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 2020, we generated net sales of $5,103 million, gross profit of $2,647 million or 51.9% of sales, and net income attributable to TD Group of $699 million. While the COVID-19 pandemic has significantly impacted our operations in the short-term, 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 over 100,000 commercial transport, regional transport, military and general aviation fixed wing turbine aircraft and rotary wing aircraft.

Diversified Revenue Base. We believe that our diversified revenue base reduces our dependence on any particular product, platform or market channel and has been a significant factor in maintaining our financial performance. Our products are installed on almost all of the major commercial aircraft platforms now in production. We expect to continue to develop new products for military and commercial applications. As a result of the COVID-19 pandemic, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from the pandemic. Product solutions currently being explored include anti-viral or antimicrobial technology, air purification, and touchless technologies, among others.

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 85 businesses and product lines since our formation in 1993. Many of these acquisitions have been integrated into an existing TransDigm production facility, which enables a higher production capacity utilization, which in turn improves gross profit levels due to the ability to spread the fixed manufacturing overhead costs over higher production volume.

Acquisitions and divestitures 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.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic caused a significant adverse impact on our sales, net income and EBITDA as Defined for fiscal 2020 and is expected to continue to do so into fiscal 2021. This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer demand for all market channels, with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce which has slowed production and/or orders. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for uncertainty. The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results. As a result of the COVID-19 pandemic, many of our businesses have taken the opportunity to explore new business opportunities by working on developing highly engineered solutions for emerging needs arising from the pandemic. Product solutions currently being explored include anti-viral or antimicrobial technology, air purification, and touchless technologies, among others.

The Company took immediate and aggressive action to minimize the spread of COVID-19 in our workplaces and reduce costs. Since the early days of the pandemic, we have been following guidance from the World Health Organization and the U.S. Center for Disease Control to protect employees and prevent the spread of the virus within all of our facilities globally. Some of the actions implemented included: flexible work-from-home scheduling; alternate shift schedules; pre-shift temperature screenings, where allowed by law; social distancing; appropriate personal protective equipment; facility deep cleaning; and paid quarantine time for impacted employees. Material actions to reduce costs included: (1) reducing its workforce to align operations with customer demand; (2) implementing unpaid furloughs and salary reductions; and (3) delaying non-essential capital projects and minimizing discretionary spending.

For the fiscal year ended September 30, 2020, COVID-19 restructuring costs incurred were approximately $46 million, of which $37 million was recorded in cost of sales and $9 million was recorded in selling and administrative expenses. These were costs related to the Company's actions to reduce its workforce to align with customer demand. Additionally, the Company incurred approximately $5 million in incremental costs related to the pandemic that are not expected to recur once the pandemic has subsided and are clearly separable from normal operations (e.g., additional cleaning and disinfecting of facilities by contractors above and beyond normal requirements, personal protective equipment, etc.).

As of September 30, 2020, the restructuring accrual associated with the costs incurred in response to the COVID-19 pandemic was approximately $13 million. The Company expects to incur and pay additional restructuring costs during fiscal 2021 related to the COVID-19 pandemic though at a reduced level in comparison to fiscal 2020. The Company continues to analyze its cost structure and may implement additional cost reduction measures as necessary due to the ongoing business challenges resulting from the COVID-19 pandemic.

Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with U.S. GAAP, which often requires the judgment of management in the selection and application of certain accounting principles and methods. Management believes that the quality and reasonableness of our most critical policies enable the fair presentation of our financial position and results of operations. However, investors are cautioned that the sensitivity of financial statements to these methods, assumptions and estimates could create materially different results under different conditions or using different assumptions.

Below are those policies applied in preparing our financial statements that management believes are the most dependent on the application of estimates and assumptions. For additional significant accounting policies, see Note 3, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements included herein.

Revenue Recognition**:** Revenue is recognized from the sale of products when control transfers to the customer, which is demonstrated by our right to payment, a transfer of title, a transfer of the risk and rewards of ownership, or the customer acceptance, but most frequently upon shipment where the customer obtains physical possession of the goods. The majority of the Company's revenue is recorded at a point in time. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes based on the standalone selling price of each performance obligation. The primary method used to estimate a standalone selling price is the price observed in standalone sales to customers for the same product or service. We consider the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price. Variable consideration is included in the estimated transaction price when there is a basis to reasonably estimate the amount, including whether the estimate should be constrained in order to avoid a significant reversal of revenue in a future period. These estimates are based on historical experience, anticipated performance under the terms of the contract and our best judgment at the time.

Inventories**:** Inventories are stated at the lower of cost or net realizable value. Cost of inventories is generally determined by the average cost and the first-in, first-out (“FIFO”) methods and includes material, labor and overhead related to the manufacturing process. Because the Company sells products that are installed on airframes that can be in-service for 25 or more years, it must keep a supply of such products on hand while the airframes are in use. Where management estimated that the net realizable value was below cost or determined that future demand was lower than current inventory levels, based on historical experience, current and projected market demand, current and projected volume trends and other relevant current and projected factors associated with the current economic conditions, a reduction in inventory cost to estimated net realizable value was made by recording a provision included in cost of sales. 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 are recognized as goodwill. The valuations of the acquired assets and liabilities will impact the determination of future operating results. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, revenue growth rates, discount rates, customer attrition rates, royalty rates, asset lives and market multiples, among other items. We determine the fair values of intangible assets acquired generally in consultation with third-party valuation advisors. Fair value adjustments to the Company’s assets and liabilities are recognized and the results of operations of the acquired business are included in our consolidated financial statements from the effective date of the merger or acquisition.

Intangible assets other than goodwill are recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed or exchanged, regardless of the Company’s intent to do so. Goodwill and identifiable intangible assets are recorded at their estimated fair value on the date of acquisition and are reviewed at least annually for impairment based on cash flow projections and fair value estimates.

U.S. GAAP requires that the annual, and any interim, 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 a common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.

Given the adverse global economic and market conditions attributable to the COVID-19 pandemic, particularly as it pertains to the commercial sector of the aerospace and defense industry, the Company determined that an interim impairment evaluation of goodwill and indefinite-lived intangible assets was necessary as of March 28, 2020 for certain reporting units in which it was concluded a potential impairment existed. For the identified reporting units, a Step 1 impairment test was performed using an income approach based on management’s determination of the prospective financial information with consideration taken of the existing uncertainty in the global economy and aerospace and defense industry, particularly the commercial sector. Management also included projected declines and subsequent recovery in commercial OEM and aftermarket as a percentage of sales based on available industry data. The Company utilized a third party valuation firm to assist in the determination of the WACC. The results of this test indicated the fair value exceeded carrying value for all reporting units tested.

The Company had 49 reporting units with goodwill as of the first day of the fourth quarter of fiscal 2020, the date of the annual impairment test. Based on its initial qualitative assessment over each of the reporting units, the Company identified 19 reporting units to test for impairment using Step 1 of the quantitative test. The estimated fair value of each of these reporting units was in excess of its respective carrying value, 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, all of the reporting units would continue to have fair values 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. 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 pricing model to estimate the grant-date fair value of the stock options awarded. The Black-Scholes pricing model requires assumptions regarding the expected volatility of the Company’s common shares, the risk-free interest rate, the expected life of the stock options award and the Company’s dividend yield. The Company utilizes historical data in determining the assumptions. An increase or decrease in the assumptions or economic events outside of management’s control could have an impact on the Black-Scholes pricing model. The Company estimates stock option forfeitures based on historical data. The total number of stock options expected to vest is adjusted by actual and estimated forfeitures. Changes to the actual and estimated forfeitures will result in a cumulative adjustment in the period of change. The Company also evaluates any subsequent changes to the respective option holders terms under the modification rules of ASC 718. If determined to be a modification, the Black-Scholes pricing model is updated as of the date of the modification resulting in a cumulative catch up to expense.

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 millions):

			Fiscal Years Ended September 30,
			2020						2020 % of Sales						2019						2019 % of Sales						2018						2018 % of Sales
Net sales			$	5,103					100.0		%				$	5,223					100.0		%				$	3,811					100.0		%
Cost of sales			2,456						48.1		%				2,414						46.2		%				1,634						42.9		%
Selling and administrative expenses			727						14.2		%				748						14.3		%				450						11.8		%
Amortization of intangible assets			169						3.3		%				135						2.6		%				72						1.9		%
Income from operations			1,751						34.3		%				1,926						36.9		%				1,655						43.4		%
Interest expense—net			1,029						20.2		%				859						16.4		%				663						17.4		%
Refinancing costs			28						0.5		%				3						0.1		%				6						0.2		%
Other (income) expense			(46)						(0.9)		%				1						—		%				—						—		%
Income tax provision			87						1.7		%				222						4.3		%				24						0.6		%
Income from continuing operations			653						12.8		%				841						16.1		%				962						25.2		%
Income (Loss) from discontinued operations, net of tax			47						0.9		%				51						1.0		%				(5)						(0.1)		%
Net income			700						13.7		%				892						17.1		%				957						25.1		%
Less: Net income attributable to noncontrolling interests			(1)						—		%				(2)						—		%				—						—		%
Net income attributable to TD Group			$	699					13.7		%				$	890					17.0		%				$	957					25.1		%

Fiscal year ended September 30, 2020 compared with fiscal year ended September 30, 2019

Total Company

• Net Sales**.** Net organic sales and acquisition sales and the related dollar and percentage changes for the fiscal years ended September 30, 2020 and 2019 were as follows (amounts in millions):

			Fiscal Years Ended												Change						% Change Total Sales
			September 30, 2020						September 30, 2019
Organic sales			$	4,404					$	5,127					$	(723)					(13.8)		%
Acquisition sales			699						96						603						11.5		%
			$	5,103					$	5,223					$	(120)					(2.3)		%

The decrease in organic sales for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019 is primarily related to decreases in commercial aftermarket sales ($410 million, a decrease of 25.7%), commercial OEM sales ($355 million, a decrease of 24.5%) and other non-aerospace sales ($9 million, a decrease of 3.4%); partially offset by an increase in defense sales ($49 million, an increase of 2.5%).

The decreases in the commercial aftermarket and commercial OEM markets are attributable to the adverse impact that the COVID-19 pandemic had on customer demand beginning in March 2020 due to the pandemic's impact on air travel demand worldwide. Commercial OEM sales were also adversely impacted by the 737 MAX production slowdown. The increase in defense sales is primarily attributable to sales growth in the Power & Control segment ($59 million).

Acquisition sales represent sales of acquired businesses for the period up to one year subsequent to their respective acquisition date. The acquisition sales in the table above were attributable to the sales recorded by the Esterline businesses.

• Cost of Sales and Gross Profit**.** Cost of sales increased by $42 million, or 1.7%, to $2,456 million for the fiscal year ended September 30, 2020 compared to $2,414 million for the fiscal year ended September 30, 2019. Cost of sales and the related percentage of total sales for the fiscal years ended September 30, 2020 and 2019 were as follows (amounts in millions):

			Fiscal Years Ended												Change						% Change
			September 30, 2020						September 30, 2019
Cost of sales—excluding costs below			$	2,414					$	2,358					$	56					2.4		%
% of total sales			47.3		%				45.1		%
COVID-19 restructuring costs			37						—						37						100.0		%
% of total sales			0.7		%				—		%
Foreign currency loss (gain)			22						(5)						27						540.0		%
% of total sales			0.4		%				(0.1)		%
Acquisition integration costs			10						13						(3)						(23.1)		%
% of total sales			0.2		%				0.2		%
Stock compensation expense			9						9						—						—		%
% of total sales			0.2		%				0.2		%
Inventory acquisition accounting adjustments			—						77						(77)						(100.0)		%
% of total sales			—		%				1.5		%
Loss contract amortization			(36)						(38)						2						5.3		%
% of total sales			(0.7)		%				(0.7)		%
Total cost of sales			$	2,456					$	2,414					$	42					1.7		%
% of total sales			48.1		%				46.2		%
Gross profit			$	2,647					$	2,809					$	(162)					(5.8)		%
Gross profit percentage			51.9		%				53.8		%

The increase in the dollar amount of cost of sales during the fiscal year ended September 30, 2020 was primarily due to a full fiscal year of ownership of the Esterline businesses in fiscal 2020 (compared to approximately 6.5 months of ownership in fiscal 2019) in addition to the other factors summarized above.

Gross profit as a percentage of sales decreased by 1.9 percentage points to 51.9% for the fiscal year ended September 30, 2020 from 53.8% for the fiscal year ended September 30, 2019. The decrease in the gross profit percentage is primarily driven by the sales mix, specifically, lower commercial aftermarket sales, the dilutive effect a full year of Esterline sales have on the gross profit percentage (as integration activities associated with the three core value drivers continued into fiscal 2020), COVID-19 restructuring charges and foreign currency losses, partially offset by a reduction in inventory acquisition accounting adjustments. Also, fixed overhead costs incurred were spread over a lower production volume resulting in an adverse impact to gross profit during the second half of fiscal 2020.

• Selling and Administrative Expenses. Selling and administrative expenses decreased by $21 million to $727 million, or 14.2% of sales, for the fiscal year ended September 30, 2020 from $748 million, or 14.3% of sales, for the comparable period in the prior year. Selling and administrative expenses and the related percentage of total sales for the fiscal years ended September 30, 2020 and 2019 were as follows (amounts in millions):

			Fiscal Years Ended												Change						% Change
			September 30, 2020						September 30, 2019
Selling and administrative expenses—excluding costs below			$	592					$	579					$	13.0					2.2		%
% of total sales			11.6		%				11.1		%
Stock compensation expense			84						84						—						—		%
% of total sales			1.6		%				1.6		%
Bad debt expense			21						6						15						250.0		%
% of total sales			0.4		%				0.1		%
Acquisition-related expenses			21						79						(58)						(73.4)		%
% of total sales			0.4		%				1.5		%
COVID-19 restructuring costs			9						—						9						100.0		%
% of total sales			0.2		%				—		%
Total selling and administrative expenses			$	727					$	748					$	(21)					(2.8)		%
% of total sales			14.2		%				14.3		%

The decrease in total selling and administrative expenses during the fiscal year ended September 30, 2020 is primarily due to lower acquisition-related expenses and cost mitigation measures enacted during the second half of fiscal 2020 in response to the COVID-19 pandemic. The material cost mitigation measures enacted beginning in the third quarter of fiscal 2020 are described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic," in the notes to the consolidated financial statements included herein. Partially offsetting the decrease in selling and administrative expenses is an increase in selling and administrative expenses as a result of a full fiscal year of ownership of the Esterline businesses in fiscal 2020 (compared to approximately 6.5 months of ownership in fiscal 2019).

• Amortization of Intangible Assets. Amortization of intangible assets was $169 million for the fiscal year ended September 30, 2020 compared to $135 million for the fiscal year ended September 30, 2019. The increase in amortization expense of $34 million was primarily due to the amortization expense on the definite-lived intangible assets recorded in connection with the fiscal 2019 acquisition of Esterline.

• 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, slightly offset by interest income. Interest expense-net increased $170 million, or 19.8%, to $1,029 million for the fiscal year ended September 30, 2020 from $859 million for the comparable period in the prior year. The increase in interest expense-net was primarily due to an increase in the weighted average level of outstanding borrowings, which was approximately $19.1 billion for the fiscal year ended September 30, 2020 compared to approximately $15.5 billion for the fiscal year ended September 30, 2019. The increase in the weighted average level of borrowings was primarily due to the activity in the second quarter of fiscal 2019 consisting of the issuance of $4.0 billion in 2026 Secured Notes and the issuance of $550 million in 7.50% 2027 Notes and the activity in fiscal 2020 consisting of the issuance of $2.65 billion in 5.50% 2027 Notes, $1.1 billion in 2025 Secured Notes, $400 million in 6.25% 2026 New Notes and a $200 million draw on the revolving credit facility. The increases in new debt described above were slightly offset by the redemptions of $550 million in 5.50% Senior Subordinated Notes (the “2020 Notes”) in the second quarter of fiscal 2019 and $1.15 billion in 6.00% Senior Subordinated Notes (the “2022 Notes”) in the first quarter of fiscal 2020. The weighted average interest rate for cash interest payments on total borrowings outstanding for the period ended September 30, 2020 was 5.22%.

• Refinancing Costs.** Refinancing costs of $28 million were recorded for the fiscal year ended September 30, 2020 and primarily related to fees incurred on the early redemption of the 2022 Notes in the first quarter of fiscal 2020. Refinancing costs of $3 million were recorded for the fiscal year ended September 30, 2019 and primarily related to the debt financing activities that occurred in the second quarter of fiscal 2019.

• Other Income**. Other income of $46 million was recorded for the fiscal year ended September 30, 2020 and primarily relates to proceeds or proceeds receivable from business interruption insurance settlements and non-service related components of net periodic benefit costs on the Company's defined benefit pension plans.

• Income Taxes.** Income tax expense as a percentage of income before income taxes was approximately 11.7% for the fiscal year ended September 30, 2020 compared to 20.9% for the fiscal year ended September 30, 2019. The Company’s lower effective tax rate for the fiscal year ended September 30, 2020 was primarily due to incrementally higher excess tax benefits related to stock-based compensation along with an increase of the IRC 163(j) interest disallowance limitations from 30% to 50% of adjusted taxable income as modified by the CARES Act.

• Income from Discontinued Operations****.** Discontinued operations for the fiscal year ended September 30, 2020 include the results of the operations of Souriau-Sunbank. Discontinued operations for the fiscal year ended September 30, 2019 include the results of the operations of Souriau-Sunbank and the EIT group of businesses. Both businesses were acquired by TransDigm as part of its acquisition of Esterline in March 2019. On December 20, 2019, TransDigm completed the divestiture of Souriau-Sunbank to Eaton for approximately $920 million. On September 20, 2019, TransDigm completed the divestiture of EIT to an affiliate of KPS Capital Partners, LP for approximately $190 million. Income from discontinued operations for the fiscal year ended September 30, 2020 was $47 million and included $7 million from Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank, net of tax, of $40 million. Income from discontinued operations for the fiscal year ended September 30, 2019 was $51 million and included $13 million from the results of operations of Souriau-Sunbank and the EIT group of businesses and a gain on the sale of the EIT group of businesses, net of tax, of $38 million.

• Net Income Attributable to TD Group**.** Net income attributable to TD Group decreased $191 million, or 21.5%, to $699 million for the fiscal year ended September 30, 2020 compared to net income attributable to TD Group of $890 million for the fiscal year ended September 30, 2019, primarily as a result of the factors referred to above.

• Earnings per Share**.** Basic and diluted earnings per share from continuing operations and discontinued operations were $8.14 and $0.82, respectively, for the fiscal year ended September 30, 2020. For the fiscal year ended September 30, 2019, basic and diluted earnings per share from continuing operations and discontinued operations were $12.94 and $0.90, respectively. Net income attributable to TD Group for the fiscal year ended September 30, 2020 of $699 million was decreased by dividend equivalent payments of $185 million, or $3.22 per share, resulting in net income applicable to TD Group common stockholders of $514 million, or $8.96 per share. Net income attributable to TD Group for the fiscal year ended September 30, 2019 of $890 million was decreased by dividend equivalent payments of $111 million, or $1.97 per share, resulting in net income applicable to TD Group common stockholders of $779 million, or $13.84 per share. The decrease of $4.88 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, 2020 and 2019 were as follows (amounts in millions):

			Fiscal Years Ended September 30,																								Change						% Change
			2020						% of Sales						2019						% of Sales
Power & Control			$	2,695					52.8		%				$	2,736					52.4		%				$	(41)					(1.5)		%
Airframe			2,253						44.2		%				2,329						44.6		%				(76)						(3.3)		%
Non-aviation			155						3.0		%				158						3.0		%				(3)						(1.9)		%
			$	5,103					100.0		%				$	5,223					100.0		%				$	(120)					(2.3)		%

Organic sales for the Power & Control segment decreased $237 million, a decrease of 8.7%, for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019. The organic sales decrease resulted primarily from decreases in commercial aftermarket sales ($157 million, a decrease of 21.0%) and commercial OEM sales ($145 million, a decrease of 23.0%); partially offset by an increase in defense sales ($59 million, an increase of 4.6%). The decreases in organic commercial OEM and aftermarket sales are attributable to the COVID-19 pandemic. The decrease in organic commercial OEM sales is also attributable to the Boeing 737 MAX production slowdown. Partially offsetting the decrease in organic sales is an increase in acquisition sales of $196 million, an increase of 7.2%, as a result of the Esterline acquisition.

Organic sales for the Airframe segment decreased $476 million, a decrease of 20.5%, for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019. The organic sales decrease resulted primarily from decreases in commercial aftermarket sales ($253 million, a decrease of 29.8%), commercial OEM sales ($213 million, a decrease of 26.5%) and defense sales ($8 million, a decrease of 1.3%). The decreases in organic commercial OEM and aftermarket sales are attributable to the COVID-19 pandemic. Partially offsetting the decrease in organic sales is an increase in acquisition sales of $400 million, an increase of 17.2%, as a result of the Esterline acquisition.

Organic sales for the Non-aviation segment decreased by $10 million, a decrease of 6.3%, for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019. Partially offsetting the decrease in organic sales is an increase in acquisition sales of $7 million, an increase of 4.4%, as a result of the Esterline acquisition.

• EBITDA As Defined**.** EBITDA As Defined by segment for the fiscal years ended September 30, 2020 and 2019 were as follows (amounts in millions):

			Fiscal Years Ended September 30,																								Change						% Change
			2020						% of Segment Sales						2019						% of Segment Sales
Power & Control			$	1,345					49.9		%				$	1,395					51.0		%				$	(50)					(3.6)		%
Airframe			955						42.4		%				1,063						45.6		%				(108)						(10.2)		%
Non-aviation			54						34.8		%				51						32.3		%				3						5.9		%
			$	2,354					46.1		%				$	2,509					48.0		%				$	(155)					(6.2)		%

Organic EBITDA As Defined for the Power & Control segment decreased approximately $105 million, a decrease of 7.5%, primarily as a result of lower sales volume in the commercial OEM and commercial aftermarket market channels as a result of the COVID-19 pandemic. Partially offsetting the decrease in organic EBITDA As Defined is acquisition EBITDA As Defined of Esterline of $55 million, an increase of 3.9%, for the Power & Control segment.

Organic EBITDA As Defined for the Airframe segment decreased approximately $261 million, a decrease of 24.6%, primarily as a result of lower sales volume in the commercial OEM and commercial aftermarket market channels as a result of the COVID-19 pandemic. Partially offsetting the decrease in organic EBITDA As Defined is acquisition EBITDA As Defined of Esterline of $153 million, an increase of 14.4%, for the Airframe segment.

Organic EBITDA As Defined for the Non-aviation segment increased approximately $2 million, an increase of 3.9%. Acquisition EBITDA As Defined from the acquisition of Esterline increased approximately $1 million, an increase of 2.0%, for the Non-aviation segment.

Fiscal year ended September 30, 2019 compared with fiscal year ended September 30, 2018

For our results of operations for fiscal 2019 compared with fiscal 2018, refer to the discussion in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Form 10-K for the fiscal year ended September 30, 2019, as filed with the Securities and Exchange Commission on November 19, 2019.

Backlog

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

Foreign Operations

Our direct sales to foreign customers were approximately $1,696 million, $1,778 million, and $1,355 million for the fiscal years 2020, 2019 and 2018, respectively. Sales to foreign customers are subject to numerous additional risks, including the COVID-19 pandemic, 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 U.S. 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 the 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 2020, 2019 and 2018 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.

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 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, including the ongoing COVID-19 pandemic.

The COVID-19 pandemic has caused a significant adverse impact on our sales, net income and EBITDA as Defined for the fiscal year ended September 30, 2020 and is expected to continue to do so into fiscal 2021. This is under the assumption that the COVID-19 pandemic will continue to adversely impact customer demand for all market channels with commercial OEM and commercial aftermarket being the most adversely impacted due to the pandemic's impact on air travel worldwide. The defense market channel is also impacted to a lesser extent due to certain supply chain disruptions as well as the "stay at home" orders, quarantines, etc. impacting the government procurement workforce which has slowed production and/or orders. Also, government funding reprioritization such as shifting funds to efforts to combat the impact of the pandemic provides for uncertainty. The magnitude of the impact of COVID-19 remains unpredictable and we, therefore, continue to anticipate potential supply chain disruptions, employee absenteeism and short-term suspensions of manufacturing facilities, and additional health and safety costs related to the COVID-19 pandemic that could unfavorably impact our business. Longer term, because the duration of the pandemic is unclear, it is difficult to forecast a precise impact on the Company’s future results.

The Company is actively managing the business to maintain cash flow, including the cost mitigation efforts described in Note 1, "Description of the Business and Impact of COVID-19 Pandemic," in the notes to the consolidated financial statements included herein in response to the COVID-19 pandemic and is continuing to focus on the application of its three core value-driven operating strategies (obtaining profitable new business, continually improving its cost structure and providing highly engineered value-added products to customers).

In March 2020, the President of the United States signed the CARES Act, a substantial tax-and-spending package intended to provide additional economic stimulus to address the impact of the COVID-19 pandemic. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, and modifications to the net interest deduction limitations. The most significant impact of the CARES Act for the Company is an increase of the IRC 163(j) Interest Disallowance Limitations from 30% to 50% of adjusted taxable income which will allow the Company to deduct additional interest for fiscal years 2020 and 2021.

In March 2020, the Company drew $200 million on its revolving credit facility to increase the Company's liquidity as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic. Also, in further action to increase the Company's liquidity, the Company executed two notes offerings in April 2020 in which the proceeds received are for general Corporate purposes. On April 8, 2020, the Company entered into a purchase agreement in connection with a private offering of $1,100 million in aggregate principal amount of 8.00% Senior Secured Notes due 2025 at an issue price of 100% of the principal amount. On April 17, 2020, the Company entered into a purchase agreement in connection with a private offering of $400 million in aggregate principal amount of 6.25% Senior Secured Notes due 2026 at an issue price of 101% of the principal amount.

As of September 30, 2020, the Company has significant cash liquidity as illustrated in the table presented below (in millions):

						As of September 30, 2020
Cash and cash equivalents						$	4,717
Availability on revolving credit facility						521
Cash liquidity						$	5,238

We believe our significant cash liquidity will allow us to meet our anticipated funding requirements. We expect to meet our short-term cash liquidity requirements (including interest obligations and capital expenditures) through net cash from operating activities, cash on hand and, if needed, additional draws on the revolving credit facility. Long-term cash liquidity requirements consist primarily of obligations under our long-term debt agreements. There is no maturity on any tranche of term loans or notes until July 2024.

As a result of the debt financing transactions completed during the fiscal year ended September 30, 2020 as described in Note 12, “Debt,” in the notes to the consolidated financial statements included herein, 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 sufficient cash provided by operating activities to meet our interest obligations and liquidity needs. We believe our cash provided by operating activities and available borrowing capacity will enable us to make strategic business combinations, pay dividends to our shareholders and/or make opportunistic investments in our own stock.

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 $1,213 million of net cash from operating activities during fiscal 2020 compared to $1,015 million during fiscal 2019. The change from prior year is primarily driven by changes in working capital as further described below.

The change in trade accounts receivable during fiscal 2020 was a source of $352 million in cash compared to a use of cash of $82 million in fiscal 2019. The increase in the source of cash of $434 million is primarily attributable to a decline in sales, and the related accounts receivable, in the second half of fiscal 2020 due to the COVID-19 pandemic. The Company continues to actively manage its accounts receivable, the related agings and collection efforts.

The change in inventories during fiscal 2020 was a use of cash of $62 million compared to a use of cash of $36 million in fiscal 2019.

The change in accounts payable during fiscal 2020 was a use of cash of $62 million compared to a use of cash of $1 million in fiscal 2019. The increase in the use of cash is primarily driven by a decline in accounts payable as inventory and other purchases have slowed as a result of the COVID-19 pandemic and cost mitigation measures enacted in the second half of fiscal 2020.

Investing Activities. Net cash provided by investing activities was $799 million during fiscal 2020, consisting of proceeds of $904 million from the divestiture of Souriau-Sunbank (net of cash transferred with the divested entities), partially offset by capital expenditures of $105 million. The Company estimates its capital expenditures in fiscal year 2021 to be between $120 million and $140 million with the increase from prior year attributable to fiscal 2020 projects that were delayed into fiscal 2021 as a result of the COVID-19 pandemic. 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).

Financing Activities. Net cash provided by financing activities during the fiscal year ended September 30, 2020 was $1,230 million. The source of cash was primarily attributable to $2,625 million in net proceeds from the completion of the 5.50% 2027 Notes offering, $1,090 million in net proceeds from the completion of the 2025 Secured Notes offering, $399 million in net proceeds from the completion of the 6.25% 2026 New Notes offering, $200 million drawn from the existing revolving credit facility and $116 million in proceeds from stock option exercises. This was partially offset by special dividend and dividend equivalent payments of $1,928 million, the redemption of the 2022 Notes outstanding for $1,167 million, repayments on term loans of $75 million, the purchase of treasury stock of $19 million and other financing costs of $11 million.

Description of Senior Secured Term Loans and Indentures

Senior Secured Credit Facilities

TransDigm has $7,449 million in fully drawn term loans (the “Term Loans Facility”) and a $760 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, 2020):

Term Loans Facility						Aggregate Principal						Maturity Date						Interest Rate
Tranche E						$2,199 million						May 30, 2025						LIBOR + 2.25%
Tranche F						$3,489 million						December 9, 2025						LIBOR + 2.25%
Tranche G						$1,761 million						August 22, 2024						LIBOR + 2.25%

The Term Loans Facility requires quarterly aggregate principal payments of $18.8 million. The revolving commitments consist of two tranches which include up to $151.5 million of multicurrency revolving commitments. At September 30, 2020, the Company had $39 million in letters of credit outstanding and $521 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 LIBOR for one, two, three or six-month (or to the extent agreed to by each relevant lender, nine or twelve-month) interest periods chosen by TransDigm, in each case plus an applicable margin percentage. The adjusted LIBOR related to tranche E, tranche F and tranche G term loans are not subject to a floor. For the fiscal year ended September 30, 2020, the applicable interest rates ranged from approximately 2.41% to 4.54% 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 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein.

Recent Amendments to the Credit Agreement

On February 6, 2020, the Company entered into Amendment No. 7 and Refinancing Facility Agreement (herein, "Amendment No. 7"). Under the terms of Amendment No. 7, the Company, among other things, (i) incurred new tranche E term loans in an aggregate principal amount equal to approximately $2,216 million, new tranche F term loans in an aggregate principal amount equal to approximately $3,515 million and new tranche G term loans, (collectively, the "New Term Loans") in an aggregate principal amount equal to approximately $1,774 million, (ii) repaid in full all of the existing tranche E term loans, tranche F term loans and tranche G term loans outstanding under the Credit Agreement immediately prior to Amendment No. 7 and (iii) extended the maturity date of the tranche F term loans to December 9, 2025, (iv) modified the definition of consolidated EBITDA in the Credit Agreement to add back certain cost savings and non-recurring cost and expenses and (v) modified certain negative covenants to provide additional flexibility to enable TransDigm to incur additional debt and make additional investments and asset sales.

The New Term Loans were fully drawn on February 6, 2020. The LIBOR per annum applicable to the New Term Loans is 2.25%, a decrease from the previous rate of 2.50%. The other terms and conditions that apply to the New Term Loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No. 7.

Indentures

Senior Subordinated Notes						Aggregate Principal						Maturity Date						Interest Rate
2024 Notes						$1,200 million						July 15, 2024						6.50%
2025 Notes						$750 million						May 15, 2025						6.50%
2025 Secured Notes						$1,100 million						December 15, 2025						8.00%
2026 Secured Notes						$4,400 million						March 15, 2026						6.25%
6.875% 2026 Notes						$500 million						May 15, 2026						6.875%
6.375% 2026 Notes						$950 million						June 15, 2026						6.375%
7.50% 2027 Notes						$550 million						March 15, 2027						7.50%
5.50% 2027 Notes						$2,650 million						November 15, 2027						5.50%

Fiscal Year 2020 Notes Issuances and Redemptions

On November 13, 2019, the Company issued $2,650 million in aggregate principal amount of 5.50% senior subordinated notes due 2027 at an issue price of 100% of the principal amount thereof in a private offering. The 5.50% 2027 Notes were issued pursuant to an indenture, dated as of November 13, 2019, among TransDigm, as issuer, TD Group, TransDigm UK and the other subsidiaries of TransDigm named therein, as guarantors.

On November 26, 2019, the Company used a portion of the net proceeds from the offering of the 5.50% 2027 Notes to redeem all of its outstanding 2022 Notes. The Company redeemed the principal amount of $1,150 million, plus accrued interest of approximately $25.5 million and paid an early redemption premium of $17.3 million.

In April 2020, the Company executed two notes offerings for general Corporate purposes, including increasing its cash liquidity as a precautionary response to macroeconomic conditions caused by the COVID-19 pandemic. On April 8, 2020, the Company entered into a purchase agreement in connection with a private offering of $1,100 million in aggregate principal amount of 8.00% Senior Secured Notes due 2025 at an issue price of 100% of the principal amount. On April 17, 2020, the Company entered into a purchase agreement in connection with a private offering of $400 million in aggregate principal amount of 6.25% Senior Secured Notes due 2026 (the “6.25% 2026 New Notes”) at an issue price of 101% of the principal amount. The 6.25% 2026 New Notes are an additional issuance of the Company's existing 2026 Secured Notes, and were issued under the indenture dated as of February 13, 2019 pursuant to which the Company previously issued $4,000 million. The 6.25% 2026 New Notes are the same class and series as, and otherwise identical to, the 2026 Secured Notes other than with respect to the date of issuance and issue price (collectively, referred to herein as the 2026 Secured Notes).

The 2024 Notes, the 6.375% 2026 Notes, the 7.50% 2027 Notes and the 5.50% 2027 Notes (collectively, 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 of 2025 Notes in the second quarter of fiscal 2017 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 2025 Secured Notes and 2026 Secured Notes (the “Secured Notes”) were issued at a price 100% of the principal amount. The initial $3,800 million offering of the 2026 Secured Notes were issued at a price of 100% of their principal amount and the subsequent $200 million and $400 million offerings of the 2026 Secured Notes (also considered to be part of the “Secured Notes”) in the second quarter of fiscal 2019 and the third quarter of fiscal 2020, respectively, were issued at a price of 101% of their principal amount, resulting in gross proceeds of $4,410.5 million.

The Notes do not require principal payments prior to their maturity. Interest under the Notes is payable semi-annually. The Notes represent our unsecured obligations ranking subordinate to our senior debt, as defined in the applicable indentures. The Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Notes.

Refer to Note 12, "Debt," in the notes to the consolidated financial statements included herein for further information.

The Notes are subordinated to all of our existing and future senior debt, rank equally with all of our existing and future senior subordinated debt and rank senior to all of our future debt that is expressly subordinated to the Notes. The TransDigm Inc. Notes are fully and unconditionally guaranteed on a senior subordinated unsecured basis by TD Group and TransDigm Inc.'s Domestic Restricted Subsidiaries. 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 their existing and future senior subordinated debt and rank senior to all of their future debt that is expressly subordinated to the guarantees of the Notes. The Notes are structurally subordinated to all of the liabilities of TD Group’s non-guarantor subsidiaries.

The Secured Notes are senior secured obligations of TransDigm and rank equally in right of payment with all of TransDigm’s existing and future senior secured debt, including indebtedness under TransDigm’s existing senior secured credit facilities, and are senior in right of payment to all of TransDigm’s existing and future senior subordinated debt, including the Notes, TransDigm’s other outstanding senior subordinated notes and TransDigm’s guarantees in respect of TransDigm UK’s outstanding senior subordinated notes. The Secured Notes are guaranteed on a senior secured basis by TD Group, TransDigm UK and TransDigm’s wholly-owned U.S. subsidiaries named in the Secured Notes Indenture. The guarantees of the Secured Notes rank equally in right of payment with all of the guarantors’ existing and future senior secured debt and are senior in right of payment to all of their existing and future senior subordinated debt. The Secured Notes are structurally subordinated to all of the liabilities of TransDigm’s non-guarantor subsidiaries. The Secured Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all of the covenants contained in the Secured Notes.

Separate financial statements of TransDigm Inc. are not presented because the Secured Notes are fully and unconditionally guaranteed on a senior secured basis by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.

Separate financial statements of TransDigm Inc. are not presented because the TransDigm Inc. 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. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.

Separate financial statements of TransDigm UK are not presented because TransDigm UK's 6.875% 2026 Notes, issued in May 2018, are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.

The financial information presented is that of TD Group and the Guarantors, which includes TransDigm Inc. and TransDigm UK, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between TD Group and the Guarantors have been eliminated and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.

(in millions)						September 30, 2020						September 30, 2019
Current assets						$	5,398					$	2,458
Noncurrent assets						9,157						8,286
Current liabilities						972						742
Noncurrent liabilities						20,423						17,328
Amounts due to subsidiaries that are non-issuers and non-guarantors - net						103						171

(in millions)						Fiscal Year Ended September 30, 2020
Net sales						$	4,040
Sales to subsidiaries that are non-issuers and non-guarantors						36
Cost of sales						1,818
Expense from subsidiaries that are non-issuers and non-guarantors - net						39
Income from continuing operations						577
Net income attributable to TD Group						692

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. 7.

Under the terms of the Credit Agreement, TransDigm is entitled, on one or more occasions, to request additional term loans or additional revolving commitments to the extent that the existing or new lenders agree to provide such incremental term loans or additional revolving commitments provided that, among other conditions, our consolidated net leverage ratio would be no greater than 7.25x and the consolidated secured net debt ratio would be no greater than 5.00x, in each case, after giving effect to such incremental term loans or additional revolving commitments.

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

With the exception of the revolving credit facility, the Company has no maintenance covenants in its existing term loan and indenture agreements. Under the Credit Agreement, if the usage of the revolving credit facility exceeds 35%, or $266 million, of the total revolving commitments, the Company is required to maintain a maximum consolidated net leverage ratio of net debt to trailing four-quarter EBITDA As Defined of 7.25x as of the last day of the fiscal quarter.

As of September 30, 2020, the Company was in compliance with all of its debt covenants and expects to remain in compliance with its debt covenants in subsequent periods.

Trade 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 22, 2020, the Company amended the Securitization Facility to extend the maturity date to July 27, 2021. As of September 30, 2020, the Company has borrowed $350 million under the Securitization Facility, which bears interest at a rate of 1.35% plus 0.50% or LIBOR, whichever is greater. At September 30, 2020, the applicable interest rate was 1.85%. The Securitization Facility is collateralized by substantially all of the Company’s domestic operations’ trade accounts receivable.

Dividend and Dividend Equivalent Payments

On January 7, 2020 and August 23, 2019, the Company paid a special cash dividends of $32.50 and $30.00, respectively, on each outstanding share of common stock and cash dividend equivalent payments on options granted under its stock incentive plans. The total cash payments related to the special dividend and dividend equivalent payments in fiscal 2020 and 2019 were approximately $1.9 billion and $1.7 billion, respectively.

We do not anticipate declaring regular quarterly or annual cash dividends on our common stock in the near future. Any declaration of special cash dividends on our common stock in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, earnings, capital requirements, financial condition, future prospects, contractual restrictions under the senior secured credit facility and Indentures, the availability of surplus under Delaware law and other factors deemed relevant by our Board of Directors. TD Group is a holding company and conducts all of its operations through direct and indirect subsidiaries. Unless TD Group receives dividends, distributions, advances, transfers of funds or other payments from our subsidiaries, TD Group will be unable to pay any dividends on our common stock in the future. The ability of any subsidiaries to take any of the foregoing actions is limited by the terms of our senior secured credit facility and Indentures and may be limited by future debt or other agreements that we may enter into.

Stock Repurchase Program

On November 8, 2017, our Board of Directors, authorized a stock repurchase program 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.

During March 2020, the Company repurchased 36,900 shares of its common stock at a gross cost of $18.9 million at the weighted average cost of $512.67 under the $650 million stock repurchase program. As of September 30, 2020, the remaining amount of repurchases allowable under the $650 million program was $631.1 million subject to any restrictions specified in the Credit Agreement and/or Indentures governing the existing Notes.

Contractual Obligations

The following is a summary of contractual cash obligations as of September 30, 2020 (in millions):

			2021						2022						2023						2024						2025						2026 and thereafter						Total
Senior Secured Term Loans(1)			$	75					$	75					$	75					$	1,764					$	2,145					$	3,315					$	7,449
Revolving Credit Facility(2)			—						—						200						—						—						—						200
2024 Notes			—						—						—						1,200						—						—						1,200
2025 Notes			—						—						—						—						750						—						750
2025 Secured Notes			—						—						—						—						—						1,100						1,100
6.875% 2026 Notes			—						—						—						—						—						500						500
6.375% 2026 Notes			—						—						—						—						—						950						950
2026 Secured Notes			—						—						—						—						—						4,400						4,400
7.50% 2027 Notes			—						—						—						—						—						550						550
5.50% 2027 Notes			—						—						—						—						—						2,650						2,650
Securitization Facility			350						—						—						—						—						—						350
Scheduled Interest Payments(3)			1,043						1,073						1,089						1,046						806						579						5,636
Government Refundable Advances			—						4						4						4						4						12						28
Operating Leases			28						24						19						16						13						35						135
Finance Leases			6						6						6						6						6						70						100
Pension Funding Minimums			6						6						6						6						6						28						58
Purchase Obligations			421						54						16						3						3						1						498
Total Contractual Cash Obligations			$	1,929					$	1,242					$	1,415					$	4,045					$	3,733					$	14,190					$	26,554

(1)The tranche E term loans mature in May 2025, the tranche F term loans mature in December 2025 and the tranche G term loans mature in August 2024. The term loans require quarterly principal payments totaling $18.8 million.

(2)On October 26, 2020, the Company repaid $200 million of the revolving credit facility.

(3)Assumes that the variable interest rate on our tranche E, tranche F and tranche G term loans under our Senior Secured Term Loans range from approximately 2.44% to 2.98% based on anticipated movements in the LIBOR. In addition, interest payments include the impact of the existing interest rate swap and cap agreements described in Note 21, “Derivatives and Hedging Activities,” in the notes to the consolidated financial statements included herein.

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 $105 million, $102 million, and $73 million during fiscal years 2020, 2019, and fiscal 2018, respectively. The Company estimates its capital expenditures in fiscal year 2021 to be between $120 million and $140 million with the increase from previous years attributable to fiscal 2020 projects that were delayed to fiscal 2021 as a result of the COVID-19 pandemic.

Off-Balance Sheet Arrangements

The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company’s revolving credit facility. As of September 30, 2020, the Company had $39 million in letters of credit outstanding.

New Accounting Standards

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

Additional Disclosure Required by Indentures

Separate financial statements of TransDigm Inc. are not presented because the Secured Notes are fully and unconditionally guaranteed on a senior secured basis by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.

Separate financial statements of TransDigm Inc. are not presented because the TransDigm Inc. 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. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.

Separate financial statements of TransDigm UK are not presented because TransDigm UK's 6.875% 2026 Notes, issued in May 2018, are fully and unconditionally guaranteed on a senior subordinated basis by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries. TD Group has no significant operations or assets separate from its investment in TransDigm Inc.