TransDigm Group Incorporated — Fiscal 2021 Third-Quarter Form 10-Q
Reporting period: The unaudited quarterly report covers the thirteen and thirty-nine week periods ended July 3, 2021, compared with June 27, 2020. TransDigm designs, manufactures and supplies proprietary aerospace components across Power & Control, Airframe and Non-aviation segments. Commercial aerospace remained materially affected by COVID-19, while defense demand showed recovery.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | 39 weeks FY2021 | 39 weeks FY2020 |
|---|---|---|---|---|
| Net sales | $1,218 million | $1,022 million | $3,519 million | $3,930 million |
| Gross profit | $655 million | $491 million | $1,788 million | $2,111 million |
| Gross margin | 53.8% | 48.0% | 50.8% | 53.7% |
| Income from operations | $447 million | $286 million | $1,156 million | $1,439 million |
| Operating margin | 36.7% | 28.0% | 32.9% | 36.6% |
| Net income attributable to TD Group | $317 million | $(6) million | $471 million | $617 million |
| EPS | $5.43 | $(0.10) | $6.83 | $7.53 |
| EBITDA As Defined | $559 million | $424 million | $1,552 million | $1,780 million |
Q3 sales increased 19.2%, including 15.1% organic growth. The increase primarily reflected higher commercial aftermarket and defense sales as air travel and aircraft utilization modestly recovered. Q3 EBITDA As Defined represented 45.9% of sales. The reported Q3 tax benefit was $73 million, producing a negative 30.0% effective tax rate, primarily because of a $69 million valuation allowance release related to IRC Section 163(j) interest-deduction carryforwards and excess tax benefits from share-based compensation.
For the first 39 weeks, sales declined 10.5% and net income attributable to TD Group declined 23.7%, largely because the prior-year period included stronger pre-pandemic activity and $66 million of discontinued-operations income, including a $59 million gain on the Souriau-Sunbank divestiture.
Cash flow, debt and liquidity
- Operating cash flow was $624 million for the first 39 weeks, down from $991 million in the prior-year period.
- Capital expenditures were $80 million. Investing cash flow was a $748 million use, including $951 million for the Cobham Aero Connectivity acquisition, partially offset by $259 million of divestiture proceeds and $24 million of fire-related insurance proceeds.
- Financing cash flow was a $74 million use. The company redeemed $1,200 million of 2024 Notes and $750 million of 2025 Notes, funded substantially through $1,200 million of 4.625% 2029 Notes and $750 million of 4.875% 2029 Notes.
- Cash and cash equivalents were $4,529 million at July 3, 2021, compared with $4,717 million at September 30, 2020.
- Reported cash liquidity was $5,053 million, consisting of cash of $4,529 million and $524 million of available revolving-credit capacity.
- Total debt, including current debt, had a gross principal amount of approximately $19.8 billion and a net carrying amount of $19.7 billion. Long-term debt was $19,384 million, and the trade-receivables securitization facility was fully drawn at $350 million.
- The company stated that it was in compliance with debt covenants. No term-loan or note maturity was scheduled before August 2024. The revolving credit facility was extended to May 2026 under Amendment No. 8.
Material changes and unusual items
- Commercial aerospace recovery: Q3 organic commercial aftermarket sales increased $68 million, or 34.1%, while defense sales increased $66 million, or 13.7%. Commercial OEM sales declined $6 million, or 2.3%.
- Year-to-date pressure: Organic sales declined 12.5%, driven by decreases of $323 million in commercial aftermarket sales and $322 million in commercial OEM sales, partly offset by a $106 million increase in defense sales.
- Acquisition: Cobham Aero Connectivity was substantially acquired in January 2021 and completed in February 2021 for approximately $945 million of net assets, or $965 million enterprise value including tax benefits. The purchase-price allocation remained preliminary and subject to potentially material measurement-period adjustments.
- Divestitures: ScioTeq and TREALITY were sold for approximately $200 million and Technical Airborne Components for approximately $40 million. These transactions generated approximately $68 million of Q3 gain on sale and $69 million for the first 39 weeks.
- COVID-19 costs: The company recorded approximately $36 million of restructuring costs and $4 million of separable incremental pandemic costs for the first 39 weeks. The restructuring accrual was approximately $26 million at July 3, 2021.
- Insurance recovery: A $21 million gain was recorded on the settlement of the property portion of the Niort, France fire claim. Discussions regarding business-interruption and other incremental losses remained ongoing.
- Margins: Q3 gross margin improved to 53.8% from 48.0%, aided by sales mix, lower pandemic restructuring costs, favorable foreign exchange and higher production volume. Year-to-date gross margin declined to 50.8% from 53.7% because of lower commercial sales, unfavorable mix, foreign exchange and pandemic costs.
- Backlog: Estimated backlog was $3,453 million at July 3, 2021 versus $3,425 million at June 27, 2020. Orders may be canceled or deferred and are not necessarily indicative of future shipments.
Outlook, 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 was expected to be less affected but subject to supply-chain disruptions and government procurement delays.
Management described the recovery in commercial air travel as slow and uneven and stated that the timing and pace remained indeterminable because of infection trends, variants, vaccination effectiveness, travel restrictions and government actions. The company expected additional pandemic-related restructuring and incremental costs, although at reduced levels compared with fiscal 2020 and the first half of fiscal 2021.
Key risks include prolonged weakness in commercial aerospace and flight hours, customer concentration, defense-budget and government-contracting risks, acquisition integration and purchase-accounting estimates, substantial indebtedness and refinancing needs, interest-rate and foreign-exchange exposure, supply-chain and labor disruptions, cybersecurity, natural disasters, litigation, environmental liabilities, regulatory approvals and rising raw-material, tax and labor costs. The company stated that no material changes had occurred to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- Whether commercial aftermarket and OEM demand continued recovering after July 3, 2021, particularly amid COVID-19 variants and travel restrictions.
- The sustainability of Q3 margins and the extent to which favorable mix, lower restructuring costs, fixed-cost absorption and other adjustments contributed to the improvement.
- Actual recurring cash earnings after excluding the $69 million valuation allowance release, $68 million divestiture gain, $21 million insurance gain and other non-recurring items.
- Progress integrating Cobham Aero Connectivity and the final purchase-price allocation, including goodwill, intangible assets and loss-contract reserves.
- Debt repayment, refinancing and interest-rate exposure, including the fully drawn $350 million securitization facility and approximately $19.8 billion of gross debt.
- Completion and proceeds of the remaining Niort fire business-interruption claim, as well as the timing and amount of any related recovery.
- Whether backlog converts into shipments and revenue, given potential customer cancellations or deferrals.