TransDigm Group Incorporated — Fiscal 2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing is an annual report, not a standalone quarterly filing; fourth-quarter results are presented in the annual and quarterly data disclosures. TransDigm designs, produces and supplies highly engineered aerospace components through Power & Control, Airframe and Non-aviation segments.
Business Context
- Approximately 90% of fiscal 2017 net sales came from proprietary products, approximately 80% from sole-source products, and approximately 55% from aftermarket sales.
- Commercial aftermarket, commercial OEM and defense markets represented approximately 35%, 26% and 34% of sales, respectively; non-aerospace sales represented approximately 5%.
- Airbus and Boeing accounted for approximately 13% and 11% of net sales, respectively; the top ten customers represented approximately 46%.
- Estimated backlog increased to $1.669 billion at September 30, 2017, from $1.554 billion at September 30, 2016, primarily due to acquisitions.
Financial Performance and Liquidity
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $3.504 billion | $3.171 billion | 10.5% |
| Gross profit | $1.985 billion | $1.728 billion | 14.8% |
| Gross margin | 56.6% | 54.5% | +2.1 pts |
| Operating income | $1.480 billion | $1.268 billion | 16.7% |
| Operating margin | 42.2% | 40.0% | +2.2 pts |
| Income from continuing operations | $628.5 million | $586.4 million | 7.2% |
| Net income | $596.9 million | $586.4 million | 1.8% |
| EPS | $7.88 | $10.39 | Down $2.51 |
| Cash flow from operations | $788.7 million | $683.3 million | 15.4% |
| Capital expenditures | $71.0 million | $44.0 million | 61.5% |
| EBITDA As Defined | $1.711 billion | $1.495 billion | 14.4% |
Fiscal fourth-quarter net sales were $923.9 million, gross profit was $531.2 million, income from continuing operations was $184.1 million and net income was $153.5 million. Fourth-quarter net loss from discontinued operations was $30.7 million, primarily reflecting the Schroth impairment.
- Cash and cash equivalents declined to $650.6 million from $1.587 billion, mainly after special dividends, share repurchases, debt repayments and acquisition-related spending.
- Total debt, excluding approximately $16 million of letters of credit, was approximately $11.8 billion at year-end; debt leverage was approximately 6.9 times EBITDA As Defined.
- The company had approximately $584.3 million of unused revolving commitments and $15.7 million of letters of credit outstanding.
- Stockholders’ deficit increased to $2.951 billion, reflecting substantial special dividends and treasury-stock purchases.
Material Changes Versus the Prior Comparable Period
- Organic sales increased 2.4%; acquisition sales contributed $255.7 million, producing total sales growth of 10.5%.
- Organic commercial aftermarket sales increased 3.0% and organic defense sales increased 4.4%; commercial OEM organic sales decreased 0.3%.
- Power & Control sales increased 20.1% to $1.948 billion, Airframe sales decreased 0.4% to $1.442 billion, and Non-aviation sales increased 12.0% to $114.0 million.
- Gross margin improved through acquisition mix, organic growth, cost controls and fixed-cost absorption.
- Net interest expense increased 24.5% to $602.6 million as average borrowings increased; the weighted-average cash interest rate remained approximately 5.3%.
- The company completed acquisitions of Schroth and three aerospace product lines. It also issued approximately $1.8 billion of Tranche G term loans, issued $300 million of additional 2025 Notes and redeemed the remaining 2021 Notes.
- The company paid $2.582 billion in dividends, including $24.00 and $22.00 special dividends per share, and repurchased $389.8 million of common stock.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued commercial aftermarket strength, continued but moderating commercial OEM production growth in fiscal 2018 and generally flat military-related sales from recent elevated levels.
- Fiscal 2018 capital expenditures were expected to be $85 million to $95 million.
- Schroth was classified as held for sale and discontinued operations following a settlement of a Department of Justice investigation concerning competitive effects of the acquisition. Fiscal 2017 included a $32.0 million impairment charge; discontinued operations produced a $31.7 million net loss.
- Key risks include high leverage, floating-rate debt, refinancing requirements, restrictive debt covenants, cyclical aircraft production and flight hours, defense-budget uncertainty, customer concentration, acquisition integration, regulatory approvals, government pricing reviews, environmental liabilities, supply constraints, cyber threats and product-liability exposure.
- A one-percentage-point increase in interest rates was estimated to increase annual term-loan interest expense by approximately $67 million. Interest-rate swaps and caps partially hedge this exposure.
- The filing states that the company was in compliance with its debt covenants at September 30, 2017. Management also stated that legal proceedings were not expected to materially affect financial condition, results of operations or cash flows, although environmental liabilities totaled approximately $39.9 million.
- Management and the independent auditor concluded that internal control over financial reporting was effective; the assessment excluded Schroth and the third-quarter 2017 acquisitions, which represented approximately 2% of total assets and 1% of revenue.
Investor Verification Checklist
- Reconcile reported net income and EPS with continuing operations, the Schroth discontinued-operations loss, special dividends and dividend-equivalent payments.
- Review debt maturities, floating-rate exposure, hedging coverage, covenant thresholds and the company’s ability to refinance or reduce leverage.
- Assess the sustainability of the 56.6% gross margin and the contribution of acquisitions versus organic growth.
- Verify the final disposition and proceeds from Schroth and any remaining DOJ-related obligations.
- Evaluate customer concentration, backlog quality and cancellation or deferral risk.
- Review goodwill and intangible assets of approximately $7.5 billion combined, including impairment sensitivity.
- Confirm future special-dividend and share-repurchase capacity under the credit agreement and indentures.