TransDigm Group Incorporated — Fiscal 2021 First-Quarter Form 10-Q
Reporting period: Thirteen weeks ended January 2, 2021, compared with thirteen weeks ended December 28, 2019. The interim financial statements are unaudited. TransDigm designs, manufactures and supplies proprietary aircraft components across Power & Control, Airframe and Non-aviation segments.
Financial performance and position
| Metric | Q1 FY2021 | Comparable period | Change |
|---|---|---|---|
| Net sales | $1,108 million | $1,465 million | Down 24.4% |
| Gross profit / margin | $541 million / 48.8% | $801 million / 54.7% | Margin down 5.9 points |
| Income from operations / margin | $315 million / 28.4% | $560 million / 38.3% | Margin down 9.9 points |
| Income from continuing operations | $50 million | $234 million | Down 78.6% |
| Net income attributable to TD Group | $50 million | $304 million | Down 84% |
| Net income applicable to common stockholders | $(23) million | $119 million | Down $142 million |
| Basic and diluted EPS | $(0.42) | $2.07 | Down $2.49 |
| EBITDA As Defined | $474 million / 42.8% of sales | $681 million / 46.5% of sales | Down 30.4% |
| Net cash from operating activities | $274 million | $433 million | Down $159 million |
Interest expense increased to $267 million from $248 million, reflecting higher average borrowings of approximately $19.9 billion versus $17.9 billion. The cash interest rate on total borrowings was approximately 5.1%. The effective tax rate was 5.5%, versus 20.1%, primarily because of excess tax benefits associated with share-based payments.
At January 2, 2021, cash and cash equivalents were $4.907 billion, total assets were $18.557 billion, and total debt, including current debt and the trade receivable securitization facility, was approximately $19.670 billion net of issuance costs and discounts. Stockholders’ deficit was $3.721 billion. Cash increased $190 million during the quarter.
Material changes versus the prior comparable period
- Commercial aerospace demand declined sharply because of COVID-19. Commercial aftermarket sales fell $221 million, or 46.3%, and commercial OEM sales fell $142 million, or 32.6%; defense sales increased $6 million, or 1.1%.
- Power & Control sales declined 20.1% to $601 million, while Airframe sales declined 31.2% to $464 million. Non-aviation sales increased 10.3% to $43 million.
- Gross margin fell because of lower commercial aftermarket mix, under-absorbed fixed overhead, foreign currency losses and $20 million of COVID-19 restructuring costs. An additional $1 million of separable pandemic-related costs was incurred.
- Selling and administrative expense declined only 2.0% to $197 million, as cost reductions were offset by higher non-cash stock compensation, COVID-19 restructuring costs and bad-debt expense.
- Amortization expense declined $11 million because Esterline sales-order backlog was fully amortized in fiscal 2020.
- The prior-year period included $71 million of discontinued-operations income, including a $62 million after-tax gain from the Souriau-Sunbank divestiture; no comparable discontinued-operations income was recorded in Q1 FY2021.
- Backlog declined to $3.195 billion from $3.528 billion at December 28, 2019, primarily because of reduced commercial customer demand.
Cash flow, liquidity and financing
- Operating cash flow was $274 million. Capital expenditures were $31 million, acquisitions used $6 million, and investing activities consumed $29 million net.
- Financing activities used $60 million, primarily due to $73 million of dividend-equivalent payments and $19 million of term-loan repayments, partly offset by $32 million of stock-option exercise proceeds.
- Reported cash liquidity was $5.427 billion, consisting of $4.907 billion of cash and $520 million available under the revolving credit facility. This excludes approximately $959 million of cash subsequently used for the Cobham Aero Connectivity acquisition.
- The company had $7.429 billion of fully drawn term loans, $200 million drawn under the revolving facility, $350 million outstanding under the trade receivable securitization facility and $39.8 million of letters of credit outstanding.
- No term-loan or note maturity occurs before August 2024. The company was in compliance with its debt covenants at January 2, 2021.
- After quarter-end, TransDigm issued $1.2 billion of 4.625% senior subordinated notes due 2029 and expected to use the proceeds to redeem its 6.50% notes due 2024.
Guidance, outlook, commentary and unusual items
- Management expects COVID-19 to continue adversely affecting sales, net income and EBITDA As Defined for at least the remainder of fiscal 2021. Commercial OEM and commercial aftermarket channels are expected to remain most affected; the recovery in air travel is expected to be slow and uneven.
- The timing and pace of recovery remain indeterminable because of infection trends, new variants, vaccine effectiveness, travel restrictions and government actions. Management anticipates possible supply-chain disruptions, employee absenteeism, temporary facility suspensions and additional health and safety costs.
- The company expects additional COVID-19 restructuring costs during fiscal 2021, but at a reduced level versus fiscal 2020. The related accrual was approximately $27 million at January 2, 2021, compared with $13 million at September 30, 2020.
- On January 5, 2021, the company substantially completed its approximately $959 million cash acquisition of Cobham Aero Connectivity; approximately 2% of the purchase price remained subject to Finnish regulatory approval. CAC is expected to be included in the Airframe segment.
- TransDigm completed the $8 million Avista divestiture during the quarter and completed the $20 million Racal Acoustics divestiture on January 29, 2021.
- A rebuilt facility following the 2019 fire at Leach International Europe’s Niort, France site began limited production in January 2021 and was expected to be fully operational in the second quarter of fiscal 2021. Approximately $27 million of insurance proceeds had been received; the timing and amount of business-interruption recoveries remained uncertain.
- No special cash dividends or share repurchases occurred during the quarter. Management did not anticipate regular dividends in the near future, although future special dividends, repurchases and acquisitions remain subject to cash flow, market conditions and debt restrictions.
Key investor verification points
- Track commercial flight activity and the resulting recovery in commercial OEM and aftermarket demand, backlog and segment margins.
- Verify the final purchase accounting, regulatory closing and integration performance of Cobham Aero Connectivity, as well as the cash impact of the acquisition.
- Monitor leverage, interest expense, refinancing execution and maturity exposure, including redemption of the 2024 notes with the 2029-note proceeds.
- Assess whether COVID-19 restructuring costs, bad-debt expense, supply-chain disruption and workforce actions remain elevated.
- Review the collectibility of receivables, which carried a $41 million allowance at January 2, 2021, and the potential for further customer credit deterioration.
- Follow the Niort facility’s full production restoration and the timing and amount of unresolved insurance recoveries.
- Reconcile EBITDA As Defined with GAAP earnings and cash flow because it excludes or adjusts for interest, taxes, stock compensation, restructuring and other items and is not a GAAP measure.