TransDigm Group Incorporated — Q3 FY2012 Form 10-Q Summary
Business context and reporting period
TransDigm designs, manufactures and supplies highly engineered aerospace components for commercial and military aircraft, with significant proprietary and aftermarket content. The filing covers the unaudited thirteen-week and thirty-nine-week periods ended June 30, 2012, compared with periods ended July 2, 2011.
Fiscal 2012 results include contributions from the acquisitions of AmSafe, Harco and Schneller, as well as prior acquisitions. AmSafe was acquired on February 15, 2012 for approximately $749.7 million, funded partly with a new $500 million term loan.
Key financial metrics
| Metric | Q3 FY2012 | Q3 FY2011 | Change |
|---|---|---|---|
| Net sales | $461.7 million | $325.2 million | Up 42.0% |
| Gross profit | $253.3 million | $183.1 million | Up 38.3% |
| Gross margin | 54.9% | 56.3% | Down 1.4 percentage points |
| Income from operations | $185.9 million | $139.2 million | Up 33.5% |
| Operating margin | 40.3% | 42.8% | Down 2.5 percentage points |
| Net income | $90.4 million | $56.3 million | Up 60.7% |
| Net earnings per share | $1.68 | $1.06 | Up $0.62 |
| EBITDA As Defined | $216.7 million | $161.4 million | Up 34.3% |
For the first thirty-nine weeks, sales were $1.238 billion versus $863.1 million, income from continuing operations was $237.1 million versus $87.9 million, and net income was $237.1 million versus $104.7 million. Thirty-nine-week gross margin improved to 55.7% from 54.2%, while operating margin improved to 41.1% from 39.9%. First thirty-nine-week EBITDA As Defined was $593.9 million versus $418.0 million.
Q3 organic sales increased 9.5%, while acquisition sales contributed $105.6 million. Organic growth reflected increases in commercial OEM, commercial aftermarket and defense sales. First thirty-nine-week organic sales increased 13.8%, aided by commercial transport OEM production and approximately $11 million of retroactive contract pricing adjustments.
Cash flow, debt and liquidity
- Cash provided by operating activities for the first thirty-nine weeks was $257.8 million, versus $143.0 million in the prior comparable period.
- Capital expenditures were $16.2 million, and cash used for acquisitions was $834.0 million. Net cash used in investing activities was $850.2 million.
- Cash provided by financing activities was $519.5 million, primarily reflecting $484.3 million of net proceeds from the incremental senior secured term loan.
- Cash and cash equivalents were $302.7 million at June 30, 2012, down from $376.2 million at September 30, 2011.
- Total debt consisted of $3.604 billion of long-term debt and $20.5 million of current maturities. This included approximately $2.024 billion of term loans and $1.600 billion of 7.75% senior subordinated notes due 2018.
- The revolving credit facility totaled $310 million; $6.6 million of letters of credit were outstanding and $303.4 million remained available at June 30, 2012.
- The applicable term-loan interest rate was 4.0%. A one-percentage-point increase in interest rates would increase estimated annual interest expense by approximately $20.2 million, based on period-end borrowings.
- Management reported compliance with all debt covenants at June 30, 2012. Mandatory excess-cash-flow prepayments begin with the fiscal year ending September 30, 2012, subject to exceptions.
Material changes versus the prior comparable period
- Revenue growth was driven by both acquisitions and organic growth, but Q3 gross and operating margins declined because of unfavorable OEM-versus-aftermarket mix and higher acquisition-related expenses.
- Interest expense increased 11.1% in Q3 and 14.8% for the first thirty-nine weeks due primarily to higher average borrowings, partially offset by lower average interest rates.
- First thirty-nine-week earnings benefited from the absence of the $72.4 million refinancing charge recorded in the prior-year period and from lower acquisition-related accounting costs.
- The effective tax rate declined to 30.7% from 34.6% in Q3 and to 32.6% from 35.3% for the first thirty-nine weeks, primarily due to an IRS audit settlement, federal tax-return adjustments and a $2.8 million state-tax benefit.
- Backlog was estimated at $824 million at June 30, 2012, versus $710 million at July 2, 2011. Approximately $91 million of the increase related to Schneller, Harco and AmSafe. Orders may be canceled or deferred.
- Total assets increased to $5.306 billion from $4.514 billion at September 30, 2011, primarily reflecting acquisitions, goodwill and acquired intangible assets. Goodwill rose to $3.027 billion.
Outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative full-year revenue or earnings guidance target. Management states that the acquisition strategy is intended to expand proprietary aerospace offerings and create value through profitable new business, cost improvements and engineered products with recurring aftermarket demand.
- Acquisition purchase-price allocations for AmSafe, Harco and Schneller remained preliminary and could be adjusted after third-party valuations.
- Q3 EBITDA As Defined included adjustments for inventory purchase accounting, acquisition integration and transaction costs, stock compensation and other acquisition-related items; it is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- Key disclosed risks include sensitivity to aircraft flight hours and customer profitability, commercial and defense aerospace cycles, U.S. defense spending, customer concentration, government and industry approvals, acquisition integration, substantial indebtedness, interest-rate exposure, foreign operations and potential environmental liabilities.
- AmSafe continued to operate under its legacy systems and internal controls; incorporation into TransDigm’s control environment was expected in fiscal 2013. Management nevertheless concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
- The company maintained an authorized $100 million share-repurchase program but repurchased only 11,300 shares for approximately $0.8 million during the first thirty-nine weeks and none during Q3.
Investor verification items
- Reconcile reported growth and margins for acquisition effects, OEM mix, aftermarket performance and the approximately $11 million of retroactive pricing adjustments.
- Assess leverage, maturity dates, covenant requirements and the effect of variable interest rates on cash flow.
- Review final purchase-price allocations for AmSafe, Harco and Schneller and related goodwill and intangible-asset amortization.
- Evaluate the quality of EBITDA As Defined by separating recurring operating performance from acquisition, stock-compensation and other excluded costs.
- Confirm backlog conversion, cancellation or deferral risk and the sustainability of commercial OEM and defense demand.
- Monitor integration of AmSafe’s systems and controls and any subsequent changes to the company’s disclosed risk factors.