TransDigm Group Incorporated: Fiscal 2021 Form 10-K Summary
Business Context and Reporting Period
TransDigm designs, manufactures and supplies highly engineered aircraft components, with operations organized into Power & Control, Airframe and Non-aviation segments. Approximately 90% of fiscal 2021 net sales came from proprietary products, approximately 80% from sole-source products and approximately 50% from aftermarket sales. The filing covers the fiscal year ended September 30, 2021; it is not a quarterly filing, although the request references 2021 Q4.
Commercial aerospace remained materially affected by COVID-19, while defense sales were comparatively resilient. Fiscal 2021 sales were approximately 50% defense, 23% commercial, regional, business jet and general aviation aftermarket, 20% commercial aerospace OEM and 7% non-aerospace.
Financial Performance and Key Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $4,798 million | $5,103 million | Down 6.0% |
| Gross profit | $2,513 million | $2,647 million | Down 5.1% |
| Gross margin | 52.4% | 51.9% | Up 0.5 percentage points |
| Income from operations | $1,691 million | $1,751 million | Down 3.4% |
| Operating margin | 35.2% | 34.3% | Up 0.9 percentage points |
| Net income attributable to TD Group | $680 million | $699 million | Down 2.7% |
| Net income applicable to common stockholders | $607 million | $514 million | Up 18.1% |
| Basic and diluted EPS | $10.41 | $8.96 | Up $1.45 |
| EBITDA As Defined | $2,189 million | $2,278 million | Down 3.9% |
| EBITDA As Defined margin | 45.6% | 44.6% | Up 1.0 percentage point |
| Cash flow from operations | $913 million | $1,213 million | Down $300 million |
| Capital expenditures | $105 million | $105 million | Flat |
Net income applicable to common stockholders benefited from lower dividend-equivalent payments on participating securities: $73 million in fiscal 2021 versus $185 million in fiscal 2020. Fiscal 2021 income also included a $69 million net gain on business divestitures, $51 million of other income and $37 million of refinancing costs.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $4.787 billion; working capital was $5.367 billion.
- Total debt was approximately $19.998 billion, including $350 million drawn under the trade receivables securitization facility and $200 million drawn under the revolving credit facility at September 30, 2021.
- Available revolving credit capacity was $529 million at year-end, increasing to approximately $729 million after repayment of the $200 million revolver draw on October 6, 2021. Reported cash liquidity at September 30, 2021 was $5.316 billion.
- Total debt represented approximately 117.1% of book capitalization, and TD Group reported a stockholders’ deficit of $2.916 billion.
- Approximately 86% of total debt was fixed rate. A hypothetical one-percentage-point increase in interest rates would increase annual interest expense on term loans by approximately $75 million.
- There are no stated maturities on term loans or notes before August 2024, although contractual cash obligations include $25.796 billion of debt principal, interest, pension funding, leases and related commitments.
- The Company was in compliance with its debt covenants at September 30, 2021. It does not anticipate regular quarterly or annual cash dividends; no dividends were declared in fiscal 2021.
Material Changes Versus Fiscal 2020
- Organic sales declined $380 million, or 7.4%, primarily from commercial OEM sales down $315 million and commercial aftermarket sales down $233 million. These declines were partly offset by defense sales up $115 million and non-aerospace sales up $53 million.
- Power & Control sales declined 5.4% to $2.550 billion; Airframe sales declined 7.5% to $2.083 billion; Non-aviation sales increased 6.5% to $165 million.
- Defense sales increased 5.4% organically, while commercial OEM and aftermarket activity remained depressed by reduced air travel and lower aircraft production rates.
- Gross margin improved despite lower volume, primarily because of cost mitigation actions. Supply shortages and inflationary pressure on materials partially offset the benefit.
- Cash flow from operations declined primarily because accounts receivable was a $78 million use of cash in fiscal 2021 versus a $352 million source in fiscal 2020.
- TransDigm acquired Cobham Aero Connectivity for approximately $945 million in fiscal 2021, financed with cash, and recorded approximately $694 million of preliminary goodwill and $325 million of other intangible assets. The purchase accounting remained subject to measurement-period adjustments.
- The Company divested ScioTeq and TREALITY, Technical Airborne Components, Racal Acoustics and Avista, generating approximately $259 million of aggregate divestiture proceeds and a $69 million net gain on business sales.
- The Company refinanced $1.950 billion of senior subordinated notes with 2029 notes, redeemed $1.200 billion of 2024 notes and $750 million of 2025 notes, and expects approximately $35 million of annual interest savings from the refinancing.
Guidance, Outlook, Commentary and Risks
- Management expected COVID-19 to continue adversely affecting net sales, net income and EBITDA As Defined relative to pre-pandemic levels into fiscal 2022.
- Commercial air travel was recovering unevenly, primarily in domestic markets, while international recovery remained slower. Management indicated that commercial aftermarket activity might not return to pre-pandemic levels until 2023 or later.
- Commercial OEM demand was expected to remain reduced in the near term, with production rates expected to gradually improve but remain below historical pre-pandemic levels for several years.
- Management expected defense sales to be relatively flat at recent elevated levels and to represent a lower percentage of total sales as commercial aerospace recovers.
- Fiscal 2022 capital expenditures were estimated at $135 million to $155 million. The Company may incur additional COVID-19 restructuring and incremental costs, but at a reduced level compared with fiscal 2021 and fiscal 2020.
- Fiscal 2021 COVID-19 restructuring costs were approximately $36 million, plus $4 million of incremental pandemic-related costs. The year-end restructuring accrual was approximately $19 million.
- Principal risks include the pace and durability of commercial aerospace recovery, new COVID-19 variants, supply-chain shortages and inflation, customer concentration, cyclical OEM demand, U.S. defense spending, government audits and pricing reviews, substantial leverage, variable interest rates and the transition away from LIBOR.
- The Company disclosed an ongoing Department of Defense Office of Inspector General audit and Congressional inquiry concerning defense-related pricing. It voluntarily refunded $16 million to the U.S. Government following an earlier audit in fiscal 2019; the filing does not quantify any potential additional refund.
- Environmental investigations and remediation continued, with recorded environmental obligations of approximately $48.9 million at September 30, 2021. Management did not expect currently known environmental matters to have a material adverse effect, but future adjustments remain possible.
- No goodwill or indefinite-lived intangible asset impairment was recorded. However, goodwill was $8.568 billion and indefinite-lived intangible assets were $983 million, making future valuations sensitive to aerospace recovery assumptions, revenue growth, margins and discount rates.
Most Important Facts for Investors to Verify
- Verify the pace of commercial flight-hour, aftermarket and OEM recovery against the Company’s fiscal 2022 assumptions.
- Reconcile reported liquidity with near-term maturities, the $350 million securitization facility, pension obligations and required interest payments.
- Monitor leverage, refinancing access and exposure to LIBOR replacement and variable-rate interest expense.
- Review the final purchase-price allocation for Cobham Aero Connectivity, including intangible assets and approximately $80.6 million of preliminary loss-contract reserves.
- Assess the impact of supply-chain shortages, electronic-component availability, inflation and the ability to recover costs through pricing.
- Follow the Department of Defense audit and Congressional inquiry for potential refunds, contract repricing, sanctions or reputational effects.
- Evaluate the sustainability of EBITDA As Defined and its adjustments, including $129 million of non-cash stock compensation, $40 million of COVID-19 costs, $37 million of refinancing costs and the $69 million divestiture gain.
- Confirm that the Company’s effective internal control over financial reporting conclusion excludes the newly acquired CAC operations, which represented approximately 6% of total assets and 3% of fiscal 2021 net sales.