TransDigm Group Incorporated — Fiscal 2012 Second-Quarter Form 10-Q
Business context and reporting period
TransDigm designs, produces and supplies highly engineered, proprietary aircraft components for commercial and military aerospace applications. The filing covers the unaudited thirteen-week quarter and twenty-six-week year-to-date periods ended March 31, 2012, compared with periods ended April 2, 2011.
Key financial metrics
| Metric | Q2 FY2012 | Q2 FY2011 | YTD FY2012 | YTD FY2011 |
|---|---|---|---|---|
| Net sales | $423.5 million | $304.3 million | $775.9 million | $537.9 million |
| Gross profit | $236.0 million | $157.9 million | $435.6 million | $285.0 million |
| Gross margin | 55.7% | 51.9% | 56.1% | 53.0% |
| Operating income | $177.2 million | $113.2 million | $322.5 million | $205.6 million |
| Income from continuing operations | $81.6 million | $36.7 million | $146.7 million | $29.5 million |
| Net income | $81.6 million | $55.8 million | $146.7 million | $48.5 million |
| Diluted EPS | $1.51 | $1.04 | $2.66 | $0.85 |
| EBITDA As Defined | $203.1 million | $146.1 million | $377.3 million | $256.6 million |
Second-quarter EBITDA As Defined was 48.0% of sales. Q2 sales increased 39.2%, including 14.9% organic growth and $73.8 million of acquisition sales. Year-to-date sales increased 44.3%, including 16.4% organic growth and $149.7 million of acquisition sales.
Operating cash flow for the first twenty-six weeks was $164.8 million, compared with $129.2 million in the prior-year period. Capital expenditures were $9.1 million. Cash used in investing activities was $842.6 million, primarily reflecting acquisitions. Cash provided by financing activities was $503.1 million. Cash declined by $174.7 million during the period to $201.5 million at March 31, 2012.
At March 31, 2012, total debt comprised $20.5 million of current debt and $3.609 billion of long-term debt. The balance sheet reported $815.1 million of current assets and $210.3 million of current liabilities. The revolving facility had $302.8 million of availability, net of $7.2 million of letters of credit. Management stated that the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Q2 gross margin expanded 3.8 percentage points, primarily from organic growth, fixed-cost leverage, lower acquisition-related costs and a favorable approximately $6 million retroactive customer contract adjustment.
- Q2 income from continuing operations rose 122.2% to $81.6 million. The comparison benefited from lower interest expense, lower acquisition-related charges, lower amortization and the absence of prior-year refinancing costs.
- Year-to-date income from continuing operations increased 396.4% to $146.7 million. The prior-year period included $72.4 million of refinancing costs.
- Prior-year net income included $19.1 million of discontinued-operations income, including a $21.0 million after-tax gain on the sale of the fastener business. No discontinued-operations income was recorded in FY2012.
- Commercial OEM sales increased 35.9% in Q2 and 33.1% year to date; commercial aftermarket sales increased 5.2% and 11.2%, respectively. Defense sales increased 10.0% in Q2 and 8.9% year to date.
- Backlog increased to approximately $845 million at March 31, 2012, from $670 million at April 2, 2011. Approximately $84 million of the increase related to recent acquisitions.
Acquisitions, outlook, risks and unusual items
On February 15, 2012, TransDigm acquired AmSafe Global Holdings for approximately $749.3 million in cash and financed part of the purchase with a new $500 million term loan. AmSafe supplied approximately $73.8 million of Q2 acquisition sales and was reflected using a preliminary purchase price allocation. Harco and Schneller also remained subject to preliminary valuation allocations.
The company provided no explicit quantitative fiscal-year revenue or earnings guidance in the filing. Management described demand as improving, particularly in commercial products, and emphasized its strategies of obtaining profitable new business, improving cost structure and supplying highly engineered value-added products.
Key risks include sensitivity to aircraft flight hours and customer profitability, reliance on certain customers, U.S. defense spending and government contracting, maintaining regulatory and industry approvals, acquisition integration, substantial indebtedness, environmental liabilities, foreign operations and interest-rate exposure. A one-percentage-point increase in rates would increase annual interest expense by approximately $20.3 million based on March 31 borrowings. Interest-rate swaps covering $353 million of variable-rate debt were scheduled to become effective December 31, 2012.
The company expected to complete integration of AmSafe into its systems and internal-control environment in fiscal 2013. The filing reported effective disclosure controls and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Assess the sustainability of organic growth and the extent to which reported growth depends on acquisitions and retroactive customer contract adjustments.
- Reconcile EBITDA As Defined to GAAP earnings and operating cash flow; it excludes or adjusts for several acquisition, stock-compensation and other costs.
- Review leverage, mandatory term-loan amortization, excess-cash-flow prepayment requirements and covenant headroom.
- Evaluate AmSafe’s integration progress, final purchase-price allocation and the effect of acquired intangible assets and goodwill.
- Confirm backlog conversion, cancellation or deferral risk and the balance between OEM and aftermarket sales.
- Monitor variable-rate debt, interest-rate swaps and the company’s remaining cash and revolving-credit liquidity.