TransDigm Group Incorporated — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended March 28, 2020, compared with March 30, 2019. The interim financial statements are unaudited. TransDigm designs, manufactures and supplies highly engineered aircraft components serving commercial, defense and non-aviation markets through its Power & Control, Airframe and Non-aviation segments.
Financial performance and position
| Metric | Q2 FY2020 | Q2 FY2019 | Change |
|---|---|---|---|
| Net sales | $1,443 million | $1,168 million | +23.5% |
| Gross profit / margin | $818 million / 56.7% | $650 million / 55.7% | Margin +1.0 point |
| Income from operations / margin | $592 million / 41.0% | $468 million / 40.1% | Margin +0.9 point |
| Net income attributable to TD Group | $319 million | $202 million | +57.9% |
| Income from continuing operations | $323 million | $200 million | +61.5% |
| EBITDA As Defined | $675 million, 46.8% of sales | $566 million | +19.3% |
| Basic and diluted EPS | $5.56 | $3.60 | +$1.96 |
Year-to-date performance: Six-month sales were $2,908 million, up 34.6%; income from operations was $1,153 million; income from continuing operations was $556 million; net income attributable to TD Group was $623 million; and EBITDA As Defined was $1,356 million, versus $1,053 million in the prior-year period. Six-month EPS was $7.63 versus $6.65, although the current period included $68 million, or $1.18 per share, of income from discontinued operations, principally the gain on the Souriau-Sunbank divestiture.
Cash flow and balance sheet: Six-month operating cash flow was $594 million versus $453 million. Investing cash flow was $854 million, including $904 million of net proceeds from the Souriau-Sunbank sale and $50 million of capital expenditures. Cash increased to $2,668 million from $1,467 million at September 30, 2019. Net inventories increased to $1,313 million from $1,233 million, while receivables declined to $999 million from $1,068 million.
Debt and liquidity: Total debt, including the trade-receivable securitization facility, was approximately $18.2 billion net of issuance costs and discounts, compared with $16.5 billion at September 30, 2019. Long-term debt was $17.9 billion. The company had $350 million drawn under the securitization facility, $200 million drawn on its revolving facility, $41.7 million of letters of credit and $518.3 million of remaining revolver availability. Reported liquidity at March 28, 2020 was $3,186 million, consisting of cash and revolver availability, excluding approximately $1.5 billion subsequently raised through April 2020 secured-note offerings.
Material changes versus the prior comparable period
- Sales growth primarily reflected the Esterline acquisition, which contributed $315 million of acquisition sales in the quarter and $699 million year to date. Organic sales increased 4.8% in the quarter and 6.7% year to date.
- Quarterly segment sales increased to $747 million in Power & Control, $655 million in Airframe and $41 million in Non-aviation. Defense sales increased, while Airframe commercial aftermarket sales declined 6.9% organically in the quarter.
- Interest expense increased 24.8% in the quarter to $252 million and 34.0% year to date to $501 million, reflecting higher borrowings. Weighted-average borrowings were approximately $18.5 billion in the quarter versus $15.3 billion in the prior year.
- The company issued $2.65 billion of 5.50% senior subordinated notes due 2027, redeemed $1.15 billion of 2022 notes and refinanced its term-loan tranches. Six-month financing cash flow included $1.928 billion of dividend and dividend-equivalent payments.
- The effective tax rate declined to 4.2% from 24.2% in the quarter and to 11.6% from 22.9% year to date, primarily because of share-based-payment tax benefits and the CARES Act modification of the interest-deduction limitation.
- The company adopted ASC 842 leases on October 1, 2019, recording approximately $99 million of operating lease assets and $105 million of lease liabilities without a material income or cash-flow effect.
Guidance, outlook, risks and unusual items
Management did not provide quantified fiscal 2020 guidance. It stated that COVID-19 was beginning to reduce commercial aftermarket and OEM demand during the final approximately three weeks of the quarter and expected a significant adverse impact on fiscal 2020 sales, net income and EBITDA As Defined, particularly in commercial aftermarket markets. The duration and severity of the impact could not be estimated.
- Beginning in the third quarter, management planned workforce reductions of up to 15%, one- to eight-week unpaid furloughs at many businesses, substantially reduced senior-management cash compensation, waived board retainers and reduced capital expenditures to essential projects.
- Commercial aerospace exposure, airline customer health, flight hours, 737 MAX production changes, supply-chain and facility disruptions, labor availability, acquisitions, foreign operations, defense spending and high leverage were identified as significant risks.
- An interim COVID-19-related impairment evaluation found no goodwill or indefinite-lived intangible-asset impairment as of March 28, 2020, but the testing depended on uncertain commercial aerospace recovery assumptions.
- The Niort, France facility fire continued to disrupt operations. Restoration was expected between the first and second quarters of fiscal 2021; insurance recoveries remained uncertain.
- On April 8 and April 17, 2020, after quarter-end, the company issued $1.1 billion of 8.00% senior secured notes due 2025 and $400 million of additional 6.25% senior secured notes due 2026, respectively, to increase liquidity.
- A consolidated securities class action had been dismissed, but plaintiffs appealed. A related shareholder derivative action was also dismissed without prejudice and appealed. Management believed the matters were without merit and did not expect a material adverse impact, although any potential loss on appeal was not estimable.
Most important facts for investors to verify
- Actual commercial aerospace demand, customer production rates and aftermarket recovery after the quarter-end COVID-19 disruption.
- Whether the planned workforce, furlough and capital-spending reductions offset revenue and margin pressure.
- Liquidity after the April note offerings, including interest costs, covenant compliance and the July 2020 securitization-facility renewal.
- Sustainability of operating cash flow and the company’s ability to service approximately $18.2 billion of debt.
- Integration performance and margins of the acquired Esterline businesses, including remaining loss-contract reserves and intangible amortization.
- Potential impairment, insurance-recovery and litigation outcomes as circumstances evolve.