TransDigm Group Incorporated — Fiscal 2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012, with quarterly data including the fourth quarter ended September 30, 2012. This is an annual Form 10-K, not a standalone Form 10-Q.
Business context
TransDigm designs, manufactures and supplies highly engineered aerospace components for commercial and military aircraft. Approximately 90% of fiscal 2012 sales came from proprietary products, approximately three-quarters from sole-source products, and approximately 55% from aftermarket sales. The company operates as one aerospace-industry reporting segment.
- Commercial and military aftermarket represented approximately 42% of sales, commercial aerospace OEM approximately 29%, defense approximately 23%, and non-aerospace approximately 6%.
- Boeing, including Aviall, represented approximately 13% of fiscal 2012 sales; the top ten customers represented approximately 43%.
- Sales order backlog was approximately $833 million at September 30, 2012, compared with $737 million at September 30, 2011.
Financial performance and key metrics
| Fiscal year ended September 30 | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $1,700.2 million | $1,206.0 million | 41.0% |
| Gross profit | $945.7 million | $661.2 million | 43.0% |
| Gross margin | 55.6% | 54.8% | +0.8 pts |
| Income from operations | $699.8 million | $487.1 million | 43.7% |
| Net income | $325.0 million | $172.1 million | 88.8% |
| Net income applicable to common stock | $321.7 million | $169.3 million | 90.0% |
| Basic and diluted EPS | $5.97 | $3.17 | 88.3% |
| Cash flow from operations | $413.9 million | $260.4 million | 58.9% |
| Capital expenditures | $25.2 million | $18.0 million | 40.0% |
| EBITDA | $768.0 million | $475.1 million | 61.6% |
| EBITDA As Defined | $809.0 million | $589.9 million | 37.1% |
Fourth-quarter fiscal 2012 sales were $462.6 million, gross profit was $256.8 million, net income was $87.9 million, and basic and diluted EPS was $1.63.
At September 30, 2012, cash and cash equivalents were $440.5 million, working capital was $816.6 million, total assets were $5.46 billion, and stockholders’ equity was $1.22 billion. Total debt was $3.62 billion, equal to approximately 74.8% of total capitalization. The debt leverage ratio was approximately 4.5 times EBITDA As Defined.
Material changes versus the prior comparable period
- Sales growth consisted of approximately 11.8% organic growth and 29.2% acquisition-related growth. Organic growth was led by commercial OEM sales, up 23.6%, commercial aftermarket sales, up 6.2%, and defense sales, up 8.9%.
- Gross margin improved despite an unfavorable OEM-versus-aftermarket mix. The company cited higher volume, fixed-cost leverage, approximately $13 million of retroactive OEM contract pricing adjustments, and lower acquisition-related costs.
- Selling and administrative expenses increased to $201.7 million from $133.7 million, primarily because of acquired businesses, higher stock compensation, and acquisition-related costs.
- Interest expense increased 14.4% to $211.9 million because average borrowings increased to approximately $3.44 billion from $2.90 billion, partly offset by a lower average interest rate of 6.2% versus 6.4%.
- Cash flow from operations increased by $153.5 million. Investing cash use was $876.3 million, primarily for the acquisitions of AmSafe, Harco and Aero-Instruments.
- The company acquired AmSafe for approximately $749.7 million, Harco for approximately $83.3 million and Aero-Instruments for approximately $34.7 million. The AmSafe distribution business was subsequently sold for approximately $17.7 million.
- Goodwill increased to $3.04 billion from $2.60 billion, and identifiable intangible assets increased to approximately $1.12 billion from approximately $828.4 million.
Debt, liquidity and capital allocation
- At September 30, 2012, term loans totaled approximately $2.02 billion and the 7.75% senior subordinated notes due 2018 totaled $1.60 billion. The term loans mature in February 2017 and require quarterly principal payments totaling $5.1 million.
- The revolving facility totaled $310 million; $7.1 million of letters of credit were outstanding and approximately $302.9 million remained available.
- The term loans carried an applicable interest rate of 4.0% at year-end. A $353 million notional amount was hedged through June 30, 2015, effectively fixing that portion at 5.17% beginning December 31, 2012.
- Management stated that internally generated funds and available revolver capacity were expected to fund operations, non-acquisition capital expenditures, research and development, and debt obligations through at least fiscal 2013, absent disruptive events.
- Fiscal 2013 capital expenditures were expected to be $35 million to $40 million.
- The company does not expect to pay regular quarterly or annual dividends. However, it declared a $12.85 per-share special dividend in October 2012, totaling approximately $663.5 million, paid in November 2012, plus approximately $36.0 million of dividend-equivalent payments.
Outlook, commentary, risks and unusual items
- Management described commercial aerospace conditions as improving, supported by modest revenue passenger mile growth and planned increases in Boeing and Airbus production. Business-jet OEM conditions were expected to show modest growth.
- Management expected military-related sales to begin declining modestly from historically high levels because of defense-budget constraints and changing global-conflict conditions.
- The company entered into an agreement to acquire Goodrich Pump & Engine Control Systems for approximately $236 million, subject to U.S. and European regulatory approval, with closing expected in late 2012 or early 2013.
- Significant risks include high leverage and floating-rate exposure, customer concentration, commercial aerospace cyclicality, potential defense-spending reductions, fixed-price contract cost overruns, acquisition integration, regulatory and export-control requirements, supplier disruptions, labor actions, product liability, environmental remediation, and impairment of goodwill or other intangible assets.
- Goodwill and identifiable intangible assets represented approximately 56% and 21%, respectively, of total assets at year-end. No goodwill impairment was recorded; reporting-unit fair values were substantially above carrying values.
- Environmental remediation liabilities totaled approximately $19.1 million. Management did not expect excess costs beyond recorded accruals to materially affect financial condition, but acknowledged that estimates could change materially as investigations proceed.
- The financial statements received an unqualified audit opinion. Management concluded that disclosure controls and internal control over financial reporting were effective, although AmSafe, representing approximately 14% of total assets and 10% of fiscal 2012 sales, was excluded from the internal-control assessment pending integration.
Most important facts for investors to verify
- Whether strong reported growth and margin performance persist after separating organic growth from acquisition contributions.
- Debt-service capacity after the October 2012 incremental $150 million term loan, the $550 million 5.5% notes issuance, and the approximately $699.5 million special dividend and dividend-equivalent payments.
- Compliance with leverage and other restrictive debt covenants, including the effect of floating interest rates.
- Execution and integration of AmSafe, Harco, Aero-Instruments and any subsequent Goodrich acquisition.
- The sustainability of aftermarket demand, OEM production rates, backlog conversion and customer concentration.
- The valuation assumptions supporting approximately $3.04 billion of goodwill and approximately $1.12 billion of identifiable intangible assets.
- The final purchase-price allocations for AmSafe, Harco and Aero-Instruments, which were still preliminary at the filing date.