TransDigm Group Incorporated — Fiscal 2013 Q3 Form 10-Q
Reporting period: Thirteen and thirty-nine week periods ended June 29, 2013, compared with June 30, 2012. Financial statements are unaudited. TransDigm designs, manufactures and supplies proprietary, highly engineered aerospace components for commercial and military aircraft. Its reporting segments are Power & Control, Airframe and Non-aviation.
Financial performance and position
| Metric | Q3 FY2013 | Q3 FY2012 | 39 weeks FY2013 | 39 weeks FY2012 |
|---|---|---|---|---|
| Net sales | $488.6 million | $461.7 million | $1,384.7 million | $1,237.6 million |
| Gross profit | $269.0 million | $253.3 million | $766.8 million | $688.9 million |
| Gross margin | 55.0% | 54.9% | 55.4% | 55.7% |
| Income from operations | $176.7 million | $185.9 million | $543.7 million | $508.4 million |
| Net income | $76.7 million | $90.4 million | $218.8 million | $237.1 million |
| Basic and diluted EPS | $0.71 | $1.68 | $2.62 | $4.34 |
| EBITDA As Defined | $231.9 million | $216.7 million | $652.1 million | $593.9 million |
Q3 sales increased 5.8%, while 39-week sales increased 11.9%. Q3 EBITDA As Defined margin was 47.5%; the reported 39-week margin was approximately 47.1%. Net income declined 15.2% in Q3 and 7.7% year to date. Q3 operating margin decreased to 36.2% from 40.3%, primarily because of higher stock compensation and acquisition-related expenses.
- Q3 segment sales were $218.0 million for Power & Control, $244.1 million for Airframe and $26.5 million for Non-aviation.
- Q3 segment EBITDA As Defined was $115.4 million, $116.2 million and $6.3 million, respectively.
- Thirty-nine-week organic sales increased 2.7%; acquisition sales contributed $127.6 million, while the prior-year AmSafe distribution business contributed $13.7 million and was subsequently sold.
- Sales order backlog was estimated at $1.107 billion at June 29, 2013, versus $824 million at June 30, 2012. Approximately $212 million of the increase was attributable to acquisitions.
Cash flow, liquidity and debt
- Net cash provided by operating activities was $267.0 million for the first 39 weeks, compared with $257.8 million in the prior-year period.
- Capital expenditures were $23.6 million. Net cash used in investing activities was $494.8 million, including $481.8 million for acquisitions.
- Cash and cash equivalents were $269.2 million at June 29, 2013, down from $440.5 million at September 30, 2012. Current assets were $1.041 billion and current liabilities were $257.5 million.
- Total debt principal was $4.339 billion, including $2.189 billion of term loans, $1.600 billion of 7.75% senior subordinated notes due 2018 and $550 million of 5.5% senior subordinated notes due 2020. Long-term debt reported on the balance sheet was $4.317 billion.
- The 2013 Credit Facility provided $302.4 million of available borrowings at June 29, 2013, after $7.6 million of outstanding letters of credit. Term loan rates were 3.50% for tranche B and 3.75% for tranche C.
- Interest expense increased to $189.4 million for the 39-week period from $156.8 million, reflecting higher average borrowings. A one-percentage-point increase in rates would have increased annual interest costs on the credit facility by approximately $21.9 million, based on period-end borrowings.
Material changes and unusual items
- TransDigm refinanced its prior credit facilities on February 28, 2013. It recorded $30.3 million of refinancing costs, reducing year-to-date pretax and net income.
- In June 2013, 2.4 million previously unvested options became fully vested under a market-sweep provision. The resulting additional stock compensation expense was $24.5 million, including approximately $21 million in selling and administrative expense and approximately $4 million in cost of sales. Management estimated the after-tax Q3 impact at $16.5 million, or $0.30 per share.
- Net income attributable to common stock was reduced by $38.0 million of dividends allocated to participating securities in Q3 and $76.1 million year to date. The company paid a $12.85-per-share special dividend in November 2012, with aggregate dividends and dividend equivalents of approximately $699.7 million.
- TransDigm acquired Arkwin Industries for approximately $285.8 million, Aerosonic for approximately $39.8 million and Whippany Actuation Systems for approximately $147.8 million during the quarter. These acquisitions were recorded using preliminary purchase-price allocations and are subject to valuation adjustments.
Outlook, risks and contingencies
- The filing does not provide a clear quantitative revenue, earnings or cash-flow forecast for fiscal 2013.
- On July 1, 2013, after the reporting date, the company drew an additional $900 million term loan and issued $500 million of 7.5% senior subordinated notes due 2021. On July 3, it declared a $22-per-share special dividend totaling approximately $1.156 billion, plus approximately $95.1 million of dividend equivalent payments, paid on or about July 25, 2013.
- The July 2013 debt amendment permitted a special dividend of up to $1.9 billion and modified certain covenants. These transactions materially increased leverage and future interest obligations after the balance-sheet date.
- Key disclosed risks include substantial indebtedness and covenant compliance, variable interest rates, dependence on commercial flight hours and customer profitability, U.S. defense spending, customer concentration, government approvals, acquisition execution and integration, international operations, environmental liabilities and potential terrorism or broader economic disruption.
- Newly acquired businesses continued to operate under separate systems and internal controls. The company expected integration into its control environment during fiscal 2014.
- Management stated that disclosure controls were effective and that there were no material changes to the previously disclosed risk factors.
Most important facts to verify
- Reconcile reported EPS with the substantial allocation of special dividends to participating securities and the accelerated stock-option vesting expense.
- Assess pro forma leverage and liquidity after the July 2013 $900 million term loan, $500 million notes issuance and approximately $1.251 billion of dividend and dividend-equivalent payments.
- Review the 2013 Credit Facility and note covenants, including leverage requirements, restricted payments, mandatory prepayments and collateral provisions.
- Evaluate the preliminary purchase-price allocations, goodwill and integration progress for Arkwin, Aerosonic and Whippany Actuation.
- Distinguish organic growth from acquisition effects and nonrecurring contract-pricing adjustments when assessing operating trends.
- Monitor interest-rate exposure, including the $353 million of swaps fixed at 5.17% through June 30, 2015, and the remaining floating-rate debt.