TransDigm Group Incorporated — Fiscal 2020 Third-Quarter Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended June 27, 2020, compared with June 29, 2019. The filing was submitted August 4, 2020. TransDigm designs, manufactures and supplies proprietary aerospace components across Power & Control, Airframe and Non-aviation segments.
Financial Results and Position
| Metric | Q3 FY2020 | Q3 FY2019 | 39 Weeks FY2020 | 39 Weeks FY2019 |
|---|---|---|---|---|
| Net sales | $1,022 million | $1,521 million | $3,930 million | $3,682 million |
| Gross profit / margin | $491 million / 48.0% | $713 million / 46.9% | $2,111 million / 53.7% | $1,927 million / 52.3% |
| Income from operations / margin | $286 million / 28.0% | $423 million / 27.8% | $1,439 million / 36.6% | $1,312 million / 35.6% |
| Income from continuing operations | $(5) million | $128 million | $552 million | $524 million |
| Net income attributable to TD Group | $(6) million | $145 million | $617 million | $543 million |
| EPS attributable to common stockholders | $(0.10) | $2.57 | $7.53 | $9.22 |
| EBITDA As Defined | $424 million / 41.5% of sales | $659 million / 43.3% of sales | $1,780 million / 45.3% of sales | $1,712 million / 46.5% of sales |
- Q3 sales declined 32.8%, principally because COVID-19 sharply reduced commercial aftermarket and commercial OEM demand. Power & Control sales declined 27.7%, Airframe sales declined 39.0% and Non-aviation sales declined 22.0%.
- Thirty-nine-week sales increased 6.7%, but included $699 million of acquisition sales related primarily to Esterline. Organic sales declined 9.6%.
- Q3 gross margin improved because the prior-year period included $89 million of inventory acquisition-accounting adjustments; the benefit was partly offset by COVID-19 restructuring costs and lower production volume.
- Interest expense increased to $262 million in Q3 and $762 million year to date, reflecting higher borrowings. The reported Q3 effective tax rate was 113.5%, primarily because COVID-19 reduced taxable income and limited interest deductibility; the year-to-date rate was 16.9%.
Cash Flow, Debt and Liquidity
- Year-to-date net cash provided by operating activities was $991 million, compared with $768 million in the prior-year period. The increase was supported by a $347 million working-capital source from accounts receivable, partly offset by a $126 million use for inventories.
- Year-to-date investing cash flow was $842 million, including $904 million of proceeds from the Souriau-Sunbank divestiture and $62 million of capital expenditures.
- Year-to-date financing cash flow was $1,245 million. Debt issuance proceeds included $2.625 billion from 5.50% notes due 2027, $1.092 billion from 8.00% secured notes due 2025 and $401 million from additional 6.25% secured notes due 2026. These proceeds were partly offset by $1.928 billion of dividends and dividend equivalents and $1.168 billion used to redeem the 2022 notes.
- Cash and cash equivalents were $4.549 billion at June 27, 2020, compared with $1.467 billion at September 30, 2019. Reported cash liquidity, including $523 million of available revolving credit capacity, was $5.072 billion.
- Total debt, including the receivables securitization facility and current portion, was approximately $19.7 billion net of issuance costs and discounts. No term loan or note maturity occurs before July 2024. The company reported compliance with its debt covenants.
- The company drew $200 million on its revolving facility in March 2020. The facility had $36.8 million of letters of credit outstanding and $523.2 million of additional borrowing availability at quarter-end. On July 22, 2020, the receivables securitization facility maturity was extended to July 27, 2021.
Material Changes Versus the Prior Comparable Period
- COVID-19 caused a significant Q3 deterioration in commercial aerospace demand. Commercial aftermarket sales declined $228 million, commercial OEM sales declined $178 million and defense sales declined $73 million.
- The company reduced its workforce by at least 30%, implemented furloughs, reduced senior-management cash compensation, deferred nonessential capital projects and minimized discretionary spending.
- COVID-19 restructuring costs were approximately $24 million, with an additional $3 million of separable pandemic-related costs. The company expected total fiscal 2020 COVID-19 restructuring and incremental costs of approximately $40 million to $60 million.
- Sales order backlog declined to $3.425 billion from $3.856 billion at June 29, 2019, primarily because of reduced commercial demand. Orders may be cancelled or deferred before shipment.
- The company completed the $920 million Souriau-Sunbank divestiture in December 2019. The transaction generated $59 million of after-tax gain and contributed to $66 million of year-to-date income from discontinued operations.
- Debt increased materially because of new note offerings and the revolving-facility draw. The company also redeemed $1.150 billion of 2022 notes.
Outlook, Commentary and Risks
- Management expected COVID-19 to continue adversely affecting sales, net income and EBITDA As Defined through at least the remainder of fiscal 2020, with commercial OEM and commercial aftermarket channels most affected. The timing and pace of recovery were described as indeterminable.
- Management expected additional risks from supply-chain disruptions, employee absenteeism, temporary facility suspensions and health-and-safety costs. The company could not assure that its workforce could be fully rehired as demand recovered.
- Management stated that available cash, operating cash flow and potential additional revolver borrowings were expected to satisfy short-term liquidity needs, including interest and capital expenditures. Fiscal 2020 capital spending was expected to remain limited to essential projects.
- Key financial risks include substantial leverage and interest obligations, dependence on aerospace flight hours and customer profitability, commercial aerospace weakness, defense procurement and government-contract risks, acquisition integration, international operations, litigation, raw-material and labor costs, and potential LIBOR replacement effects.
- Interim goodwill and indefinite-lived intangible-asset testing performed in response to COVID-19 identified no impairment as of March 28, 2020; the assessment was updated through June 27, 2020 without changing that conclusion. Future deterioration in commercial aerospace assumptions could increase impairment risk.
- A facility fire in Niort, France remained subject to insurance recovery uncertainties. Approximately $26 million of property-loss recoveries had been received, while the timing and amount of business-interruption recoveries remained uncertain.
Important Facts for Investors to Verify
- Whether commercial air travel and aftermarket demand recover sufficiently to stabilize sales, backlog and plant utilization.
- The sustainability of reported liquidity after interest payments, debt maturities, working-capital requirements and any further restructuring costs.
- Leverage, floating-rate exposure, refinancing requirements beginning in 2024 and the effect of higher borrowing costs on cash flow.
- The extent to which Q3 margin and EBITDA benefited from nonrecurring adjustments, including the absence of prior-year acquisition accounting charges and the use of non-GAAP EBITDA As Defined.
- Progress and final costs associated with workforce reductions, furloughs, facility disruptions and the Niort insurance claim.
- Potential goodwill, intangible-asset and inventory valuation effects if the aerospace recovery is slower than management assumptions.
- Restrictions under credit agreements and indentures affecting dividends, share repurchases, acquisitions, additional debt and liquidity allocation.