TransDigm Group Incorporated — Fiscal 2015 First-Quarter 10-Q
Business context and reporting period
TransDigm designs, manufactures and supplies highly engineered aerospace components for commercial and military aircraft, organized into Power & Control, Airframe and Non-aviation segments. The filing covers the unaudited thirteen-week period ended December 27, 2014, compared with December 28, 2013.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $586.9 million | $529.3 million | 10.9% increase |
| Gross profit / margin | $321.2 million / 54.7% | $284.1 million / 53.7% | Margin up 1.0 point |
| Operating income / margin | $240.7 million / 41.0% | $210.6 million / 39.8% | Margin up 1.2 points |
| Net income / margin | $95.5 million / 16.3% | $86.1 million / 17.3% | 10.9% increase; margin down 1.0 point |
| Basic and diluted EPS | $1.63 | $1.44 | Increase of $0.19 |
| EBITDA As Defined | $269.7 million / 46.0% of sales | $243.6 million | 11.3% increase |
| Cash from operating activities | $189.0 million | $115.7 million | Increase of $73.3 million |
Segment sales were $283.4 million for Power & Control, $281.6 million for Airframe and $21.9 million for Non-aviation. Airframe growth included $44.3 million of acquisition sales from EME and Airborne. Estimated backlog was $1.233 billion at December 27, 2014, versus $1.192 billion at December 28, 2013.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1.012 billion, up from $819.5 million at September 30, 2014.
- Total liabilities were $8.378 billion, including $7.234 billion of long-term debt, $39.3 million of current maturities and $200 million drawn under the trade receivables securitization facility.
- The company had approximately $408.9 million of unused revolving credit capacity, subject to $11.1 million of outstanding letters of credit.
- Stockholders’ deficit was $1.465 billion at December 27, 2014, compared with $1.556 billion at September 30, 2014.
- Capital expenditures were $8.1 million. No acquisition cash payments were made during the quarter, compared with $263.9 million in the prior-year quarter.
Material changes versus the prior comparable period
- Organic sales increased 2.5%; acquisition sales contributed 8.4% of reported sales growth. Commercial aftermarket sales increased 5.1%, commercial OEM sales increased 6.0%, and defense sales declined 2.5%.
- Gross margin improved primarily from organic growth, operating leverage and lower acquisition-related costs. Selling and administrative expense increased to 11.5% of sales from 10.8%, partly due to recent acquisitions.
- Interest expense increased 22.4% to $98.9 million because of higher average borrowings associated with the 2022 and 2024 Notes, additional credit-facility borrowings and the securitization facility.
- Cash flow from operations improved substantially, while investing cash use fell because the prior-year period included the Airborne acquisition.
- Other comprehensive income declined to a loss of $21.3 million, primarily from foreign-currency translation and interest-rate swap effects.
Outlook, risks and unusual items
The filing does not provide specific financial guidance for fiscal 2015. Management states that results depend on flight hours, customer profitability, commercial and defense demand, acquisitions and the company’s value-driven operating strategies. Management cautions that quarterly results are not necessarily indicative of full-year results.
- Material risks include substantial indebtedness, interest-rate exposure, dependence on certain customers, commercial flight activity, U.S. defense spending, government-supplier requirements, acquisition integration, foreign operations, currency fluctuations and environmental liabilities.
- A hypothetical one-percentage-point increase in interest rates would increase annual interest costs on credit-facility borrowings by approximately $38.7 million.
- Debt agreements contain restrictive covenants and potential mandatory prepayment provisions. A covenant breach could accelerate debt and permit lenders to terminate commitments or enforce collateral rights.
- Interest-rate swaps hedged aggregate notional amounts of $353 million, $1.0 billion and $750 million at various future periods. Swap liabilities totaled approximately $42.2 million at December 27, 2014.
- The effective tax rate was 32.6%, favorably affected by a discrete adjustment from retroactive reinstatement of the research and development tax credit.
- The company was undergoing U.S. federal tax examinations for fiscal 2012 and 2013. Unrecognized tax benefits were $12.3 million at December 27, 2014.
- The company adopted no new revenue standard during the quarter; it was evaluating the future impact of ASU 2014-09, effective for the company’s fiscal year beginning October 1, 2017.
Important facts for investors to verify
- Whether organic growth and commercial aftermarket demand can offset defense-sales pressure.
- The sustainability of reported margins after acquisition-related contributions and non-GAAP adjustments.
- Debt maturities, refinancing requirements, covenant compliance and sensitivity to variable interest rates.
- Cash conversion, working-capital movements and the availability of cash at operating subsidiaries.
- Integration progress and performance of the EME and Airborne acquisitions.
- The effect of foreign-exchange movements, tax examinations and unrecognized tax benefits.
- The filing’s non-GAAP EBITDA As Defined reconciliations, including acquisition integration costs, stock compensation and other adjustments.