Business Context and Reporting Period
TransDigm Group designs, produces and supplies highly engineered aircraft components for commercial and military aerospace markets, organized into Power & Control, Airframe and Non-aviation segments. This unaudited Form 10-Q covers the 13-week and 39-week periods ended June 30, 2018, compared with periods ended July 1, 2017.
Financial Performance and Position
| Metric | Q3 FY2018 | Q3 FY2017 | 39 Weeks FY2018 | 39 Weeks FY2017 |
|---|---|---|---|---|
| Net sales | $980.7 million | $897.7 million | $2.762 billion | $2.580 billion |
| Gross profit / margin | $569.5 million / 58.1% | $519.7 million / 57.9% | $1.580 billion / 57.2% | $1.453 billion / 56.3% |
| Operating income / margin | $437.3 million / 44.6% | $388.3 million / 43.3% | $1.199 billion / 43.4% | $1.072 billion / 41.5% |
| Net income | $217.2 million | $169.1 million | $728.3 million | $443.4 million |
| Net income per diluted share | $3.91 | $3.08 | $12.09 | $6.23 |
| EBITDA As Defined | $487.1 million | $447.6 million | $1.352 billion | $1.250 billion |
| EBITDA As Defined margin | 49.7% | 49.9% | 49.0% | 48.5% |
- Q3 sales increased 9.2%, including 4.4% organic growth and 4.8% acquisition-related sales. Year-to-date sales increased 7.0%, including 4.7% organic growth and 2.3% acquisition-related sales.
- Organic Q3 growth was led by commercial aftermarket sales up 7.0% and defense sales up 5.6%; commercial OEM sales increased 0.4%.
- Q3 net income rose 28.5%, while year-to-date net income increased 64.2%. Year-to-date results benefited materially from a provisional $147.1 million discrete tax benefit related to the Tax Cuts and Jobs Act.
- Net cash provided by operating activities was $690.9 million for the 39 weeks, compared with $555.2 million in the prior-year period. Capital expenditures were $50.1 million and acquisition payments were $582.3 million.
- Cash and cash equivalents were $1.853 billion at June 30, 2018, versus $650.6 million at September 30, 2017. Current assets were $3.385 billion and current liabilities were $817.2 million.
- Debt consisted of approximately $12.719 billion of principal debt, including $7.619 billion of term loans and $300.0 million drawn under the trade receivable securitization facility. Net debt carrying value was approximately $12.592 billion. The weighted-average cash interest rate on borrowings was 5.2%.
- The company had $585.4 million of available revolving commitments and $14.6 million of outstanding letters of credit at June 30, 2018.
- Stockholders’ deficit improved to $2.098 billion from $2.951 billion at September 30, 2017, primarily reflecting year-to-date net income and other comprehensive income.
Material Changes Versus the Prior Comparable Period
- Power & Control Q3 sales increased 9.6% to $546.9 million, and Airframe sales increased 9.8% to $398.6 million. Non-aviation sales decreased 1.4% to $35.2 million.
- Year-to-date Power & Control sales increased 10.6% to $1.558 billion, while Airframe sales increased 2.8% to $1.102 billion and Non-aviation sales increased 2.3% to $101.8 million.
- Q3 gross margin improved 20 basis points, and year-to-date gross margin improved 90 basis points. Management attributed improvement to organic growth, cost initiatives, operating leverage, lower inventory purchase-accounting adjustments year to date and favorable foreign currency movements.
- Interest expense increased 10.2% in Q3 and 9.8% year to date because average borrowings increased to approximately $12.4 billion and $12.5 billion, respectively, from approximately $11.2 billion and $11.3 billion in the prior periods.
- Refinancing costs declined to $5.9 million year to date from $35.9 million, primarily because the prior-year period included the redemption premium and write-offs associated with the 2021 notes.
- The company acquired Extant for approximately $532.5 million and Kirkhill for approximately $49.3 million during fiscal 2018. Extant contributed to Power & Control and Kirkhill to Airframe. The one-year purchase-accounting measurement periods remained open at June 30, 2018.
- Schroth was sold on January 26, 2018, following a Department of Justice investigation into competitive effects of its acquisition. The sale generated approximately $61.4 million of proceeds and resulted in a year-to-date discontinued-operations loss of $2.9 million.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a specific quantitative revenue, earnings or cash-flow outlook. Management expects its value-driven operating strategies and strong margins to continue generating sufficient operating cash flow for interest obligations and liquidity needs.
- Estimated sales backlog was $2.018 billion at June 30, 2018, up from $1.601 billion at July 1, 2017. Most orders were expected to ship within 12 months, but purchase orders may be cancelled or deferred and backlog is not necessarily indicative of future sales.
- Management expects to use excess cash for capital spending, acquisitions, special dividends or share repurchases, and debt reduction, subject to market conditions, liquidity, contractual restrictions and leverage requirements. No repurchases occurred during the quarter or year to date under the $650 million authorization.
- Tax accounting under the Tax Cuts and Jobs Act remained provisional. The company recorded a $170.2 million deferred-tax remeasurement benefit and a $23.1 million transition-tax expense; final amounts could change as the analysis is completed.
- Key risks include substantial indebtedness and interest-rate exposure, dependence on aircraft flight hours and customer profitability, defense-budget and government-contracting risks, customer concentration, acquisition integration, foreign operations and currency, raw-material and labor costs, cybersecurity, natural disasters, regulatory approvals and environmental liabilities.
- The company was in compliance with its debt covenants at June 30, 2018. A covenant breach or inability to satisfy leverage requirements could accelerate debt, terminate revolver commitments and permit lenders to act against collateral.
- Pending securities class-action and shareholder derivative litigation concerns alleged disclosures and business practices relating to U.S. government sales. Management considers the claims without merit and expects insurance coverage, but the filing states that potential loss cannot currently be estimated.
- Subsequent events included the approximately $84 million acquisition of Skandia on July 13, 2018, financed with cash, and an amendment on July 31, 2018 that increased the receivables securitization facility to $350 million and extended its maturity to July 31, 2019.
Most Important Facts to Verify
- Whether the year-to-date earnings increase is appropriately normalized for the $147.1 million provisional tax benefit.
- The company’s sustainable leverage, interest-rate sensitivity and maturities, including the $550 million of 5.50% notes due in 2020.
- Actual organic growth and margin performance after separating acquisition contributions, foreign currency gains and purchase-accounting adjustments.
- Integration progress and final purchase-price allocations for Extant, Kirkhill and subsequent Skandia acquisition.
- Conversion of the $2.018 billion backlog into shipments and sales, including cancellation or deferral rates.
- Final Tax Cuts and Jobs Act accounting, status and potential exposure from pending litigation, and compliance with debt covenants.