TRANSDIGM GROUP INC. The following discussion of our financial condition and results of operations should be read together withTD 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 toTD 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.
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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 ofU.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 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. 24
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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):
Fiscal Years Ended
2022 % of Net Sales 2021 % of Net Sales
Net sales $ 5,429 100.0 % $ 4,798 100.0 %
Cost of sales 2,330 42.9 % 2,285 47.6 %
Selling and administrative expenses 748 13.8 % 685 14.3 %
Amortization of intangible assets 136 2.5 % 137 2.9 %
Income from operations 2,215 40.8 % 1,691 35.2 %
Interest expense, net 1,076 19.8 % 1,059 22.1 %
Refinancing costs 1 - % 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 provision 261 4.8 % 34 0.7 %
Income from continuing operations 866 16.0 % 681 14.2 %
Less: Net income attributable to noncontrolling
interests (1) - % (1) - %
Income from continuing operations attributable to
865 15.9 % 680 14.2 %
Income from discontinued operations, net of tax 1 - % - - %
Net income attributable to TD Group $ 866 16.0 % $ 680 14.2 %
Net income applicable to
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 diluted
0.02 (2) - (2)
Earnings per share $ 13.40 $ 10.41
Cash dividends declared per common share $ 18.50 $ -
Weighted-average shares outstanding-basic and diluted 58.2 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
(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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Fiscal year ended
•Net Sales. Net organic sales and acquisition and divestiture sales and the related dollar and percentage changes for the fiscal years endedSeptember 30, 2022 and 2021 were as follows (amounts in millions): Fiscal Years Ended September 30, % Change September 30, 2022 2021 Change Net Sales Organic sales$ 5,355 $ 4,665 $ 690 14.4 % Acquisition and divestiture sales 74 133 (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 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 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 endedSeptember 30, 2022 compared to the fiscal year endedSeptember 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 inChina ) and 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 decrease in acquisition and divestiture sales for the fiscal year endedSeptember 30, 2022 is primarily 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 acquisitions of CAC and DART. 26
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•Cost of Sales and Gross Profit. Cost of sales increased by$45 million , or 2.0%, to$2,330 million for the fiscal year endedSeptember 30, 2022 compared to$2,285 million for the fiscal year endedSeptember 30, 2021 . Cost of sales and the related percentage of net sales for the fiscal years endedSeptember 30, 2022 and 2021 were as follows (amounts in millions): Fiscal Years Ended September 30, 2022 September 30, 2021 Change % Change Cost of sales - excluding costs below $ 2,383 $ 2,277$ 106 4.7 % % of net sales 43.9 % 47.5 % Non-cash stock and deferred compensation expense 19 13 6 46.2 % % of net sales 0.3 % 0.3 % Acquisition integration costs 4 4 - - % % of net sales 0.1 % 0.1 % Inventory acquisition accounting adjustments 3 6 (3) (50.0) % % of net sales 0.1 % 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 sales 42.9 % 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2022 from 52.4% for the fiscal year endedSeptember 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 theU.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 theU.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
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•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 endedSeptember 30, 2022 from$685 million , or 14.3% of net sales, for the fiscal year endedSeptember 30, 2021 . Selling and administrative expenses and the related percentage of net sales for the fiscal years endedSeptember 30, 2022 and 2021 were as follows (amounts in millions): Fiscal
Years Ended
September 30, 2022 September 30, 2021 Change % Change
Selling and administrative expenses -
excluding costs below $ 563 $ 534 $ 29 5.4 %
% of net sales 10.4 % 11.1 %
Non-cash stock and deferred compensation
expense 165 117 48 41.0 %
% of net sales 3.0 % 2.4 %
Bad debt expense 9 (2) 11 550.0 %
% of net sales 0.2 % - %
Acquisition integration costs 7 10 (3) (30.0) %
% of net sales 0.1 % 0.2 %
Acquisition and divestiture
transaction-related expenses 4 15 (11) (73.3) %
% of net sales 0.1 % 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 sales 13.8 % 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$18 million for the fiscal year endedSeptember 30, 2022 compared to$(51) million for the fiscal year endedSeptember 30, 2021 . Other expense for the fiscal year endedSeptember 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 endedSeptember 30, 2021 was primarily driven by$24 million recorded for the settlement of the insurance claim forLeach International Europe's Niort, France operating facility fire inAugust 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 endedSeptember 30, 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 fiscal year endedSeptember 30, 2021 , and is primarily related to the net gain on sale recognized on theScioTeq 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 endedSeptember 30, 2022 compared to 4.8% for the fiscal year endedSeptember 30, 2021 . The Company's significantly lower effective tax rate for the fiscal year endedSeptember 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 endedSeptember 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 endedSeptember 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
•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 endedSeptember 30, 2022 . Basic and diluted earnings per share from continuing operations was$10.41 for the fiscal year endedSeptember 30, 2021 . There was no impact on earnings per share from discontinued operations for the fiscal year endedSeptember 30, 2021 . Net income attributable toTD Group for the fiscal year endedSeptember 30, 2022 of$866 million was decreased by dividend equivalent payments of$86 million , or$1.47 per share, resulting in net income applicable toTD Group common stockholders of$780 million , or$13.40 per share. Net income attributable toTD Group for the fiscal year endedSeptember 30, 2021 of$680 million was decreased by dividend equivalent payments of$73 million , or$1.24 per share, resulting in net income applicable toTD Group common stockholders of$607 million , or$10.41 per share.
Business Segments
•Segment
Fiscal Years Ended
2022 % of Net Sales 2021 % of Net Sales Change % Change
Power & Control $ 2,873 52.9 % $ 2,550 53.1 % $ 323 12.7 %
Airframe 2,391 44.1 % 2,083 43.5 % 308 14.8 %
Non-aviation 165 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 endedSeptember 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 inChina ) and 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. Net sales for the Airframe segment increased$308 million , an increase of 14.8%, for the fiscal year endedSeptember 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 inChina ) and 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$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 endedSeptember 30, 2022 and 2021 were as follows (amounts in millions): Fiscal Years
Ended
% of Segment % of Segment
2022 Net Sales 2021 Net Sales Change % Change
Power & Control $ 1,531 53.3 % $ 1,319 51.7 % $ 212 16.1 %
Airframe 1,121 46.9 % 878 42.2 % 243 27.7 %
Non-aviation 65 39.4 % 62 37.6 % 3 4.8 %
Total segment EBITDA As Defined 2,717 50.0 % 2,259 47.1 % 458 20.3 %
Less: Unallocated corporate
expenses 71 1.3 % (1) 70 1.5 % (1) 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 ofSeptember 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. 30
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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
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 endedSeptember 30, 2021 , as filed with theSecurities and Exchange Commission onNovember 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, September 30,
2022 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 assets 18,107 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
2022 2021
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 expenditures 119 105
Ratio of earnings to fixed charges (1) 2.0x 1.7x
(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. InAugust 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
As of September 30, 2022
Cash and cash equivalents $ 3,001
Availability on revolving credit facility 779
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
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 ofSeptember 2022 compared toSeptember 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 theRussia andUkraine 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 atSeptember 30, 2021 . The Company continues to actively and strategically manage inventory levels in response to the pandemic and the ongoing supply chain challenges. 32
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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 ourExtant 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 theScioTeq 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 theLeach 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
Term Loans Facility Aggregate Principal Maturity Date Interest Rate
Tranche E $2,155 million May 30, 2025 LIBOR plus 2.25%
Tranche F $3,418 million December 9, 2025 LIBOR plus 2.25%
Tranche G $1,725 million August 22, 2024 LIBOR 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
OnDecember 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. 33
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Indentures
The following table represents the senior subordinated and secured notes
outstanding as of
Description Aggregate Principal Maturity Date Interest Rate
2025 Secured Notes $1,100 million December 15, 2025 8.00%
2026 Secured Notes $4,400 million March 15, 2026 6.25%
6.875% 2026 Notes $500 million May 15, 2026 6.875%
6.375% 2026 Notes $950 million June 15, 2026 6.375%
7.50% 2027 Notes $550 million March 15, 2027 7.50%
5.50% 2027 Notes $2,650 million November 15, 2027 5.50%
4.625% 2029 Notes $1,200 million July 15, 2029 4.625%
4.875% 2029 Notes $750 million October 15, 2029 4.875%
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 ofTD Group and the Guarantors, which includesTransDigm Inc. andTransDigm UK , on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions betweenTD 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 Goodwill 6,849 Other non-current assets 2,843 Current liabilities 735 Non-current liabilities 20,077 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-guarantors 50 Cost of sales 1,724
Expense from subsidiaries that are non-issuers and non-guarantors - net
69
Income from continuing operations 552
Net income attributable to TD Group 552
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
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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OnJuly 25, 2022 , the Company amended the Securitization Facility to, among other things, extend the maturity date toJuly 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 ofSeptember 30, 2022 , the Company has borrowed$350 million under the Securitization Facility, which is fully drawn. AtSeptember 30, 2022 , the applicable interest rate was 3.84%.
Dividend and Dividend Equivalent Payments
OnAugust 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 underDelaware 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. UnlessTD 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
Total Payment Due by Period
Contractual Less than Between Between Over
Obligations 1 Year 1-3 Years 3-5 Years 5 Years
Senior subordinated and secured
notes (1) $ 12,100 $ -
$ -
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 Facility 350 350 - - -
Finance leases 294 12 26 26 230
Operating leases 113 21 34 23 35
Total contractual cash obligations
$ 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
(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 ofSeptember 30, 2022 , the Company had$31 million in letters of credit outstanding. 36
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Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity withU.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 atSeptember 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. 37
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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 underU.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 withU.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 otherU.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 underU.S. GAAP, and neither should be considered as an alternative to net income or cash flow from operations determined in accordance withU.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. 40
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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
2022 2021
Income from continuing operations $ 866 $ 681
Adjustments:
Depreciation and amortization expense 253 253
Interest expense, net 1,076 1,059
Income tax provision 261 34
EBITDA 2,456 2,027
Adjustments:
Inventory acquisition accounting adjustments (1) 3 6
Acquisition integration costs (2) 11 14
Acquisition and divestiture transaction-related expenses (3) 4 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
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
2022 2021
Net cash provided by operating activities $ 948 $ 913
Adjustments:
Changes in assets and liabilities, net of effects from acquisitions
and sales of businesses 288 98
Interest expense, net (1) 1,076 1,059
Income tax provision - current 283 -
Loss contract amortization 39 55
Non-cash stock and deferred compensation expense (2) (184) (130)
Refinancing costs (3) (1) (37)
Gain on sale of businesses, net (4) 7 69
EBITDA 2,456 2,027
Adjustments:
Inventory acquisition accounting adjustments (5) 3 6 Acquisition integration costs (6) 11 14 Acquisition and divestiture transaction-related expenses (7) 4 15 Non-cash stock and deferred compensation expense (2) 184 130 Refinancing costs (3) 1 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
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
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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