TransDigm Group Incorporated — Fiscal 2011 First-Quarter Form 10-Q
Business context and reporting period
TransDigm designs, produces and supplies highly engineered aerospace components for commercial and military aircraft. The filing covers the unaudited thirteen-week period ended January 1, 2011, compared with the thirteen-week period ended January 2, 2010. Fiscal 2011 results include McKechnie Aerospace from December 6, 2010, Talley Actuation from December 31, 2010, and prior acquisitions including Semco Instruments and Dukes Aerospace.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $240.0 million | $184.3 million | Up 30.3% |
| Gross profit | $127.7 million | $103.1 million | Up 23.9% |
| Gross margin | 53.2% | 55.9% | Down 2.7 percentage points |
| Income from operations | $21.6 million | $76.5 million | Down $54.9 million |
| Net income (loss) | $(7.3) million | $30.8 million | Declined $38.1 million |
| Net loss applicable to common stock | $(10.2) million | $0.4 million | Basic and diluted EPS: $(0.19) vs. $0.01 |
| Cash flow from operations | $62.1 million | $59.6 million | Up $2.6 million |
| Capital expenditures | $3.0 million | $3.5 million | Down $0.5 million |
| EBITDA As Defined | $111.3 million | $90.4 million | Up 23.2%; 46.4% of sales in FY2011 |
At January 1, 2011, cash and cash equivalents were $234.3 million. Total assets were $4.21 billion, total liabilities were $3.62 billion, and stockholders’ equity was $596.3 million. Net working capital was approximately $509.1 million.
Total debt consisted primarily of $1.55 billion under the new senior secured term loan, $1.60 billion of 7.75% senior subordinated notes due 2018, and approximately $31.4 million of remaining 2014 notes at the quarter-end balance-sheet date. The company subsequently redeemed the remaining 2014 notes on January 15, 2011. The new revolving facility had $238.0 million of availability, net of $7.0 million of letters of credit.
Operating cash flow exceeded capital expenditures by approximately $59.2 million, but acquisition spending was $1.36 billion. Financing activities provided $1.30 billion, resulting in a net cash increase of $0.2 million for the quarter.
Material changes versus the prior comparable period
- Sales increased by $55.7 million. Acquisitions contributed $36.3 million, while organic sales increased $19.4 million, or 10.6%.
- Organic growth was driven primarily by higher commercial aftermarket volumes and demand, plus favorable commercial OEM sales. Defense sales were essentially flat.
- Gross margin declined to 53.2%, partly because acquired businesses contributed lower-margin sales and diluted margin by approximately four percentage points.
- Selling and administrative expense increased to $31.0 million from $22.5 million, reflecting acquisition-related severance, corporate costs, transaction expenses, and incremental costs from acquired businesses.
- Operating income and net income were materially reduced by $70.7 million of one-time refinancing costs and higher interest expense.
- Interest expense increased to $32.6 million from $28.5 million as average borrowings increased to approximately $2.15 billion from $1.78 billion.
- Estimated sales backlog increased to $671 million from $427 million, including approximately $207 million of purchase orders acquired with Semco, McKechnie, and Talley. Orders may be canceled or deferred.
Acquisitions, refinancing, outlook and risks
McKechnie Aerospace was acquired for approximately $1.27 billion, and Talley Actuation was acquired for approximately $94 million. The preliminary purchase-price allocation added approximately $1.01 billion of goodwill, $110.0 million of trademarks and trade names, and $235.0 million of amortizable intangible assets. The acquisition accounting remains subject to adjustment.
The company financed the McKechnie acquisition and refinanced its debt with a $1.55 billion senior secured term loan, a $245 million revolving facility, and $1.6 billion of 7.75% senior subordinated notes due 2018. Refinancing costs included a $40.7 million redemption premium, $25.7 million of debt-cost and discount write-offs, and $4.3 million of swap settlement and other expenses.
No formal financial guidance is provided in the filing. Management reported improving commercial aftermarket demand and expects to integrate McKechnie into its systems and control environment during fiscal 2011. On January 28, 2011, the company agreed to sell its fastener businesses for approximately $240 million, subject to regulatory approval and customary closing conditions.
- Leverage and debt-service risk are significant. A one-percentage-point increase in interest rates would increase annual interest cost on the variable-rate term loan by approximately $15.5 million.
- Debt agreements impose restrictive covenants, including limits on additional debt, dividends, asset sales, acquisitions and investments. Financial covenants begin with the quarter ending April 2, 2011.
- Results depend on aircraft flight hours, customer profitability, commercial aftermarket demand, the U.S. defense budget, government approvals and customer concentration.
- Acquisition integration, preliminary valuation estimates, goodwill, acquired intangible assets and potential earn-outs create execution and accounting risks.
- Environmental remediation liabilities totaled approximately $22.9 million, and future adjustments could materially affect a period’s results or cash flows.
- Backlog is not equivalent to future revenue because customer orders may be canceled or deferred.
Most important facts for investors to verify
- Reconcile reported growth with acquisition contribution and organic growth, particularly the sustainability of commercial aftermarket demand.
- Assess post-acquisition leverage, required term-loan amortization, covenant compliance and available revolver capacity.
- Separate recurring operating performance from the $70.7 million refinancing charge and other acquisition-related adjustments included in EBITDA As Defined.
- Review the final purchase-price allocations, goodwill recoverability and amortization effects for McKechnie and Talley.
- Confirm completion and proceeds of the planned approximately $240 million fastener-business divestiture.
- Monitor the effect of variable interest rates, integration costs, environmental obligations and potential changes to backlog.