TransDigm Group Incorporated — Fiscal 2017 First-Quarter 10-Q
Reporting period: Thirteen weeks ended December 31, 2016, compared with thirteen weeks ended January 2, 2016. The interim financial statements are unaudited. TransDigm designs, manufactures and supplies highly engineered aerospace components through Power & Control, Airframe and Non-aviation segments.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $814.0 million | $701.7 million | Up 16.0% |
| Gross profit / margin | $444.3 million / 54.6% | $374.6 million / 53.4% | Margin up 1.2 points |
| Operating income / margin | $317.0 million / 38.9% | $276.0 million / 39.3% | Income up 14.8% |
| Net income | $118.9 million | $129.4 million | Down 8.2% |
| Net income available to common stock | $22.9 million | $126.4 million | Down materially |
| Basic and diluted EPS | $0.41 | $2.23 | Down $1.82 |
| EBITDA As Defined | $385.0 million / 47.3% of sales | $319.4 million / 45.5% of sales | Up 20.5% |
| Cash flow from operations | $225.8 million | $178.7 million | Up $47.1 million |
| Capital expenditures | $21.8 million | $10.2 million | Up $11.6 million |
Revenue and Operating Performance
- Organic sales increased 3.5%, while $87.5 million of acquisition sales contributed 12.5 percentage points to total growth.
- Organic commercial aftermarket sales increased 3.7% and defense sales increased 10.3%; organic commercial OEM sales declined 2.3%.
- Power & Control sales rose 27.0% to $441.1 million, primarily reflecting acquisitions and organic commercial aftermarket growth.
- Airframe sales rose 5.3% to $348.7 million, led by defense and commercial OEM sales.
- Gross margin improved because of acquisition contribution, organic growth, operating leverage and cost initiatives, partly offset by higher acquisition-related inventory purchase accounting adjustments.
- Operating margin declined modestly because selling and administrative expense and amortization grew faster than sales.
- Interest expense increased 30.4% to $146.0 million, driven by higher borrowings. Refinancing costs of $32.1 million were also recognized in the quarter.
Cash, Debt and Liquidity
- Cash and cash equivalents declined to $972.4 million at December 31, 2016, from $1.587 billion at September 30, 2016.
- Net cash used in financing activities was $784.7 million, including the $1.376 billion special dividend and dividend-equivalent payments, $528.8 million for redemption of the 2021 Notes, and $1.133 billion of net proceeds from new term loans.
- Debt, including the receivables securitization facility, totaled approximately $10.8 billion gross, or approximately $10.6 billion net of issuance costs and discounts. Long-term debt was $10.6 billion net at quarter-end.
- The company had $6.423 billion of term loans, a $600 million revolving credit facility, $16 million of letters of credit outstanding and $584 million of available revolver capacity.
- The company also had $200 million outstanding under its trade-receivables securitization facility, which had an amended maturity date of August 1, 2017.
- Management stated that internally generated funds and available borrowing capacity are expected to meet current obligations. The company was in compliance with debt covenants at December 31, 2016.
Material Changes Versus the Prior Comparable Period
- Sales benefited substantially from the fiscal 2016 acquisitions of Breeze-Eastern, Data Device Corporation and Young & Franklin/Tactair.
- Gross margin increased from 53.4% to 54.6%, while EBITDA As Defined margin increased from 45.5% to 47.3%.
- Net income declined despite stronger operating performance because of higher interest expense and $32.1 million of refinancing costs.
- EPS declined sharply because the $24.00 per-share special dividend resulted in a $96.0 million allocation to participating securities, reducing income applicable to common stock.
- Backlog increased to an estimated $1.569 billion from $1.444 billion, primarily due to acquisitions. Orders may be canceled or deferred before shipment.
- Stockholders’ deficit increased to $1.875 billion from $651.5 million, primarily reflecting the special dividend and related dividend-equivalent payments.
Outlook, Risks and Unusual Items
- No specific quantitative revenue, earnings or cash-flow guidance is provided in the filing.
- Management expects continued strong margins and sufficient operating cash flow to support liquidity, potential acquisitions, stock repurchases and dividends, while acknowledging that new debt financing will increase future interest payments.
- Key risks include substantial indebtedness and interest-rate exposure, dependence on aircraft flight hours and customer profitability, commercial and defense aerospace cycles, customer concentration, government-budget and contracting risks, acquisition integration, cybersecurity, terrorism, natural disasters, international operations, foreign exchange, raw-material and labor costs, regulatory approvals and environmental liabilities.
- Interest-rate swaps and caps hedge portions of floating-rate debt; the filing estimates approximately $32.0 million of existing derivative gains and losses will be reclassified into interest expense during the following twelve months.
- Breeze-Eastern acquisition-related environmental reserves totaled approximately $25.0 million for contamination at former facilities unrelated to current operations.
- January 2017 subsequent events included authorization to increase the stock-repurchase program to $472 million and repurchases of 666,755 shares for approximately $150.0 million. Remaining authorization was $212.9 million as of February 8, 2017.
- The company adopted ASU 2016-09 early, affecting tax-benefit presentation and prior-period EPS; it was evaluating the future effects of revenue-recognition, lease, credit-loss and cash-flow accounting standards.
Investor Verification Checklist
- Reconcile reported EBITDA As Defined with GAAP net income and operating cash flow, particularly the $32.1 million refinancing-cost add-back and acquisition-related adjustments.
- Assess leverage, refinancing requirements, floating-rate exposure and the August 2017 maturity of the receivables securitization facility.
- Determine whether organic growth and margin performance can continue after acquisition-related contributions and purchase-accounting adjustments normalize.
- Monitor commercial OEM weakness, defense demand, aftermarket trends, backlog conversion and potential order cancellations or deferrals.
- Review the effect of special dividends and future share repurchases on liquidity, stockholders’ deficit and per-share results.
- Track acquisition integration, purchase-price allocation adjustments and environmental or other contingent liabilities.