TransDigm Group Incorporated: Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2020. The filing is an annual Form 10-K, not a standalone quarterly filing; fourth-quarter information is presented in unaudited quarterly data. TransDigm designs, manufactures and supplies highly engineered aircraft components through its Power & Control, Airframe and Non-aviation segments. Approximately 90% of fiscal 2020 net sales came from proprietary products and approximately 80% from products for which TransDigm was the sole-source provider.
Business Context
- Commercial aerospace demand was sharply reduced by COVID-19, including lower flight activity, airline profitability, aftermarket demand and commercial OEM production. The Boeing 737 MAX production slowdown also affected commercial OEM sales.
- Fiscal 2020 sales mix was approximately 43% defense, 26% commercial aerospace aftermarket, 26% commercial aerospace OEM and 5% non-aerospace.
- Aftermarket sales represented approximately 49% of net sales. The company estimates that its products are installed on more than 100,000 aircraft.
- Estimated backlog declined to $3.145 billion at September 30, 2020 from $3.437 billion at September 30, 2019, primarily because of reduced commercial demand.
Financial Performance and Liquidity
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $5,103 million | $5,223 million | Down 2.3% |
| Gross profit | $2,647 million | $2,809 million | Down 5.8% |
| Gross margin | 51.9% | 53.8% | Down 1.9 percentage points |
| Income from operations | $1,751 million | $1,926 million | Down 9.1% |
| Operating margin | 34.3% | 36.9% | Down 2.6 percentage points |
| Interest expense, net | $1,029 million | $859 million | Up 19.8% |
| Income from continuing operations | $653 million | $841 million | Down 22.4% |
| Net income attributable to TD Group | $699 million | $890 million | Down 21.5% |
| Net income applicable to common stockholders | $514 million | $779 million | Down 34.0% |
| EPS | $8.96 | $13.84 | Down $4.88 |
| EBITDA As Defined | $2,278 million | $2,419 million | Down 5.8% |
| Cash flow from operating activities | $1,213 million | $1,015 million | Up $198 million |
- Fiscal 2020 organic sales declined $723 million, or 13.8%, primarily from commercial aftermarket sales down 25.7% and commercial OEM sales down 24.5%. Acquisition sales, primarily from Esterline, contributed $699 million.
- Defense sales increased $49 million, or 2.5%, partially offsetting commercial declines. Defense represented a larger-than-historical share of sales because commercial markets were more severely affected.
- Power & Control sales were $2.695 billion and segment EBITDA As Defined was $1.345 billion. Airframe sales were $2.253 billion and segment EBITDA As Defined was $955 million. Non-aviation sales were $155 million and segment EBITDA As Defined was $54 million.
- Operating cash flow benefited from a $352 million source of cash from accounts receivable, reflecting lower second-half sales and related receivables. Capital expenditures were $105 million.
- Cash and cash equivalents were $4.717 billion at year-end, with $520.6 million of available revolving credit capacity, for total stated cash liquidity of approximately $5.238 billion.
- Total net debt was approximately $20.009 billion, or 124.8% of total book capitalization. Total book stockholders’ deficit was $3.968 billion.
- Goodwill was $7.889 billion and other intangible assets were $2.610 billion. The company recorded no goodwill or indefinite-lived intangible asset impairment after interim and annual testing.
Material Changes Versus Fiscal 2019
- COVID-19 drove substantial commercial aerospace volume declines and reduced gross margin through unfavorable mix, lower production volumes, restructuring costs and foreign-currency losses.
- Cost of sales increased $42 million despite lower sales, while gross profit declined $162 million. Fiscal 2020 included $46 million of COVID-19 restructuring costs and approximately $5 million of incremental pandemic-related costs.
- Interest expense rose $170 million due primarily to higher average borrowings, which increased to approximately $19.1 billion from $15.5 billion.
- TransDigm issued $2.65 billion of 5.50% senior subordinated notes due 2027, $1.1 billion of 8.00% senior secured notes due 2025 and $400 million of 6.25% senior secured notes due 2026. It also drew $200 million on its revolving facility as a precautionary liquidity measure and redeemed $1.15 billion of 2022 notes.
- The company received approximately $904 million of net proceeds from the December 2019 divestiture of Souriau-Sunbank to Eaton. The transaction generated a $40 million after-tax gain included in discontinued operations.
- The company paid approximately $1.928 billion in special dividends and dividend-equivalent payments, including a $32.50 per-share special dividend, compared with approximately $1.712 billion in fiscal 2019. It also repurchased 36,900 shares for $18.9 million.
- Net accounts receivable declined to $720 million from $1.068 billion, while the allowance for uncollectible accounts increased to $37 million from $17 million. Inventory reserves increased to $178 million from $124 million.
Guidance, Outlook, Risks and Unusual Items
- Management stated that COVID-19 was expected to continue adversely affecting sales, net income and EBITDA As Defined into fiscal 2021. The timing and pace of commercial aerospace recovery remained uncertain, with industry expectations that commercial aftermarket demand might not return to pre-pandemic levels until 2023 or later.
- Management expected additional COVID-19 restructuring costs in fiscal 2021, but at a reduced level, and estimated fiscal 2021 capital expenditures of $120 million to $140 million.
- There was no detailed formal revenue or earnings guidance in the filing. For planning purposes, management assumed military-related sales would remain flat at recent high levels.
- Major risks include prolonged commercial aerospace weakness, airline and OEM customer failures or deferrals, high leverage, variable-rate debt and LIBOR replacement, acquisition integration, government pricing reviews and audits, regulatory approvals, supply-chain disruptions, labor availability, cyber risks, environmental liabilities and litigation.
- The company disclosed an ongoing Congressional inquiry and an OIG audit involving its defense-related business. It had voluntarily refunded $16 million to the U.S. Government following a prior OIG audit and stated that further refunds or other adverse government actions were possible.
- Long-term debt and other contractual cash obligations totaled approximately $26.554 billion, including $5.636 billion of scheduled interest payments. The company had no maturity on any tranche of term loans or notes before July 2024, but substantial maturities occur in fiscal 2024 and 2025.
- A fire at the Leach International Europe facility in Niort, France remained under remediation. The company had received approximately $27 million of property-loss insurance proceeds and incurred approximately $17 million of business-interruption-related costs in fiscal 2020; the timing and amount of further business-interruption recoveries were not clear.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill valuation was identified as a critical audit matter because of the judgment required in forecasting recovery, margins and discount rates.
Investor Verification Checklist
- Verify the pace of commercial aftermarket and OEM recovery, including aircraft utilization, airline liquidity, Boeing and Airbus production rates and 737 MAX developments.
- Reconcile reported operating cash flow with the unusually large accounts-receivable benefit and assess the sustainability of cash generation under recovering demand.
- Monitor leverage, refinancing requirements, covenant compliance, interest-rate exposure and the replacement of LIBOR.
- Assess whether $7.889 billion of goodwill and $2.610 billion of intangible assets remain recoverable if the aerospace recovery is delayed.
- Track additional COVID-19 restructuring costs, employee rehiring, facility disruptions and supply-chain conditions.
- Review the outcome of the OIG audit and Congressional inquiry, including potential refunds, pricing changes, penalties or restrictions on government contracts.
- Evaluate the effect of special dividends and the company’s negative book equity on future capital allocation and debt reduction capacity.
- Confirm the status and collectability of insurance recoveries related to the Niort facility fire and the company’s environmental and tax contingencies.