Item 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical consolidated financial and other data of TD Group for the fiscal years ended September 30, 2014 to 2018, which have been derived from TD Group’s audited consolidated financial statements.

Separate historical financial information of TransDigm Inc. is not presented since the 5.50% Senior Subordinated Notes issued in October 2012 (the “2020 Notes”), the 6.00% Senior Subordinated Notes issued in June 2014 (the “2022 Notes”), the 6.50% Senior Subordinated Notes issued June 2014 (the “2024 Notes”), the 6.50% Senior Subordinated Notes issued May 2015 (the “2025 Notes”) and the 6.375% Senior Subordinated Notes issued June 2016 (the “6.375% 2026 Notes”) (also together with the 2020 Notes, the 2022 Notes, the 2024 Notes, the 2025 Notes, and the 2026 Notes, the “Notes”) are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm UK and all of TransDigm Inc.’s Domestic Restricted Subsidiaries and because TD Group has no significant operations or assets separate from its investment in TransDigm Inc.

Separate financial information of TransDigm UK Holdings plc (“TransDigm UK”) is not presented because TransDigm UK’s 6.875% Senior Subordinated Notes issued in May 2018 (the “6.875% 2026 Notes”) are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm Inc., and all of TransDigm Inc.’s Domestic Restricted Subsidiaries.

Acquisitions of businesses and product lines completed by TD Group during the last five fiscal years are as follows:

Date	Acquisition
December 19, 2013	Airborne Global Inc. (“Airborne”)
March 6, 2014	Elektro-Metall Export GmbH (“EME”)
March 26, 2015	Telair Cargo Group (comprised of Telair International GmbH (“Telair Int’l”), Telair US LLC and Nordisk Aviation Products)
March 31, 2015	Franke Aquarotter GmbH (“Adams Rite Aerospace GmbH”)
May 14, 2015	Pexco LLC (“Pexco Aerospace”)
August 19, 2015	PneuDraulics, Inc. (“PneuDraulics”)
January 4, 2016	Breeze-Eastern Corporation (“Breeze-Eastern”)
June 23, 2016	Data Device Corporation (“DDC”)
September 23, 2016	Young & Franklin Inc. / Tactair Fluid Controls Inc. (“Y&F/Tactair”)
February 22, 2017	Schroth Safety Products Group (“Schroth”)
May 5, 2017, May 31, 2017 and June 1, 2017	North Hills Signal Processing Corp, Cablecraft Motion Controls LLC and Preece Incorporated (together, the “Third Quarter 2017 Acquisitions”)
March 15, 2018	Kirkhill Elastomers (“Kirkhill”)
April 24, 2018	Extant Components Group Holdings, Inc. (together with the product line acquisition on August 17, 2018 listed below, “Extant”)
July 13, 2018	Skandia Inc. (“Skandia”)
August 17, 2018	Certain assets and liabilities of Rockwell Collins (Extant product line acquisition)

All of the acquisitions were accounted for using the acquisition method. The results of operations of the acquired businesses and product lines are included in TD Group’s consolidated financial statements from the effective date of each acquisition.

In connection with the settlement of a Department of Justice investigation into the competitive effects of the acquisition, during the fourth quarter of 2017, the Company committed to dispose of the Schroth business. Therefore, Schroth was classified as held-for-sale beginning in the fourth quarter of fiscal 2017. The results of operations of Schroth are reflected as discontinued operations in the accompanying consolidated financial statements. On January 26, 2018, the Company completed the sale of Schroth in a management buyout to a private equity fund and certain members of Schroth management for approximately $61.4 million, which includes a working capital adjustment of $0.3 million that was settled in July 2018. Further disclosure related to Schroth’s discontinued operations is included within Note 22, “Discontinued Operations,” to the consolidated financial statements.

The information presented below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere herein.

	Fiscal Years Ended September 30,
	2018				2017				2016				2015				2014
	(in thousands, except per share amounts )
Statement of Income Data:
Net sales	$	3,811,126			$	3,504,286			$	3,171,411			$	2,707,115			$	2,372,906
Gross profit(1)	2,177,510				1,984,627				1,728,063				1,449,845				1,267,874
Selling and administrative expenses	450,095				415,575				382,858				321,624				276,446
Amortization of intangible assets	72,454				89,226				77,445				54,219				63,608
Income from operations(1)	1,654,961				1,479,826				1,267,760				1,074,002				927,820
Interest expense—net	663,008				602,589				483,850				418,785				347,688
Refinancing costs	6,396				39,807				15,794				18,393				131,622
Income from continuing operations before income taxes	985,557				837,430				768,116				636,824				448,510
Income tax provision	24,021				208,889				181,702				189,612				141,600
Income from continuing operations	961,536				628,541				586,414				447,212				306,910
Loss from discontinued operations, net of tax (5)	(4,474		)		(31,654		)		—				—				—
Net income	$	957,062			$	596,887			$	586,414			$	447,212			$	306,910
Net income applicable to common stock	$	900,914			$	437,630			$	583,414			$	443,847			$	180,284
Denominator for basic and diluted earnings per share under the two-class method:
Weighted-average common shares outstanding	52,345				52,517				53,326				53,112				52,748
Vested options deemed participating securities	3,252				3,013				2,831				3,494				4,245
Total shares for basic and diluted earnings per share	55,597				55,530				56,157				56,606				56,993
Net earnings per share:
Net earnings per share from continuing operations—basic and diluted	$	16.28			$	8.45			$	10.39			$	7.84			$	3.16
Net loss per share from discontinued operations—basic and diluted	(0.08		)		(0.57		)		—				—				—
Net earnings per share(2)	$	16.20			$	7.88			$	10.39			$	7.84			$	3.16
Cash dividends paid per common share	$	—			$	46.00			$	—			$	—			$	25.00

	As of September 30,
	2018				2017				2016				2015				2014
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	2,073,017			$	650,561			$	1,586,994			$	714,033			$	819,548
Working capital(3,4)	2,756,905				1,262,558				2,178,094				1,128,993				1,066,735
Total assets(3,4)	12,197,467				9,975,661				10,726,277				8,303,935				6,626,786
Long-term debt, including current portion(4)	12,877,282				11,762,661				10,195,607				8,349,602				7,380,738
Stockholders’ deficit	(1,808,471		)		(2,951,204		)		(651,490		)		(1,038,306		)		(1,556,099		)

(1)	Gross profit and income from operations include the effect of charges relating to purchase accounting adjustments to inventory associated with the acquisition of various businesses and product lines for the fiscal years ended September 30, 2018, 2017, 2016, 2015 and 2014 of $7,080, $20,621, $23,449, $11,362, and $10,441, respectively.

(2)	Net earnings per share is calculated by dividing net income applicable to common stock by the basic and diluted weighted average common shares outstanding.

(3)	In connection with adopting ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” for reporting periods ended after October 1, 2015, the Company reclassified $45,375 and $37,669 from current deferred income tax assets in our consolidated balance sheets as of September 2015 and 2014, respectively, to non-current deferred income tax liabilities.

(4)	In connection with adopting ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” for reporting periods ended after October 1, 2015, the Company reclassified $77,740 and $92,393 from debt issuance costs in our consolidated balance sheets as of September 2015 and 2014, respectively, to the current portion of long-term and long-term-term debt.

(5)

During the fourth quarter of fiscal 2017, the Company committed to disposing of Schroth in connection with the settlement of a Department of Justice investigation into the competitive effects of the acquisition. Therefore, Schroth was classified as held-for-sale beginning September 30, 2017. The loss from discontinued operations in the consolidated statements of income for the year ended September 30, 2017 includes a $32.0 million impairment charge to write down the assets to fair value. On January 26, 2018, the Company completed the sale of Schroth in a management buyout to a private equity fund and certain members of Schroth management for approximately $61.4 million, which includes a working capital adjustment of $0.3 million that was settled in July 2018. Refer to Note 22, “Discontinued Operations,” to the consolidated financial statements for further information.

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 net income to EBITDA and EBITDA As Defined and the reconciliations of net cash provided by operating activities to EBITDA and EBITDA As Defined presented below.

Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under accounting principles generally accepted in the United States of America (“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 commitments under our senior secured credit facility requires compliance under certain circumstances, on a pro forma basis, with a financial covenant that measures the ratio of the amount of our secured indebtedness to the amount of our Consolidated EBITDA defined in the same manner as we define EBITDA As Defined herein.

In addition to the above, our management uses EBITDA As Defined to review and assess the performance of the management team in connection with employee incentive programs and to prepare its annual budget and financial projections. Moreover, our management uses EBITDA As Defined to evaluate acquisitions.

Although we use EBITDA and EBITDA As Defined as measures to assess the performance of our business and for the other purposes set forth above, the use of these non-GAAP financial measures as analytical tools has limitations, and you should not consider any of them in isolation, or as a substitute for analysis of our results of operations as reported in accordance with GAAP. Some of these limitations are:

•	neither EBITDA nor EBITDA As Defined reflects the significant interest expense, or the cash requirements, necessary to service interest payments on our indebtedness;

•	although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor EBITDA As Defined reflects any cash requirements for such replacements;

•	the omission of the substantial amortization expense associated with our intangible assets further limits the usefulness of EBITDA and EBITDA As Defined;

•	neither EBITDA nor EBITDA As Defined includes the payment of taxes, which is a necessary element of our operations; and

•	EBITDA As Defined excludes the cash expense we have incurred to integrate acquired businesses into our operations, which is a necessary element of certain of our acquisitions.

Because of these limitations, EBITDA and EBITDA As Defined should not be considered as measures of discretionary cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA or EBITDA As Defined in isolation and specifically by using other GAAP measures, such as net income, net sales and operating profit, to measure our operating performance. Neither EBITDA nor EBITDA As Defined is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net income or cash flow from operations determined in accordance with GAAP. Our calculation of EBITDA and EBITDA As Defined may not be comparable to the calculation of similarly titled measures reported by other companies.

	Fiscal Years Ended September 30,
	2018				2017				2016				2015				2014
	(in thousands)
Other Financial Data:
Cash flows provided by (used in):
Operating activities	$	1,022,173			$	788,733			$	683,298			$	520,938			$	541,222
Investing activities	(683,577		)		(287,003		)		(1,443,046		)		(1,679,149		)		(329,638		)
Financing activities	1,085,600				(1,443,682		)		1,632,467				1,054,947				43,973
Depreciation and amortization	129,844				141,025				121,670				93,663				96,385
Capital expenditures	73,341				71,013				43,982				54,871				34,146
Ratio of earnings to fixed charges(1)	2.5x				2.4x				2.6x				2.5x				2.3x
Other Data:
EBITDA(2)	$	1,778,409			$	1,581,044			$	1,373,636			$	1,149,272			$	892,583
EBITDA As Defined(2)	$	1,876,558			$	1,710,563			$	1,495,196			$	1,233,654			$	1,073,207

(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 portion (approximately 33%) of rental expense that management believes is representative of the interest component of rental expense.

(2)

EBITDA represents earnings from continuing operations before interest, taxes, depreciation and amortization. EBITDA As Defined represents EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliation of net income to EBITDA and EBITDA As Defined and the reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined presented below. See “Non-GAAP Financial Measures” for additional information and limitations regarding these non-GAAP financial measures.

The following table sets forth a reconciliation of net income to EBITDA and EBITDA As Defined:

	Fiscal Years Ended September 30,
	2018				2017				2016				2015				2014
	(in thousands)
Net income	$	957,062			$	596,887			$	586,414			$	447,212			$	306,910
Loss from discontinued operations, net of tax(1)	(4,474		)		(31,654		)		—				—				—
Income from continuing operations	961,536				628,541				586,414				447,212				306,910
Adjustments:
Depreciation and amortization expense	129,844				141,025				121,670				93,663				96,385
Interest expense, net	663,008				602,589				483,850				418,785				347,688
Income tax provision	24,021				208,889				181,702				189,612				141,600
EBITDA	1,778,409				1,581,044				1,373,636				1,149,272				892,583
Adjustments:
Inventory purchase accounting adjustments(2)	7,080				20,621				23,449				11,362				10,441
Acquisition integration costs(3)	17,484				6,341				18,539				12,554				7,239
Acquisition transaction-related expenses(4)	3,886				4,229				15,711				12,289				3,480
Non-cash stock and deferred compensation expense(5)	58,481				45,524				48,306				31,500				26,332
Refinancing costs(6)	6,396				39,807				15,794				18,393				131,622
Other, net (7)	4,822				12,997				(239		)		(1,716		)		1,510
EBITDA As Defined	$	1,876,558			$	1,710,563			$	1,495,196			$	1,233,654			$	1,073,207

(1)

During the fourth quarter of fiscal 2017, the Company committed to disposing of Schroth in connection with the settlement of a Department of Justice investigation into the competitive effects of the acquisition. Therefore, Schroth was classified as held-for-sale beginning September 30, 2017. On January 26, 2018, the Company completed the sale of Schroth in a management buyout to a private equity fund and certain members of Schroth management for approximately $61.4 million, which includes a working capital adjustment of $0.3 million that was settled in July 2018. Refer to Note 22, "Discontinued Operations," to the consolidated financial statements for further information.

(2)	Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold.

(3)	Represents costs incurred to integrate acquired businesses and product lines into TD Group’s operations, facility relocation costs and other acquisition-related costs.

(4)	Represents transaction-related costs comprising deal fees; legal, financial and tax due diligence expenses; and valuation costs that are required to be expensed as incurred.

(5)	Represents the compensation expense recognized by TD Group under our stock incentive plans.

(6)	Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.

(7)	Primarily represents foreign currency transaction gain or loss, payroll withholding taxes on dividend equivalent payments and stock option exercises, and gain or loss on sale of fixed assets.

The following table sets forth a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined:

	Fiscal Years Ended September 30,
	2018				2017				2016				2015				2014
	(in thousands)
Net cash provided by operating activities	$	1,022,173			$	788,733			$	683,298			$	520,938			$	541,222
Adjustments:
Changes in assets and liabilities, net of effects from acquisitions of businesses	4,936				83,753				110,905				24,322				(27,967		)
Net gain on sale of real estate	—				—				—				—				804
Interest expense, net(1)	640,880				581,483				467,639				402,988				333,753
Income tax provision—current(2)	175,661				215,385				175,894				188,952				151,016
Non-cash stock and deferred compensation expense(3)	(58,481		)		(45,524		)		(48,306		)		(31,500		)		(26,332		)
Excess tax benefit from exercise of stock options(2)	—				—				—				61,965				51,709
Refinancing costs(4)	(6,396		)		(39,807		)		(15,794		)		(18,393		)		(131,622		)
EBITDA from discontinued operations(9)	(364		)		(2,979		)		—				—				—
EBITDA	1,778,409				1,581,044				1,373,636				1,149,272				892,583
Adjustments:
Inventory purchase accounting adjustments(5)	7,080				20,621				23,449				11,362				10,441
Acquisition integration costs(6)	17,484				6,341				18,539				12,554				7,239
Acquisition transaction-related expenses(7)	3,886				4,229				15,711				12,289				3,480
Non-cash stock and deferred compensation expense(3)	58,481				45,524				48,306				31,500				26,332
Refinancing costs(4)	6,396				39,807				15,794				18,393				131,622
Other, net(8)	4,822				12,997				(239		)		(1,716		)		1,510
EBITDA As Defined	$	1,876,558			$	1,710,563			$	1,495,196			$	1,233,654			$	1,073,207

(1)	Represents interest expense excluding the amortization of debt issuance costs, original issue discount and premium.

(2)	For the period ended September 30, 2016, the income tax provision and excess tax benefit from exercise of stock options were impacted by the adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.”

(3)	Represents the compensation expense recognized by TD Group under our stock incentive plans.

(4)	Represents costs expensed related to debt financing activities, including new issuances, extinguishments, refinancings and amendments to existing agreements.

(5)	Represents accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the 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 comprising deal fees; legal, financial and tax due diligence expenses; and valuation costs that are required to be expensed as incurred.

(8)	Primarily represents foreign currency transaction gain or loss, payroll withholding taxes on dividend equivalent payments and stock option exercises, and gain or loss on sale of fixed assets.

(9)

During the fourth quarter of fiscal 2017, the Company committed to disposing of Schroth in connection with the settlement of a Department of Justice investigation into the competitive effects of the acquisition. Therefore, Schroth was classified as held-for-sale beginning September 30, 2017. On January 26, 2018, the Company completed the sale of Schroth in a management buyout to a private equity fund and certain members of Schroth management for approximately $61.4 million, which includes a working capital adjustment of $0.3 million that was settled in July 2018. Refer to Note 22, "Discontinued Operations," to the consolidated financial statements for further information.

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with “Selected Financial Data” and TD Group’s consolidated financial statements and the related notes included elsewhere in this report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under the heading entitled “Risk Factors” included elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested below.

Overview

For fiscal year 2018, we generated net sales of $3,811.1 million, gross profit of $2,177.5 million or 57.1% of sales, and net income of $957.1 million. We believe we have achieved steady, long-term growth in sales and improvements in operating performance since our formation in 1993 due to our competitive strengths and through execution of our value-driven operating strategy. More specifically, focusing our businesses on our value-driven operating strategy of obtaining profitable new business, carefully controlling the cost structure and pricing our highly engineered value-added products to fairly reflect the value we provide and the resources required to do so has historically resulted in improvements in gross profit and income from operations over the long term.

Our selective acquisition strategy has also contributed to the growth of our business. The integration of certain acquisitions into our existing businesses combined with implementing our proven operating strategy has historically resulted in improvements of 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 approximately 95,000 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.

Barriers to Entry. We believe that the niche nature of our markets, the industry’s stringent regulatory and certification requirements, the large number of products that we sell and the investments necessary to develop and certify products create potential disincentives to competition for certain 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.

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 70 businesses and/or 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.

Acquisitions and the divestiture during the most recent three fiscal years are more fully described in Note 2, “Acquisitions and Divestitures,” in the notes to the consolidated financial statements included herein.

Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with 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 accounting policies, see Note 3, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements included herein.

Revenue Recognition and Related Allowances: Revenue is recognized from the sale of products when title and risk of loss passes to the customer, which is generally at the time of shipment. Substantially all product sales are made pursuant to firm, fixed-price purchase orders received from customers. Collectibility of amounts recorded as revenue is reasonably assured at the time of sale. Provisions for returns, uncollectible accounts and the cost of repairs under contract warranty provisions are provided for in the same period as the related revenues are recorded and are principally based on historical results modified, as appropriate, by the most current information available. We have a history of making reasonably dependable estimates of such allowances; however, due to uncertainties inherent in the estimation process, it is possible that actual results may vary from the estimates and the differences could be material.

Allowance for Uncollectible Accounts: Management estimates the allowance for uncollectible accounts based on the aging of the accounts receivable and customer creditworthiness. The allowance also incorporates a provision for the estimated impact of disputes with customers. Management’s estimate of the allowance amounts that are necessary includes amounts for specifically identified credit losses and estimated credit losses based on historical information. The determination of the amount of the allowance for uncollectible accounts is subject to significant levels of judgment and estimation by management. Depending on the resolution of potential credit and other collection issues, or if the financial condition of any of the Company’s customers were to deteriorate and their ability to make required payments were to become impaired, increases in these allowances may be required. Historically, changes in estimates in the allowance for uncollectible accounts have not been significant.

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. Although management believes that the Company’s estimates of excess and obsolete inventory are reasonable, actual results may differ materially from the estimates and additional provisions may be required in the future. In addition, 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. Historically, changes in estimates in the net realizable value of inventories have not been significant.

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 were recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. In addition to using management estimates and negotiated amounts, the Company used a variety of information sources to determine the estimated fair values of acquired assets and liabilities including third-party appraisals for the estimated value and lives of identifiable intangible assets. 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.

GAAP requires that the annual, and any interim, impairment assessment be performed at the reporting unit level. The reporting unit level is one level below an operating segment. 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.

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, growth rates, 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 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 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. As an indicator that each reporting unit has been valued appropriately through the use of the discounted cash flow valuation model, the aggregate of all reporting unit’s estimated fair value is reconciled to the total market capitalization of the Company.

The Company had 35 reporting units with goodwill as of the first day of the fourth quarter of fiscal 2018, the date of the last annual impairment test. The estimated fair values of each of the reporting units was substantially in excess of their respective carrying values, and therefore, no goodwill impairment was recorded. The Company performed a sensitivity analysis on the discount rate, which is a significant assumption in the calculation of fair values. With a one percentage point increase in the discount rate, nearly all of the reporting units would continue to have fair values substantially in excess of their respective carrying values.

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 and periodically substantiated by 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.

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-Merton option pricing model to estimate the grant-date fair value of the stock options awarded. The Black-Scholes-Merton 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 utilizes historical data in determining these assumptions. An increase or decrease in the assumptions or economic events outside of management’s control could have an impact on the Black-Scholes-Merton model.

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.

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 thousands):

	Fiscal Years Ended September 30,
	2018				2018 % of Sales			2017				2017 % of Sales			2016				2016 % of Sales
Net sales	$	3,811,126			100.0	%		$	3,504,286			100.0	%		$	3,171,411			100.0	%
Cost of sales	1,633,616				42.9			1,519,659				43.4			1,443,348				45.5
Selling and administrative expenses	450,095				11.8			415,575				11.9			382,858				12.1
Amortization of intangible assets	72,454				1.9			89,226				2.5			77,445				2.4
Income from operations	1,654,961				43.4			1,479,826				42.2			1,267,760				40.0
Interest expense, net	663,008				17.4			602,589				17.2			483,850				15.3
Refinancing costs	6,396				0.2			39,807				1.1			15,794				0.5
Income tax provision	24,021				0.6			208,889				6.0			181,702				5.7
Income from continuing operations	961,536				25.2			628,541				17.9			586,414				18.5
Loss from discontinued operations, net of tax	(4,474		)		(0.1	)		(31,654		)		(0.9	)		—				—
Net income	$	957,062			25.1	%		$	596,887			17.0	%		$	586,414			18.5	%

Fiscal year ended September 30, 2018 compared with fiscal year ended September 30, 2017

Total Company

Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the fiscal years ended September 30, 2018 and 2017 were as follows (amounts in millions):

	Fiscal Years Ended								Change				% Change Total Sales
	September 30, 2018				September 30, 2017
Organic sales	$	3,695.9			$	3,504.3			$	191.6			5.5	%
Acquisition sales	115.2				—				115.2				3.3	%
	$	3,811.1			$	3,504.3			$	306.8			8.8	%

Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their acquisition date. The amount of acquisition sales shown in the table above was attributable to the acquisitions of Kirkhill, Extant and Skandia in fiscal year 2018, and the Third Quarter 2017 Acquisitions described in Note 2, “Acquisitions and Divestitures”.

The increase in organic sales was primarily driven by commercial aftermarket sales increasing by $109.6 million, or 9.0%, defense sales increasing by $62.3 million, or 5.3%, and commercial OEM sales increasing by $7.5 million, or 0.8%.

Cost of Sales and Gross Profit. Cost of sales increased by $113.9 million, or 7.5%, to $1,633.6 million for the fiscal year ended September 30, 2018 compared to $1,519.7 million for the fiscal year ended September 30, 2017. Cost of sales and the related percentage of total sales for the fiscal years ended September 30, 2018 and 2017 were as follows (amounts in millions):

	Fiscal Years Ended								Change				% Change
	September 30, 2018				September 30, 2017
Cost of sales—excluding costs below	$	1,607.2			$	1,482.9			$	124.3			8.4	%
% of total sales	42.2		%		42.3		%
Inventory purchase accounting adjustments	7.1				20.6				(13.5		)		(65.5	)%
% of total sales	0.2		%		0.6		%
Foreign currency (gain) loss	(0.4		)		7.6				(8.0		)		(105.3	)%
% of total sales	—		%		0.2		%
Acquisition integration costs	13.8				4.0				9.8				245.0	%
% of total sales	0.4		%		0.1		%
Stock compensation expense	5.9				4.6				1.3				28.3	%
% of total sales	0.2		%		0.1		%
Total cost of sales	1,633.6				1,519.7				$	113.9			7.5	%
% of total sales	42.9		%		43.4		%
Gross profit	$	2,177.5			$	1,984.6			$	192.9			9.7	%
Gross profit percentage	57.1		%		56.6		%		0.5		%

The net increase in the dollar amount of cost of sales during the fiscal year ended September 30, 2018 was primarily due to increased volume associated with the sales from acquisitions and organic sales growth offset by a reduction in purchase accounting adjustments on inventory and a benefit from foreign exchange rate fluctuations.

Gross profit as a percentage of sales increased by 0.5 percentage points to 57.1% for the fiscal year ended September 30, 2018 from 56.6% for the fiscal year ended September 30, 2017. The dollar amount of gross profit increased by $192.9 million, or 9.7%, for the fiscal year ended September 30, 2018 compared to the comparable period last year due to the following items:

•

Gross profit on the sales from the acquisitions indicated above (excluding acquisition-related costs) was approximately $49.3 million for the fiscal year ended September 30, 2018, which represented gross profit of approximately 42.8% of the acquisition sales. The lower gross profit margin on the acquisition sales decreased gross profit as a percentage of consolidated sales by approximately 0.5 percentage points.

•

Organic sales growth described above, 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), and positive leverage on our fixed overhead costs spread over a higher production volume, resulted in a net increase in gross profit of approximately $133.2 million for the fiscal year ended September 30, 2018.

•

Also contributing to the increase in gross profit were lower inventory purchase accounting adjustments of $13.5 million and $8.0 million in favorable foreign currency movement, particularly related to the U.S. dollar against the Euro over the course of fiscal 2018 compared to fiscal 2017. Partially offsetting these increases in gross profit is an increase in acquisition integration costs of $9.8 million and an increase in stock compensation expense of $1.3 million for the fiscal year ended September 30, 2018.

Selling and Administrative Expenses. Selling and administrative expenses increased by $34.5 million to $450.1 million, or 11.8% of sales, for the fiscal year ended September 30, 2018 from $415.6 million, or 11.9% of sales, for the comparable period last year. Selling and administrative expenses and the related percentage of total sales for the fiscal years ended September 30, 2018 and 2017 were as follows (amounts in millions):

	Fiscal Years Ended								Change				% Change
	September 30, 2018				September 30, 2017
Selling and administrative expenses—excluding costs below	$	389.9			$	368.1			$	21.8			5.9	%
% of total sales	10.2		%		10.5		%
Stock compensation expense	52.6				41.0				11.6				28.3	%
% of total sales	1.4		%		1.2		%
Acquisition-related expenses	7.6				6.5				1.1				16.9	%
% of total sales	0.2		%		0.2		%
Total selling and administrative expenses	$	450.1			$	415.6			$	34.5			8.3	%
% of total sales	11.8		%		11.9		%

The increase in the dollar amount of selling and administrative expenses during the fiscal year ended September 30, 2018 is primarily due to an increase in stock compensation expense of $11.6 million, higher selling and administrative expenses from organic sales growth of $11.4 million and recent acquisitions of approximately $10.4 million, which was approximately 9% of acquisition sales, and an increase in acquisition-related expenses of $1.1 million.

Amortization of Intangible Assets. Amortization of intangible assets decreased $16.8 million to $72.4 million for the fiscal year ended September 30, 2018 from $89.2 million for the comparable period last year. The net decrease was primarily due to the order backlog recorded in connection with the Young & Franklin/Tactair and Data Device Corporation acquisitions becoming fully amortized prior to fiscal 2018. This is slightly offset by amortization expense on the definite-lived intangible assets (i.e., technology and order backlog) recorded in connection with the Skandia, Extant, Kirkhill and the Third Quarter 2017 acquisitions.

Refinancing Costs. Refinancing costs of $6.4 million were recorded during the year ended September 30, 2018 representing debt issuance costs expensed in connection with the debt financing activity as disclosed in Note 11, "Debt," to the consolidated financial statements. Refinancing costs of $39.8 million recorded during the fiscal year ended September 30, 2017 primarily consisted of $28.8 million in premium paid on the redemption of the 2021 Notes and the write-off of $3.1 million in unamortized debt issuance costs and debt issuance costs expensed in connection with new debt issuance that occurred in fiscal 2017.

Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, and revolving credit facility fees offset by interest income. Interest expense-net increased $60.4 million, or 10.0%, to $663.0 million for the fiscal year ended September 30, 2018 from $602.6 million for the comparable period last year. The net increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $12,603 million for the fiscal year ended September 30, 2018 compared to approximately $10,993 million for the fiscal year ended September 30, 2017. The weighted average cash interest rate was at 5.1% during the fiscal year ended September 30, 2018 compared to 5.3% in the prior year. The increase in weighted average level of borrowings was primarily due to the activity in the third fiscal quarter of 2018 consisting of the incurrence of additional term loans of $700 million (gross), $500 million in 6.875% 2026 senior subordinated notes, an additional $100 million drawn on the trade receivable securitization facility in the fourth quarter of fiscal 2017 and additional net debt financing of $575 million in the fourth quarter of fiscal 2017. The increases in new debt described above was partially offset by principal payments on the term loans over the comparable period. The weighted average interest rate for cash interest payments on total borrowings outstanding at September 30, 2018 was 5.2%.

Income Taxes. Income tax expense as a percentage of income before income taxes was approximately 2.4% for the fiscal year ended September 30, 2018 compared to 24.9% for the fiscal year ended September 30, 2017. The Company’s lower effective tax rate for year ended September 30, 2018 was primarily due to a reduction in the U.S. federal corporate tax rate that was enacted in the Tax Cuts and Jobs Act (“the Act”) which reduced the tax rate from 35% to 21% as well the one-time impact related to the remeasurement of U.S. deferred tax liabilities under the Act. As a result, the blended statutory tax rate for the fiscal year is 24.5%. The Company’s effective tax rate for the fiscal year ended September 30, 2017 was less than the Federal statutory tax rate due primarily to excess tax benefits on equity compensation, foreign earnings taxed at rates lower than the U.S. statutory rates, and the domestic manufacturing deduction. The decrease in the effective tax rate for the fiscal year ended September 30, 2018 compared to the fiscal year ended September 30, 2017 was primarily due to the reduction in the U.S. federal corporate tax rate and the one-time impact under the Act.

Loss from Discontinued Operations. On January 26, 2018, the Company completed the sale of Schroth in a management buy out to a private equity fund and certain members of Schroth management for approximately $61.4 million which includes a

working capital adjustment of $0.3 million that was settled in July 2018. The loss from discontinued operations was $4.5 million for the fiscal year ended September 30, 2018. Loss from discontinued operations is comprised of the operating loss from the Schroth operations that were classified as held-for-sale as of September 30, 2017. The loss includes a $32 million impairment charge to write-down Schroth’s assets to fair value. More detailed information can be found in Note 22, “Discontinued Operations.”

Net Income. Net income increased $360.2 million, or 60.3%, to $957.1 million for the fiscal year ended September 30, 2018 compared to net income of $596.9 million for the fiscal year ended September 30, 2017, primarily as a result of the factors referred to above.

Earnings per Share. The basic and diluted earnings per share were $16.20 for the fiscal year ended September 30, 2018 and $7.88 per share for the fiscal year ended September 30, 2017. For the fiscal year ended September 30, 2018, basic and diluted earnings per share from continuing operations were $16.28 and basic and diluted loss per share from discontinued operations were ($0.08). For the fiscal year ended September 30, 2017, basic and diluted earnings per share from continuing operations were $8.45 and basic and diluted loss per share from discontinued operations were ($0.57). Net income for the fiscal year ended September 30, 2018 of $957.1 million was decreased by dividend equivalent payments of $56.1 million resulting in net income available to common shareholders of $900.9 million. Net income for the fiscal year ended September 30, 2017 of $596.9 million was decreased by dividend equivalent payments of $159.3 million resulting in net income available to common shareholders of $437.6 million. The increase in earnings per share of $8.32 per share to $16.20 per share is a result of the factors referred to above.

Business Segments

Effective October 1, 2017, the Company made an organizational realignment of certain businesses comprising the Power & Control, Airframe, and the Non-Aviation segments. Operating results for the year ended September 30, 2017 were reclassified to conform to the presentation for the fiscal year ended September 30, 2018.

Segment Net Sales. Net sales by segment for the fiscal years ended September 30, 2018 and 2017 were as follows (amounts in millions):

	Fiscal Years Ended September 30,														Change				% Change
	2018				% of Sales			2017				% of Sales
Power & Control	$	2,139.1			56.1	%		$	1,927.2			55.0	%		$	211.9			11.0	%
Airframe	1,531.0				40.2	%		1,442.1				41.2	%		88.9				6.2	%
Non-aviation	141.0				3.7	%		135.0				3.8	%		6.0				4.4	%
	$	3,811.1			100.0	%		$	3,504.3			100.0	%		$	306.8			8.8	%

Organic sales for the Power & Control segment increased $153.7 million, or an increase of 8.0%, when compared to the fiscal year ended September 30, 2017. The organic sales increase resulted primarily from increases in commercial aftermarket sales ($45.7 million, an increase of 7.7%), defense sales ($74.5 million, an increase of 8.7%), and commercial OEM sales ($26.9 million, an increase of 6.3%). Acquisition sales for the Power & Control segment totaled $58.2 million, or an increase of 3.0%, resulting from the acquisition of Extant and the Third Quarter 2017 Acquisitions.

Organic sales for the Airframe segment increased $31.9 million, or an increase of 2.2%, when compared to the fiscal year ended September 30, 2017. The organic sales increase resulted primarily from increases in commercial aftermarket sales ($63.9 million, an increase of 10.2%) slightly offset by decreases in commercial OEM sales ($17.9 million, a decrease of 3.7%) and defense sales ($14.0 million, a decrease of 4.4%). Acquisition sales for the Airframe segment totaled $57.0 million, or an increase of 4.0%, resulting from the acquisitions of Kirkhill and Skandia.

EBITDA As Defined. EBITDA As Defined by segment for the fiscal years ended September 30, 2018 and 2017 were as follows (amounts in millions):

	Fiscal Years Ended September 30,														Change				% Change
	2018				% of Segment Sales			2017				% of Segment Sales
Power & Control	$	1,114.4			52.1	%		$	980.0			50.9	%		$	134.4			13.7	%
Airframe	759.3				49.6	%		726.6				50.4	%		32.7				4.5	%
Non-aviation	44.3				31.4	%		42.5				31.5	%		1.8				4.2	%
	$	1,918.0			50.3	%		$	1,749.1			49.9	%		$	168.9			9.7	%

Organic EBITDA As Defined for the Power & Control segment increased approximately $107.3 million for the fiscal year ended September 30, 2018 compared to the fiscal year ended September 30, 2017. EBITDA As Defined from the acquisition of Extant and the Third Quarter 2017 Acquisitions was approximately $27.1 million for the fiscal year ended September 30, 2018.

Organic EBITDA As Defined for the Airframe segment increased approximately $18.3 million for the fiscal year ended September 30, 2018 compared to the fiscal year ended September 30, 2017. EBITDA As Defined from the acquisitions of Kirkhill and Skandia was approximately $14.4 million for the fiscal year ended September 30, 2018.

Fiscal year ended September 30, 2017 compared with fiscal year ended September 30, 2016

Total Company

Net Sales. Net organic sales and acquisition sales and the related dollar and percentage changes for the fiscal years ended September 30, 2017 and 2016 were as follows (amounts in millions):

	Fiscal Years Ended								Change				% Change Total Sales
	September 30, 2017				September 30, 2016
Organic sales	$	3,248.6			$	3,171.4			$	77.2			2.4	%
Acquisition sales	255.7				—				255.7				8.1	%
	$	3,504.3			$	3,171.4			$	332.9			10.5	%

Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their acquisition date. The amount of acquisition sales shown in the table above was attributable to the Third Quarter 2017 Acquisitions in fiscal year 2017 and the acquisitions of Y&F/Tactair, DDC and Breeze-Eastern in fiscal year 2016.

The increase in organic sales was primarily driven by commercial aftermarket organic sales increasing by $34.8 million, or 3.0% and defense organic sales increasing by $41.5 million, or 4.4%. Slightly offsetting the increases was commercial OEM organic sales decreasing by $2.8 million, or 0.3%.

Cost of Sales and Gross Profit. Cost of sales increased by $76.4 million, or 5.3%, to $1,519.7 million for the fiscal year ended September 30, 2017 compared to $1,443.3 million for the fiscal year ended September 30, 2016. Cost of sales and the related percentage of total sales for the fiscal years ended September 30, 2017 and 2016 were as follows (amounts in millions):

	Fiscal Years Ended								Change				% Change
	September 30, 2017				September 30, 2016
Cost of sales—excluding acquisition-related costs below	$	1,482.9			$	1,409.8			$	73.1			5.2	%
% of total sales	42.3		%		44.5		%
Inventory purchase accounting adjustments	20.6				23.4				(2.8		)		(12.0	)%
% of total sales	0.6		%		0.7		%
Foreign currency loss (gain)	7.6				(4.2		)		11.8				(281.0	)%
% of total sales	0.2		%		(0.1		)%
Acquisition integration costs	4.0				8.3				(4.3		)		(51.8	)%
% of total sales	0.1		%		0.3		%
Stock compensation expense	4.6				6.0				(1.4		)		(23.3	)%
% of total sales	0.1		%		0.2		%
Total cost of sales	$	1,519.7			$	1,443.3			$	76.4			5.3	%
% of total sales	43.4		%		45.5		%
Gross profit	$	1,984.6			$	1,728.1			$	256.5			14.8	%
Gross profit percentage	56.6		%		54.5		%		2.1		%

The increase in the dollar amount of cost of sales during the fiscal year ended September 30, 2017 was primarily due to increased volume associated with the sales from acquisitions and organic sales growth.

Gross profit as a percentage of sales increased by 2.1 percentage points to 56.6% for the fiscal year ended September 30, 2017 from 54.5% for the fiscal year ended September 30, 2016. The dollar amount of gross profit increased by $256.5 million, or 14.8%, for the fiscal year ended September 30, 2017 compared to the comparable period last year due to the following items:

•

Gross profit on the sales from the acquisitions indicated above (excluding acquisition-related costs) was approximately $153.6 million for the fiscal year ended September 30, 2017, which represented gross profit of approximately 60% of the acquisition sales. The higher gross profit margin on the acquisition sales increase gross profit as a percentage of consolidated sales by approximately 1 percentage point.

•	Organic sales growth described above, 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), and positive leverage on our fixed overhead costs spread over a higher production volume, resulted in a net increase in gross profit of approximately $106.2 million for the fiscal year ended September 30, 2017.

•	Gross profit decreased $11.8 million as foreign currency losses increased due to the unfavorable effect of changes in foreign currency exchange rates. This was partially offset by the reduction of the impact of inventory purchase accounting adjustments, acquisition integration costs and stock compensation expense charged to cost of sales of approximately $8.5 million.

Selling and Administrative Expenses. Selling and administrative expenses increased by $32.7 million to $415.6 million, or 11.9% of sales, for the fiscal year ended September 30, 2017 from $382.9 million, or 12.1% of sales, for the comparable period last year. Selling and administrative expenses and the related percentage of total sales for the fiscal years ended September 30, 2017 and 2016 were as follows (amounts in millions):

	Fiscal Years Ended								Change				% Change
	September 30, 2017				September 30, 2016
Selling and administrative expenses—excluding costs below	$	368.1			$	314.5			$	53.6			17.0	%
% of total sales	10.5		%		9.9		%
Stock compensation expense	41.0				42.4				(1.4		)		(3.3	)%
% of total sales	1.2		%		1.3		%
Acquisition-related expenses	6.5				26.0				(19.5		)		(75.0	)%
% of total sales	0.2		%		0.8		%
Total selling and administrative expenses	$	415.6			$	382.9			$	32.7			8.5	%
% of total sales	11.9		%		12.1		%

The increase in the dollar amount of selling and administrative expenses during the fiscal year ended September 30, 2017 is primarily due to higher selling and administrative expenses relating to recent acquisitions of approximately $47.7 million, which was approximately 19% of acquisition sales. The increase is partially offset by lower acquisition-related and stock compensation expense of $19.5 million and $1.4 million, respectively.

Amortization of Intangible Assets. Amortization of intangible assets increased to $89.2 million for the fiscal year ended September 30, 2017 from $77.4 million for the comparable period last year. The net increase of $11.8 million was primarily due to the Third Quarter 2017 Acquisitions and full year amortization recorded from the fiscal 2016 acquisitions of Breeze-Eastern, DDC and Y&F/Tactair.

Refinancing Costs. Refinancing costs of $39.8 million were recorded during the year ended September 30, 2017 representing debt issuance costs expensed in connection with the debt financing activity as disclosed in Note 11, "Debt," to the consolidated financial statements. Included within the $39.8 million was approximately $31.9 million in debt issuance costs and premium related to the repurchase of the 2021 Notes. Refinancing costs of $15.8 million were recorded during the fiscal year ended September 30, 2016 representing debt issuance costs expensed in connection with the debt financing activity in June 2016.

Interest Expense-net. Interest expense-net includes interest on borrowings outstanding, amortization of debt issuance costs, original issue discount and premium, and revolving credit facility fees offset by interest income. Interest expense-net increased $118.7 million, or 24.5%, to $602.6 million for the fiscal year ended September 30, 2017 from $483.9 million for the comparable period last year. The net increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $10,993 million for the fiscal year ended September 30, 2017 and approximately $8,834 million for the fiscal year ended September 30, 2016. The weighted average cash interest rate was consistent at 5.3% during the fiscal years ended September 30, 2017 and 2016. The increase in weighted average level of borrowings was due to the issuance of the 2026 Notes for $950 million in June 2016, the incremental term loans of $950 million in June 2016, the additional net debt financing of $641 million in the first fiscal quarter of 2017, the additional 2025 Notes offering of $300 million in the second fiscal quarter of 2017, the additional $100 million drawn on the trade receivable securitization facility in the fourth quarter of fiscal 2017 and the additional net debt financing of $575 million in the fourth quarter of fiscal 2017. The weighted average interest rate for cash interest payments on total borrowings outstanding at September 30, 2017 was 5.2%.

Income Taxes. Income tax expense as a percentage of income before income taxes was approximately 24.9% for the fiscal year ended September 30, 2017 compared to 23.7% for the fiscal year ended September 30, 2016. The Company’s effective tax rate for these periods was less than the Federal statutory tax rate due primarily to excess tax benefits on equity compensation, foreign earnings taxed at rates lower than the U.S. statutory rates, and the domestic manufacturing deduction. The increase in the effective tax rate for the fiscal year ended September 30, 2017 compared to the fiscal year ended September 30, 2016 was primarily due to foreign earnings taxed at higher rates versus the prior year foreign earnings.

Loss from Discontinued Operations. Loss from discontinued operations is comprised of the operating loss from the Schroth operations that were classified as held-for-sale as of September 30, 2017. The loss includes a $32 million impairment charge to write-down Schroth’s assets to fair value. More detailed information can be found in Note 22, “Discontinued Operations.”

Net Income. Net income increased $10.5 million, or 1.8%, to $596.9 million for the fiscal year ended September 30, 2017 compared to net income of $586.4 million for the fiscal year ended September 30, 2016, primarily as a result of the factors referred to above.

Earnings per Share. The basic and diluted earnings per share were $7.88 for the fiscal year ended September 30, 2017 and $10.39 per share for the fiscal year ended September 30, 2016. For the fiscal year ended September 30, 2017, basic and diluted earnings per share from continuing operations were $8.45 and basic and diluted loss per share from discontinued operations were ($0.57). Net income for the fiscal year ended September 30, 2017 of $596.9 million was decreased by dividend equivalent payments of $159.3 million resulting in net income available to common shareholders of $437.6 million. Net income for the fiscal year ended September 30, 2016 of $586.4 million was decreased by dividend equivalent payments of $3.0 million resulting in net income available to common shareholders of $583.4 million. The decrease in earnings per share of $2.51 per share to $7.88 per share is a result of the factors referred to above.

Business Segments

Segment Net Sales. Net sales by segment for the fiscal years ended September 30, 2017 and 2016 were as follows (amounts in millions):

	Fiscal Years Ended September 30														Change				% Change
	2017				% of Sales			2016				% of Sales
Power & Control	$	1,927.2			55.0	%		$	1,621.7			51.1	%		$	305.5			18.8	%
Airframe	1,442.1				41.2	%		1,447.9				45.7	%		(5.8		)		(0.4	)%
Non-aviation	135.0				3.8	%		101.8				3.2	%		33.2				32.6	%
	$	3,504.3			100.0	%		$	3,171.4			100.0	%		$	332.9			10.5	%

Organic sales for the Power & Control segment increased $70.8 million, or an increase of 4.4%, when compared to the fiscal year ended September 30, 2016. The organic sales increase resulted primarily from increases in commercial aftermarket sales ($40.9 million, an increase of 7.5%), defense sales ($28.2 million, an increase of 4.4%), and commercial OEM sales ($1.0 million, an increase of 0.3%). Acquisition sales for the Power & Control segment totaled $234.7 million, or an increase of 14.4%, resulting from the Third Quarter 2017 Acquisitions and the acquisitions of Tactair, DDC and Breeze-Eastern in fiscal year 2016.

Organic sales for the Airframe segment decreased $5.8 million, or a decrease of 0.4%, when compared to the fiscal year ended September 30, 2016. The organic sales decrease resulted primarily from decreases in commercial aftermarket sales ($6.1 million, a decrease of 1.0%), commercial OEM sales ($5.3 million, a decrease of 1.1%) and non-aerospace sales ($6.9 million, a decrease of 39.4%) offset by an increase in defense sales ($12.5 million, an increase of 4.2%). There was no impact from acquisitions in the results of the Airframe segment.

Organic sales for the Non-aviation segment increased $12.3 million, or an increase of 12.0%, when compared to the fiscal year ended September 30, 2016. The sales increase was primarily due to an increase in non-aerospace sales of $9.9 million, an increase of 11.5%. Acquisition sales for the Non-aviation segment totaled $20.9 million, or an increase of 20.6%, resulting from the acquisition of Y&F completed in fiscal year 2016.

EBITDA As Defined. EBITDA As Defined by segment for the fiscal years ended September 30, 2017 and 2016 were as follows (amounts in millions):

	Fiscal Years Ended September 30														Change				% Change
	2017				% of Segment Sales			2016				% of Segment Sales
Power & Control	$	980.0			50.9	%		$	787.4			48.6	%		$	192.6			24.5	%
Airframe	726.6				50.4	%		709.9				49.0	%		16.7				2.4	%
Non-aviation	42.5				31.5	%		28.2				27.7	%		14.3				50.7	%
	$	1,749.1			49.9	%		$	1,525.5			48.1	%		$	223.6			14.7	%

Organic EBITDA As Defined for the Power & Control segment increased approximately $88.7 million for the fiscal year ended September 30, 2017 compared to the fiscal year ended September 30, 2016. EBITDA As Defined from the Third Quarter 2017 Acquisitions and the acquisitions of Tactair, DDC and Breeze-Eastern in fiscal year 2016 was approximately $103.9 million for the fiscal year ended September 30, 2017.

Organic EBITDA As Defined for the Airframe segment increased approximately $16.7 million for the fiscal year ended September 30, 2017 compared to the fiscal year ended September 30, 2016. There was no impact from acquisitions in the results of the Airframe segment.

Organic EBITDA As Defined for the Non-aviation segment increased approximately $7.4 million for the fiscal year ended September 30, 2017 compared to the fiscal year ended September 30, 2016. EBITDA As Defined from the acquisition of Y&F completed in fiscal year 2016 was approximately $6.9 million.

Backlog

For information about our backlog, see Item 1. - “Business.”

Foreign Operations

Our direct sales to foreign customers were approximately $1,355.1 million, $1,318.9 million, and $1,169.5 million for the fiscal years 2018, 2017 and 2016, respectively. Sales to foreign customers are subject to numerous additional risks, including foreign currency fluctuations, the impact of foreign government regulations, political uncertainties and differences in business practices. There can be no assurance that foreign governments will not adopt regulations or take other action that would have a direct or indirect adverse impact on the business or market opportunities of the Company within such governments’ countries. Furthermore, there can be no assurance that the political, cultural and economic climate outside the United States will be favorable to our operations and growth strategy.

Inflation

Many of the Company’s raw materials and operating expenses are sensitive to the effects of inflation, which could result in changing operating costs. Furthermore, recently implemented changes to U.S. and other countries’ tariff and import/export regulations may have an unfavorable impact on raw materials pricing. The effects of inflation on the Company’s businesses during the fiscal years 2018, 2017 and 2016 were immaterial.

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.

We continually evaluate our debt facilities to assess whether they most efficiently and effectively meet the current and future needs of our business. The Company evaluates from time to time the appropriateness of its current leverage, taking into consideration the Company’s debt holders, equity holders, credit ratings, acquisition opportunities and other factors. The Company’s debt leverage ratio, which is computed as total debt divided by EBITDA As Defined for the applicable twelve-month period, has varied widely during the Company’s history, ranging from approximately 3.5 to 7.2. Our debt leverage ratio at September 30, 2018 was approximately 6.9.

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. Whether the Company undertakes additional common stock repurchases or other aforementioned activities will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. In addition, the Company may issue additional debt if prevailing market conditions are favorable to doing so.

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.

As a result of the additional debt financing during the fiscal year ended September 30, 2018, interest payments will increase going forward in accordance with the terms of the related debt agreements. However, 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 more than sufficient cash from operating activities to meet our interest obligations and liquidity needs. We believe our cash from operations and available borrowing capacity will enable us to make opportunistic investments in our own stock, make strategic business combinations and/or pay dividends to our shareholders.

In connection with the merger agreement to acquire Esterline for approximately $4 billion, the Company entered into a commitment letter for a senior secured term facility up to $3.7 billion. The actual amount and timing of the new senior secured term facility is subject to the closing of the Esterline acquisition and the cash on hand at that time. The merger is anticipated to close in 2019, subject to approval of Esterline’s shareholders, as well as other customary closing conditions, including the receipt of required regulatory approvals.

In the future, 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 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 $1,022.2 million of net cash from operating activities during fiscal 2018 compared to $788.7 million during fiscal 2017. The net increase of $233.5 million is primarily attributable to an increase in income from continuing operations of $156.6 million (excludes the non-cash effects of the adjustments resulting from the Tax Cuts and Jobs Act of $176.4 million). Changes in inventories, accounts payable and trade accounts receivable improved by approximately $23.4 million compared to the prior year. The changes in inventories, accounts payable and trade accounts receivable are more fully described below.

The change in trade accounts receivable during fiscal 2018 was a use of $43.8 million in cash compared to a use of cash of $54.7 million in fiscal 2017, which is a reduction to the use of cash of $10.9 million year over year. The reduction in the use of cash in fiscal 2018 compared to fiscal 2017 is attributable to the timing of sales and a higher rate of collections on trade accounts receivable.

The change in inventories was a use of cash of $10.8 million in fiscal 2018 compared to a source of cash of $5.1 million in fiscal 2017. The increase in inventories compared to prior year relates to the building up of inventories at certain reporting units during the fourth fiscal quarter of 2018 based on existing backlog for the first quarter of fiscal 2019.

The change in accounts payable during fiscal 2018 was a source of cash of $18.1 million compared to a use of cash of $10.4 million in fiscal 2017. The decrease in the use of cash was primarily attributable to the timing of payments to vendors.

The Company generated $788.7 million of net cash from operating activities during fiscal 2017 compared to $683.3 million during fiscal 2016. The net increase is primarily attributable to an increase in income from continuing operations and items adjusting

net income for non-cash expenses and income of $38.8 million, and favorable changes in trade accounts receivable, inventories, and accounts payable of $28.9 million, net.

Investing Activities. Net cash used in investing activities was $683.6 million during fiscal 2018, primarily consisting of cash paid in connection with the acquisitions of Kirkhill, Extant, and Skandia of $667.6 million and capital expenditures of $73.3 million slightly offset by the cash proceeds received from the sale of Schroth of $57.4 million. The Company expects its capital expenditures in fiscal year 2019 to be between $85 million and $100 million. The Company’s capital expenditures incurred from year to year are primarily for projects that are consistent with our three core value-driven operating strategies (obtaining profitable new business, continually improve our cost structure and providing highly engineered value-added products to customers).

Net cash used in investing activities was $287.0 million during fiscal 2017, primarily consisting of cash paid for the Third Quarter 2017 Acquisitions of $106.3 million, the cash settlement of the Breeze-Eastern dissenting shares litigation of $28.7 million, the acquisition of Schroth of $79.7 million and capital expenditures of $71.0 million.

Net cash used in investing activities was $1,443.0 million during fiscal 2016, primarily consisting of the acquisitions of Breeze-Eastern, DDC, and Y&F/Tactair for a total of $1,401.5 million and capital expenditures of $44.0 million.

Financing Activities. Net cash used in financing activities during the fiscal year ended September 30, 2018 was $1,085.6 million. The source of cash was primarily due to the net proceeds of $678.6 million from the fiscal 2018 term loans activity and net proceeds of $489.6 million from the issuance of the 6.875% 2026 Notes in the third quarter of fiscal 2018, along with $57.8 million in proceeds from stock option exercises. Partially offsetting these sources of cash was $56.1 million in dividend equivalent payments made in the first quarter of fiscal 2018.

Net cash used in financing activities during the fiscal year ended September 30, 2017 was $1,443.7 million. The use of cash was primarily related to the aggregate payment of $2,581.6 million for a $24.00 per share special dividend declared and paid during the first quarter of fiscal 2017 and a $22.00 per share special dividend declared and paid in the fourth quarter of fiscal 2017 and dividend equivalent payments. Also contributing to the use of cash was $1,284.7 million in debt service payments on the existing term loans and the remaining principal on the tranche C term loans, redemption and related premium paid on the 2021 Notes aggregating to $528.8 million and $389.8 million related to treasury stock purchases under the Company's share repurchase program. Slightly offsetting the uses of cash were net proceeds from the 2017 term loans (tranche F and tranche G term loans) of $2,937.7 million and the additional 2025 Notes offering of $300.4 million, $99.5 million in net proceeds from an additional A/R Securitization draw in the fourth quarter of fiscal 2017 and $21.2 million in proceeds from stock option exercises.

Net cash provided by financing activities during the fiscal year ended September 30, 2016 was $1,632.5 million, which primarily comprised of net proceeds from the fiscal 2016 term loans of $1,711.5 million, net proceeds from our 2026 Notes of $939.6 million, and $30.1 million of cash proceeds from the exercise of stock options. These increases were partially offset by $834.4 million of repayments on our existing term loans, $207.8 million in treasury stock purchases under the Company’s share repurchase programs, $3.0 million in dividend equivalent payments and the impact from the adoption of ASU 2016-09 which resulted in the excess tax benefits related to share-based payment arrangements being classified within operating activities beginning in fiscal 2016.

Description of Senior Secured Term Loans and Indentures

Senior Secured Credit Facilities

TransDigm has $7,599.9 million in fully drawn term loans (the “Term Loans Facility”) and a $600 million revolving credit facility. The Term Loans Facility consists of three tranches of term loans as follows (aggregate principal amount disclosed is as of September 30, 2018):

Term Loans Facility		Aggregate Principal		Maturity Date		Interest Rate
Tranche E		$2,244 million		May 30, 2025		LIBO rate + 2.50%
Tranche F		$3,560 million		June 9, 2023		LIBO rate + 2.50%
Tranche G		$1,796 million		August 22, 2024		LIBO rate + 2.50%

The Term Loans Facility requires quarterly aggregate principal payments of $19.1 million. The revolving commitments consist of two tranches which include up to $99.4 million of multicurrency revolving commitments. At September 30, 2018, the Company had $17.5 million in letters of credit outstanding and $582.5 million in borrowings available under the revolving commitments. 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 LIBO rate 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 LIBO rate is not subject to a floor. For the fiscal year ended September 30, 2018, the applicable interest rates ranged from approximately 4.1% to 5.1% on the existing term loans. Interest rate swaps and caps used to hedge and offset, respectively, the

variable interest rates on the credit facility are described in Note 11, “Derivatives and Hedging Activities,” to the consolidated financial statements included herein.

Recent Amendments to the Credit Agreement

On November 30, 2017, the Company entered into Amendment No. 4 to the Second Amended and Restated Credit Agreement (“Amendment No. 4”). Pursuant to Amendment No. 4, TransDigm, among other things, converted approximately $798.2 million of existing tranche D term loans into additional tranche F term loans and decreased the margin applicable to the existing tranche E term loans and tranche F term loans to LIBO rate plus 2.75% per annum and also removed the LIBO rate floor of 0.75%. The terms and conditions (other than maturity date and pricing) that apply to the tranche F term loans are substantially the same as the terms and conditions that apply to the tranche D term loans immediately prior to Amendment No. 4.

On February 22, 2018, the Company entered into a refinancing facility agreement to the Second Amended and Restated Credit Agreement. TransDigm, among other things, incurred new tranche G term loans in an aggregate principal amount equal to $1,810 million and repaid in full all of the existing tranche G term loans outstanding under the Second and Amended Restated Credit Agreement immediately prior to the refinancing facility agreement. The refinancing facility agreement also decreased the margin applicable to the tranche G term loans to LIBO rate plus 2.5% per annum. The terms and conditions that apply to the tranche G term loans, excluding pricing, are substantially the same as the terms and conditions that apply to the tranche G term loans immediately prior to the refinancing facility agreement.

On May 30, 2018, the Company entered into Amendment No. 5 to the Second Amended and Restated Credit Agreement ("Amendment No. 5"). Pursuant to Amendment No. 5, TransDigm, among other things, incurred new tranche E term loans in an aggregate principal amount equal to $1,322 million, and repaid in full all of the existing tranche E term loans outstanding under the Second Amended and Restated Credit Agreement immediately prior to Amendment No. 5. The Company also incurred incremental tranche E term loans in an aggregate principal amount equal to $933 million. The new tranche E term loans and incremental tranche E term loans mature on May 30, 2025. Amendment No. 5 also decreased the margin applicable to the new tranche E term loans to LIBO rate plus 2.5% per annum. The terms and conditions that apply to the tranche E term loans, other than the maturity date and margin, are substantially the same as the terms and conditions that apply to the tranche E term loans immediately prior to Amendment No. 5.

Additionally, pursuant to Amendment No. 5, the Company incurred new tranche F term loans in an aggregate principal amount equal to $3,578 million, and repaid in full all of the existing tranche F term loans outstanding under the Second and Amended Restated Credit Agreement immediately prior to Amendment No. 5. Amendment No. 5 also decreased the margin applicable to the tranche F term loans to LIBO rate plus 2.5% per annum.

Under the terms of Amendment No. 5, the maturity date of our $600 million revolving credit facility was extended to December 28, 2022. The revolving commitments consist of two tranches which includes up to $99.4 million of multicurrency revolving commitments. The terms and conditions that apply to the revolving credit facility, other than the maturity date, are substantially the same as the terms and conditions that applied to the revolving credit facility immediately prior to Amendment No. 5.

Amendment No. 5 extended our ability to make certain additional restricted payments (including the ability of the Company to declare or pay dividends or repurchase stock) in an aggregate amount not to exceed $1,500 million, so long as, among other conditions, the consolidated secured net debt ratio is no greater than 4.00 to 1.00 (in the case of share repurchases) or the consolidated net leverage ratio is no greater than 6.75 to 1.00 (in the case of dividends or other distributions), in each case, after giving pro forma effect to such transactions. If any portion of the $1,500 million is not used for dividends or share repurchases prior to December 31, 2018, such amount (not to exceed $500 million) may be used to repurchase stock at any time thereafter.

Indentures

Senior Subordinated Notes		Aggregate Principal		Maturity Date		Interest Rate
2020 Notes		$550 million		October 15, 2020		5.50%
2022 Notes		$1,150 million		July 15, 2022		6.00%
2024 Notes		$1,200 million		July 15, 2024		6.50%
2025 Notes		$750 million		May 15, 2025		6.50%
6.875% 2026 Notes		$500 million		May 15, 2026		6.875%
6.375% 2026 Notes		$950 million		June 15, 2026		6.375%

The 2020 Notes, the 2022 Notes, the 2024 Notes, and the 6.375% 2026 Notes (the “TransDigm Inc. Notes”) were issued at a price of 100% of the principal amount. The initial $450 million offering of the 2025 Notes (also considered to be part of the “TransDigm Inc. Notes”) were issued at a price of 100% of the principal amount and the subsequent $300 million offering in the

second quarter ended of fiscal 2017 of 2025 Notes were issued at a price of 101.5% of the principal amount, resulting in gross proceeds of $304.5 million. 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 $496.2 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 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 guaranteed on a senior subordinated unsecured basis by TD Group and TransDigm Inc.'s domestic restricted subsidiaries. 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 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.

The TransDigm UK Notes were issued during the third quarter of fiscal 2018 by TransDigm UK, a wholly-owned, indirect subsidiary of TD Group, at a discount of 0.76%.

Certain Restrictive Covenants in Our Debt Documents

The Credit Agreement and the Indentures governing the 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. 5. The restrictive covenants are described above in the Recent Amendments to the Credit Agreement section.

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 7.25 to 1.00 and the consolidated secured net debt ratio would be no greater than 5.00 to 1.00, in each case, after giving effect to such incremental term loans or additional revolving commitments.

The Credit Agreement requires mandatory prepayments of principal based on certain percentages of Excess Cash Flow (as defined in the Credit Agreement), commencing 90 days after the end of each fiscal year, subject to certain exceptions. In addition, subject to certain exceptions (including, with respect to asset sales, the reinvestment in productive assets), TransDigm will be required to prepay the loans outstanding under the Credit Agreement at 100% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of certain asset sales and issuance or incurrence of certain indebtedness. No matters mandating prepayments occurred during the quarter ended September 30, 2018.

In addition, under the Credit Agreement, if the usage of the revolving credit facility exceeds 25% of the total revolving commitments, the Company will be required to maintain a maximum consolidated net leverage ratio of net debt, as defined, to trailing four-quarter EBITDA As Defined. A breach of any of the covenants or an inability to comply with the required leverage ratio could result in a default under the Credit Agreement or the Indentures.

If any such default occurs, the lenders under the Credit Agreement and the holders of the 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 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.

As of September 30, 2018, the Company was in compliance with all of its debt covenants.

Trade Receivables Securitization

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. On July 31, 2018, the Company amended

the Securitization Facility to increase the borrowing capacity to $350 million and extend the maturity date to July 31, 2019. As of September 30, 2018, the Company has borrowed $300 million under the Securitization Facility. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable.

Stock Repurchase Program

On November 8, 2017, our Board of Directors, authorized a new stock repurchase program replacing the previous $600 million program and permitting repurchases of our outstanding shares not to exceed $650 million in the aggregate, subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes. No repurchases were made under the program during the fiscal year ended September 30, 2018.

Contractual Obligations

The following is a summary of contractual cash obligations as of September 30, 2018 (in millions):

	2019				2020				2021				2022				2023				2024 and thereafter				Total
Senior Secured Term Loans(1)	$	76.4			$	76.4			$	76.4			$	76.4			$	3,457.4			$	3,836.9			$	7,599.9
2020 Notes	—				—				550.0				—				—				—				550.0
2022 Notes	—				—				—				1,150.0				—				—				1,150.0
2024 Notes	—				—				—				—				—				1,200.0				1,200.0
2025 Notes	—				—				—				—				—				750.0				750.0
6.875% 2026 Notes	—				—				—				—				—				500.0				500.0
6.375% 2026 Notes	—				—				—				—				—				950.0				950.0
Securitization Facility	300.0				—				—				—				—				—				300.0
Scheduled Interest Payments(2)	715.5				727.8				696.8				685.0				586.8				680.1				4,092.0
Operating Leases	19.3				16.3				13.9				12.2				9.7				27.1				98.5
Purchase Obligations	371.8				43.1				30.4				17.4				21.2				—				483.9
Total Contractual Cash Obligations	$	1,483.0			$	863.6			$	1,367.5			$	1,941.0			$	4,075.1			$	7,944.1			$	17,674.3

(1)	The tranche E term loans mature in May 2025, the tranche F term loans mature in June 2023, and the tranche G term loans mature in August 2024. The term loans require quarterly principal payments totaling $19.1 million.

(2)

Assumes that the variable interest rate on our tranche E, tranche F and tranche G borrowings under our Senior Secured Term Loans range from approximately 4.74% to 5.66% based on anticipated movements in the LIBO rate. In addition, interest payments include the impact of the existing interest rate swap and cap agreements described in Note 20, “Derivatives and Hedging Activities” to the consolidated financial statements herein.

In addition to the contractual obligations set forth above, the Company incurs capital expenditures for the purpose of maintaining and replacing existing equipment and facilities and, from time to time, for facility expansion. Capital expenditures totaled approximately $73.3 million, $71.0 million, and $44.0 million during fiscal years 2018, 2017, and fiscal 2016, respectively. The Company expects its capital expenditures in fiscal year 2019 to be between $85 million and $100 million.

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.

New Accounting Standards

For information about new accounting standards, see Note 4, “Recent Accounting Pronouncements,” to our consolidated financial statements included herein.

Additional Disclosure Required by Indentures

Separate financial statements of TransDigm Inc. are not presented because TransDigm Inc.’s 2020 Notes, 2022 Notes, 2024 Notes, 2025 Notes and 6.375% 2026 Notes are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm UK and all of TransDigm Inc's Domestic Restricted Subsidiaries and because 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.