TransDigm Group Incorporated — Form 10-Q Summary
Business context and reporting period
TransDigm designs, produces and supplies highly engineered proprietary aircraft components for commercial and military aircraft. The filing covers the thirteen and twenty-six weeks ended April 2, 2011, compared with the comparable periods ended April 3, 2010. The interim financial statements are unaudited.
Fiscal 2011 results include the acquisitions of McKechnie Aerospace, Talley Actuation and Semco Instruments, as well as the prior acquisition of Dukes Aerospace. The company divested its fastener business on March 9, 2011 and completed the divestiture of Aero Quality Sales after quarter-end on April 7, 2011.
Key financial metrics
| Metric | Q2 FY2011 | Q2 FY2010 | 26 weeks FY2011 | 26 weeks FY2010 |
|---|---|---|---|---|
| Net sales | $311.3 million | $206.1 million | $548.2 million | $390.4 million |
| Gross profit | $158.6 million | $115.2 million | $286.2 million | $218.3 million |
| Gross margin | 50.9% | 55.9% | 52.2% | 55.9% |
| Operating income | $113.2 million | $88.1 million | $205.8 million | $164.5 million |
| Income from continuing operations | $36.7 million | $38.0 million | $29.7 million | $68.8 million |
| Net income | $55.8 million | $38.0 million | $48.5 million | $68.8 million |
| Net earnings per share | $1.05 | $0.72 | $0.86 | $0.73 |
| Cash flow from operations | Not separately provided | Not separately provided | $129.2 million | $83.8 million |
| EBITDA As Defined | $146.7 million | $99.8 million | $257.7 million | $190.1 million |
Q2 EBITDA As Defined was 47.1% of sales. The twenty-six-week income from continuing operations margin was 5.4%, compared with 17.6% in the prior-year period, primarily reflecting refinancing costs and higher interest expense.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $505.3 million at April 2, 2011, up from $234.1 million at September 30, 2010.
- Total debt was $3.146 billion, consisting primarily of $1.546 billion of term loans and $1.600 billion of 7.75% senior subordinated notes due 2018. Total debt was $1.772 billion at September 30, 2010.
- Long-term debt was $3.131 billion, with $15.5 million classified as current.
- The revolving facility had $238.0 million of borrowing availability and $7.0 million of outstanding letters of credit at April 2, 2011.
- The new term loan matures in February 2017, and the 2018 notes mature in December 2018. The term loan carried a 4.0% interest rate at April 2, 2011.
- Current assets were $964.0 million versus current liabilities of $217.8 million. Stockholders’ equity was $667.0 million.
- The company stated that it was in compliance with the covenants under its new senior secured credit facility and 2018 notes.
Material changes versus the prior comparable period
- Q2 sales increased 51.1% to $311.3 million. Acquisitions contributed $81.2 million, while organic sales increased 11.7%, driven mainly by commercial aftermarket demand and, to a lesser extent, commercial OEM sales. Defense sales declined slightly.
- For the first 26 weeks, sales increased 40.4% to $548.2 million. Acquisitions contributed $114.3 million and organic sales increased 11.1%.
- Gross margin declined by 5.0 percentage points in both the quarter and year-to-date period. Acquisition-related inventory purchase accounting adjustments and integration costs diluted Q2 gross margin by approximately 8 percentage points and year-to-date gross margin by approximately 6 percentage points.
- Q2 net income increased 46.7%, but year-to-date net income declined 29.6% because the prior-year period did not include the current-year refinancing charge and the current-year period included significantly higher interest expense.
- Interest expense rose to $54.1 million in Q2 and $86.7 million year-to-date, reflecting debt incurred for acquisitions and refinancing. Refinancing costs were $72.4 million year-to-date, including a $42.4 million premium on redeemed notes and $25.7 million of debt-cost write-offs and related items.
- Net income included $19.1 million of income from discontinued operations in Q2 and $18.8 million year-to-date, including a $21.0 million after-tax gain on the fastener-business sale.
- Backlog increased to an estimated $670.0 million from $429.5 million, with approximately $185.2 million attributable to purchase orders acquired in recent acquisitions. Orders may be canceled or deferred.
Cash flow, acquisitions and unusual items
- Operating cash flow increased to $129.2 million from $83.8 million for the first 26 weeks.
- Investing cash outflow was $1.131 billion, including $1.362 billion for acquisitions and $240.0 million of proceeds from the fastener-business sale.
- Financing cash inflow was $1.273 billion, primarily from $1.500 billion of new secured debt and $1.583 billion of net proceeds from the 2018 notes, partly offset by repayments of prior debt and the 2014 notes.
- McKechnie Aerospace was acquired for approximately $1.27 billion in cash and contributed $99.1 million of sales from acquisition through April 2, 2011. The preliminary allocation included $879.8 million of goodwill and $433.0 million of intangible assets.
- Talley Actuation was acquired for approximately $94 million. Semco Instruments was acquired for approximately $73.6 million, and Dukes Aerospace included potential earn-out payments of up to $60 million over four years.
- Goodwill increased to $2.426 billion from $1.572 billion, and other intangible assets increased to $466.7 million from $212.8 million, primarily because of acquisitions.
Guidance, outlook, management commentary and risks
The filing does not provide a clear quantitative full-year revenue, earnings or cash-flow guidance range. Management characterized demand as improving, particularly in the commercial aftermarket, and cited favorable product mix and pricing on proprietary products. Management also expects to complete the integration of McKechnie Aerospace into its systems and control environment during fiscal 2011.
- Principal risks include sensitivity to aircraft flight hours and customer profitability, general economic conditions, terrorism, reliance on certain customers, U.S. defense spending, government contracting requirements, regulatory approvals and acquisition integration.
- Substantial indebtedness creates interest-rate, refinancing, covenant-compliance and liquidity risks. A one-percentage-point increase in interest rates was estimated to increase annual interest expense by approximately $15.1 million on the variable-rate secured debt outstanding at April 2, 2011.
- Debt agreements restrict additional indebtedness, dividends, asset sales, acquisitions, liens and other actions. A covenant breach could accelerate debt and permit lenders to pursue collateral.
- Environmental remediation liabilities totaled $20.3 million at April 2, 2011. The company noted that estimates may require adjustment and that changes could materially affect results or cash flow in a period.
- Acquisition accounting remained preliminary for certain acquired assets, and goodwill and intangible-asset impairment depend on management estimates of cash flows, growth rates and discount rates.
- The company reported effective disclosure controls and stated that no material changes had occurred in internal controls, although McKechnie was still operating under much of its prior systems and control environment.
Investor verification points
- Verify the final purchase-price allocations, goodwill, intangible values and integration costs for McKechnie Aerospace and Talley Actuation.
- Reconcile reported net income with continuing operations, discontinued operations and the $21.0 million after-tax divestiture gain.
- Assess sustainable margins excluding acquisition-related inventory adjustments, integration costs and other non-GAAP EBITDA As Defined adjustments.
- Review debt maturities, mandatory amortization, excess-cash-flow prepayments, covenant calculations and exposure to variable interest rates.
- Monitor commercial aftermarket demand, defense sales, backlog conversion and potential order cancellations or deferrals.
- Track environmental remediation developments, tax examinations and unrecognized tax benefits, which were $6.7 million at April 2, 2011.
- Confirm the post-quarter-end financial effects of the April 7, 2011 Aero Quality Sales divestiture, for which approximately $30 million of cash proceeds were expected.