TransDigm Group Incorporated: Fiscal 2019 First-Quarter 10-Q Summary
Business Context and Reporting Period
TransDigm designs, manufactures and supplies highly engineered aircraft components for commercial and military aircraft. Its reporting segments are Power & Control, Airframe and Non-aviation. This unaudited Form 10-Q covers the 13 weeks ended December 29, 2018, compared with the 13 weeks ended December 30, 2017.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $993.3 million | $848.0 million | 17.1% increase |
| Gross profit | $564.1 million | $476.7 million | 18.3% increase |
| Gross margin | 56.8% | 56.2% | 0.6 percentage-point increase |
| Income from operations | $421.9 million | $353.0 million | 19.5% increase |
| Operating margin | 42.5% | 41.6% | 0.9 percentage-point increase |
| Net income | $196.0 million | $314.8 million | 37.7% decrease |
| Net income applicable to common stock | $171.7 million | $258.6 million | 33.6% decrease |
| Basic and diluted EPS | $3.05 | $4.65 | Decrease |
| EBITDA As Defined | $486.7 million | $401.5 million | 21.2% increase |
| EBITDA As Defined margin | 49.0% | 47.4%(1) | Improved |
| Operating cash flow | $329.9 million | $292.8 million | $37.1 million increase |
(1) The prior-period margin is calculated from reported EBITDA As Defined and net sales.
- Cash and cash equivalents were $2.34 billion at December 29, 2018, up from $2.07 billion at September 30, 2018.
- Capital expenditures were $23.8 million, and acquisition payments were $28.7 million, primarily for NavCom.
- Net cash increased $264.3 million during the quarter, ending at $2.34 billion.
- Total debt, including the trade-receivable securitization facility and net of issuance costs and discounts, was approximately $12.88 billion; long-term debt was $12.51 billion and the securitization facility balance was $299.7 million.
- The company had $583.9 million of unused revolving credit capacity, with $16.1 million of letters of credit outstanding.
- Stockholders’ deficit improved to $1.67 billion from $1.81 billion at September 30, 2018, although the company remained in a deficit position.
Material Changes Versus the Prior Comparable Period
- Organic sales increased 11.6%, while acquisition-related sales contributed $46.8 million, or 5.5% of total sales growth.
- Defense sales increased $46.2 million, commercial OEM sales increased $29.5 million and commercial aftermarket sales increased $19.6 million.
- Power & Control sales rose 16.1% to $560.3 million; Airframe sales rose 19.6% to $398.8 million; Non-aviation sales rose 7.2% to $34.2 million.
- Segment EBITDA As Defined increased 21.8% to $502.1 million, led by 22.5% growth in Power & Control and 20.9% growth in Airframe.
- Net income declined primarily because the prior-year period included a $121.0 million income tax benefit related to the Tax Cuts and Jobs Act and $2.8 million of discontinued-operations income. The current quarter included a $53.7 million tax provision and no discontinued-operations income.
- Interest expense increased 6.9% to $172.0 million, reflecting higher average borrowings of approximately $13.0 billion versus $11.9 billion in the prior-year quarter.
- Backlog increased to approximately $2.18 billion from $1.71 billion, principally from acquisitions and organic growth. Most backlog was scheduled for delivery within 12 months, but purchase orders may be canceled or deferred.
- The company adopted ASC 606 and ASC 2016-16 in the first quarter. ASC 606 increased retained earnings by $3.3 million at adoption but had no material ongoing impact on the quarter’s consolidated results.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that the quarter’s growth reflected higher defense, commercial OEM and commercial aftermarket demand, acquisitions, value-driven pricing and operating strategies, and fixed-cost leverage.
- Management expects continued strong margins and sufficient operating cash flow to meet interest obligations and liquidity needs, but provides no specific full-year revenue or earnings guidance in the filing.
- TransDigm agreed to acquire Esterline Technologies for approximately $4.0 billion, including existing Esterline debt, at $122.50 per share in cash. The company expected closing in March or April 2019, subject to remaining European Commission antitrust and French foreign-investment reviews and other customary conditions.
- After the quarter, TransDigm agreed to issue $4.0 billion of 6.25% senior secured notes due 2026 to fund the Esterline acquisition. It also agreed to issue $550 million of 7.50% senior subordinated notes due 2027, together with existing cash, to redeem the $550 million of 2020 Notes.
- Recent acquisitions include NavCom, Skandia, Extant and the Kirkhill elastomers business. The NavCom purchase was approximately $27 million in cash. Purchase-price allocations for several acquisitions remained subject to measurement-period adjustments.
- Key risks include substantial indebtedness and refinancing needs, interest-rate exposure, acquisition closing and integration risk, dependence on flight hours and customer profitability, U.S. defense spending, reliance on certain customers, regulatory and government-contracting requirements, international operations, raw-material and labor costs, cybersecurity and natural disasters.
- The company was in compliance with debt covenants at December 29, 2018. A covenant breach could accelerate debt repayment and restrict access to borrowing capacity.
- The company disclosed securities class-action and shareholder derivative litigation concerning alleged disclosures and business practices relating to U.S. government sales. Management believes the claims are without merit and expects no material adverse effect, but the potential outcome and loss range could not be estimated.
- The $650 million stock-repurchase authorization remained unused at quarter-end, subject to debt-document restrictions.
Important Facts for Investors to Verify
- Completion, financing and integration of the Esterline acquisition, including the resulting leverage and interest burden.
- Actual closing of the $4.0 billion secured-notes offerings and the $550 million refinancing of the 2020 Notes.
- Debt covenant headroom, available revolver capacity, interest-rate exposure and the company’s ability to refinance maturities.
- Whether organic sales and backlog growth persist across defense, commercial OEM and commercial aftermarket markets.
- The sustainability of reported margins and EBITDA As Defined after excluding acquisition, stock-compensation, integration and other adjustments.
- Resolution and potential financial exposure from the securities and derivative litigation.
- Measurement-period adjustments, loss-contract reserves related to Kirkhill, and goodwill and intangible-asset impairment risk.