UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

INDEX

 

(Unaudited) 

1.    DESCRIPTION OF THE BUSINESS

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 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, 20172018 included in TD Group’s Form 10-K filed on November 13, 2017.9, 2018. 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, 20172018 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the twenty-sixthirteen week period ended March 31,December 29, 2018 are not necessarily indicative of the results to be expected for the full year.

During the twenty-sixthirteen week period ended March 31,December 29, 2018, Extant Aerospace ("Extant"), a wholly owned subsidiary of the Company, completed the acquisition of substantially all of the Kirkhill elastomers businessassets and technical data rights of NavCom Defense Electronics ("Kirkhill"NavCom") from Esterline Technologies.. During the fiscal year ended September 30, 2017,2018, the Company completed the acquisitions of three separate aerospace product lines (collectively,Skandia Inc. ("Skandia"), Extant, and the "Third Quarter 2017 Acquisitions"Kirkhill elastomers business ("Kirkhill"). The Company accounted for the acquisitions using the acquisition method and included the results of operations of the acquisitions in its condensed consolidated financial statements from the effective date of each acquisition. As of March 31,December 29, 2018, the one-year measurement period is open for KirkhillNavCom, Skandia, Extant and the Third Quarter 2017 Acquisitions;Kirkhill; therefore, the assets acquired and liabilities assumed related to these acquisitions are subject to adjustment until the end of their respective one-year measurement

periods. The Company is in the process of obtaining a third-party valuation of certain intangible assets and tangible assets of NavCom and Skandia. Pro forma net sales and results of operations for the acquisitions had they occurred at the beginning of the applicable twenty-sixthirteen week period ended March 31,December 29, 2018 or April 1,December 30, 2017 are not material and, accordingly, are not provided.

The acquisitions strengthen and expand the Company’s position to design, produce and supply highly engineered proprietary aerospace components in niche markets with significant aftermarket content and provide opportunities to create value through the application of our three core value-driven operating strategies (obtaining profitable new business, improving our cost structure, and providing highly engineered value-added products to customers). The purchase price paid for each acquisition reflects the current earnings before interest, taxes, depreciation and amortization (EBITDA) and cash flows, as well as the future EBITDA and cash flows expected to be generated by the business, which are driven in most cases by the recurring aftermarket consumption over the life of a particular aircraft, estimated to be approximately 25 to 30 years.

In connection with the settlement of a Department of Justice investigation into the competitive effects of the acquisition, during the fourth quarter of 2017, the Company committed to dispose of the Schroth business. Therefore, Schroth was classified as held-for-sale beginning in the fourth quarter of 2017. The2017 and the results of operations of Schroth arewere reflected as discontinued operations in the accompanying condensed consolidated financial statements.

On January 26, 2018, the Company completed the sale of Schroth in a management buyout to a private equity fund and certain members of Schroth management for approximately $61.4 million, subject towhich included a working capital adjustment. Further disclosure related to Schroth’sadjustment of $0.3 million that was paid in July 2018.

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.  Additionally, in July 2018, the FASB issued ASU 2018-10, "Codification Improvements to ASC 842, Leases" which provides narrow amendments to clarify how to apply certain aspects of the new leases standard. The new leases standard 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 itsour consolidated financial statements and disclosures.

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 itsour consolidated financial statements and disclosures.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” to eliminate Step 2 from the goodwill impairment test in order to simplify the subsequent measurement of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019. Early2019, with early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.permitted. The adoption of this standard is not expected to have a material impact on itsour consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-07, "Compensation—Retirement Benefits (ASC 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," that will changechanges how employers that sponsor defined benefit and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Under the newprevious guidance, employers will present the service cost componentcompanies included all components of the net periodic benefit costcosts in the same income statementlines as the service cost component. Current guidance requires employers to present the other components of the net periodic benefit costs separately from the line item(s) as other employee compensation costs arising from services rendered duringitems that include the period.service cost and outside of any subtotal of operating income. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. Employers will have to disclose the line(s)lines used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement.Thestatement. The standard is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within the fiscal year. Early adoption is permitted, including adoptionThe Company adopted this standard in any interim period for which financial statements have not yet been issued.the first quarter of fiscal 2019. The adoption of this standard isdid not expected to have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, "Compensation—Stock Compensation (ASC 718): Scope of Modification Accounting," which provides clarity on which changes to the terms or conditions of share-based payment awards require an entity to apply the modification accounting provisions required in ASC 718. The standard is effective for all entities for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The adoption ofCompany adopted this standard is not expected to have a material impact on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic(ASC 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which gives entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the "Act") into retained earnings. The guidance allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Act's new federal corporate income tax rate. The guidance also allows entities to elect to reclassify other stranded tax effects that relate to the Act but do not directly relate to the change in the federal tax rate (e.g., state taxes, changing from a worldwide tax system to a territorial system). Tax effects that are stranded in accumulated other comprehensive income for other reasons (e.g., prior changes in tax law, a change in valuation allowance) may not be reclassified. The standard is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within the fiscal year. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. Entities have the option to apply the guidance retrospectively or in the period of adoption. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic(ASC 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.” The ASU adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’

the period of enactment. SAB 118 allowsallowed disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act arewere incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. We have accountedfinalized our accounting for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on118. Such finalization did not result in a material impact to the provisional basis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects and havepreviously recorded provisional amounts in our condensed consolidated financial statements. Refer to Note 9,10, "Income Taxes," for further information.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

Inventories are stated at the lower of cost or market. Cost of inventories is generally determined by the average cost and the first-in, first-out (FIFO) methods and includes material, labor and overhead related to the manufacturing process.

Inventories consist of the following (in thousands):

Other intangible assets - net in the condensed consolidated balance sheets consist of the following (in thousands):

The aggregate amortization expense on identifiable intangible assets for the twenty-sixthirteen week periods ended March 31,December 29, 2018 and April 1,December 30, 2017 was approximately $34.6$20.0 million and $47.6$17.1 million, respectively. The estimated amortization expense is $71.9 million for fiscal year 2018, $70.2$76.7 million for fiscal year 2019 and $67.2$70.9 million for each of the fourfive succeeding fiscal years 2020 through 2023.2024.

The following is a summary of changes in the carrying value of goodwill by segment from September 30, 20172018 through March 31,December 29, 2018 (in thousands):

The Company’s debt consists of the following (in thousands):

Accrued interest which is included in accrued liabilities was $83.1$117.6 million and $82.2$96.6 million as of March 31,December 29, 2018 and September 30, 2017,2018, respectively.

9.10.    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 March 31,December 29, 2018 and April 1,December 30, 2017, the effective income tax rate was 18.3%21.5% and 27.7%, respectively. During the twenty-six week periods ended March 31, 2018 and April 1, 2017, the effective income tax rate was (17.3)(63.4)% and 22.5%, respectively. The Company's lowerhigher effective tax rate for the thirteen week period ended March 31,December 29, 2018 was primarily due to the reductiondiscrete benefit recognized in the U.S. federal corporate statutory ratethirteen week period ended December 30, 2017 related to the enactmentremeasurement of deferred tax balances resulting from the Act.provisions of The Tax Cuts and Jobs Act enacted on December 22, 2017 (the "Act"). The Company’s lower effective tax rate for the twenty-six week period ended March 31,December 29, 2018 was higher than the Federal statutory rate of 21% primarily resulting from our net interest expense limitation under IRC Section 163(j) offset by the benefit associated with the deduction for foreign-derived intangible income (FDII) and excess tax benefits for share-based payments. The Company’s effective tax rate for the period ended December 30, 2017 was less than the Federal statutory tax rate primarily due to the reduction in the U.S. federal corporate tax rate as well as discrete adjustmentsadjustment related to the enactment of the Act described above. The Company’sFDII was introduced, and interest deductibility under IRC Section 163(j) was modified by the Act and were both effective tax rate for TD Group beginning the thirteen and twenty-six week periodsperiod ended March 31, 2018 was lower than the Federal statutory tax rate primarily due to enactment of the Act described above. The Company’s effective tax rate for the thirteen and twenty-six periods ended April 1, 2017 was lower than the Federal statutory tax rate primarily due to excess tax benefits from share based payments, the domestic manufacturing deduction and foreign earnings taxed at rates lower than the U.S. statutory rate.December 29, 2018.

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, Japan, 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 fiscal 2014. In addition, the Company is subject to state income tax examinations for fiscal years 20092011 and later.

At March 31,December 29, 2018 and September 30, 2017,2018, TD Group had $8.8$14.0 million and $8.7$14.1 million in unrecognized tax benefits, the recognition of which would have an effect of approximately $8.7$13.0 million and $13.1 million on the effective tax rate at March 31,December 29, 2018 and September 30, 2017,2018, respectively. The Company believes the tax positions that comprise the unrecognized tax benefits will be reduced by approximately $0.6$1.4 million over the next 12 months. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.

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 Company values its financial instruments using an industry standard market approach, in which prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized using unobservable inputs.

Interest rate swaps were measured at fair value using quoted market prices for the swap interest rate indexes over the term of the swap discounted to present value versus the fixed rate of the contract. The interest rate caps were measured at fair value using implied volatility rates of each individual caplet and the yield curve for the related periods. The estimated fair value of the Company’s term loans was based on information provided by the agent under the Company’s senior secured credit facility. The estimated fair values of the Company’s notes were based upon quoted market prices. There has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.

The fair value of cash and cash equivalents, trade accounts receivable-net and accounts payable approximated book value due to the short-term nature of these instruments at March 31,December 29, 2018 and September 30, 2017.2018.

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

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(loss) income in stockholders’ deficit and subsequently reclassified into earnings in the same line as the hedged item in the same period or periods during which the hedged item affected earnings. As the interest rate swap and cap agreements are used to manage interest rate risk, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in interest expense - net in the condensed consolidated statements of income.

The following table summarizes the Company's interest rate swap agreements:

The following table summarizes the Company's interest rate cap agreements:

All interest rate swap and cap agreements are recognized in our condensed consolidated balance sheets at fair value. Certain derivative asset and liability balances are offset where master netting agreements provide for the legal right of setoff. For classification purposes, we record the net fair value of each type of derivative position that is expected to settle in less than one year with each counterparty as a net current asset or liability and each type of long-term position as a net long-termnon-current asset or liability. The amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the condensed consolidated balance sheet and the net amounts of assets and liabilities presented therein.

                                     

Effective September 30, 2016, the Company redesignated the interest rate cap agreements related to the $400 million and the $750 million aggregate notional amount with cap rates of 2.0% and 2.5%, respectively, based on the expected probable cash flows associated with the 2016 term loans and 2015 term loans in consideration of the Company’s ability to select one-month, two-month, three-month, or six-month LIBO rate set forth in the Second Amended and Restated Credit Agreement.  Accordingly, amounts previously recorded as a component of accumulated other comprehensive loss(loss) income in stockholder’s deficit amortized into interest expense was $2.0$1.1 million and $1.9$1.0 million for the twenty-sixthirteen week periods ended March 31,December 29, 2018 and April 1,December 30, 2017, respectively. The accumulated other comprehensive loss to be reclassified into interest expense over the remaining term of the cap agreements is $8.9$9.9 million with a related tax benefit of $2.4$2.3 million as of March 31,December 29, 2018.

Effective December 30, 2017, the Company redesignated the existing interest rate swap agreements related to the $750 million, $500 million, $1,000 million and $750 million aggregate notional amounts with swap rates of 5.25%5.0%, 4.65%4.4%, 4.55%4.3% and 5.55%5.3%, respectively, based on the expected probable cash flows associated with the tranche Fcertain term loans in consideration of the Company’s removal of the LIBO rate floor on the tranche Fcertain term loans as set forth in Amendment No. 4 to the Second Amended and Restated Credit Agreement.  Accordingly, the amount recorded as a component of accumulated other comprehensive loss(loss) income in stockholders’ deficit related to these redesignated interest rate swap hedges will be amortized into earnings based on the original maturity date of the related interest rate swap agreements. Accordingly, amountsAmounts previously recorded as a component of accumulated other comprehensive loss(loss) income in stockholder’s deficit amortized into interest expense was $0.3 million for the twenty-sixthirteen week period ended March 31,December 29, 2018. The accumulated other comprehensive gainincome to be reclassified into interest expenseincome over the remaining term of the swapswaps agreements is immaterial.$0.9 million with a related tax expense of $0.2 million as of December 29, 2018.

Effective March 31, 2018, the Company redesignated the existing interest rate swap agreements related to the $1,000 million and the $400 million aggregate notional amount with swap rates of 4.90%4.9% and 4.40%4.4%, respectively, based on the expected probable cash flows associated with the tranche Gcertain term loans in consideration of the Company’s removal of the LIBO rate floor on the tranche Gcertain term loans as set forth in the refinancing facility agreement dated February 22, 2018 related to the Second Amended and Restated Credit Agreement. Accordingly, the amount recorded as a component of accumulated

other comprehensive loss(loss) income in stockholders’ deficit related to these redesignated interest rate swap hedges of approximately $12.8 million with a related tax expense of $3.1 million as of March 31, 2018, will be amortized into earnings based on the original maturity date of the related interest rate swap agreements. Amounts previously recorded as a component of accumulated other comprehensive (loss) income in stockholder’s deficit amortized into interest income was $0.7 million for the thirteen week period ended December 29, 2018. The accumulated other comprehensive income to be reclassified into interest income over the remaining term of the swaps agreements is $10.7 million with a related tax expense of $2.5 million as of December 29, 2018.

The Company’s businesses are organized and managed in three reporting segments: Power & Control, Airframe and Non-aviation.

The Power & Control segment includes operations that primarily develop, produce and market systems and components that predominately provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies. Major product offerings include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, databus and power controls, high performance hoists, winches and lifting devices and cargo loading and handling systems. Primary customers of this segment are engine and power system and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.

The Airframe segment includes operations that primarily develop, produce and market systems and components that are used in non-power airframe applications utilizing airframe and cabin structure technologies. Major product offerings include engineered latching and locking devices, rods and locking devices, engineered connectors and elastomers, 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, hydraulic/electromechanical actuators and fuel valves for land based gas turbines, and refueling systems for heavy equipment used in mining, construction and other industries and turbine controls for the energy and oil and gas markets. Primary customers of this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers, manufacturers of heavy equipment used in mining, construction and other industries and turbine original equipment manufacturers, gas pipeline builders and electric utilities.

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 insignificant 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):