TransDigm Group Incorporated — Fiscal 2023 First-Quarter Form 10-Q
Reporting period: Thirteen weeks ended December 31, 2022, compared with thirteen weeks ended January 1, 2022. The interim financial statements are unaudited. TransDigm designs, produces and supplies highly engineered aircraft components, with significant proprietary and aftermarket content, through Power & Control, Airframe and Non-aviation segments.
Financial performance and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,397 million | $1,194 million | 17.0% |
| Gross profit | $793 million | $661 million | 20.0% |
| Gross margin | 56.8% | 55.4% | +1.4 percentage points |
| Income from operations | $590 million | $455 million | 29.7% |
| Operating margin | 42.2% | 38.1% | +4.1 percentage points |
| Income from continuing operations | $229 million | $163 million | 40.5% |
| Net income attributable to TD Group | $228 million | $163 million | 39.9% |
| Net income applicable to common stockholders | $190 million | $117 million | 62.4% |
| EPS, basic and diluted | $3.33 | $1.98 | Up $1.35 |
| EBITDA As Defined | $699 million | $565 million | 23.7% |
| EBITDA As Defined margin | 50.0% | 47.3% | +2.7 percentage points |
| Cash flow from operations | $377 million | $279 million | +$98 million |
| Capital expenditures | $31 million | $25 million | +$6 million |
Organic sales increased 15.2%, while acquisition sales contributed 1.8 percentage points of reported growth. Commercial aftermarket sales rose $115 million, commercial OEM sales rose $53 million and defense sales rose $17 million. Management attributed the commercial increases primarily to recovering air travel, higher flight hours, aircraft utilization and improving aircraft production and deliveries.
At December 31, 2022, cash and cash equivalents were $3.288 billion, working capital was $4.521 billion and total debt was $19.803 billion, including the trade receivable securitization facility. Reported stockholders’ deficit was $3.336 billion. Cash liquidity, including revolving-credit availability, was $4.067 billion, consisting of $3.288 billion of cash and $779 million of available revolver capacity. No term loan or note maturity occurs before May 2025.
Material changes versus the prior comparable period
- Power & Control sales increased 11.5% to $725 million; Airframe sales increased 25.9% to $637 million; Non-aviation sales declined 7.9% to $35 million.
- Segment EBITDA As Defined increased 28.0% to $727 million, driven by higher commercial aftermarket and OEM sales, operating leverage, cost actions and favorable mix.
- Gross margin expanded despite inflationary pressure from freight, labor and raw materials. Cost of sales increased 13.3%, below the 17.0% sales increase.
- Interest expense increased 8.3% to $286 million, primarily because of higher LIBOR on unhedged variable-rate debt; this was partly offset by higher interest income.
- The effective tax rate increased to 23.9% from 15.5%, principally because the prior-year period benefited from a larger discrete tax benefit related to share-based compensation.
- Cash from operations increased to $377 million, although inventory consumed $89 million of cash versus $32 million in the prior period as the company built raw-material inventories amid supply-chain challenges.
- Weighted-average shares declined to 57.1 million from 59.2 million. Dividend equivalent payments reduced income applicable to common stockholders by $38 million, or approximately $0.67 per share, compared with $46 million, or approximately $0.77 per share, in the prior period.
Debt, refinancing and capital allocation
- On December 14, 2022, TransDigm refinanced approximately $1.725 billion of Tranche G term loans due August 2024 with Tranche H term loans due February 2027. The new loans bear interest at Term SOFR plus 3.25% and were issued with approximately $34.5 million of original issue discount.
- Gross debt was more than 75% fixed rate at quarter-end. The company reported a weighted-average cash interest rate of 5.9% for the quarter.
- The $350 million trade receivable securitization facility was fully drawn and matures July 25, 2023.
- No share repurchases were made during the quarter. The company had $1.288 billion remaining under its $2.2 billion repurchase authorization.
- Management expects operating cash flow, cash on hand and available revolver capacity to fund interest obligations, capital expenditures and other short-term requirements. The company may pursue acquisitions, dividends, share repurchases or debt transactions subject to market conditions and debt-document restrictions.
Outlook, commentary, risks and unusual items
Management said commercial aerospace markets continued to recover in fiscal 2023 and expects further progress, absent significant disruptions. Domestic air travel was nearer to pre-pandemic levels, while international recovery remained slower but continued to improve. Commercial OEM recovery continued, although Boeing and Airbus supply-chain constraints were limiting the pace of new-aircraft production. Defense demand was less affected by the pandemic, but government spending outlay delays and funding reprioritization remained sources of uncertainty.
- Key operating risks include commercial flight-hour volatility, customer profitability, geopolitical events, cybersecurity, natural disasters, climate-related events, reliance on certain customers, defense-budget changes, government audits, acquisition integration, high indebtedness, raw-material and labor inflation, supply-chain disruptions and international operations.
- The company stated that suppliers, raw materials and components may be difficult or expensive to replace because of aviation certification and OEM approval requirements.
- The Department of Defense Office of Inspector General recommended a voluntary refund of at least $20.8 million related to 150 contracts. TransDigm disputes the report’s methodology and had recorded no loss contingency because it considered payment uncertain.
- A derivative litigation settlement concerning director compensation and governance changes was approved in November 2022 and was not expected to materially affect the financial statements.
- The company concluded that no goodwill or intangible-asset impairment triggering event occurred during the quarter.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor verification checklist
- Verify the sustainability of commercial aftermarket recovery, OEM production increases and related margin expansion.
- Monitor leverage, interest expense, floating-rate exposure and the July 2023 securitization-facility maturity.
- Assess cash conversion as inventory and supply-chain investment increase.
- Review the status and potential financial impact of the DOD OIG voluntary-refund request.
- Reconcile EBITDA As Defined with GAAP income and operating cash flow; it is a non-GAAP measure that excludes interest, taxes and other costs.
- Confirm future capital allocation, including acquisitions, special dividends, repurchases and debt reduction, against covenant restrictions and available liquidity.