TransDigm Group Incorporated — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended July 1, 2017, compared with July 2, 2016. The interim financial statements are unaudited. TransDigm designs, manufactures and supplies highly engineered aerospace components for commercial, military and other markets through its Power & Control, Airframe and Non-aviation segments.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | 39 weeks FY2017 | 39 weeks FY2016 |
|---|---|---|---|---|
| Net sales | $907.7 million | $797.7 million | $2,594.9 million | $2,296.2 million |
| Gross profit | $521.8 million | $443.5 million | $1,457.1 million | $1,243.7 million |
| Gross margin | 57.5% | 55.6% | 56.2% | 54.2% |
| Income from operations | $387.6 million | $330.6 million | $1,071.0 million | $918.8 million |
| Net income | $169.1 million | $160.6 million | $443.4 million | $431.7 million |
| Net margin | 18.6% | 20.1% | 17.1% | 18.8% |
| EPS, basic and diluted | $3.08 | $2.88 | $6.23 | $7.63 |
| EBITDA As Defined | $442.9 million | $383.9 million | $1,249.0 million | $1,071.9 million |
| EBITDA As Defined margin | 48.8% | 48.1% | 48.1% | 46.7% |
Quarterly sales increased 13.8%, including 2.9% organic growth and 10.9% acquisition sales. Year-to-date sales increased 13.0%, including 2.4% organic growth and 10.6% acquisition sales. Quarterly net income rose 5.2%, while year-to-date net income rose 2.7%.
Cash flow, balance sheet and liquidity
- Year-to-date operating cash flow was $555.2 million, up from $482.2 million in the prior-year period.
- Capital expenditures were $55.7 million, and acquisition-related cash payments were $215.2 million. Investing cash outflow was $270.9 million.
- Financing cash outflow was $902.6 million, primarily reflecting the $1,376.0 million special dividend and related payments, $389.8 million of treasury stock purchases, the $528.8 million redemption of 2021 Notes and $48.5 million of term-loan repayments. These uses were partly offset by $1,132.8 million of net 2017 term-loan proceeds and $300.5 million of net proceeds from additional 2025 Notes.
- Cash and cash equivalents were $970.6 million at July 1, 2017, compared with $1,587.0 million at September 30, 2016.
- Total debt consisted of approximately $10.99 billion of gross term loans and notes, plus $200.0 million outstanding under the trade receivable securitization facility. Net long-term debt was $10.83 billion.
- The company had $584 million of available revolving commitments, with $16 million of letters of credit outstanding. Management stated that internally generated cash and available borrowing capacity should support debt obligations, interest payments and liquidity needs.
- Stockholders’ deficit increased to $1.90 billion from $651.5 million, primarily reflecting the special dividend, dividend equivalents and share repurchases.
Material changes versus the prior comparable period
- Power & Control was the principal growth driver, with quarterly sales up 25.4% to $504.3 million and year-to-date sales up 23.4% to $1,425.1 million. Airframe quarterly sales increased 0.7%, while Non-aviation sales increased 21.5%.
- Quarterly gross margin expanded 1.9 percentage points and year-to-date gross margin expanded 2.0 percentage points, supported by acquisition contributions, organic growth, cost initiatives and fixed-cost leverage.
- Interest expense increased 26.0% in the quarter and 29.6% year to date because of higher borrowings. The weighted-average cash interest rate on outstanding borrowings was 5.2% at July 1, 2017.
- Year-to-date refinancing costs increased to $35.9 million from $15.7 million, primarily from the redemption of the 2021 Notes, incremental term-loan financing and the additional 2025 Notes issuance.
- Year-to-date EPS declined to $6.23 from $7.63 despite higher net income, primarily because $96.0 million of dividends allocated to participating securities reduced income available to common shareholders. The prior-year allocation was $3.0 million.
- The company acquired Schroth Safety Products and certain Takata aviation and defense assets for approximately $89.7 million, including $79.7 million paid in cash, and acquired three aerospace product lines for approximately $105.5 million in cash.
Outlook, risks and unusual items
- Management expects continued strong margins and sufficient operating cash flow to meet interest and liquidity requirements, while retaining flexibility for acquisitions, share repurchases and dividends. No specific revenue or earnings guidance is provided in the filing text.
- Backlog was estimated at $1.612 billion at July 1, 2017, compared with $1.525 billion a year earlier. Most orders were expected to ship within twelve months, but orders may be canceled or deferred and backlog may not translate into future-period sales.
- The company remained in compliance with its debt covenants. Amendment No. 2 to the credit agreement permits up to $1.5 billion of dividends and share repurchases through March 6, 2018, subject to conditions; approximately $1.26 billion remained permissible as of July 1, 2017.
- In August 2017, the trade receivable securitization facility was extended to July 31, 2018 and borrowing capacity increased from $250 million to $300 million.
- Key risks include substantial indebtedness and interest-rate exposure, dependence on flight hours and customer profitability, defense-budget and government-contracting risks, customer concentration, acquisition integration, international operations, cybersecurity, natural disasters, raw-material and labor costs, regulatory approvals and environmental liabilities.
- Breeze-Eastern-related environmental reserves totaled approximately $24.6 million for contamination at former facilities. The company was also under U.S. federal tax examination for fiscal 2014 and had $7.0 million of unrecognized tax benefits at July 1, 2017.
- Newly acquired businesses continued to operate under their own systems and internal controls; integration into TransDigm’s systems and control environment was expected to be completed in fiscal 2018.
Investor verification points
- Reconcile reported growth and margins to organic growth, acquisition contributions and the company’s non-GAAP EBITDA As Defined.
- Assess leverage, maturities, refinancing requirements, floating-rate exposure and compliance with debt covenants.
- Evaluate whether operating cash flow can sustain interest expense, acquisitions, dividends and share repurchases.
- Review the impact of the special dividend and participating-security allocation on common-stock EPS and stockholders’ deficit.
- Validate acquisition purchase-price allocations, goodwill, intangible amortization and integration progress.
- Monitor backlog conversion, commercial OEM trends, defense demand and aftermarket growth.
- Review environmental reserves, tax examinations, unrecognized tax benefits and other contingent liabilities.