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 December 31, 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 54,598,064 as of January 31, 2023.

TABLE OF CONTENTS

			Page
PART I	FINANCIAL INFORMATION
ITEM 1		Financial Statements
		Condensed Consolidated Balance Sheets – December 31, 2022 and September 30, 2022	1
		Condensed Consolidated Statements of Income – Thirteen Week Periods Ended December 31, 2022 and January 1, 2022	2
		Condensed Consolidated Statements of Comprehensive Income – Thirteen Week Periods Ended December 31, 2022 and January 1, 2022	3
		Condensed Consolidated Statements of Changes in Stockholders’ Deficit – Thirteen Week Periods Ended December 31, 2022 and January 1, 2022	4
		Condensed Consolidated Statements of Cash Flows – Thirteen Week Periods Ended December 31, 2022 and January 1, 2022	5
		Notes to Condensed Consolidated Financial Statements	6
ITEM 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3		Quantitative and Qualitative Disclosure About Market Risk	38
ITEM 4		Controls and Procedures	38
PART II	OTHER INFORMATION		39
ITEM 1		Legal Proceedings	39
ITEM 1A		Risk Factors	39
ITEM 2		Unregistered Sales of Equity Securities and Use of Proceeds: Purchases of Equity Securities by the Issuer	39
ITEM 5		Other Information	39
ITEM 6		Exhibits	40
SIGNATURES			41

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except share amounts)

(Unaudited)

	December 31, 2022		September 30, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3,288	$	3,001
Trade accounts receivable—Net	860		967
Inventories—Net	1,439		1,332
Prepaid expenses and other	342		349
Total current assets	5,929		5,649
PROPERTY, PLANT AND EQUIPMENT—NET	864		807
GOODWILL	8,719		8,641
OTHER INTANGIBLE ASSETS—NET	2,750		2,750
OTHER NON-CURRENT ASSETS	227		260
TOTAL ASSETS	$	18,489	$	18,107
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt	$	78	$	76
Short-term borrowings—trade receivable securitization facility	350		350
Accounts payable	271		279
Accrued and other current liabilities	709		721
Total current liabilities	1,408		1,426
LONG-TERM DEBT	19,375		19,369
DEFERRED INCOME TAXES	607		596
OTHER NON-CURRENT LIABILITIES	427		482
Total liabilities	21,817		21,873
TD GROUP STOCKHOLDERS’ DEFICIT:
Common stock - $.01 par value; authorized 224,400,000 shares; issued 60,171,175 and 60,049,685 at December 31, 2022 and September 30, 2022, respectively	1		1
Additional paid-in capital	2,164		2,113
Accumulated deficit	(3,687)		(3,914)
Accumulated other comprehensive loss	(108)		(267)
Treasury stock, at cost; 5,688,639 shares at December 31, 2022 and September 30, 2022, respectively	(1,706)		(1,706)
Total TD Group stockholders’ deficit	(3,336)		(3,773)
NONCONTROLLING INTERESTS	8		7
Total stockholders’ deficit	(3,328)		(3,766)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	18,489	$	18,107

See notes to condensed consolidated financial statements

1

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited) 

	Thirteen Week Periods Ended
	December 31, 2022		January 1, 2022
NET SALES	$	1,397	$	1,194
COST OF SALES	604		533
GROSS PROFIT	793		661
SELLING AND ADMINISTRATIVE EXPENSES	169		170
AMORTIZATION OF INTANGIBLE ASSETS	34		36
INCOME FROM OPERATIONS	590		455
INTEREST EXPENSE—NET	286		264
REFINANCING COSTS	4		—
OTHER INCOME	(1)		(2)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	301		193
INCOME TAX PROVISION	72		30
INCOME FROM CONTINUING OPERATIONS	229		163
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX	—		1
NET INCOME	229		164
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS	(1)		(1)
NET INCOME ATTRIBUTABLE TO TD GROUP	$	228	$	163
NET INCOME APPLICABLE TO TD GROUP COMMON STOCKHOLDERS	$	190	$	117
Earnings per share attributable to TD Group common stockholders
Earnings per share from continuing operations—basic and diluted	$	3.33	$	1.96
Earnings per share from discontinued operations—basic and diluted	—		0.02
Earnings per share	$	3.33	$	1.98
Weighted-average shares outstanding:
Basic and diluted	57.1		59.2

See notes to condensed consolidated financial statements

2

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

	Thirteen Week Periods Ended
	December 31, 2022		January 1, 2022
Net income	$	229	$	164
Less: Net income attributable to noncontrolling interests	(1)		(1)
Net income attributable to TD Group	$	228	$	163
Other comprehensive income, net of tax:
Foreign currency translation adjustment	137		(10)
Unrealized gain on derivatives	22		58
Pension and postretirement benefit plans adjustment	—		—
Other comprehensive income, net of tax, attributable to TD Group	159		48
TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO TD GROUP	$	387	$	211

See notes to condensed consolidated financial statements

3

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 Deficit		Accumulated Other Comprehensive Loss		Treasury Stock
	Number of Shares	Par Value								Number of Shares	Value		Noncontrolling 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 adjustment, net of tax	—	—		—		—		(10)		—	—		—		(10)
Unrealized gain on derivatives, net of tax	—	—		—		—		58		—	—		—		58
Pension and postretirement benefit plans adjustment, net of tax	—	—		—		—		—		—	—		—		—
BALANCE—January 1, 2022	59,618,917	$	1	$	1,905	$	(3,545)	$	(200)	(4,198,226)	$	(794)	$	7	$	(2,626)

	TD Group Stockholders
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Treasury Stock
	Number of Shares	Par Value								Number of Shares	Value		Noncontrolling Interests		Total
BALANCE—September 30, 2022	60,049,685	$	1	$	2,113	$	(3,914)	$	(267)	(5,688,639)	$	(1,706)	$	7	$	(3,766)
Changes in noncontrolling interest of consolidated subsidiaries, net	—	—		—		—		—		—	—		1		1
Accrued unvested dividend equivalents and other	—	—		—		(1)		—		—	—		—		(1)
Compensation expense recognized for employee stock options	—	—		24		—		—		—	—		—		24
Exercise of employee stock options	121,490	—		27		—		—		—	—		—		27
Net income attributable to TD Group	—	—		—		228		—		—	—		—		228
Foreign currency translation adjustment, net of tax	—	—		—		—		137		—	—		—		137
Unrealized gain on derivatives, net of tax	—	—		—		—		22		—	—		—		22
Pension and postretirement benefit plans adjustment, net of tax	—	—		—		—		—		—	—		—		—
BALANCE—December 31, 2022	60,171,175	$	1	$	2,164	$	(3,687)	$	(108)	(5,688,639)	$	(1,706)	$	8	$	(3,328)

See notes to condensed consolidated financial statements

4

TRANSDIGM GROUP INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

	Thirteen Week Periods Ended
	December 31, 2022		January 1, 2022
OPERATING ACTIVITIES:
Net income	$	229	$	164
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	34		36
Amortization of debt issuance costs, original issue discount and premium	9		8
Amortization of inventory step-up	2		—
Amortization of loss contract reserves	(12)		(12)
Refinancing costs	4		—
Non-cash stock compensation expense	29		37
Foreign currency exchange losses (gains)	18		(1)
Changes in assets/liabilities, net of effects from acquisitions and sales of businesses:
Trade accounts receivable	121		117
Inventories	(89)		(32)
Income taxes payable (receivable)	77		(6)
Other assets	(2)		(2)
Accounts payable	(13)		(14)
Accrued interest	3		(19)
Accrued and other liabilities	(62)		(25)
Net cash provided by operating activities	377		279
INVESTING ACTIVITIES:
Capital expenditures	(31)		(25)
Acquisition of businesses, net of cash acquired	(10)		—
Net cash used in investing activities	(41)		(25)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options	27		40
Dividend equivalent payments	(38)		(46)
Repayment on revolving credit facility	—		(200)
Proceeds from term loans, net	1,690		—
Repayment on term loans	(1,739)		(19)
Financing costs and other, net	(5)		—
Net cash used in financing activities	(65)		(225)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS	16		(3)
NET INCREASE IN CASH AND CASH EQUIVALENTS	287		26
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	3,001		4,787
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	3,288	$	4,813
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest, net	$	272	$	273
Cash (refunded) paid during the period for income taxes, net	$	(2)	$	17

See notes to condensed consolidated financial statements

5

TRANSDIGM GROUP INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THIRTEEN WEEK PERIODS ENDED DECEMBER 31, 2022 AND JANUARY 1, 2022

(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, 2022 included in TD Group’s Form 10-K filed on November 10, 2022. 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, 2022 condensed consolidated balance sheet was derived from TD Group’s audited financial statements. The results of operations for the thirteen week period ended December 31, 2022 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation, none of which are material.

3.    ACQUISITIONS

DART Aerospace – On May 25, 2022, the Company acquired all the outstanding stock of DART Aerospace (“DART”) for a total purchase price of $359 million in cash, which is net of a working capital settlement received in the fourth quarter of fiscal 2022 of approximately $1 million. The acquisition was financed through existing cash on hand. DART operates from four primary facilities (Hawkesbury, Ontario, Canada; Portland, Oregon; Fort Collins, Colorado and Chihuahua, Mexico) and is a leading provider of highly engineered, unique helicopter mission equipment solutions that predominantly service civilian aircraft. The products are primarily proprietary with significant aftermarket content. DART's operating results are included within TransDigm's Airframe segment.

6

The Company accounted for the DART 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 date of the acquisition. The total purchase price of DART 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. As of December 31, 2022, the measurement period (not to exceed one year) is open; therefore, the assets acquired and liabilities assumed related to the DART acquisition are subject to adjustment until the end of the respective measurement period, including those related to deferred taxes and income taxes. The fair values of acquired intangibles are determined based on estimates and assumptions that are deemed reasonable by the Company. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted results of the acquired business including revenue, earnings before interest, taxes, depreciation and amortization (“EBITDA”), growth rates, royalty rates and technology obsolescence rates. 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 thirteen week periods ended December 31, 2022 or January 1, 2022 are not material and, accordingly, are not provided.

The allocation of the estimated fair value of assets acquired and liabilities assumed in the DART acquisition as of the May 25, 2022 acquisition date is summarized in the table below (in millions):

	Preliminary		Measurement Period		Adjusted Preliminary
	Allocation		Adjustments (2)		Allocation
Assets acquired (excluding cash):
Trade accounts receivable	$	16	$	(1)	$	15
Inventories	33		—		33
Prepaid expenses and other	4		1		5
Property, plant and equipment	9		—		9
Goodwill	236		(34)		202		(1)
Other intangible assets	112		36		148		(1)
Other non-current assets	8		9		17
Total assets acquired (excluding cash)	418		11		429
Liabilities assumed:
Accounts payable	4		—		4
Accrued and other current liabilities	11		3		14
Deferred income taxes	35		1		36
Other non-current liabilities	8		8		16
Total liabilities assumed	58		12		70
Net assets acquired	$	360	$	(1)	$	359

(1)The Company expects that none of the approximately $202 million of goodwill and $148 million of other intangible assets recognized for the acquisition will be deductible for tax purposes.

(2)Measurement period adjustments primarily relate to the adjustments in the fair values of the acquired other intangible assets from the third-party valuation. The principal offset was to goodwill.

Extant Aerospace Acquisitions – For the fiscal year ended September 30, 2022, the Company's Extant Aerospace subsidiary, which is included in TransDigm’s Power & Control segment, completed a series of acquisitions of substantially all of the assets and technical data rights of certain product lines, each meeting the definition of a business, for a total purchase price of $88 million. The allocation of the purchase prices is preliminary and will likely change in future periods up to the expiration of the respective one year measurement period as fair value estimates of the assets acquired and liabilities assumed are finalized. The Company expects that all of the approximately $60 million of goodwill and all of the approximately $37 million of other intangible assets recognized for the acquisitions will be deductible for tax purposes over 15 years. Pro forma net sales and results of operations for the Extant Aerospace acquisitions had they occurred at the beginning of the thirteen week periods ended December 31, 2022 or January 1, 2022 are not material and, accordingly, are not provided.

7

The acquisitions completed by the Company 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, continually improving our cost structure, and providing highly engineered value-added products to customers). The purchase price paid reflect the current EBITDA and cash flows, as well as the future EBITDA and cash flows expected to be generated by the businesses, 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.

4.    RECENT ACCOUNTING PRONOUNCEMENTS

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, and ASU 2022-06, “Reference Rate Reform (ASC 848): Deferral of the Sunset Date.” ASU 2021-01 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. As a result of ASU 2022-06 deferring the sunset date, ASC 848 is effective through December 31, 2024. The Company is evaluating the impact of reference rate reform on our existing Credit Agreement and our interest rate swap and cap agreements. To the extent that, prior to December 31, 2024, the Company enters into any transactions for which the optional practical expedients permissible under ASC 848 are applied, the adoption of this standard is not expected to have a material impact on the Company's condensed consolidated financial statements and disclosures.

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 Company's revenue is primarily recorded at a point in time basis. 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.

8

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 (Deferred revenue) 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):

	December 31, 2022		September 30, 2022
Contract assets, current (1)	$	137	$	119
Contract assets, non-current (2)	1		1
Total contract assets	138		120
Contract liabilities, current (3)	59		45
Contract liabilities, non-current (4)	9		9
Total contract liabilities	68		54
Net contract assets	$	70	$	66

(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.

The increase in the Company's total contract assets at December 31, 2022 compared to September 30, 2022 primarily is due to the timing and status of work in process and/or milestones of certain contracts. The increase in the Company's total contract liabilities at December 31, 2022 compared to September 30, 2022 primarily is due to the receipt of advance payments. For the thirteen week period ended December 31, 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. The allowance also incorporates a provision for the estimated impact of disputes with customers. All provisions for allowances for uncollectible accounts are included in selling and administrative expenses. 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.

As of December 31, 2022 and September 30, 2022, the allowance for uncollectible accounts was $36 million. The allowance for uncollectible accounts is assessed individually at each operating unit by the operating unit’s management team.

9

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:

	Thirteen Week Periods Ended
	December 31, 2022		January 1, 2022
Numerator for earnings per share:
Income from continuing operations	$	229	$	163
Less: Net income attributable to noncontrolling interests	(1)		(1)
Net income from continuing operations attributable to TD Group	228		162
Less: Dividends paid on participating securities	(38)		(46)
Income from discontinued operations, net of tax	—		1
Net income applicable to TD Group common stockholders—basic and diluted	$	190	$	117
Denominator for basic and diluted earnings per share under the two-class method:
Weighted-average common shares outstanding	54.4		55.3
Vested options deemed participating securities	2.7		3.9
Total shares for basic and diluted earnings per share	57.1		59.2
Earnings per share from continuing operations—basic and diluted	$	3.33	$	1.96
Earnings per share from discontinued operations—basic and diluted	—		0.02
Earnings per share	$	3.33	$	1.98

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):

	December 31, 2022		September 30, 2022
Raw materials and purchased component parts	$	1,037	$	959
Work-in-progress	390		359
Finished goods	216		210
Total	1,643		1,528
Reserves for excess and obsolete inventory	(204)		(196)
Inventories—Net	$	1,439	$	1,332

10

8.    INTANGIBLE ASSETS

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

	December 31, 2022						September 30, 2022
	Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
Trademarks & trade names	$	998	$	—	$	998	$	990	$	—	$	990
Technology	2,075		810		1,265		2,054		780		1,274
Order backlog	7		4		3		7		3		4
Customer relationships	592		113		479		580		104		476
Other	9		4		5		9		3		6
Total	$	3,681	$	931	$	2,750	$	3,640	$	890	$	2,750

The aggregate amortization expense on identifiable intangible assets is approximately $34 million and $36 million for the thirteen week periods ended December 31, 2022 and January 1, 2022, respectively.

The following is a summary of changes in the carrying value of goodwill by segment from September 30, 2022 through December 31, 2022 (in millions):

	Power & Control		Airframe		Non-aviation		Total
Balance at September 30, 2022	$	4,155	$	4,393	$	93	$	8,641
Purchase price allocation adjustments (1)	3		—		—		3
Currency translation adjustments and other	25		50		—		75
Balance at December 31, 2022	$	4,183	$	4,443	$	93	$	8,719

(1)Primarily related to opening balance sheet adjustments recorded from the series of acquisitions by the Company's Extant Aerospace subsidiary completed during fiscal year 2022. Refer to Note 3, “Acquisitions,” for further information.

The Company performs its 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 events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. We assessed the changes in events and circumstances during the first quarter of fiscal 2023 and concluded that no triggering events occurred that would require interim quantitative testing.

11

9.    DEBT

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

	December 31, 2022
	Gross Amount		Debt Issuance Costs		Original Issue (Discount) or Premium		Net Amount
Short-term borrowings—trade receivable securitization facility	$	350	$	—	$	—	$	350
Term loans	$	7,284	$	(27)	$	(45)	$	7,212
8.00% senior secured notes due 2025 (“2025 Secured Notes”)	1,100		(5)		—		1,095
6.375% senior subordinated notes due 2026 (“6.375% 2026 Notes”)	950		(4)		—		946
6.875% senior subordinated notes due 2026 (“6.875% 2026 Notes”)	500		(3)		(2)		495
6.25% secured notes due 2026 (“2026 Secured Notes”)	4,400		(33)		3		4,370
7.50% senior subordinated notes due 2027 (“7.50% 2027 Notes”)	550		(3)		—		547
5.50% senior subordinated notes due 2027 (“5.50% 2027 Notes”)	2,650		(14)		—		2,636
4.625% senior subordinated notes due 2029 (“4.625% 2029 Notes”)	1,200		(8)		—		1,192
4.875% senior subordinated notes due 2029 (“4.875% 2029 Notes”)	750		(6)		—		744
Government refundable advances	23		—		—		23
Finance lease obligations	193		—		—		193
	19,600		(103)		(44)		19,453
Less: current portion	79		(1)		—		78
Long-term debt	$	19,521	$	(102)	$	(44)	$	19,375

	September 30, 2022
	Gross Amount		Debt Issuance Costs		Original Issue (Discount) or Premium		Net Amount
Short-term borrowings—trade receivable securitization facility	$	350	$	—	$	—	$	350
Term loans	$	7,298	$	(29)	$	(13)	$	7,256
2025 Secured Notes	1,100		(6)		—		1,094
6.375% 2026 Notes	950		(4)		—		946
6.875% 2026 Notes	500		(3)		(2)		495
2026 Secured Notes	4,400		(35)		3		4,368
7.50% 2027 Notes	550		(3)		—		547
5.50% 2027 Notes	2,650		(15)		—		2,635
4.625% 2029 Notes	1,200		(9)		—		1,191
4.875% 2029 Notes	750		(6)		—		744
Government refundable advances	23		—		—		23
Finance lease obligations	146		—		—		146
	19,567		(110)		(12)		19,445
Less: current portion	77		(1)		—		76
Long-term debt	$	19,490	$	(109)	$	(12)	$	19,369

Accrued interest, which is classified as a component of accrued and other current liabilities on the condensed consolidated balance sheets, was $173 million and $170 million as of December 31, 2022 and September 30, 2022, respectively.

12

Amendment No. 10 to the Second Amended and Restated Credit Agreement – On December 14, 2022, the Company entered into Amendment No. 10, Loan Modification Agreement and Refinancing Facility Agreement, to the Second Amended and Restated Credit Agreement, dated June 4, 2014 (herein, “Amendment No. 10”). Under the terms of Amendment No. 10, the Company, among other things, repaid in full its existing approximately $1,725 million in Tranche G term loans maturing August 22, 2024 and replaced such loans with approximately $1,725 million in Tranche H term loans maturing February 22, 2027. The applicable margin for the Tranche H term loans bearing interest at Term Secured Overnight Financing Rate (“SOFR”) is 3.25% compared to an applicable margin for the former Tranche G term loans which bore interest at LIBOR plus 2.25%. Original issue discount of 2%, or approximately $34.5 million, was paid to lenders of the Tranche H term loans. The Tranche H term loans were fully drawn on December 14, 2022 and the other terms and conditions that apply to the Tranche H term loans are substantially the same as the terms and conditions that applied to the term loans immediately prior to Amendment No 10.

In addition to a discount of $34.5 million recorded in conjunction with the Tranche H term loans, the Company expensed $3.0 million of refinancing costs associated with the refinancing during the thirteen week period ended December 31, 2022. Additionally, the Company wrote off $0.2 million in unamortized debt issuance costs and $0.1 million of original issue discount related to the Tranche G terms loans during the thirteen week period ended December 31, 2022.

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 December 31, 2022 and September 30, 2022, the outstanding balance of these advances was $23 million.

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 $193 million and $146 million at December 31, 2022 and September 30, 2022, respectively. The increase in the current fiscal year is attributable to certain new leases of facilities and amendments to previous agreements qualifying as lease modifications resulting in a change in classification from an operating lease to a finance lease. Refer to Note 15, “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 December 31, 2022 and January 1, 2022, the effective income tax rate was 23.9% and 15.5%, respectively. The Company’s higher effective tax rate for the thirteen week period ended December 31, 2022 was primarily due to a more significant discrete benefit associated with excess tax benefits applicable to share-based payments for the thirteen week period ended January 1, 2022. The Company’s effective income tax rate for the thirteen week period ended December 31, 2022 was higher than the federal statutory tax rate of 21% primarily due to an increase in the valuation allowance applicable to the Company's net interest deduction limitation carryforward, partially offset by the discrete impact of excess tax benefits associated with share-based payments.

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, and in Germany for fiscal years 2014 through 2017. In addition, the Company is subject to state income tax examinations for fiscal years 2015 and later.

Unrecognized tax benefits at December 31, 2022 and September 30, 2022, the recognition of which would have an impact on the effective tax rate for each fiscal year, amounted to $17.0 million and $16.6 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 December 31, 2022 and January 1, 2022. As of December 31, 2022 and September 30, 2022, the Company accrued $4.6 million and $4.5 million, respectively, for the potential payment of interest and penalties. Within the next 12 months, the Company does not anticipate a material increase or decrease in the amount of unrecognized tax benefits.

13

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):

		December 31, 2022				September 30, 2022
	Level	Carrying Amount		Fair Value		Carrying Amount	Fair Value
Assets:
Cash and cash equivalents	1	$	3,288	$	3,288	$