TransDigm Group Incorporated — Fiscal 2013 First-Quarter Form 10-Q
Reporting period: Thirteen weeks ended December 29, 2012, compared with the thirteen weeks ended December 31, 2011. Financial statements are unaudited. TransDigm designs, manufactures and supplies highly engineered aircraft components for commercial and military aircraft.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $430.4 million | $352.5 million | 22.1% |
| Gross profit | $238.5 million | $199.6 million | 19.5% |
| Gross margin | 55.4% | 56.6% | Down 1.2 points |
| Income from operations | $172.8 million | $145.3 million | 19.0% |
| Operating margin | 40.2% | 41.2% | Down 1.0 point |
| Net income | $74.2 million | $65.1 million | 13.9% |
| Net margin | 17.2% | 18.5% | Down 1.3 points |
| Net income available to common stockholders | $36.0 million | $61.8 million | Down 41.7% |
| Basic and diluted EPS | $0.66 | $1.15 | Down $0.49 |
| EBITDA As Defined | $200.9 million | $174.1 million | 15.4% |
| Cash flow from operations | $98.1 million | $68.1 million | 44.1% |
Sales growth included $73.0 million of acquisition-related sales and $4.9 million of organic growth. Organic growth was driven primarily by commercial OEM and defense sales, while commercial aftermarket sales were slightly lower.
Cash and cash equivalents increased to $554.4 million from $440.5 million at September 30, 2012. Investing activities used $3.5 million, including $8.7 million of capital expenditures, partly offset by proceeds from the sale of an investment. Financing activities provided $19.2 million after $702.4 million of dividend and dividend-equivalent payments.
Debt and capital structure
- Total current and long-term debt was $4.32 billion at December 29, 2012, compared with $3.62 billion at September 30, 2012.
- Debt increased primarily from a $150 million incremental term loan and issuance of $550 million of 5.5% senior subordinated notes due 2020.
- The company paid a special cash dividend of $12.85 per common share, totaling approximately $664.3 million, plus approximately $35.4 million of dividend-equivalent payments.
- Term-loan borrowings were $2.17 billion at a 4.0% weighted-average rate. The company had $302.7 million of revolving capacity available, net of $7.3 million of letters of credit.
- The company was in compliance with its debt covenants at December 29, 2012. Interest-rate swaps hedged $353 million of variable-rate debt and were expected to fix that portion at 5.17% through June 30, 2015.
Material changes and unusual items
- Acquisition sales from Aero-Instruments, AmSafe and Harco contributed substantially to reported growth. The company continued to finalize purchase-price allocations for Aero-Instruments and AmSafe.
- Cost of sales rose to 44.6% of sales from 43.4%, reflecting acquisition volume, unfavorable OEM-versus-aftermarket mix and higher underlying costs. Acquisition-related inventory adjustments declined, but integration costs increased.
- Selling and administrative expense increased to 12.8% of sales from 11.9%, primarily because of acquired businesses and higher stock compensation expense.
- Interest expense increased 28.2% to $62.9 million, reflecting higher average borrowings of approximately $4.21 billion versus $3.14 billion in the prior-year quarter.
- EPS was disproportionately affected by the allocation of $38.1 million of dividends to participating securities, compared with $3.3 million in the prior-year period.
- TransDigm and Goodrich mutually terminated the previously announced agreement under which TransDigm would have acquired Goodrich's pump and engine control systems business for approximately $236 million.
- Backlog increased to approximately $886 million from $777 million, although customer orders may be canceled or deferred and backlog is not necessarily indicative of future sales.
Outlook, risks and contingencies
The filing does not provide explicit fiscal-year revenue or earnings guidance. Management reported that the first-quarter results were not necessarily indicative of full-year results and highlighted its strategies of obtaining profitable new business, improving cost structure and supplying highly engineered value-added products.
- Key risks include sensitivity to commercial flight hours and customer profitability, U.S. defense spending, dependence on certain customers, government and industry approvals, acquisition execution and integration, substantial indebtedness, interest-rate exposure, foreign operations, environmental liabilities and potential terrorist attacks.
- A one-percentage-point increase in interest rates would increase annual interest expense on the variable-rate term loans by approximately $21.7 million, based on period-end borrowings.
- Debt agreements restrict additional indebtedness, dividends, investments, asset sales, liens and other transactions. A covenant breach or inability to satisfy leverage requirements could accelerate debt maturities and restrict access to revolving commitments.
- The company had approximately $6.9 million of unrecognized tax benefits at December 29, 2012 and reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether acquisition-driven sales growth converts into sustained organic growth and whether aftermarket demand improves.
- The effect of higher leverage, interest expense and variable-rate debt on future earnings and cash flow.
- Compliance with debt covenants and availability under the revolving credit facility.
- The sustainability of margins given higher selling, administrative and integration costs and OEM/aftermarket mix.
- The final purchase-price allocations and any resulting changes to goodwill, intangible assets or amortization.
- The cash-flow and balance-sheet effects of the special dividend and the company’s capacity to fund capital expenditures, debt service and future acquisitions.
- The reliability of the $886 million backlog, including customer cancellation or deferral risk.