TransDigm Group Incorporated — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2018. The filing also provides fourth-quarter fiscal 2018 data for the quarter ended September 30, 2018. TransDigm designs, manufactures and supplies highly engineered aerospace components through its Power & Control, Airframe and Non-aviation segments. Approximately 90% of fiscal 2018 sales were from proprietary products, approximately 80% from sole-source products and approximately 60% from aftermarket sales.
Financial performance and position
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $3,811.1 million | $3,504.3 million | +8.8% |
| Gross profit | $2,177.5 million | $1,984.6 million | +9.7% |
| Gross margin | 57.1% | 56.6% | +0.5 percentage points |
| Income from operations | $1,655.0 million | $1,479.8 million | +11.8% |
| Operating margin | 43.4% | 42.2% | +1.2 percentage points |
| Income from continuing operations | $961.5 million | $628.5 million | +53.0% |
| Net income | $957.1 million | $596.9 million | +60.3% |
| Net earnings per share | $16.20 | $7.88 | +$8.32 |
| EBITDA As Defined | $1,876.6 million | $1,710.6 million | +9.7% |
| Net cash from operating activities | $1,022.2 million | $788.7 million | +29.6% |
Fourth-quarter fiscal 2018 net sales were $1,049.4 million, gross profit was $597.3 million, income from continuing operations was $230.3 million and net income was $228.8 million. Fourth-quarter basic and diluted EPS was $4.11.
- Organic sales increased 5.5%; acquisitions contributed $115.2 million, or 3.3%, of reported sales growth.
- Commercial aftermarket sales increased $109.6 million, or 9.0%; defense sales increased $62.3 million, or 5.3%; commercial OEM sales increased $7.5 million, or 0.8%.
- Power & Control sales increased 11.0% to $2,139.1 million, Airframe sales increased 6.2% to $1,530.9 million and Non-aviation sales increased 4.4% to $141.0 million.
- Segment EBITDA As Defined increased 9.7% to $1,918.0 million, with segment margins of 52.1% for Power & Control, 49.6% for Airframe and 31.4% for Non-aviation.
- Cash and cash equivalents were $2,073.0 million at September 30, 2018, compared with $650.6 million a year earlier. Working capital was $2,756.9 million.
- Capital expenditures were $73.3 million. Investing cash outflows were $683.6 million, including $667.6 million for acquisitions and $57.4 million of proceeds from the Schroth divestiture.
Debt, liquidity and capital allocation
- Total indebtedness was approximately $12.9 billion, excluding $17.5 million of letters of credit, compared with approximately $11.8 billion at September 30, 2017. Debt represented 116.3% of total book capitalization, and the debt leverage ratio was approximately 6.9x EBITDA As Defined.
- Term loans totaled approximately $7.6 billion, with maturities in 2023, 2024 and 2025 and interest generally at LIBOR plus 2.50%. The company also had $2.0 billion of senior subordinated notes due from 2020 through 2026 and $300 million outstanding under its receivables securitization facility.
- The $600 million revolving facility had $582.5 million of available borrowing capacity, net of $17.5 million of letters of credit.
- Cash interest paid was $635.0 million. A one-percentage-point increase in interest rates was estimated to increase annual term-loan interest expense by approximately $76 million.
- The company was in compliance with its debt covenants at year-end. It did not repurchase shares during fiscal 2018, although $650 million remained authorized under its repurchase program. No dividends were declared during fiscal 2018.
- Contractual cash obligations totaled $17.7 billion, including $12.7 billion of debt principal and $4.1 billion of scheduled interest payments.
Material changes versus the prior comparable period
- Revenue growth accelerated to 8.8% from fiscal 2017, supported by organic growth and the Kirkhill, Extant and Skandia acquisitions. Backlog increased to $2.026 billion from $1.669 billion.
- Gross margin improved to 57.1% from 56.6%, primarily from organic growth, operating leverage, lower inventory purchase-accounting adjustments and favorable foreign currency effects. Acquisition sales carried a lower margin of approximately 42.8%.
- Interest expense increased 10.0% to $663.0 million because average borrowings increased to approximately $12.6 billion from $11.0 billion, partly offset by a lower weighted-average cash interest rate of 5.1% versus 5.3%.
- The effective tax rate declined to approximately 2.4% from 24.9%, primarily because of the Tax Cuts and Jobs Act, including a provisional $176.4 million benefit from remeasuring U.S. deferred tax liabilities. The company stated that certain tax accounting remained provisional at year-end.
- Operating cash flow increased $233.5 million to $1,022.2 million. Financing activities provided $1,085.6 million, principally from term-loan and note issuance proceeds.
- Schroth was sold on January 26, 2018 for approximately $61.4 million following its classification as held for sale in connection with a Department of Justice investigation. Fiscal 2018 included a $4.5 million loss from discontinued operations; fiscal 2017 included a $32.0 million impairment charge.
Guidance, outlook, risks and unusual items
- Management expected continued commercial aftermarket strength, supported by growth in revenue passenger miles and the installed aircraft fleet. Industry consensus cited in the filing indicated continued, though moderating, commercial OEM production growth in 2019 and 2020.
- For planning purposes, management assumed military-related sales would remain flat at recent high levels, while acknowledging uncertainty from defense budgets, order timing and geopolitical conditions.
- Fiscal 2019 capital expenditures were expected to be $85 million to $100 million. Management expected operating cash flow and available borrowing capacity to support debt service, capital expenditures, acquisitions and potential shareholder returns.
- On October 9, 2018, after year-end, TransDigm agreed to acquire Esterline Technologies for $122.50 per share in cash, with an anticipated transaction value of approximately $4 billion. The company expected to fund the transaction primarily with cash and up to $3.7 billion of new senior secured term loans. Closing was expected in 2019, subject to shareholder and regulatory approvals.
- On October 1, 2018, Extant acquired substantially all assets and technical data rights of NavCom Defense Electronics for approximately $27 million.
- Key risks include high leverage and variable-rate debt, refinancing and covenant risk, acquisition integration risk, dependence on commercial flight activity and defense spending, customer concentration, government pricing reviews and audits, regulatory certifications, environmental liabilities, litigation, cybersecurity, supply-chain disruption and potential goodwill or intangible-asset impairment.
- The company was defending a consolidated securities class action and a related shareholder derivative action concerning alleged disclosures about sales practices involving the U.S. government. Management considered the claims without merit and did not expect a material adverse impact, but stated that potential losses could not yet be estimated reliably.
- Kirkhill included approximately $39.2 million of loss-contract reserves for agreements whose prices were insufficient to cover production costs.
Most important facts for investors to verify
- Whether the Esterline acquisition closed as planned, the final purchase price and financing structure, and the resulting pro forma leverage.
- Debt maturities, refinancing availability and compliance with leverage and restricted-payment covenants, particularly the $550 million of notes due in 2020.
- Actual commercial aftermarket, commercial OEM and defense growth relative to management’s fiscal 2019 assumptions.
- The sustainability of the 57.1% gross margin and the effect of lower-margin acquired businesses and product mix.
- The final accounting for provisional Tax Cuts and Jobs Act amounts and the resulting effective tax rate.
- Progress in integrating Kirkhill, Extant, Skandia and any subsequent acquisitions, including changes to loss-contract reserves.
- Developments in the securities litigation, Department of Defense pricing review and environmental matters.
- Actual capital expenditures, operating cash flow, interest expense and interest-rate exposure relative to disclosed expectations.