TransDigm Group Incorporated — Form 10-Q Summary
Business context and reporting period
TransDigm designs, manufactures and supplies proprietary, highly engineered aircraft components for commercial and military aircraft. The filing covers the 13-week and 39-week periods ended July 3, 2010, compared with the periods ended June 27, 2009. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 FY2010 | Q3 FY2009 | 39 weeks FY2010 | 39 weeks FY2009 |
|---|---|---|---|---|
| Net sales | $214.2 million | $189.9 million | $604.5 million | $564.2 million |
| Gross profit | $122.4 million | $107.9 million | $340.7 million | $321.0 million |
| Gross margin | 57.2% | 56.8% | 56.4% | 56.9% |
| Operating income | $95.3 million | $85.2 million | $259.8 million | $252.9 million |
| Operating margin | 44.5% | 44.9% | 43.0% | 44.8% |
| Net income | $44.0 million | $41.4 million | $112.8 million | $121.3 million |
| Net margin | 20.5% | 21.8% | 18.7% | 21.5% |
| Basic and diluted EPS | $0.83 | $0.79 | $1.56 | $2.31 |
| EBITDA As Defined | $105.8 million | $94.7 million | $296.0 million | $280.6 million |
Net income applicable to common stock for the 39-week period was $82.5 million after a $30.3 million allocation to participating securities related to the special dividend; reported net income was $112.8 million.
- Cash provided by operating activities was $155.3 million for the first 39 weeks, compared with $129.0 million in the prior-year period.
- Capital expenditures were $9.9 million and acquisition spending was $95.9 million, producing $105.8 million of cash used in investing activities.
- Cash and cash equivalents were $258.4 million at July 3, 2010, compared with $190.2 million at September 30, 2009.
- Total long-term debt was $1.771 billion, consisting primarily of a fully drawn $780 million term loan and approximately $1.0 billion of 7.75% senior subordinated notes.
- The $200 million revolving credit facility had $198.0 million available at July 3, 2010.
- The debt leverage ratio was approximately 4.5 times for the 12 months ended July 3, 2010, compared with approximately 3.5 times at September 30, 2009.
- Estimated sales backlog was $436 million at July 3, 2010, compared with $367 million at June 27, 2009; most backlog was scheduled for delivery within 12 months, but orders could be cancelled or deferred.
Material changes versus prior comparable periods
- Third-quarter sales increased 12.8%, primarily from acquisitions contributing $20.9 million and organic growth of 1.8%. Commercial aftermarket sales improved by $7.2 million, while commercial OEM sales declined by $3.6 million and defense sales declined slightly.
- For the 39-week period, sales increased 7.1%, but organic sales declined 2.9%. Acquisitions contributed $56.9 million, offsetting a $20.7 million decline in commercial OEM sales and a $4.7 million decline in commercial aftermarket sales. Defense sales increased $7.6 million.
- Third-quarter gross margin improved modestly due to product mix, pricing and cost reductions. Year-to-date gross margin declined because acquired businesses diluted margin by approximately two percentage points and integration and purchase-accounting costs increased.
- Year-to-date selling and administrative expense increased 19.8% to $69.4 million, including approximately $4.9 million of acquisition-related expenses, $1.5 million of Dukes transaction costs, higher research and development spending and higher professional fees.
- Interest expense increased 31.3% year to date to $85.1 million, principally because of the $425 million of 7.75% notes issued in October 2009. Higher interest expense contributed to the year-to-date decline in net income and EPS.
- On October 26, 2009, the company paid a special cash dividend of $7.65 per share, totaling approximately $374.6 million, funded substantially through the new subordinated notes.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide formal full-year revenue or earnings guidance. Management cautions that year-to-date results are not necessarily indicative of full-year results.
- Management cited improving commercial aerospace aftermarket demand in the quarter, but continued economic weakness and reduced business-jet production affected year-to-date organic sales.
- The company completed or integrated acquisitions of Dukes Aerospace, Acme Aerospace and the Woodward HRT product line during the relevant periods. Dukes included potential earn-out payments of up to $60 million, with an $8 million preliminary fair-value liability recorded.
- On August 6, 2010, after quarter-end, the company agreed to acquire Semco Instruments for approximately $73.5 million in cash, subject to working-capital adjustments and closing conditions. The transaction was expected to close in the fourth quarter of fiscal 2010.
- The company depends on aircraft flight hours, customer profitability, commercial and defense budgets, government approvals and continued customer demand. Other material risks include acquisition execution and integration, substantial indebtedness, refinancing requirements, reliance on certain customers, terrorism and general economic conditions.
- The senior secured credit facility matures in June 2013 and the senior subordinated notes mature in July 2014. Management expects to refinance a significant portion of long-term debt at or before maturity.
- A one-percentage-point increase in interest rates would increase annual interest expense on the senior secured credit facility by approximately $7.8 million. A $300 million interest-rate swap provided partial protection through March 23, 2011.
- The IRS was examining fiscal years 2007 and 2008, and state and local tax examinations covered fiscal years 2005 through 2009. Unrecognized tax benefits totaled $3.2 million, with an estimated $2.0 million potential effect on the effective tax rate.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported year-to-date EPS decline with the special-dividend allocation to participating securities.
- Assess whether commercial aftermarket recovery can offset continued weakness in commercial OEM and business-jet markets.
- Review debt maturities, refinancing assumptions, leverage-covenant requirements and the availability of the revolving facility.
- Evaluate acquisition integration, Dukes earn-out exposure, preliminary purchase-price allocations and the pending Semco transaction.
- Consider the sustainability of cash flow after acquisitions, capital expenditures, interest payments and any future dividends or repurchases.
- Review goodwill and indefinite-lived intangible assets in light of the changed fiscal 2010 impairment-testing date and the company’s substantial acquisition-related balances.