Item 8. AND ITEM 15(a) (1)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

			Page
Financial Statements:
Report of Independent Registered Public Accounting Firm			F-1
Consolidated Balance Sheets as of September 30, 2020 and 2019			F-3
Consolidated Statements of Income for Fiscal Years Ended September 30, 2020, 2019 and 2018			F-4
Consolidated Statements of Comprehensive Income for Fiscal Years Ended September 30, 2020, 2019 and 2018			F-5
Consolidated Statements of Changes in Stockholders’ Deficit for Fiscal Years Ended September 30, 2020, 2019 and 2018			F-6
Consolidated Statements of Cash Flows for Fiscal Years Ended September 30, 2020, 2019 and 2018			F-7
Notes to Consolidated Financial Statements for Fiscal Years Ended September 30, 2020, 2019 and 2018			F-8 to F-47
Supplementary Data:
Valuation and Qualifying Accounts for the Fiscal Years Ended September 30, 2020, 2019 and 2018			F-48

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

TransDigm Group Incorporated

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of TransDigm Group Incorporated (“the Company”) as of September 30, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ deficit, and cash flows for each of the three years in the period ended September 30, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at September 30, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 12, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

F-1

									Valuation of goodwill
Description of the Matter									At September 30, 2020, the Company’s goodwill balance was $7.9 billion. As discussed in Note 1 to the consolidated financial statements, the Company evaluates the carrying amount of goodwill for impairment annually as of the first day of the fourth quarter or more frequently if indicators of impairment exist. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. Management performs an initial assessment of qualitative factors to determine whether it is more likely than not that the reporting unit’s fair value is less than its carrying value. If management concludes the qualitative assessment is not sufficient to conclude on whether the fair value is less than the carrying value, a quantitative impairment test is performed. As part of the quantitative approach, the Company determines the fair value of the reporting unit through the use of a discounted cash flow valuation model. 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 was necessary for certain reporting units in which it was concluded a potential impairment existed. Auditing management’s goodwill impairment assessment was complex and judgmental due to the significant estimation required to determine the fair value of the reporting units derived using the quantitative approach. In particular, the fair value estimate was sensitive to significant assumptions, such as changes in the discount rate applied, revenue growth rates, and EBITDA margins, which are affected by expectations about future market or economic conditions.
How We Addressed the Matter in Our Audit									We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment process. This included controls over management’s review of the valuation model and the significant assumptions underlying the fair value determination, as described above. To test the implied fair value of the Company’s reporting units, we performed audit procedures that included, among others, assessing the use of the discounted cash flow valuation model and testing the significant assumptions and underlying data used by the Company. We utilized internal valuation specialists in assessing the fair value methodologies applied and evaluating the reasonableness of certain assumptions selected by management. We compared the significant assumptions used by management to current industry and economic trends, recent historical performance, and other relevant factors. We assessed the historical accuracy of management’s estimates, and we performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the assumptions.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2004.

Cleveland, Ohio

November 12, 2020

F-2

TRANSDIGM GROUP INCORPORATED

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2020 AND 2019

(Amounts in millions, except share amounts)

			2020						2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents			$	4,717					$	1,467
Trade accounts receivable—Net			720						1,068
Inventories—Net			1,283						1,233
Assets held-for-sale			—						962
Prepaid expenses and other			240						135
Total current assets			6,960						4,865
PROPERTY, PLANT AND EQUIPMENT—NET			752						757
GOODWILL			7,889						7,820
OTHER INTANGIBLE ASSETS—NET			2,610						2,744
DEFERRED INCOME TAXES			17						—
OTHER			167						69
TOTAL ASSETS			$	18,395					$	16,255
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt			$	276					$	80
Short-term borrowings—trade receivable securitization facility			349						350
Accounts payable			218						276
Accrued liabilities			773						675
Liabilities held-for-sale			—						157
Total current liabilities			1,616						1,538
LONG-TERM DEBT			19,384						16,469
DEFERRED INCOME TAXES			430						441
OTHER NON-CURRENT LIABILITIES			933						691
Total liabilities			22,363						19,139
TD GROUP STOCKHOLDERS’ DEFICIT:
Common stock - $.01 par value; authorized 224,400,000 shares; issued 58,612,028 and 57,623,311 at September 30, 2020 and September 30, 2019, respectively			1						1
Additional paid-in capital			1,581						1,379
Accumulated deficit			(4,359)						(3,120)
Accumulated other comprehensive loss			(401)						(379)
Treasury stock, at cost; 4,198,226 and 4,161,326 shares at September 30, 2020 and September 30, 2019, respectively			(794)						(775)
Total TD Group stockholders’ deficit			(3,972)						(2,894)
NONCONTROLLING INTERESTS			4						10
Total stockholders’ deficit			(3,968)						(2,884)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT			$	18,395					$	16,255

See Notes to Consolidated Financial Statements

F-3

TRANSDIGM GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

			Fiscal Years Ended September 30,
			2020						2019						2018
NET SALES			$	5,103					$	5,223					$	3,811
COST OF SALES			2,456						2,414						1,634
GROSS PROFIT			2,647						2,809						2,177
SELLING AND ADMINISTRATIVE EXPENSES			727						748						450
AMORTIZATION OF INTANGIBLE ASSETS			169						135						72
INCOME FROM OPERATIONS			1,751						1,926						1,655
INTEREST EXPENSE—NET			1,029						859						663
REFINANCING COSTS			28						3						6
OTHER (INCOME) EXPENSE			(46)						1						—
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			740						1,063						986
INCOME TAX PROVISION			87						222						24
INCOME FROM CONTINUING OPERATIONS			653						841						962
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX			47						51						(5)
NET INCOME			700						892						957
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			(1)						(2)						—
NET INCOME ATTRIBUTABLE TO TD GROUP			$	699					$	890					$	957
NET INCOME APPLICABLE TO TD GROUP COMMON STOCKHOLDERS			$	514					$	779					$	901
Earnings per share attributable to TD Group common stockholders:
Earnings per share from continuing operations—basic and diluted			$	8.14					$	12.94					$	16.28
Earnings (Loss) per share from discontinued operations—basic and diluted			0.82						0.90						(0.08)
Earnings per share			$	8.96					$	13.84					$	16.20
Cash dividends paid per common share			$	32.50					$	30.00					$	—
Weighted-average shares outstanding:
Basic and diluted			57.3						56.3						55.6

See Notes to Consolidated Financial Statements

F-4

TRANSDIGM GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

			Fiscal Years Ended September 30,
			2020						2019						2018
Net income			$	700					892						957
Less: Net income attributable to noncontrolling interests			(1)						(2)						—
Net income attributable to TD Group			699						890						957
Other comprehensive (loss) income, net of tax:
Foreign currency translation			76						(115)						(10)
Unrealized (loss) gain on derivatives			(130)						(239)						94
Pensions and other postretirement benefits			32						(29)						5
Other comprehensive (loss) income, net of tax, attributable to TD Group			(22)						(383)						89
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO TD GROUP			$	677					$	507					$	1,046

See Notes to Consolidated Financial Statements

F-5

TRANSDIGM GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Amounts in millions, except share and per share amounts)

			TD Group Stockholders
			Common Stock												Additional Paid-In Capital						Accumulated Deficit						Accumulated Other Comprehensive (Loss) Income						Treasury Stock
			Number of Shares						Common Stock						Number of Shares						Value						Non-controlling Interests						Total
BALANCE—September 30, 2017			56,093,659						$	1					$	1,095					$	(3,187)					$	(85)					(4,159,207)						$	(775)					—						$	(2,951)
Accrued unvested dividend equivalents and other			—						—						—						(17)						—						—						—						—						(17)
Compensation expense recognized for employee stock options and restricted stock			—						—						56						—						—						—						—						—						56
Exercise of employee stock options and restricted stock activity, net			800,955						—						58						—						—						(2,119)						—						—						58
Common stock issued			1,072						—						—						—						—						—						—						—						—
Net income attributable to TD Group			—						—						—						957						—						—						—						—						957
Foreign currency translation adjustments, net of tax			—						—						—						—						(10)						—						—						—						(10)
Unrealized gain on derivatives, net of tax			—						—						—						—						94						—						—						—						94
Pensions and other postretirement benefits adjustments, net of tax			—						—						—						—						5						—						—						—						5
BALANCE—September 30, 2018			56,895,686						$	1					$	1,209					$	(2,247)					$	4					(4,161,326)						$	(775)					$	—					$	(1,808)
Cumulative effect of ASC 606, adopted October 1, 2018			—						—						—						3						—						—						—						—						3
Cumulative effect of ASU 2018-02, adopted October 1, 2018			—						—						—						2						(2)						—						—						—						—
Noncontrolling interests assumed related to acquisitions			—						—						—						—						—						—						—						8						8
Dividends paid			—						—						—						(1,688)						—						—						—						—						(1,688)
Accrued unvested dividend equivalents and other			—						—						—						(80)						—						—						—						—						(80)
Compensation expense recognized for employee stock options			—						—						88						—						—						—						—						—						88
Exercise of employee stock options			726,750						—						82						—						—						—						—						—						82
Common stock issued			875						—						—						—						—						—						—						—						—
Net income attributable to TD Group			—						—						—						890						—						—						—						2						892
Foreign currency translation adjustments, net of tax			—						—						—						—						(115)						—						—						—						(115)
Unrealized loss on derivatives, net of tax			—						—						—						—						(237)						—						—						—						(237)
Pensions and other postretirement benefits adjustments, net of tax			—						—						—						—						(29)						—						—						—						(29)
BALANCE—September 30, 2019			57,623,311						$	1					$	1,379					$	(3,120)					$	(379)					(4,161,326)						$	(775)					$	10					$	(2,884)
Noncontrolling interests attributable to divestiture			—						—						—						—						—						—						—						(6)						(6)
Dividends paid			—						—						—						(1,864)						—						—						—						—						(1,864)
Accrued unvested dividend equivalents and other			—						—						—						(74)						—						—						—						—						(74)
Compensation expense recognized for employee stock options			—						—						86						—						—						—						—						—						86
Exercise of employee stock options			988,717						—						116						—						—						—						—						—						116
Treasury stock purchased			—						—						—						—						—						(36,900)						(19)						—						(19)
Net income attributable to TD Group			—						—						—						699						—						—						—						—						699
Foreign currency translation adjustments, net of tax			—						—						—						—						76						—						—						—						76
Unrealized loss on derivatives, net of tax			—						—						—						—						(130)						—						—						—						(130)
Pensions and other postretirement benefits adjustments, net of tax			—						—						—						—						32						—						—						—						32
BALANCE—September 30, 2020			58,612,028						$	1					$	1,581					$	(4,359)					$	(401)					(4,198,226)						$	(794)					$	4					$	(3,968)

See Notes to Consolidated Financial Statements

F-6

TRANSDIGM GROUP INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

			Fiscal Years Ended September 30,
			2020						2019						2018
OPERATING ACTIVITIES:
Net income			$	700					$	892					$	957
Net (income) loss from discontinued operations			(47)						(51)						5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			114						91						57
Amortization of intangible assets			169						135						72
Amortization of debt issuance costs, original issue discount and premium			33						28						22
Amortization of inventory step-up			—						77						7
Amortization of loss contract reserves			(36)						(38)						(10)
Refinancing costs			28						3						6
Non-cash stock compensation			93						93						58
Deferred income taxes			24						—						(151)
Changes in assets/liabilities, net of effects from acquisitions and sales of businesses:
Trade accounts receivable			352						(82)						(44)
Inventories			(62)						(36)						(18)
Income taxes (receivable) or payable			(144)						(3)						36
Other assets			(16)						(27)						(5)
Accounts payable			(62)						(1)						18
Accrued interest			85						(4)						14
Accrued and other liabilities			(18)						(62)						(2)
Net cash provided by operating activities			1,213						1,015						1,022
INVESTING ACTIVITIES:
Capital expenditures			(105)						(102)						(73)
Payments made in connection with acquisitions			—						(3,976)						(668)
Proceeds in connection with the sale of discontinued operations			904						189						57
Net cash provided by (used in) investing activities			799						(3,889)						(684)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options			116						82						58
Dividends and dividend equivalent payments			(1,928)						(1,712)						(56)
Treasury stock purchases			(19)						—						—
Proceeds from revolving credit facility			200						—						—
Proceeds from term loans, net			—						—						12,779
Repayment on term loans			(75)						(77)						(12,174)
Redemption of senior subordinated notes due 2020, net			—						(550)						—
Redemption of senior subordinated notes due 2022, net			(1,167)						—						—
Proceeds from 7.50% senior subordinated notes due 2027, net			—						544						490
Proceeds from 5.50% senior subordinated notes due 2027, net			2,625						—						—
Proceeds from 8.00% senior secured notes due 2025, net			1,090						—						—
Proceeds from 6.25% senior secured notes due 2026, net			399						3,936						—
Proceeds from trade receivable securitization facility, net			—						49						—
Financing costs and other, net			(11)						(1)						(11)
Net cash provided by financing activities			1,230						2,271						1,086
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			8						(3)						(2)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			3,250						(606)						1,422
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			1,467						2,073						651
CASH AND CASH EQUIVALENTS, END OF PERIOD			$	4,717					$	1,467					$	2,073
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest			$	923					$	878					$	635
Cash paid during the period for income taxes, net of refunds			$	223					$	215					$	129

See Notes to Consolidated Financial Statements

F-7

TRANSDIGM GROUP INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FISCAL YEARS ENDED SEPTEMBER 30, 2020, 2019 AND 2018

1. DESCRIPTION OF THE BUSINESS AND IMPACT OF COVID-19 PANDEMIC

Description of the Business – TD Group, through its wholly-owned subsidiary, TransDigm Inc., is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly every commercial and military aircraft in service today. TransDigm Inc., along with TransDigm Inc.’s direct and indirect wholly-owned operating subsidiaries (collectively, with TD Group, the “Company” or “TransDigm”), offers a broad range of proprietary aerospace products. TD Group has no significant assets or operations other than its 100% ownership of TransDigm Inc. TD Group’s common stock is listed on the New York Stock Exchange, or the NYSE, under the trading symbol “TDG.”

TransDigm's major product offerings, substantially all of which are ultimately provided to end-users in the aerospace industry, include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, databus and power controls, cockpit security components and systems, specialized and advanced cockpit displays, aircraft audio systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products, switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems.

Impact of COVID-19 Pandemic – In December 2019, COVID-19 surfaced in Wuhan, China, and has since spread to other countries, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. The pandemic has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. The commercial aerospace industry, in particular, has been significantly disrupted, both domestically and internationally.

Employee Safety and Cost Mitigation Measures

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 include: 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 on the consolidated statements of income. 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. This accrual is recorded as a component of accrued liabilities on the consolidated balance sheet. 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.

F-8

Impairment Testing

U.S. GAAP requires that both indefinite-lived intangible assets and goodwill are tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not (i.e., a likelihood greater than 50%) that the intangible asset or the reporting unit is impaired. During interim periods, ASC 350 requires companies to focus on those events and circumstances that affect significant inputs used to determine the fair value of the asset, asset group or reporting unit to determine whether an interim quantitative impairment test is required. 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 the second quarter of fiscal 2020 for certain reporting units in which it was concluded a potential impairment existed.

Interim Impairment Testing—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 given to 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 weighted average cost of capital. The results of this test indicated the fair value exceeded carrying value for all reporting units tested.

As a result of the interim impairment testing performed as of March 28, 2020, no indefinite-lived intangible assets or goodwill was determined to be impaired. Management updated our assessment during the third quarter of fiscal 2020 and validated that the assumptions used in the analyses performed as of March 28, 2020 and the resulting conclusions remained appropriate as of June 27, 2020.

Annual Impairment Testing—The Company performed its annual impairment test for goodwill and intangible assets as of the first day of the fourth quarter. The Company first assessed certain qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or indefinite lived intangible assets is less than its carrying amount, and whether it is therefore necessary to perform the quantitative impairment test. 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 used a similar approach to the interim impairment testing performed. For the identified reporting units, the Company performed a Step 1 impairment test using an income approach based on management’s determination of the prospective financial information with consideration given to 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 weighted average cost of capital. 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.

As a result of the impairment testing performed as of the first day of the fourth quarter, no indefinite-lived intangible assets or goodwill was determined to be impaired. As economic and market conditions have not changed significantly since the first day of the fourth quarter, this conclusion remains appropriate as of September 30, 2020.

CARES Act

On March 27, 2020, the President of the United States signed 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 with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022, 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 expense for fiscal years 2020 and 2021.

F-9

2. ACQUISITIONS AND DIVESTITURES

During the fiscal year ended September 30, 2019, the Company completed the acquisitions of Esterline and substantially all of the assets and technical data rights of the Stormscope product line from L3Harris Technologies, Inc. ("Stormscope") and NavCom Defense Electronics ("NavCom"). The Company accounted for the acquisitions using the acquisition method and included the results of operations of the acquisitions in its consolidated financial statements from the effective date of each acquisition.

The acquisitions strengthen and expand the Company’s position to design, produce and supply highly engineered proprietary aerospace components in niche markets with significant aftermarket content and provide opportunities to create value through the application of our three core value-driven operating strategies (obtaining profitable new business, improving our cost structure, and providing highly engineered value-added products to customers). The purchase price paid for each acquisition reflects the current earnings before interest, taxes, depreciation and amortization (“EBITDA”) and cash flows, as well as the future EBITDA and cash flows expected to be generated by the business, which are driven in most cases by the recurring aftermarket consumption over the life of a particular aircraft, estimated to be approximately 25 to 30 years.

Acquisitions

Esterline – On March 14, 2019, TransDigm completed the acquisition of all the outstanding stock of Esterline for $122.50 per share in cash, plus the repayment of Esterline debt. The purchase price, net of cash acquired of approximately $398.2 million, totaled approximately $3,923.9 million. Of the $3,923.9 million purchase price, $3,536.3 million was paid at closing and the remaining $387.6 million was classified as restricted cash for the redemption of Esterline’s outstanding senior notes due 2023 (the "2023 Notes"). The 2023 Notes were redeemed on April 15, 2019. Esterline, through its subsidiaries, was an industry leader in specialized manufacturing for the aerospace and defense industry primarily within three core disciplines: advanced materials, avionics and controls and sensors and systems. The acquisition of Esterline expands TransDigm's platform of proprietary and sole source content for the aerospace and defense industry. TransDigm evaluated the strategic fit and description of each Esterline reporting unit to determine the appropriate business segment for the reporting unit. Each Esterline reporting unit is included in one of TransDigm's segments: Power and Control, Airframe, or Non-aviation. Refer to Note 17, "Segments," for additional information about the Company's segments.

The total purchase price of Esterline was allocated to the underlying assets acquired and liabilities assumed based upon the respective fair value at the date of acquisition. To the extent the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill. Allocations were based on the acquisition method of accounting and third-party valuation appraisals.

The allocation of the fair value of the assets acquired and liabilities assumed in the Esterline acquisition as of the acquisition date of March 14, 2019 is summarized in the table below (in millions).

Assets acquired, excluding cash:
Trade accounts receivable			$	384
Inventories			583
Prepaid expenses and other current assets			423
Property, plant, and equipment			469
Other intangible assets			1,301
Goodwill			2,256
Other			20
Total assets acquired, excluding cash			5,436
Liabilities assumed:
Accounts payable			146
Other current liabilities			751
Other noncurrent liabilities			615
Total liabilities assumed			1,512
Net assets acquired			$	3,924

F-10

Of the approximately $2.3 billion of goodwill recognized for the acquisition, approximately $25.6 million is deductible for tax purposes. Also, of the approximately $1.3 billion of other intangible assets recognized for the acquisition, approximately $48.9 million is deductible for tax purposes.

In connection with the Esterline acquisition, we acquired existing long-term contracts with customers that were incurring negative gross margins as of the date of acquisition. Based on our review of these contracts, we concluded that the terms of certain of these loss-making contracts were unfavorable when compared to market terms as of the acquisition date. As a result, we recognized loss contract reserves of $267.9 million as of the acquisition date based on the present value of the difference between the contractual cash flows of the existing long-term contracts and the estimated cash flows had the contracts been executed at market terms as of the acquisition date. These adjustments applied only to contracts generating a negative margin as of the date of acquisition. As of September 30, 2019, we have reclassified $9.3 million in loss contract reserves to liabilities held-for-sale, as it pertains to Souriau-Sunbank. Significant assumptions used to determine the fair value of the loss contract reserves using the discounted cash flow model include discount rates, forecasted quantities of products to be sold under the long-term contracts and market prices for respective products. These were forward looking assumptions and could be affected by future economic and market conditions. The loss contract reserves are amortized and recorded as an offset to cost of sales over the life of the contracts as actual sales occur under the long-term contracts. Approximately $29.5 million and $27.3 million was amortized and recorded as an offset to cost of sales in the consolidated statements of income for the fiscal years ended September 30, 2020 and 2019, respectively. Total loss contract reserves related to the Esterline acquisition were $201.3 million and $231.8 million at September 30, 2020 and 2019, respectively of which $31.9 million and $60.0 million is classified in accrued liabilities and $169.4 million and $171.8 million is classified in other non-current liabilities in the consolidated balance sheets at September 30, 2020 and 2019, respectively.

Esterline acquisition costs were expensed as incurred and totaled $26.9 million and $85.1 million for the the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

Skandia – On July 13, 2018, the Company acquired all of the outstanding stock of Skandia for a total purchase price of approximately $84.3 million, which is net of a $0.2 million working capital settlement paid in the fourth quarter of fiscal 2018. Skandia provides highly engineered seating foam, foam fabrication, flammability testing and acoustic solutions for the business jet market. Skandia is included as a product line within an existing reporting unit in TransDigm's Airframe segment. No goodwill recognized for the acquisition is deductible for tax purposes.

Extant – On April 24, 2018, the Company acquired all of the outstanding stock of Extant for a total purchase price of approximately $533.1 million in cash, which is net of a $0.2 million working capital settlement received in the third quarter of fiscal 2018. Extant provides a broad range of proprietary aftermarket products and repair and overhaul services to the aerospace and defense end markets. Extant is included in TransDigm's Power and Control segment.

Prior to the Company's acquisition of Extant, Extant was owned by an equity fund sponsored by Warburg Pincus LLC. Michael Graff, a director of TransDigm, is a managing director of Warburg Pincus LLC and was chairman of the board of Extant. Robert Henderson, Vice Chairman of TransDigm, was also on the board of Extant and owned less than 2% of Extant on a fully diluted basis. In addition, Mr. Graff, Mr. W. Nicholas Howley, TransDigm's Executive Chairman, Mr. Douglas Peacock, then a director of TransDigm, and Mr. David Barr, a director of TransDigm, each had minority interests of less than 1% in the Warburg Pincus LLC fund that owned Extant.

The total purchase price of Extant was allocated to the underlying assets acquired and liabilities assumed based upon the fair values at the date of acquisition. To the extent the purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, such excess was allocated to goodwill.

Approximately $62.5 million of the $105.0 million other intangible assets recognized for the acquisition is deductible for tax purposes over 15 years. Of the $407.0 million of goodwill recognized for the acquisition, approximately $12.4 million is deductible for tax purposes.

Extant Acquisitions - On August 30, 2019, the Company's Extant subsidiary completed the acquisition of substantially all of the assets and technical data rights of the Stormscope product line from L3Harris Technologies, Inc. for approximately $20 million in cash. Stormscope is a lightning detection system for the general aviation market. Stormscope is included as a product line of Extant, which is included in TransDigm's Power and Control segment. Approximately $11.1 million of goodwill recognized for the acquisition and approximately $7.5 million of other intangible assets recognized for the acquisition is deductible for tax purposes over 15 years.

On October 1, 2018, the Company's Extant subsidiary completed the acquisition of substantially all of the assets and technical data rights of the Corona, California operations of NavCom for approximately $27 million in cash. NavCom develops, manufactures, and supports high-reliability, mission-critical electronics, avionics and sub-assemblies. NavCom is included as a product line of Extant, which is included in TransDigm's Power and Control segment. Approximately $9.0 million of goodwill recognized for the acquisition is deductible for tax purposes over 15 years.

F-11

Kirkhill – On March 15, 2018, the Company acquired the assets and certain liabilities of the Kirkhill elastomers business from Esterline Technologies for a total purchase price of approximately $49.3 million, which is net of a $0.6 million working capital settlement received in the third quarter of fiscal 2018. Kirkhill, headquartered in Brea, California, is a leading supplier of highly engineered aerospace elastomers. Kirkhill's products are used in a broad variety of most major commercial transport and military platforms. Kirkhill is included in TransDigm's Airframe segment. No goodwill recognized for the acquisition is deductible for tax purposes.

Divestitures

Souriau-Sunbank Companies – On December 20, 2019, TransDigm completed the divestiture Souriau-Sunbank to Eaton for approximately $920 million, which included a working capital settlement of $1.7 million. Souriau-Sunbank was acquired by TransDigm as part of its acquisition of Esterline in March 2019. The results of operations of Souriau-Sunbank are presented in discontinued operations in the accompanying consolidated financial statements for all periods presented since the date acquired. Refer to Note 23, “Discontinued Operations” for additional information.

Esterline Interface Technology Group – On September 20, 2019, TransDigm completed the divestiture of its EIT group of businesses to an affiliate of KPS Capital Partners, LP for approximately $190 million, which included a working capital settlement of $0.7 million. EIT was acquired by TransDigm as part of its acquisition of Esterline in March 2019. The results of operations of EIT are presented in discontinued operations in the accompanying consolidated financial statements for all periods presented since the date acquired. Refer to Note 23, “Discontinued Operations” for additional information.

Schroth – In connection with the settlement of a Department of Justice investigation into the competitive effects of the Schroth acquisition, during the fourth quarter of 2017, the Company committed to divest the Schroth business. 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 paid in July 2018. The results of operations of Schroth are presented in discontinued operations in the accompanying consolidated financial statements for the fiscal 2018 period.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation—The accompanying consolidated financial statements were prepared in conformity with U.S. GAAP and include the accounts of TD Group and subsidiaries. All significant intercompany balances and transactions have been eliminated.

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. Refer to Note 5, “Revenue Recognition,” for additional information regarding the Company’s revenue recognition policy.

Shipping and Handling Costs—Shipping and handling costs are included in cost of sales in the consolidated statements of income.

Research and Development Costs—The Company expenses research and development costs as incurred and classifies such amounts in selling and administrative expenses. The expense recognized for research and development costs for the fiscal years ended September 30, 2020, 2019 and 2018 was approximately $130.9 million, $116.8 million, and $73.8 million, respectively.

Cash Equivalents—The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Allowance for Uncollectible Accounts—The Company reserves for amounts determined to be uncollectible based on specific identification of losses and estimated losses based on historical experience. The allowance also incorporates a provision for the estimated impact of disputes with customers. The determination of the amount of the allowance for uncollectible accounts is subject to judgment and estimation by management. If circumstances change or economic conditions deteriorate or improve, the allowance for uncollectible accounts could increase or decrease.

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. Provision for potentially obsolete or slow-moving inventory is made based on management’s analysis of inventory levels and future sales forecasts.

F-12

Property, Plant and Equipment—Property, plant and equipment are stated at cost and include improvements which significantly increase capacities or extend the useful lives of existing plant and equipment. Depreciation is computed using the straight-line method over the following estimated useful lives: land improvements from 10 to 20 years, buildings and improvements from 5 to 30 years, machinery and equipment from 2 to 10 years and furniture and fixtures from 3 to 10 years. Net gains or losses related to asset dispositions are recognized in earnings in the period in which dispositions occur. Routine maintenance, repairs and replacements are expensed as incurred. Amortization expense of assets accounted for as finance leases is included within depreciation expense.

Property, plant and equipment is assessed for potential impairment whenever indicators of impairment are present by determining whether the carrying value of the property can be recovered through projected, undiscounted cash flows from future operations over the property’s remaining estimated useful life. Any impairment recognized is the amount by which the carrying amount exceeds the fair value of the asset. Fair value is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows.

Debt Issuance Costs, Premiums and Discounts—The cost of obtaining financing as well as premiums and discounts are amortized using the effective interest method over the terms of the respective obligations as a component of interest expense within the consolidated statements of income. Debt issuance costs are presented in the consolidated balance sheets as a direct reduction from the carrying amount of the related debt liabilities.

Financial Instruments—Interest rate swap and cap agreements are used to manage interest rate risk associated with floating-rate borrowings under our credit facility. The interest rate swap and cap agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s variable rate debt to a fixed rate basis through the expiration date of the interest rate swap and cap agreements, thereby reducing the impact of interest rate volatility on future interest expense. These agreements involve the receipt of variable rate amounts in exchange for fixed rate interest payments over the term of the agreements without an exchange of the underlying principal amount. These derivative instruments qualify as effective cash flow hedges under U.S. GAAP.

The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and results of operations to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies.

For the interest rate swap and cap agreements and the foreign currency forward contracts designated as cash flow hedges, the effective portion of the gain or loss from the financial instruments was initially reported as a component of accumulated other comprehensive loss in stockholders’ deficit and subsequently reclassified into earnings in the same line as the hedged item in the same period or periods during which the hedged item affected earnings. As the interest rate swap and cap agreements are used to manage interest rate risk, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in interest expense - net in the consolidated statements of income. As the foreign currency forward exchange contracts are used to manage foreign currency exposure primarily arising from purchases or sales from third parties, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in cost of sales or net sales in the consolidated statements of income.

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 assumed 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.

F-13

Goodwill is the excess of the purchase price paid over the estimated fair value of the net assets of a business acquired. Other intangible assets consist of identifiable intangibles acquired or recognized in accounting for the acquisitions (trademarks, trade names, technology, customer relationships, order backlog and other intangible assets). Goodwill and intangible assets that have indefinite useful lives (i.e., trademarks and trade names) are subject to annual impairment testing. Management determines fair value using a discounted future cash flow analysis or other accepted valuation techniques. The Company performs an annual impairment test for goodwill and other intangible assets as of the first day of the fourth fiscal quarter of each year, or more frequently, if an event occurs or circumstances change that would more likely than not reduce fair value below current value.

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 therefore necessary to perform the quantitative goodwill impairment test. The quantitative goodwill impairment test consists of two steps. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit (as defined) with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired, and the second step of the goodwill impairment test is unnecessary. The second step measures the amount of impairment, if any, by comparing the carrying value of the goodwill associated with a reporting unit to the implied fair value of the goodwill derived from the estimated overall fair value of the reporting unit and the individual fair values of the other assets and liabilities of the reporting unit.

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.

The impairment test for indefinite lived intangible assets consists of a comparison between their fair values and carrying values. If the carrying amounts of intangible assets that have indefinite useful lives exceed their fair values, an impairment loss will be recognized in an amount equal to the sum of any such excesses.

The Company assesses the recoverability of its amortizable intangible assets only when indicators of impairment are present by determining whether the amortization over their remaining lives can be recovered through projected, undiscounted cash flows from future operations. Amortization of amortizable intangible assets is computed using the straight-line method over the following estimated useful lives: technology from 20 to 22 years, order backlog from 1 to 1.5 years, customer relationships over 20 years and other intangible assets over 20 years.

Refer to Note 1, "Description of the Business and Impact of COVID-19 Pandemic," for further disclosures over the interim and annual impairment procedures performed during fiscal year 2020.

Stock-Based Compensation—The Company records stock-based compensation expense using the Black-Scholes pricing model based on certain valuation assumptions. Compensation expense is recorded over the vesting periods of the stock options. The Company has classified stock-based compensation primarily within selling and administrative expenses to correspond with the classification of employees that receive stock option grants. No expense is recognized for any stock options ultimately forfeited because the recipients fail to meet vesting requirements. 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 provision for income taxes is calculated using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax effect of temporary differences between the financial statement carrying amount of assets and liabilities and the amounts used for income tax purposes and for certain changes in valuation allowances. Valuation allowances are recorded to reduce certain deferred tax assets when, in our estimation, it is more likely than not that a tax benefit will not be realized.

Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-14

Comprehensive Income (Loss)—The term “comprehensive income (loss)” represents the change in stockholders’ equity (deficit) from transactions and other events and circumstances resulting from non-stockholder sources. The Company’s accumulated other comprehensive income or loss, consisting principally of fair value adjustments to its interest rate swap and cap agreements (net of tax), cumulative foreign currency translation adjustments and pension liability adjustments (net of tax), is reported separately in the accompanying consolidated statements of comprehensive income.

Foreign Currency Translation and Transactions—The assets and liabilities of subsidiaries located outside the United States are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates. Revenue and expense items are translated at the average monthly exchange rates prevailing during the period. Gains and losses resulting from foreign currency transactions are recognized currently in income, and those resulting from translation of financial statements are accumulated as a separate component of other comprehensive income (loss) for the period. Foreign currency gains or losses recognized currently in income from changes in exchange rates were immaterial to our results of operations.

Earnings per Share—Earnings per share information is determined using the two-class method, which includes the weighted-average number of common shares outstanding during the period and other securities that participate in dividends (“participating securities”). Our vested stock options are considered “participating securities” because they include non-forfeitable rights to dividends. In applying the two-class method, earnings are allocated to both common stock shares and participating securities based on their respective weighted-average shares outstanding for the period. Diluted earnings per share information may include the additional effect of other securities, if dilutive, in which case the dilutive effect of such securities is calculated using the treasury stock method. Contingently issuable shares are not included in earnings per share until the period in which the contingency is satisfied; therefore, basic and diluted earnings per share are the same.

Pension Benefits—The Company accounts for pension expense using the end of the fiscal year as our measurement date. Management selects appropriate assumptions including the discount rate, rate of increase in future compensation levels and assumed long-term rate of return on plan assets. The assumptions are based upon historical results, the current economic environment and reasonable expectations of future events. Actual results which vary from our assumptions are accumulated and amortized over future periods, and accordingly, are recognized in expense in these periods. Significant differences between the assumptions and actual experience or significant changes in assumptions could impact the pension costs and the pension obligation.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU 2016-02, “Leases (ASC 842),” which requires lessees to recognize a right-of-use asset and lease liability for all leases with a term of more than 12 months. ASU 2016-02 was effective for the Company on October 1, 2019, and required a modified retrospective application. In July 2018, the FASB issued ASU 2018-11, “Leases (ASC 842) Targeted Improvements,” which provided an additional transition method that allowed entities to initially apply the new standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption without restating prior periods. The Company has completed the necessary changes to the consolidated financial statements and related disclosures, internal controls, financial policies and information systems. On October 1, 2019, the Company adopted ASC 842 and related amendments using the modified retrospective method. Results for reporting periods beginning after October 1, 2019, are presented under ASC 842, while prior period amounts continue to be reported under ASC 840, “Leases." The Company elected to apply the package of practical expedients permitted within the new standard, which among other things, allow the carry forward of historical lease classification of existing leases. Additionally, the adoption of the new standard resulted in the recording of lease assets and lease liabilities for operating leases of $99 million and $105 million, respectively, as of October 1, 2019. The effects of our transition to ASC 842 resulted in no cumulative adjustment to retained earnings in the period of adoption. The adoption of the standard did not have a material impact on our results of operations or cash flows. Refer to Note 19, "Leases," for additional disclosures.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)," which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses, and will apply to most financial assets measured at amortized cost (e.g., trade, unbilled and other receivables). ASU 2016-13 is effective for the Company on October 1, 2020 and will not materially impact the Company’s results of operations and financial condition upon adoption.

F-15

In August 2018, the FASB issued ASU 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (ASC 715-20)." ASC 715-20 modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASC 715-20 also requires an entity to disclose the weighted-average interest crediting rates for cash balance plans and to explain the reasons for significant gains and losses related to changes in the benefit obligation. The Company adopted this standard in the fourth quarter of fiscal 2020. ASC 715-20 did not have a material impact on our consolidated financial statements and disclosures.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (ASC 740) - Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued. Depending on the amendment, adoption may be applied on the retrospective, modified retrospective or prospective basis. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements and disclosures.

In March 2020, the Securities and Exchange Commission adopted amendments to simplify the financial disclosure requirements for guarantors and issuers of guaranteed securities registered under Rule 3-10 of Regulation S-X. As permitted, the Company elected to early adopt these amendments during the third quarter of fiscal 2020. The amendments replace the consolidating financial information with summarized financial information of the issuers and guarantors, require expanded qualitative disclosures with respect to information about guarantors, the terms and conditions of guarantees and the factors that may affect payment, and permit these disclosures to be provided outside the notes to the parent company’s annual and interim consolidated financial statements. The Company has provided this information in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform." ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impacts associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. The amendments in ASU 2020-04 apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 are effective through December 31, 2022. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements and disclosures.

5. REVENUE RECOGNITION

TransDigm's sales are concentrated in the aerospace industry. The Company’s customers include: distributors of aerospace components, commercial airlines, large commercial transport and regional and business aircraft OEMs, various armed forces of the United States and friendly foreign governments, defense OEMs, system suppliers, and various other industrial customers.

The majority of the Company's revenue is recorded at a point in time. 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.

In some contracts, control transfers to the customer over time, primarily in contracts where the customer is required to pay for the cost of both the finished and unfinished goods at the time of cancellation plus a reasonable profit relative to the work performed for products that were customized for the customer. Therefore, we recognize revenue over time for those agreements that have a right to margin and where the products being produced have no alternative use.

Based on our production cycle, it is generally expected that goods related to the revenue will be shipped and billed within the current year. For revenue recognized over time, we estimate the amount of revenue attributable to a contract earned at a given point during the production cycle based on certain costs, such as materials and labor incurred to date, plus the expected profit, which is a cost-to-cost input method.

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.

F-16

The Company’s payment terms vary by the type and location of the customer and the products or services offered. The Company does not offer any payment terms that would meet the requirements for consideration as a significant financing component.

Shipping and handling fees and costs incurred in connection with products sold are recorded in cost of sales in the consolidated statements of income, and are not considered a performance obligation to our customers.

The Company pays sales commissions that relate to contracts for products or services that are satisfied at a point in time or over a period of one year or less and are expensed as incurred. These costs are reported as a component of selling and administrative expenses in the consolidated statements of income.

In fiscal 2020, no customer individually accounted for 10% or more of the Company’s net sales. In fiscal 2019, one customer accounted for approximately 11% of the Company’s net sales, which was split approximately 60% and 40% between the Airframe and Power & Control segments, respectively. In fiscal 2018, one customer accounted for approximately 11% of the Company’s net sales and a second customer accounted for approximately 10% of the Company’s net sales, each of which were split approximately evenly between the Power & Control and Airframe segments.

Sales to foreign customers, primarily in Western Europe, Canada and Asia, were $1,696 million, $1,778 million and $1,355 million during the fiscal years ended 2020, 2019 and 2018.

Contract Assets and Liabilities - Contract assets reflect revenue recognized and performance obligations satisfied in advance of customer billing or reimbursable costs related to a specific contract. Contract liabilities relate to payments received in advance of the satisfaction of performance under the contract. We receive payments from customers based on the terms established in our contracts. The following table summarizes our contract assets and liabilities balances (in millions):

			September 30, 2020						September 30, 2019						Change
Contract assets, current (1)			$	36					$	44					$	(8)
Contract assets, non-current (2)			6						7						(1)
Total contract assets			42						51						(9)
Contract liabilities, current (3)			18						18						—
Contract liabilities, non-current (4)			9						13						(4)
Total contract liabilities			27						31						(4)
Net contract assets			$	15					$	20					$	(5)

(1)Included in prepaid expenses and other on the consolidated balance sheets.

(2)Included in other non-current assets on the consolidated balance sheets.

(3)Included in accrued liabilities on the consolidated balance sheets.

(4)Included in other non-current liabilities on the consolidated balance sheets.

For the fiscal year ended September 30, 2020, the revenue recognized that was previously included in contract liabilities was not material.

Refer to Note 17, “Segments”, for disclosures related to the disaggregation of revenue.

F-17

6. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data) using the two-class method:

			Fiscal Years Ended September 30,
			2020						2019						2018
Numerator for earnings per share:
Income from continuing operations			$	653					$	841					$	962
Less: Net income attributable to noncontrolling interests			(1)						(2)						—
Net income from continuing operations attributable to TD Group			652						839						962
Less: Special dividends declared or paid on participating securities, including dividend equivalent payments			(185)						(111)						(56)
			467						728						906
Income (Loss) from discontinued operations, net of tax			47						51						(5)
Net income applicable to TD Group common stockholders - basic and diluted			$	514					$	779					$	901
Denominator for basic and diluted earnings per share under the two-class method:
Weighted-average common shares outstanding			53.9						53.1						52.3
Vested options deemed participating securities			3.4						3.2						3.3
Total shares for basic and diluted earnings per share			57.3						56.3						55.6
Earnings per share from continuing operations—basic and diluted			$	8.14					$	12.94					$	16.28
Earnings (Loss) per share from discontinued operations—basic and diluted			0.82						0.90						(0.08)
Earnings per share			$	8.96					$	13.84					$	16.20

7. TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable consist of the following (in millions):

			September 30, 2020						September 30, 2019
Trade accounts receivable—gross			$	757					$	1,085
Allowance for uncollectible accounts			(37)						(17)
Trade accounts receivable—net			$	720					$	1,068

At September 30, 2020, one customer individually accounted for approximately 10% of the Company’s trade accounts receivable. In addition, approximately 41% of the Company’s trade accounts receivable was due from entities that operate principally outside of the United States. Credit is extended based on an evaluation of each customer’s financial condition and collateral is generally not required.

The increase in the allowance for uncollectible accounts for the fiscal year ended September 30, 2020 is primarily driven by an increase in estimated losses from certain commercial aerospace customers that have been more adversely affected by the COVID-19 pandemic.

F-18

8. INVENTORIES

Inventories consist of the following (in millions):

			September 30, 2020						September 30, 2019
Raw materials and purchased component parts			$	881					$	805
Work-in-progress			358						360
Finished goods			222						192
Total			1,461						1,357
Reserves for excess and obsolete inventory			(178)						(124)
Inventories—Net			$	1,283					$	1,233

9. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following (in millions):

			September 30, 2020						September 30, 2019
Land and improvements			$	103					$	96
Buildings and improvements			350						408
Machinery, equipment and other			782						628
Construction in progress			57						52
Total			1,292						1,184
Accumulated depreciation			(540)						(427)
Property, plant and equipment—net			$	752					$	757

10. INTANGIBLE ASSETS

Other intangible assets - net in the consolidated balance sheets consist of the following at September 30 (in millions):

			2020																		2019
			Gross Carrying Amount						Accumulated Amortization						Net						Gross Carrying Amount						Accumulated Amortization						Net
Trademarks and trade names			$	958					$	—					$	958					$	956					$	—					$	956
Technology			1,842						589						1,253						1,806						496						1,310
Order backlog			93						93						—						107						45						62
Customer relationships			443						52						391						438						30						408
Other			18						10						8						17						9						8
Total			$	3,354					$	744					$	2,610					$	3,324					$	580					$	2,744

Information regarding the amortization expense of amortizable intangible assets is detailed below (in millions):

Annual Amortization Expense:

Fiscal years ended September 30,
2020			$	169
2019			135
2018			72

Estimated Amortization Expense:

Fiscal years ending September 30,
2021			$	115
2022			114
2023			114
2024			114
2025			114

F-19

The changes in the carrying amount of goodwill by segment for the fiscal years ended September 30, 2019 and 2020 were as follows (in millions):

			Power & Control						Airframe						Non- aviation						Total
Balance at September 30, 2018			$	3,678					$	2,452					$	93					$	6,223
Goodwill acquired during the year (Note 2)			469						1,180						546						2,195
Divestiture of goodwill acquired			—						—						(43)						(43)
Reclass of goodwill acquired to assets held-for-sale (Note 23)			—						—						(480)						(480)
Purchase price allocation adjustments(1)			(9)						(23)						—						(32)
Currency translation adjustments			(17)						(11)						(15)						(43)
Balance at September 30, 2019			4,121						3,598						101						7,820
Purchase price allocation adjustments(1)			(1)						39						—						38
Currency translation adjustments			21						10						—						31
Balance at September 30, 2020			$	4,141					$	3,647					$	101					$	7,889

(1) Primarily relates to opening balance sheet adjustments recorded by the reporting units acquired from Esterline up to the expiration of the one year measurement period in March 2020.

11. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in millions):

			September 30, 2020						September 30, 2019
Compensation and related benefits			$	173					$	178
Interest			178						93
Interest rate swap agreements			56						13
Product warranties			32						34
Dividend equivalent payments—current (Note 18)			72						64
Environmental and other litigation reserves			15						12
Income taxes payable			19						44
Loss contract reserves			42						64
Other			186						173
Total			$	773					$	675

F-20

12. DEBT

The Company’s debt consists of the following (in millions):

			September 30, 2020
			Gross Amount						Debt Issuance Costs						Original Issue Discount or Premium						Net Amount
Short-term borrowings—trade receivable securitization facility			$	350					$	(1)					$	—					$	349
Term loans			$	7,449					$	(48)					$	(23)					$	7,378
Revolving credit facility			200						—						—						200
2024 Notes			1,200						(5)						—						1,195
2025 Notes			750						(3)						3						750
2025 Secured Notes			1,100						(9)						—						1,091
6.375% 2026 Notes			950						(6)						—						944
6.875% 2026 Notes			500						(4)						(3)						493
2026 Secured Notes			4,400						(55)						5						4,350
7.50% 2027 Notes			550						(5)						—						545
5.50% 2027 Notes			2,650						(21)						—						2,629
Government refundable advances			28						—						—						28
Finance lease obligations			57						—						—						57
			19,834						(156)						(18)						19,660
Less: current portion			277						(1)						—						276
Long-term debt			$	19,557					$	(155)					$	(18)					$	19,384

			September 30, 2019
			Gross Amount						Debt Issuance Costs						Original Issue Discount or Premium						Net Amount
Short-term borrowings—trade receivable securitization facility			$	350					$	—					$	—					$	350
Term loans			$	7,524					$	(58)					$	(17)					$	7,449
2022 Notes			1,150						(4)						—						1,146
2024 Notes			1,200						(6)						—						1,194
2025 Notes			750						(3)						3						750
6.375% 2026 Notes			950						(7)						—						943
6.875% 2026 Notes			500						(6)						(3)						491
2026 Secured Notes			4,000						(60)						2						3,942
7.50% 2027 Notes			550						(5)						—						545
Government refundable advances			39						—						—						39
Finance lease obligations			50						—						—						50
			16,713						(149)						(15)						16,549
Less: current portion			81						(1)						—						80
Long-term debt			$	16,632					$	(148)					$	(15)					$	16,469

F-21

Issuance of Senior Subordinated Notes due 2027

On October 29, 2019, the Company entered into a purchase agreement in connection with a private offering of $2,650 million in new 5.50% senior subordinated notes due 2027. The 5.50% 2027 Notes were issued pursuant to an indenture, dated as of November 13, 2019, among TransDigm, as issuer, TransDigm Group, TransDigm UK and the other subsidiaries of TransDigm named therein, as guarantors.

The 5.50% 2027 Notes bear interest at the rate of 5.50% per annum, which accrues from November 13, 2019 and is payable in arrears on May 15th and November 15th of each year, commencing on May 15, 2020. The 5.50% 2027 Notes mature on November 15, 2027, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.

The Company capitalized $23.8 million and expensed $1.1 million of refinancing costs representing debt issue costs associated with the 5.50% 2027 Notes during the fiscal year ended September 30, 2020.

Repurchase of Senior Subordinated Notes due 2022

On October 29, 2019, the Company announced a cash tender offer for any and all of its 2022 Notes outstanding. On November 26, 2019, the Company redeemed the principal amount of $1,150 million, plus accrued interest of approximately $25.5 million and early redemption premium of $17.3 million.

The Company wrote off $3.8 million in unamortized debt issue costs during the fiscal year ended September 30, 2020 in conjunction with the redemption of the 2022 Notes.

Amendment No. 7 and Refinancing Facility Agreement

On February 6, 2020, the Company entered into Amendment No. 7 to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the “Credit Agreement”).

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, in an aggregate principal amount equal to approximately $1,774 million, (ii) repaid in full all of the prior 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) extend the maturity date of the new tranche F term loans to December 9, 2025. 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 2.50% rate that previously applied.

In addition to a discount of $8.8 million recorded in conjunction with the new tranche F term loans, the Company capitalized $3.4 million and expensed $4.5 million of refinancing costs representing debt issue costs associated with Amendment No. 7 during the fiscal year ended September 30, 2020.

Revolving Credit Facility

On March 24, 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. The revolving credit facility bears interest at a rate of 3.00% plus 0.75% or LIBOR, whichever is greater. At September 30, 2020, the applicable interest rate was 3.75%. As of September 30, 2020, the Company had $39.4 million in letters of credit outstanding and $520.6 million of borrowings available under the revolving credit facility.

Issuance of Senior Secured Notes due 2025

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. The 2025 Secured Notes were issued pursuant to an indenture, dated as of April 8, 2020, amongst TransDigm, as issuer, TransDigm Group, TransDigm UK and the other subsidiaries of TransDigm named therein, as guarantors. The 2025 Secured Notes are secured by a first-priority security interest in substantially all the assets of TransDigm, TransDigm Group, TransDigm UK and each other guarantor on an equal and ratable basis with any other existing and future senior secured debt, including indebtedness under the Company's senior secured credit facilities and the 2026 Secured Notes.

The 2025 Secured Notes bear interest at the rate of 8.00% per annum, which accrues from April 8, 2020 and is payable in arrears on April 1 and October 1 of each year, commencing on October 1, 2020. The 2025 Secured Notes mature on December 15, 2025, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.

The Company capitalized $10.1 million of refinancing costs representing debt issue costs associated with the 2025 Secured Notes during the fiscal year ended September 30, 2020.

F-22

Issuance of Senior Secured Notes due 2026

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. 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.

The 6.25% 2026 New Notes bear interest at a rate of 6.25% per annum, which accrues from March 15, 2020 and is payable semiannually in arrears on March 15th and September 15th of each year, commencing on September 15, 2020. The 6.25% 2026 New Notes mature on March 15, 2026, unless earlier redeemed or repurchased, and are subject to the terms and conditions set forth in the indenture.

The Company capitalized $5.4 million of refinancing costs representing debt issue costs associated with the 6.25% 2026 New Notes during the fiscal year ended September 30, 2020.

Trade Receivable Securitization Facility

During fiscal 2014, the Company established a trade receivable securitization facility (the “Securitization Facility”). The Securitization Facility effectively increases the Company’s borrowing capacity depending on the amount of the domestic operations’ trade accounts receivable. The Securitization Facility includes the right for the Company to exercise annual one year extensions as long as there have been no termination events as defined by the agreement. The Company uses the proceeds from the Securitization Facility as an alternative to other forms of debt, effectively reducing borrowing costs.

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.

Government Refundable Advances

Government refundable advances consist of payments received from the Canadian government to assist in research and development related to commercial aviation. The requirement to repay this advance is solely based on year-over-year commercial aviation revenue growth at CMC Electronics, which is a subsidiary of TransDigm. As of September 30, 2020 and 2019, the outstanding balance of these advances were $28.4 million and $39.2 million, respectively.

Obligations under Finance Leases

The Company leases certain buildings and equipment under finance leases. The present value of the minimum finance lease payments, net of the current portion, represents a balance of $56.8 million and $49.9 million at September 30, 2020 and 2019, respectively. Refer to Note 19, “Leases,” for further disclosure of the Company’s lease obligations.

Term Loans

As of September 30, 2020 and 2019, TransDigm had $7,449 million and $7,524 million in fully drawn term loans and $760 million in revolving commitments, of which $521 million and $719 million was available to the Company as of September 30, 2020 and 2019, respectively. The term loans consist of three tranches as follows (in millions):

Term Loan Facility						Maturity Date						Interest Rate						Aggregate Principal as of September 30,
									2020						2019
Tranche E						May 30, 2025						LIBOR + 2.25%						$	2,199					$	2,221
Tranche F						December 9, 2025						LIBOR + 2.25%						$	3,489					$	3,524
Tranche G						August 22, 2024						LIBOR + 2.25%						$	1,761					$	1,779

The interest rates per annum applicable to all of the existing tranches of term loans 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 is not subject to a floor. At September 30, 2020 and 2019, the applicable interest rates for all existing tranches were 2.41% and 4.83%, respectively.

F-23

Refinancing Costs

During the fiscal year ended September 30, 2020, the Company recorded refinancing costs of $28 million primarily representing the early redemption premium paid in connection with the repurchase of the $1,150 million 6.00% 2022 Notes, and also the execution of Amendment No. 7 and the Refinancing Facility Agreement. During the fiscal year ended September 30, 2019, the Company recorded refinancing costs of $3 million representing the early redemption premium paid in connection with the repurchase of the $550 million 2020 Senior Subordinated Notes and issuance of the $4.0 billion 2026 Senior Secured Notes. During the fiscal year ended September 30, 2018, the Company recorded refinancing costs of $6 million representing the refinancing of term loans, and issuance of the $500 million 6.875% Senior Subordinated Notes.

Interest Rate Swap and Cap Agreements

See Note 21, “Derivatives and Hedging Activities,” for information about how our interest rate swap and cap agreements are used to manage interest rate risk associated with floating-rate borrowings under our credit facilities.

Secured Notes

TransDigm Inc.’s 2025 Secured Notes and 2026 Secured Notes jointly and severally guaranteed, on a senior basis, by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indentures. The Secured Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all the covenants contained in the notes.

Subordinated Notes

TransDigm Inc.'s 2024 Notes, 2025 Notes, 6.375% 2026 Notes, 7.50% 2027 Notes and 5.50% 2027 Notes are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm UK and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indenture. TransDigm UK's 6.875% 2026 Notes are jointly and severally guaranteed, on a senior subordinated basis, by TD Group, TransDigm Inc. and all of TransDigm Inc.'s Domestic Restricted Subsidiaries, as defined in the applicable Indenture. The Notes contain many of the restrictive covenants included in the Credit Agreement. TransDigm is in compliance with all the covenants contained in the notes.

Debt Repayment Schedule

At September 30, 2020, future maturities of long-term debt (includes finance leases) are as follows (in millions):

Fiscal years ending September 30,
2021			$	77
2022			81
2023			281
2024			2,970
2025			2,902
Thereafter			13,523
			$	19,834

13. RETIREMENT PLANS

The Company maintains certain non-contributory defined benefit pension plans. The plans provide benefits of stated amounts for each year of service. The Company’s funding policy is to contribute actuarially determined amounts allowable under tax and statutory regulations for the qualified plans. The Company uses a September 30th measurement date for its defined benefit pension plans. In addition, the Company makes actuarially computed contributions to these plans as necessary to adequately fund benefits. The Company’s funding policy is consistent with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”).

The Company sponsors a number of U.S. defined benefit pension plans, with the largest plan being the Esterline Retirement Plan (“ERP”). Under the ERP, pension benefits are primarily earned under a cash balance formula with annual pay credits ranging from 2% to 6%. The weighted average interest crediting rate for the plan is 5.50% for fiscal years 2020 and 2019. The Company also sponsors other retirement benefit plans for certain employees in the U.S., such as non-contributory health care and life insurance plans.

F-24

The Company sponsors a number of non-U.S. defined benefit pension plans primarily in Canada, Belgium, France, Germany and the United Kingdom. These defined benefit plans generally provide benefits to employees based on formulas recognizing length of service and earnings. The Company also sponsors other retirement benefit plans for its employees in Canada. Other retirement benefit plans are non-contributory health care and life insurance plans.

The accumulated benefit obligation and projected benefit obligation for the U.S. plans are $358.1 million and $366.2 million, respectively, with plan assets of $342.0 million as of September 30, 2020. The underfunded status for the Company’s U.S. plans is $24.2 million at September 30, 2020, all of which is for the Company’s qualified U.S. plans. As of September 30, 2020, a $19.4 million decrease to the projected benefit obligation is due to settlements that occurred in fiscal 2020. Contributions to the Company’s qualified and non-qualified U.S. plans totaled $1.7 million and $19.8 million, respectively, in fiscal 2020. Contributions to the Company’s qualified and non-qualified U.S. plans totaled $1.4 million and $0.9 million, respectively, in fiscal 2019. There is an expected funding requirement of $0.9 million for fiscal 2021 for the qualified U.S. pension plans maintained by the Company.

The accumulated benefit obligation and projected benefit obligation for the non-U.S. plans are $237.2 million and $247.8 million, respectively, with plan assets of $204.3 million as of September 30, 2020. The underfunded status for these non-U.S. plans is $47.5 million at September 30, 2020. As of September 30, 2020, a $40.1 million decrease to the projected benefit obligation is due to settlements that occurred in fiscal 2020. Contributions to the non-U.S. plans totaled $8.3 million and $2.7 million in fiscal 2020 and 2019, respectively. The expected funding requirement for fiscal 2021 for the non-U.S. plans is $3.1 million.

			U.S. Defined Benefit Pension Plans												Non-U.S. Defined Benefit Pension Plans
Principal assumptions as of year end:			2020						2019						2020						2019
Discount rate			2.47%						3.03%						1.90%						2.20%
Rate of increase in future compensation levels			4.45%						4.48%						2.90%						2.98%
Assumed long-term rate of return on plan assets			5.99%						6.00%						3.69%						4.16%

			U.S. Post-Retirement Pension Plans												Non-U.S. Post Retirement Pension Plans
Principal assumptions as of year end:			2020						2019						2020						2019
Discount rate			1.99%						2.86%						2.28%						2.68%
Initial weighted average health care trend rate			7.27%						7.46%						5.50%						5.60%
Ultimate weighted average health care trend rate			6.00%						6.00%						4.10%						4.10%

The Company uses discount rates developed from a yield curve established from high-quality corporate bonds and matched to plan-specific projected benefit payments. Although future changes to the discount rate are unknown, had the discount rate increased or decreased by 25 basis points, pension liabilities in total would have decreased $20.3 million or increased $17.1 million, respectively. Had the discount rate increased or decreased by 25 basis points, fiscal 2020 net periodic benefit cost for the pension plans would have increased $0.2 million or decreased $0.1 million, respectively. In determining the expected long-term rate of return on the defined benefit pension plans’ assets, the Company considers the historical rates of return, the nature of investments, the asset allocation, and expectations of future investment strategies. Had the expected return on assets increased or decreased by 25 basis points, fiscal 2020 net periodic benefit cost would have decreased $1.3 million or increased $1.3 million, respectively. Management is not aware of any legislative or other initiatives or circumstances that will significantly impact the Company’s pension obligations in fiscal 2021.

Plan assets are invested in a diversified portfolio of equity and debt securities consisting primarily of common stocks, bonds and government securities. The objective of these investments is to maintain sufficient liquidity to fund current benefit payments and achieve targeted risk-adjusted returns. Management periodically reviews allocations of plan assets by investment type and evaluates external sources of information regarding the long-term historical returns and expected future returns for each investment type.

F-25

Allocations by investment type are as follows**:**

												Actual
Plan assets allocation as of fiscal year end:						Target						2020						2019
Equity securities						35 - 70%						39.1%						35.1%
Debt securities						30 - 65%						57.0%						59.5%
Cash						—%						3.9%						5.4%
Total												100.0%						100.0%

The following table presents the fair value of the Company’s pension plan assets as of September 30, 2020, by asset category segregated by level within the fair value hierarchy, as described in Note 20, “Fair Value Measurements” (in millions):

						Fair Value Hierarchy
						Level 1						Level 2						Total
Investments measured at fair value by category:
Equity Funds:(1)
U.S. Equity Securities						$	4					$	—					$	4
Non-U.S. Equity Securities						48						—						48
Fixed Income Securities:(2)
Non-U.S. Foreign Commercial and Government Bonds						—						58						58
Cash and Cash Equivalents(3)						22						—						22
						$	74					$	58					$	132
Investments measured at net asset value by category:**(4)
Equity Funds:(1)
Commingled Trust Funds - Non-U.S. Securities																		153
Non-U.S. Equity Securities																		9
Fixed Income Securities:(2)
U.S. Government Bonds and Securities																		80
U.S Corporate Bonds																		123
Non-U.S. Corporate Bonds																		18
Non-U.S. Foreign Commercial and Government Bonds																		31
Total																		$	546

F-26

The following table presents the fair value of the Company’s pension plan assets as of September 30, 2019, by asset category segregated by level within the fair value hierarchy, as described in Note 20, “Fair Value Measurements” (in millions):

						Fair Value Hierarchy
						Level 1						Level 2						Total
Investments measured at fair value by category:
Equity Funds:(1)
U.S. Equity Securities						$	3					$	—					$	3
Non-U.S. Equity Securities						48						—						48
Fixed Income Securities:(2)
Non-U.S. Foreign Commercial and Government Bonds						—						86						86
Cash and Cash Equivalents(3)						30						—						30
						$	81					$	86					$	167
Investments measured at net asset value by category:**(4)
Equity Funds:(1)
Commingled Trust Funds - Non-U.S. Securities																		142
Fixed Income Securities:(2)
U.S. Government Bonds and Securities																		86
U.S Corporate Bonds																		108
Non-U.S. Corporate Bonds																		18
Non-U.S. Foreign Commercial and Government Bonds																		30
Total																		$	551

(1) Level 1 Equity Securities are actively traded on U.S. and non-U.S. exchanges and are either valued using the market approach at quoted market prices on the measurement date or at the net asset value of the shares held by the plan on the measurement date based on quoted market prices.

(2) Level 2 Fixed Income Securities are primarily valued using the market approach at either quoted market prices, pricing models that use observable market data, or bids provided by independent investment brokerage firms.

(3) Cash and Cash Equivalents include cash which is used to pay benefits and cash invested in a short-term investment fund that holds securities with values based on quoted market prices, but for which the funds are not valued on quoted market basis.

(4) These investments are valued at the net asset value (“NAV”) of units held. The NAV is used to estimate fair value and is based on the fair value of the underlying investments held by the fund less its liability.

Net periodic pension cost for the Company’s U.S. and non-U.S. defined benefit pension plans at the end of each fiscal year consisted of the following (in millions):

						Defined Benefit Pension Plans
						2020												2019												2018
						U.S. Pension Plans						Non-U.S. Pension Plans						U.S. Pension Plans						Non-U.S. Pension Plans						U.S. Pension Plans						Non-U.S. Pension Plans
Service cost						$	9					$	6					$	5					$	3					$	1					$	1
Interest cost						10						5						7						5						1						2
Expected return on plan assets						(19)						(8)						(10)						(6)						(1)						(3)
Amortization of actuarial loss (gain)						1						1						—						—						—						1
Curtailment/settlement loss (gain)						(1)						(1)						—						—						—						—
Net periodic pension cost						$	—					$	3					$	2					$	2					$	1					$	1

F-27

Net periodic pension cost for the Company’s U.S. and non-U.S. post-retirement pension plans was less than $1 million at the end of fiscal year 2020, 2019 and 2018.

The components of net periodic pension costs other than service cost are included in other (income) expense in the consolidated statements of income.

The funded status of the defined benefit pension and post-retirement plans at the end of fiscal 2020 and 2019 were as follows (in millions):

			Defined Benefit Pension Plans																								Post-Retirement Pension Plans
			September 30, 2020												September 30, 2019												September 30, 2020												September 30, 2019
			U.S. Pension Plans						Non-U.S. Pension Plans						U.S. Pension Plans						Non-U.S. Pension Plans						U.S. Pension Plans						Non-U.S. Pension Plans						U.S. Pension Plans						Non-U.S. Pension Plans
Benefit Obligations
Beginning balance			$	379					$	270					$	19					$	73					$	1					$	14					$	1					$	—
Currency translation adjustment			—						5						—						(4)						—						—						—						—
Service cost			9						6						5						3						—						—						—						—
Interest cost			10						5						8						5						—						—						—						—
Plan participant contributions			—						1						—						—						—						—						—						—
Actuarial loss			10						13						43						28						—						1						—						1
Acquisitions			—						—						318						171						—						—						—						13
Curtailments			—						(2)						—						—						—						—						—						—
Settlements			(20)						(40)						—						—						—						—						—						—
Other adjustments			—						—						—						1						—						—						—						—
Benefits paid			(22)						(10)						(14)						(7)						—						(1)						—						—
Ending balance			$	366					$	248					$	379					$	270					$	1					$	14					$	1					$	14
Plan Assets - Fair Value
Beginning balance			$	318					$	234					$	9					$	60					$	—					$	—					$	—					$	—
Currency translation adjustment			—						3						—						(3)						—						—						—						—
Realized and unrealized gain on plan assets			44						8						31						19						—						—						—						—
Plan participants contributions			—						1						—						—						—						—						—						—
Company contributions			21						8						2						3						—						1						—						—
Settlements			(19)						(40)						—						—						—						—						—						—
Acquisitions			—						—						290						162						—						—						—						—
Other adjustments			—						—						—						—						—						—						—						—
Expenses paid			—						—						—						—						—						—						—						—
Benefits paid			(22)						(10)						(14)						(7)						—						(1)						—						—
Ending balance			$	342					$	204					$	318					$	234					$	—					$	—					$	—					$	—
Funded Status
Fair value of plan assets			$	342					$	204					$	318					$	234					$	—					$	—					$	—					$	—
Benefit obligations			(366)						(248)						(379)						(270)						(1)						(14)						(1)						(14)
Net amount recognized			$	(24)					$	(44)					$	(61)					$	(36)					$	(1)					$	(14)					$	(1)					$	(14)
Amount Recognized on Consolidated Balance Sheet
Non-current asset			$	—					$	4					$	—					$	4					$	—					$	—					$	—					$	—
Current liability			(1)						(1)						(2)						—						—						(1)						—						(1)
Non-current liability			(23)						(47)						(59)						(40)						(1)						(13)						(1)						(13)
Net amount recognized			$	(24)					$	(44)					$	(61)					$	(36)					$	(1)					$	(14)					$	(1)					$	(14)
Amounts Recognized in Accumulated Other Comprehensive Income
Net actuarial loss			$	12					$	35					$	28					$	23					$	—					$	2					$	—					$	1
Prior service cost			1						1						1						1						—						—						—						—
Ending balance			$	13					$	36					$	29					$	24					$	—					$	2					$	—					$	1

The accumulated benefit obligation for all pension plans was $595.3 million at September 30, 2020 and $623.8 million at September 30, 2019.

F-28

Estimated future benefit payments expected to be paid from the pension and post-retirement benefit plans or from the Company’s assets are as follows (in millions):

Fiscal Year
2021						$	31
2022						31
2023						32
2024						33
2025						34
2026 - 2030						182

Defined Contribution Plans

The Company sponsors certain defined contribution employee savings plans that cover substantially all of the Company’s U.S. employees. Under certain plans, the Company contributes a percentage of employee compensation and matches a portion of employee contributions. The cost recognized for such contributions for the fiscal years ended September 30, 2020, 2019 and 2018 was approximately $25.3 million, $24.5 million and $14.9 million, respectively.

14. INCOME TAXES

The Company’s income from continuing operations before income taxes includes the following components for the periods shown below (in millions):

			Fiscal Years Ended September 30,
			2020						2019						2018
United States			$	635					$	878					$	827
Foreign			105						185						159
			$	740					$	1,063					$	986

The Company’s income tax provision on income from continuing operations consists of the following for the periods shown below (in millions):

			Fiscal Years Ended September 30,
			2020						2019						2018
Current
Federal			$	26					$	154					$	137
State			3						15						12
Foreign			34						54						27
			63						223						176
Deferred			24						(1)						(152)
			$	87					$	222					$	24

F-29

The differences between the income tax provision on income from continuing operations at the federal statutory income tax rate and the tax provision shown in the accompanying consolidated statements of income for the periods shown below are as follows (in millions):

			Fiscal Years Ended September 30,
			2020						2019						2018
Tax at statutory rate of 21% (21% for fiscal 2019 and 24.5% for fiscal 2018 )			$	155					$	223					$	242
Stock compensation			(79)						(58)						(51)
Domestic manufacturing deduction			—						—						(15)
U.S. tax reform(1)			—						—						(146)
Foreign rate differential			5						2						(14)
Foreign derived intangible income			(20)						(16)						—
Foreign tax credits			(5)						(18)						(3)
Changes in valuation allowances impacting results(2)			31						66						—
Other—net			—						23						11
Income tax provision			$	87					$	222					$	24

(1) On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings from certain foreign subsidiaries that were previously deferred as well as other changes. We recorded tax benefits of $176.4 million related to the remeasurement of our net U.S. deferred tax liabilities to reflect the reduction in the corporate tax rate. We also recorded tax expense of $30.0 million related to the one-time transition tax.

(2) Primarily relates to the Company’s business interest expense limitation pursuant to IRC §163(j) as modified by the Act. Such provision, as modified, is effective for the Company beginning in fiscal 2019. In general, the deduction for interest expense is limited to 30% (50% as modified by the CARES Act for the Company’s fiscal 2020 and 2021) of the sum of the Company’s adjusted taxable income (“ATI”) and its business interest income. Interest expense disallowed by such limitation, in a taxable year, may be carried forward indefinitely. Based upon available evidence, a valuation allowance was recorded for the resulting carryforward to reflect the Company’s belief that it is more likely than not that such deferred tax assets will not be realized.

The components of the deferred taxes consist of the following at September 30 (in millions):

			2020						2019
Deferred tax assets (liabilities):
Intangible assets			$	(730)					$	(710)
Property, plant and equipment			(59)						(64)
Employee benefits			110						123
Interest rate swaps and caps			92						55
U.S. interest expense limitation			87						65
Loss contract reserves			55						63
Net operating losses			54						58
Inventories			41						39
Non-U.S. income tax credits			21						24
U.S. income tax credits			17						17
Environmental reserves			12						10
Product warranty reserves			10						8
Other			9						4
Total			(281)						(308)
Add: Valuation allowance			(132)						(118)
Total net deferred tax			$	(413)					$	(426)

F-30

At September 30, 2020, the Company has state net operating loss carryforwards of approximately $1,482.1 million, Belgium net operating loss carryforwards of $47.0 million, German net operating loss carryforwards of $18.1 million and United Kingdom net operating loss carryforwards of approximately $12.3 million that expire in various years from 2020 to 2039. The Company had U.S. and non-U.S. tax credit carryforwards of $38.2 million that expire beginning in 2025.

The deferred tax assets for the interest expense limitation, net operating losses, and tax credit carryforwards are reduced by a valuation allowance for the amount of such assets that the Company believes will not be realized.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. The Company is no longer subject to U.S. federal examinations for years before fiscal 2015.The Company is currently under examination for its federal income taxes in the U.S. for fiscal 2016, in Belgium for fiscal years 2016 through 2018, in Canada for fiscal years 2013 through 2015, and in France for fiscal years 2015 through 2018. The Company expects the examination in France to be completed during fiscal 2021. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

			2020						2019
Balance at October 1			$	37					$	14
Additions based on tax positions related to the prior year			7						26
Additions based on tax positions related to the current year			2						—
Reductions based on tax positions related to the prior year			(1)						(2)
Settlement with tax authorities			(2)						—
Lapse in statute of limitations			(2)						(1)
Balance at September 30			$	41					$	37

Unrecognized tax benefits at September 30, 2020 and 2019, the recognition of which would have an effect on the effective tax rate for each fiscal year, amounted to $40.9 million and $36.7 million, respectively. The Company classifies all income tax related interest and penalties as income tax expense, which were not significant for the years ended September 30, 2020 and 2019. As of September 30, 2020 and 2019, the Company accrued $8.7 million and $5.0 million, respectively, for the potential payment of interest and penalties. Within the next 12 months, it is reasonably possible that unrecognized tax benefits could be reduced by approximately $20.0 million resulting from resolution or closure of tax examinations. Any increase in the amount of unrecognized tax benefits within the next 12 months is expected to be insignificant.

15. COMMITMENTS AND CONTINGENCIES

During the ordinary course of business, the Company is from time to time threatened with, or may become a party to, legal actions and other proceedings. While the Company is currently involved in certain legal proceedings, it believes the results of these proceedings will not have a material adverse effect on its financial condition, results of operations, or cash flows.

Environmental Liabilities

Our operations and facilities are subject to a number of federal, state, local and foreign environmental laws and regulations that govern, among other things, discharges of pollutants into the air and water, the generation, handling, storage and disposal of hazardous materials and wastes, the remediation of contamination and the health and safety of our employees. Environmental laws and regulations may require that the Company investigate and remediate the effects of the release or disposal of materials at sites associated with past and present operations. Certain facilities and third-party sites utilized by the Company have been identified as potentially responsible parties under the federal superfund laws and comparable state laws. The Company is currently involved in the investigation and remediation of a number of sites under applicable laws.

F-31

Estimates of the Company’s environmental liabilities are based on current facts, laws, regulations and technology. These estimates take into consideration the Company’s prior experience and professional judgment of the Company’s environmental advisors. Estimates of the Company’s environmental liabilities are further subject to uncertainties regarding the nature and extent of site contamination, the range of remediation alternatives available, evolving remediation standards, imprecise engineering evaluations and cost estimates, the extent of corrective actions that may be required and the number and financial condition of other potentially responsible parties, as well as the extent of their responsibility for the remediation.

Accordingly, as investigation and remediation proceed, it is likely that adjustments in the Company’s accruals will be necessary to reflect new information. The amounts of any such adjustments could have a material adverse effect on the Company’s results of operations or cash flows in a given period. Based on currently available information, however, the Company does not believe that future environmental costs in excess of those accrued with respect to sites for which the Company has been identified as a potentially responsible party are likely to have a material adverse effect on the Company’s financial condition.

Environmental liabilities are recorded when the liability is probable and the costs are reasonably estimable, which generally is not later than at completion of a feasibility study or when the Company has recommended a remedy or has committed to an appropriate plan of action. The Company also takes into consideration the estimated period of time in which payments will be required. The liabilities are reviewed periodically and, as investigation and remediation proceed, adjustments are made as necessary. Liabilities for losses from environmental remediation obligations do not consider the effects of inflation and anticipated expenditures are not discounted to their present value. The liabilities are not offset by possible recoveries from insurance carriers or other third parties, but do reflect anticipated allocations among potentially responsible parties at federal superfund sites or similar state-managed sites, third party indemnity obligations, and an assessment of the likelihood that such parties will fulfill their obligations at such sites.

The Company’s consolidated balance sheets includes current environmental remediation obligations at September 30, 2020 and 2019 of $7.9 million and $9.4 million classified as a component of accrued liabilities, respectively, and non-current environmental remediation obligations at September 30, 2020 and 2019 of $43.1 million and $32.7 million classified as a component of other non-current liabilities, respectively.

Leach International Europe - Fire

On August 8, 2019, a fire caused significant damage to the Niort, France operating facility of Leach International Europe, a subsidiary of TransDigm. Leach International Europe’s results are reported within the Company’s Power & Control segment. The facility as well as certain machinery, equipment and inventory sustained damage. The Company suspended operations at the Niort facility as a result of the fire and transferred certain operations to temporary facilities until operations are fully restored at the rebuilt facility in Niort. The new facility is estimated to be complete and fully operational during the second quarter of fiscal 2021.

The Company’s insurance covers damage to the facility, equipment, inventory, and other assets, at replacement cost, as well as business interruption, and recovery-related expenses caused by the fire, subject to a $1 million deductible and certain sub-limits based on the nature of the covered item. Anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. Anticipated insurance recoveries in excess of net book value of the damaged property and inventory will not be recorded until all contingencies relating to the claim have been resolved. As of September 30, 2020, the Company has received approximately $27 million in insurance proceeds for property loss. The recoveries received were previously recorded as an insurance recovery receivable (classified as a component of prepaid expenses and other on the consolidated balance sheets) at the time of loss. For the fiscal year ended September 30, 2020, the Company incurred costs of approximately $17 million subject to coverage under the business interruption portion of the Company’s insurance policy. The timing of and amounts of insurance recoveries for business interruption are not known at this time.

16. CAPITAL STOCK

TD Group consists of 224,400,000 shares of $.01 par value common stock and 149,600,000 shares of $.01 par value preferred stock. The total number of shares of common stock issued at September 30, 2020 and 2019 was 58,612,028 and 57,623,311, respectively. The total number of shares held in treasury at September 30, 2020 and 2019 was 4,198,226 and 4,161,326, respectively. There were no shares of preferred stock outstanding at September 30, 2020 and 2019. The terms of the preferred stock have not been established.

F-32

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. No repurchases were made under the program during the fiscal year ended September 30, 2019. 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.

17. SEGMENTS

The Company’s businesses are organized and managed in three reporting segments: Power & Control, Airframe and Non-aviation.

The Power & Control segment includes operations that primarily develop, produce and market systems and components that predominately provide power to or control power of the aircraft utilizing electronic, fluid, power and mechanical motion control technologies. Major product offerings include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, databus and power controls, advanced sensor products, switches and relay panels, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems. Primary customers of this segment are engine and power system and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.

The Airframe segment includes operations that primarily develop, produce and market systems and components that are used in non-power airframe applications utilizing airframe and cabin structure technologies. Major product offerings include engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, cockpit security components and systems, specialized and advanced cockpit displays, aircraft audio systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, thermal protection and insulation, lighting and control technology and parachutes. Primary customers of this segment are airframe manufacturers and cabin system suppliers and subsystem suppliers, airlines, third party maintenance suppliers, military buying agencies and repair depots. Products are sold in the original equipment and aftermarket market channels.

The Non-aviation segment includes operations that primarily develop, produce and market products for non-aviation markets. Major product offerings include headsets for high-noise, medium-noise, and dismounted applications, seat belts and safety restraints for ground transportation applications, mechanical/electro-mechanical actuators and controls for space applications, hydraulic/electromechanical actuators and fuel valves for land based gas turbines, and refueling systems for heavy equipment used in mining, construction and other industries and turbine controls for the energy and oil and gas markets. Primary customers of this segment are off-road vehicle suppliers and subsystem suppliers, child restraint system suppliers, satellite and space system suppliers, manufacturers of heavy equipment used in mining, construction and other industries and turbine original equipment manufacturers, gas pipeline builders and electric utilities.

The Esterline businesses were acquired during the second quarter of fiscal 2019 and preliminarily assessed as a separate segment of the Company. During the third quarter of fiscal 2019, the Esterline businesses were integrated into TransDigm's existing Power & Control, Airframe, and Non-Aviation segments. Previously reported operating results for the Esterline businesses were reclassified to conform to the presentation for the fiscal year ended September 30, 2020. The re-segmentation did not impact prior period results.

The primary measurement used by management to review and assess the operating performance of each segment is EBITDA As Defined. The Company defines EBITDA As Defined as earnings before interest, taxes, depreciation and amortization plus certain non-operating items recorded as corporate expenses including refinancing costs, acquisition-related costs, transaction-related costs, foreign currency gains and losses, and non-cash compensation charges incurred in connection with the Company’s stock incentive plans. Acquisition-related costs represent accounting adjustments to inventory associated with acquisitions of businesses and product lines that were charged to cost of sales when the inventory was sold; costs incurred to integrate acquired businesses and product lines into the Company’s operations, facility relocation costs and other acquisition-related costs; transaction related costs comprising deal fees; legal, financial and tax diligence expenses and valuation costs that are required to be expensed as incurred and other acquisition accounting adjustments.

F-33

EBITDA As Defined is not a measurement of financial performance under U.S. GAAP. Although the Company uses EBITDA As Defined to assess the performance of its business and for various other purposes, the use of this non-GAAP financial measure as an analytical tool has limitations, and it should not be considered in isolation or as a substitute for analysis of the Company’s results of operations as reported in accordance with U.S. GAAP.

The Company’s segments are reported on the same basis used internally for evaluating performance and for allocating resources. The accounting policies for each segment are the same as those described in the summary of significant accounting policies in the Company’s consolidated financial statements. Intersegment sales and transfers are recorded at values based on market prices, which creates intercompany profit on intersegment sales or transfers that is eliminated in consolidation. Intersegment sales were immaterial for the periods presented below. Certain corporate-level expenses are allocated to the operating segments.

The following table presents net sales by reportable segment (in millions):

			Fiscal Years Ended September 30,
			2020						2019						2018
Net sales to external customers
Power & Control
Commercial OEM			$	623					$	686					$	499
Commercial Aftermarket			673						769						665
Defense			1,399						1,281						975
Total Power & Control			2,695						2,736						2,139
Airframe
Commercial OEM			783						836						509
Commercial Aftermarket			689						865						701
Defense			781						628						321
Total Airframe			2,253						2,329						1,531
Total Non-aviation			155						158						141
			$	5,103					$	5,223					$	3,811

The following table reconciles EBITDA As Defined by segment to consolidated income from continuing operations before income taxes (in millions):

			Fiscal Years Ended September 30,
			2020						2019						2018
EBITDA As Defined
Power & Control			$	1,345					$	1,395					$	1,115
Airframe			955						1,063						759
Non-aviation			54						51						44
Total segment EBITDA As Defined			2,354						2,509						1,918
Unallocated corporate expenses			76						90						41
Total Company EBITDA As Defined			2,278						2,419						1,877
Depreciation and amortization			283						225						129
Interest expense - net			1,029						859						663
Acquisition-related costs			31						169						29
Stock compensation expense			93						93						58
Refinancing costs			28						3						6
COVID-19 pandemic & 737 MAX restructuring costs			54						—						—
Other, net			20						7						6
Income from continuing operations before income taxes			$	740					$	1,063					$	986

F-34

The following table presents capital expenditures and depreciation and amortization by segment (in millions):

			Fiscal Years Ended September 30,
			2020						2019						2018
Capital expenditures
Power & Control			$	89					$	50					$	39
Airframe			10						48						32
Non-aviation			4						3						2
Corporate			2						1						—
			$	105					$	102					$	73
Depreciation and amortization
Power & Control			$	117					$	99					$	67
Airframe			157						119						56
Non-aviation			7						6						5
Corporate			2						2						1
			$	283					$	226					$	129

The following table presents total assets by segment (in millions):

			September 30, 2020						September 30, 2019
Total assets
Power & Control			$	7,005					$	7,037
Airframe			6,575						6,672
Non-aviation			251						262
Corporate			4,564						1,322
Assets of discontinued operations (Note 23)			—						962
			$	18,395					$	16,255

The Company’s sales principally originate from the United States, and the Company’s long-lived assets are principally located in the United States.

18. STOCK-BASED COMPENSATION

The Company’s equity compensation plans are designed to assist the Company in attracting, retaining, motivating and rewarding key employees, directors or consultants, and promoting the creation of long-term value for stockholders by closely aligning the interests of these individuals with those of the Company’s stockholders. The Company’s equity compensation plans provide for the granting of stock options.

Non-cash stock compensation expense recognized by the Company during the fiscal years ended September 30, 2020, 2019 and 2018 was $92.7 million, $93.4 million and $58.5 million, respectively.

The weighted-average grant date fair value of options granted during the fiscal years ended September 30, 2020, 2019 and 2018 was $157.41, $114.43 and $81.04, respectively.

Compensation expense is recognized based upon probability assessments of awards that are expected to vest in future periods, adjusted for expected forfeitures. Such probability assessments are subject to revision and, therefore, unrecognized compensation expense is subject to future changes in estimate. As of September 30, 2020, there was approximately $62.8 million of total unrecognized compensation expense related to non-vested awards expected to vest, which is expected to be recognized over a weighted-average period of 1.7 years.

On September 25, 2020, the Compensation Committee of the Board of Directors determined to allow the portion of options granted in fiscal 2020 with a scheduled vesting date in 2020 to vest, effective September 30, 2020, notwithstanding that performance criteria for such options would not be met. This action impacts options granted to approximately 85 individuals, including all of the independent directors and certain executive officers. This action was treated as a modification for accounting purposes under ASC 718. An additional $2.5 million of stock compensation expense for fiscal 2020 resulted from this modification.

F-35

The fair value of the Company’s employee stock options was estimated at the date of grant or modification using a Black-Scholes option-pricing model with the following weighted average assumptions for all options granted during the fiscal years ended:

			Fiscal Years Ended September 30,
			2020						2019						2018
Risk-free interest rate			0.26% to 1.65%						2.33% to 3.03%						2.01% to 2.84%
Expected life of options			5 to 5.5 years						5.5 years						5.2 years
Expected dividend yield of stock			—						—						—
Expected volatility of stock			25% to 39%						25%						25%

The risk-free interest rate is based upon the Treasury bond rates as of the grant or modification date. The average expected life of stock-based awards is based on the Company’s actual historical exercise experience. Expected volatility of stock was calculated using a rate based upon the historical volatility of TransDigm’s common stock up to the date of grant or date of modification. 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. Notwithstanding the special cash dividends declared and paid from time to time, the Company historically has not declared and paid regular cash dividends and does not anticipate declaring and paying regular cash dividends in future periods; thus, no dividend rate assumption is used.

The total fair value of options vested during fiscal years ended September 30, 2020, 2019 and 2018 was $97.2 million, $37.7 million and $44.4 million, respectively. The significant increase in the total fair value of options vested during fiscal year 2020 compared to fiscal years 2019 and 2018 resulted from substantially more options vesting and an increase in the fair value of options granted during the current fiscal year.

2019 Stock Option Plan

In August 2019, the Board of Directors of TD Group adopted a new stock option plan, which was subsequently approved by stockholders on October 3, 2019. The 2019 stock option plan permits TD Group to award stock options to our key employees, directors or consultants. The total number shares of TD Group common stock reserved for issuance or delivery under the 2019 stock option plan is 4,000,000, subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate transaction or event. No grants have been made from TD Group’s 2019 stock option plan as of September 30, 2020.

2014 Stock Option Plan

In July 2014, the Board of Directors of TD Group adopted the 2014 stock option plan, which was subsequently approved by stockholders on October 2, 2014. The 2014 stock option plan permits TD Group to award our key employees, directors or consultants stock options. The total number of shares of TD Group common stock reserved for issuance or delivery under the 2014 stock option plan is 5,000,000, subject to adjustment in the event of any stock dividend or split, reorganization, recapitalization, merger, share exchange or any other similar corporate transaction or event.

F-36

Performance Vested Stock Options—Generally all of the options granted through September 30, 2020 under the 2014 stock option plan have been pursuant to an equity incentive program adopted by the Company in 2008. Under the 2008 equity incentive program, generally all of the options granted will vest based on the Company’s achievement of established operating performance goals. As of September 30, 2020, the Company projected that the performance criteria is not expected to be acheived on the portion of options granted in fiscal 2020 with a scheduled vesting date of September 30, 2021 and beyond. The following table summarizes the activity, pricing and other information for the Company’s performance vested stock-based award activity during the fiscal year ended September 30, 2020:

			Number of Options						Weighted-Average Exercise Price Per Option						Weighted-Average Remaining Contractual Term						Aggregate Intrinsic Value
Outstanding at September 30, 2019			3,167,458						$	323.73
Granted			742,840						538.92
Exercised			(34,495)						284.21
Forfeited			(261,946)						372.81
Expired			—						—
Outstanding at September 30, 2020			3,613,857						$	364.79					7.6 years						$	398,716,843
Expected to vest			1,235,922						$	332.98					7.5 years						$	175,676,981
Exercisable at September 30, 2020			1,709,551						$	336.58					7.2 years						$	236,841,196

At September 30, 2020, there were 1,316,998 remaining shares available for award under TD Group’s 2014 stock option plan.

2006 Stock Incentive Plan

In conjunction with the consummation of the Company’s initial public offering, a 2006 stock incentive plan was adopted by TD Group. In July 2008 and March 2011, the plan was amended to increase the number of shares available for issuance thereunder. TD Group reserved 8,119,668 shares of its common stock for issuance to key employees, directors or consultants under the plan. Awards under the plan were in the form of options, restricted stock or other stock-based awards. Options granted under the plan expire no later than the tenth anniversary of the applicable date of grant of the options, and have an exercise price of not less than the fair market value of our common stock on the date of grant. Restricted stock granted under the plan vested over three years. No restricted stock units remained outstanding as of September 30, 2018.

Performance Vested Stock Options—All of the options granted under the 2006 stock incentive plan have been pursuant to an equity incentive program adopted by the Company in 2008. Under the 2008 equity incentive program, all of the options granted vest based on the Company’s achievement of established operating performance goals. The following table summarizes the activity, pricing and other information for the Company’s performance vested stock-based award activity during the fiscal year ended September 30, 2020:

			Number of Options						Weighted-Average Exercise Price Per Option						Weighted-Average Remaining Contractual Term						Aggregate Intrinsic Value
Outstanding at September 30, 2019			3,134,022						$	155.34
Granted			—						—
Exercised			(887,842)						115.15
Forfeited			(10,500)						226.34
Expired			—						—
Outstanding at September 30, 2020			2,235,680						$	170.97					3.4 years						$	679,982,072
Exercisable at September 30, 2020			2,235,680						$	170.97					3.4 years						$	679,982,072

The 2006 stock incentive plan expired on March 14, 2016 and no further shares were granted under the plan thereafter.

2003 Stock Option Plan

Certain executives and key employees of the Company were granted stock options under TD Group’s 2003 stock option plan. All shares had been issued as of September 30, 2013. As of September 30, 2020 and 2019, 829 and 77,829 options were outstanding and exercisable at a weighted average price per option of $130.09. As of September 30, 2020, the weighted average remaining contractual term of the 829 options outstanding and exercisable is 2.1 years and the aggregate intrinsic value is $0.3 million.

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The total intrinsic value of performance options exercised during the fiscal years ended September 30, 2020, 2019 and 2018 was $394.2 million, $240.2 million and $192.5 million, respectively.

Dividend Equivalent Plans

Pursuant to the Third Amended and Restated TransDigm Group Incorporated 2003 Stock Option Plan Dividend Equivalent Plan, the Second Amended and Restated TransDigm Group Incorporated 2006 Stock Incentive Plan Dividend Equivalent Plan and the 2014 Stock Option Plan Dividend Equivalent Plan, all of the options granted under the existing stock option plans are entitled to certain dividend equivalent payments in the event of the declaration of a dividend by the Company.

Dividend equivalent payments on vested options were $184.9 million, $111.0 million and $56.1 million during the fiscal years ended September 30, 2020, 2019 and 2018, respectively. At September 30, 2020, there was $72.4 million recorded in accrued liabilities and $49.0 million accrued in other non-current liabilities on the consolidated balance sheets related to future dividend equivalent payments.

19. LEASES

The Company leases certain manufacturing facilities, offices, land, equipment and vehicles. Such leases, some of which are noncancellable and, in many cases, include renewals, expire at various dates. Such options to renew are included in the lease term when it is reasonably certain that the option will be exercised. The Company’s lease agreements typically do not contain any significant residual value guarantees or restrictive covenants, and payments within certain lease agreements are adjusted periodically for changes in an index or rate.

The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The discount rate implicit within our leases is generally not determinable and therefore we determine the discount rate based on our incremental borrowing rate. The incremental borrowing rate for our leases is determined based on the lease term and the currency in which lease payments are made. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.

The components of lease expense for the fiscal year ended September 30, 2020 are as follows (in millions):

			Classification						Fiscal Year Ended September 30, 2020
Operating lease cost			Cost of Sales or Selling and Administrative Expenses						$	29
Finance lease cost
Amortization of leased assets			Cost of Sales						3
Interest on lease liabilities			Interest Expense - Net						4
Total lease cost									$	36

Supplemental cash flow information related to leases for the fiscal year ended September 30, 2020 is as follows (in millions):

						Fiscal Year Ended September 30, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases						$	29
Operating cash outflows from finance leases						4
Financing cash outflows from finance leases						2
Lease assets obtained in exchange for new lease obligations:
Operating leases						$	32

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Supplemental balance sheet information related to leases is as follows (in millions):

			Classification						September 30, 2020
Operating Leases
Operating lease right-of-use assets			Other Assets						$	103
Current operating lease liabilities			Accrued Liabilities						22
Long-term operating lease liabilities			Other Non-current Liabilities						87
Total operating lease liabilities									$	109

Finance Leases
Finance lease right-of-use assets, net			Property, Plant and Equipment—Net						$	67
Current finance lease liabilities			Accrued Liabilities						2
Long-term finance lease liabilities			Other Non-current Liabilities						55
Total finance lease liabilities									$	57

As of September 30, 2020, the Company has the following remaining lease term and weighted average discount rates:

Weighted-average remaining lease term
Operating leases			6.5 years
Finance leases			16.4 years
Weighted-average discount rate
Operating leases			6.2%
Finance leases			7.2%

Maturities of lease liabilities at September 30, 2020 are as follows (in millions):

			Operating Leases						Finance Leases
2021			$	28					$	6
2022			24						6
2023			19						6
2024			16						6
2025			13						6
Thereafter			35						70
Total future minimum lease payments			135						100
Less: imputed interest			26						43
Present value of lease liabilities reported			$	109					$	57

Rental expense during the fiscal years ended September 30, 2019 and September 30, 2018 was $26 million and $19 million, respectively.

Future minimum rental commitments at September 30, 2019 under operating leases having initial or remaining non-cancellable lease terms exceeding one year are $22 million in fiscal 2020, $32 million in fiscal 2021, $17 million in fiscal 2022, $14 million in fiscal 2023, $13 million in fiscal 2024 and $28 million thereafter.

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20. FAIR VALUE MEASUREMENTS

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following summarizes the carrying amounts and fair values of financial instruments (in millions):

									September 30, 2020												September 30, 2019
			Level						Carrying Amount						Fair Value						Carrying Amount						Fair Value
Assets:
Cash and cash equivalents			1						$	4,717					$	4,717					$	1,467					$	1,467
Interest rate cap agreements(1)			2						—						—						1						1
Liabilities:
Interest rate swap agreements(2)			2						56						56						13						13
Interest rate swap agreements(3)			2						328						328						202						202
Foreign currency forward exchange contracts(3)			2						1						1						6						6
Short-term borrowings - trade receivable securitization facility(4)			1						349						349						350						350
Long-term debt, including current portion:
Term loans(4)			2						7,378						7,004						7,449						7,478
Revolving credit facility(4)			2						200						200						—						—
2022 Notes(4)			1						—						—						1,146						1,167
2024 Notes(4)			1						1,195						1,194						1,194						1,239
2025 Notes(4)			1						750						743						750						782
2025 Secured Notes(4)			1						1,091						1,194						—						—
6.375% 2026 Notes(4)			1						944						948						943						999
6.875% 2026 Notes(4)			1						493						500						491						535
6.25% 2026 Notes(4)			1						4,350						4,604						3,942						4,290
7.50% 2027 Notes(4)			1						545						569						545						595
5.50% 2027 Notes(4)			1						2,629						2,544						—						—
Government refundable advances			2						28						28						39						39
Finance lease obligations			2						57						57						50						50

(1)Included in other non-current assets on the consolidated balance sheets.

(2)Included in accrued liabilities on the consolidated balance sheets.

(3)Included in other non-current liabilities on the consolidated balance sheets.

(4)The carrying amount of the debt instrument is presented net of the debt issuance costs, premium and discount. Refer to Note 12, “Debt,” for gross carrying amounts.

The Company values its financial instruments using an industry standard market approach, in which prices and other relevant information are generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized using unobservable inputs.

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Interest rate swaps were measured at fair value using quoted market prices for the swap interest rate indexes over the term of the swap discounted to present value versus the fixed rate of the contract. The interest rate caps were measured at fair value using implied volatility rates of each individual caplet and the yield curve for the related periods.

The Company’s derivative contracts consist of foreign currency exchange contracts and, from time to time, interest rate swap and cap agreements. These derivative contracts are over-the-counter, and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates. These contracts are categorized as Level 2 in the fair value hierarchy.

The estimated fair value of the Company’s term loans was based on information provided by the agent under the Company’s senior secured credit facility. The estimated fair values of the Company’s notes were based upon quoted market prices. There has not been any impact to the fair value of derivative liabilities due to the Company's own credit risk. Similarly, there has not been any impact to the fair value of derivative assets based on the Company's evaluation of counterparties' credit risks.

The fair value of cash and cash equivalents, trade accounts receivable-net and accounts payable approximated book value due to the short-term nature of these instruments at September 30, 2020 and 2019.

21. DERIVATIVES AND HEDGING ACTIVITIES

The Company is exposed to, among other things, the impact of changes in foreign currency exchange rates and interest rates in the normal course of business. The Company’s risk management program is designed to manage the exposure and volatility arising from these risks, and utilizes derivative financial instruments to offset a portion of these risks. The Company uses derivative financial instruments only to the extent necessary to hedge identified business risks and does not enter into such transactions for trading purposes. The Company generally does not require collateral or other security with counterparties to these financial instruments and is therefore subject to credit risk in the event of nonperformance; however, the Company monitors credit risk and currently does not anticipate nonperformance by other parties. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged. The Company has agreements with each of its swap and cap counterparties that contain a provision whereby if the Company defaults on the credit facility the Company could also be declared in default on its swaps and caps, resulting in an acceleration of payment under the swaps and caps.

All derivative financial instruments are recorded at fair value in the consolidated balance sheets. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the consolidated balance sheet in accumulated other comprehensive income to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within accumulated other comprehensive income is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.

Interest Rate Swap and Cap Agreements – Interest rate swap and cap agreements are used to manage interest rate risk associated with floating-rate borrowings under our credit facility. The interest rate swap and cap agreements utilized by the Company effectively modify the Company’s exposure to interest rate risk by converting a portion of the Company’s floating-rate debt to a fixed rate basis through the expiration date of the interest rate swap and cap agreements, thereby reducing the impact of interest rate changes on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the term of the agreements without an exchange of the underlying principal amount. These derivative instruments qualify as effective cash flow hedges under U.S. GAAP. For these cash flow hedges, the effective portion of the gain or loss from the financial instruments was initially reported as a component of accumulated other comprehensive loss in stockholders’ deficit and subsequently reclassified into earnings in the same line as the hedged item in the same period or periods during which the hedged item affected earnings. As the interest rate swap and cap agreements are used to manage interest rate risk, any gains or losses from the derivative instruments that are reclassified into earnings are recognized in interest expense - net in the consolidated statements of income.

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The following table summarizes the Company’s interest rate swap agreements:

Aggregate Notional Amount (in millions)			Start Date			End Date			Related Term Loans			Conversion of Related Variable Rate Debt to Fixed Rate of:
$500			6/29/2018			3/31/2025			Tranche E			5.25% (3.0% plus the 2.25% margin percentage)
$750			6/30/2020			6/30/2022			Tranche E			4.75% (2.5% plus the 2.25% margin percentage)
$1,500			6/30/2022			3/31/2025			Tranche E			5.35% (3.1% plus the 2.25% margin percentage)
$1,000			6/28/2019			12/9/2025			Tranche F			4.05% (1.8% plus the 2.25% margin percentage)
$1,400			6/30/2021			12/9/2025			Tranche F			5.25% (3.0% plus the 2.25% margin percentage)
$500			12/30/2016			12/31/2021			Tranche G			4.15% (1.9% plus the 2.25% margin percentage)
$400			9/30/2017			9/30/2022			Tranche G			4.15% (1.9% plus the 2.25% margin percentage)
$900			12/31/2021			6/28/2024			Tranche G			5.35% (3.1% plus the 2.25% margin percentage)
$400			9/30/2022			6/28/2024			Tranche G			5.25% (3.0% plus the 2.25% margin percentage)

The following table summarizes the Company’s interest rate cap agreements:

Aggregate Notional Amount (in millions)			Start Date			End Date			Related Debt			Offsets Variable Rate Debt Attributable to Fluctuations Above:
$750			6/30/2020			6/30/2022			Tranche E			Three month LIBOR of 2.5%
$400			6/30/2016			6/30/2021			Tranche F			Three month LIBOR of 2.0%
$400			12/30/2016			12/31/2021			Tranche G			Three month LIBOR of 2.5%

Certain derivative asset and liability balances are offset where master netting agreements provide for the legal right of setoff. For classification purposes, we record the net fair value of each type of derivative position that is expected to settle in less than one year with each counterparty as a net current asset or liability and each type of long-term position as a net non-current asset or liability. The amounts shown in the table below represent the gross amounts of recognized assets and liabilities, the amounts offset in the consolidated balance sheet and the net amounts of assets and liabilities presented therein.

						September 30, 2020												September 30, 2019
						Asset						Liability						Asset						Liability
Interest rate cap agreements						$	—					$	—					$	1					$	—
Interest rate swap agreements(1)						—						(384)						—						(216)
Net derivatives as classified in the balance sheet(2)						$	—					$	(384)					$	1					$	(216)

(1)The increase in the interest rate swap liability is primarily attributable to a downward trend in LIBOR during fiscal 2020.

(2) Refer to Note 20, "Fair Value Measurements," for the consolidated balance sheet classification of our interest rate swap and cap agreements.

Based on the fair value amounts of the interest rate swap and cap agreements determined as of September 30, 2020, the estimated net amount of existing gains and losses and caplet amortization expected to be reclassified into interest expense within the next twelve months is approximately $10.3 million. During the fourth quarter of fiscal 2020, the $750 million notional amount interest rate swap agreement and the $750 million notional amount interest rate cap agreement, both with maturity dates of June 30, 2020, were settled. Upon the settlement of both agreements, the Company recognized interest expense of $2.2 million.

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Foreign Currency Forward Exchange Contracts – The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At September 30, 2020, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $172.5 million. These notional values consist primarily of contracts for the Canadian dollar and European euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates. During the fiscal year ended September 30, 2020, the Company recognized losses on foreign currency forward exchange contracts designated as fair value hedges of $1.6 million in other (income) expense on the consolidated statements of income. During the fiscal year ended September 30, 2020, the Company recognized losses on foreign currency forward exchange contracts designated as cash flow hedges of $3.9 million in net sales on the consolidated statements of income. The losses were previously recorded as a component of accumulated other comprehensive (loss) income in stockholders' deficit.

During the fiscal year ended September 30, 2020, the Company recorded a loss of $0.7 million on foreign currency forward exchange contracts that have not been designated as accounting hedges. These foreign currency exchange losses are included in selling and administrative expenses.

Amounts related to foreign currency forward exchange contracts included in accumulated other comprehensive (loss) income in stockholders' deficit are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $1.2 million of net losses into earnings over the next 12 months. The maximum duration of the Company’s foreign currency cash flow hedge contracts at September 30, 2020 was 12 months.

22. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the components of accumulated other comprehensive (loss) income, net of taxes, for the fiscal years ended September 30, 2020, 2019 and 2018 (in millions):

			Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges**(1)**						Defined benefit pension plan activity**(2)**						Currency translation adjustment						Total
Balance at September 30, 2018			$	67					$	(11)					$	(52)					$	4
Cumulative effect of ASU 2018-02, adopted October 1, 2018			(2)						—						—						(2)
Current-period other comprehensive loss			(241)						(29)						(115)						(385)
Amounts reclassified from AOCI related to derivative instruments			4						—						—						4
Net current-period other comprehensive loss			(239)						(29)						(115)						(383)
Balance at September 30, 2019			(172)						(40)						(167)						(379)
Current-period other comprehensive (loss) gain			(130)						32						76						(22)
Balance at September 30, 2020			$	(302)					$	(8)					$	(91)					$	(401)

(1)Unrealized (loss) gain represents derivative instruments, net of taxes of $36, $70 and $(34) for the fiscal years ended September 30, 2020, 2019 and 2018, respectively.

(1)Defined benefit pension plan and other post-retirement plan activity represents pension liability adjustments, net of taxes of $(1), $9 and $(1) for the fiscal years ended September 30, 2020, 2019 and 2018, respectively.

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A summary of reclassifications out of accumulated other comprehensive (loss) income for the fiscal years ended September 30, 2020 and 2019 is provided below (in millions):

						Amount Reclassified
						Fiscal Years Ended September 30,
Description of reclassifications out of accumulated other comprehensive (loss) income						2020						2019
Amortization from redesignated interest rate swap and cap agreements(1)						$	4					$	3
Losses from settlement of foreign currency forward exchange contracts(2)						(4)						—
Deferred tax expense on reclassifications out of accumulated other comprehensive (loss) income						—						1
Losses reclassified into earnings, net of tax						$	—					$	4

(1)This component of accumulated other comprehensive (loss) income is included in interest expense. Refer to Note 21, “Derivatives and Hedging Activities,” for additional information.

(2)This component of accumulated other comprehensive (loss) income is included in net sales. Refer to Note 21, “Derivatives and Hedging Activities,” for additional information.

23. DISCONTINUED OPERATIONS

The table below summarizes income (loss) from discontinued operations, net of tax, for the fiscal years ended September 30, 2020, 2019 and 2018 (in millions):

			Fiscal Year Ended September 30,
			2020						2019						2018
Net sales			$	79					$	294					$	12
Income (loss) from discontinued operations, before income taxes			11						—						—
Income tax provision (benefit)			4						(13)						(2)
Income from discontinued operations, net of tax			7						13						2
Gain (loss) from sale of discontinued operations, net of tax			40						38						(7)
Income (loss) from discontinued operations, net of tax			$	47					$	51					$	(5)

Fiscal Year 2020 Divestitures & Discontinued Operations

On December 20, 2019, TransDigm completed the divestiture of Souriau-Sunbank to Eaton for approximately $920 million. Souriau-Sunbank was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm’s Non-aviation segment. The divestiture represented a strategic shift in TransDigm’s business and, in accordance with U.S. GAAP, qualified as discontinued operations. Therefore, the results of operations of Souriau-Sunbank are presented in discontinued operations in the accompanying consolidated financial statements for all periods presented since the date acquired.

Income from discontinued operations, net of tax, for the fiscal year ended September 30, 2020 was $47 million. This was comprised of $7 million income from Souriau-Sunbank's operations and a gain on the sale of Souriau-Sunbank of $40 million.

Fiscal Year 2019 Divestitures & Discontinued Operations

On September 20, 2019, TransDigm completed the divestiture of its EIT group of businesses to an affiliate of KPS Capital Partners, LP for approximately $190 million. EIT was acquired by TransDigm as part of its acquisition of Esterline Technologies Corporation in March 2019 and was included in TransDigm’s Non-aviation segment. The divestiture represented a strategic shift in TransDigm’s business and, in accordance with U.S. GAAP, qualified as discontinued operations. Therefore, the results of operations of EIT were presented in discontinued operations in the accompanying consolidated financial statements for all periods presented since the date acquired.

Income from discontinued operations, net of tax, was $51 million for the fiscal year ended September 30, 2019. This included income from operations of $13 million related to EIT and Souriau-Sunbank and a gain on the sale of EIT of $38 million.

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Souriau-Sunbank’s net sales, loss from discontinued operations (before income tax) and income tax benefit were $199 million, $17 million and $14 million, respectively, for the fiscal year ended September 30, 2019.

EIT’s net sales, income from discontinued operations (before income tax) and income tax expense were $95 million, $17 million and $1 million, respectively, for the fiscal year ended September 30, 2019.

Cash related to discontinued operations, which was excluded from the consolidated statement of cash flows, included net cash provided by operating activities of $35 million and net cash used in investing activities of $11 million.

Fiscal Year 2018 Divestitures & Discontinued Operations

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 million. The Company previously acquired Schroth in February 2017. The results of operations of Schroth are presented in discontinued operations in the accompanying consolidated financial statements for the fiscal year ended September 30, 2018. The loss from discontinued operations, net of tax, was approximately $5 million in the consolidated statement of income for the fiscal year ended September 30, 2018.

Assets and Liabilities Held for Sale - Souriau-Sunbank

At September 30, 2019, Souriau-Sunbank’s assets held-for-sale and liabilities held-for-sale were $962 million and $157 million, respectively. Under U.S. GAAP, assets held for sale are to be reported at lower of its carrying amount or fair value less cost to sell. The following is the summarized balance sheet of Souriau-Sunbank’s assets held-for-sale and liabilities held-for-sale as of September 30, 2019 (in millions):

Assets and Liabilities of Discontinued Operations Held-for-Sale						Fiscal Year Ended September 30, 2019
Cash and cash equivalents						$	29
Trade accounts receivable—Net						67
Inventories—Net						88
Prepaid expenses and other						2
Property, plant and equipment—Net						101
Goodwill						480
Other intangibles—Net						194
Other						1
Total assets of discontinued operations						$	962
Accounts payable						$	33
Accrued liabilities						55
Long-term debt						6
Deferred income taxes						42
Other						21
Total liabilities of discontinued operations						$	157

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24. QUARTERLY FINANCIAL DATA (UNAUDITED)

			First Quarter Ended December 28, 2019						Second Quarter Ended March 28, 2020						Third Quarter Ended June 27, 2020						Fourth Quarter Ended September 30, 2020
			(in millions, except per share amounts)
Fiscal Year Ended September 30, 2020**(1)**
Net sales(2)			$	1,465					$	1,443					$	1,022					$	1,173
Gross profit(2)			801						818						491						536
Income (Loss) from continuing operations, net of tax(2)			234						323						(5)						101
Income (Loss) from discontinued operations, net of tax(2)			71						(4)						(1)						(19)
Less: Net income attributable to noncontrolling interests(2)			(1)						—						—						—
Net income (loss) attributable to TD Group(2)			$	304					$	319					$	(6)					$	82
Net income (loss) attributable to TD Group common stockholders(3)			$	119					$	319					$	(6)					$	82
Earnings (Loss) per share from continuing operations—basic and diluted(4)			$	0.83					$	5.63					$	(0.09)					$	1.76
Earnings (Loss) per share from discontinued operations—basic and diluted(4)			1.24						(0.07)						(0.01)						(0.33)
Earnings (Loss) per share(4)			$	2.07					$	5.56					$	(0.10)					$	1.43

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			First Quarter Ended December 29, 2018						Second Quarter Ended March 30, 2019						Third Quarter Ended June 29, 2019						Fourth Quarter Ended September 30, 2019
			(in millions, except per share amounts)
Fiscal Year Ended September 30, 2019**(1)**
Net sales(2)			$	993					$	1,168					$	1,521					$	1,541
Gross profit(2)			564						650						713						882
Income from continuing operations, net of tax(2)			196						200						128						317
Income from discontinued operations, net of tax(2)			—						2						17						32
Less: Net income attributable to noncontrolling interests(2)			—						—						—						(2)
Net income attributable to TD Group(2)			$	196					$	202					$	145					$	347
Net income attributable to TD Group common stockholders(3)			$	172					$	202					$	145					$	260
Earnings per share from continuing operations—basic and diluted(4)			$	3.05					$	3.56					$	2.27					$	4.08
Earnings per share from discontinued operations—basic and diluted(4)			—						0.04						0.30						0.55
Earnings per share(4)			$	3.05					$	3.60					$	2.57					$	4.63

(1)Results adjusted to reflect amounts reclassified to discontinued operations due to the Company’s classification of Souriau-Sunbank and EIT at September 30, 2019, as discontinued operations. Refer to Note 23, “Discontinued Operations,” for additional information.

(2)The Company’s operating results include the results of operations of acquisitions from the effective date of each acquisition. Refer to Note 2 “Acquisitions and Divestitures,” for additional information.

(3)Net income applicable to TD Group common stockholders represents net income attributable to TD Group less special dividends and dividend equivalent payments. Special dividend and dividend equivalent payments were $185 million, $24 million and $87 million, respectively, for the first quarter ended December 28, 2019, first quarter ended December 29, 2018 and fourth quarter ended September 30, 2019.

(4)The sum of the earnings per share for the four quarters in a year does not necessarily equal the total year earnings per share due to the weighted average number of shares outstanding in each quarter.

25. SUBSEQUENT EVENTS

On October 26, 2020, the Company repaid $200 million of the revolving credit facility, in addition to $0.5 million of accrued interest.

F-47

TRANSDIGM GROUP INCORPORATED

VALUATION AND QUALIFYING ACCOUNTS

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2020, 2019, AND 2018

(Amounts in millions)

Column A			Column B						Column C												Column D						Column E
			Balance at Beginning of Period						Additions												Deductions from Reserve**(1)**						Balance at End of Period
Description			Charged to Costs and Expenses						Acquisitions & Purchase Price Adjustments
Fiscal Year Ended September 30, 2020
Allowance for uncollectible accounts			$	17					$	21					$	3					$	(4)					$	37
Inventory valuation reserves			124						34						37						(17)						178
Valuation allowance for deferred tax assets			118						15						(1)						—						132
Fiscal Year Ended September 30, 2019
Allowance for uncollectible accounts			$	5					$	5					$	9					$	(2)					$	17
Reserve for excess and obsolete inventory			99						17						17						(9)						124
Valuation allowance for deferred tax assets			47						40						31						—						118
Fiscal Year Ended September 30, 2018
Allowance for uncollectible accounts			$	4					$	2					$	1					$	(2)					$	5
Reserve for excess and obsolete inventory			80						15						11						(11)						95
Valuation allowance for deferred tax assets			33						14						—						—						47

(1)The amounts in this column represent charge-offs net of recoveries and the impact of foreign currency translation adjustments.

F-48

EXHIBIT INDEX

TO FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2020

EXHIBIT NO.						DESCRIPTION
10.27						Form of Stock Option Agreement for options awarded in fiscal 2020*
10.52						Twelfth Amendment to the Receivables Purchase Agreement dated as of July 22, 2020, among TransDigm Receivables LLC, TransDigm Inc., PNC Bank, National Association, as a Committed Purchaser, as Purchaser Agent for its Purchaser Group and as Administrator, Atlantic Asset Securitization LLC, as a Conduit Purchaser, Credit Agricole Corporate and Investment Bank, as a Committed Purchaser and as a Purchaser Agent for its and Atlantic’s Purchaser Group, and Fifth Third Bank, as a Committed Purchaser and as Purchaser Agent for its Purchaser Group
21.1						Subsidiaries of TransDigm Group Incorporated
23.1						Consent of Independent Registered Public Accounting Firm
31.1						Certification by Principal Executive Officer of TransDigm Group Incorporated pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification by Principal Financial Officer of TransDigm Group Incorporated pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1						Certification by Principal Executive Officer of TransDigm Group Incorporated pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification by Principal Financial Officer of TransDigm Group Incorporated pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.SCH						Inline XBRL Taxonomy Extension Schema
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase
104						Cover Page Interactive Data File: the cover page XBRL tags are embedded within the Inline XBRL document and are contained within Exhibit 101

*			Indicates management contract or compensatory plan contract or arrangement.