TransDigm Group Incorporated — Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019. The filing is an annual 10-K rather than a standalone fourth-quarter filing; quarterly data is included. TransDigm designs, manufactures and supplies highly engineered aerospace components across Power & Control, Airframe and Non-aviation segments. Approximately 90% of fiscal 2019 net sales were proprietary products, 80% were sole-source products and 52% came from aftermarket sales.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $5.223 billion | $3.811 billion | +37.0% |
| Gross profit | $2.809 billion | $2.178 billion | +29.0% |
| Gross margin | 53.8% | 57.1% | -3.3 percentage points |
| Income from operations | $1.927 billion | $1.655 billion | +16.4% |
| Operating margin | 36.9% | 43.4% | -6.5 percentage points |
| Income from continuing operations | $840.9 million | $961.5 million | -12.5% |
| Net income attributable to TD Group | $889.8 million | $957.1 million | -7.0% |
| Net earnings per share | $13.84 | $16.20 | -14.6% |
| EBITDA | $2.148 billion | $1.778 billion | +20.8% |
| EBITDA As Defined | $2.419 billion | $1.877 billion | +28.9% |
| Cash flow from operations | $1.015 billion | $1.022 billion | -0.7% |
| Capital expenditures | $101.6 million | $73.3 million | +38.5% |
Fiscal 2019 gross margin was reduced by higher acquisition-related inventory purchase accounting adjustments, principally from Esterline. Interest expense increased to $859.8 million from $663.0 million as debt increased to fund the Esterline acquisition. The effective tax rate rose to approximately 20.9% from 2.4%, primarily because fiscal 2018 included significant Tax Cuts and Jobs Act benefits and fiscal 2019 included additional tax charges.
Liquidity, Debt and Capital Structure
- Cash and cash equivalents were $1.467 billion at September 30, 2019, compared with $2.073 billion a year earlier.
- Total debt was approximately $16.9 billion, or 120.7% of total book capitalization; debt leverage was approximately 7.0 times EBITDA As Defined.
- The company had $718.5 million of unused revolving commitments, subject to debt-document restrictions, and $41.5 million of outstanding letters of credit.
- Term loans totaled approximately $7.524 billion and generally bear interest at LIBOR plus 2.5%; approximately 83% of total debt was fixed-rate after hedging activities.
- Fiscal 2019 financing included $4.0 billion of 6.25% secured notes due 2026 and $550 million of 7.50% subordinated notes due 2027. The company redeemed $550 million of Esterline 2020 notes and approximately $373.8 million of Esterline 2023 notes.
- On November 13, 2019, after year-end, the company issued $2.65 billion of 5.50% subordinated notes due 2027 and planned to redeem its $1.15 billion of 6.00% notes due 2022.
- Stockholders’ deficit was $2.895 billion at year-end, compared with a $1.808 billion deficit in 2018, reflecting the company’s highly leveraged structure and special dividend activity.
Material Changes Versus Fiscal 2018
- Esterline acquisition: Completed March 14, 2019 for approximately $3.924 billion net of cash acquired. Esterline contributed $908.0 million of sales and $57.1 million of income from continuing operations before taxes in the period owned.
- Revenue growth: Organic sales increased 10.5%, while acquisition sales contributed $1.011 billion, or 26.5% of total fiscal 2019 sales growth. Organic growth was driven by defense, commercial OEM and commercial aftermarket sales.
- Segment performance: Power & Control sales increased 27.9% to $2.736 billion; Airframe sales increased 52.2% to $2.329 billion; Non-aviation sales increased 12.2% to $158.2 million.
- Margin pressure: EBITDA As Defined margin declined to 46.3% on a consolidated basis from approximately 49.2% using the reported amounts, while segment EBITDA As Defined margins also declined, primarily due to acquired-business mix and acquisition accounting effects.
- Cash deployment: Investing cash outflow rose to $3.889 billion, primarily due to the Esterline acquisition. The company paid approximately $1.712 billion in special dividends and dividend-equivalent payments, including a $30.00 per-share special dividend.
- Divestitures: EIT was sold for approximately $190 million in September 2019. Souriau-Sunbank was classified as held for sale and was expected to be sold to Eaton for approximately $920 million in the first quarter of fiscal 2020.
- Backlog: Estimated backlog increased to $3.437 billion from $2.026 billion, principally reflecting Esterline and organic growth. Purchase orders may be cancelled or deferred.
Guidance, Outlook, Risks and Unusual Items
- Management expected continued commercial aftermarket and commercial OEM growth, supported by rising revenue passenger miles and aircraft production. Industry consensus suggested continued OEM production growth in 2020, with possible moderation or modest decline in 2021.
- Management assumed military-related sales would remain broadly flat at recent high levels because of uncertainty regarding defense budgets, procurement timing and geopolitical conditions.
- Fiscal 2020 capital expenditures were estimated at $160 million to $190 million, higher than fiscal 2019 because Esterline would be owned for the full year.
- The company voluntarily refunded $16 million to the U.S. government following a Department of Defense Office of Inspector General audit. Another OIG audit and a Congressional inquiry into defense-related business practices were ongoing at year-end, creating potential for further refunds, pricing changes, contract actions or penalties.
- The company faces substantial interest-rate, refinancing and covenant risk. A one-percentage-point increase in rates was estimated to increase annual term-loan interest expense by approximately $75 million.
- A fire at the Niort, France facility caused significant damage and suspended operations; rebuilding could take up to 18 months. Fiscal 2019 fire-related expense was $2.4 million net of an insurance recovery receivable, while the timing and amount of ultimate insurance recoveries remained uncertain.
- Other significant risks include commercial aerospace cyclicality, airline profitability, dependence on Boeing and other major customers, defense procurement and government audits, acquisition integration, raw-material costs, regulation and certification, environmental liabilities, litigation, cybersecurity, foreign operations and potential impairment of substantial goodwill and intangible assets.
- Goodwill was $7.820 billion and identifiable intangible assets were $2.744 billion at year-end. No goodwill impairment was recorded, but the values depend on forecast cash flows, discount rates and other estimates.
- The company adopted ASC 606 in fiscal 2019 without a material overall impact. It expected adoption of the lease standard in fiscal 2020 to add right-of-use assets and lease liabilities of approximately 1% of total assets and liabilities, without a material effect on earnings or cash flow.
Most Important Facts for Investors to Verify
- Whether the company can reduce leverage and refinance substantial maturities while sustaining acquisitions, special dividends and shareholder returns.
- The actual operating performance and integration progress of Esterline, including the effect of acquired contracts, inventory step-up amortization and loss-contract reserves.
- The outcome of the OIG audit, Congressional inquiry and any related government pricing reviews, refunds or contract consequences.
- The timing and net proceeds from the Souriau-Sunbank sale and the use of proceeds from the transaction and the November 2019 debt issuance.
- Whether commercial aerospace demand, aircraft utilization, airline profitability and defense spending remain consistent with management’s outlook.
- The sufficiency of cash flow to service debt, fund higher capital expenditures and absorb variable-rate exposure, facility disruptions, litigation, environmental obligations and pension requirements.
- The sensitivity of goodwill, intangible assets and acquisition-related reserves to changes in forecast growth, customer retention, market prices and discount rates.