TransDigm Group Incorporated — Fiscal 2020 First-Quarter Form 10-Q
Business Context and Reporting Period
TransDigm designs, manufactures and supplies highly engineered aerospace components for commercial, defense and other markets. The filing covers the unaudited 13-week period ended December 28, 2019, compared with the 13-week period ended December 29, 2018.
Results include the March 2019 Esterline acquisition. Souriau-Sunbank, acquired with Esterline, was sold on December 20, 2019 and is reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $1,465 million | $993 million |
| Gross profit | $801 million; 54.7% margin | $564 million; 56.8% margin |
| Income from operations | $560 million; 38.3% margin | $422 million; 42.5% margin |
| Income from continuing operations attributable to TD Group | $233 million | $196 million |
| Net income attributable to TD Group | $304 million | $196 million |
| EPS attributable to common stockholders | $2.07 | $3.05 |
| Cash flow from operations | $433 million | $330 million |
| EBITDA As Defined | $681 million; 46.5% of sales | $487 million |
Net income included $71 million from discontinued operations, comprising $9 million of Souriau-Sunbank operating income and a $62 million after-tax gain on sale. A $32.50 per-share special dividend and related option payments reduced income available to common shareholders by approximately $185 million for EPS purposes.
At December 28, 2019, cash and equivalents were $4,194 million, trade receivables were $1,025 million, and inventories were $1,294 million. Total debt, including the trade-receivable securitization facility and finance leases, was approximately $18,207 million gross, or $18,032 million net of issuance costs and discounts. Stockholders’ deficit was $4,299 million.
Material Changes Versus the Prior Comparable Period
- Sales increased $472 million, or 47.5%, with $385 million attributable to acquisition sales and $87 million, or 8.7%, to organic growth.
- Organic growth was driven primarily by commercial aftermarket sales, up $43 million, and defense sales, up $40 million.
- Power & Control sales increased 34.3% to $752 million; Airframe sales increased 68.9% to $674 million; Non-aviation sales increased 14.7% to $39 million.
- Gross margin declined 2.1 percentage points, primarily due to the acquired Esterline mix and negative foreign-currency effects.
- Operating margin declined 4.2 percentage points as selling and administrative expense, amortization and other acquisition-related costs increased.
- Interest expense increased $76 million to $248 million, reflecting higher average borrowings of approximately $17.9 billion versus $13.0 billion.
- The company issued $2,650 million of 5.50% senior subordinated notes due 2027 and redeemed $1,150 million of 6.00% notes due 2022, recording $22 million of refinancing costs.
- Operating cash flow increased $103 million to $433 million. Investing cash flow was $877 million, primarily reflecting $904 million of proceeds from the Souriau-Sunbank divestiture.
- Estimated backlog increased to $3,528 million from $2,181 million, although customer orders may be canceled or deferred.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific full-year revenue, earnings or cash-flow guidance. Management expects continued strong margins and sufficient operating cash flow to meet interest obligations and liquidity needs, while retaining flexibility for acquisitions, stock investments and special dividends.
Management stated that it does not anticipate regular quarterly or annual dividends in the near future. A special dividend of approximately $1.9 billion was paid on January 7, 2020 using existing cash and Souriau-Sunbank sale proceeds; this payment was accrued at December 28, 2019.
- Total leverage and substantial interest obligations remain material. The company had $718.2 million of available revolving capacity, net of $41.8 million of letters of credit, and was in compliance with debt covenants.
- The $350 million trade-receivable securitization facility matures July 28, 2020. Management expects to fund obligations through operations and refinancing as needed.
- A fire at the Niort, France facility caused significant damage. Operations were moved to temporary facilities, with full restoration expected between the first and second quarters of fiscal 2021. Insurance recovery timing and amounts remain uncertain.
- The company faces aerospace-cycle, customer concentration, commercial flight-hour, defense-budget, acquisition-integration, cybersecurity, foreign-currency, international-operation, regulatory, environmental and litigation risks.
- Pending securities class-action and derivative litigation concerns alleged disclosures and practices related to U.S. government sales. Management believes the matters are without merit and expects insurance coverage, but the potential loss cannot presently be estimated.
- The company adopted ASC 842 lease accounting on October 1, 2019, recording approximately $99 million of operating lease assets and $105 million of operating lease liabilities without a material income or cash-flow effect.
Most Important Facts for Investors to Verify
- Reconcile reported growth and margins excluding Esterline acquisition effects, discontinued operations, refinancing costs and other non-GAAP adjustments.
- Assess debt-service capacity after the special dividend and after the additional 2027 notes issuance, including interest-rate exposure on floating-rate term loans.
- Verify the timing and economics of the Souriau-Sunbank divestiture, including the $62 million after-tax gain and use of sale proceeds.
- Monitor Esterline integration, loss-contract reserves of $222.5 million, purchase-price allocation adjustments and potential goodwill or intangible-asset impairment.
- Track Niort facility restoration, insurance recoveries and any production or customer-service disruption.
- Review backlog quality, cancellation rights and the proportion scheduled for shipment within 12 months.
- Confirm the outcome and potential financial exposure of the securities and derivative litigation and ongoing tax examinations.