Why did net income decline in fiscal 2006 despite strong sales growth?

Net income fell 27.6% to $25.1 million mainly because of a one-time $48.6 million refinancing charge in June 2006. That charge covered a $25.6 million premium to redeem the 8 3/8% notes and a $22.9 million write-off of debt issuance costs. Operating performance improved, and excluding these one-time items EBITDA As Defined grew to $194.4 million.

How leveraged is TransDigm and how is its debt structured?

Total debt is $925 million, with $650 million in floating-rate term loans and $275 million in fixed 7 3/4% senior subordinated notes maturing in 2014. A $187 million interest rate swap at a fixed 7.63% rate covers part of the term loan, so the company's total debt is roughly 50% variable and 50% fixed. Covenants include a first-lien leverage test on the revolver, and failure to comply could trigger defaults.

What is the risk from the DOD pricing review?

The DOD Inspector General recommended that five divisions voluntarily refund $2.6 million for allegedly overpriced sole-source spare parts from fiscal 2002 to 2004. TransDigm disputes the report and believes its pricing is fair. The larger risk is that the Defense Logistics Agency may move these parts to cost-based Strategic Supplier Alliances or alternative sources, which could reduce revenue and margins on those government sales.

How concentrated is TransDigm's ownership and customer base?

Warburg Pincus, through TD Group LLC, beneficially owns about 70% of the common stock, giving it control over board elections and major transactions, including a blocking position on merger approvals. On the customer side, Honeywell (about 10%) and Aviall (about 9%) were the two largest customers in fiscal 2006, and the top ten accounted for about 48% of net sales.

What growth drivers and acquisitions are planned?

Growth is driven by rising production rates at Boeing and Airbus, recovery in the commercial aftermarket, and a steady acquisition program. Fiscal 2006 acquisitions included Electra-Motion and Sweeney for $27 million combined, and the company closed the CDA InterCorp acquisition for about $45 million in October 2006, after the fiscal year end. Backlog rose to $251.3 million from $200.0 million, and management expects capital expenditures of about $15 million in fiscal 2007.

TDG 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed November 28, 2006. Cited figures are marked; the original filing is the authoritative source.

TransDigm Group (TDG) reported fiscal 2006 (year ended September 30, 2006) net sales of $435.2 million^a, up 16.3% from $374.3 million, with organic growth of about 10.7% driven by commercial aftermarket recovery and rising OEM production rates at Boeing and Airbus.

Net income fell 27.6% to $25.1 million^b, but this was driven by a one-time $48.6 million refinancing charge in June 2006. Excluding that charge and other one-time items, the company's EBITDA As Defined rose to $194.4 million, or 44.7% of net sales, and gross margin improved as cost of sales fell to 49.1% of sales from 50.8%. The balance sheet is now heavily leveraged.

Total debt is $925 million^c, consisting of a $650 million term loan, $275 million of 7 3/4% senior subordinated notes due 2014, and an undrawn $150 million revolver. Following the June 2006 refinancing, the company retired its 8 3/8% notes, the 12% promissory notes, and the TD Group loan facility. Roughly half of the term loan is hedged with a swap, and the company says it does not expect to pay regular dividends.

Operating cash flow was only $3.1 million^d in fiscal 2006, reflecting about $63 million of accrued interest payments and $26 million of deferred compensation distributions, but management expects internally generated cash to be sufficient through fiscal 2007. The main investor concerns are concentrated ownership by Warburg Pincus (about 70%, which also makes TDG a controlled company exempt from certain NYSE governance rules), a DOD Inspector General pricing review that recommends a $2.6 million refund and may lead to cost-based Strategic Supplier Alliances, and goodwill and intangibles totaling roughly 77% of total assets. Acquisitions are an ongoing growth lever, with the CDA InterCorp deal for about $45 million closing in October 2006.

02—Key points

Key Highlights

Net sales rose 16.3% to $435.2 million in FY2006, with organic growth of 10.7%, led by commercial aftermarket recovery and higher OEM production rates at Boeing and Airbus.
Net income fell 27.6% to $25.1 million because of a one-time $48.6 million refinancing charge; EBITDA As Defined rose to $194.4 million (44.7% margin) from $164.2 million.
Total debt stands at $925 million after the June 2006 refinancing: a $650 million term loan, $275 million of 7 3/4% notes due 2014, and a $150 million undrawn revolver.
Roughly 60% of net sales come from aftermarket revenue, and about 75% from sole-source products, with over 90% from proprietary designs, supporting high-margin recurring revenue.
Operating cash flow fell to $3.1 million from $80.7 million, mainly from one-time interest and deferred compensation payments; capital expenditures were $8.3 million.
Warburg Pincus controls about 70% of the stock, making TDG a 'controlled company' that has opted out of certain NYSE governance requirements.
A DOD Inspector General pricing review of five divisions recommends a $2.6 million voluntary refund and may push sole-source spare parts toward cost-based Strategic Supplier Alliances.

03—Questions

Frequently Asked Questions

Why did net income decline in fiscal 2006 despite strong sales growth?
Net income fell 27.6% to $25.1 million mainly because of a one-time $48.6 million refinancing charge in June 2006. That charge covered a $25.6 million premium to redeem the 8 3/8% notes and a $22.9 million write-off of debt issuance costs. Operating performance improved, and excluding these one-time items EBITDA As Defined grew to $194.4 million.
How leveraged is TransDigm and how is its debt structured?
Total debt is $925 million, with $650 million in floating-rate term loans and $275 million in fixed 7 3/4% senior subordinated notes maturing in 2014. A $187 million interest rate swap at a fixed 7.63% rate covers part of the term loan, so the company's total debt is roughly 50% variable and 50% fixed. Covenants include a first-lien leverage test on the revolver, and failure to comply could trigger defaults.
What is the risk from the DOD pricing review?
The DOD Inspector General recommended that five divisions voluntarily refund $2.6 million for allegedly overpriced sole-source spare parts from fiscal 2002 to 2004. TransDigm disputes the report and believes its pricing is fair. The larger risk is that the Defense Logistics Agency may move these parts to cost-based Strategic Supplier Alliances or alternative sources, which could reduce revenue and margins on those government sales.
How concentrated is TransDigm's ownership and customer base?
Warburg Pincus, through TD Group LLC, beneficially owns about 70% of the common stock, giving it control over board elections and major transactions, including a blocking position on merger approvals. On the customer side, Honeywell (about 10%) and Aviall (about 9%) were the two largest customers in fiscal 2006, and the top ten accounted for about 48% of net sales.
What growth drivers and acquisitions are planned?
Growth is driven by rising production rates at Boeing and Airbus, recovery in the commercial aftermarket, and a steady acquisition program. Fiscal 2006 acquisitions included Electra-Motion and Sweeney for $27 million combined, and the company closed the CDA InterCorp acquisition for about $45 million in October 2006, after the fiscal year end. Backlog rose to $251.3 million from $200.0 million, and management expects capital expenditures of about $15 million in fiscal 2007.

04—Continue

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