TransDigm Group Incorporated — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing is an annual report, not a standalone quarterly filing; fourth-quarter data are presented on an unaudited basis. TransDigm designs and manufactures highly engineered proprietary aerospace components for commercial and military aircraft. More than 90% of fiscal 2011 sales were from proprietary products, approximately 75% from sole-source products, and approximately 56% from aftermarket sales.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $1,206.0 million | $827.7 million | +45.7% |
| Gross profit | $661.2 million | $473.1 million | +39.8% |
| Gross margin | 54.8% | 57.2% | Down 2.4 percentage points |
| Income from operations | $487.1 million | $363.1 million | +34.2% |
| Income from continuing operations | $152.2 million | $163.4 million | Down 6.9% |
| Net income | $172.1 million | $163.4 million | +5.3% |
| Net earnings per share | $3.17 | $2.52 | +25.8% |
| Cash flow from operations | $260.6 million | $197.3 million | +32.1% |
| EBITDA | $475.1 million | $393.2 million | +20.8% |
| EBITDA As Defined | $589.9 million | $411.6 million | +43.3% |
Fiscal 2011 fourth-quarter net sales were $343.0 million, gross profit was $193.0 million, income from continuing operations was $64.3 million, and net income was $67.4 million, or $1.26 per diluted share.
At September 30, 2011, cash and cash equivalents were $376.2 million, working capital was $663.4 million, total assets were $4.51 billion, and stockholders’ equity was $810.9 million. Total debt was $3.14 billion, representing approximately 79.5% of total capitalization. The debt leverage ratio was approximately 5.3 times EBITDA As Defined.
Material Changes Versus Fiscal 2010
- Organic sales increased $102.2 million, or 12.3%, primarily due to commercial OEM growth and a 22.1% increase in commercial aftermarket sales.
- Acquisitions contributed $276.2 million of sales, principally from McKechnie Aerospace, Talley Actuation and Schneller Holdings. Acquired businesses diluted gross margin by approximately four percentage points because of purchase-accounting and integration costs.
- Gross margin declined to 54.8% from 57.2%, while operating margin declined to approximately 40.4% from 43.9%.
- Interest expense increased to $185.3 million from $112.2 million due to higher borrowings associated with the McKechnie acquisition and debt refinancing.
- A $72.5 million refinancing charge reduced continuing-operations earnings. The charge included a $41.9 million premium on redeemed 2014 notes, $25.7 million of debt-cost and note adjustments, and $4.9 million of other refinancing costs.
- Net income included $19.9 million of income from discontinued operations, consisting primarily of a $22.0 million after-tax gain from divestitures, partly offset by operating losses.
- Sales order backlog increased to approximately $737 million from $467 million, although purchase orders may be cancelled or deferred.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $260.6 million. Investing cash outflow was $1.40 billion, including $1.65 billion for acquisitions, $18.0 million of capital expenditures, and $271.4 million of divestiture proceeds.
- Financing cash inflow was $1.28 billion, primarily from the debt refinancing. The company issued $1.6 billion of 7.75% senior subordinated notes due 2018 and had $1.54 billion outstanding under its new senior secured term loan at year-end.
- The revolving credit facility had $237.0 million of unused borrowing capacity and $8.0 million of outstanding letters of credit at September 30, 2011.
- Management stated that internally generated funds and available revolver capacity should fund operations, capital expenditures, research and development, and debt obligations through at least fiscal 2012, absent disruptive events.
- Fiscal 2012 capital expenditures were expected to be $25 million to $30 million. No regular cash dividend was expected; a $100 million share-repurchase authorization was outstanding, but no shares had been repurchased under it at year-end.
Acquisitions, Divestitures and Outlook
- Major fiscal 2011 acquisitions included McKechnie Aerospace for approximately $1.27 billion, Talley Actuation for approximately $93.6 million, and Schneller Holdings for approximately $288.5 million.
- The company divested the McKechnie fastener business for approximately $239.6 million and Aero Quality Sales for approximately $31.8 million because they did not fit its strategic direction.
- Management reported improving commercial aerospace conditions, including rising revenue passenger miles, increased large-commercial-aircraft production, and recovery in business-jet OEM demand. Industry consensus at filing suggested continued commercial transport growth in 2012.
- Management expected military-related sales to be flat to modestly down from historically high levels due to defense-budget constraints and order timing.
- On November 8, 2011, the company agreed to acquire Harco Laboratories for approximately $84 million, subject to regulatory review and customary closing conditions.
Principal Risks and Unusual Items
- High leverage, floating-rate debt, restrictive covenants, mandatory principal repayments, and refinancing requirements create material financial risk. A one-percentage-point increase in interest rates would increase annual interest cost on the term loan by approximately $15.4 million before hedging effects.
- Commercial aftermarket demand depends on revenue passenger miles, fleet size and age, airline profitability, and broader economic conditions. OEM sales are cyclical and defense sales depend on government budgets and geopolitical events.
- Boeing and Aviall represented approximately 14% of fiscal 2011 sales; the top ten customers represented approximately 43%.
- Goodwill was $2.60 billion and identifiable intangible assets were approximately $828.4 million at year-end, creating exposure to impairment if operating performance or valuation assumptions weaken.
- Environmental remediation liabilities totaled approximately $19.9 million, and the company identified uncertainty that future costs could exceed current accruals.
- Approximately 16% of employees were union-represented, with collective bargaining agreements expiring between February 2012 and April 2014.
- Management and auditors concluded that internal control over financial reporting was effective, but the assessment excluded McKechnie Aerospace, which represented approximately 27% of total assets and 18% of fiscal 2011 sales.
Investor Verification Checklist
- Reconcile reported earnings growth with the $19.9 million discontinued-operations benefit and the $72.5 million refinancing charge.
- Assess organic growth, acquired revenue contribution, and the sustainability of the 54.8% gross margin after acquisition integration is complete.
- Verify debt maturities, excess-cash-flow prepayment requirements, covenant compliance, floating-rate exposure, and available revolver capacity.
- Review the preliminary purchase-price allocations for McKechnie Aerospace and Schneller, including goodwill and intangible-asset assumptions.
- Evaluate exposure to Boeing, the top ten customers, commercial aftermarket conditions, and potential defense-budget reductions.
- Monitor environmental liabilities, product liability exposure, labor negotiations, and the planned Harco acquisition.