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Cover and table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended January 1, 2022


☐			Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-32833

TransDigm Group Incorporated

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

41-2101738

(I.R.S. Employer Identification No.)


1301 East 9th Street,			Suite 3000,			Cleveland,			Ohio						44114
(Address of principal executive offices)															(Zip Code)

(216) 706-2960

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer, smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
Emerging Growth Company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒


Securities registered pursuant to Section 12(b) of the Act:
Title of each class:	Trading Symbol:	Name of each exchange on which registered:
Common Stock, $0.01 par value	TDG	New York Stock Exchange

The number of shares outstanding of TransDigm Group Incorporated’s common stock, par value $.01 per share, was 55,462,081 as of January 31, 2022.

TABLE OF CONTENTS


			Page
PART I	FINANCIAL INFORMATION
ITEM 1		Financial Statements
		Condensed Consolidated Balance Sheets – January 1, 2022 and September 30, 2021	1
		Condensed Consolidated Statements of Income – Thirteen Week Periods Ended January 1, 2022 and January 2, 2021	2
		Condensed Consolidated Statements of Comprehensive Income – Thirteen Week Periods Ended January 1, 2022 and January 2, 2021	3
		Condensed Consolidated Statements of Changes in Stockholders’ Deficit – Thirteen Week Periods Ended January 1, 2022 and January 2, 2021	4
		Condensed Consolidated Statements of Cash Flows – Thirteen Week Periods Ended January 1, 2022 and January 2, 2021	5
		Notes to Condensed Consolidated Financial Statements	6
ITEM 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
ITEM 3		Quantitative and Qualitative Disclosure About Market Risk	41
ITEM 4		Controls and Procedures	41

PART II	OTHER INFORMATION		42
ITEM 1		Legal Proceedings	42
ITEM 1A		Risk Factors	42
ITEM 2		Unregistered Sales of Equity Securities and Use of Proceeds	42
ITEM 6		Exhibits	43

SIGNATURES			44

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share amounts)

(Unaudited)


	January 1, 2022		September 30, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,813	$	4,787
Trade accounts receivable—Net	673		791
Inventories—Net	1,215		1,185
Prepaid expenses and other	270		267

Total current assets	6,971		7,030
PROPERTY, PLANT AND EQUIPMENT—NET	794		770
GOODWILL	8,568		8,568
OTHER INTANGIBLE ASSETS—NET	2,752		2,791

OTHER	157		156
TOTAL ASSETS	$	19,242	$	19,315

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	$	76	$	277
Short-term borrowings—trade receivable securitization facility	350		349
Accounts payable	212		227
Accrued and other current liabilities	740		810

Total current liabilities	1,378		1,663
LONG-TERM DEBT	19,388		19,372
DEFERRED INCOME TAXES	503		485
OTHER NON-CURRENT LIABILITIES	599		705
Total liabilities	21,868		22,225
TD GROUP STOCKHOLDERS’ DEFICIT:
Common stock - $.01 par value; authorized 224,400,000 shares; issued 59,618,917 and 59,403,100 at January 1, 2022 and September 30, 2021, respectively	1		1
Additional paid-in capital	1,905		1,830
Accumulated deficit	(3,545)		(3,705)
Accumulated other comprehensive loss	(200)		(248)
Treasury stock, at cost; 4,198,226 shares at January 1, 2022 and September 30, 2021, respectively	(794)		(794)
Total TD Group stockholders’ deficit	(2,633)		(2,916)
NONCONTROLLING INTERESTS	7		6
Total stockholders’ deficit	(2,626)		(2,910)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	19,242	$	19,315

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)


	Thirteen Week Periods Ended
		January 1, 2022		January 2, 2021
NET SALES		$	1,194	$	1,108
COST OF SALES		533		567
GROSS PROFIT		661		541
SELLING AND ADMINISTRATIVE EXPENSES		170		197
AMORTIZATION OF INTANGIBLE ASSETS		36		29
INCOME FROM OPERATIONS		455		315
INTEREST EXPENSE—NET		264		267

OTHER INCOME		(2)		(5)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		193		53
INCOME TAX PROVISION		30		3
INCOME FROM CONTINUING OPERATIONS		163		50
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX		1		—
NET INCOME		164		50
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS		(1)		—
NET INCOME ATTRIBUTABLE TO TD GROUP		$	163	$	50
NET INCOME (LOSS) APPLICABLE TO TD GROUP COMMON STOCKHOLDERS		$	117	$	(23)
Earnings (loss) per share attributable to TD Group common stockholders:
Earnings (loss) per share from continuing operations—basic and diluted		$	1.96	$	(0.42)
Earnings per share from discontinued operations—basic and diluted		0.02		—
Earnings (loss) per share		$	1.98	$	(0.42)

Weighted-average shares outstanding:
Basic and diluted		59.2		54.7

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)


	Thirteen Week Periods Ended
		January 1, 2022		January 2, 2021
Net income		$	164	$	50
Less: Net income attributable to noncontrolling interests		(1)		—
Net income attributable to TD Group		$	163	$	50
Other comprehensive income, net of tax:
Foreign currency translation (loss) gain		(10)		111
Unrealized gain on derivatives		58		13
Pensions and other postretirement benefits		—		—
Other comprehensive income, net of tax, attributable to TD Group		48		124
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO TD GROUP		$	211	$	174

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Amounts in millions, except share amounts)

(Unaudited)


	TD Group Stockholders
	Common Stock			Additional Paid-In Capital					Accumulated Other Comprehensive Loss		Treasury Stock
	Number of Shares	Par Value				Accumulated Deficit			Number of Shares		Value	Non-controlling Interests		Total
BALANCE—September 30, 2020	58,612,028	$	1	$	1,581		$	(4,359)	$	(401)	(4,198,226)	$	(794)	$	4	$	(3,968)
Changes in noncontrolling interest of consolidated subsidiaries, net	—	—		—			—		—		—	—		3		3

Accrued unvested dividend equivalents and other	—	—		—			(5)		—		—	—		—		(5)
Compensation expense recognized for employee stock options	—	—		43			—		—		—	—		—		43
Exercise of employee stock options	240,979	—		32			—		—		—	—		—		32

Net income attributable to TD Group	—	—		—			50		—		—	—		—		50
Foreign currency translation (loss) gain, net of tax	—	—		—			—		111		—	—		—		111
Unrealized gain on derivatives, net of tax	—	—		—			—		13		—	—		—		13
Pensions and other postretirement benefits adjustments, net of tax	—	—		—			—		—		—	—		—		—
BALANCE—January 2, 2021	58,853,007	$	1	$	1,656		$	(4,314)	$	(277)	(4,198,226)	$	(794)	$	7	$	(3,721)


	TD Group Stockholders
	Common Stock			Additional Paid-In Capital					Accumulated Other Comprehensive Loss		Treasury Stock
	Number of Shares	Par Value				Accumulated Deficit			Number of Shares		Value	Non-controlling Interests		Total
BALANCE—September 30, 2021	59,403,100	$	1	$	1,830		$	(3,705)	$	(248)	(4,198,226)	$	(794)	$	6	$	(2,910)
Changes in noncontrolling interest of consolidated subsidiaries, net	—	—		—			—		—		—	—		1		1

Accrued unvested dividend equivalents and other	—	—		—			(3)		—		—	—		—		(3)
Compensation expense recognized for employee stock options	—	—		35			—		—		—	—		—		35
Exercise of employee stock options	215,817	—		40			—		—		—	—		—		40

Net income attributable to TD Group	—	—		—			163		—		—	—		—		163
Foreign currency translation (loss) gain, net of tax	—	—		—			—		(10)		—	—		—		(10)
Unrealized gain on derivatives, net of tax	—	—		—			—		58		—	—		—		58
Pensions and other postretirement benefits adjustments, net of tax	—	—		—			—		—		—	—		—		—
BALANCE—January 1, 2022	59,618,917	$	1	$	1,905		$	(3,545)	$	(200)	(4,198,226)	$	(794)	$	7	$	(2,626)

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)


	Thirteen Week Periods Ended
	January 1, 2022		January 2, 2021
OPERATING ACTIVITIES:
Net income	$	164	$	50
Income from discontinued operations, net of tax	(1)		—
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	29		29
Amortization of intangible assets and product certification costs	36		29
Amortization of debt issuance costs, original issue discount and premium	8		9

Amortization of loss contract reserves	(12)		(18)




Non-cash stock compensation expense	37		49

Deferred income taxes	—		5
Foreign currency exchange (gain) loss	(1)		22

Changes in assets/liabilities, net of effects from acquisitions and sales of businesses:
Trade accounts receivable	117		86
Inventories	(32)		1
Income taxes (receivable) payable	(6)		16
Other assets	(2)		3
Accounts payable	(14)		(20)
Accrued interest	(19)		7
Accrued and other liabilities	(25)		6
Net cash provided by operating activities	279		274
INVESTING ACTIVITIES:
Capital expenditures	(25)		(31)
Acquisition of businesses, net of cash acquired	—		(6)
Net proceeds from sale of businesses	—		8

Net cash used in investing activities	(25)		(29)
FINANCING ACTIVITIES:

Proceeds from exercise of stock options	40		32
Dividend equivalent payments	(46)		(73)

Proceeds from revolving credit facility	—		200

Repayment on revolving credit facility	(200)		(200)
Repayment on term loans	(19)		(19)












Net cash used in financing activities	(225)		(60)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	(3)		5
NET INCREASE IN CASH AND CASH EQUIVALENTS	26		190
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	4,787		4,717
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	4,813	$	4,907
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	273	$	252
Cash paid (refunded) during the period for income taxes, net	$	17	$	(5)

See notes to condensed consolidated financial statements

TRANSDIGM GROUP INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THIRTEEN WEEK PERIODS ENDED JANUARY 1, 2022 AND JANUARY 2, 2021

(UNAUDITED)

1. DESCRIPTION OF THE BUSINESS

TransDigm Group Incorporated (“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, engineered audio, radio and antenna systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products, switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems.

2. UNAUDITED INTERIM FINANCIAL INFORMATION

The financial information included herein is unaudited; however, the information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s condensed consolidated financial statements for the interim periods presented. These financial statements and notes should be read in conjunction with the financial statements and related notes for the fiscal year ended September 30, 2021 included in TD Group’s Form 10-K filed on November 16, 2021. As disclosed therein, the Company’s annual consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The September 30, 2021 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the thirteen week period ended January 1, 2022 are not necessarily indicative of the results to be expected for the full year.

Certain reclassifications have been made to the prior year financial statements to conform to current year presentation, none of which are material.

3. ACQUISITIONS AND DIVESTITURES

Acquisitions

Cobham Aero Connectivity – On November 24, 2020, the Company entered into a definitive agreement to acquire all the outstanding stock of Chelton Limited, Chelton Avionics Holdings, Inc. and Mastsystem Int'l Oy, collectively, Cobham Aero Connectivity (“CAC”), for a total purchase price of $945 million. The acquisition was substantially completed on January 5, 2021 and financed through existing cash on hand. The Company completed the remainder of the acquisition of CAC on February 12, 2021, also through existing cash on hand. CAC operates from two primary facilities (Marlow, United Kingdom and Prescott, Arizona) and is a leading provider of highly engineered antennas and radios for the aerospace end market. The products are primarily proprietary with significant aftermarket content and have a strong presence across major defense platforms as well as select commercial applications. CAC's operating results are included within TransDigm's Airframe segment.

The acquisition strengthens and expands 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, continually improving our cost structure, and providing highly engineered value-added products to customers). The purchase price paid for the 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.

The Company accounted for the CAC acquisition using the acquisition method of accounting and third-party valuation appraisals and included the results of operations of the acquisition in its condensed consolidated financial statements from the effective dates of the acquisition. The total purchase price of CAC was allocated to the underlying assets acquired and liabilities assumed based upon the respective fair value at the dates 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. The fair values of acquired intangibles and certain liabilities, such as loss contract reserves, are determined based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions used to determine the fair values of acquired intangible assets include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including revenue growth rates, EBITDA margins, royalty rates and technology obsolescence rates. Significant assumptions used to determine the fair value of the loss contract reserves using the discounted cash flow model include discount rates and forecasted costs to be incurred under the long-term contracts and at-market bid prices for respective contracts. These assumptions are forward looking and could be affected by future economic and market conditions.

Pro forma net sales and results of operations for the acquisition had it occurred at the beginning of the applicable thirteen week period ended January 1, 2022 or January 2, 2021 are not material and, accordingly, are not provided.

The final allocation of the fair value of assets acquired and liabilities assumed in the CAC acquisition as of the acquisition date, as well as measurement period adjustments recorded as of January 1, 2022, are summarized in the table below (in millions):


	Preliminary Allocation		Measurement Period Adjustments			Final Allocation
Assets acquired (excluding cash):
Trade accounts receivable	$	31	$	1		$	32
Inventories	27		2			29
Prepaid expenses and other	10		(3)			7
Property, plant and equipment	18		3			21
Goodwill	636		61			697		(1)
Other intangible assets	309		15			324		(1)
Other	34		(3)			31
Total assets acquired (excluding cash)	1,065		76			1,141
Liabilities assumed:
Accounts payable	15		3			18
Accrued and other current liabilities	38		6		(2)	44
Deferred income taxes	38		(7)			31
Other non-current liabilities	29		74		(2)	103
Total liabilities assumed	120		76			196
Net assets acquired	$	945	$	—		$	945

(1)Of the approximately $697 million of goodwill recognized for the acquisition, approximately $65 million is deductible for tax purposes. Of the approximately $324 million of other intangible assets recognized for the acquisition, approximately $105 million is deductible for tax purposes. The goodwill and intangible assets are deductible over 15 years.

(2)Primarily relates to the recording of loss contract reserves associated with acquired ongoing 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 contracts were unfavorable when compared to market terms as of the acquisition date. The loss contract reserves, totaling $80.6 million, will be released over an estimated three to five year period.

Divestitures

ScioTeq and TREALITY Simulation Visual Systems – On June 30, 2021, TransDigm completed the divestiture of its ScioTeq and TREALITY Simulation Visual Systems businesses (“ScioTeq and TREALITY”) to OpenGate Capital for approximately $200 million in cash. ScioTeq and TREALITY were acquired by TransDigm as part of its acquisition of Esterline Technologies Corporation (“Esterline”) in March 2019 and were included in TransDigm’s Airframe segment. Neither ScioTeq or TREALITY met the criteria to be classified as held for sale as of January 2, 2021.

Technical Airborne Components – On April 27, 2021, TransDigm completed the divestiture of the Technical Airborne Components business (“TAC”) to Searchlight Capital Partners for approximately $40 million in cash. TAC was included in TransDigm’s Airframe segment. TAC did not meet the criteria to be classified as held for sale as of January 2, 2021.

The net gain on sale recognized in fiscal 2021 as a result of the ScioTeq and TREALITY and TAC divestitures was approximately $68 million, which was classified as a component of gain on sale of businesses-net within the condensed consolidated statements of income during the third quarter of fiscal 2021.

Racal Acoustics – On January 29, 2021, TransDigm completed the divestiture of the Racal Acoustics business (“Racal”) to Invisio Communications AB (“Invisio”) for approximately $20 million in cash. During the first quarter of fiscal 2021, the Company determined Racal met the criteria to be classified as held for sale. Therefore, the assets and liabilities of Racal, which were not material, have been presented as held for sale in other assets, accrued and other current liabilities and other non-current liabilities, respectively, in the condensed consolidated balance sheets as of January 2, 2021. Racal was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Non-aviation segment.

Avista, Inc. – On November 17, 2020, TransDigm completed the divestiture of the Avista, Inc. business (“Avista”) to Belcan, LLC (“Belcan”) for approximately $8 million in cash. Avista was acquired by TransDigm as part of its acquisition of Esterline in March 2019 and was included in TransDigm's Airframe segment. The gain on sale recognized in the first quarter of fiscal 2021 as a result of the divestiture was immaterial and classified as a component of gain on sale of businesses-net within the condensed consolidated statements of income.

Souriau-Sunbank Connection Technologies – On December 20, 2019, TransDigm completed the divestiture of the Souriau-Sunbank Connection Technologies business (“Souriau-Sunbank”) to Eaton Corporation plc (“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. During the first quarter of fiscal 2022, the Company received approximately $1 million from Eaton related to a final working capital settlement from the Souriau-Sunbank divestiture. These proceeds are classified as income from discontinued operations, net of tax, in the condensed consolidated statements of income.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Accounting Standards Codification (“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. The Company adopted ASU 2019-12 on October 1, 2021. The adoption of this standard did not have a material impact on our condensed consolidated financial statements and disclosures.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform." Certain amendments were provided for in ASU 2021-01, “Reference Rate Reform (ASC 848): Scope,” which was issued in January 2021. This ASU 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 the London Interbank Offered Rate (“LIBOR”). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in this ASU are effective through December 31, 2022. The Company is currently evaluating the impact of adopting this standard on our condensed consolidated financial statements and disclosures and we continue to monitor any subsequent updates impacting the transition.

5. REVENUE RECOGNITION

TransDigm's sales are concentrated in the aerospace and defense 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 assess 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.

When contracts are modified to account for changes in contract specifications and requirements, the Company considers whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original good or service provided, are accounted for as if they were part of that existing contract. The effect of a contract modification to an existing contract on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct and at relative stand-alone selling price, they are accounted for as a new contract and performance obligation, which are recognized prospectively.

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 condensed 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 condensed consolidated statements of income.

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):


	January 1, 2022		September 30, 2021
Contract assets, current (1)	$	78	$	72
Contract assets, non-current (2)	1		2
Total contract assets	79		74
Contract liabilities, current (3)	38		27
Contract liabilities, non-current (4)	8		5
Total contract liabilities	46		32
Net contract assets	$	33	$	42

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

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

(3)Included in accrued and other current liabilities on the condensed consolidated balance sheets.

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

For the thirteen week period ended January 1, 2022, the revenue recognized that was previously included in contract liabilities was not material.

Refer to Note 13, “Segments,” for disclosures related to the disaggregation of revenue.

Allowance for Credit Losses – The Company's allowance for credit losses is the allowance for uncollectible accounts. The allowance for uncollectible accounts reduces the trade accounts receivable balance to the estimated net realizable value equal to the amount that is expected to be collected.

The Company’s method for developing its allowance for credit losses is based on historical write-off experience, the aging of receivables, an assessment of the creditworthiness of customers, economic conditions and other external market information. All provisions for allowances for uncollectible accounts are included in selling and administrative expenses.

As of January 1, 2022 and September 30, 2021, the allowance for uncollectible accounts was $30 million. The allowance for uncollectible accounts is assessed individually at each operating unit by the operating unit’s management team.

6. EARNINGS (LOSS) PER SHARE

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


	Thirteen Week Periods Ended
		January 1, 2022		January 2, 2021
Numerator for earnings (loss) per share:
Income from continuing operations		$	163	$	50
Less: Net income attributable to noncontrolling interests		(1)		—
Net income from continuing operations attributable to TD Group		162		50
Less: Special dividends declared or paid on participating securities, including dividend equivalent payments		(46)		(73)
Income from discontinued operations, net of tax		1		—
Net income (loss) applicable to TD Group common stockholders—basic and diluted		$	117	$	(23)
Denominator for basic and diluted earnings (loss) per share under the two-class method:
Weighted-average common shares outstanding		55.3		54.7
Vested options deemed participating securities		3.9		—
Total shares for basic and diluted earnings per share		59.2		54.7

Earnings (loss) per share from continuing operations—basic and diluted		$	1.96	$	(0.42)
Earnings per share from discontinued operations—basic and diluted		0.02		—
Earnings (loss) per share		$	1.98	$	(0.42)

7. 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.

Inventories consist of the following (in millions):


	January 1, 2022		September 30, 2021
Raw materials and purchased component parts	$	871	$	850
Work-in-progress	335		322
Finished goods	206		207
Total	1,412		1,379
Reserves for excess and obsolete inventory	(197)		(194)
Inventories—Net	$	1,215	$	1,185

8. INTANGIBLE ASSETS

Other intangible assets–net in the condensed consolidated balance sheets consist of the following (in millions):


	January 1, 2022						September 30, 2021
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Trademarks & trade names	$	983	$	—	$	983	$	983	$	—	$	983
Technology	2,017		714		1,303		2,009		679		1,330
Order backlog	16		15		1		16		11		5
Customer relationships	544		86		458		545		78		467
Other	8		1		7		18		12		6
Total	$	3,568	$	816	$	2,752	$	3,571	$	780	$	2,791

The aggregate amortization expense on identifiable intangible assets for the thirteen week periods ended January 1, 2022 and January 2, 2021 was approximately $36 million and $29 million, respectively.

The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2021 through January 1, 2022 (in millions):


	Power & Control		Airframe		Non- aviation		Total
Balance at September 30, 2021	$	4,149	$	4,326	$	93	$	8,568
Purchase price allocation adjustments (1)	—		3		—		3
Currency translation adjustments	(4)		1		—		(3)
Balance at January 1, 2022	$	4,145	$	4,330	$	93	$	8,568

(1)Primarily relates to opening balance sheet adjustments recorded from the acquisition of CAC up to the expiration of the one year measurement period.

9. DEBT

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


	January 1, 2022
	Gross Amount		Debt Issuance Costs		Original Issue Discount or Premium		Net Amount
Short-term borrowings—trade receivable securitization facility	$	350	$	—	$	—	$	350
Term loans	$	7,354	$	(36)	$	(16)	$	7,302
8.00% senior secured notes due 2025 (“2025 Secured Notes”)	1,100		(7)		—		1,093
6.375% senior subordinated notes due 2026 (“6.375% 2026 Notes”)	950		(5)		—		945
6.875% senior subordinated notes due 2026 (“6.875% 2026 Notes”)	500		(4)		(2)		494
6.25% secured notes due 2026 (“2026 Secured Notes”)	4,400		(43)		4		4,361
7.50% senior subordinated notes due 2027 (“7.50% 2027 Notes”)	550		(4)		—		546
5.50% senior subordinated notes due 2027 (“5.50% 2027 Notes”)	2,650		(17)		—		2,633
4.625% senior subordinated notes due 2029 (“4.625% 2029 Notes”)	1,200		(10)		—		1,190
4.875% senior subordinated notes due 2029 (“4.875% 2029 Notes”)	750		(6)		—		744
Government refundable advances	28		—		—		28
Finance lease obligations	128		—		—		128
	19,610		(132)		(14)		19,464
Less: current portion	77		(1)		—		76
Long-term debt	$	19,533	$	(131)	$	(14)	$	19,388


	September 30, 2021
	Gross Amount		Debt Issuance Costs		Original Issue Discount or Premium		Net Amount
Short-term borrowings—trade receivable securitization facility	$	350	$	(1)	$	—	$	349
Term loans	$	7,374	$	(39)	$	(17)	$	7,318
Revolving credit facility	200		—		—		200
2025 Secured Notes	1,100		(7)		—		1,093
6.375% 2026 Notes	950		(5)		—		945
6.875% 2026 Notes	500		(4)		(2)		494
2026 Secured Notes	4,400		(45)		4		4,359
7.50% 2027 Notes	550		(4)		—		546
5.50% 2027 Notes	2,650		(18)		—		2,632
4.625% 2029 Notes	1,200		(10)		—		1,190
4.875% 2029 Notes	750		(7)		—		743
Government refundable advances	29		—		—		29
Finance lease obligations	100		—		—		100
	19,803		(139)		(15)		19,649
Less: current portion	278		(1)		—		277
Long-term debt	$	19,525	$	(138)	$	(15)	$	19,372

Accrued interest, which is classified as a component of accrued and other current liabilities on the condensed consolidated balance sheets, was $172 million and $191 million as of January 1, 2022 and September 30, 2021, respectively.

Amendment No. 9 and Loan Modification Agreement – On December 29, 2021, the Company entered into Amendment No. 9 and Incremental Revolving Credit Assumption Agreement (herein, “Amendment No. 9”) to the Second Amended and Restated Credit Agreement dated as of June 4, 2014 (the “Credit Agreement”), which increases the capacity under the revolving credit facility from $760 million to $810 million. The terms and conditions that apply to Amendment No. 9 are the same as the terms and conditions that apply to the existing dollar revolving commitments and term loans under the Credit Agreement. As of January 1, 2022, the borrowings available under the revolving commitments were $776.5 million.

The Company capitalized $0.2 million representing debt issuance costs associated with Amendment No. 9 during the thirteen week period ended January 1, 2022.

Revolving Credit Facility – On October 6, 2021, the Company repaid $200 million previously drawn on the revolving credit facility, in addition to $0.1 million of accrued interest.

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 based on year-over-year commercial aviation revenue growth for certain product lines at CMC Electronics, which is a wholly-owned subsidiary of TransDigm. As of January 1, 2022 and September 30, 2021, the outstanding balance of these advances was $28 million and $29 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 $128 million and $100 million at January 1, 2022 and September 30, 2021, respectively. Refer to Note 16, “Leases,” for further disclosure of the Company's lease obligations.

10. INCOME TAXES

At the end of each reporting period, TD Group makes an estimate of its annual effective income tax rate. The estimate used in the year-to-date period may change in subsequent periods.

During the thirteen week periods ended January 1, 2022 and January 2, 2021, the effective income tax rate was 15.7% and 5.5%, respectively. The Company’s higher effective tax rate for the thirteen week period ended January 1, 2022 was primarily due to the ratio of the discrete impact of excess tax benefits from share-based payments to income from continuing operations being lower in the thirteen week period ended January 1, 2022 resulting from an increase in income from continuing operations before income taxes for the same thirteen week period. The Company’s effective income tax rate of 15.7% for the thirteen week period ended January 1, 2022 was lower than the federal statutory tax rate of 21%, primarily due to the discrete impact of excess tax benefits associated with share-based payments during the first quarter of fiscal 2022.

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 2017. The Company is currently under examination for its federal income taxes in Canada for fiscal years 2013 through 2019, in France for fiscal years 2018 through 2019 and in Germany for fiscal years 2014 through 2017. The Company expects the examinations in France to be completed during fiscal 2022. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.

Unrecognized tax benefits at January 1, 2022 and September 30, 2021, the recognition of which would have an impact on the effective tax rate for each fiscal year, amounted to $18.5 million and $19.1 million, respectively. The Company classifies all income tax-related interest and penalties as income tax expense, which were not material for the thirteen week periods ended January 1, 2022 and January 2, 2021. As of January 1, 2022 and September 30, 2021, the Company accrued $4.9 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 $3.8 million. Any increase in the amount of unrecognized tax benefits within the next 12 months is not expected to be material.

11. FAIR VALUE MEASUREMENTS

The following table presents 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):


		January 1, 2022				September 30, 2021
	Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Cash and cash equivalents	1	$	4,813	$	4,813	$	4,787	$	4,787




Interest rate cap agreements (1)	2	11		11		8		8
Liabilities:
Interest rate swap agreements (2)	2	106		106		100		100
Interest rate swap agreements (3)	2	103		103		180		180
Foreign currency forward exchange contracts (2)	2	4		4		4		4

Short-term borrowings - trade receivable securitization facility (4)	2	350		350		349		349
Long-term debt, including current portion:
Term loans (4)	2	7,302		7,216		7,318		7,268
Revolving credit facility (4)	2	—		—		200		200
2025 Secured Notes (4)	1	1,093		1,159		1,093		1,170
6.375% 2026 Notes (4)	1	945		976		945		981
6.875% 2026 Notes (4)	1	494		521		494		527
2026 Secured Notes (4)	1	4,361		4,565		4,359		4,593
7.50% 2027 Notes (4)	1	546		575		546		578
5.50% 2027 Notes (4)	1	2,633		2,703		2,632		2,730
4.625% 2029 Notes (4)	1	1,190		1,188		1,190		1,196
4.875% 2029 Notes (4)	1	744		750		743		751
Government refundable advances	2	28		28		29		29
Finance lease obligations	2	128		128		100		100

(1)Included in other assets on the condensed consolidated balance sheets.

(2)Included in accrued and other current liabilities on the condensed consolidated balance sheets.

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

(4)The carrying amount of the debt instrument is presented net of debt issuance costs, premium and discount. Refer to Note 9, “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 or disclosed using unobservable inputs (i.e., Level 3).

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 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 significant 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 carrying value due to the short-term nature of these instruments at January 1, 2022 and September 30, 2021.

12. 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 condensed 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 condensed consolidated balance sheets in accumulated other comprehensive loss 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 loss 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 condensed consolidated statements of income.

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)
$700	3/31/2023	9/30/2025	Tranche F	3.55% (1.3% plus the 2.25% margin percentage)
$1,400	6/30/2021	3/31/2023	Tranche F	5.25% (3.0% 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 Term Loans	Offsets Variable Rate Debt Attributable to Fluctuations Above:
$750	6/30/2020	6/30/2022	Tranche E	Three month LIBOR rate of 2.50%
$700	3/31/2023	9/30/2025	Tranche F	Three month LIBOR rate of 1.25%

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 condensed consolidated balance sheets and the net amounts of assets and liabilities presented therein (in millions):


	January 1, 2022				September 30, 2021
	Asset		Liability		Asset		Liability
Interest rate cap agreements	$	11	$	—	$	8	$	—
Interest rate swap agreements	—		(209)		—		(280)


Net derivatives as classified in the condensed consolidated balance sheets (1)	$	11	$	(209)	$	8	$	(280)

(1)Refer to Note 11, “Fair Value Measurements,” for the condensed consolidated balance sheets 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 January 1, 2022, the estimated net amount of existing gains and losses and caplet amortization expected to be reclassified into interest expense-net within the next 12 months is approximately $106.3 million.

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 January 1, 2022, the Company had outstanding foreign currency forward exchange contracts to sell U.S. dollars with notional amounts of $97.5 million. The maximum duration of the Company’s foreign currency cash flow hedge contracts at January 1, 2022 is 9 months. These notional values consist of contracts for the Canadian dollar and the European euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective trade dates. Amounts related to foreign currency forward exchange contracts included in accumulated other comprehensive loss in stockholders' deficit are reclassified into net sales when the hedged transaction settles.

During the thirteen week period ended January 1, 2022, the losses reclassified on settlements of foreign currency forward exchange contracts designated as cash flow hedges into net sales were less than $1 million. The losses were previously recorded as a component of accumulated other comprehensive loss in stockholders' deficit.

As of January 1, 2022, the Company expects to record a net loss of approximately $3.7 million on foreign currency forward exchange contracts designated as cash flow hedges to net sales over the next 12 months.

13. 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, engineered audio, radio and antenna 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 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 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 non-cash compensation charges incurred in connection with the Company’s stock incentive plans, restructuring costs related to the Company's cost reduction measures in response to the COVID-19 pandemic, foreign currency gains and losses, acquisition-integration costs, acquisition and divestiture transaction-related expenses, and refinancing costs. COVID-19 pandemic restructuring costs represent actions taken by the Company to reduce its workforce to align with customer demand, as well as 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). Acquisition and divestiture-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 for both acquisitions and divestitures 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.

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 condensed 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. Corporate consists of our corporate offices. Corporate office expenses consist primarily of compensation, benefits, professional services and other administrative costs incurred by the corporate offices. Corporate assets consist primarily of cash and cash equivalents. Corporate expenses and assets reconcile reportable segment data to the consolidated totals. An immaterial amount of corporate expenses are allocated to the operating segments.

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


	Thirteen Week Periods Ended
		January 1, 2022		January 2, 2021
Net sales to external customers
Power & Control
Commercial and non-aerospace OEM		$	136	$	126
Commercial and non-aerospace aftermarket		202		132
Defense		312		343
Total Power & Control		650		601

Airframe
Commercial and non-aerospace OEM		143		142
Commercial and non-aerospace aftermarket		164		112
Defense		199		210
Total Airframe		506		464

Total Non-aviation		38		43

Net Sales		$	1,194	$	1,108

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


	Thirteen Week Periods Ended
		January 1, 2022		January 2, 2021
EBITDA As Defined
Power & Control		$	328	$	304
Airframe		226		177
Non-aviation		14		15
Total segment EBITDA As Defined		568		496
Less: Unallocated corporate expenses		3		22
Total Company EBITDA As Defined		565		474
Depreciation and amortization expense		65		58
Interest expense, net		264		267
Acquisition and divestiture-related costs		5		4
Non-cash stock compensation expense		37		49

COVID-19 pandemic restructuring costs		—		21

Other, net		1		22
Income from continuing operations before income taxes		$	193	$	53

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


	January 1, 2022		September 30, 2021
Total assets
Power & Control	$	6,870	$	6,980
Airframe	7,459		7,472
Non-aviation	223		229
Corporate	4,690		4,634
	$	19,242	$	19,315

14. RETIREMENT PLANS

The components of net periodic pension benefit (income) cost for the Company's U.S. and non-U.S. defined benefit pension plans consisted of the following (in millions):


	Thirteen Week Periods Ended
		January 1, 2022	January 2, 2021
			U.S. Pension Plans		Non-U.S. Pension Plans		U.S. Pension Plans		Non-U.S. Pension Plans
Service cost			$	—	$	1	$	2	$	1
Interest cost			1		1		2		1
Expected return on plan assets			(2)		(1)		(5)		(2)
Amortization of net loss			—		—		—		1

Net periodic pension benefit (income) cost			$	(1)	$	1	$	(1)	$	1

Net periodic pension benefit (income) cost for the Company’s U.S. and non-U.S. post-retirement pension plans was less than $1 million for the thirteen week periods ended January 1, 2022 and January 2, 2021, respectively. The components of net periodic pension benefit cost, other than service cost, are included in other income in the condensed consolidated statements of income.

Effective June 30, 2021, the Company terminated the Esterline Technologies Retirement Plan (the “ERP”) in accordance with IRS regulations. Pension obligations will be distributed through a combination of lump sum payments to eligible plan participants and the purchase of a group annuity contract. Upon settlement of the pension obligations, the Company will reclassify unrecognized actuarial gains or losses, currently recorded as a component of accumulated other comprehensive loss in stockholders' deficit, to the Company's condensed consolidated statements of income as settlement gains or charges. The Company anticipates the termination process will be completed by the end of fiscal year 2022.

15. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the components of accumulated other comprehensive loss, net of taxes, for the thirteen week periods ended January 1, 2022 and January 2, 2021 (in millions):


	Unrealized gains on derivatives designated and qualifying as cash flow hedges (1)		Defined benefit pension plan activity (2)		Foreign currency translation		Total
Balance at September 30, 2021	$	(229)	$	(18)	$	(1)	$	(248)


Net current-period other comprehensive gain (loss)	58		—		(10)		48
Balance at January 1, 2022	$	(171)	$	(18)	$	(11)	$	(200)

Balance at September 30, 2020	$	(302)	$	(8)	$	(91)	$	(401)


Net current-period other comprehensive gain	13		—		111		124
Balance at January 2, 2021	$	(289)	$	(8)	$	20	$	(277)

(1)Represents unrealized gains on derivatives designated and qualifying as cash flow hedges, net of tax benefits of $17.8 million and $5.0 million for the thirteen week periods ended January 1, 2022 and January 2, 2021, respectively.

(2)There were no material pension liability adjustments, net of taxes, for the thirteen week periods ended January 1, 2022 and January 2, 2021.

Reclassifications out of accumulated other comprehensive loss for the thirteen week periods ended January 1, 2022 and January 2, 2021 were not material.

16. 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 are as follows (in millions):


		Thirteen Week Periods Ended
	Classification		January 1, 2022		January 2, 2021
Operating lease cost	Cost of Sales or Selling and Administrative Expenses		$	8	$	7
Finance lease cost
Amortization of leased assets	Cost of Sales		1		1
Interest on lease liabilities	Interest Expense - Net		2		1
Total lease cost			$	11	$	9

Supplemental cash flow information related to leases is as follows (in millions):


	Thirteen Week Periods Ended
	January 1, 2022		January 2, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	7	$	7
Operating cash outflows from finance leases	2		1
Financing cash outflows from finance leases	1		—

Lease assets obtained in exchange for new lease obligations:
Operating leases	$	2	$	4
Financing leases	25		19

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


	Classification	January 1, 2022		September 30, 2021
Operating Leases
Operating lease right-of-use assets	Other assets	$	89	$	94

Current operating lease liabilities	Accrued and other current liabilities	19		20
Long-term operating lease liabilities	Other non-current liabilities	74		79
Total operating lease liabilities		$	93	$	99

Finance Leases
Finance lease right-of-use assets, net	Property, plant and equipment - net	$	129	$	104

Current finance lease liabilities	Accrued and other current liabilities	2		2
Long-term finance lease liabilities	Other non-current liabilities	126		98
Total finance lease liabilities		$	128	$	100

As of January 1, 2022, the Company has the following remaining lease term and weighted average discount rates:


Weighted-average remaining lease term
Operating leases			6.4 years
Finance leases			21.5 years

Weighted-average discount rate
Operating leases			5.1%
Finance leases			7.2%

Maturities of lease liabilities at January 1, 2022 are as follows (in millions):


	Operating Leases		Finance Leases
2022	$	18	$	9
2023	19		11
2024	16		12
2025	13		12
2026	10		12
Thereafter	43		212
Total future minimum lease payments	119		268
Less: imputed interest	26		140
Present value of lease liabilities reported	$	93	$	128

17. 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.

DoD OIG Audit – TransDigm’s subsidiaries are periodically subject to pricing reviews and government buying agencies that purchase some of our subsidiaries’ products are periodically subject to audits by the Department of Defense (“DoD”) Office of Inspector General (“OIG”) with respect to prices paid for such products. In 2019, the DoD OIG received a congressional letter requesting a comprehensive review of TransDigm’s contracts with the DoD from January 2017 through June 2019 to identify whether TransDigm earned excess profits. This subsequently resulted in an audit by the DoD OIG in which the objective was to determine whether TransDigm’s business model impacted the DoD’s ability to pay fair and reasonable prices for spare parts. In December 2021, the OIG completed the audit and issued the related audit report. Despite the audit report making clear there was no wrongdoing by TransDigm, its businesses, or the DoD, the report recommended that TransDigm voluntarily refund at least $20.8 million in excess profit on 150 contracts subject to the audit.

TransDigm disagrees with many of the implications contained in the report, and objects to the use of arbitrary standards and analysis which render many areas of the report inaccurate and misleading. These include: (1) The report expressly acknowledges that it used arbitrary standards that are not applicable to the audited contracts and warns that its arbitrary standards should not be used in the future. The use of inapplicable standards results in flawed analysis and is misleading; (2) The report ignores significant real costs incurred by the business and contrary to law reports these costs as excess profit; (3) Despite data demonstrating that the DoD paid lower prices compared to the commercial prices for similar parts, the report did not conduct a price analysis and instead implies that the DoD negotiated prices that were too high.

No loss contingency related to the voluntary refund request has been recorded as of January 1, 2022 as the Company has concluded that based on the current facts and circumstances, it's uncertain as to whether or not the requested voluntary refund will be made.

Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS