TransDigm Group Incorporated — Fiscal 2021 Second-Quarter Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended April 3, 2021, compared with the corresponding periods ended March 28, 2020. The filing is unaudited. TransDigm designs, produces and supplies proprietary, highly engineered aircraft components, with reporting segments of Power & Control, Airframe and Non-aviation.
Financial Performance and Position
| Metric | Q2 FY2021 | Q2 FY2020 | Change |
|---|---|---|---|
| Net sales | $1,194 million | $1,443 million | Down 17.3% |
| Gross profit | $592 million | $818 million | Down 27.6% |
| Gross margin | 49.6% | 56.7% | Down 7.1 percentage points |
| Income from operations | $394 million | $592 million | Down 33.4% |
| Income from continuing operations | $105 million | $323 million | Down 67.5% |
| Net income attributable to TD Group | $104 million | $319 million | Down 67.4% |
| Basic and diluted EPS | $1.79 | $5.56 | Down $3.77 |
| EBITDA As Defined | $519 million | $675 million | Down 22.9% |
For the first 26 weeks, sales were $2,301 million, down 20.9%; gross margin was 49.2% versus 55.7%; income from continuing operations was $155 million versus $556 million; net income attributable to TD Group was $154 million versus $623 million; EPS was $1.40 versus $7.63; and EBITDA As Defined was $993 million versus $1,356 million.
Q2 sales declined primarily because commercial OEM sales fell $170 million, or 37.2%, and commercial aftermarket sales fell $170 million, or 37.4%. Defense sales increased $48 million, or 9.1%. Organic sales declined 20.3%, partly offset by $43 million of acquisition sales, principally from Cobham Aero Connectivity.
| Segment | Q2 FY2021 sales | Q2 FY2020 sales | Change |
|---|---|---|---|
| Power & Control | $641 million | $747 million | Down 14.2% |
| Airframe | $513 million | $655 million | Down 21.7% |
| Non-aviation | $40 million | $41 million | Down 2.4% |
Segment EBITDA As Defined was $309 million for Power & Control, $208 million for Airframe and $16 million for Non-aviation. Consolidated EBITDA As Defined represented 43.5% of Q2 sales, compared with 46.8% in the prior-year quarter based on the reported amounts.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities for the first 26 weeks was $372 million, compared with $594 million in the prior-year period.
- Capital expenditures were $60 million. Investing cash flow was negative $952 million, primarily reflecting the $951 million acquisition of Cobham Aero Connectivity.
- Cash and cash equivalents were $4,072 million at April 3, 2021, compared with $4,717 million at September 30, 2020.
- Management reported total cash liquidity of $4,592 million, consisting of cash of $4,072 million and $520 million of revolving-credit availability.
- Debt consisted of approximately $19.7 billion of net debt obligations, including $7.3 billion of term loans, $350 million under the trade-receivable securitization facility, and $200 million drawn on the revolving credit facility. Stockholders’ deficit was $3.5 billion.
- Interest expense was $268 million in Q2 and $535 million year to date. The weighted-average cash interest rate was approximately 5.0% in Q2 and 5.1% year to date.
- The company issued $1.2 billion of 4.625% senior subordinated notes due 2029 and used the proceeds to redeem its $1.2 billion of 6.50% notes due 2024. Subsequent to quarter-end, it issued $750 million of 4.875% notes due 2029 and expected to use the proceeds to redeem the 6.50% notes due 2025.
- There are no stated maturities of term loans or notes before August 2024. The company reported compliance with its debt covenants.
Material Changes and Unusual Items
- COVID-19 impact: The pandemic materially reduced commercial air travel demand, sales, profitability and backlog. Q2 COVID-19 restructuring costs were approximately $17 million, with an additional $1 million of separable pandemic-related costs. Year-to-date amounts were approximately $36 million and $3 million, respectively.
- Margin pressure: Gross margin declined because of restructuring costs, unfavorable foreign-currency movements, lower commercial aftermarket mix, inventory acquisition-accounting adjustments and lower production volume spreading fixed overhead over fewer units.
- Acquisition: Cobham Aero Connectivity was substantially acquired in January 2021 and completed in February 2021 for enterprise value of approximately $965 million, funded with cash. It contributed approximately $43 million of Q2 sales.
- Divestitures: Racal Acoustics and Avista were sold during the period. The company also agreed to sell ScioTeq and TREALITY for approximately $200 million, subject to approvals, and subsequently agreed to sell Technical Airborne Components for approximately $40 million; both transactions were expected to generate gains.
- Insurance recovery: A $22 million gain was recognized from settlement of the property portion of the Niort, France facility fire claim. Discussions regarding business-interruption and other incremental losses remained ongoing.
- Backlog: Estimated backlog was $3,314 million at April 3, 2021, down from $3,579 million a year earlier. Orders may be canceled or deferred, and backlog is not necessarily indicative of future sales.
Outlook, Management Commentary and Risks
Management expected COVID-19 to continue adversely affecting sales, net income and EBITDA As Defined through at least the remainder of fiscal 2021. Commercial OEM and commercial aftermarket channels were expected to remain the most affected, while defense demand was expected to be comparatively more resilient but subject to supply-chain disruption and government procurement uncertainty. The timing and pace of recovery remained indeterminable.
Management expected additional pandemic-related restructuring and incremental costs, although at reduced levels relative to fiscal 2020. Cost actions included workforce reductions, unpaid furloughs, salary reductions, delayed nonessential capital projects and reduced discretionary spending.
Management stated that cash on hand, operating cash flow and available revolver capacity should fund near-term interest, capital expenditures and other requirements, and that the company expected to refinance or otherwise meet debt obligations as they mature. The company also continued to consider acquisitions, dividends and share repurchases subject to liquidity, contractual restrictions, market conditions and pandemic developments.
Key risks include prolonged or uneven commercial aerospace recovery, new COVID-19 variants and travel restrictions, customer cancellations or deferrals, supply-chain and labor disruptions, high leverage and refinancing risk, interest-rate and foreign-currency exposure, acquisition integration and valuation risk, defense-budget and government-contracting risks, litigation, environmental liabilities, cybersecurity threats and international operating risks. Management reported effective disclosure controls and no material change in risk factors from the prior Form 10-K.
Investor Verification Priorities
- Verify the pace of commercial OEM and aftermarket recovery and whether sales and backlog stabilize or improve.
- Reconcile reported EBITDA As Defined to GAAP income and cash flow, including the recurring or nonrecurring nature of add-backs.
- Monitor leverage, interest expense, covenant headroom, revolver availability and the refinancing of the 2025 notes.
- Assess Cobham Aero Connectivity integration, purchase-price allocation changes and realized earnings or cash-flow contribution.
- Track remaining COVID-19 restructuring obligations and potential additional workforce or facility actions.
- Follow the timing, regulatory approvals and proceeds from the ScioTeq, TREALITY and Technical Airborne Components divestitures.
- Evaluate the unresolved business-interruption insurance claim related to the Niort fire and any resulting gain or loss.
- Review customer receivable collectibility, as the allowance for uncollectible accounts increased to $40 million due partly to pandemic-affected customers.