TransDigm Group Incorporated — Fiscal 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended September 30, 2015. TransDigm designs, manufactures and supplies highly engineered aircraft components for commercial, military and other markets. Its reporting segments are Power & Control, Airframe and Non-aviation. Approximately 90% of fiscal 2015 sales came from proprietary products, approximately 80% from sole-source products and approximately 54% from aftermarket sales.
Fiscal 2015 included the acquisitions of Telair Cargo Group, Adams Rite Aerospace GmbH, Pexco Aerospace and PneuDraulics. The company operated 52 principal manufacturing facilities and employed approximately 8,200 people.
Financial performance and key metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $2,707.1 million | $2,372.9 million | 14.1% |
| Gross profit | $1,449.8 million | $1,267.9 million | 14.3% |
| Gross margin | 53.6% | 53.4% | Up 0.2 points |
| Income from operations | $1,074.0 million | $927.8 million | 15.8% |
| Operating margin | 39.7% | 39.1% | Up 0.6 points |
| Net income | $447.2 million | $306.9 million | 45.7% |
| Net earnings per share | $7.84 | $3.16 | Up $4.68 |
| EBITDA | $1,149.3 million | $892.6 million | 28.8% |
| EBITDA As Defined | $1,233.7 million | $1,073.2 million | 14.9% |
| Cash flow from operations | $520.9 million | $541.2 million | Down $20.3 million |
| Capital expenditures | $54.9 million | $34.1 million | Up $20.7 million |
Segment sales were $1,330.1 million for Power & Control, $1,280.7 million for Airframe and $96.3 million for Non-aviation. Segment EBITDA As Defined was $653.1 million, $585.5 million and $22.4 million, respectively.
At September 30, 2015, cash and cash equivalents were $714.0 million, working capital was $1,173.7 million and total assets were $8,427.1 million. Stockholders’ deficit was $1,038.3 million. Goodwill was $4,686.2 million and other intangible assets were $1,539.9 million.
Debt, liquidity and cash flows
Total debt, including current maturities and the trade receivable securitization facility, was $8,227.3 million at September 30, 2015, compared with $7,273.1 million a year earlier. Management reported total indebtedness of approximately $8,427.3 million when describing leverage, including the effect of debt-related balances. The debt leverage ratio, calculated using total debt divided by EBITDA As Defined, was approximately 6.8x.
- Term loans totaled approximately $4.377 billion and had applicable rates of 3.75% for the Tranche C and D loans and 3.50% for the Tranche E loans at year-end.
- The company issued $450 million of 6.50% Senior Subordinated Notes due 2025 and incurred $1.0 billion of new Tranche E term loans in May 2015.
- The revolving facility totaled $550 million, with $534 million available after $16 million of letters of credit.
- The trade receivable securitization facility had $250 million of capacity and $200 million outstanding.
- Cash interest paid was $398.9 million, compared with $319.6 million in fiscal 2014.
- Net cash used in investing activities was $1,679.1 million, primarily reflecting $1,624.3 million spent on acquisitions.
- Net cash provided by financing activities was $1,054.9 million, primarily from new term loans and the 2025 Notes, partially offset by debt repayments.
Management stated that, absent disruptive events, internally generated funds and available revolver capacity should fund operations, non-acquisition capital expenditures, research and development and long-term debt obligations through at least fiscal 2016. Fiscal 2016 capital expenditures were expected to be between $55 million and $60 million.
Material changes versus the prior comparable period
- Sales increased 14.1%; organic sales increased 3.3% and acquisition-related sales contributed approximately $256.2 million.
- Commercial aftermarket sales increased 4.2%, defense sales increased 4.3% and commercial OEM sales increased 2.4%.
- Gross margin improved modestly despite acquired businesses carrying an approximately 39% gross margin, below the consolidated margin.
- Operating margin improved to 39.7% from 39.1%, while selling and administrative expense increased to 11.9% of sales from 11.6%.
- Interest expense increased 20.4% to $418.8 million because of higher average borrowings, partly offset by a lower average cash interest rate.
- Refinancing costs fell to $18.4 million from $131.6 million in 2014, when the company redeemed its 2018 Notes.
- Operating cash flow declined despite higher operating income, primarily because of higher interest payments.
- Backlog increased to an estimated $1.428 billion from $1.195 billion, with most orders scheduled for delivery within twelve months; management attributed much of the increase to acquisitions.
- No regular or special common-stock dividend was declared in fiscal 2015, and no share repurchases were made under the $300 million authorization.
Guidance, outlook, risks and unusual items
Management cited continued growth in revenue passenger miles and commercial aircraft production, with industry indicators suggesting positive commercial transport trends in fiscal 2016. Commercial OEM growth was expected to continue in 2016 and 2017, although growth could moderate. For planning purposes, management assumed military-related sales would remain flat at recent high levels.
Unusual or non-recurring items included $18.4 million of refinancing costs, $12.3 million of acquisition transaction expenses, $13.0 million of acquisition integration costs, $11.4 million of inventory purchase-accounting adjustments and $31.5 million of non-cash stock compensation expense. EBITDA As Defined is a non-GAAP measure and excludes or adjusts for several of these items; it should not be treated as discretionary cash flow.
- High leverage and substantial interest obligations could constrain financial flexibility, acquisitions, capital expenditures and shareholder returns.
- Approximately $2.896 billion of contractual cash obligations, including scheduled interest, were due in fiscal 2020, largely because of debt maturities.
- Floating-rate term debt creates interest-rate exposure; a hypothetical one-percentage-point increase in rates was estimated to increase annual term-loan interest expense by approximately $44 million.
- Demand is sensitive to flight hours, airline profitability, aircraft production, defense budgets and geopolitical conditions.
- The company relies on major customers: Boeing represented approximately 12% of sales, Airbus approximately 11%, and the top ten customers approximately 46%.
- Acquisition integration, goodwill and intangible-asset impairment, regulatory approvals, government contracting, environmental liabilities, supplier disruptions, labor availability, cybersecurity, product liability and international operations remain material risks.
- Goodwill and identifiable intangible assets represented approximately 73.9% of total assets at year-end. No goodwill impairment was recorded, and reporting-unit fair values were substantially above carrying values.
- Environmental remediation liabilities were $21.9 million; management did not expect costs beyond accrued amounts to materially affect financial condition based on available information.
Most important facts for investors to verify
- Reconcile reported total debt, leverage of approximately 6.8x and available liquidity, including revolver and securitization capacity.
- Assess debt maturities, refinancing requirements and the sensitivity of earnings and cash flow to interest rates.
- Separate organic growth from acquisition growth and evaluate the profitability and integration progress of the four fiscal 2015 acquisitions.
- Review the sustainability of the 53.6% gross margin and 39.7% operating margin, particularly as product mix and aftermarket demand change.
- Validate operating cash conversion, including the decline in operating cash flow and the increase in interest payments.
- Monitor customer concentration, commercial aircraft production, aftermarket activity and U.S. defense spending.
- Evaluate goodwill and intangible-asset balances, purchase-price accounting still subject to adjustment, and impairment sensitivity.
- Review environmental, tax, legal, regulatory, government-contracting and product-liability contingencies, as well as the control assessment that excluded fiscal 2015 acquisitions.