TransDigm Group Incorporated — Fiscal 2015 Second-Quarter Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended March 28, 2015, compared with the corresponding periods ended March 29, 2014. Financial statements are unaudited. TransDigm designs, manufactures and supplies highly engineered aircraft components through Power & Control, Airframe and Non-aviation segments.
Financial performance and condition
| Metric | Q2 FY2015 | Q2 FY2014 | Change |
|---|---|---|---|
| Net sales | $619.0 million | $590.8 million | +4.8% |
| Gross profit | $341.6 million | $307.6 million | +11.1% |
| Gross margin | 55.2% | 52.1% | +310 basis points |
| Income from operations | $256.6 million | $218.5 million | +17.4% |
| Net income | $110.9 million | $90.4 million | +22.7% |
| Basic and diluted EPS | $1.96 | $1.49 | +$0.47 |
| EBITDA As Defined | $288.1 million | $263.0 million | +9.5% |
| EBITDA As Defined margin | 46.5% | 44.5% | +200 basis points |
- For the first 26 weeks, sales increased 7.7% to $1.206 billion, net income increased 17.0% to $206.4 million, and EBITDA As Defined increased 10.1% to $557.8 million.
- First-half operating margin was 41.2%, compared with 38.3% in the prior-year period; net margin was 17.1%, compared with 15.8%.
- Operating cash flow was $182.9 million for the first 26 weeks, down from $220.5 million. Capital expenditures were $23.0 million.
- Cash and cash equivalents were $392.5 million at March 28, 2015, compared with $819.5 million at September 30, 2014. The decline primarily reflected the Telair acquisition.
- Total debt was approximately $7.34 billion, including $7.30 billion of long-term debt and $200.0 million outstanding under the trade-receivables securitization facility. Stockholders’ deficit was $1.326 billion.
- The Company had $329.7 million of borrowing availability under its revolving credit facility after $15.3 million of letters of credit. The securitization facility had a $225 million capacity and matured August 7, 2015.
- Net interest expense increased 21.4% to $99.9 million in the quarter and 21.9% to $198.8 million year to date. The weighted-average cash interest rate on total borrowings was 5.09% at quarter-end.
Material changes versus the prior comparable period
- Organic second-quarter sales grew 3.4%; acquisition sales contributed $8.4 million. Commercial aftermarket sales increased 7.0%, defense sales increased 2.3%, and commercial OEM sales increased 0.8%.
- Power & Control sales rose 3.0% to $292.2 million, while Airframe sales rose 7.0% to $302.9 million. Non-aviation sales declined 0.8% to $23.9 million.
- Management attributed margin expansion to productivity initiatives, value-driven pricing and product strategies, operating leverage, and lower acquisition-related inventory adjustments and integration costs.
- Amortization expense declined 37.3% in the quarter because order-backlog intangible assets from earlier acquisitions became fully amortized.
- The effective tax rate declined to 29.2% from 33.7% in the quarter and to 30.8% from 33.6% year to date, primarily due to lower foreign tax rates and an IRS examination-related discrete adjustment.
- Backlog was estimated at $1.384 billion at March 28, 2015, compared with $1.253 billion a year earlier. Management stated that the increase was primarily acquisition-related and that orders may be cancelled or deferred.
Acquisitions, outlook, risks and unusual items
- On March 26, 2015, TransDigm acquired Telair Cargo Group for approximately $730.9 million in cash, subject to adjustments. The acquisition was funded with cash and $75 million drawn under the revolving facility. Approximately $439.9 million of goodwill was recorded and is expected to be nondeductible for tax purposes.
- Subsequent events included the March 31 acquisition of Adams Rite Aerospace for approximately $75 million and an April 30 definitive agreement to acquire Pexco Aerospace for approximately $496 million. TransDigm expected to fund Pexco primarily with cash, revolver availability and new debt; the purchase price includes approximately $160 million of tax benefits over 15 years.
- No specific fiscal-year revenue or earnings guidance was provided in the filing text. Management described continued opportunities from aftermarket demand, acquisitions, cost improvements and highly engineered products, but cautioned that forward-looking results are uncertain.
- Key risks include substantial indebtedness, interest-rate exposure, reliance on flight hours and customer profitability, defense-budget changes, customer concentration, government-supplier requirements, acquisition execution and integration, foreign-exchange and international operating risks, environmental liabilities, and required government or industry approvals.
- A hypothetical one-percentage-point increase in interest rates would increase annual interest costs by approximately $39.2 million based on quarter-end Credit Facility borrowings. Interest-rate swaps hedged portions of variable-rate debt.
- The Company reported effective disclosure controls. Telair retained its own systems and internal controls after acquisition, with integration into TransDigm’s control environment expected in fiscal 2016.
- Unrecognized tax benefits were $10.8 million at March 28, 2015; management expected approximately $3.5 million to be reduced over the following 12 months.
- EBITDA and EBITDA As Defined are non-GAAP measures and exclude, among other items, interest, taxes, depreciation and amortization and certain acquisition and stock-compensation costs. They should not be viewed as discretionary cash flow.
Most important facts for investors to verify
- Reconcile the approximately $7.34 billion of debt, scheduled maturities, covenant requirements and available liquidity after the Telair acquisition.
- Assess whether operating cash flow can support interest payments, capital expenditures, acquisitions and future debt reduction.
- Review the final purchase-price accounting for Telair, including goodwill, intangible assets, tax treatment and post-acquisition operating contribution.
- Confirm the financing, closing conditions and leverage implications of the announced Pexco Aerospace transaction and the completed Adams Rite acquisition.
- Evaluate the sustainability of the 55.2% gross margin and 46.5% EBITDA As Defined margin after excluding favorable acquisition-related and tax items.
- Monitor aftermarket demand, flight hours, commercial OEM activity, defense sales and backlog conversion, recognizing that backlog may be cancelled or deferred.
- Review the transition of Telair’s internal controls and the Company’s stated risks related to acquisitions, interest rates, government contracts and international operations.