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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2022
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-32833
TransDigm Group Incorporated
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)
41-2101738
(I.R.S. Employer Identification No.)
1301 East 9th Street,Suite 3000,Cleveland,Ohio 44114
(Address of principal executive offices) (Zip Code)

(216) 706-2960
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of exchange on which registered
Common Stock, $0.01 par valueTDGNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  Accelerated Filer
Non-Accelerated Filer
  Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of April 1, 2022, based upon the last sale price of such voting and non-voting common stock on that date, was $36,817,194,154.
The number of shares outstanding of TransDigm Group Incorporated’s common stock, par value $.01 per share, was 54,374,596 as of October 31, 2022.
Documents incorporated by reference: Certain sections of the registrant’s definitive Proxy Statement to be filed in connection with its 2023 Annual Meeting of Shareholders expected to be held on March 9, 2023 are incorporated by reference into Part III of this Annual Report on Form 10-K.


TABLE OF CONTENTS
Page
PART I
PART II
PART III
PART IV


Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 27A of the Securities Act of 1933, as amended. All statements other than statements of historical fact included that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about our plans, objectives, strategies and prospects regarding, among other things, our financial condition, results of operations and business. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained throughout this Annual Report on Form 10-K. These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to, among other things, our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Annual Report on Form 10-K, including the risks outlined under “Risk Factors,” will be important in determining future results. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including those described under “Risk Factors” in this Annual Report on Form 10-K. Since our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements, we cannot give any assurance that any of the events anticipated by these forward-looking statements will occur or, if any of them does occur, what impact they will have on our business, results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. We do not undertake any obligation to update these forward-looking statements or the risk factors contained in this Annual Report on Form 10-K to reflect new information, future events or otherwise, except as may be required under federal securities laws.
Important factors that could cause actual results to differ materially from the forward-looking statements made in this Annual Report on Form 10-K include but are not limited to: the impact that the COVID-19 pandemic has on our business, results of operations, financial condition and liquidity; 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; current and future geopolitical or other worldwide events; cybersecurity threats and natural disasters; our reliance on certain customers; the United States (“U.S.”) defense budget and risks associated with being a government supplier including government audits and investigations; failure to maintain government or industry approvals; failure to complete or successfully integrate acquisitions; our indebtedness; potential environmental liabilities; liabilities arising in connection with litigation; increases in raw material costs, taxes and labor costs that cannot be recovered in product pricing; risks and costs associated with our international sales and operations; and other factors.
In this report, the term “TD Group” refers to TransDigm Group Incorporated, which holds all of the outstanding capital stock of TransDigm Inc. The terms “Company,” “TransDigm,” “we,” “us,” “our” and similar terms, unless the context otherwise requires, refer to TD Group, together with TransDigm Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest. References to “fiscal year” mean the year ending or ended September 30. For example, “fiscal year 2022” or “fiscal 2022” means the period from October 1, 2021 to September 30, 2022.
PART I
ITEM 1.    BUSINESS
The Company
TD Group, through its wholly-owned subsidiary, TransDigm Inc., is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. Our business is well diversified due to the broad range of products we offer to our customers. We estimate that approximately 90% of our net sales for fiscal year 2022 were generated by proprietary products.
Most of our products generate significant aftermarket revenue. Once our parts are designed into and sold on a new aircraft, we generate net sales from aftermarket consumption over the life of that aircraft, which is generally estimated to be approximately 25 to 30 years. A typical platform can be produced for 20 to 30 years, giving us an estimated product life cycle in excess of 50 years. We estimate that approximately 55% of our net sales in fiscal year 2022 were generated from the aftermarket, the vast majority of which come from the commercial and military aftermarkets. Historically, these aftermarket revenues have produced a higher gross profit and have been more stable than net sales to original equipment manufacturers (“OEMs”).
1

Pre-pandemic, and as our business continues to recover from the COVID-19 pandemic, we believe we have achieved steady, long-term growth in sales and improvements in operating performance we believe that due to our competitive strengths and through execution of our value-driven operating strategy. More specifically, focusing our businesses on our value-driven operating strategy of obtaining profitable new business, carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit and income from operations over the long-term.
Products
We primarily design, produce and supply highly engineered proprietary aerospace components with significant aftermarket content. We seek to develop highly customized products to solve specific needs for aircraft operators and manufacturers. We attempt to differentiate ourselves based on engineering, service and manufacturing capabilities. We typically choose not to compete for non-proprietary “build to print” business because it frequently offers lower margins than proprietary products. We believe that our products have strong brand names within the industry and that we have a reputation for high quality, reliability and strong customer support.
Our business is well diversified due to the broad range of products that we offer to our customers. Our 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, batteries and chargers, engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, databus and power controls, cockpit security components and systems, specialized and advanced cockpit displays, engineered audio, radio and antenna systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products, switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Each of our product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer.
Segments
The Company’s businesses are organized and managed in three reporting segments: Power & Control, Airframe and Non-aviation.
The Power & Control segment includes operations that primarily develop, produce and market systems and components that predominately provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies. Major product offerings include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, databus and power controls, advanced sensor products, switches and relay panels, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery 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, engineered rods, engineered connectors and elastomer sealing solutions, cockpit security components and systems, specialized and advanced cockpit displays, engineered audio, radio and antenna systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, thermal protection and insulation, lighting and control technology and parachutes. 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.
2

The primary measurement used by management to review and assess the operating performance of each segment is EBITDA As Defined. The Company defines EBITDA As Defined as earnings before interest, taxes, depreciation and amortization plus certain non-operating items recorded as corporate expenses including non-cash compensation charges incurred in connection with the Company’s stock incentive or deferred compensation plans, restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic, foreign currency gains and losses, acquisition-integration costs, acquisition and divestiture transaction-related expenses, and refinancing costs. COVID-19 restructuring costs represented actions primarily taken by the Company in fiscal 2021 and 2020 to reduce its workforce to align with customer demand, as well as incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment). Acquisition and divestiture-related costs represent accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold; costs incurred to integrate acquired businesses and product lines into the Company’s operations, facility relocation costs and other acquisition-related costs; transaction-related costs for both acquisitions and divestitures comprising deal fees; legal, financial and tax diligence expenses and valuation costs that are required to be expensed as incurred and other acquisition accounting adjustments.
For financial information about our segments, refer to Note 17, “Segments,” in the notes to the consolidated financial statements included herein.
Sales and Marketing
Consistent with our overall strategy, our sales and marketing organization is structured to continually develop technical solutions that meet customer needs. In particular, we attempt to focus on products and programs that will lead to high-margin, repeatable sales in the aftermarket.
We have structured our sales efforts along our major product offerings, assigning a business unit manager to certain products. Each business unit manager is expected to grow the sales and profitability of the products for which he or she is responsible and to achieve the targeted annual level of bookings, net sales, new business and profitability for such products. The business unit managers are assisted by account managers and sales engineers who are responsible for covering major OEM and aftermarket accounts. Account managers and sales engineers are expected to be familiar with the personnel, organization and needs of specific customers to achieve total bookings and new business goals for each account and, together with the business unit managers, to determine when additional resources are required at customer locations. Most of our sales personnel are evaluated, in part, on their bookings and their ability to identify and obtain new business opportunities.
Though typically performed by employees, the account manager function may be performed by independent representatives depending on the specific customer, product and geographic location. We also use a number of distributors to provide logistical support as well as serve as a primary customer contact with certain smaller accounts. Boeing Distribution Services, Inc., Satair A/S (a subsidiary of Airbus S.A.S.) and AAR Corp., among others, are our major distributors.
Manufacturing and Engineering
We maintain approximately 100 manufacturing facilities. Most of our manufacturing facilities are comprised of manufacturing, distribution and engineering functions, and most facilities have certain administrative functions, including management, sales and finance. We continually strive to improve productivity and reduce costs, including rationalization of operations, developing improved control systems that allow for accurate accounting and reporting, investing in equipment, tooling, information systems (including cybersecurity) and implementing broad-based employee training programs. Management believes that our manufacturing systems and equipment contribute to our ability to compete by permitting us to meet the rigorous tolerances and cost sensitive price structure of aircraft component customers.
We attempt to differentiate ourselves from our competitors by producing uniquely engineered products with high quality and timely delivery. Our engineering costs are recorded in cost of sales and in selling and administrative expenses within our consolidated statements of income. Research and development costs are recorded in selling and administrative expenses within our consolidated statements of income. The aggregate of engineering expense and research and development expense represents approximately 10% of our operating units’ aggregate costs, or approximately 5% of our consolidated net sales for fiscal year 2022. Our proprietary products, and particularly our new product initiatives, are designed by our engineers and are intended to serve the needs of the aircraft component industry. These proprietary designs must withstand the extraordinary conditions and stresses that will be endured by products during use and meet the rigorous demands of our customers’ tolerance and quality requirements. Refer to Note 3, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements included herein with respect to the total costs of research and development.
We use sophisticated equipment and procedures to comply with quality requirements, specifications and aviation authority and OEM requirements. We perform a variety of testing procedures as required by our customers, such as testing under different temperature, humidity and altitude levels, flammability testing, shock and vibration testing and X-ray fluorescent measurement. These procedures, together with other customer approved techniques for document, process and quality control, are used throughout our manufacturing facilities.
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Customers
We predominantly serve customers in the commercial, regional, business jet and general aviation aftermarket, which accounted for approximately 29% of our net sales for fiscal year 2022; the commercial aerospace OEM market, comprising large commercial transport manufacturers and regional and business jet manufacturers, which accounted for approximately 21% of our net sales for fiscal year 2022; and the defense market (which includes defense OEMs and aftermarket sales to the U.S. and friendly foreign governments), which accounted for approximately 43% of our net sales for fiscal year 2022. Non-aerospace net sales comprised approximately 7% of our net sales for fiscal year 2022.
As a result of the COVID-19 pandemic and its adverse impact on air travel worldwide, the commercial aerospace industry has been significantly disrupted. To a lesser extent, the defense aerospace market has been adversely impacted by the COVID-19 pandemic, with this impact arising primarily from supply chain shortages. This has led to the defense market comprising a greater percentage of our net sales in fiscal years 2022, 2021 and 2020 compared to pre-pandemic historical levels. In fiscal years 2015 through 2019, defense market net sales ranged from 29% to 37% of total net sales. As the commercial aerospace industry continues to recover, we expect defense market net sales to account for a percentage of total net sales that is relatively in line with our historical levels prior to the COVID-19 pandemic. We began to see this expected trend in fiscal 2022, as defense sales represented 43% of net sales compared to 50% of net sales in fiscal 2021.
Our customers include: (1) distributors of aerospace components; (2) worldwide commercial airlines, including national and regional airlines; (3) large commercial transport and regional and business aircraft OEMs; (4) various armed forces of the United States and friendly foreign governments; (5) defense OEMs; (6) system suppliers; and (7) various other industrial customers. Our top ten customers for fiscal year 2022 accounted for approximately 41% of our net sales. Products supplied to many of our customers are used on multiple platforms. None of our customers individually accounted for greater than 10% of our net sales for fiscal year 2022.
The markets in which we sell our products are, to varying degrees, cyclical and have experienced upswings and downturns. The demand for our commercial aftermarket parts and services depends on, among other things, the breadth of our installed OEM base, revenue passenger miles (“RPMs”), the size and age of the worldwide aircraft fleet, the percentage of the worldwide fleet that is in warranty, and airline profitability. The demand for defense products is specifically dependent on government budget trends, military campaigns and political pressures.
Competition
The niche markets within the aerospace industry that we serve are relatively fragmented and we face several competitors for many of the products and services we provide. Due to the global nature of the commercial aircraft industry, competition in these categories comes from both U.S. and foreign companies. Competitors in our product offerings range in size from divisions of large public corporations to small privately-held entities with only one or two components in their entire product portfolios.
We compete on the basis of engineering, manufacturing and marketing high quality products, which we believe meet or exceed the performance and maintenance requirements of our customers, consistent and timely delivery, and superior customer service and support. The industry’s stringent regulatory, certification and technical requirements and the investments necessary in the development and certification of products may create disincentives for potential new competitors for certain products. If customers receive products that meet or exceed expectations and performance standards, we believe that they will have a reduced incentive to certify another supplier because of the cost and time of the technical design and testing certification process. In addition, we believe that the availability, dependability and safety of our products are reasons for our customers to continue long-term supplier relationships.
Government Contracts
Companies engaged in supplying defense-related equipment and services to United States Government (“U.S. Government”) agencies are subject to business risks specific to the defense industry. These risks include the ability of the U.S. Government to unilaterally: (1) suspend us from receiving new contracts; (2) terminate existing contracts; (3) reduce the value of existing contracts; (4) audit our contract-related costs and fees, including allocated indirect costs; (5) control and potentially prohibit the export of our products; and (6) seek repayment of contract related payments under certain circumstances. Violations of government procurement laws could result in civil or criminal penalties.
Governmental Regulation
The commercial aircraft component industry is highly regulated by the Federal Aviation Administration (“FAA”) in the United States and by the European Union Aviation Safety Agency in Europe and other agencies throughout the world, while the military aircraft component industry is governed by military quality specifications. We, and the components we manufacture, are required to be certified by one or more of these entities or agencies, and, in many cases, by individual OEMs, in order to engineer and service parts and components used in specific aircraft models.
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We must also satisfy the requirements of our customers, including OEMs and airlines that are subject to FAA regulations, and provide these customers with products and services that comply with the government regulations applicable to commercial flight operations. In addition, the FAA and other aviation authorities require that various maintenance routines be performed on aircraft components. We believe that we currently satisfy or exceed these maintenance standards in our repair and overhaul services. We also maintain several FAA-approved repair stations.
In addition, our businesses are subject to many other laws and requirements typically applicable to manufacturers and exporters. Without limiting the foregoing, sales of many of our products that will be used on aircraft owned by foreign entities are subject to compliance with export control laws and the manufacture of our products and the operations of our businesses, including the disposal of hazardous wastes, are subject to compliance with applicable environmental laws.
Market Channels
The commercial aerospace industry, including the aftermarket and OEM markets, is impacted by the health of the global economy and geopolitical events around the world. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the COVID-19 pandemic. The commercial aerospace industry experienced a steep decline in RPMs beginning in the second half of our fiscal 2020 due to the COVID-19 pandemic’s impact on worldwide air travel demand. RPMs have significantly recovered from pandemic lows, but remained depressed in fiscal 2022 when compared to pre-pandemic levels. Also, as a result of the pandemic and decreased demand in commercial air travel, the commercial OEM sector experienced reductions in commercial OEM production rates, including reductions at the two largest commercial OEMs, The Boeing Company (“Boeing”) and Airbus S.A.S. (“Airbus”). Throughout fiscal 2022, the commercial aerospace industry continued to recover towards pre-pandemic levels. In fiscal 2022, commercial air travel demand trended upward, and both Boeing and Airbus increased OEM production rates. Boeing and Airbus are also expecting further improvement in OEM production rates during calendar 2023. These trends are favorable; however, uncertainty remains in the shape and pace of the commercial aerospace industry’s path to a full recovery.
The defense aerospace market is dependent on government budget constraints, the timing of orders, political pressures and the extent of global conflicts. It is not necessarily affected by the same general economic conditions that affect the commercial aerospace industry. The defense aerospace market has been impacted by the COVID-19 pandemic to a lesser extent than the commercial aerospace market with this impact arising primarily from supply chain shortages. Additionally, within the defense market, the pace of U.S. government defense spending outlays and government funding reprioritization provides for uncertainty.
Historically, our presence in both the commercial aerospace and military sectors of the aerospace industry has served to mitigate the impact on our business of any specific industry risk. We service a diversified customer base in the commercial and military aerospace industry, and we provide components to a diverse installed base of aircraft, which mitigates our exposure to any individual airframe platform. At times, declines in net sales in one channel have been offset by increased net sales in another channel. However, due to differences between the profitability of our products sold to OEM and aftermarket customers, variation in product mix can cause variation in gross profit.
Outside of the market disruption caused by COVID-19, there are many short-term factors (including customer inventory level adjustments, supply chain issues, unannounced changes in order patterns, strikes, facility shutdowns caused by fires, hurricanes, health crises or other incidents and mergers and acquisitions) that can cause short-term disruptions in our quarterly shipment patterns as compared to previous quarters and the same periods in prior years. As such, it can be difficult to determine longer-term trends in our business based on quarterly comparisons. To normalize for short-term fluctuations, we tend to look at our performance over several quarters or years of activity rather than discrete short-term periods. Additionally, there are fluctuations in OEM and aftermarket product mix from quarter-to-quarter that may cause positive or negative variations in gross profit since commercial aftermarket net sales have historically produced higher gross profit margins than net sales to commercial OEMs. Again, in many instances these are timing events between quarters and must be balanced with macro aerospace industry indicators.
Commercial Aftermarket
The key market factors in the commercial aftermarket include worldwide RPMs and the size and activity level of the worldwide fleet of aircraft and the percentage of the fleet that is in warranty. As a result of the COVID-19 pandemic and the stringent measures implemented to help control the pandemic, demand for air travel declined at a rapid pace and led to a significant reduction in flights. Although worldwide air traffic remains significantly lower than pre-pandemic levels, RPMs continued to steadily improve in fiscal 2022 and many aircraft parked by airlines have been returned to service. Commercial air travel in domestic markets continued to lead the air traffic recovery in fiscal 2022 with certain domestic markets nearing pre-pandemic air traffic levels. The pace of the international air traffic recovery has been slower than the domestic recovery, but international RPMs made positive strides in fiscal 2022 and are catching up to the domestic air traffic recovery. Current industry consensus indicates that worldwide RPMs will continue to recover in 2023. Overall, the timing and pace of the commercial aftermarket recovery remains uncertain and continues to evolve.
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Commercial OEM Market
The commercial OEM market remained depressed in fiscal 2022 primarily due to the continued impact of the COVID-19 pandemic, the supply chain disruptions throughout the commercial OEM supply chain and Boeing’s ongoing regulatory and quality challenges with the 737 MAX aircraft (particularly in China) and the 787 aircraft. Our commercial transport OEM shipments and revenues generally run ahead of Boeing and Airbus aircraft delivery schedules. As a result, and consistent with prior years, our fiscal 2023 shipments will be a function of, among other things, the estimated 2023 and 2024 commercial aircraft production rates. We have been experiencing depressed net sales across the commercial OEM sector primarily due to the lower than pre-pandemic production rates at Boeing and Airbus, although production rates slowly began to improve in fiscal 2022. We expect demand for our commercial OEM products to continue to be reduced in the short-term. The commercial OEM market is now showing signs of recovery with airlines returning to the commercial OEMs to place orders; however, the commercial OEM supply chain challenges impacting Boeing and Airbus are slowing the pace of new aircraft manufacturing. Both Boeing and Airbus have disclosed further planned OEM production rate increases for calendar 2023. The pace of the recovery of the commercial OEM market remains uncertain and continues to evolve.
Our businesses continually seek to provide solutions for our customers and others in the commercial aerospace industry. Our current initiatives include creating new products that are more environmentally friendly, such as radiation-free exciters, and creating new products that will help further improve commercial airlines’ efforts to keep passengers healthy and safe, such as touch-free aircraft lavatory suite products.
Defense
Our military business fluctuates from year-to-year, and is dependent, to a degree, on government budget constraints, the timing of orders, macro and micro dynamics with respect to the U.S. Department of Defense (“DOD”) procurement policy and the extent of global conflicts. Also, delays in government spending outlays and government funding reprioritization, such as shifting funds to efforts to combat the impact of the pandemic or efforts to assist Ukraine in the Russia and Ukraine conflict, provides for further unpredictability in the military spending outlook. For a variety of reasons, the military spending outlook is very uncertain, though recent DOD budgets have trended upwards.
Raw Materials
We require the use of various raw materials in our manufacturing processes. We purchase a variety of manufactured component parts from various suppliers. We also purchase replacement parts, which are utilized in our various repair and overhaul operations. At times, we concentrate our orders among a few suppliers in order to strengthen our supplier relationships. Most of our raw materials and component parts are generally available from multiple suppliers at competitive prices.
The COVID-19 pandemic has continued to disrupt the global supply chain to a certain extent and availability of raw materials, particularly electronic parts, which primarily are utilized to produce products in the defense market channel. Because we strive to limit the volume of raw materials and component parts on hand, our business could be adversely affected if we are unable to obtain these raw materials and components from our suppliers in the quantities we require or on favorable terms. Although we believe in most cases that we could identify alternative suppliers, or alternative raw materials or component parts, the lengthy and expensive FAA and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part.
Intellectual Property
We have various trade secrets, proprietary information, trademarks, trade names, patents, copyrights and other intellectual property rights, which we believe, in the aggregate but not individually, are important to our business. The Company's products are manufactured, marketed and sold using a portfolio of patents, trademarks, licenses, and other forms of intellectual property, some of which expire in the future. The Company develops and acquires new intellectual property on an ongoing basis. Based on the broad scope of the Company’s product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on our consolidated financial statements.
Environmental Matters
Our operations and facilities are subject to a number of federal, state, local and foreign environmental laws and regulations that govern, among other things, discharges of pollutants into the air and water, the generation, handling, storage and disposal of hazardous materials and wastes, the remediation of contamination and the health and safety of our employees. Environmental laws and regulations may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Certain facilities and third-party sites utilized by the Company have been identified as potentially responsible parties under the federal superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under applicable laws.
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For information regarding environmental accruals, refer to Note 15, “Commitments and Contingencies,” in the notes to the consolidated financial statements included herein. Compliance with federal, state, local and foreign environmental laws during fiscal 2022 had no material impact on our capital expenditures or results of operations. Based upon consideration of currently available information, we believe liabilities for environmental matters will not have a material adverse impact on our consolidated financial statements, but we cannot assure that material environmental liabilities may not arise in the future. For further information on environmental-related risks, including climate change, refer to Item 1A. “Risk Factors.”
Human Capital Resources
As of September 30, 2022, we had approximately 14,400 full-time, part-time and temporary employees. Approximately 17% of our full-time and part-time employees are represented by labor unions. Collective bargaining agreements between us and these labor unions expire at various dates up to September 2026.
Talent Development
We consider our employees to be our greatest asset. Succession planning and the development, attraction and retention of employees is critical for TransDigm and its operating units to sustain our three core value drivers (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers). To support the advancement of our employees, we offer training and development programs encouraging advancement from within and continue to fill our team with strong and experienced management talent. We leverage both formal and informal programs to identify, foster, and retain top talent at both the corporate and operating unit level.
We have established TransDigm University, in partnership with the University of Southern California Marshall School of Business, a formal mentoring and education program with a curated curriculum and established leadership serving as mentors. Participants in the program learn and develop more advanced skills leading to higher contribution and satisfaction within their roles, while mentors enhance their leadership capabilities by helping others progress. This program helps identify top performers, improving employee performance and retention, increasing our organizational learning and supporting the promotion of our current employees.
The Company’s Management Development Program (“MDP”) identifies new talent and prepares them for success within our organization. The Company actively recruits for MDP candidates at colleges and universities across the U.S. to ensure we are reaching a large and diverse pool of candidates. The program hires recent Master of Business Administration graduates who work for three eight-month periods at a selection of operating units. Program participants gain experience in developing, manufacturing, and selling aerospace components with the intent of becoming fully immersed in the operations of our business. Once the program is complete, MDP participants are better equipped with the knowledge and experience needed to excel as a manager at TransDigm. Our goal for successful MDP participants is to hire them on a full-time basis at an operating unit upon completion of the program.
TransDigm’s executive team also mentors rising talent on a more informal basis. This informal mentorship achieves a number of goals, including accelerating the development of top performers, increasing organizational learning, and improving employee performance and retention. The executive team also commits substantial time to evaluating the bench strength of our leadership and working with our leadership to improve their performance.
TransDigm University, MDP, various internship programs and informal mentoring demonstrates the Company’s ongoing commitment and initiatives towards accelerating the development of our future leaders.
Benefits
We are proud to offer attractive benefits packages that attract, retain, motivate and reward our talent, and we are committed to providing our employees and their families with programs that support their health and overall well-being. To assist employees with financial empowerment, we offer retirement savings plans. We also offer employees the ability to save money on a tax-free basis through flexible spending accounts and health savings accounts. TransDigm offers competitive compensation programs to our employees that includes base pay, bonus programs and equity programs. TransDigm employees also receive paid time off and holidays.
We understand the value in furthering the knowledge and education of our current employee base. In addition to formal and informal employee development programs within TransDigm and our operating units, employees can expand their careers by accessing tuition reimbursement programs. Some operating units also partner with local colleges to provide training courses to TransDigm employees. Access to programs such as these enhance our employees’ value to the Company, our customers and our communities.
TransDigm’s equity compensation plans are designed to assist in attracting, retaining, motivating and rewarding key employees and directors, and promoting the creation of long-term value for our stockholders by closely aligning the interests of these individuals with those of our stockholders. TransDigm’s equity compensation plans provide for the granting of performance-based stock options. Equity compensation, and specifically stock options, is a significant component of TransDigm’s equity-based compensation strategy and value-based culture. Our approach to equity has a track record of success and we believe that the continued use of performance-based stock options will help retain the Company’s key employees and recruit the talented minds of the future.
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Diversity
At TransDigm, we value new ideas, different experiences and fresh perspectives, and we firmly believe this is enhanced by a more diverse workforce throughout all levels of our organization. Diversity and inclusion make us stronger as a company – it is critical to innovation, provides a competitive advantage, yields better outcomes, and in turn, enables us to better deliver for all of our stakeholders.
We know that the tone is set from the top, and our commitment to diversity and inclusion must be reflected within our leadership team as well as our Board of Directors. TransDigm implemented unconscious bias training for our Board of Directors and management in fiscal 2022. Also, for the fiscal 2022 MDP class and moving forward, we expanded the MDP recruitment program to include nine additional colleges and universities, and we also focused on creating a more diverse class. Approximately 35% of total past and present MDP participants are gender and racially diverse, and we are working to further improve that percentage in the future. We are committed to diversity at all levels of management and leadership, and our leadership team and Board of Directors are committed to improving diversity throughout the Company and fostering a more inclusive and open environment. Diversity and inclusion make us stronger as a business so we can effectively serve all our stakeholders. Our workforce includes talented people from many backgrounds.
Discrimination is not tolerated at TransDigm. We are committed to high ethical standards and equal employment opportunities in all personnel actions without regard to race, color, religion, gender, national origin, citizenship status, age, marital status, gender identity or expression, sexual orientation, physical or mental disability, or veteran status.
As a company whose products and values are closely tied to supporting the U.S. military and its allies, we are dedicated to offering employment opportunities to U.S. military veterans. Supporting our veterans as they enter the civilian workforce is incredibly important to us given their valuable wealth of knowledge and skills. Many of our U.S.-based operating units have specific programs or initiatives that provide career opportunities to veterans as they transition into the civilian workforce.
Health and Safety
Our commitment to manufacturing the safest, highest quality products is matched by our commitment to keeping our employees healthy and safe as they work to produce these products. We are dedicated to building, designing, maintaining, and operating our facilities to effectively manage process safety and other hazards, and to minimize risks. We also seek to empower and support our employees to prevent accidents and promote a safe environment. We expect personnel to report and communicate risks, potential hazards, incidents and near hits so that they can be investigated, and appropriate action can be taken to prevent future issues. To elevate the importance of this, we began to require our operating units to individually report on Environmental Health and Safety matters monthly to the executive team.
Throughout the COVID-19 pandemic, we have been following guidance from the World Health Organization and the U.S. Center for Disease Control to protect employees and prevent the spread of the virus within all of our facilities globally.
Seasonality
We do not believe our net sales are subject to significant seasonal variation; however, our net sales have generally been lower in the first quarter of our fiscal year compared to the subsequent quarters due to fewer working days resulting from the observance of various holidays.
Available Information
TD Group’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including any amendments, will be made available free of charge on the Company’s website, www.transdigm.com, as soon as reasonably practicable, following the filing of the reports with the Securities and Exchange Commission (“SEC”). In addition, the Company’s website allows investors and other interested persons to sign up to automatically receive e-mail alerts when news releases and financial information is posted on the website. The SEC also maintains a website, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The information on or obtainable through our website is not incorporated into this Annual Report on Form 10-K.
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ITEM 1A.    RISK FACTORS
Set forth below are material risks and uncertainties that could negatively affect our business and financial condition and could cause our actual results to differ materially from those expressed in forward-looking statements contained in this report. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations and financial condition.
Risks Related to our Strategy
We face risks related to the current COVID-19 pandemic and other health pandemics, epidemics and outbreaks.
The COVID-19 pandemic is continuing to cause an adverse impact on our employees, operations, supply chain and distribution system and the long-term impact to our business remains unknown. This is due to the numerous uncertainties that have risen from the pandemic, including the likelihood of resurgences and the emergence and spread of variants, actions that may be taken by governmental authorities in response to the disease, the continued efficacy and public acceptance of vaccines, and unintended consequences of the foregoing.
The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the pandemic. The pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a rapid pace beginning in the second half of fiscal 2020 and has remained depressed compared to pre-pandemic levels.
The COVID-19 pandemic has also disrupted the global supply chain and availability of raw materials, particularly electronic parts. The disruption in the supply chain has resulted in increased freight costs, raw material costs and labor costs from the ongoing inflationary environment. Our business has been adversely affected and could continue to be adversely affected by disruptions in our ability to timely obtain raw materials and components from our suppliers in the quantities we require or on favorable terms. Although we believe in most cases that we could identify alternative suppliers, or alternative raw materials or component parts, the lengthy and expensive aviation authority and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part. Because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, supply chain, consolidated results of operations, financial condition, and liquidity.
Our business focuses almost exclusively on the aerospace and defense industry.
During a prolonged period of significant market disruption in the aerospace and defense industry, such as the adverse impact that the COVID-19 pandemic has had and is expected to continue to have on the commercial aerospace market, and other macroeconomic factors such as when recessions occur, our business may be disproportionately impacted compared to peer companies that are more diversified in the industries they serve. A more diversified company with significant sales and earnings derived from outside the aerospace and defense sector may be able to recover more quickly from significant market disruptions such as the COVID-19 pandemic.
We rely heavily on certain customers for much of our sales.
In fiscal year 2022, no customer individually accounted for 10% or more of the Company’s net sales; however, our top ten customers for fiscal year 2022 accounted for approximately 41% of our net sales. A material reduction in purchasing by one of our larger customers for any reason, including but not limited to the COVID-19 pandemic, general economic or aerospace downturn, decreased production, strike or resourcing, could have a material adverse effect on results of operations, financial position and cash flows.
We generally do not have guaranteed future sales of our products. Further, when we enter into fixed price contracts with some of our customers, we take the risk for cost overruns.
As is customary in our business, we do not generally have long-term contracts with most of our aftermarket customers and, therefore, do not have guaranteed future sales. Although we have long-term contracts with many of our OEM customers, many of those customers may terminate the contracts on short notice and, in most cases, our customers have not committed to buy any minimum quantity of our products. In addition, in certain cases, we must anticipate the future volume of orders based upon the historic purchasing patterns of customers and upon our discussions with customers as to their anticipated future requirements, and this anticipated future volume of orders may not materialize.
We also have entered into multi-year, fixed-price contracts with some of our customers, pursuant to which we have agreed to perform the work for a fixed price and, accordingly, realize all the benefit or detriment resulting from any decreases or increases in the costs of making these products. This risk is greater in a high inflationary environment, such as currently. Sometimes we accept a fixed-price contract for a product that we have not yet produced, and this increases the risk of cost overruns or delays in the completion of the design and manufacturing of the product. Most of our contracts do not permit us to recover increases in raw material prices, taxes or labor costs.
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We intend to pursue acquisitions. Our business may be adversely affected if we cannot consummate acquisitions on satisfactory terms, or if we cannot effectively integrate acquired operations.
A significant portion of our growth has occurred through acquisitions. Any future growth through acquisitions will be partially dependent upon the continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions. We intend to pursue acquisitions that we believe will present opportunities consistent with our overall business strategy. However, we may not be able to find suitable acquisition candidates to purchase or may be unable to acquire desired businesses or assets on economically acceptable terms or may be unable to receive necessary regulatory approvals or support. In addition, we may not be able to raise the capital necessary to fund future acquisitions. Because we may actively pursue a number of opportunities simultaneously, we may encounter unforeseen expenses, complications and delays, including regulatory complications or difficulties in employing sufficient staff and maintaining operational and management oversight.
We regularly engage in discussions with respect to potential acquisition and investment opportunities. If we consummate an acquisition, our capitalization and results of operations may change significantly. Future acquisitions could result in margin dilution and further likely result in the incurrence of additional debt and contingent liabilities and an increase in interest and amortization expenses or periodic impairment charges related to goodwill and other intangible assets as well as significant charges relating to integration costs.
Acquisitions involve risks that the businesses acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect. In addition, we may not be able to successfully integrate any business we acquire into our existing business. The successful integration of new businesses, with the most significant recent acquisition being the DART Aerospace acquisition in the third quarter of fiscal 2022, depends on our ability to manage these new businesses and cut excess costs. The successful integration of future acquisitions may also require substantial attention from our senior management and the management of the acquired business, which could decrease the time that they have to service, attract customers and develop new products and services or attend to other acquisition opportunities.
Our indebtedness could adversely affect our financial health and could harm our ability to react to changes to our business and prevent us from fulfilling our obligations under our indebtedness.
We have a significant amount of indebtedness. As of September 30, 2022, our total indebtedness, excluding approximately $31 million in letters of credit outstanding, was approximately $20 billion, which was 123.5% of our total book capitalization.
In addition, we may be able to incur substantial additional indebtedness in the future. As of September 30, 2022, we had approximately $779 million of unused commitments under our revolving credit facility. Although our senior secured credit facility and the indentures governing the various senior secured and senior subordinated notes outstanding (the “Indentures”) contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these qualifications and exceptions could be substantial. A breach of any of the covenants or an inability to comply with the required leverage ratio could result in a default under the senior secured credit facility or the Indentures.
An increase in our indebtedness could also have other important consequences to investors. For example, it could:
increase our vulnerability to general economic downturns and adverse competitive and industry conditions;
increase the risk we are subjected to downgrade or put on a negative watch by the ratings agencies;
require us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital requirements, capital expenditures, acquisitions, research and development efforts and other general corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to competitors that have less debt; and
limit, along with the financial and other restrictive covenants contained in the documents governing our indebtedness, among other things, our ability to borrow additional funds, make investments and incur liens.
All of our debt under the senior secured credit facility, which includes $7.3 billion in term loans and a revolving credit facility of $810 million, bears interest at variable rates primarily based on the London interbank offered rate (“LIBOR”) for deposits of U.S. dollars. Accordingly, if LIBOR or other variable interest rates increase, our debt service expense will also increase. In order to mitigate the interest rate risk of these variable rate borrowings, we entered into interest rate swap and cap agreements that cover a significant portion of the existing variable rate debt. The Company's objective is to maintain an allocation of at least 75% fixed rate and 25% variable rate debt thereby limiting its exposure to changes in near-term interest rates. As of September 30, 2022, approximately 85% of our total debt was fixed rate. For information about our interest rate swap and cap agreements, refer to Note 21, “Derivatives and Hedging Instruments,” in the notes to the consolidated financial statements included herein.
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In July 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for the remaining tenors of USD LIBOR (one-month, three-month, six-month and twelve-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2023. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, has chosen the secured overnight financing rate (“SOFR”) as the recommended risk-free reference rate for the U.S. (calculated based on repurchase agreements backed by treasury securities), we cannot currently predict the extent to which this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates. In February 2020, in connection with Amendment No. 7 and the Refinancing Facility Agreement (herein, “Amendment No. 7”) to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the “Credit Agreement”), we amended our Credit Agreement to include a provision for the determination of an alternative reference interest rate. Additionally, with respect to our derivatives portfolio, we have elected the LIBOR protocols issued by the International Swaps and Derivatives Association, but the discontinuation of LIBOR may also require our derivative agreements to be amended in some way. Once the alternative interest rate has replaced LIBOR, our future interest expense could be impacted.
Our indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness, including the Indentures. We cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the senior secured credit facility or otherwise in amounts sufficient to enable us to service our indebtedness. If we cannot service our debt, we will have to take actions such as reducing or delaying capital investments, selling assets, restructuring or refinancing our debt or seeking additional equity capital.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.
Our ability to make payments on and to refinance our indebtedness, including the Indentures, amounts borrowed under the senior secured credit facility, amounts due under our trade receivable securitization facility (“Securitization Facility”), and to fund our operations, will depend on our ability to generate cash in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
We cannot assure that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under the senior secured credit facility or otherwise in amounts sufficient to enable us to service our indebtedness, including the amounts borrowed under the senior secured credit facility, amounts borrowed under our Securitization Facility and the Indentures, or to fund our other liquidity needs. If we cannot service our debt, we will have to take actions such as reducing or delaying capital investments, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We cannot assure that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, the Securitization Facility, the Indentures and the senior secured credit facility may restrict us from adopting any of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on acceptable terms and would otherwise adversely affect the Indentures.
The terms of the senior secured credit facility and Indentures may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
Our senior secured credit facility and the Indentures contain a number of restrictive covenants that impose significant operating and financial restrictions on TD Group, TransDigm Inc. and its subsidiaries (in the case of the senior secured credit facility) and TransDigm Inc. and its subsidiaries (in the case of the Indentures) and may limit their ability to engage in acts that may be in our long-term best interests. The senior secured credit facility and Indentures include covenants restricting, among other things, the ability of TD Group, TransDigm Inc. and its subsidiaries (in the case of the senior secured credit facility) and TransDigm Inc. and its subsidiaries (in the case of the Indentures) to:
incur or guarantee additional indebtedness or issue preferred stock;
pay distributions on, redeem or repurchase our capital stock or redeem or repurchase our subordinated debt;
make investments;
sell assets;
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enter into agreements that restrict distributions or other payments from our restricted subsidiaries to us;
incur or allow to exist liens;
consolidate, merge or transfer all or substantially all of our assets;
engage in transactions with affiliates;
create unrestricted subsidiaries; and
engage in certain business activities.
A breach of any of these covenants could result in a default under the senior secured credit facility or the Indentures. If any such default occurs, the lenders under the senior secured credit facility and the holders of the senior secured and senior subordinated notes may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the senior secured credit facility also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the senior secured credit facility, the lenders under that facility will have the right to proceed against the collateral granted to them to secure the debt, which includes our available cash, and they will also have the right to prevent us from making debt service payments on the senior subordinated notes. If the debt under the senior secured credit facility or the senior secured or subordinated notes were to be accelerated, we cannot assure that our assets would be sufficient to repay in full our debt.
We are dependent on our executive officers, senior management team and highly trained employees and any work stoppage, difficulty hiring similar employees, or ineffective succession planning could adversely affect our business.
Because our products are complicated and highly engineered, we depend on an educated and trained workforce. Historically, there has been substantial competition for skilled personnel in the aerospace and defense industry, and we could be adversely affected by a shortage of skilled employees. We may not be able to fill new positions or vacancies created by expansion or turnover or attract and retain qualified personnel. We cannot be assured that we can continue to hire, train and retain qualified employees at current wage rates since we operate in a competitive labor market, and there are currently significant inflationary and other pressures on wages.
Reduction in force actions, such as the actions primarily taken in fiscal 2020 and fiscal 2021 to reduce our workforce to align operations with customer demand as a result of the COVID-19 pandemic, could result in difficulty in rehiring capable employees to refill the positions eliminated as needed once business recovers.
Although we believe that our relations with our employees are satisfactory, we cannot assure that we will be able to negotiate a satisfactory renewal of collective bargaining agreements or that our employee relations will remain stable. Because we strive to limit the volume of finished goods inventory, any work stoppage could materially and adversely affect our ability to provide products to our customers.
In addition, our success depends in part on our ability to attract and motivate our senior management and key employees. Achieving this objective may be difficult due to a variety of factors, including fluctuations in economic and industry conditions, competitors’ hiring practices, and the effectiveness of our compensation programs. Competition for qualified personnel can be intense. If we are unable to effectively provide for the succession of key personnel, senior management and our executive officers, including our President, Chief Executive Officer and Director, our business, results of operations, cash flows and financial condition may be adversely affected. The Company’s Board of Directors continually monitors this risk and we believe that the Company’s succession plan, together with our straightforward strategy, clear value drivers, decentralized nature and the quality of managers running our operating units helps to mitigate this risk.
Risks Related to our Operations
Our sales to manufacturers of aircraft are cyclical, and a downturn in sales to these manufacturers may adversely affect us.
Our sales to manufacturers of large commercial aircraft, such as Boeing, Airbus, and related OEM suppliers, as well as manufacturers of business jets have historically experienced periodic downturns. In the past, these sales have been affected by airline profitability, which is impacted by, among other things, fuel and labor costs, price competition, interest rates, downturns in the global economy and national and international events. In addition, sales of our products to manufacturers of business jets are impacted by, among other things, downturns in the global economy. In recent years, such as in fiscal 2021 and the second half of fiscal 2020, we have experienced decreased sales across the commercial OEM sector driven primarily by the decrease in production by Boeing and Airbus related to reduced demand in the commercial aerospace industry from the COVID-19 pandemic, and airlines deferring or cancelling orders. Regulatory and quality challenges, such as with Boeing’s 737 MAX aircraft and 787 aircraft, also has an adverse impact. Downturns adversely affect our results of operations, financial position and cash flows.
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Our business is dependent on the availability of certain components and raw materials from suppliers.
Our business is affected by the price and availability of the raw materials and component parts that we use to manufacture our components. Our business, therefore, could be adversely impacted by factors affecting our suppliers (such as the destruction of our suppliers’ facilities or their distribution infrastructure, a work stoppage or strike by our suppliers’ employees or the failure of our suppliers to provide materials of the requisite quality), or by increased costs of such raw materials or components if we were unable to pass along such price increases to our customers.
The COVID-19 pandemic has continued to disrupt the global supply chain. We currently are experiencing supply shortages and inflationary pressures for certain components and raw materials that are important to our manufacturing process, particularly electronic parts. Expected growth in the global economy may exacerbate these pressures on us and our suppliers, and we expect these supply chain challenges and cost impacts to continue for the foreseeable future. Because we strive to limit the volume of raw materials and component parts on hand, our business could be adversely affected if we were unable to obtain these raw materials and components from our suppliers in the quantities we require or on favorable terms. Although we believe in most cases that we could identify alternative suppliers, or alternative raw materials or component parts, the lengthy and expensive aviation authority and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part.
We face significant competition.
We operate in a highly competitive global industry and compete against a number of companies. Competitors in our product lines are both U.S. and foreign companies and range in size from divisions of large public corporations to small privately-held entities. We believe that our ability to compete depends on high product performance, consistent high quality, short lead-time and timely delivery, competitive pricing, superior customer service and support and continued certification under customer quality requirements and assurance programs. We may have to adjust the prices of some of our products to stay competitive.
Climate-related regulations designed to address climate change may result in additional compliance costs.
Our operations and the products we sell are currently subject to rules limiting emissions and to other climate-related regulations in certain jurisdictions where we operate. The increased prevalence of global climate change concerns may result in new regulations that may negatively impact us, our suppliers and customers. We are continuing to evaluate short-, medium- and long-term risks related to climate change. We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers, in which case, the costs of raw materials and component parts could increase.
As a whole, because our manufacturing facilities primarily engage in assembly and light manufacturing and because we do not maintain any transportation infrastructure, we have relatively low Scope 1 and Scope 2 emissions. Accordingly, we do not anticipate any material adverse impact from increased carbon regulation directly on our manufacturing operations. Further, because of our wide portfolio of hundreds of thousands of products, we do not anticipate any material adverse impact from the reliance on a supplier or group of suppliers that may be subject to climate risks. However, regulation that would have a material adverse impact on air travel could have a material adverse impact on our business. Given the political significance and uncertainty around these issues, we cannot predict how legislation, regulation, and increased awareness of these issues will affect our operations and financial condition. We have established a science-aligned greenhouse gas emissions reduction target of at least a 50% reduction in our Scope 1 and Scope 2 emissions on an absolute basis by the year 2031. Fiscal 2019 is the selected baseline year for TransDigm that we will compare against as we make progress towards our emissions reduction goal. We continue to evaluate ways to reduce our energy and water consumption and lower our greenhouse gas emissions through energy efficiency measures, the purchase of green power and other actions.
Our operations depend on our manufacturing facilities, which are subject to physical and other risks that could disrupt production.
Our operations and those of our customers and suppliers have been and may again be subject to natural disasters, climate change-related events, pandemics or other business disruptions, which could seriously harm our results of operation and increase our costs and expenses. Some of our manufacturing facilities are located in regions that may be impacted by severe weather events, such as increased storm frequency or severity in the Atlantic and fires in hotter and drier climates. These could result in potential damage to our physical assets as well as disruptions in manufacturing activities. Some of our manufacturing facilities are located in areas that may be at risk due to rising sea levels. Moreover, some of our manufacturing facilities are located in areas that could experience decreased access to water due to climate issues.
We are also vulnerable to damage from other types of disasters, including power loss, fire, explosions, floods, communications failures, terrorist attacks and similar events. Disruptions could also occur due to health-related outbreaks and crises, cyber attacks, computer or equipment malfunction (accidental or intentional), operator error or process failures. Should insurance or other risk transfer mechanisms, such as our existing disaster recovery and business continuity plans, be insufficient to recover all costs, we could experience a material adverse effect on our business, results of operations, financial position and cash flows.
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Operations and sales outside of the United States may be subject to additional risks.
Our net sales to foreign customers were approximately $1.9 billion for the fiscal year ended September 30, 2022. A number of risks inherent in international operations could have a material adverse effect on our results of operations, including war, sanctions, global health crises, currency fluctuations, difficulties in staffing and managing multinational operations, general economic and political uncertainties and potential for social unrest in countries in which we operate, limitations on our ability to enforce legal rights and remedies, restrictions on the repatriation of funds, change in trade policies, tariff regulation, difficulties in obtaining export and import licenses and the risk of government financed competition.
Issues with the global supply chain can also rise due to some of the aforementioned risks, as well as the availability and cost of raw materials to suppliers, merchandise quality or safety issues, shipping and transport availability and cost, increases in wage rates and taxes, transport security, inflation and other factors relating to the suppliers and the countries in which they are located or from which they import. Such issues are often beyond our control and could adversely affect our operations and profitability. Furthermore, the Company is subject to laws and regulations, such as the Foreign Corrupt Practices Act, UK Bribery Act and similar local anti-bribery laws, which generally prohibit companies and their employees, agents and contractors from making improper payments for the purpose of obtaining or retaining business. Failure to comply with these laws could subject the Company to civil and criminal penalties that could materially adversely affect the Company’s results of operations, financial position and cash flows.
We are monitoring the ongoing conflict between Russia and Ukraine and the related export controls and financial and economic sanctions imposed on certain industry sectors, including the aviation sector, and parties in Russia by the U.S., the U.K., the European Union and others. Although the conflict has not resulted in a direct material adverse impact on TransDigm's business to date, the implications of the Russia and Ukraine conflict in the short-term and long-term are difficult to predict at this time. Factors such as increased energy costs, increased freight costs, the availability of certain raw materials for aircraft manufacturers, embargoes on flights from Russian airlines, sanctions on Russian companies, and the stability of Ukrainian customers could impact the global economy and aviation sector.
We are subject to certain unique business risks as a result of supplying equipment and services to the U.S. Government.
Companies engaged in supplying defense-related equipment and services to U.S. Government agencies, whether through direct contracts with the U.S. Government or as a subcontractor to customers contracting with the U.S. Government, are subject to business risks specific to the defense industry. These risks include the ability of the U.S. Government to unilaterally:
suspend us from receiving new contracts based on alleged violations of procurement laws or regulations;
terminate existing contracts;
revoke required security clearances;
reduce the value of existing contracts; and
audit our contract-related costs and fees, including allocated indirect costs.
Most of our U.S. Government contracts can be terminated by the U.S. Government at its convenience without significant notice. Termination for convenience provisions provide only for our recovery of costs incurred or committed, settlement expenses and profit on the work completed prior to termination.
On contracts for which the price is based on cost, the U.S. Government may review our costs and performance, as well as our accounting and general business practices. Based on the results of such audits, the U.S. Government may adjust our contract-related costs and fees, including allocated indirect costs. In addition, under U.S. Government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of research and development costs, and certain marketing expenses may not be subject to reimbursement.
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Furthermore, even where the price is not based on cost, the U.S. Government may seek to review our costs to determine whether our pricing is “fair and reasonable.” Our subsidiaries are periodically subject to pricing reviews and government buying agencies that purchase some of our subsidiaries’ products are periodically subject to audits by the DOD Office of Inspector General (“OIG”) with respect to prices paid for such products. In the third quarter of fiscal 2019, we voluntarily refunded $16.0 million to the U.S. Government following an OIG audit, and the DOD has requested refunds of $20.8 million in response to another OIG audit completed in the first quarter of fiscal 2022. In addition, our defense-related business has been the subject of an ongoing Congressional inquiry by the House Oversight Committee; Congressional inquiries are costly and time consuming for our management and could distract from our ability to effectively manage the business. As a result of these reviews, audits and inquiries, we could be subject to providing further refunds to the U.S. Government, we could be asked to enter into an arrangement whereby our prices would be based on cost, the DOD could seek to pursue alternative sources of supply for our parts, or the U.S. Government could take other adverse actions with respect to our contracts. Any of those occurrences could lead to a reduction in our revenue from, or the profitability of certain of our supply arrangements with, certain agencies and buying organizations of the U.S. Government. Further, negative publicity relating to the results of any audit, inquiry or subsequent hearing or the like could negatively impact our stock price.
If a government inquiry or investigation uncovers improper or illegal activities, we could be subject to civil or criminal penalties or administrative sanctions, including contract termination, fines, forfeiture of fees, suspension of payment and suspension or debarment from doing business with U.S. Government agencies, any of which could materially adversely affect our reputation, business, financial condition, results of operations and cash flows.
Moreover, U.S. Government purchasing regulations contain a number of additional operational requirements, which do not apply to entities not engaged in government contracting. Failure to comply with such government contracting requirements could result in civil and criminal penalties that could have a material adverse effect on the Company’s results of operations.
Our business may be adversely affected if we would lose our government or industry approvals or if more stringent government regulations are enacted or if industry oversight is increased.
The aerospace industry is highly regulated in the U.S. and in other countries. In order to sell our products, we and the products we manufacture must be certified by the FAA, the DOD and similar agencies in foreign countries and by individual manufacturers. If new and more stringent government regulations are adopted or if industry oversight increases, we might incur significant expenses to comply with any new regulations or heightened industry oversight. In addition, if material authorizations or approvals were revoked or suspended, our business would be adversely affected.
In addition to the aviation approvals, we are at times required to obtain approval from U.S. Government agencies and similar agencies elsewhere in the world to export our products. U.S. laws and regulations applicable to us include the Arms Export Control Act, the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and the trade sanctions laws and regulations administered by the United States Department of the Treasury's Office of Foreign Assets Control (“OFAC”). EAR restricts the export of commercial and dual-use products and technical data to certain countries, while ITAR restricts the export of defense products, technical data and defense services.
Failure to obtain approval to export or determination by the U.S. Government or similar agencies elsewhere in the world that we failed to receive required approvals or licenses could eliminate or restrict our ability to sell our products outside the United States or other country of origin, and the penalties that could be imposed by the U.S. Government or other applicable government for failure to comply with these laws could be significant.
We could incur substantial costs as a result of data protection concerns.
The interpretation and application of data protection laws in the U.S. and Europe, including but not limited to the General Data Protection Regulation (the “GDPR”) and the California Consumer Privacy Act (the “CCPA”), and elsewhere are uncertain and evolving. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. Complying with these various laws is difficult and could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Further, although we have implemented internal controls and procedures designed to ensure compliance with the GDPR, CCPA and other privacy-related laws, rules and regulations (collectively, the “Data Protection Laws”), there can be no assurance that our controls and procedures will enable us to be fully compliant with all Data Protection Laws.
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Increased cybersecurity threats and more sophisticated and targeted computer crime have posed and could continue to pose a risk to our information technology systems and a disruption to or breach in the security of such systems, if material, could have adverse effects on our result of operations and financial condition.
We rely extensively on information technology systems to manage and operate our business, some of which are managed by third parties. The security and functionality of these information technology systems, and the processing of data by these systems, are critical to our business operations. If these systems, or any part of the systems, are damaged, intruded upon, attacked, shutdown or cease to function properly (whether by planned upgrades, force majeure, telecommunications failures, criminal acts, including hardware or software break-ins or extortion attempts, or viruses, or other cybersecurity incidents) and we suffer any resulting interruption in our ability to manage and operate our business or if our products are affected, our results of operations and financial condition could be materially adversely affected. In fact, we have experienced data security incidents, although these have not had a material impact on our financial results. Furthermore, the Company has access to classified, sensitive, confidential, or personal data or information that is subject to privacy and security laws, regulations, or other contractually-imposed controls.
Despite our use of reasonable and appropriate technical security controls and monitoring, security breaches, theft, misplaced, lost or corrupted data, programming, or employee errors and/or malfeasance have led and could in the future lead to the compromise or improper use of such sensitive, confidential, or personal data or information. Such events may result in possible negative consequences, such as fines, ransom demands, penalties, failure to comply with laws governing sensitive data, negative publicity, loss of reputation, loss of intellectual property, loss of competitiveness or customers, increased security and compliance costs or other negative consequences. Further, the amount of insurance coverage that we maintain may be inadequate to cover claims or liabilities relating to a cybersecurity incident. Depending on the nature and magnitude of these events, they may have an adverse impact on our results of operations or financial condition.
Risks Related to Legal and Regulatory Matters
We could incur substantial costs as a result of violations of or liabilities under environmental laws and regulations.
Our operations and facilities are subject to a number of federal, state, local and foreign environmental laws and regulations that govern, among other things, discharges of pollutants into the air and water, the generation, handling, storage and disposal of hazardous materials and wastes, the remediation of contamination and the health and safety of our employees. Environmental laws and regulations may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Certain facilities and third-party sites utilized by subsidiaries of the Company have been identified as potentially responsible parties under the federal superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under applicable laws.
Estimates of the Company’s environmental liabilities are based on current facts, laws, regulations and technology. These estimates take into consideration the Company’s prior experience and professional judgment of the Company’s environmental advisors. Estimates of the Company’s environmental liabilities are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and cost estimates, the extent of corrective actions that may be required and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.
Accordingly, as investigations and remediations proceed, it is likely that adjustments in the Company’s accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company’s results of operations or cash flows in a given period. Based on currently available information, however, the Company does not believe that future environmental costs in excess of those accrued with respect to sites for which the Company has been identified as a potentially responsible party are likely to have a material adverse effect on the Company’s financial condition.
We may be subject to periodic litigation and regulatory proceedings, which may adversely affect our business and financial performance.
From time to time, we are involved in lawsuits and regulatory actions brought or threatened against us in the ordinary course of business. These actions and proceedings may involve claims for, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, or breach of contract. In addition, we may be subject to class action lawsuits, including those involving allegations of violations of consumer product statutes or the Fair Labor Standards Act and state wage and hour laws. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such actions or proceedings. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify, as plaintiffs may seek recovery of very large or indeterminate amounts in these types of lawsuits, and the magnitude of the potential loss may remain unknown for substantial periods of time. In addition, plaintiffs in many types of actions may seek punitive damages, civil penalties, consequential damages or other losses, or injunctive or declaratory relief. These proceedings could result in substantial cost and may require us to devote substantial resources to defend ourselves. The ultimate resolution of these matters through settlement, mediation, or court judgment could have a material impact on our financial condition, results of operations, and cash flows.
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We could be adversely affected if one of our products cause an aircraft to crash.
Our operations expose us to potential liabilities for personal injury or death as a result of the failure of an aircraft product that we have designed, manufactured or serviced. While we maintain liability insurance to protect us from future product liability claims, in the event of product liability claims our insurers may attempt to deny coverage or any coverage we have may not be adequate. We also may not be able to maintain insurance coverage in the future at an acceptable cost. Any liability not covered by insurance or for which third party indemnification is not available could result in significant liability to us.
In addition, a crash caused by one of our products could damage our reputation for quality products. We believe our customers consider safety and reliability as key criteria in selecting a provider of aircraft products. If a crash were to be caused by one of our products, or if we were to otherwise fail to maintain a satisfactory record of safety and reliability, our ability to retain and attract customers may be materially adversely affected.
Risks Related to Financial Matters
We have recorded a significant amount of intangible assets, which may never generate the returns we expect.
Mergers and acquisitions have resulted in significant increases in identifiable intangible assets and goodwill. Identifiable intangible assets, which primarily include trademarks, trade names, customer relationships, and technology, were approximately $2.8 billion at September 30, 2022, representing approximately 15% of our total assets. Goodwill recognized in accounting for the mergers and acquisitions was approximately $8.6 billion at September 30, 2022, representing approximately 48% of our total assets. We may never realize the full value of our identifiable intangible assets and goodwill, and to the extent we were to determine that our identifiable intangible assets or our goodwill were impaired within the meaning of applicable accounting standards, we would be required to write-off the amount of any impairment.
We may be subject to risks relating to changes in our tax rates or exposure to additional income tax liabilities.
We are subject to income taxes in the U.S. and various non-U.S. jurisdictions. The Company’s domestic and international tax liabilities are dependent upon the location of earnings among these different jurisdictions. The Company’s future results of operations could be adversely affected by changes in the Company’s effective tax rate as a result of changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets, challenges by tax authorities or changes in tax laws or regulations. In addition, the amount of income taxes paid by the Company is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments to the Company’s tax liabilities, which could have a material adverse effect on the Company’s results of operations.
We do not regularly declare and pay quarterly or annual cash dividends on our stock.
Notwithstanding special cash dividends, of which the most recent declaration by the Company’s Board of Directors in the fourth quarter of fiscal 2022 in the amount of $18.50 per outstanding share of common stock, we do not anticipate declaring regular quarterly or annual cash dividends on our common stock or any other equity security in the foreseeable future.
The amounts that may be available to us to pay future special cash dividends are restricted under our debt and other agreements. Any payment of special cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend on our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions and other factors deemed relevant by our Board of Directors. Therefore, shareholders should not rely on regular quarterly or annual dividend income from shares of our common stock and should not rely on special dividends with any regularity or at all.
General Risks
Our commercial business is sensitive to the number of flight hours that our customers’ planes spend aloft, the size and age of the worldwide aircraft fleet and our customers’ profitability. These items are, in turn, affected by general economic and geopolitical and other worldwide conditions.
Our commercial business is directly affected by, among other factors, changes in RPMs, the size and age of the worldwide aircraft fleet, the percentage of the fleet that is out-of-warranty and changes in the profitability of the commercial airline industry. RPMs and airline profitability have historically been correlated with the general economic environment, although national and international events also play a key role. For example, in addition to the current COVID-19 pandemic and the adverse impact it has had on the airline industry, past examples in which the airline industry has been negatively affected include downturns in the global economy, higher fuel prices, increased security concerns among airline customers following the events of September 11, 2001, the Severe Acute Respiratory Syndrome (“SARS”) epidemic, and conflicts abroad. Additional examples include future geopolitical or other worldwide events, such as war, terrorist acts, or additional worldwide infectious disease outbreaks.
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In addition, global market and economic conditions have been challenging due to turbulence in the U.S. and international markets and economies and have prolonged declines in business and consumer spending. As a result of the substantial reduction in airline traffic resulting from the aforementioned events, the airline industry incurred large losses and financial difficulties. Some carriers parked or retired a portion of their fleets and reduced workforces and flights. During periods of reduced airline profitability, some airlines may delay purchases of spare parts, preferring instead to deplete existing inventories, and delay refurbishments and discretionary spending. If demand for spare parts decreases, there would be a decrease in demand for certain products. An adverse change in demand could impact our results of operations, collection of accounts receivable and our expected cash flow generation from current and acquired businesses which may adversely impact our financial condition and access to capital markets.
U.S. military spending is dependent upon the U.S. defense budget.
The military and defense market is significantly dependent upon government budget trends, particularly the DOD budget. In addition to normal business risks, our supply of products to the U.S. Government is subject to unique risks largely beyond our control. DOD budgets could be negatively impacted by several factors, including, but not limited to, a change in defense spending policy as a result of the presidential election or otherwise, the U.S. Government’s budget deficits, spending priorities (e.g., shifting funds to efforts to combat the impact of the pandemic or efforts to assist Ukraine in the Russia and Ukraine conflict), the cost of sustaining the U.S. military presence internationally and possible political pressure to reduce U.S. Government military spending, each of which could cause the DOD budget to remain unchanged or to decline. A significant decline in U.S. military expenditures could result in a reduction in the amount of our products sold to the various agencies and buying organizations of the U.S. Government.
Our stock price may be volatile, and an investment in our common stock could suffer a decline in value.
There has been significant volatility in the market price and trading volume of equity securities, which is unrelated to the operating performance of the companies issuing the securities. These market fluctuations may negatively affect the market price of our common stock. Shareholders may not be able to sell their shares at or above the purchase price due to fluctuations in the market price of our common stock. Such changes could be caused by changes in our operating performance or prospects, including possible changes due to the cyclical nature of the aerospace industry and other factors such as fluctuations in OEM and aftermarket ordering, which could cause short-term swings in profit margins. Or such changes could be unrelated to our operating performance, such as changes in market conditions affecting the stock market generally or the stocks of aerospace companies or changes in the outlook for our common stock, such as changes to or the confidence in our business strategy, changes to or confidence in our management, or expectations for future growth of the Company. Global health crises such as the COVID-19 pandemic could also cause significant volatility in the market price.
ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
18

ITEM 2.    PROPERTIES
TransDigm’s principal owned properties (defined as greater than 20,000 square feet or related to a principal operation) as of September 30, 2022 are as follows:
LocationReporting SegmentSquare
Footage
Brea, CA (1)
Airframe315,000
Stillington, United KingdomAirframe274,800
Montreal, CanadaAirframe271,700
Miesbach, GermanyPower & Control242,000
Liberty, SC (1)
Power & Control219,000
Waco, TXPower & Control218,800
Liverpool, NYPower & Control197,100
Ingolstadt, GermanyAirframe191,900
Kent, OH (1)
Airframe185,000
Bridport, United KingdomAirframe174,700
Lillington, NCPower & Control162,400
Union Gap, WA (1)
Airframe144,400
Coachella, CA (1)
Power & Control140,000
Phoenix, AZAirframe138,700
Paks, HungaryAirframe137,800
Los Angeles, CAPower & Control131,000
Bohemia, NY (1)
Power & Control124,000
Buena Park, CAPower & Control115,000
Llangeinor, United KingdomAirframe110,000
Bourges, FrancePower & Control109,400
Westbury, NYPower & Control106,800
Kent, WA (1)
Airframe100,000
Painesville, OHPower & Control94,200
Valencia, CA (1)
Airframe88,400
Letchworth, United KingdomAirframe88,200
Placentia, CAAirframe86,600
Addison, IL (1)
Power & Control83,300
Sarralbe, FrancePower & Control77,900
Niort, FrancePower & Control69,000
Prescott, AZAirframe66,200
Clearwater, FLPower & Control64,200
South Euclid, OHPower & Control60,000
Wichita, KSPower & Control57,000
Branford, CTAirframe52,000
Hawkesbury, CanadaAirframe50,000
Avenel, NJPower & Control48,500
Rancho Cucamonga, CA (1)
Power & Control47,000
Pennsauken, NJAirframe38,000
Ryde, United KingdomPower & Control33,200
Rancho Cucamonga, CAAirframe32,700
Melaka, MalaysiaPower & Control24,800
Cheveley, United KingdomAirframe24,000
Broussard, LAAirframe22,000
Deerfield Beach, FLNon-aviation20,000
(1)Subject to mortgage liens under our senior secured credit facility, our 6.25% secured notes due March 15, 2026 (“2026 Secured Notes”) and our 8.00% secured notes due December 15, 2025 (“2025 Secured Notes”).
19

TransDigm’s principal leased properties (defined as greater than 20,000 square feet or related to a principal operation) as of September 30, 2022 are as follows:
LocationReporting SegmentSquare
Footage
Everett, WAAirframe339,300
East Camden, ARPower & Control276,000
Whippany, NJPower & Control230,500
Nittambuwa, Sri LankaAirframe168,000
Santa Ana, CAAirframe159,200
Dayton, NVAirframe144,000
Tijuana, MexicoAirframe141,000
Holmestrand, NorwayAirframe139,500
Anaheim, CAAirframe138,900
Marlow, United KingdomAirframe116,100
Tijuana, MexicoPower & Control112,800
Melbourne, FLPower & Control107,000
Farnborough, United KingdomPower & Control103,400
Goldsboro, NCPower & Control101,000
Fullerton, CAAirframe100,000
Kunshan, ChinaAirframe99,500
Sylmar, CAAirframe93,000
Elkhart, INNon-aviation91,500
Davis Junction, ILAirframe84,500
Miesbach, GermanyPower & Control80,800
Kunshan, ChinaNon-aviation75,300
Camarillo, CAPower & Control70,000
Gloucestor, United KingdomAirframe69,100
Matamoros, MexicoPower & Control60,500
Chihuahua, MexicoAirframe55,000
Portland, OregonAirframe50,000
Sugar Grove, ILAirframe45,000
Zunyi, ChinaPower & Control43,000
Tempe, AZPower & Control40,200
Fort Collins, COAirframe40,000
Collegeville, PAAirframe37,000
Chongqing, ChinaAirframe36,300
Rancho Santa Margarita, CAAirframe35,200
Joensuu, FinlandAirframe32,300
Eloy, AZAirframe28,100
Ashford, United KingdomPower & Control28,000
Nogales, MexicoAirframe27,000
Redhill, United KingdomAirframe22,700
Ravenna, OHAirframe22,500
Pennsauken, NJAirframe20,500
Cleveland, OHCorporate20,100
Our Cleveland, OH and Pasadena, CA corporate facilities house our principal executive offices, and we currently lease approximately 20,100 square feet and 5,300 square feet, respectively, for those purposes. TransDigm also leases certain of its other non-material facilities. Management believes that our machinery, plants and offices are in satisfactory operating condition and that it will have sufficient capacity to meet foreseeable future needs without incurring significant additional capital expenditures.
20

ITEM 3.    LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the ordinary course of business. SEC regulations require us to disclose certain information about environmental proceedings when a governmental authority is a party to the proceedings if we reasonably believe that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to such regulations, the Company uses a threshold of $1 million or more for purposes of determining whether disclosure of any such proceedings is required as we believe matters under this threshold are not material to the Company. While the Company is currently involved in certain legal proceedings, it believes the results of these proceedings will not have a material adverse effect on its financial condition, results of operations, or cash flows.
Information with respect to our legal proceedings is contained in Note 15, “Commitments and Contingencies,” within the notes to the consolidated financial statements included herein.
PART II
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is traded on the New York Stock Exchange, or NYSE, under the ticker symbol “TDG.”
Holders
As of October 18, 2022, there were 36 stockholders of record of our common stock and approximately 251,000 beneficial stockholders, which includes an estimated number of stockholders who have their shares held in their accounts by banks and brokers.
Dividends
In August 2022, TD Group’s Board of Directors declared a special cash dividend of $18.50 on each outstanding share of common stock and cash dividend equivalent payments on options granted under its equity compensation plans to non-directors. Directors received an $18.50 reduction in the strike price of their respective vested options in lieu of a cash payment.
Performance Graph
Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in the shares of common stock of TD Group with the cumulative total return of a hypothetical investment in each of the S&P 500 Index and the S&P Aerospace & Defense Select Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on September 30, 2017, and its relative performance is tracked through September 30, 2022.
21

The following performance graph and related information shall not be deemed “soliciting material” nor to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among TransDigm Group Inc., the S&P 500 Index and S&P Aerospace & Defense Select Index
tdg-20220930_g1.jpg
*$100 invested on 9/30/2017 in stock or index, including reinvestment of dividends.
Copyright 2022 Standard & Poor’s, a division of S&P Global. All rights reserved.
9/30/20179/30/20189/30/20199/30/20209/30/20219/30/2022
TransDigm Group Inc.100.00 145.63 215.50 207.98 273.40 236.22 
S&P 500 Index100.00 117.91 122.93 141.55 184.02 155.55 
S&P Aerospace & Defense Select Index100.00 126.38 137.35 113.48 156.92 121.51 
Purchases of Equity Securities by the Issuer or Affiliated Purchaser
On January 27, 2022, the Board of Directors of the Company authorized a new stock repurchase program to permit repurchases of its outstanding common stock not to exceed $2,200 million in the aggregate (the “$2,200 million stock repurchase program”), replacing the $650 million stock repurchase program previously authorized by the Board on November 8, 2017, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the Company's existing Notes. There is no expiration date for this program.
No repurchases were made under the program during the fourth quarter of fiscal 2022. During the second and third quarters of fiscal 2022, the Company repurchased 1,490,413 shares of common stock at an average price of $612.13 per share, for a total amount of $912 million. The repurchased shares of common stock are classified as treasury stock in the statement of changes in stockholders' deficit. As of September 30, 2022, $1,288 million remains available for repurchase under the $2,200 million stock repurchase program.
ITEM 6.    [RESERVED]

22

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our 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 report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under the heading entitled “Risk Factors” included elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested below.
Overview
For fiscal year 2022, we generated net sales of $5,429 million, gross profit of $3,099 million or 57.1% of net sales, and net income attributable to TD Group of $866 million. The COVID-19 pandemic has continued to have an adverse impact on our net sales, net income and EBITDA As Defined when compared to pre-pandemic levels. Pre-pandemic, and as our business continues to recover from the pandemic, we believe we have achieved steady, long-term growth in sales and improvements in operating performance due to our competitive strengths and through execution of our value-driven operating strategy. More specifically, we believe that focusing our businesses on our value-driven operating strategy of obtaining profitable new business, carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit and income from operations over the long-term.
Our selective acquisition strategy has also been an important contribution to the growth of our business. The integration of acquisitions into our existing businesses combined with implementing our proven operating strategy has historically resulted in improvements in the financial performance of the acquired business.
We believe our key competitive strengths include:
Large and Growing Installed Product Base with Aftermarket Revenue Stream. We provide components to a large and growing installed base of aircraft to which we supply aftermarket products. We estimate that our products are installed on over 100,000 commercial transport, regional transport, military and general aviation fixed wing turbine aircraft and rotary wing aircraft.
Diversified Revenue Base. We believe that our diversified revenue base reduces our dependence on any particular product, platform or market channel and has been a significant factor in maintaining our financial performance. Our products are installed on almost all of the major commercial aircraft platforms now in production. We expect to continue to develop new products for military and commercial applications. Our current initiatives include creating new products that are more environmentally friendly, such as radiation-free exciters, and creating new products that will help further improve commercial airlines’ efforts to keep passengers healthy and safe, such as touch-free aircraft lavatory suite products.
Our business strategy is made up of two key elements: (1) a value-driven operating strategy focused around our three core value drivers and (2) a selective acquisition strategy.
Value-Driven Operating Strategy. Our three core value drivers are:
Obtaining Profitable New Business. We attempt to obtain profitable new business by using our technical expertise and application skill and our detailed knowledge of our customer base and the individual niche markets in which we operate. We have regularly been successful in identifying and developing both aftermarket and OEM products to drive our growth.
Improving Our Cost Structure. We are committed to maintaining and continuously improving our lean cost structure through detailed attention to the cost of each of the products that we offer and our organizational structure, with a focus on reducing the cost of each.
Providing Highly Engineered Value-Added Products to Customers. We focus on the engineering, manufacturing and marketing of a broad range of highly engineered niche products that we believe provide value to our customers. We believe we have been consistently successful in communicating to our customers the value of our products. This has generally enabled us to price our products to fairly reflect the value we provide and the resources required to do so.
23

Selective Acquisition Strategy. We selectively pursue the acquisition of proprietary aerospace component businesses when we see an opportunity to create value through the application of our three core value-driven operating strategies. The aerospace industry, in particular, remains highly fragmented, with many of the companies in the industry being small private businesses or small non-core operations of larger businesses. We have significant experience among our management team in executing acquisitions and integrating acquired businesses into our company and culture. As of the date of this report, we have successfully acquired approximately 87 businesses and product lines since our formation in 1993. Many of these acquisitions have been integrated into an existing TransDigm production facility, which enables a higher production capacity utilization, which in turn improves gross profit levels due to the ability to spread the fixed manufacturing overhead costs over higher production volume. In the case of larger acquisitions that consist of multiple operating units (such as the Esterline acquisition), we may pursue opportunities to divest certain acquired operating units that are not in line with our long-term acquisition strategy.
Acquisitions and divestitures during the most recent three fiscal years are described in Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein.
The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally, by the pandemic. The pandemic has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. As a result, demand for travel declined at a rapid pace beginning in the second half of fiscal 2020 and has remained depressed compared to pre-pandemic levels. Although worldwide air traffic remains significantly lower than pre-pandemic levels, RPMs continued to steadily improve in fiscal 2022 and many aircraft parked by airlines have been returned to service. Commercial air travel in domestic markets continued to lead the air traffic recovery in fiscal 2022 with certain domestic markets nearing pre-pandemic air traffic levels. The pace of the international air traffic recovery has been slower than the domestic recovery, but international RPMs made positive strides in fiscal 2022 and are catching up to the domestic air traffic recovery. The commercial OEM market is continuing to show signs of recovery with airlines returning to the commercial OEMs to place orders; however, the commercial OEM supply chain challenges impacting manufacturers such as Boeing and Airbus are slowing the pace of new aircraft manufacturing. The exact pace and timing of the commercial air travel recovery remains uncertain and continues to evolve.
The defense aerospace market has been impacted by the COVID-19 pandemic to a lesser extent than the commercial aerospace market with this impact arising primarily from supply chain shortages. Additionally, within the defense market, the pace of U.S. government defense spending outlays and government funding reprioritization provides for uncertainty.
The COVID-19 pandemic has also disrupted the global supply chain and availability of raw materials. The disruption in the supply chain has resulted in increased freight costs, raw material costs and labor costs from the ongoing inflationary environment. Our business has been adversely affected and could continue to be adversely affected by disruptions in our ability to timely obtain raw materials and components from our suppliers in the quantities we require or on favorable terms. Although we believe in most cases that we could identify alternative suppliers, or alternative raw materials or component parts, the lengthy and expensive aviation authority and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part.
Because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, supply chain, consolidated results of operations, financial condition, and liquidity.
We are also monitoring the ongoing conflict between Russia and Ukraine and the related export controls and financial and economic sanctions imposed on certain industry sectors, including the aviation sector, and parties in Russia by the U.S., the U.K., the European Union and others. Although the conflict has not resulted in a direct material adverse impact on TransDigm's business to date, the implications of the Russia and Ukraine conflict in the short-term and long-term are difficult to predict at this time. Factors such as increased energy costs, the availability of certain raw materials for aircraft manufacturers, embargoes on flights from Russian airlines, sanctions on Russian companies, and the stability of Ukrainian customers could impact the global economy and aviation sector.
24

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 millions, except per share data):
Fiscal Years Ended September 30,
2022% of Net Sales2021% of Net Sales
Net sales$5,429 100.0 %$4,798 100.0 %
Cost of sales2,330 42.9 %2,285 47.6 %
Selling and administrative expenses748 13.8 %685 14.3 %
Amortization of intangible assets136 2.5 %137 2.9 %
Income from operations2,215 40.8 %1,691 35.2 %
Interest expense, net1,076 19.8 %1,059 22.1 %
Refinancing costs— %37 0.8 %
Other expense (income)18 0.3 %(51)(1.1)%
Gain on sale of businesses, net(7)(0.1)%(69)(1.4)%
Income tax provision261 4.8 %34 0.7 %
Income from continuing operations866 16.0 %681 14.2 %
Less: Net income attributable to noncontrolling interests(1)— %(1)— %
Income from continuing operations attributable to TD Group865 15.9 %680 14.2 %
Income from discontinued operations, net of tax— %— — %
Net income attributable to TD Group$866 16.0 %$680 14.2 %
Net income applicable to TD Group common stockholders$780 
(1)
14.4 %$607 
(1)
12.7 %
Earnings per share:
Earnings per share from continuing operations—basic and diluted$13.38
(2)
$10.41
(2)
Earnings per share from discontinued operations—basic and diluted0.02
(2)
(2)
Earnings per share$13.40$10.41
Cash dividends declared per common share$18.50$
Weighted-average shares outstanding—basic and diluted58.2 58.4 
Other Data:
EBITDA$2,456 
(3)
$2,027 
(3)
EBITDA As Defined$2,646 (3)48.7 %$2,189 (3)45.6 %
(1)Net income applicable to TD Group common stockholders represents net income attributable to TD Group less special dividends paid on participating securities, including dividend equivalent payments of $86 million and $73 million for the fiscal years ended September 30, 2022 and 2021, respectively.
(2)Earnings per share from continuing operations is calculated by dividing net income applicable to TD Group common stockholders, excluding income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding. Earnings per share from discontinued operations is calculated by dividing income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding.
(3)Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable GAAP financial measure.
25

Fiscal year ended September 30, 2022 compared with fiscal year ended September 30, 2021
Total Company
Net Sales. Net organic sales and acquisition and divestiture sales and the related dollar and percentage changes for the fiscal years ended September 30, 2022 and 2021 were as follows (amounts in millions):
Fiscal Years Ended% Change
Net Sales
September 30, 2022September 30, 2021Change
Organic sales$5,355 $4,665 $690 14.4 %
Acquisition and divestiture sales74 133 (59)(1.2)%
Net sales$5,429 $4,798 $631 13.2 %
Organic sales represent net sales from existing businesses owned by the Company, excluding sales from acquisitions and divestitures. Acquisition sales represent net sales from acquired businesses for the period up to one year subsequent to their respective acquisition date. Therefore, beginning in the second quarter of fiscal 2022, Cobham Aero Connectivity’s (“CAC's”) net sales, including the comparable period in the prior year, are included in the organic growth calculation (acquisition date was January 2021). Beginning in the third quarter of fiscal 2022, DART Aerospace (“DART”) is included in the acquisitions and divestitures classification due to the completion of the acquisition by TransDigm. Divestiture sales represent net sales from businesses up to the date the respective divestiture was completed. Acquisition and divestiture sales are excluded from organic sales due to the variability in the nature, timing and extent of acquisitions and divestitures and resulting variable impact on underlying trends. Refer to Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein for further information on the Company's recent acquisition and divestiture activity.
The increase in organic sales of $690 million for the fiscal year ended September 30, 2022 compared to the fiscal year ended September 30, 2021 is primarily related to increases in commercial aftermarket sales ($478 million, an increase of 44.8%) and commercial OEM sales ($221 million, an increase of 23.8%); partially offset by a decrease in defense sales ($52 million, a decrease of 2.2%). The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand, particularly the increase in the utilization of narrow-body aircraft, and air cargo demand and the resulting higher flight hours in fiscal 2022 compared to fiscal 2021. The increase in OEM sales is primarily attributable to a higher volume of narrow-body aircraft deliveries by aircraft manufacturers to airlines and also production rate increases of narrow-body aircraft compared to fiscal 2021. Partially offsetting the OEM sales growth are wide-body aircraft production and delivery slowdowns due to the COVID-19 pandemic adversely impacting international travel particularly in the first half of fiscal 2022 and also due to Boeing's ongoing regulatory and quality challenges with the 737 MAX aircraft (particularly in China) and the 787 aircraft. The decrease in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays in U.S. government defense spend outlays.
The decrease in acquisition and divestiture sales for the fiscal year ended September 30, 2022 is primarily attributable to the divestitures of ScioTeq and TREALITY Simulation Visual Systems (“ScioTeq and TREALITY”), Technical Airborne Components (“TAC”), Racal Acoustics (“Racal”) and Avista, Inc. (“Avista”), all of which were completed in fiscal 2021, partially offset by the acquisitions of CAC and DART.
26

Cost of Sales and Gross Profit. Cost of sales increased by $45 million, or 2.0%, to $2,330 million for the fiscal year ended September 30, 2022 compared to $2,285 million for the fiscal year ended September 30, 2021. Cost of sales and the related percentage of net sales for the fiscal years ended September 30, 2022 and 2021 were as follows (amounts in millions):
Fiscal Years Ended
September 30, 2022September 30, 2021Change% Change
Cost of sales - excluding costs below$2,383 $2,277 $106 4.7 %
% of net sales43.9 %47.5 %
Non-cash stock and deferred compensation expense19 13 46.2 %
% of net sales0.3 %0.3 %
Acquisition integration costs— — %
% of net sales0.1 %0.1 %
Inventory acquisition accounting adjustments(3)(50.0)%
% of net sales0.1 %0.1 %
COVID-19 pandemic restructuring costs— 29 (29)(100.0)%
% of net sales— %0.6 %
Loss contract amortization(39)(55)16 (29.1)%
% of net sales(0.7)%(1.1)%
Foreign currency (gains) losses(40)11 (51)(463.6)%
% of net sales(0.7)%0.2 %
Total cost of sales$2,330 $2,285 $45 2.0 %
% of net sales42.9 %47.6 %
Gross profit (Net sales less Total cost of sales)$3,099 $2,513 $586 23.3 %
Gross profit percentage (Gross profit / Net sales)57.1 %52.4 %
Excluding the specific components to cost of sales listed above, the change in cost of sales during the fiscal year ended September 30, 2022, which decreased as a percentage of net sales, was primarily driven by a favorable sales mix, specifically, higher commercial aftermarket sales as a percentage of net sales compared to commercial OEM net sales in the prior fiscal year ended September 30, 2021. In addition, despite increased freight, raw material, and labor costs resulting from the ongoing inflationary environment and disruption within the global supply chain and labor markets, the continued application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers) coupled with fixed overhead costs incurred being spread over a higher production volume, resulted in gross profit as a percentage of net sales increasing by 4.7 percentage points to 57.1% for the fiscal year ended September 30, 2022 from 52.4% for the fiscal year ended September 30, 2021.
Regarding the specific components to cost of sales listed above, COVID-19 pandemic restructuring costs were not material in fiscal 2022 and foreign exchange rates, particularly the U.S. dollar compared to the British pound and the euro, strengthened considerably in the fourth quarter of fiscal 2022, resulting in favorable movement compared to the prior year when the U.S. dollar depreciated against both the British pound and euro resulting in foreign currency losses.
Non-cash stock and deferred compensation expense is higher due to the adoption of a new deferred compensation plan for certain members of non-executive management in fiscal 2022, the impact of the new stock option grants awarded in fiscal 2022 and the impact of a modification approved by the Board of Directors of the performance criteria for the fiscal 2021 and 2020 grants. Refer to Note 18, “Stock-Based Compensation,” in the notes to the consolidated financial statements included herein for further information.
27

Selling and Administrative Expenses. Selling and administrative expenses increased by $63 million to $748 million, or 13.8% of net sales, for the fiscal year ended September 30, 2022 from $685 million, or 14.3% of net sales, for the fiscal year ended September 30, 2021. Selling and administrative expenses and the related percentage of net sales for the fiscal years ended September 30, 2022 and 2021 were as follows (amounts in millions):
Fiscal Years Ended
September 30, 2022September 30, 2021Change% Change
Selling and administrative expenses - excluding costs below$563 $534 $29 5.4 %
% of net sales10.4 %11.1 %
Non-cash stock and deferred compensation expense165 117 48 41.0 %
% of net sales3.0 %2.4 %
Bad debt expense(2)11 550.0 %
% of net sales0.2 %— %
Acquisition integration costs10 (3)(30.0)%
% of net sales0.1 %0.2 %
Acquisition and divestiture transaction-related expenses15 (11)(73.3)%
% of net sales0.1 %0.3 %
COVID-19 pandemic restructuring costs— 11 (11)(100.0)%
% of net sales— %0.2 %
Total selling and administrative expenses$748 $685 $63 9.2 %
% of net sales13.8 %14.3 %
Excluding the specific components to selling and administrative expenses listed above, the change in selling and administrative expenses during the fiscal year ended September 30, 2022 improved as a percentage of net sales compared to the prior fiscal year ended September 30, 2021. This is a result of the continued realization of the cost mitigation measures that were enacted in the second half of fiscal 2020 and in fiscal 2021 in response to the COVID-19 pandemic partially offset by increased costs incurred for labor, travel and other sales support and administrative costs due to the ongoing inflationary environment and the lessening of travel restrictions from the pandemic enabling a return to conducting meetings and other business-related matters in person.
Non-cash stock and deferred compensation expense is higher due to the adoption of a new deferred compensation plan for certain members of non-executive management in fiscal 2022, the impact of the new stock option grants awarded in fiscal 2022 and the impact of a modification approved by the Board of Directors of the performance criteria for the fiscal 2021 and 2020 grants. Refer to Note 18, “Stock-Based Compensation,” in the notes to the consolidated financial statements included herein for further information.
The increase in bad debt expense is primarily attributable to certain non-U.S. customers and also the Russia and Ukraine conflict. The decrease in acquisition and divestiture transaction-related expenses is due to the lack of divestitures occurring in fiscal 2022.
Amortization of Intangible Assets. Amortization of intangible assets was $136 million for the fiscal year ended September 30, 2022 compared to $137 million for the fiscal year ended September 30, 2021. The slight decrease in amortization expense of $1 million was due to the amortization expense recognized on intangible assets from the fiscal 2022 acquisition of DART being offset by sales order backlog recorded in connection with the CAC acquisition becoming fully amortized in the first quarter of fiscal 2022.
Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, revolving credit facility fees, finance leases and interest income. Interest expense-net increased $17 million, or 1.6%, to $1,076 million for the fiscal year ended September 30, 2022 from $1,059 million for the fiscal year ended September 30, 2021. The increase in interest expense-net was primarily due to an increase in LIBOR compared to the prior year, which adversely impacted the interest expense on the approximately 15% of gross debt that is variable rate and not hedged via an interest rate swap or cap. This was partially offset by a $12 million increase in interest income, the repayment of $200 million previously drawn on the revolving credit facility in the first quarter of fiscal 2022 and the favorable impact from refinancing activities executed in fiscal 2021. The weighted average interest rate for cash interest payments on total borrowings outstanding for the fiscal year ended September 30, 2022 was 5.3%.
Refinancing Costs. Refinancing costs of $1 million were recorded for the fiscal year ended September 30, 2022. Refinancing costs of $37 million recorded for the fiscal year ended September 30, 2021 were primarily related to fees incurred on the early redemption of the 6.50% senior subordinated notes due 2024 (the “2024 Notes”) and the 6.50% senior subordinated notes due 2025 (the “2025 Notes”) that occurred in the second and third quarters of fiscal 2021.
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Other Expense (Income). Other expense (income) was $18 million for the fiscal year ended September 30, 2022 compared to $(51) million for the fiscal year ended September 30, 2021. Other expense for the fiscal year ended September 30, 2022 was primarily driven by a pension settlement charge of approximately $22 million for the Esterline Retirement Plan. Refer to Note 13, “Retirement Plans,” in the notes to the consolidated financial statements included herein for further information. Partially offsetting this expense was the non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($3 million). Other income for the fiscal year ended September 30, 2021 was primarily driven by $24 million recorded for the settlement of the insurance claim for Leach International Europe’s Niort, France operating facility fire in August 2019. This primarily represents the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory and proceeds from the business interruption settlement. The remaining $27 million is primarily driven by non-service related components of net periodic benefit income on the Company's defined benefit pension plans ($14 million), receipt of payment of Canadian governmental subsidies ($7 million) and the release of a litigation reserve ($3 million).
Gain on Sale of Businesses-net. Gain on sale of businesses-net of $7 million was recorded for the fiscal year ended September 30, 2022, and is primarily driven by cash proceeds received from a final working capital settlement for the ScioTeq and TREALITY divestiture ($3 million). Gain on sale of businesses-net of $69 million was recorded for the fiscal year ended September 30, 2021, and is primarily related to the net gain on sale recognized on the ScioTeq and TREALITY and TAC divestitures. Refer to Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein for further information.
Income Tax Provision. Income tax expense as a percentage of income before income taxes was approximately 23.2% for the fiscal year ended September 30, 2022 compared to 4.8% for the fiscal year ended September 30, 2021. The Company’s significantly lower effective tax rate for the fiscal year ended September 30, 2021 was primarily due to a one time benefit from a tax election made on the Company's fiscal 2020 U.S. federal income tax return enabling the Company to utilize its net interest deduction limitation carryforward pursuant to IRC Section 163(j) resulting in the release of the valuation allowance applicable to such carryforward during the fourth quarter of fiscal 2021.
Income from Discontinued Operations, net of tax. Income from discontinued operations, net of tax, for the fiscal year ended September 30, 2022 was $1 million, which was driven by cash proceeds received during the first quarter of fiscal 2022 from a final working capital settlement for the Souriau-Sunbank Connection Technologies (“Souriau-Sunbank”) divestiture. There was no income from discontinued operations, net of tax, for the fiscal year ended September 30, 2021. Refer to Note 23, “Discontinued Operations,” in the notes to the consolidated financial statements included herein for further information.
Net Income Attributable to TD Group. Net income attributable to TD Group increased $186 million, or 27.4%, to $866 million for the fiscal year ended September 30, 2022 compared to net income attributable to TD Group of $680 million for the fiscal year ended September 30, 2021, primarily as a result of the factors referenced above.
Earnings per Share. Basic and diluted earnings per share from continuing operations and discontinued operations were $13.38 and $0.02, respectively, for the fiscal year ended September 30, 2022. Basic and diluted earnings per share from continuing operations was $10.41 for the fiscal year ended September 30, 2021. There was no impact on earnings per share from discontinued operations for the fiscal year ended September 30, 2021. Net income attributable to TD Group for the fiscal year ended September 30, 2022 of $866 million was decreased by dividend equivalent payments of $86 million, or $1.47 per share, resulting in net income applicable to TD Group common stockholders of $780 million, or $13.40 per share. Net income attributable to TD Group for the fiscal year ended September 30, 2021 of $680 million was decreased by dividend equivalent payments of $73 million, or $1.24 per share, resulting in net income applicable to TD Group common stockholders of $607 million, or $10.41 per share.
Business Segments
Segment Net Sales. Net sales by segment for the fiscal years ended September 30, 2022 and 2021 were as follows (amounts in millions):
Fiscal Years Ended September 30,
2022% of Net Sales2021% of Net SalesChange% Change
Power & Control$2,873 52.9 %$2,550 53.1 %$323 12.7 %
Airframe2,391 44.1 %2,083 43.5 %308 14.8 %
Non-aviation165 3.0 %165 3.4 %— — %
Net sales$5,429 100.0 %$4,798 100.0 %$631 13.2 %
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Net sales for the Power & Control segment increased $323 million, an increase of 12.7%, for the fiscal year ended September 30, 2022. The sales increase resulted primarily from increases in organic sales in commercial aftermarket ($241 million, an increase of 43.5%) and commercial OEM ($83 million, an increase of 18.7%); partially offset by a decrease in organic defense sales ($28 million, a decrease of 1.9%). The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand, particularly the increase in the utilization of narrow-body aircraft, and air cargo demand and the resulting higher flight hours compared to fiscal 2021. The increase in commercial OEM sales is primarily attributable to a higher volume of narrow-body aircraft deliveries by aircraft manufacturers to airlines and also production rate increases of narrow-body aircraft compared to fiscal 2021. Partially offsetting the commercial OEM sales growth are wide-body aircraft production and delivery slowdowns due to the COVID-19 pandemic adversely impacting international travel particularly in the first half of fiscal 2022 and also due to Boeing's ongoing regulatory and quality challenges with the 737 MAX aircraft (particularly in China) and the 787 aircraft. The decrease in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays in U.S. government defense spend outlays. The change in acquisition and divestiture sales was not material.
Net sales for the Airframe segment increased $308 million, an increase of 14.8%, for the fiscal year ended September 30, 2022. The sales increase resulted primarily from increases in organic sales in commercial aftermarket ($237 million, an increase of 46.2%) and commercial OEM ($138 million, an increase of 29.3%); partially offset by a decrease in organic defense sales ($23 million, a decrease of 2.6%). The increase in commercial aftermarket sales is primarily attributable to the continued recovery in commercial air travel demand, particularly the increase in the utilization of narrow-body aircraft, and air cargo demand and the resulting higher flight hours compared to fiscal 2021. The increase in commercial OEM sales is primarily attributable to a higher volume of narrow-body aircraft deliveries by aircraft manufacturers to airlines and also production rate increases of narrow-body aircraft compared to fiscal 2021. Partially offsetting the commercial OEM sales growth are wide-body aircraft production and delivery slowdowns due to the COVID-19 pandemic adversely impacting international travel particularly in the first half of fiscal 2022 and also due to Boeing's ongoing regulatory and quality challenges with the 737 MAX aircraft (particularly in China) and the 787 aircraft. The decrease in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays in U.S. government defense spend outlays. Acquisition and divestiture sales decreased $52 million primarily due to the divestitures completed during fiscal 2021, partially offset by the impact of CAC's sales being included in acquisition and divestiture sales through the first quarter of fiscal 2022 and DART's sales beginning in the third quarter of fiscal 2022.
The change in Non-aviation net sales compared to the prior fiscal year was not material.
EBITDA As Defined. Refer to “Non-GAAP Financial Measures” in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable GAAP financial measure. EBITDA As Defined by segment for the fiscal years ended September 30, 2022 and 2021 were as follows (amounts in millions):
Fiscal Years Ended September 30,
2022% of Segment
Net Sales
2021% of Segment
Net Sales
Change% Change
Power & Control$1,531 53.3 %$1,319 51.7 %$212 16.1 %
Airframe1,121 46.9 %878 42.2 %243 27.7 %
Non-aviation65 39.4 %62 37.6 %4.8 %
Total segment EBITDA As Defined2,717 50.0 %2,259 47.1 %458 20.3 %
Less: Unallocated corporate expenses71 1.3 %
(1)
70 1.5 %
(1)
1.4 %
Total Company EBITDA As Defined$2,646 48.7 %
(1)
$2,189 45.6 %
(1)
$457 20.9 %
(1)Calculated as a percentage of consolidated net sales.
Organic EBITDA As Defined represents EBITDA As Defined from existing businesses owned by the Company as of September 30, 2022, excluding EBITDA As Defined from acquisitions and divestitures. EBITDA As Defined from acquisitions and divestitures represents EBITDA As Defined from acquired businesses for the period up to one year subsequent to the respective acquisition date and from businesses up to the date the respective divestiture was completed. Refer to Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein for further information on the Company's recent acquisition and divestiture activity.
EBITDA As Defined for the Power & Control segment increased approximately $212 million, an increase of 16.1%, resulting from higher organic sales, particularly in the commercial aftermarket and OEM channels. Also contributing to the increase in EBITDA As Defined was the application of our three core value-driven operating strategies and positive leverage on our fixed overhead costs spread over a higher production volume despite the ongoing inflationary environment for freight, labor and certain raw materials. The change in EBITDA As Defined for the Power & Control segment from acquisitions and divestitures was not material for fiscal 2022.
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EBITDA As Defined for the Airframe segment increased approximately $243 million, an increase of 27.7%, resulting primarily from higher organic sales, particularly in the commercial aftermarket and OEM channels. Also contributing to the increase in EBITDA As Defined was the application of our three core value-driven operating strategies and positive leverage on our fixed overhead costs spread over a higher production volume despite the ongoing inflationary environment for freight, labor and certain raw materials. EBITDA As Defined for the Airframe segment from acquisitions and divestitures decreased by $9 million, primarily due to the impact on the comparable period from the divestitures completed in fiscal year 2021, partially offset by the impact of CAC (only through the first quarter of fiscal 2022) and DART (beginning in the third quarter of fiscal 2022).
The change in Non-aviation EBITDA as Defined compared to the prior fiscal year was not material.
Corporate expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. An immaterial amount of corporate expenses is allocated to the operating segments. The change in corporate expenses compared to the prior fiscal year was not material.
Fiscal year ended September 30, 2021 compared with fiscal year ended September 30, 2020
For our results of operations for fiscal 2021 compared with fiscal 2020, refer to the discussion in Item 7. “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of Form 10-K for the fiscal year ended September 30, 2021, as filed with the Securities and Exchange Commission on November 16, 2021.
Liquidity and Capital Resources
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
The following tables present selected balance sheet, cash flow and other financial data relevant to the liquidity or capital resources of the Company for the periods specified below (amounts in millions):
September 30, 2022September 30, 2021
Selected Balance Sheet Data:
Cash and cash equivalents$3,001 $4,787 
Working capital (Total current assets less total current liabilities)4,223 5,367 
Total assets18,107 19,315 
Total debt (1)
19,795 19,998 
TD Group stockholders’ deficit(3,773)(2,916)
(1)Includes debt issuance costs and original issue discount and premiums. Reference Note 12, “Debt,” in the notes to the consolidated financial statements included herein for additional information.
Fiscal Years Ended September 30,
20222021
Selected Cash Flow and Other Financial Data:
Cash flows provided by (used in):
Operating activities$948 $913 
Investing activities(553)(785)
Financing activities(2,148)(70)
Capital expenditures119 105 
Ratio of earnings to fixed charges (1)
2.0x1.7x
(1)For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings from continuing operations before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs, original issue discount and premium and the “interest component” of rental expense.
If the Company has excess cash, it generally prioritizes allocating the excess cash in the following manner: (1) capital spending at existing businesses, (2) acquisitions of businesses, (3) payment of a special dividend and/or repurchases of our common stock and (4) prepayment of indebtedness or repurchase of debt.
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In fiscal 2022, the Company returned approximately $2 billion to shareholders through share repurchases and a special dividend payment. In the second and third quarters of fiscal 2022, the Company repurchased 1,490,413 shares of common stock at an average price of $612.13 per share, aggregating to approximately $912 million in repurchases. In August 2022, TransDigm's Board of Directors authorized and declared a special cash dividend of $18.50 on each outstanding share of common stock and cash dividend equivalent payments on vested options outstanding under its stock incentive plans. The total cash payment of the special dividend, using existing cash on hand, was approximately $1,045 million. Whether the Company undertakes additional share repurchases, special dividends or other aforementioned activities in fiscal 2023 will depend on prevailing market conditions, the Company's liquidity requirements, contractual restrictions and other factors.
The Company’s ability to make scheduled interest payments on, or to refinance, the Company’s indebtedness, or to fund non-acquisition related capital expenditures and research and development efforts, will depend on the Company’s ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control, including the ongoing COVID-19 pandemic.
The Company is continuing to strategically manage the Company’s cash and cash equivalents in response to the ongoing inflationary environment, COVID-19 pandemic and related uncertainty of the duration and impact on the Company’s business. In the first quarter of fiscal 2022, the Company entered into Amendment No. 9 and Incremental Revolving Credit Assumption Agreement (herein, “Amendment No. 9”) to the Credit Agreement, increasing the capacity under the revolving credit facility from $760 million to $810 million. The Company also repaid $200 million previously drawn on the revolving credit facility. In fiscal 2021, due to favorable market conditions in the high yield bond market, the Company refinanced $1,950 million of its senior subordinated notes resulting in a reduced interest rate (estimated $35 million reduction in annual interest payments) and an extended maturity date.
As of September 30, 2022, the Company has significant cash liquidity as illustrated in the table presented below (in millions):
As of September 30, 2022
Cash and cash equivalents$3,001 
Availability on revolving credit facility779 
Cash liquidity$3,780 
We believe our significant cash liquidity will allow us to meet our anticipated funding requirements. We expect to meet our short-term cash liquidity requirements (including interest obligations and capital expenditures) through net cash from operating activities, cash on hand and, if needed, draws on the revolving credit facility. Long-term cash liquidity requirements consist primarily of obligations under our long-term debt agreements. There is no maturity on any tranche of term loans or notes until August 2024.
In connection with the continued application of our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers), we expect our efforts will continue to generate strong margins and provide sufficient cash provided by operating activities to meet our interest obligations and liquidity needs. We believe our cash provided by operating activities and available borrowing capacity will enable us to make strategic business acquisitions, such as the DART acquisition completed in the third quarter of fiscal 2022 for $359 million, pay dividends to our shareholders and make opportunistic investments in our own stock, subject to any restrictions in our existing credit agreement and market conditions.
The Company may issue additional debt if prevailing market conditions are favorable to doing so. In addition, the Company may increase its borrowings in connection with acquisitions, if cash flow from operating activities becomes insufficient to fund current operations or for other short-term cash needs or for common stock repurchases or dividends. Our future leverage will also be impacted by the then current conditions of the credit markets.
Operating Activities. The Company generated $948 million of net cash from operating activities during fiscal 2022 compared to $913 million during fiscal 2021.
The change in trade accounts receivable during fiscal 2022 was a use of cash of $190 million compared to a use of cash of $78 million in fiscal 2021. The increase in the use of cash of $112 million is primarily attributable to the timing of cash receipts as there were higher sales in the month of September 2022 compared to September 2021. The Company continues to actively manage its accounts receivable, the related agings and collection efforts in response to the COVID-19 pandemic and other factors, such as the Russia and Ukraine conflict.
The change in inventories during fiscal 2022 was a use of cash of $134 million compared to a source of cash of $79 million in fiscal 2021. The increase in the use of cash of $213 million is primarily driven by increased purchasing from higher demand in fiscal 2022 and fiscal 2023 as raw material inventory is up approximately $109 million compared to at September 30, 2021. The Company continues to actively and strategically manage inventory levels in response to the pandemic and the ongoing supply chain challenges.
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The change in accounts payable during fiscal 2022 was a source of cash of $58 million compared to a source of cash of $3 million in fiscal 2021. The change is primarily due to increased inventory purchases and the related timing of payments to suppliers.
Investing Activities. Net cash used in investing activities was $553 million during fiscal 2022, consisting of the acquisitions of DART and certain product line acquisitions made by our Extant Aerospace subsidiary for a total of $437 million and capital expenditures of $119 million. This was slightly offset by $3 million in proceeds received from the final working capital settlement for the ScioTeq and TREALITY divestiture. The Company estimates its capital expenditures in fiscal year 2023 to be approximately 2% to 3% of net sales, which is consistent with its historical annual spend as a percentage of net sales. The Company’s capital expenditures incurred from year-to-year are funded using existing cash on hand and are primarily for projects that are consistent with our three core value-driven operating strategies (obtaining profitable new business, continually improving our cost structure and providing highly engineered value-added products to customers).
Net cash used in investing activities was $785 million during fiscal 2021, consisting primarily of the acquisition of CAC for $963 million and capital expenditures of $105 million. This was partially offset by proceeds of $259 million from the completion of the divestiture of certain businesses and $24 million of insurance proceeds received from the Leach International Europe fire property claim.
Financing Activities. Net cash used in financing activities was $2,148 million during fiscal 2022. The use of cash was primarily attributable to $1,091 million of dividends and dividend equivalent payments, $912 million in common stock repurchases, the $200 million repayment of a previous draw on the revolving commitments and repayment on term loans of $75 million. This was partially offset by $132 million in proceeds from stock option exercises.
Net cash used in financing activities was $70 million during fiscal 2021. The use of cash was primarily attributable to the redemption of the 2024 Notes and 2025 Notes for $1,220 million and $762 million, respectively, repayments on term loans of $75 million and dividend equivalent payments of $73 million. This was partially offset by $1,189 million in net proceeds from the completion of the 4.625% senior subordinated notes due 2029 (the “4.625% 2029 Notes”) offering, $743 million in net proceeds from the completion of the 4.875% senior subordinated notes due 2029 (the “4.875% 2029 Notes”) offering and $128 million in proceeds from stock option exercises.
Description of Senior Secured Term Loans and Indentures
Senior Secured Term Loans Facility
TransDigm has $7,298 million in fully drawn term loans (the “Term Loans Facility”) and an $810 million revolving credit facility. The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as of September 30, 2022):
Term Loans FacilityAggregate PrincipalMaturity DateInterest Rate
Tranche E$2,155 millionMay 30, 2025LIBOR plus 2.25%
Tranche F$3,418 millionDecember 9, 2025LIBOR plus 2.25%
Tranche G$1,725 millionAugust 22, 2024LIBOR plus 2.25%
The Term Loans Facility requires quarterly aggregate principal payments of $19 million. The revolving commitments consist of two tranches which include up to $152 million of multicurrency revolving commitments. At September 30, 2022, the Company had $31 million in letters of credit outstanding and $779 million in borrowings available under the revolving commitments. Draws on the revolving commitments are subject to an interest rate of 2.50% per annum. The unused portion of the revolving commitments is subject to a fee of 0.5% per annum.
The interest rates per annum applicable to the loans under the Credit Agreement are, at TransDigm’s option, equal to either an alternate base rate or an adjusted LIBOR for one, two, three or six-month (or to the extent agreed to by each relevant lender, nine or twelve-month) interest periods chosen by TransDigm, in each case plus an applicable margin percentage. The adjusted LIBOR related to Tranche E, Tranche F and Tranche G term loans are not subject to a floor. At September 30, 2022 and 2021, the applicable interest rates for all existing tranches (which excludes the impact of our interest rate swaps and caps) were 5.92% and 2.33%, respectively, with the increase due to higher LIBOR particularly in the second half of fiscal 2022. Refer to Note 21, “Derivatives and Hedging Activities,” for information about how our interest rate swaps and cap agreements are used to hedge and offset, respectively, the variable interest rates on the credit facility.
Fiscal 2022 Amendment to the Credit Agreement
On December 29, 2021, the Company entered into Amendment No. 9 and Incremental Revolving Credit Assumption Agreement (herein, “Amendment No. 9”) to the Credit Agreement, which increases the capacity under the revolving credit facility from $760 million to $810 million. The terms and conditions that apply to Amendment No. 9 are the same as the terms and conditions that apply to the existing dollar revolving commitments and term loans under the Credit Agreement.
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Indentures
The following table represents the senior subordinated and secured notes outstanding as of September 30, 2022:
DescriptionAggregate PrincipalMaturity DateInterest Rate
2025 Secured Notes$1,100 millionDecember 15, 20258.00%
2026 Secured Notes$4,400 millionMarch 15, 20266.25%
6.875% 2026 Notes$500 millionMay 15, 20266.875%
6.375% 2026 Notes$950 millionJune 15, 20266.375%
7.50% 2027 Notes$550 millionMarch 15, 20277.50%
5.50% 2027 Notes$2,650 millionNovember 15, 20275.50%
4.625% 2029 Notes$1,200 millionJuly 15, 20294.625%
4.875% 2029 Notes$750 millionOctober 15, 20294.875%
The 6.375% 2026 Notes, the 7.50% 2027 Notes, the 5.50% 2027 Notes, the 4.625% 2029 Notes and the 4.875% 2029 Notes (collectively, the “TransDigm Inc. Notes”) were issued at a price of 100% of the principal amount. The 6.875% 2026 Notes (the “TransDigm UK Notes” and together with the TransDigm Inc. Notes, the “Notes,” are further described below) offered in May 2018 were issued at a price of 99.24% of the principal amount, resulting in gross proceeds of $496 million. The 2025 Secured Notes were issued at a price 100% of the principal amount. The initial $3,800 million offering of the 2026 Secured Notes (which, along with the 2025 Secured Notes, are collectively referred to as the “Secured Notes”) was issued at a price of 100% of its principal amount and the subsequent $200 million and $400 million offerings of the 2026 Secured Notes in the second quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively, were issued at a price of 101% of their principal amount, resulting in gross proceeds of $4,411 million.
The Notes do not require principal payments prior to their maturity. Interest under the Notes is payable semi-annually. The Notes represent our unsecured obligations ranking subordinate to our senior debt, as defined in the applicable indentures. The Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Notes.
Guarantor Information
The Notes are subordinated to all of our existing and future senior debt, rank equally with all of our existing and future senior subordinated debt and rank senior to all of our future debt that is expressly subordinated to the Notes. The TransDigm Inc. Notes are fully and unconditionally guaranteed on a senior subordinated unsecured basis by TD Group and TransDigm Inc.'s Domestic Restricted Subsidiaries (as defined in the applicable Indentures). The TransDigm UK Notes are guaranteed on a senior subordinated basis by TransDigm Inc., TD Group and TransDigm Inc.'s Domestic Restricted Subsidiaries. The guarantees of the Notes are subordinated to all of the guarantors’ existing and future senior debt, rank equally with all of their existing and future senior subordinated debt and rank senior to all of their future debt that is expressly subordinated to the guarantees of the Notes. The Notes are structurally subordinated to all of the liabilities of TD Group’s non-guarantor subsidiaries.
The Secured Notes are senior secured obligations of TransDigm and rank equally in right of payment with all of TransDigm’s existing and future senior secured debt, including indebtedness under TransDigm’s existing senior secured credit facilities, and are senior in right of payment to all of TransDigm’s existing and future senior subordinated debt, including the Notes, TransDigm’s other outstanding senior subordinated notes and TransDigm’s guarantees in respect of TransDigm UK’s outstanding senior subordinated notes. The Secured Notes are guaranteed on a senior secured basis by TD Group, TransDigm UK and TransDigm Inc.’s Domestic Restricted Subsidiaries named in the Secured Notes Indenture. The guarantees of the Secured Notes rank equally in right of payment with all of the guarantors’ existing and future senior secured debt and are senior in right of payment to all of their existing and future senior subordinated debt. The Secured Notes are structurally subordinated to all of the liabilities of TransDigm’s non-guarantor subsidiaries. The Secured Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Secured Notes.
Separate financial statements of TransDigm Inc. are not presented because the Secured Notes are fully and unconditionally guaranteed on a senior secured basis by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.
Separate financial statements of TransDigm UK are not presented because TransDigm UK's 6.875% 2026 Notes, issued in May 2018, are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.
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The financial information presented is that of TD Group and the Guarantors, which includes TransDigm Inc. and TransDigm UK, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between TD Group and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.
(in millions)September 30, 2022
Current assets$3,954 
Goodwill6,849 
Other non-current assets2,843 
Current liabilities735 
Non-current liabilities20,077 
Amounts (from) due to subsidiaries that are non-issuers and non-guarantors - net(1,334)
Fiscal Year Ended
(in millions)September 30, 2022
Net sales$4,208 
Sales to subsidiaries that are non-issuers and non-guarantors50 
Cost of sales1,724 
Expense from subsidiaries that are non-issuers and non-guarantors - net69 
Income from continuing operations552 
Net income attributable to TD Group552 
Certain Restrictive Covenants in Our Debt Documents
The Credit Agreement and the Indentures governing the Notes and Secured Notes contain restrictive covenants that, among other things, limit the incurrence of additional indebtedness, the payment of special dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, liens and encumbrances, and prepayments of certain other indebtedness.
The restrictive covenants included in the Credit Agreement are subject to amendments executed periodically. The most recent amendment that impacted the restrictive covenants contained in the Credit Agreement is Amendment No. 7.
Under the terms of the Credit Agreement, TransDigm is entitled, on one or more occasions, to request additional term loans or additional revolving commitments to the extent that the existing or new lenders agree to provide such incremental term loans or additional revolving commitments provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25x and the consolidated secured net debt ratio would be no greater than 5.00x, in each case, after giving effect to such incremental term loans or additional revolving commitments.
If any such default occurs, the lenders under the Credit Agreement and the holders of the Notes and Secured Notes may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. The lenders under the Credit Agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, following an event of default under the Credit Agreement, the lenders thereunder and the holders of the Secured Notes will have the right to proceed against the collateral granted to them to secure the debt, which includes our available cash, and they will also have the right to prevent us from making debt service payments on the Notes.
With the exception of the revolving credit facility, the Company has no maintenance covenants in its existing term loan and indenture agreements. Under the Credit Agreement, if the usage of the revolving credit facility exceeds 35%, or $284 million, of the total revolving commitments, the Company is required to maintain a maximum consolidated net leverage ratio of net debt to trailing four-quarter EBITDA As Defined of 7.25x as of the last day of the fiscal quarter.
As of September 30, 2022, the Company was in compliance with all of its debt covenants and expects to remain in compliance with its debt covenants in subsequent periods.
Trade Receivable Securitization Facility
During fiscal 2014, the Company established a trade receivable securitization facility (the “Securitization Facility”). The Securitization Facility effectively increases the Company’s borrowing capacity depending on the amount of the domestic operations’ trade accounts receivable. The Securitization Facility includes the right for the Company to exercise annual one year extensions as long as there have been no termination events as defined by the agreement. The Company uses the proceeds from the Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs.
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On July 25, 2022, the Company amended the Securitization Facility to, among other things, extend the maturity date to July 25, 2023 and bear interest at a rate of SOFR plus 1.30%, compared to an interest rate of LIBOR plus 1.20% that applied prior to the amendment. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable. As of September 30, 2022, the Company has borrowed $350 million under the Securitization Facility, which is fully drawn. At September 30, 2022, the applicable interest rate was 3.84%.
Dividend and Dividend Equivalent Payments
On August 26, 2022, the Company paid a special cash dividend of $18.50 on each outstanding share of common stock. No dividends were declared or paid during fiscal 2021. In fiscal 2022, the Company paid approximately $86 million in dividend equivalent payments. Total cash payments related to the special dividend and dividend equivalent payments in fiscal 2022 and 2021 were approximately $1,091 million and $73 million, respectively. Refer to Note 18, “Stock-Based Compensation,” in the notes to the consolidated financial statements herein for further information on the Company’s dividend equivalent payments.
Any future declaration of special cash dividends on our common stock will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions under the Credit Agreement and Indentures, the availability of surplus under Delaware law and other factors deemed relevant by our Board of Directors. TD Group is a holding company and conducts all of its operations through direct and indirect subsidiaries. Unless TD Group receives dividends, distributions, advances, transfers of funds or other payments from our subsidiaries, TD Group will be unable to pay any dividends on our common stock in the future. The ability of any subsidiaries to take any of the foregoing actions is limited by the terms of our Term Loans Facility and Indentures and may be limited by future debt or other agreements that we may enter into.
Contractual Obligations and Commitments
The following table summarizes the Company’s cash requirements from all significant contractual obligations as of September 30, 2022 (in millions):
TotalPayment Due by Period
ContractualLess thanBetweenBetweenOver
Obligations1 Year1-3 Years3-5 Years5 Years
Senior subordinated and secured notes (1)
$12,100 $— $— $7,500 $4,600 
Term Loans Facility (2)
7,298 75 3,910 3,313 — 
Scheduled interest payments (3)
4,273 1,177 2,126 780 190 
Pension funding minimums (4)
127 12 24 25 66 
Securitization Facility350 350 — — — 
Finance leases294 122626230
Operating leases113 21342335
Total contractual cash obligations$24,555 $1,647 $6,120 $11,667 $5,121 
(1)Represents principal maturities which excludes interest, debt issuance costs, original issue discount and premiums.
(2)The Tranche G term loans mature in August 2024, the Tranche E term loans mature in May 2025 and the Tranche F term loans mature in December 2025. The Term Loans Facility requires quarterly aggregate principal payments of $19 million.
(3)Assumes that the variable interest rate on our Tranche E, Tranche F and Tranche G term loans under our Term Loans Facility range from approximately 5.82% to 7.21% based on anticipated movements in the LIBOR, which given the ongoing volatility in rates, are highly uncertain. In addition, interest payments include the impact of the existing interest rate swap and cap agreements described in Note 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein.
(4)Represents future benefit payments expected to be paid from the pension and post-retirement benefit plans or from the Company’s assets.
Off-Balance Sheet Arrangements
The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company’s revolving credit facility. As of September 30, 2022, the Company had $31 million in letters of credit outstanding.
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Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with U.S. 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.
Below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions. For additional significant accounting policies, see Note 3, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements included herein.
Revenue Recognition – Revenue is recognized from the sale of products when control transfers to the customer, which is demonstrated by our right to payment, a transfer of title, a transfer of the risk and rewards of ownership, or the customer acceptance, but most frequently upon shipment where the customer obtains physical possession of the goods. The majority of the Company's revenue is recorded at a point in time. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes based on the standalone selling price of each performance obligation. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. We consider the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.
Inventories – Inventories are stated at the lower of cost or net realizable value. 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. Because the Company sells products that are installed on airframes that can be in-service for 25 or more years, it must keep a supply of such products on hand while the airframes are in use. Where management estimated that the net realizable value was below cost or determined that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value was made by recording a provision included in cost of sales. Additionally, management believes that the Company’s estimates of excess and obsolete inventory are reasonable and material changes in future estimates or assumptions used to calculate our estimate is unlikely. However, actual results may differ materially from the estimates and additional provisions may be required in the future. A 10% change in our excess and obsolete inventory reserve at September 30, 2022 would not have a material impact on our results. In accordance with industry practice, all inventories are classified as current assets as all inventories are available and necessary to support current sales, even though a portion of the inventories may not be sold within one year.
Goodwill and Other Intangible Assets – In accordance with ASC 805, “Business Combinations,” the Company uses the acquisition method of accounting to allocate costs of acquired businesses to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition. The excess costs of acquired businesses over the fair values of the assets acquired and liabilities assumed are recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates and EBITDA margins, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. Fair value adjustments to the Company’s assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the merger or acquisition.
Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so. Goodwill and identifiable intangible assets are recorded at their estimated fair value on the date of acquisition and are reviewed at least annually for impairment based on cash flow projections and fair value estimates.
U.S. GAAP requires that the annual, and any interim, goodwill impairment assessment be performed at the reporting unit level. Our reporting units have been identified at the operating unit level, which is one level below our operating segments. Substantially all goodwill was determined and recognized for each reporting unit pursuant to the accounting for the merger or acquisition as of the date of each transaction. With respect to acquisitions integrated into an existing reporting unit, any acquired goodwill is combined with the goodwill of the reporting unit.
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At the time of goodwill impairment testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the quantitative goodwill impairment test. The quantitative test is required only if the Company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit. For the quantitative test, management determines the estimated fair value through the use of a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved for each reporting unit. If the calculated estimated fair value is less than the current carrying value, impairment of goodwill of the reporting unit may exist. The use of a discounted cash flow valuation model to determine estimated fair value is common practice in impairment testing. The key assumptions used in the discounted cash flow valuation model for impairment testing includes discount rates, revenue growth rates and EBITDA margins, cash flow projections and terminal value rates. Discount rates are set by using the Weighted Average Cost of Capital (“WACC”) methodology. The WACC methodology considers market and industry data as well as company specific risk factors for each reporting unit in determining the appropriate discount rates to be used. The Company utilizes a third party valuation firm to assist in the determination of the WACC. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business.
Management, considering industry and company-specific historical and projected data, develops growth rates, sales projections and cash flow projections for each reporting unit. Terminal value rate determination follows a common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.
Management tests indefinite-lived intangible assets for impairment at the asset level, as determined by appropriate asset valuation at the time of acquisition. The impairment test for indefinite-lived intangible assets consists of a comparison between the estimated fair values and carrying values. If the carrying amounts of intangible assets that have indefinite useful lives exceed their estimated fair values, an impairment loss will be recognized in an amount equal to the difference. Management utilizes the royalty savings valuation method to determine the estimated fair value for each indefinite-lived intangible asset. In this method, management estimates the royalty savings arising from the ownership of the intangible asset. The key assumptions used in estimating the royalty savings for impairment testing include discount rates, royalty rates, growth rates, sales projections and terminal value rates. Discount rates used are similar to the rates developed by the WACC methodology considering any differences in company-specific risk factors between reporting units and the indefinite-lived intangible assets. Royalty rates are established by management with the advice of valuation experts. Management, considering industry and company-specific historical and projected data, develops growth rates and sales projections for each significant intangible asset. Terminal value rate determination follows common methodology of capturing the present value of perpetual sales estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.
The discounted cash flow and royalty savings valuation methodologies require management to make certain assumptions based upon information available at the time the valuations are performed. Actual results could differ from these assumptions. Management believes the assumptions used are reflective of what a market participant would have used in calculating fair value considering the current economic conditions.
The Company had 47 reporting units with goodwill and 44 reporting units with indefinite-lived intangible assets as of the first day of the fourth quarter of fiscal 2022, the date of the annual impairment test. Based on its initial qualitative assessment over each of the reporting units, the Company identified 13 reporting units to test for impairment using a quantitative test for both goodwill and indefinite-lived intangible assets. The 13 reporting units selected for quantitative testing have higher commercial aerospace content and, as a result, have been more adversely impacted by the COVID-19 pandemic. The estimated fair values of each of these reporting units and other indefinite-lived intangible assets were in excess of their respective carrying values. The Company performed a sensitivity analysis on certain company-specific projected data, specifically earnings before taxes and net sales, which are significant assumptions in the discounted cash flow valuation model to determine estimated fair value. With a ten percentage point decrease in earnings before taxes and net sales data, all of the reporting units would continue to have fair values in excess of their respective carrying values of goodwill and other indefinite-lived intangible assets.
Stock-Based Compensation – The cost of the Company’s stock-based compensation is recorded in accordance with ASC 718, “Stock Compensation.” The Company uses a Black-Scholes pricing model to estimate the grant-date fair value of the stock options awarded. The Black-Scholes pricing model requires assumptions regarding the expected volatility of the Company’s common shares, the risk-free interest rate, the expected life of the stock options award and the Company’s dividend yield. The Company primarily utilizes historical data in determining the assumptions. An increase or decrease in the assumptions or economic events outside of management’s control could, and do, have an impact on the Black-Scholes pricing model. The Company estimates stock option forfeitures based on historical data. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative adjustment in the period of change. The Company also evaluates any subsequent changes to the respective option holders terms under the modification rules of ASC 718. If determined to be a modification, the Black-Scholes pricing model is updated as of the date of the modification resulting in a cumulative catch-up to expense.
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Income Taxes – The Company estimates income taxes in each jurisdiction in which it operates. This involves estimating taxable earnings, specific taxable and deductible items, the likelihood of generating sufficient future taxable income to utilize deferred tax assets and possible exposures related to future tax audits. To the extent these estimates change, adjustments to deferred and accrued income taxes are made in the period in which the changes occur. Historically, such adjustments have not been significant.
New Accounting Standards
For information about new accounting standards, see Note 4, “Recent Accounting Pronouncements,” in the notes to the consolidated financial statements included herein.
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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 income from continuing operations 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 U.S. 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 the revolving credit facility under our senior secured credit facility requires compliance under certain circumstances, 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.
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 U.S. 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 U.S. 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 U.S. GAAP, and neither should be considered as an alternative to net income or cash flow from operations determined in accordance with U.S. 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 income from continuing operations to EBITDA and EBITDA As Defined (in millions):
Fiscal Years Ended September 30,
20222021
Income from continuing operations$866 $681 
Adjustments:
Depreciation and amortization expense253 253 
Interest expense, net1,076 1,059 
Income tax provision261 34 
EBITDA2,456 2,027 
Adjustments:
Inventory acquisition accounting adjustments (1)
Acquisition integration costs (2)
11 14 
Acquisition and divestiture transaction-related expenses (3)
15 
Non-cash stock and deferred compensation expense (4)
184 130 
Refinancing costs (5)
1 37 
COVID-19 pandemic restructuring costs (6)
 40 
Gain on sale of businesses, net (7)
(7)(69)
Other, net (8)
(6)(11)
EBITDA As Defined$2,646 $2,189 
(1)
Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when 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 for both acquisitions and divestitures 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 incentive plans and deferred compensation plans.
(5)
Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(6)
Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic of $36 million for the fiscal year ended September 30, 2021. These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. This also includes $4 million for the fiscal year ended September 30, 2021 of incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment, etc.). Restructuring costs incurred in response to the COVID-19 pandemic for the fiscal year ended September 30, 2022 were not material.
(7)
Represents the net gain on sale of businesses. Refer to Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein for further information.
(8)
Primarily represents foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, including the pension settlement charge for the Esterline Retirement Plan (further detailed in Note 15, “Retirement Plans”) and gain or loss on sale of fixed assets.
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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 millions):
Fiscal Years Ended September 30,
20222021
Net cash provided by operating activities$948 $913 
Adjustments:
Changes in assets and liabilities, net of effects from acquisitions and sales of businesses288 98 
Interest expense, net (1)
1,076 1,059 
Income tax provision - current283 — 
Loss contract amortization39 55 
Non-cash stock and deferred compensation expense (2)
(184)(130)
Refinancing costs (3)
(1)(37)
Gain on sale of businesses, net (4)
69 
EBITDA2,456 2,027 
Adjustments:
Inventory acquisition accounting adjustments (5)
Acquisition integration costs (6)
11 14 
Acquisition and divestiture transaction-related expenses (7)
15 
Non-cash stock and deferred compensation expense (2)
184 130 
Refinancing costs (3)
37 
COVID-19 pandemic restructuring costs (8)
— 40 
Gain on sale of businesses, net (4)
(7)(69)
Other, net (9)
(6)(11)
EBITDA As Defined$2,646 $2,189 
(1)
Represents interest expense excluding the amortization of debt issuance costs and premium and discount on debt.
(2)
Represents the compensation expense recognized by TD Group under our stock incentive plans and deferred compensation plans.
(3)
Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.
(4)
Represents the net gain on sale of businesses. Refer to Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein for further information.
(5)
Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when inventory was sold.
(6)
Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.
(7)
Represents transaction-related costs for both acquisitions and divestitures comprising deal fees, legal, financial and tax due diligence expenses, and valuation costs that are required to be expensed as incurred.
(8)
Represents restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic of $36 million for the fiscal year ended September 30, 2021. These are costs related to the Company's actions to reduce its workforce and consolidate certain facilities to align with customer demand. This also includes $4 million for the fiscal year ended September 30, 2021 of incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment, etc.). Restructuring costs incurred in response to the COVID-19 pandemic for the fiscal year ended September 30, 2022 were not material.
(9)
Primarily represents foreign currency transaction gain or loss, payroll withholding taxes related to special dividend and dividend equivalent payments and stock option exercises, non-service related pension costs, including the pension settlement charge for the Esterline Retirement Plan (further detailed in Note 15, “Retirement Plans”) and gain or loss on sale of fixed assets.
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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our main exposure to market risk relates to interest rates. Our financial instruments that are subject to interest rate risk is principally our variable rate debt. In July 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The discontinuation date for submission and publication of rates for the remaining tenors of USD LIBOR (one-month, three-month, six-month and twelve-month) was subsequently extended by the ICE Benchmark Administration (the administrator of LIBOR) until June 30, 2023. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2023. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become acceptable alternatives to LIBOR, or what effect these changes in views or alternatives may have on financial markets for LIBOR-linked financial instruments. While the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, has chosen the secured overnight financing rate (“SOFR”) as the recommended risk-free reference rate for the U.S. (calculated based on repurchase agreements backed by treasury securities), we cannot currently predict the extent to which this index will gain widespread acceptance as a replacement for LIBOR. It is not possible to predict the effect of these changes, other reforms or the establishment of alternative reference rates.
In February 2020, in connection with Amendment No. 7 to the Credit Agreement, we amended our Credit Agreement to include a provision for the determination of an alternative reference interest rate. Additionally, with respect to our derivatives portfolio, we have elected the LIBOR protocols issued by the International Swaps and Derivatives Association, but the discontinuation of LIBOR may also require our derivative agreements to be amended in some way. Once the alternative interest rate has replaced LIBOR, our future interest expense could be impacted. We will continue to evaluate the risks and opportunities related to LIBOR transition.
At September 30, 2022, we had borrowings under our Term Loans Facility, which consists of three tranches of term loans, of approximately $7,298 million that were subject to interest rate risk. Borrowings under our term loans bear interest, at our option, at a rate equal to either an alternate base rate or an adjusted LIBOR for a one-, two-, three- or six-month (or to the extent available to each lender, nine- or twelve-month) interest period chosen by us, in each case, plus an applicable margin percentage. Accordingly, the Company’s cash flows and earnings will be exposed to the market risk of interest rate changes resulting from variable rate borrowings under our term loans. The Company's objective is to maintain an allocation of at least 75% fixed rate and 25% variable rate debt thereby limiting its exposure to changes in near-term interest rates. Interest rate swaps and caps used to hedge and offset, respectively, the variable interest rates on the credit facility are described in Note 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein. We do not hold or issue derivative instruments for speculative purposes. As of September 30, 2022, approximately 85% of our total debt was fixed rate. The effect of a hypothetical one percentage point increase in interest rates would increase the annual interest costs under our term loans by approximately $74 million based on the amount of outstanding borrowings at September 30, 2022. The weighted average interest rate on the $7,298 million of borrowings under our Term Loans Facility on September 30, 2022 was 6.3%.
For information about the fair value of the aggregate principal amount of borrowings under our term loans and the fair value of the Notes, refer to Note 20, “Fair Value Measurements,” in the notes to the consolidated financial statements included herein.
Foreign Currency Risk
Certain of our foreign subsidiaries’ sales and results of operations are subject to the impact of foreign currency fluctuations, primarily the British pound and the euro. Because our consolidated financial statements are presented in U.S. dollars, increases or decreases in the value of the U.S. dollar relative to other currencies in which we transact business could materially adversely affect our net sales, net income and the carrying values of our assets located outside the U.S. global economic uncertainty continues to exist. Strengthening of the U.S. dollar relative to other currencies may adversely affect our operating results. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. The foreign currency forward exchange contracts entered into by the Company are described in Note 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein.
A 10% change in foreign currency exchange rates would not have resulted in a material impact to net income for the fiscal year ended September 30, 2022.
As disclosed elsewhere in this report, the future impacts of the Russia and Ukraine conflict and the COVID-19 pandemic and their residual effects, including economic uncertainty, inflationary environment and disruption within the global supply chain, labor markets and aerospace industry, on our business remain uncertain. As we cannot anticipate the ultimate duration or scope of the Russia-Ukraine war and the COVID-19 pandemic, the ultimate financial impact to our results cannot be reasonably estimated, but could be material.
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained on pages F-1 through F-45