TransDigm Group Incorporated — Fiscal 2016 Q3 Form 10-Q
Business context and reporting period
TransDigm designs, produces and supplies highly engineered aircraft components for commercial, military and other aerospace applications. The company reports Power & Control, Airframe and Non-aviation segments. This filing covers the thirteen-week quarter and thirty-nine-week year-to-date periods ended July 2, 2016, compared with June 27, 2015. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q3 FY2016 | Q3 FY2015 | YTD FY2016 | YTD FY2015 |
|---|---|---|---|---|
| Net sales | $797.7 million | $691.4 million | $2.296 billion | $1.897 billion |
| Gross profit / margin | $443.5 million / 55.6% | $359.5 million / 52.0% | $1.244 billion / 54.2% | $1.022 billion / 53.9% |
| Operating income / margin | $330.6 million / 41.4% | $263.7 million / 38.1% | $918.8 million / 40.0% | $760.9 million / 40.1% |
| Net income | $140.6 million | $99.1 million | $394.1 million | $305.5 million |
| EPS, basic and diluted | $2.52 | $1.75 | $6.95 | $5.34 |
| EBITDA As Defined | $383.9 million / 48.1% of sales | $312.9 million | $1.072 billion / 46.7% of sales | $870.7 million |
| Net cash from operations | Not provided for quarter | Not provided for quarter | $444.4 million | $373.4 million |
Q3 organic sales increased 8.3%, while acquisition sales contributed $48.8 million, producing total sales growth of 15.4%. Commercial aftermarket organic sales increased 12.0%, commercial OEM sales increased 7.8% and defense sales increased 4.7%. Year-to-date organic sales increased 4.1% and acquisition sales contributed $320.6 million.
At July 2, 2016, cash and cash equivalents were $1.667 billion, compared with $714.0 million at September 30, 2015. Net working capital included $525.8 million of receivables and $706.1 million of inventories. Total assets were $10.570 billion and stockholders’ deficit was $808.2 million.
Debt consisted of approximately $10.102 billion gross principal, or $10.006 billion net of issuance costs and discounts, plus $200.0 million outstanding under the trade receivable securitization facility. Long-term debt was $9.953 billion. The company had a $600 million revolving facility, with $583 million of borrowing capacity available and $17 million of letters of credit outstanding. The weighted-average cash interest rate on borrowings was 5.3% at quarter-end.
Material changes versus the prior comparable period
- Q3 sales increased $106.3 million, or 15.4%; net income increased $41.5 million, or 41.9%; and EPS increased $0.77.
- Q3 gross margin expanded 3.6 percentage points to 55.6%, primarily from organic growth, operating leverage, value-driven pricing and lower inventory purchase-accounting and integration costs.
- Year-to-date sales increased 21.0%, while net income increased 29.0%. Year-to-date gross margin improved modestly by 0.3 percentage points.
- Power & Control Q3 sales increased 17.6% and EBITDA As Defined increased 20.9%; Airframe sales increased 13.9% and EBITDA As Defined increased 23.4%.
- The company acquired Breeze-Eastern for approximately $205.9 million and Data Device Corporation for approximately $1.0 billion during fiscal 2016. DDC added approximately $731.7 million of goodwill, and acquisition purchase-price allocations remained preliminary.
- June financing activity added $950 million of 6.375% senior subordinated notes due 2026 and approximately $950 million of incremental term loans. Debt increased materially from September 30, 2015, while interest expense increased 13.1% in Q3 and 12.6% year to date.
- The company repurchased $207.8 million of treasury stock year to date and paid $3.0 million of dividends.
Guidance, outlook, commentary and risks
No formal revenue or earnings guidance is provided in the filing. Management expects cash from operations and available borrowing capacity to support debt obligations, potential acquisitions, stock repurchases and dividends. Management also expects the company’s operating strategies to sustain strong margins, but noted that additional debt financing will increase future interest payments.
Estimated backlog was $1.525 billion at July 2, 2016, up from $1.416 billion a year earlier, primarily due to acquisitions. Most backlog was scheduled for delivery within twelve months, but purchase orders may be cancelled or deferred and backlog is not necessarily indicative of future sales.
- Material risks include exposure to commercial flight hours and airline profitability, defense-budget changes, customer concentration, terrorist attacks, cybersecurity threats, natural disasters, international operations and currency movements.
- Acquisition integration and completion risks remain relevant; DDC, Breeze-Eastern and PneuDraulics purchase-price allocations were still preliminary.
- The company has substantial leverage. Covenant breaches or failure to meet applicable leverage tests could trigger defaults, accelerated repayment and termination of borrowing commitments.
- Breeze-Eastern included approximately $26.1 million of preliminary environmental reserves for soil and groundwater contamination and other matters at former facilities.
- The company was under U.S. federal tax examination for fiscal 2014, Belgium examinations for fiscal 2013 and 2014, and state examinations for fiscal 2009 and later. Unrecognized tax benefits were $7.7 million at July 2, 2016.
- The trade receivable securitization facility was amended in August 2016 to extend its maturity to August 1, 2017; capacity remained $250 million and $200 million was drawn at quarter-end.
- Interest-rate swaps and caps reduce exposure to floating-rate debt, but accumulated other comprehensive loss included $68.5 million of net unrealized derivative losses at quarter-end.
Most important facts for investors to verify
- Whether organic commercial aftermarket growth and unusually high Q3 gross-margin performance persist after acquisition-related effects normalize.
- The sustainability of cash generation relative to approximately $10.1 billion of gross debt and higher future interest obligations.
- Final purchase-price allocations, goodwill values, integration results and any impairment or environmental-reserve changes related to recent acquisitions.
- Compliance with debt covenants, restricted-payment limits and refinancing requirements as maturities approach.
- The conversion of the company’s non-GAAP EBITDA As Defined into GAAP cash flow after interest, taxes, capital expenditures, acquisitions and working-capital needs.