orders are generally subject
to cancellation by the customer prior to shipment. The level of unfilled
purchase orders at any given date during the year will be materially affected
by the timing of the Company's receipt of purchase orders and the speed with
which those orders are filled. Accordingly, the Company's backlog as of April
2, 1999 may not necessarily represent the actual amount of shipments or sales
for any future period.
FOREIGN OPERATIONS
The Company manufactures virtually all of its products in the United States.
However, a portion of the Company's current sales is conducted abroad. These
sales are subject to numerous additional risks, including the impact of
foreign government regulations, currency fluctuations, political
uncertainties and differences in business practices. There can be no
assurance that foreign governments will not adopt regulations or take other
action that would have a direct or indirect adverse impact on the business or
market opportunities of the Company within such governments' countries.
Furthermore, there can be no assurance that the political, cultural and
economic climate outside the United States will be favorable to the Company's
operations and growth strategy.
-11-
<PAGE>
INFLATION
Many of the Company's raw materials and operating expenses are sensitive to
the effects of inflation, which could result in higher operating costs. The
effects of inflation on the Company's businesses during the twenty-six week
periods ended April 2, 1999 and March 27, 1998 were not significant.
LIQUIDITY AND CAPITAL RESOURCES
The Company used approximately $29.2 million of cash in operating activities
during the twenty-six weeks ended April 2, 1999 compared to approximately
$6.0 million generated during the twenty-six weeks ended March 27, 1998. Such
decrease in operating cash flows is due to the one-time merger expenses of
$39.7 million partially offset by improved operating results.
Cash used in investing activities was approximately $1.7 million during the
twenty-six weeks ended April 2, 1999 compared to approximately $.6 million
used during the twenty-six weeks ended March 27, 1998. The change in
investing cash flows is primarily due to a $.4 million increase in capital
expenditures during fiscal 1999 and a post-closing purchase price adjustment
of approximately $.7 million received during the first quarter of fiscal 1998
as a result of the acquisition of Marathon.
Cash provided by financing activities during the twenty-six weeks ended April
2, 1999 was approximately $15 million compared to approximately $5.1 million
used during the twenty-six weeks ended March 27, 1998. This change in
financing cash flows was due to incurrence and refinancing of substantial
indebtedness as a result of the Recapitalization.
As a result of the Recapitalization and the acquisition of ZMP, the Company
incurred substantial indebtedness and refinanced certain other indebtedness
including all borrowings under the prior credit facility. As of April 2,
1999, on a pro forma basis after giving effect to the acquisition of ZMP and
the related borrowings under the Company's credit facility as if they had
occurred on April 2, 1999, Holdings would have had indebtedness consisting of
$20.8 million in Holdings PIK Notes and TransDigm would have had indebtedness
consisting of (1) $125 million in principal amounts of subordinated notes and
(2) $132 million of borrowings under the credit facility, which would have
consisted of $8 million under a $30 million Revolving Credit Facility, a $62
million term loan under the Tranche A Facility and a $62 million term loan
under the Tranche B Facility.
The interest rate for the credit facility is, at TransDigm's option, either
(A) a floating rate equal to the Base Rate plus the Applicable Margin, as
defined in the credit facility, or (B) the Eurodollar Rate for fixed periods
of one, two, three, or six months, plus the Applicable Margin. The
"Applicable Margin" means the percentage per year equal to (1) in the case of
Tranche A Facility and Revolving Credit Facility, (A) bearing an interest
rate determined by the Base Rate, plus 2.25%, 2.00%, 1.75% or 1.50% depending
on Holdings' ability to achieve the respective debt coverage ratio specified
in the credit facility, as amended; and (B) bearing an interest rate
determined by the Eurodollar Rate, plus 3.25%, 3.00%, 2.75% or 2.50%
depending on Holdings' ability to achieve the respective debt coverage ratio
specified in the credit facility, as amended; and (2) in the case of Tranche
B Facility, (A) bearing an interest rate determined by the Base Rate, 2.50%;
and (B) bearing an interest rate determined by the Eurodollar Rate, 3.50%.
The credit facility is subject to mandatory prepayment with a defined
percentage of net proceeds from certain asset sales, insurance proceeds or
other awards that are payable in connection with the loss, destruction or
condemnation of any assets, certain new debt and equity offerings and 50% of
excess cash flow (as defined in the credit facility) in excess of a
predetermined amount under the credit facility.
The subordinated notes bear interest at 10 3/8% and do not require principal
payments prior to maturity. The Revolving Credit Facility and the Tranche A
Facility will each mature on the six year anniversary of the initial
borrowing date and the Tranche B Facility will mature on the seven and a half
year anniversary of the initial borrowing date. The credit facility requires
TransDigm to amortize the outstanding indebtedness under each of the Tranche
A and the Tranche B Facilities, commencing in the year 1999, and contains
restrictive covenants that will, 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 other indebtedness.
-12-
<PAGE>
The Company's primary cash needs will consist of capital expenditures and
debt service. The Company incurs capital expenditures for the purpose of
maintaining and replacing existing equipment and facilities and, from time to
time, for facility expansion. Capital expenditures totaled approximately $1.7
million and $1.3 million during the twenty-six weeks ended April 2, 1999 and
March 27, 1998, respectively. The Company estimates that capital
expenditures, excluding those of Adams Rite Aerospace, will total
approximately $5.6 million in fiscal 1999.
The Company intends to pursue additional acquisitions that present
opportunities to realize significant synergies, operating expense economies
or overhead cost savings or to increase the Company's market position. The
Company regularly engages in discussions with respect to potential
acquisitions and investments. However, there are no binding agreements with
respect to any material acquisitions at this time, and there can be no
assurance that we will be able to reach an agreement with respect to any
future acquisition. The Company's acquisition strategy may require
substantial capital, and no assurance can be given that the Company will be
able to raise any necessary funds on terms acceptable to the Company or at
all. If the Company incurs additional debt to finance acquisitions, its total
interest expense will increase.
The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance, its indebtedness, including the
subordinated notes, or to fund planned capital expenditures and research and
development, will depend on its future performance, which, to a certain
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond its control. Based upon the
current level of operations and anticipated cost savings and revenue growth,
management believes that cash flow from operations and available cash,
together with available borrowings under the credit facility, will be
adequate to meet the Company's future liquidity needs for at least the next
few years. The Company may, however, need to refinance all or a portion of
the principal of the subordinated notes on or prior to maturity. There can be
no assurance that the Company's business will generate sufficient cash flow
from operations and that anticipated revenue growth and operating
improvements will be sufficient to enable the Company to service its
indebtedness, including the subordinated notes, or to fund its other
liquidity needs. In addition, there can be no assurance that the Company will
be able to effect any such refinancing on commercially reasonable terms or at
all.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. The Company adopted this
standard during the first quarter of fiscal 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement requires that a public business enterprise report financial and
descriptive information about its reportable operating segments such as a
measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. The Company will adopt this standard for its
fiscal 1999 year-end financial statements.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement requires an enterprise to disclose certain
information about its pension and postretirement benefits, including a
reconciliation of beginning and ending balances of the benefit obligation,
the funded status of the plans, and the amount of net periodic benefit cost
recognized. The Company will adopt this standard for its fiscal 1999 year-end
financial statements.
-13-
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions
are met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or
an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The Company will adopt this standard during fiscal
2000.
While management has not completed its analysis of those new accounting
standards contained in SFAS No. 131, SFAS No. 132, and SFAS No. 133, the
adoption of these standards is not expected to have a material effect on the
Company's financial statements.
IMPACT OF YEAR 2000 ISSUE
The Company has completed a review of its information technology systems at
its Waco, Texas site and is completing a review of its information technology
systems at the Los Angeles, California site and the Cleveland, Ohio site. The
Company is also completing a review of its embedded systems at each of the
three sites in order to assess its exposure to year 2000 issues. These
reviews, including testing and verification, will be completed internally.
Management anticipates that these reviews, including testing and
verification, will be completed by June 1999. Prior to the acquisition of
ZMP, ZMP represented to the Company that the review of Adams Rite Aerospace's
information technology systems and embedded systems has been completed and
that it believes the plan to make those systems year 2000 compliant can be
fully implemented by December 1999. However, the Company has not initiated
its independent review of Adams Rite Aerospace's information technology
systems or embedded systems. Although management believes that any repairs
necessary to make its embedded systems year 2000 compliant can be completed
internally, until the Company has completed its review, testing and
verification of its embedded systems, the Company will not be in a position
to assess the extent of repairs that will be required or the parts that will
need to be replaced in order to make its embedded systems year 2000
compliant. The Company purchased all of its computer software from third
party vendors and is relying on those vendors to make their software year
2000 compliant. Except for the vendor of its e-mail system, those vendors
have provided the Company with third party certifications that their systems
are year 2000 compliant.
The Company has distributed questionnaires to assess the year 2000 compliance
of its suppliers and customers, including various agencies of the United
States government. However, the Company has not currently gathered sufficient
data to determine to what extent those suppliers and customers are year 2000
compliant. Prior to the acquisition of ZMP, ZMP represented to the Company
that it has received confirmation from the material suppliers and customers
of Adams Rite Aerospace of their respective year 2000 compliance.
In the event that year 2000 problems arise within the Company or that its
suppliers or customers, including various agencies of the United States
government, do not successfully and timely achieve year 2000 compliance, the
result may be a delay in its receiving orders and collecting payments,
leading to a temporary loss of revenue. The Company has incurred
approximately $180,000 in costs associated with year 2000 compliance and,
excluding Adams Rite Aerospace, anticipates incurring $150,000 of additional
costs in the future. Because the Company has not independently reviewed the
information technology systems and the embedded systems of Adams Rite
Aerospace, management does not currently have adequate data to estimate the
additional cost that may have to be incurred by the Company in order to make
Adams Rite Aerospace's systems year 2000 compliant. However, since the
anticipated additional cost reflects the cost of the review, testing,
verification and repair to be completed internally, the Company has not
allocated such cost between its embedded systems and its information
technology systems. The Company may, however, have to bear further year 2000
costs and expenses, which could have a material adverse effect on its
business.
-14-
<PAGE>
The Company has no formal contingency plan in the event year 2000 problems
arise with respect to its information technology systems; however, the
Company's accounting and business information systems are not complex, and
manual procedures could be performed for a period of time to provide the
information necessary to continue to operate the business. In the event that
year 2000 problems arise within embedded systems, the Company intends to
employ its existing subcontractor machinists to manufacture the affected
components.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
All of the Company's outstanding indebtedness at September 30, 1998 was
repaid in connection with the Merger and Recapitalization. At April 2, 1999,
the Company is subject to interest rate risk with respect to borrowings under
its credit facility as the interest rates on such borrowings vary with market
conditions and, thus, the amount of outstanding borrowings approximates the
fair value of the indebtedness. On a historical basis, the weighted average
interest rate on the $90 million of borrowings outstanding under the credit
facility at April 2, 1999 was 8.75%. Also outstanding at April 2, 1999 was
$125 million of Company indebtedness in the form of subordinated notes and
$20.8 million of Holdings PIK Notes. The interest rates on both of these
borrowings are fixed at 10 3/8% and 12% per year, respectively. Although
management believes that the fair value of these debt obligations
approximates their outstanding balance at April 2, 1999, the effect of a
hypothetical one percentage point decrease in interest rates would increase
the estimated fair value of the borrowings by $13.2 million and $2.4 million,
respectively.
The acquisition of ZMP, including all of its outstanding common stock, on
April 23, 1999 and the related expenses were funded entirely through $42
million of additional borrowings under the credit facility. The weighted
average interest rate on all borrowings outstanding under the credit facility
on April 23, 1999 was 8.5%. The effect of a hypothetical one percentage point
decrease in interest rates would increase the estimated fair value of the
borrowings outstanding under the credit facility on April 23, 1999 by
approximately $6 million.
ADDITIONAL DISCLOSURE REQUIRED BY INDENTURE
Separate financial information of TransDigm is not presented since the Senior
Subordinated Notes are guaranteed by Holdings and all direct and indirect
subsidiaries of TransDigm and since Holdings has no operations or assets
separate from its investment in TransDigm. In addition, Holdings' only
liability consists of Holdings PIK Notes of $20 million that bear interest at
12% annually. Interest expense recognized on the Holdings PIK Notes during
the thirteen and twenty-six week periods ended April 2, 1999 was $.6 million
and $.8 million, respectively.
-15-
<PAGE>
PART II: OTHER INFORMATION
ITEM 5 Other information
(a) Acquisition of ZMP, Inc.
On April 23, 1999, TransDigm acquired all of the outstanding
common stock of ZMP, Inc. ("ZMP"), the corporate parent of Adams
Rite Aerospace, through a merger. Adams Rite Aerospace
manufactures mechanical hardware, fluid controls, lavatory
hardware, electromechanical controls and oxygen systems related
products. The purchase price for the acquisition was $41
million, subject to adjustment for changes in working capital
and other matters as defined in the merger agreement. The
acquisition was funded entirely through additional borrowings
under the Company's credit facility. As a result of the
acquisition, ZMP and Adams Rite Aerospace became wholly-owned
subsidiaries of TransDigm.
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
quarter ended April 2, 1999.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TransDigm Inc. and TransDigm Holding Company
--------------------------------------------
(Registrant)
Date: May 13, 1999 /s/ Douglas W. Peacock
--------------------------------------------
Douglas W. Peacock, Chairman and
Chief Executive Officer
Date: May 13, 1999 /s/ Peter B. Radekevich
--------------------------------------------
Peter B. Radekevich, Chief Financial Officer
-17-
<PAGE>
EXHIBIT INDEX
TO FORM 10-Q FOR THE QUARTER ENDED APRIL 2, 1999
EXHIBIT NO. DESCRIPTION PAGE
27 Financial Data Schedule 19
-18-
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<FISCAL-YEAR-END> SEP-30-1999
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<PERIOD-END> APR-02-1999
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