TransDigm Group Incorporated — Fiscal 2013 Second-Quarter Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended March 30, 2013, compared with the periods ended March 31, 2012. The interim financial statements are unaudited. TransDigm designs, manufactures and supplies highly engineered aircraft components for commercial and military aerospace markets.
Key Financial Metrics
| Metric | Q2 FY2013 | Q2 FY2012 | YTD FY2013 | YTD FY2012 |
|---|---|---|---|---|
| Net sales | $465.6 million | $423.5 million | $896.0 million | $775.9 million |
| Gross profit | $259.3 million | $236.0 million | $497.9 million | $435.6 million |
| Gross margin | 55.7% | 55.7% | 55.6% | 56.1% |
| Income from operations | $194.1 million | $177.2 million | $367.0 million | $322.5 million |
| Net income | $67.9 million | $81.6 million | $142.1 million | $146.7 million |
| Net margin | 14.6% | 19.3% | 15.9% | 18.9% |
| Basic and diluted EPS | $1.25 | $1.51 | $1.91 | $2.66 |
| EBITDA As Defined | $219.3 million | $203.1 million | $420.2 million | $377.3 million |
| Net cash from operating activities | Not separately provided | Not separately provided | $197.3 million | $165.0 million |
At March 30, 2013, cash and cash equivalents were $680.0 million, compared with $440.5 million at September 30, 2012. Total debt was $4.345 billion, consisting principally of $2.195 billion of term loans, $1.600 billion of 2018 senior subordinated notes and $550.0 million of 2020 senior subordinated notes. The company had $303.3 million of unused borrowing capacity and $6.7 million of outstanding letters of credit under its revolving credit facility.
Total assets were $5.694 billion and stockholders’ equity was $685.4 million at March 30, 2013. Goodwill was $3.040 billion and net amortizable intangible assets were $634.0 million.
Material Changes Versus Prior Comparable Period
- Q2 sales increased 10.0%, with organic sales up 1.7% and acquisition sales contributing $39.7 million. Organic growth reflected higher commercial OEM and defense sales, partly offset by lower commercial aftermarket sales.
- YTD sales increased 15.5%, including $112.7 million of acquisition sales and 1.6% organic growth.
- Q2 operating income increased 9.5%, but net income declined 16.7% because of higher interest expense and a $30.3 million refinancing charge.
- YTD net income declined 3.1%, while operating income increased 13.8%. Higher borrowings increased Q2 interest expense by 22.6% and YTD interest expense by 25.3%.
- YTD gross margin declined to 55.6% from 56.1%, primarily reflecting unfavorable OEM-versus-aftermarket mix. Q2 gross margin was unchanged at 55.7%.
- Operating cash flow increased $32.3 million year over year. Investing cash use fell to $14.2 million from $842.6 million, largely because the prior-year period included the AmSafe acquisition.
- Cash financing activity included the refinancing of prior credit facilities, issuance of the $550 million 2020 notes and approximately $702.4 million of dividend and dividend-equivalent payments.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide clear quantitative full-year revenue or earnings guidance.
- Management reported estimated backlog of $895 million at March 30, 2013, up from $845 million at March 31, 2012. Most backlog was scheduled for delivery within twelve months, but orders may be canceled or deferred.
- On February 28, 2013, the company entered a new $2.2 billion term loan facility and a $310 million revolving facility. Term loan maturities are 2017 and 2020; revolving commitments mature in 2015 and 2018.
- Variable-rate debt creates interest-rate exposure. A hypothetical one-percentage-point increase in rates would increase annual interest expense by approximately $21.9 million based on outstanding 2013 Credit Facility borrowings. Swaps fixed the rate on $353 million of notional debt at 5.17% through June 30, 2015.
- Material risks include substantial indebtedness, covenant compliance, interest-rate exposure, dependence on flight hours and customer profitability, U.S. defense spending, customer concentration, acquisition integration, required government and industry approvals, environmental liabilities, foreign operations and potential terrorist attacks.
- Unusual items included the $30.3 million refinancing charge, the $12.85-per-share special dividend paid in November 2012, acquisition-related costs, stock-based compensation and preliminary purchase-price allocation for Aero-Instruments.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Reconcile reported net income, EPS and the two-class allocation of $38.1 million of YTD dividends to participating securities.
- Assess leverage, debt maturities, variable-rate exposure, interest-rate swaps and compliance with credit-facility covenants.
- Evaluate whether organic growth, aftermarket demand and backlog conversion support future revenue without relying primarily on acquisitions.
- Review the sustainability of EBITDA As Defined, including its exclusions for refinancing, acquisition, integration and stock-compensation costs.
- Monitor the preliminary valuation and integration of Aero-Instruments and the continuing effects of prior AmSafe and Harco acquisitions.
- Confirm the cash-flow impact of the special dividend and whether future distributions remain permitted under debt agreements.
- Review the detailed risk factors in the fiscal 2012 Form 10-K, which the filing incorporates by reference.