TransDigm Group Incorporated: Fiscal 2013 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended September 30, 2013, including fourth-quarter data. TransDigm designs, manufactures and supplies highly engineered aerospace components for commercial, military and other markets. Approximately 90% of fiscal 2013 sales came from proprietary products, approximately 75% from sole-source products, and approximately 53% from aftermarket sales.
The company operates through Power & Control, Airframe and Non-aviation segments. It completed acquisitions of Whippany Actuation, Arkwin Industries and Aerosonic during fiscal 2013 for aggregate cash consideration of approximately $475 million before certain adjustments.
Financial performance and key metrics
| Fiscal year ended September 30 | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $1,924.4 million | $1,700.2 million | 13.2% increase |
| Gross profit | $1,049.6 million | $945.7 million | 11.0% increase |
| Gross margin | 54.5% | 55.6% | Down 1.1 points |
| Income from operations | $749.5 million | $699.8 million | 7.1% increase |
| Net income | $302.8 million | $325.0 million | 6.8% decrease |
| Net earnings per share | $2.39 | $5.97 | Decrease, primarily reflecting special-dividend equivalent payments and higher costs |
| EBITDA | $792.7 million | $768.0 million | 3.2% increase |
| EBITDA As Defined | $900.3 million | $809.0 million | 11.3% increase |
| Cash flow from operations | $470.2 million | $413.9 million | 13.6% increase |
| Capital expenditures | $35.5 million | $25.2 million | Increase |
Fourth-quarter fiscal 2013 net sales were $539.7 million, gross profit was $282.7 million and net income was $84.0 million. Reported fourth-quarter earnings per share were a loss of $0.20 under the two-class method, reflecting the allocation of dividend equivalent payments to participating securities; the filing cautions that quarterly earnings per share may not sum to the annual amount.
At September 30, 2013, cash and cash equivalents were $564.7 million, working capital was $998.0 million and total assets were $6.15 billion. Total debt was $5.73 billion, compared with $3.62 billion at September 30, 2012. Stockholders’ equity was negative $336.4 million after substantial special dividends.
- Power & Control sales were $872.3 million, up 12.4%; EBITDA As Defined was $456.0 million, up 11.1%.
- Airframe sales were $951.4 million, up 12.8%; EBITDA As Defined was $444.1 million, up 10.5%.
- Non-aviation sales were $100.6 million, up 25.4%; EBITDA As Defined declined 2.1% to $23.6 million.
- Direct sales to foreign customers were $572.0 million, versus $508.8 million in fiscal 2012.
- Backlog was estimated at $1.081 billion, compared with $833 million a year earlier, although orders may be cancelled or deferred.
Material changes versus the prior comparable period
- Sales growth consisted of approximately $58.9 million of organic growth and $184.1 million of acquisition sales, partly offset by the absence of $18.8 million of prior-year AmSafe distribution sales.
- Cost of sales increased faster than revenue, and gross margin declined because of unfavorable OEM-versus-aftermarket mix, higher stock compensation and acquisition-related costs.
- Interest expense increased 27.7% to $270.7 million as average borrowings rose to approximately $4.63 billion from $3.44 billion, despite a lower average interest rate.
- The company recorded $30.3 million of refinancing costs and $48.9 million of stock compensation expense, including $24.5 million from accelerated vesting of certain options under market-sweep provisions.
- Fiscal 2013 included $1.99 billion of dividend and dividend-equivalent payments, funded substantially through additional debt. The company does not anticipate regular quarterly or annual dividends.
- The company refinanced its prior facilities with a new $2.2 billion term loan and $310 million revolving facility, then added a $900 million incremental term facility. It also issued $550 million of 2020 Notes and $500 million of 2021 Notes.
Guidance, outlook, risks and unusual items
Management stated that, absent disruptive events, internally generated funds and available revolving capacity should support operations, capital expenditures, research and development and long-term debt obligations through at least fiscal 2014. Fiscal 2014 capital expenditures were expected to be approximately $40 million to $45 million.
Management cited continued revenue passenger-mile growth and higher large commercial aircraft production as support for commercial aftermarket and OEM demand. It expected military-related sales to decline modestly from historically high levels and described business-jet demand as sluggish with possible modest growth.
- Leverage was approximately 6.4 times debt to EBITDA As Defined at September 30, 2013. The company disclosed substantial refinancing, interest-rate, covenant and maturity risk.
- Approximately $303.2 million remained available under the revolving facility, with $6.8 million of letters of credit outstanding. A one-percentage-point increase in interest rates would increase annual interest costs on the credit facility by approximately $30.8 million before hedging effects.
- Interest-rate swaps fixed rates on $353 million of borrowings through June 2015 and on $1.0 billion beginning in September 2014 through June 2019.
- Customer concentration remained material: Boeing, including Aviall, represented approximately 12% of fiscal 2013 sales, and the top ten customers represented approximately 41%.
- Key risks include commercial aerospace cyclicality, airline profitability, defense-budget reductions, fixed-price contract cost overruns, supplier and labor disruptions, regulatory and export-control requirements, product liability, environmental remediation and acquisition integration.
- Goodwill was $3.34 billion and identifiable intangible assets were approximately $1.19 billion at year-end. No goodwill impairment was recorded, but the balances create exposure to future impairment charges.
- Environmental remediation liabilities were $27.2 million, up from $19.1 million, primarily due to liabilities assumed with Arkwin. Management believed excess future environmental costs were unlikely to materially affect financial condition based on information then available.
- Management and the independent auditor reported effective internal control over financial reporting, but the assessment excluded the newly acquired Whippany Actuation, Arkwin and Aerosonic businesses, representing approximately 9% of total assets and 3% of fiscal 2013 sales.
Important facts for investors to verify
- Whether operating cash flow can sustain required interest, scheduled principal payments, capital expenditures and future acquisitions at approximately 6.4 times leverage.
- The sustainability of aftermarket demand, backlog conversion and the reported commercial OEM recovery.
- The effect of debt-funded special dividends on future liquidity, equity value and covenant capacity.
- Organic growth and margin performance excluding acquisitions, retroactive contract-price adjustments and other nonrecurring items.
- Integration results and final purchase-price allocations for Whippany Actuation, Arkwin and Aerosonic.
- Potential goodwill, intangible-asset, environmental, product-liability and government-contract exposures.
- The effect of option-related compensation and dividend-equivalent payments on GAAP earnings per share and shareholder returns.