Business Context and Reporting Period
TransDigm Group Incorporated, through TransDigm Inc. and subsidiaries, designs, produces and supplies proprietary, highly engineered aircraft components for commercial and military aircraft. This unaudited Form 10-Q covers the 13-week and 39-week periods ended July 2, 2011, compared with July 3, 2010.
Key Financial Metrics
| Metric | Q3 FY2011 | Q3 FY2010 | 39 Weeks FY2011 | 39 Weeks FY2010 |
|---|---|---|---|---|
| Net sales | $325.2 million | $214.2 million | $863.1 million | $604.5 million |
| Gross profit | $183.1 million | $122.4 million | $468.2 million | $340.7 million |
| Gross margin | 56.3% | 57.2% | 54.2% | 56.4% |
| Income from operations | $139.2 million | $95.3 million | $344.7 million | $259.8 million |
| Operating margin | 42.8% | 44.5% | 39.9% | 43.0% |
| Net income | $56.3 million | $44.0 million | $104.7 million | $112.8 million |
| Net margin | 17.3% | 20.5% | 12.1% | 18.7% |
| EPS | $1.06 | $0.83 | $1.91 | $1.56 |
| EBITDA As Defined | $161.4 million | $105.8 million | $418.0 million | $296.0 million |
For the 39-week period, income from continuing operations was $87.9 million versus $112.8 million in the prior-year period. The current period included $72.4 million of refinancing costs. Discontinued operations contributed $16.8 million, including net gains on divestitures.
Net cash provided by operating activities was $143.7 million for the 39 weeks, compared with $155.3 million previously. Capital expenditures were $12.2 million. Cash used in investing activities was $1.103 billion, principally reflecting acquisitions of $1.362 billion, partially offset by $271.4 million of proceeds from divestitures.
Cash and cash equivalents were $549.3 million at July 2, 2011, compared with $234.1 million at September 30, 2010. Total debt was $3.142 billion, consisting primarily of $1.542 billion of term loans and $1.600 billion of 7.75% senior subordinated notes due 2018. Revolver availability was $237.0 million, with $8.0 million of letters of credit outstanding.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 51.8%; 38.7 percentage points of the increase came from acquisitions and organic sales increased 13.2%.
- For the 39 weeks, sales increased 42.8%, including $187.0 million from acquisitions and 11.8% organic growth.
- Organic growth was driven primarily by commercial aftermarket sales, which increased 24.8% in Q3 and 22.7% year to date. Commercial OEM sales also increased, while defense sales declined slightly.
- Gross margin declined because acquired businesses carried acquisition-related inventory purchase accounting and integration costs and had lower initial margins. Amortization expense increased to $28.2 million from $11.5 million year to date.
- Interest expense increased to $136.6 million from $85.1 million year to date because average borrowings increased substantially following the McKechnie acquisition and debt refinancing.
- McKechnie Aerospace was acquired for approximately $1.27 billion in December 2010; Talley Actuation was acquired for approximately $93.6 million. The acquisitions added $142.1 million of reported sales from acquisition dates through July 2, 2011.
- The fastener business and Aero Quality Sales were divested for aggregate cash proceeds of approximately $271.4 million and were classified as discontinued operations.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific full-year revenue or earnings guidance. Management reported estimated sales backlog of $694 million at July 2, 2011, up from $436 million, with most orders scheduled for delivery within 12 months; however, purchase orders may be canceled or deferred.
Management cited improving commercial aftermarket demand, favorable product mix and pricing on proprietary products. The filing cautions that results depend on aircraft flight hours, customer profitability, economic conditions, defense spending, government contracting, customer concentration, regulatory approvals and successful integration of acquisitions.
Debt refinancing produced a non-recurring $72.4 million charge. The company was in compliance with its debt covenants. Approximately $1.54 billion of term debt was variable-rate debt; a one-percentage-point rate increase would raise annual interest costs by approximately $15.4 million. Interest-rate swaps covering $353 million of notional debt will begin converting exposure to a fixed 5.17% rate in December 2012.
Environmental remediation liabilities totaled $20.1 million. Management stated that future environmental costs beyond accrued amounts were not currently expected to materially affect financial condition, although estimates may change materially as investigations proceed. On August 5, 2011, after quarter-end, the company agreed to acquire Schneller Holdings for approximately $288.5 million, subject to customary closing conditions and regulatory approvals.
Management concluded that disclosure controls were effective. McKechnie Aerospace remained on its prior systems and control environment pending planned integration in the first quarter of fiscal 2012. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Separate organic performance from acquisition-driven growth and assess whether acquired businesses achieve expected margins.
- Reconcile EBITDA As Defined to GAAP earnings and operating cash flow, particularly the substantial excluded refinancing, integration, stock compensation and acquisition-related items.
- Monitor leverage, mandatory term-loan amortization, excess-cash-flow prepayments, covenant compliance and variable-rate exposure.
- Assess the sustainability of commercial aftermarket demand and the conversion of the $694 million backlog into shipments and revenue.
- Review purchase-price allocations, goodwill of $2.410 billion and other acquired intangible assets for potential impairment or revisions.
- Track environmental remediation obligations, tax exposures, warranty liabilities and the closing and integration of the proposed Schneller acquisition.