TransDigm Group Incorporated — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended April 2, 2016, compared with the periods ended March 28, 2015. The filing is unaudited. TransDigm designs, produces and supplies highly engineered aircraft components for commercial and military applications, organized into Power & Control, Airframe and Non-aviation segments.
Key Financial Metrics
| Metric | Q2 FY2016 | Q2 FY2015 | Change |
|---|---|---|---|
| Net sales | $796.8 million | $619.0 million | +28.7% |
| Gross profit | $425.7 million | $341.6 million | +24.6% |
| Gross margin | 53.4% | 55.2% | -1.8 percentage points |
| Income from operations | $312.1 million | $256.6 million | +21.6% |
| Operating margin | 39.2% | 41.4% | -2.2 percentage points |
| Net income | $138.6 million | $110.9 million | +25.0% |
| Basic and diluted EPS | $2.47 | $1.96 | +$0.51 |
| EBITDA As Defined | $368.6 million | $288.1 million | +28.0% |
| EBITDA As Defined margin | 46.3% | 46.5% | -0.2 percentage points |
For the twenty-six weeks ended April 2, 2016, sales were $1.498 billion, net income was $253.5 million, EPS was $4.44, operating income was $588.1 million and EBITDA As Defined was $688.0 million. Year-to-date gross margin was 53.4%, compared with 55.0% in the prior-year period, while net income increased 22.8%.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $269.2 million for the first twenty-six weeks, up from $182.9 million in the prior-year period.
- Capital expenditures were $22.3 million. Cash used for acquisitions was $144.4 million, primarily for Breeze-Eastern, partially offset by a $2.0 million PneuDraulics working-capital settlement.
- Financing cash outflows were $202.6 million, including $207.8 million for treasury-stock repurchases, $21.9 million of term-loan repayments and $3.0 million of dividend-equivalent payments.
- Cash and cash equivalents were $612.0 million at April 2, 2016, down from $714.0 million at September 30, 2015. Current assets were $1.758 billion versus current liabilities of $676.0 million.
- Total debt, including the trade-receivable securitization facility, was approximately $8.335 billion net of issuance costs and discounts. Long-term debt was $8.092 billion, and the $200 million securitization facility was outstanding.
- The company had $534.4 million of available borrowings under its $550 million revolving credit facility, after $15.6 million of letters of credit. The stated cash interest rate on total borrowings was 5.02% at April 2, 2016.
- Stockholders’ deficit was $961.8 million. The company repurchased 691,519 shares during the quarter for approximately $109.1 million and had $340.9 million remaining under its $450 million authorization.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven substantially by acquisitions: Q2 organic sales increased 4.4%, while acquisition sales contributed $150.4 million, or 24.3% of the prior-year comparable sales base. For the first half, organic sales increased 1.7% and acquisition sales contributed $271.8 million.
- Commercial aftermarket organic sales increased 12.6% in Q2, while defense organic sales declined 1.5%. For the first half, commercial aftermarket organic sales increased 5.9%, but defense and commercial OEM organic sales declined 1.0% and 0.8%, respectively.
- Power & Control Q2 sales increased 38.8% to $405.5 million, including $109.9 million of acquisition sales. Airframe sales increased 20.7% to $365.7 million, including $40.6 million of acquisition sales. Non-aviation sales increased 7.1% to $25.6 million.
- Margins declined because of higher acquisition-related costs, inventory purchase-accounting adjustments, integration costs, amortization and stock compensation. Q2 inventory purchase-accounting adjustments were $5.6 million, and acquisition integration costs were $9.7 million year to date.
- Net interest expense increased 11.4% in Q2 and 12.3% year to date, primarily because of higher borrowings associated with the May 2015 issuance of $450 million of 2025 Notes and a $1.0 billion incremental term loan.
- On January 4, 2016, TransDigm acquired Breeze-Eastern for approximately $205.9 million, including $146.4 million paid at closing net of cash acquired. Breeze-Eastern was included in Power & Control. Purchase price allocations for Breeze-Eastern, PneuDraulics and Pexco remained preliminary at quarter-end.
Outlook, Commentary, Risks and Unusual Items
- The filing does not provide formal quantitative fiscal 2016 revenue or earnings guidance. Management states that current debt obligations are expected to be met through internally generated funds and/or refinancing before maturity.
- Estimated sales backlog was $1.570 billion at April 2, 2016, compared with $1.384 billion at March 28, 2015, primarily due to acquisitions. Orders may be canceled or deferred and backlog is not necessarily indicative of future shipments or sales.
- Management emphasizes its value-driven strategies: obtaining profitable new business, improving cost structure and providing highly engineered value-added products. EBITDA As Defined is non-GAAP and excludes, among other items, interest, taxes, depreciation and amortization, acquisition-related costs and stock compensation.
- Key risks include substantial indebtedness and restrictive debt covenants, interest-rate exposure, dependence on aircraft flight hours and customer profitability, commercial and defense-market conditions, customer concentration, acquisition integration, government approvals and contracting, international operations, foreign exchange, raw-material and labor costs, cybersecurity, terrorism, natural disasters and environmental liabilities.
- Interest-rate swaps and caps hedge portions of variable-rate debt. The company had $750 million of swaps at 5.8%, $750 million of caps above a 2.5% LIBOR threshold and $1.0 billion of swaps at 5.4%.
- The company was under examination in Belgium for fiscal years 2013 and 2014 and had $6.9 million of unrecognized tax benefits at April 2, 2016. No material changes to previously disclosed risk factors were reported.
- Disclosure controls were assessed as effective. Breeze-Eastern continued to operate under much of its existing systems and control environment, with integration into TransDigm’s systems expected in fiscal 2017.
Investor Verification Checklist
- Reconcile acquisition-driven growth with organic sales trends, particularly the weakness in Power & Control organic sales during the first half.
- Assess whether gross-margin pressure from acquisition accounting, integration costs and amortization is temporary or structural.
- Review debt maturities, variable-rate exposure, covenant requirements and refinancing capacity relative to operating cash flow.
- Verify the sustainability of cash generation after interest payments, acquisitions, capital expenditures and share repurchases.
- Evaluate Breeze-Eastern integration progress and the final purchase price allocations for recent acquisitions.
- Consider the reliability of backlog as an indicator of future revenue given customer cancellation and deferral rights.