Forward-looking Statements
The following discussion of the Company's financial condition and results of operations should be read together withTD Group's condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. References in this section to "TransDigm ," "the Company," "we," "us," "our," and similar references refer toTD Group ,TransDigm Inc. andTransDigm Inc.'s subsidiaries, unless the context otherwise indicates. This Quarterly Report on Form 10-Q contains both historical and "forward-looking statements" within the meaning of Section 21E of the Exchange Act, and 27A of the Securities Act. 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q, 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 the Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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; future geopolitical or other worldwide events; cyber-security threats and natural disasters; our reliance on certain customers; theU.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. Refer to Part II, Item 1A included in this Quarterly Report on Form 10-Q and to Part II, Item 1A of the Annual Report on Form 10-K for additional information regarding the foregoing factors that may affect our business.
Overview
We believe we are a leading global designer, producer and supplier of highly engineered 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 these product offerings is composed of many individual products that are typically customized to meet the needs of a particular aircraft platform or customer. 26
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For the third quarter of fiscal year 2022, we generated net sales of$1,398 million and net income attributable toTD Group of$238 million . EBITDA As Defined was$696 million , or 49.8% of net sales. Refer to the "Non-GAAP Financial Measures" section for certain information regarding EBITDA and EBITDA As Defined, including reconciliations of EBITDA and EBITDA As Defined to income from continuing operations and net cash provided by operating activities. 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 severity of the disease, the duration of the outbreak, the likelihood of resurgences of the outbreak, including due to the emergence and spread of variants, actions that may be taken by governmental authorities in response to the disease including vaccination mandates, 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. However, commercial air travel has increasingly shown signs of recovery in recent months with increasing air traffic, primarily in certain domestic markets. The recovery in international commercial air travel has been slower with international travel moderately recovered from COVID-19 pandemic lows. The exact pace and timing of the commercial air travel recovery remains uncertain and is expected to continue to be uneven depending on factors such as trends in the number of COVID-19 infections (e.g., impact of new variants of COVID-19 resurfacing), the continued efficacy and public acceptance of vaccines and easing of quarantines and travel restrictions, among other factors. The COVID-19 pandemic has also disrupted the global supply chain and availability of raw materials, particularly electronic parts. 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 expensiveFederal Aviation Administration ("FAA") and OEM certification processes associated with aerospace products could prevent efficient replacement of a supplier, raw material or component part. We currently expect COVID-19 to continue to cause an adverse impact on our net sales, net income and EBITDA As Defined compared to pre-pandemic levels for the remainder of fiscal 2022. Longer-term, 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 betweenRussia andUkraine and the related export controls and financial and economic sanctions imposed on certain industry sectors, including the aviation sector, and parties inRussia by theU.S. , theU.K. , theEuropean Union and others. Although the conflict has not resulted in a direct material adverse impact onTransDigm's business to date, the implications of theRussia andUkraine 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.
Critical Accounting Policies and Estimates
The preparation and fair presentation of the consolidated unaudited interim financial statements and accompanying notes included in this report are the responsibility of management. The financial statements and footnotes have been prepared in conformity with generally accepted accounting principles inthe United States ("U.S. GAAP") for interim financial statements and contain certain amounts that were based upon management's best estimates, judgments and assumptions that were believed to be reasonable under the circumstances. On an ongoing basis, we evaluate the accounting policies and estimates used to prepare financial statements. Estimates are based on historical experience, judgments and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates used by management. A comprehensive discussion of the Company's critical accounting policies and management estimates and significant accounting policies followed in the preparation of the financial statements is included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 , filed onNovember 16, 2021 . Refer to Note 4, "Recent Accounting Pronouncements," in the notes to the condensed consolidated financial statements included herein for further disclosure of accounting standards recently adopted or required to be adopted in the future. Acquisitions and Divestitures Recent acquisitions and divestitures are described in Note 3, "Acquisitions and Divestitures," in the notes to the condensed consolidated financial statements included herein. 27
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Results of Operations
The following table sets forth, for the periods indicated, certain operating data of the Company, including presentation of the amounts as a percentage of net sales (amounts in millions, except per share data):
Thirteen Week Periods Ended
July 2, 2022 % of Net Sales July 3, 2021 % of Net Sales Net sales$ 1,398 100.0 %$ 1,218 100.0 % Cost of sales 582 41.6 % 563 46.2 % Selling and administrative expenses 184 13.2 % 172 14.1 % Amortization of intangible assets 33 2.4 % 36 3.0 % Income from operations 599 42.8 % 447 36.7 % Interest expense, net 269 19.2 % 263 21.6 % Refinancing costs - - % 13 1.1 % Other expense (income) 21 1.5 % (5) (0.4) % Gain on sale of businesses, net (3) (0.2) % (68) (5.6) % Income tax provision (benefit) 73 5.2 % (73) (6.0) % Income from continuing operations 239 17.1 % 317 26.0 % Less: Net income attributable to noncontrolling interests (1) (0.1) % - - %
Income from continuing operations attributable to
238 17.0 % 317 26.0 % Net income attributable to TD Group $ 238 17.0 % $ 317 26.0 % Net income applicable toTD Group common stockholders $ 238 (1) 17.0 % $ 317 (1) 26.0 %
Earnings per share: Earnings per share from continuing operations-basic and diluted
$ 4.10 (2) $ 5.43 (2) Earnings per share from discontinued operations-basic and diluted - (2) - (2) Earnings per share $ 4.10 $ 5.43 Weighted-average shares outstanding-basic and diluted 58.0 58.4 Other Data: EBITDA $ 643 (3) $ 572 (3) EBITDA As Defined $ 696 (3) 49.8 % $ 559 (3) 45.9 % (1)Net income applicable toTD Group common stockholders represents net income attributable toTD Group less special dividends declared or paid on participating securities, including dividend equivalent payments. No special dividends were declared or paid on participating securities, including dividend equivalent payments, for the thirteen week periods endedJuly 2, 2022 andJuly 3, 2021 , respectively. (2)Earnings per share from continuing operations is calculated by dividing net income applicable toTD 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.
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Table of Contents Thirty-Nine Week Periods Ended July 2, 2022 % of Net Sales July 3, 2021 % of Net Sales Net sales$ 3,919 100.0 %$ 3,519 100.0 % Cost of sales 1,706 43.5 % 1,731 49.2 % Selling and administrative expenses 537 13.7 % 531 15.1 % Amortization of intangible assets 102 2.6 % 101 2.9 % Income from operations 1,574 40.2 % 1,156 32.9 % Interest expense, net 799 20.4 % 798 22.7 % Refinancing costs - - % 36 1.0 % Other expense (income) 15 0.4 % (37) (1.1) % Gain on sale of businesses, net (6) (0.2) % (69) (2.0) % Income tax provision (benefit) 165 4.2 % (45) (1.3) % Income from continuing operations 601 15.3 % 473 13.4 % Less: Net income attributable to noncontrolling interests (2) (0.1) % (2) (0.1) %
Income from continuing operations attributable to
599 15.3 % 471 13.4 % Income from discontinued operations, net of tax 1 - % - - % Net income attributable to TD Group$ 600 15.3 % $ 471 13.4 % Net income applicable toTD Group common stockholders$ 554 (1) 14.1 % $ 398 (1) 11.3 %
Earnings per share: Earnings per share from continuing operations-basic and diluted
$ 9.42 (2) $ 6.83 (2) Earnings per share from discontinued operations-basic and diluted 0.02 (2) - (2) Earnings per share$ 9.44 $ 6.83 Weighted-average shares outstanding-basic and diluted 58.7 58.4 Other Data: EBITDA$ 1,753 (3)$ 1,414 (3) EBITDA As Defined$ 1,894 (3) 48.3 %$ 1,552 (3) 44.1 % (1)Net income applicable toTD Group common stockholders represents net income attributable toTD Group less special dividends declared or paid on participating securities, including dividend equivalent payments of$46 million and$73 million for the thirty-nine week periods endedJuly 2, 2022 andJuly 3, 2021 , respectively. (2)Earnings per share from continuing operations is calculated by dividing net income applicable toTD Group common stockholders, excluding income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding. Earnings per share from discontinued operations is calculated by dividing income from discontinued operations, net of tax, by the basic and diluted weighted average common shares outstanding.
(3)Refer to "Non-GAAP Financial Measures" in this discussion and analysis for additional information and limitations regarding these non-GAAP financial measures, including a reconciliation to the comparable GAAP financial measure.
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Thirteen week period ended
Total Company
•Net Sales. Net organic sales and acquisition and divestiture sales and the
related dollar and percentage changes for the thirteen week periods ended
Thirteen Week Periods Ended % Change July 2, 2022 July 3, 2021 Change Net Sales Organic sales$ 1,387 $ 1,184 $ 203 16.7 % Acquisition and divestiture sales 11 34 (23) (1.9) % Net sales$ 1,398 $ 1,218 $ 180 14.8 % 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 thirteen week period in the prior year, were included in the organic growth calculation (acquisition date wasJanuary 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 byTransDigm . 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 3, "Acquisitions and Divestitures," in the notes to the condensed consolidated financial statements included herein for further information on the Company's recent acquisition and divestiture activity. The increase in organic sales of$203 million for the thirteen week period endedJuly 2, 2022 compared to the thirteen week period endedJuly 3, 2021 is primarily related to increases in commercial aftermarket sales ($129 million , an increase of 47.1%), commercial OEM sales ($56 million , an increase of 23.3%) and defense sales ($2 million , an increase of 0.4%). 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 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. The only slight increase in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays inU.S. government defense spend outlays. The decrease in acquisition and divestiture sales for the thirteen week period endedJuly 2, 2022 is attributable to the divestitures ofScioTeq 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 net sales fromDART Aerospace ("DART"), which the acquisition was completed in the third quarter of fiscal 2022. 30
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•Cost of Sales and Gross Profit. Cost of sales increased by$19 million , or 3.4%, to$582 million for the thirteen week period endedJuly 2, 2022 compared to$563 million for the thirteen week period endedJuly 3, 2021 . Cost of sales and the related percentage of net sales for the thirteen week periods endedJuly 2, 2022 andJuly 3, 2021 were as follows (amounts in millions): Thirteen Week Periods
Ended
July 2, 2022 July 3, 2021 Change % Change Cost of sales - excluding costs below$ 604 $ 580 $ 24 4.1 % % of net sales 43.2 % 47.6 % Non-cash stock compensation expense 4 4 - - % % of net sales 0.3 % 0.3 % Inventory acquisition accounting adjustments 1 - 1 100.0 % % of net sales 0.1 % - % Acquisition integration costs 1 2 (1) (50.0) % % of net sales 0.1 % 0.2 % COVID-19 pandemic restructuring costs - 1 (1) (100.0) % % of net sales - % 0.1 % Foreign currency gains (20) (4) (16) (400.0) % % of net sales (1.4) % (0.3) % Loss contract amortization (8) (20) 12 60.0 % % of net sales (0.6) % (1.6) % Total cost of sales$ 582 $ 563 $ 19 3.4 % % of net sales 41.6 % 46.2 % Gross profit$ 816 $ 655 $ 161 24.6 % Gross profit percentage 58.4 % 53.8 % Excluding the specific components to cost of sales listed above, the change in cost of sales during the thirteen week period endedJuly 2, 2022 , which decreased as a percentage of net sales, was primarily driven by a favorable sales mix, specifically, higher commercial aftermarket net sales as a percentage of net sales compared to commercial OEM net sales in the comparable period one year ago. In addition, despite the inflationary pressures existing for labor and certain raw materials, particularly those related to electronics and castings, 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 4.6 percentage points to 58.4% for the thirteen week period endedJuly 2, 2022 from 53.8% for the thirteen week period endedJuly 3, 2021 . 31
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•Selling and Administrative Expenses. Selling and administrative expenses increased by$12 million to$184 million , or 13.2% of net sales, for the thirteen week period endedJuly 2, 2022 from$172 million , or 14.1% of net sales, for the thirteen week period endedJuly 3, 2021 . Selling and administrative expenses and the related percentage of net sales for the thirteen week periods endedJuly 2, 2022 andJuly 3, 2021 were as follows (amounts in millions): Thirteen Week Periods Ended July 2, 2022 July 3, 2021 Change % Change Selling and administrative expenses - excluding costs below$ 147 $ 136 $ 11 8.1 % % of net sales 10.5 % 11.2 % Non-cash stock compensation expense 32 32 - - % % of net sales 2.3 % 2.6 % Bad debt expense 1 - 1 100.0 % % of net sales 0.1 % - % Acquisition integration costs 1 2 (1) (50.0) % % of net sales 0.1 % 0.2 % Acquisition and divestiture transaction-related expenses 3 2 1 50.0 % % of net sales 0.2 % 0.2 % Total selling and administrative expenses$ 184 $ 172 $ 12 7.0 % % of net sales 13.2 % 14.1 % Excluding the specific components to selling and administrative expenses listed above, the change in selling and administrative expenses during the thirteen week period endedJuly 2, 2022 improved as a percentage of net sales compared to the thirteen week period in the prior year. 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 compared to the prior year for travel and other sales support and administrative costs. •Amortization of Intangible Assets. Amortization of intangible assets was$33 million for the thirteen week period endedJuly 2, 2022 compared to$36 million for the thirteen week period endedJuly 3, 2021 . The decrease in amortization expense of$3 million was due to amortization expense on sales order backlog for the CAC acquisition becoming fully amortized in the second quarter of fiscal 2022 reducing the total amortization expense recorded in the third quarter of fiscal 2022 compared to fiscal 2021. This is partially offset by the amortization expense recorded for the estimated other intangible assets from the fiscal 2022 acquisitions. •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 and interest on finance leases; slightly offset by interest income. Interest expense-net increased$6 million , or 2.3%, to$269 million for the thirteen week period endedJuly 2, 2022 from$263 million for the comparable thirteen week period in the prior fiscal year. 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 slightly offset by an increase in interest income. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirteen week period endedJuly 2, 2022 was 5.3%. •Other Expense (Income). Other expense (income) was$21 million for the thirteen week period endedJuly 2, 2022 compared to$(5) million for the thirteen week period endedJuly 3, 2021 . Other expense for the thirteen week period endedJuly 2, 2022 was primarily driven by a pension settlement charge of approximately$21 million for the Esterline Retirement Plan (the "ERP"). Refer to Note 15, "Retirement Plans," in the notes to the condensed consolidated financial statements included herein for further information. Other income for the thirteen week period endedJuly 3, 2021 was primarily driven by the release of a litigation reserve ($3 million ) and the non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($2 million ). •Income Tax Provision (Benefit). Income tax expense (benefit) as a percentage of income before income taxes was approximately 23.4% for the thirteen week period endedJuly 2, 2022 compared to (29.9)% for the thirteen week period endedJuly 3, 2021 . The Company's significantly lower effective tax rate for the thirteen week period endedJuly 3, 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. 32
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•Net Income Attributable toTD Group . Net income attributable toTD Group decreased$79 million , or 24.9%, to$238 million for the thirteen week period endedJuly 2, 2022 compared to net income attributable toTD Group of$317 million for the thirteen week period endedJuly 3, 2021 , primarily as a result of the significant change in income tax expense (benefit) described above. •Earnings per Share. Basic and diluted earnings per share was$4.10 for the thirteen week period endedJuly 2, 2022 and$5.43 per share for the thirteen week period endedJuly 3, 2021 . There was no impact on earnings per share from discontinued operations for the thirteen week periods endedJuly 2, 2022 andJuly 3, 2021 . Business Segments
•Segment
Thirteen Week Periods Ended July 2, 2022 % of Net Sales July 3, 2021 % of Net Sales Change % Change Power & Control $ 737 52.7 % $ 628 51.5 %$ 109 17.4 % Airframe 620 44.4 % 550 45.2 % 70 12.7 % Non-aviation 41 2.9 % 40 3.3 % 1 2.5 % Net sales$ 1,398 100.0 %$ 1,218 100.0 %$ 180 14.8 % Net sales for the Power & Control segment increased$109 million , an increase of 17.4%, for the thirteen week period endedJuly 2, 2022 compared to the thirteen week period endedJuly 3, 2021 . The sales increase resulted primarily from increases in organic sales in the commercial aftermarket ($71 million , an increase of 51.6%), commercial OEM ($21 million , an increase of 17.8%) and defense ($6 million , an increase of 1.6%). 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 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. The only slight increase in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays inU.S. government defense spend outlays. Net sales for the Airframe segment increased$70 million , an increase of 12.7%, for the thirteen week period endedJuly 2, 2022 compared to the thirteen week period endedJuly 3, 2021 . The sales increase resulted primarily from increases in organic sales in the commercial aftermarket ($57 million , an increase of 42.4%) and commercial OEM sales ($34 million , an increase of 27.7%); slightly offset by a decrease in organic defense sales ($2 million , a decrease of 0.9%). 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 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. The slight decrease in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays inU.S. government defense spend outlays. Acquisition and divestiture sales decreased by$23 million for the thirteen week period endedJuly 2, 2022 due to the impact on the comparable period from the divestitures completed in fiscal 2021; partially offset by the net sales from DART, which the acquisition was completed in the third quarter of fiscal 2022. •EBITDA As Defined. Refer to "Non-GAAP Financial Measures" in this discussion and analysis for further information on EBITDA As Defined. EBITDA As Defined by segment for the thirteen week periods endedJuly 2, 2022 andJuly 3, 2021 were as follows (amounts in millions): Thirteen Week Periods Ended % of Segment % of Segment July 2, 2022 Net Sales July 3, 2021 Net Sales Change % Change Power & Control$ 398 54.0 % $ 331 52.7 %$ 67 20.2 % Airframe 292 47.1 % 233 42.4 % 59 25.3 % Non-aviation 16 39.0 % 14 35.0 % 2 14.3 %$ 706 50.5 % $ 578 47.5 %$ 128 22.1 % 33
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Organic EBITDA As Defined represents EBITDA As Defined from existing businesses owned by the Company as ofJuly 2, 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. Therefore, beginning in the second quarter of fiscal 2022, CAC's EBITDA As Defined, including the comparable thirteen week period in the prior year, is included in the organic growth calculation (acquisition date wasJanuary 2021 ). Beginning in the third quarter of fiscal 2022, DART is included in the acquisitions and divestitures classification. Refer to Note 3, "Acquisitions and Divestitures," in the notes to the condensed 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$67 million , an increase of 20.2%, 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 current inflationary environment for labor and certain raw materials. EBITDA As Defined for the Airframe segment increased approximately$59 million , an increase of 25.3%, 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 current inflationary environment for labor and certain raw materials. EBITDA As Defined for the Airframe segment from acquisitions and divestitures decreased by$4 million , primarily due to the impact on the comparable period from the divestitures completed in fiscal year 2021; partially offset by the EBITDA As Defined from DART.
Thirty-nine week period ended
Total Company •Net Sales. Net organic sales and acquisition and divestiture sales and the related dollar and percentage changes for the thirty-nine week periods endedJuly 2, 2022 andJuly 3, 2021 were as follows (amounts in millions): Thirty-Nine Week Periods Ended % Change July 2, 2022 July 3, 2021 Change Net Sales Organic sales $ 3,867$ 3,387 $ 480 13.6 % Acquisition and divestiture sales 52 132 (80) (2.3) % Net sales $ 3,919$ 3,519 $ 400 11.4 % 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, CAC's net sales, including the comparable period in the prior year, are included in the organic growth calculation (acquisition date wasJanuary 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 byTransDigm . 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 3, "Acquisitions and Divestitures," in the notes to the condensed consolidated financial statements included herein for further information on the Company's recent acquisition and divestiture activity. The increase in organic sales of$480 million for the thirty-nine week period endedJuly 2, 2022 compared to the thirty-nine week period endedJuly 3, 2021 is primarily related to increases in commercial aftermarket sales ($358 million , an increase of 47.4%) and commercial OEM sales ($146 million , an increase of 21.3%); partially offset by a decrease in defense sales ($56 million , a decrease of 3.3%). 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 our fiscal year and also due to Boeing's quality control issues with the 787 aircraft. The decrease in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays inU.S. government defense spend outlays. 34
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The decrease in acquisition and divestiture sales for the thirty-nine week period endedJuly 2, 2022 is primarily attributable to the divestitures ofScioTeq and TREALITY, TAC, Racal and Avista, all of which were completed in fiscal 2021; partially offset by the acquisitions of CAC and DART. CAC's sales were classified as acquisition and divestiture sales only through the first quarter of fiscal 2022 as upon reaching one year subsequent to the acquisition date in the second quarter of fiscal 2022, CAC's sales were included within organic sales. •Cost of Sales and Gross Profit. Cost of sales decreased by$25 million , or 1.4%, to$1,706 million for the thirty-nine week period endedJuly 2, 2022 compared to$1,731 million for the thirty-nine week period endedJuly 3, 2021 . Cost of sales and the related percentage of net sales for the thirty-nine week periods endedJuly 2, 2022 andJuly 3, 2021 were as follows (amounts in millions): Thirty-Nine Week Periods Ended July 2, 2022 July 3, 2021 Change % Change Cost of sales - excluding costs below$ 1,741 $ 1,710 $ 31 1.8 % % of net sales 44.4 % 48.6 % Non-cash stock compensation expense 12 10 2 20.0 % % of net sales 0.3 % 0.3 % Inventory acquisition accounting adjustments 1 6 (5) (83.3) % % of net sales - % 0.2 % Acquisition integration costs 2 3 (1) (33.3) % % of net sales 0.1 % 0.1 % COVID-19 pandemic restructuring costs - 29 (29) (100.0) % % of net sales - % 0.8 % Foreign currency (gains) losses (22) 20 (42) (210.0) % % of net sales (0.6) % 0.6 % Loss contract amortization (28) (47) 19 40.4 % % of net sales (0.7) % (1.2) % Total cost of sales$ 1,706 $ 1,731 $ (25) (1.4) % % of net sales 43.5 % 49.2 % Gross profit$ 2,213 $ 1,788 $ 425 23.8 % Gross profit percentage 56.5 % 50.8 % Excluding the specific components to cost of sales listed above, the change in cost of sales during the thirty-nine week period endedJuly 2, 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 comparable period one year ago. Regarding the specific components to cost of sales listed above, COVID-19 pandemic restructuring costs were not material in the first three quarters of fiscal 2022 and foreign exchange rates, particularly theU.S. dollar compared to the British pound and the Euro, strengthened considerably in the third quarter of fiscal 2022, resulting in favorable movement compared to the prior year when theU.S. dollar depreciated against both the British pound and Euro resulting in foreign currency losses. In addition, despite the inflationary pressures existing for labor and certain raw materials, particularly those related to electronics and castings, 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 5.7 percentage points to 56.5% for the thirty-nine week period endedJuly 2, 2022 from 50.8% for the thirty-nine week period endedJuly 3, 2021 . 35
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•Selling and Administrative Expenses. Selling and administrative expenses increased by$6 million to$537 million , or 13.7% of net sales, for the thirty-nine week period endedJuly 2, 2022 from$531 million , or 15.1% of net sales, for the thirty-nine week period endedJuly 3, 2021 . Selling and administrative expenses and the related percentage of net sales for the thirty-nine week periods endedJuly 2, 2022 andJuly 3, 2021 were as follows (amounts in millions): Thirty-Nine Week Periods Ended July 2, 2022 July 3, 2021 Change % Change Selling and administrative expenses - excluding costs below $ 419$ 405 $ 14 3.5 % % of net sales 10.7 % 11.5 % Non-cash stock compensation expense 103 95 8 8.4 % % of net sales 2.6 % 2.7 % Acquisition integration costs 6 7 (1) (14.3) % % of net sales 0.2 % 0.2 % Bad debt expense 5 5 - - % % of net sales 0.1 % 0.1 % Acquisition and divestiture transaction-related expenses 4 8 (4) (50.0) % % of net sales 0.1 % 0.2 % COVID-19 pandemic restructuring costs - 11 (11) (100.0) % % of net sales - % 0.3 % Total selling and administrative expenses $ 537$ 531 $ 6 1.1 % % of net sales 13.7 % 15.1 % Excluding the specific components to selling and administrative expenses listed above, the change in selling and administrative expenses during the thirty-nine week period endedJuly 2, 2022 improved as a percentage of net sales compared to the thirty-nine week period in the prior year. 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 compared to the prior year for travel and other sales support and administrative costs. •Amortization of Intangible Assets. Amortization of intangible assets was$102 million for the thirty-nine week period endedJuly 2, 2022 compared to$101 million for the thirty-nine week period endedJuly 3, 2021 . The increase in amortization expense of$1 million was primarily due to the amortization expense recognized on intangible assets from the acquisitions of CAC and DART. •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 and interest on finance leases; slightly offset by interest income. Interest expense-net increased$1 million , or 0.1%, to$799 million for the thirty-nine week period endedJuly 2, 2022 from$798 million for the comparable thirty-nine week period in the prior year. The slight 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 mostly offset by 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 the 2025 Notes in the third quarter of fiscal 2021, effectively resulting in a reduced interest rate of 4.875% and an extended maturity date of$750 million in senior subordinated notes. The weighted average interest rate for cash interest payments on total borrowings outstanding for the thirty-nine week period endedJuly 2, 2022 was 5.3%. •Refinancing Costs. Refinancing costs were not material for the thirty-nine week period endedJuly 2, 2022 . Refinancing costs of$36 million recorded for the thirty-nine week period endedJuly 3, 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 2025 Notes that occurred in the second and third quarters of fiscal 2021. 36
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•Other Expense (Income). Other expense (income) was$15 million for the thirty-nine week period endedJuly 2, 2022 compared to$(37) million for the thirty-nine week period endedJuly 3, 2021 . Other expense for the thirty-nine week period endedJuly 2, 2022 was primarily driven by a pension settlement charge of approximately$21 million for the ERP. Refer to Note 15, "Retirement Plans," in the notes to the condensed consolidated financial statements included herein for further information. Partially offsetting this expense was the release of a contingent liability ($2 million ) and the non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($3 million ). Other income for the thirty-nine week period endedJuly 3, 2021 was primarily driven by a$21 million gain on the settlement of the property insurance portion of the claim forLeach International Europe's Niort, France operating facility fire inAugust 2019 . The gain represented the insurance proceeds received in excess of the carrying value of the damaged fixed assets and inventory. The remaining$16 million was primarily driven by non-service related components of net periodic benefit costs on the Company's defined benefit pension plans ($9 million ), receipt of payment of Canadian governmental subsidies ($4 million ) and the release of a litigation reserve ($3 million ). •Gain on Sale of Businesses-net. Gain on sale of businesses-net of$6 million was recorded for the thirty-nine week period endedJuly 2, 2022 , and is primarily driven by cash proceeds received from a final working capital settlement for theScioTeq and TREALITY divestiture ($3 million ). Gain on sale of businesses-net of$69 million was recorded for the thirty-nine week period endedJuly 3, 2021 , and is primarily related to the net gain on sale recognized on theScioTeq and TREALITY and TAC divestitures. Refer to Note 3, "Acquisitions and Divestitures," in the notes to the condensed consolidated financial statements included herein for further information. •Income Tax Provision (Benefit). Income tax expense (benefit) as a percentage of income before income taxes was approximately 21.5% for the thirty-nine week period endedJuly 2, 2022 compared to (10.5)% for the thirty-nine week period endedJuly 3, 2021 . The Company's significantly lower effective tax rate for the thirty-nine week period endedJuly 3, 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 third quarter of fiscal 2021. •Income from Discontinued Operations, net of tax. Income from discontinued operations, net of tax, for the thirty-nine week period endedJuly 2, 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 for the thirty-nine week period endedJuly 3, 2021 . Refer to Note 3, "Acquisitions and Divestitures," in the notes to the condensed consolidated financial statements included herein for further information. •Net Income Attributable toTD Group . Net income attributable toTD Group increased$129 million , or 27.4%, to$600 million for the thirty-nine week period endedJuly 2, 2022 compared to net income attributable toTD Group of$471 million for the thirty-nine week period endedJuly 3, 2021 , primarily as a result of the factors referenced above. •Earnings per Share. Basic and diluted earnings per share from continuing operations was$9.42 for the thirty-nine week period endedJuly 2, 2022 compared to$6.83 per share for the thirty-nine week period endedJuly 3, 2021 . Basic and diluted earnings per share from discontinued operations was$0.02 for the thirty-nine week period endedJuly 2, 2022 . There was no impact on earnings per share from discontinued operations for the thirty-nine week period endedJuly 3, 2021 . Business Segments
•Segment
Thirty-Nine Week Periods Ended July 2, 2022 % of Net Sales July 3, 2021 % of Net Sales Change % Change Power & Control$ 2,095 53.5 %$ 1,870 53.1 %$ 225 12.0 % Airframe 1,705 43.5 % 1,527 43.4 % 178 11.7 % Non-aviation 119 3.0 % 122 3.5 % (3) (2.5) % Net sales$ 3,919 100.0 %$ 3,519 100.0 %$ 400 11.4 % 37
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Net sales for the Power & Control segment increased$225 million , an increase of 12.0%, for the thirty-nine week period endedJuly 2, 2022 . The sales increase resulted primarily from increases in organic sales in commercial aftermarket ($180 million , an increase of 44.6%) and commercial OEM ($66 million , an increase of 20.3%); partially offset by a decrease in organic defense sales ($37 million , a decrease of 3.5%). 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 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 our fiscal year and also due to Boeing's quality control issues with the 787 aircraft. The decrease in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays inU.S. government defense spend outlays. The change in acquisition and divestiture sales was not material for the thirty-nine week period endedJuly 2, 2022 . Net sales for the Airframe segment increased$178 million , an increase of 11.7%, for the thirty-nine week period endedJuly 2, 2022 . The sales increase resulted primarily from increases in organic sales in commercial aftermarket ($178 million , an increase of 50.5%) and commercial OEM ($81 million , an increase of 23.2%); partially offset by a decrease in organic defense sales ($16 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 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 our fiscal year and also due to Boeing's quality control issues with the 787 aircraft. The decrease in defense sales is attributable to continued supply chain shortages resulting in shipment delays and delays inU.S. government defense spend outlays. Acquisition and divestiture sales decreased$74 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. Net sales for the Non-aviation segment decreased by$3 million , a decrease of 2.5%, for the thirty-nine week period endedJuly 2, 2022 . The sales decrease resulted primarily from the decrease in acquisition and divestiture sales of$5 million for the divestitures completed during fiscal 2021. •EBITDA As Defined. EBITDA As Defined by segment for the thirty-nine week periods endedJuly 2, 2022 andJuly 3, 2021 were as follows (amounts in millions): Thirty-Nine Week Periods Ended % of Segment % of Segment July 2, 2022 Net Sales July 3, 2021 Net Sales Change % Change Power & Control$ 1,100 52.5 % $ 944 50.5 %$ 156 16.5 % Airframe 791 46.4 % 618 40.5 % 173 28.0 % Non-aviation 45 37.8 % 45 36.9 % - - %$ 1,936 49.4 %$ 1,607 45.7 %$ 329 20.5 % Organic EBITDA As Defined represents EBITDA As Defined from existing businesses owned by the Company as ofJuly 2, 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. Therefore, beginning in the second quarter of fiscal 2022, CAC's EBITDA As Defined, including the comparable thirteen week period in the prior year, is included in the organic growth calculation (acquisition date wasJanuary 2021 ). Beginning in the third quarter of fiscal 2022, DART is included in the acquisitions and divestitures classification. Refer to Note 3, "Acquisitions and Divestitures," in the notes to the condensed 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$156 million , an increase of 16.5%, 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 current inflationary environment for labor and certain raw materials. The change in EBITDA As Defined for the Power & Control segment from acquisitions and divestitures was immaterial for the thirty-nine week period endedJuly 2, 2022 . 38
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EBITDA As Defined for the Airframe segment increased approximately$173 million , an increase of 28.0%, 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 current inflationary environment for labor and certain raw materials. EBITDA As Defined for the Airframe segment from acquisitions and divestitures decreased by$13 million , primarily due to the impact on the comparable period from the divestitures completed in fiscal year 2021, partially offset by the impact of CAC (only through the first quarter of fiscal 2022) and DART (beginning in the third quarter of fiscal 2022).
Liquidity and Capital Resources
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage both to optimize our equity return and to pursue acquisitions. We expect to meet our current debt obligations as they come due through internally generated funds from current levels of operations and/or through refinancing in the debt markets prior to the maturity dates of our debt.
The following tables present selected balance sheet, cash flow and other financial data relevant to the liquidity or capital resources of the Company for the periods specified below (amounts in millions):
July 2, 2022 September 30, 2021 Selected Balance Sheet Data: Cash and cash equivalents$ 3,808 $ 4,787 Working capital (Total current assets less total current liabilities) 4,964 5,367 Total assets 18,819 19,315 Total debt (1) 19,809 19,998 TD Group stockholders' deficit (2,976) (2,916)
(1)Includes debt issuance costs and original issue discount and premiums. Reference Note 10, "Debt," in the notes to the condensed consolidated financial statements included herein for additional information.
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