TransDigm Group Incorporated — Fiscal 2014 Second-Quarter Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended March 29, 2014, compared with the corresponding periods ended March 30, 2013. Financial statements are unaudited. TransDigm designs, manufactures and supplies proprietary, highly engineered aircraft components for commercial and military aviation, organized into Power & Control, Airframe and Non-aviation segments.
Key Financial Metrics
| Metric | 13 weeks ended Mar. 29, 2014 | 13 weeks ended Mar. 30, 2013 | 26 weeks ended Mar. 29, 2014 | 26 weeks ended Mar. 30, 2013 |
|---|---|---|---|---|
| Net sales | $590.8 million | $465.6 million | $1,120.1 million | $896.0 million |
| Gross profit | $307.6 million | $259.3 million | $591.7 million | $497.9 million |
| Gross margin | 52.1% | 55.7% | 52.8% | 55.6% |
| Income from operations | $218.5 million | $194.1 million | $429.1 million | $367.0 million |
| Operating margin | 37.0% | 41.7% | 38.3% | 41.0% |
| Net income | $90.4 million | $67.9 million | $176.5 million | $142.1 million |
| Net margin | 15.3% | 14.6% | 15.8% | 15.9% |
| Basic and diluted EPS | $1.49 | $1.25 | $2.93 | $1.91 |
| EBITDA As Defined | $263.0 million | $219.3 million | $506.5 million | $420.2 million |
EBITDA As Defined is a non-GAAP measure that excludes, among other items, interest, taxes, depreciation and amortization, acquisition-related costs and stock compensation.
Cash Flow, Liquidity and Debt
- Net cash provided by operating activities was $220.5 million for the first 26 weeks, compared with $197.3 million in the prior-year period.
- Capital expenditures were $17.7 million. Net cash used in investing activities was $312.3 million, primarily reflecting $311.0 million of business acquisitions, partly offset by $16.4 million of real-estate sale proceeds.
- Cash and cash equivalents were $475.7 million at March 29, 2014, down from $564.7 million at September 30, 2013.
- Total debt was approximately $5.72 billion, consisting principally of $3.07 billion of term loans and $2.65 billion of senior subordinated notes. The balance sheet reported $5.69 billion of long-term debt plus $31.0 million of current debt.
- The $310 million revolving credit facility had $302.7 million of borrowing capacity available, with $7.3 million of letters of credit outstanding. The company had not borrowed under its trade receivables securitization facility, which could provide up to $225 million and matures October 20, 2014.
- Cash interest paid was $127.2 million and income taxes paid were $84.4 million during the first 26 weeks.
- Stockholders’ deficit improved to $125.6 million from $336.4 million at September 30, 2013, principally due to earnings and related equity activity.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 26.9% to $590.8 million. Organic sales increased 6.1%, while acquisition sales contributed $96.9 million.
- First-half sales increased 25.0% to $1.12 billion, comprising 7.5% organic growth and $156.7 million of acquisition sales.
- Second-quarter net income increased 33.1% to $90.4 million; first-half net income increased 24.2% to $176.5 million.
- Second-quarter EBITDA As Defined increased 19.9% to $263.0 million, while first-half EBITDA As Defined increased 20.6% to $506.5 million.
- Gross margin declined 3.6 percentage points in the quarter and 2.8 percentage points year to date. The decline reflected acquisition-related costs, including $6.0 million of inventory purchase-accounting adjustments and $1.6 million of integration costs in the quarter.
- Interest expense increased 28.4% year over year in both the quarter and first half, reflecting higher average borrowings. Average borrowings were approximately $5.72 billion in the quarter and $5.73 billion year to date, versus approximately $4.33 billion and $4.27 billion, respectively, in the prior periods.
- Prior-year results included $30.3 million of refinancing costs; no comparable refinancing cost was recorded in 2014.
- Power & Control and Airframe led segment growth. Second-quarter sales rose 26.7% and 30.4%, respectively; Non-aviation sales declined 4.3%.
- Estimated backlog was $1.253 billion at March 29, 2014, up from $895 million at March 30, 2013. Approximately $314 million of the increase was attributable to acquisitions, and most orders were scheduled for delivery within twelve months.
Acquisitions, Outlook and Risks
- TransDigm acquired Airborne Global on December 19, 2013, for approximately $263.8 million in cash, and Elektro-Metall Export GmbH on March 6, 2014, for approximately $49.5 million, including assumed net debt. Both acquisitions were recorded using preliminary purchase-price allocations.
- Management cited organic growth, profitable new business, cost-structure improvements, highly engineered value-added products and recurring aerospace aftermarket demand as key operating drivers. The filing does not provide specific full-year financial guidance.
- Management expects to complete the integration of EME’s operations and control environment into TransDigm’s systems in fiscal 2015. Disclosure controls were assessed as effective, and no material changes to internal controls were reported other than the EME integration matter.
- Interest-rate exposure remains significant: a hypothetical one-percentage-point increase in rates would increase annual interest expense by approximately $30.7 million based on March 29, 2014 borrowings. Interest-rate swaps hedged portions of the variable-rate debt.
- Principal risks include substantial indebtedness and covenant compliance, dependence on flight hours and customer profitability, defense-budget conditions, customer concentration, government approvals and contracts, acquisition integration, foreign operations and currency exposure, environmental liabilities, and potential terrorism or geopolitical events.
- The company authorized a $200 million share-repurchase program but made no repurchases during the quarter.
Most Important Facts for Investors to Verify
- Whether organic growth and backlog conversion continue after separating acquisition-driven growth.
- Whether gross-margin pressure from acquired businesses and purchase-accounting adjustments moderates as integrations progress.
- Debt repayment capacity, covenant headroom, refinancing requirements and sensitivity to variable interest rates.
- The final purchase-price allocations and goodwill and intangible-asset valuations for recent acquisitions.
- Cash-flow conversion after interest, taxes, capital expenditures, acquisitions and any shareholder distributions.
- The timing and effectiveness of integrating EME into TransDigm’s financial reporting and internal-control environment.