TransDigm Group Incorporated — Fiscal 2015 Third-Quarter Form 10-Q
Business Context and Reporting Period
TransDigm designs, produces and supplies proprietary, highly engineered aircraft components for commercial and military aircraft. Its reporting segments are Power & Control, Airframe and Non-aviation. The filing covers the unaudited 13-week quarter and 39-week year-to-date periods ended June 27, 2015, compared with June 28, 2014.
Key Financial Metrics
| Metric | Q3 FY2015 | Q3 FY2014 | 39 Weeks FY2015 | 39 Weeks FY2014 |
|---|---|---|---|---|
| Net sales | $691.4 million | $610.6 million | $1,897.3 million | $1,730.7 million |
| Gross profit / margin | $359.5 million / 52.0% | $327.5 million / 53.6% | $1,022.2 million / 53.9% | $919.2 million / 53.1% |
| Income from operations / margin | $263.7 million / 38.1% | $240.0 million / 39.3% | $760.9 million / 40.1% | $669.1 million / 38.7% |
| Net income / margin | $99.1 million / 14.3% | $16.2 million / 2.6% | $305.5 million / 16.1% | $192.7 million / 11.1% |
| EPS, basic and diluted | $1.75 | $(1.66) | $5.34 | $1.26 |
| EBITDA As Defined | $312.9 million / 45.2% of sales | $275.6 million / 45.1% | $870.7 million / 45.9% | $782.1 million / 45.2% |
Year-to-date net cash provided by operating activities was $373.4 million, compared with $349.5 million in the prior-year period. Capital expenditures were $40.3 million. Cash used for acquisitions was $1.293 billion, resulting in net cash used in investing activities of $1.334 billion. Net cash provided by financing activities was $1.058 billion, and ending cash was $915.4 million versus $729.1 million at June 28, 2014.
At June 27, 2015, total assets were $8.350 billion and stockholders’ deficit was $1.169 billion. Gross debt included $4.399 billion of term loans, $3.850 billion of senior subordinated notes and $200 million borrowed under the trade receivable securitization facility. The revolver had $533.9 million of borrowing availability, with $16.1 million of letters of credit outstanding. The weighted-average cash interest rate on total borrowings was 5.10%.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 13.2%, with organic sales up 2.7% and acquisition sales contributing $64.1 million. Year-to-date sales increased 9.6%, including 2.9% organic growth.
- Quarterly sales growth was led by Power & Control, up 17.5%, and Airframe, up 10.0%; Non-aviation sales were essentially flat. Year-to-date Power & Control increased 8.1%, Airframe increased 12.2%, and Non-aviation declined 2.2%.
- Quarterly gross margin declined 1.6 percentage points, primarily reflecting acquisition-related integration costs and inventory purchase accounting adjustments. Year-to-date gross margin improved 0.8 percentage points.
- Operating income rose 9.9% in the quarter and 13.7% year to date. Net income increased 512.6% in the quarter and 58.6% year to date.
- The prior-year quarter included $131.5 million of refinancing costs and a $110.9 million allocation of dividends on participating securities, which contributed to the prior-year loss applicable to common stock. Current-quarter refinancing costs were $18.2 million.
- Interest expense increased 21.9% in both the quarter and year-to-date period because of higher borrowings, including a $1.0 billion incremental term loan and $450 million of 2025 notes issued in May 2015.
- The company completed the Telair, Adams Rite Aerospace and Pexco Aerospace acquisitions for approximately $1.3 billion in aggregate cash consideration during the first 39 weeks. Certain purchase price allocations remained preliminary.
- Goodwill increased from $3.525 billion at September 30, 2014 to $4.325 billion at June 27, 2015, largely because of acquisitions.
Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a clear quantitative fiscal 2015 revenue, earnings or EBITDA guidance range.
- Management reported estimated backlog of $1.416 billion at June 27, 2015, up from $1.289 billion a year earlier, primarily due to acquisitions. Most backlog was scheduled for delivery within 12 months, but orders may be cancelled or deferred.
- On July 29, 2015, the company agreed to acquire PneuDraulics for approximately $325 million in cash, including approximately $107 million of expected tax benefits over 15 years. The transaction was expected to be funded with cash and revolver availability.
- Debt refinancing in May 2015 added the Tranche E term loans and extended or increased revolving commitments. The company also issued 6.5% senior subordinated notes due 2025.
- Interest-rate exposure remains material: a hypothetical one-percentage-point increase in rates would increase annual interest costs on the credit facility by approximately $44 million. Swaps and subsequent interest-rate caps partially mitigate this exposure.
- Key stated risks include sensitivity to commercial flight hours and customer profitability, defense-budget changes, reliance on customers and government approvals, acquisition execution and integration, substantial indebtedness, interest-rate volatility, foreign operations, environmental liabilities and potential covenant breaches.
- The company had $8.9 million of unrecognized tax benefits at June 27, 2015 and was subject to tax examinations in Belgium and certain state jurisdictions. Management expected approximately $3.5 million of unrecognized tax benefits to be reduced over the following 12 months.
- Management concluded disclosure controls were effective. Newly acquired businesses continued to operate under their own systems and controls pending integration, which was expected to be completed in fiscal 2016.
Important Facts for Investors to Verify
- Reconcile reported EBITDA As Defined to GAAP net income and operating cash flow; the measure excludes interest, taxes, depreciation, amortization and selected acquisition, compensation and refinancing costs.
- Assess leverage and debt-service capacity following the Telair, Adams Rite and Pexco acquisitions, the new term loan, the 2025 notes and the planned PneuDraulics acquisition.
- Evaluate whether organic growth and segment margins can offset higher interest expense and acquisition integration costs.
- Review the preliminary purchase price allocations, goodwill levels and future impairment exposure for recent acquisitions.
- Verify the conversion of backlog into shipments and sales, given customer cancellation or deferral rights.
- Review debt covenants, mandatory prepayment provisions, variable-rate exposure and available revolver capacity.
- Confirm the final terms, financing and integration progress of the PneuDraulics transaction and the subsequent amendment to the receivables securitization facility.