TransDigm Group Incorporated — Fiscal 2018 First-Quarter Form 10-Q
Business context and reporting period
TransDigm designs, produces and supplies highly engineered aerospace components for commercial and military aircraft, with reporting segments in Power & Control, Airframe and Non-aviation. The filing covers the unaudited thirteen-week period ended December 30, 2017, compared with the thirteen-week period ended December 31, 2016. Fiscal 2018 first-quarter results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $848.0 million | $814.0 million | 4.2% |
| Gross profit | $476.7 million | $444.3 million | 7.3% |
| Gross margin | 56.2% | 54.6% | +1.6 percentage points |
| Income from operations | $353.0 million | $317.0 million | 11.4% |
| Operating margin | 41.6% | 38.9% | +2.7 percentage points |
| Net income | $314.8 million | $118.9 million | 164.8% |
| Net income applicable to common stock | $258.6 million | $22.9 million | Material increase |
| Basic and diluted EPS | $4.65 | $0.41 | Material increase |
| Net cash from operating activities | $292.8 million | $225.8 million | 29.7% |
| EBITDA As Defined | $401.5 million | $381.2 million | 5.3% |
| EBITDA As Defined margin | 47.4% | 46.8% | +0.6 percentage points |
Power & Control sales increased 10.8% to $482.7 million, Airframe sales decreased 4.4% to $333.4 million, and Non-aviation sales increased 7.8% to $31.9 million. Commercial aftermarket sales increased $26.5 million, or 9.5%, and acquisition sales contributed $9.9 million.
At December 30, 2017, cash and cash equivalents were $857.9 million, compared with $650.6 million at September 30, 2017. Current assets were $2.27 billion versus current liabilities of $823.4 million. The company had $11.45 billion of total debt, including $299.7 million drawn under its trade receivable securitization facility, and stockholders’ deficit of $2.60 billion.
Capital expenditures were $15.3 million. Net cash used in financing activities was $71.0 million, including $56.1 million of dividend equivalent payments and $17.4 million of term-loan repayments. No share repurchases were made during the quarter.
Material changes versus the prior comparable period
- Sales growth was driven primarily by commercial aftermarket demand, acquisitions and higher Power & Control sales; Airframe performance declined because of lower commercial OEM and defense sales.
- Gross margin expanded because of organic growth, operating leverage and the absence of $16.6 million of prior-year inventory purchase-accounting adjustments.
- Amortization expense declined by $8.4 million as certain acquisition-related order backlog became fully amortized.
- Interest expense increased 10.2% to $160.9 million, reflecting higher average borrowings of approximately $11.87 billion versus $11.01 billion in the prior-year quarter.
- Refinancing costs declined to $1.1 million from $32.1 million in the prior-year period.
- Net income benefited substantially from the Tax Cuts and Jobs Act, including a provisional discrete tax benefit of $147.1 million. The effective tax rate was negative 63.4%, compared with 14.4% in the prior-year quarter.
- Operating cash flow increased by $67.0 million, helped by higher earnings and improved collections, partly offset by increased inventory purchases associated with backlog growth.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide specific quantitative full-year revenue, earnings or cash-flow guidance. Management expects its value-driven operating strategies, including profitable new business, cost-structure improvement and highly engineered value-added products, to support strong margins and sufficient operating cash flow for interest obligations and liquidity needs. Management also indicated that available cash and borrowing capacity could support acquisitions, share repurchases and dividends.
Estimated sales backlog was $1.706 billion at December 30, 2017, up from $1.569 billion at December 31, 2016. Most backlog was scheduled for delivery within twelve months, but purchase orders may be cancelled or deferred and backlog may not translate into future shipments or sales.
On November 30, 2017, Amendment No. 4 to the credit agreement converted approximately $798 million of term loans, reduced the applicable margin on certain term loans to LIBOR plus 2.75%, and removed the LIBOR floor for tranche E and F loans. The company reported $583.6 million of available revolving capacity, net of $16.4 million of letters of credit, and stated that it was in compliance with all debt covenants.
Schroth was classified as held for sale following a Department of Justice investigation concerning competitive effects of its acquisition. The company completed its sale on January 26, 2018, for approximately $61.4 million, subject to a working-capital adjustment. Schroth contributed $2.8 million of discontinued-operation income in the quarter; a $32.0 million impairment charge had been recorded in the prior quarter.
Key risks include substantial indebtedness and interest-rate exposure, dependence on commercial flight activity and customer profitability, reliance on certain customers, U.S. defense-budget changes, government and industry approvals, acquisition integration, raw-material and labor costs, international operations, cybersecurity, terrorism, natural disasters and potential environmental liabilities. The company hedges portions of its floating-rate debt with interest-rate swaps and caps.
The company had not completed its accounting for all effects of the Tax Cuts and Jobs Act at December 30, 2017. Provisional amounts included a $170.2 million deferred-tax remeasurement benefit and a $23.1 million transition-tax liability, both subject to refinement.
Most important facts for investors to verify
- Whether commercial aftermarket growth and the $1.706 billion backlog convert into sustained revenue and margin growth.
- The sustainability of reported earnings after excluding the $147.1 million provisional tax benefit and other unusual items.
- Debt maturity, refinancing and interest-rate exposure, including approximately $11.45 billion of debt and $299.7 million under the receivable securitization facility.
- Compliance with leverage and other debt covenants as borrowing, dividends, acquisitions or repurchases change.
- The final accounting impact of the Tax Cuts and Jobs Act and any resulting changes to the effective tax rate.
- The final proceeds and working-capital adjustment from the Schroth divestiture and any remaining liabilities related to the Department of Justice matter.
- The effect of the Airframe segment’s lower OEM and defense sales on consolidated growth.
- The company’s future use of the $650 million stock-repurchase authorization and its balance against acquisitions, dividends, capital spending and debt reduction.