01—Abstract
Summary
Summary of the 10-K filed November 21, 2007. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) reported fiscal 2007 (year ended September 30, 2007) results that show a company with strong top-line growth, substantially higher profitability, and a much more leveraged balance sheet following its acquisitions.
Net sales rose 36.2% to $592.8 milliona, of which roughly $61.5 million (14.1%) was organic growth and the remainder came from acquisitions, most notably ATI (acquired February 2007 for $430.1 million) and CDA and Bruce Industries. Operating income grew 97.9% to $233.8 million, though the prior year included a $48.6 million one-time refinancing charge, so the comparison is flattered. Net income rose to $88.6 million ($1.83 diluted EPS) from $25.1 million.
EBITDA was $257.8 millionb (43.5% margin) and EBITDA As Defined, the company's covenant-based metric, was $274.7 million (46.3%). The company's aftermarket exposure is a key strength. Management estimates that about 60% of fiscal 2007 sales came from aftermarket work, that over 90% of sales came from proprietary products, and that about 75% came from products where TransDigm is the sole source.
These characteristics support the higher, more stable margins the company describes. Customer concentration is significant, however: Boeing (including Aviall) accounted for about 16%c of sales and Honeywell for about 11%, and the top ten customers represented about 51%. The main investor consideration is leverage.
Total indebtedness was approximately $1.36 billiond, about 73.6% of total capitalization, and interest expense was $91.8 million. Most of the senior secured debt floats, so a one-percentage-point rate increase would add roughly $7.8 million in annual interest, partly offset by an interest rate swap. Goodwill ($1.25 billion) and intangibles together make up roughly 76% of total assets, which creates impairment risk.
The company also faces a DOD Inspector General pricing review covering five subsidiaries, which recommended a voluntary refund of about $2.6 million. Management does not plan regular dividends, and Warburg Pincus controls about 45% of the stock.
02—Key points
Key Highlights
- Net sales grew 36.2% to $592.8 million in FY2007; organic growth was 14.1% ($61.5 million), with the balance from acquisitions including ATI, CDA and Bruce Industries.
- Net income rose to $88.6 million ($1.83 diluted EPS) from $25.1 million, though FY2006 included a $48.6 million one-time refinancing charge that flatters the comparison.
- Operating income increased 97.9% to $233.8 million; EBITDA was $257.8 million (43.5% margin) and EBITDA As Defined was $274.7 million (46.3% margin).
- Approximately 60% of net sales came from aftermarket revenue, over 90% from proprietary designs, and about 75% from sole-source products, supporting higher and more stable margins.
- Total debt was about $1.36 billion, or 73.6% of total capitalization, with $780 million of floating-rate term loans; a 1% rate increase would add about $7.8 million in annual interest.
- Customer concentration is high: Boeing (including Aviall) was about 16% of sales, Honeywell about 11%, and the top ten customers about 51%.
- Goodwill of $1.25 billion and intangibles of $335 million together represent roughly 76% of total assets, so impairment risk is material; a DOD Inspector General pricing review of five subsidiaries is ongoing.
03—Questions
Frequently Asked Questions
How much of TransDigm's growth in fiscal 2007 came from acquisitions versus the existing business?
Net sales grew $157.6 million, or 36.2%. Organic growth excluding acquisitions was $61.5 million (14.1%), driven by commercial aftermarket sales (+$34.9 million), commercial OEM sales (+$14.3 million) and military sales (+$11.8 million). The remaining $96.1 million came from acquisitions, primarily ATI, CDA and Bruce Industries in fiscal 2007 and Electra-Motion and Sweeney in fiscal 2006.
Is TransDigm's leverage a concern for investors?
Yes. Total indebtedness of about $1.36 billion represents roughly 73.6% of total capitalization, and interest expense was $91.8 million. Debt service absorbs a large share of cash flow, and the senior secured facility carries floating rates. Management hedged $170 million of the term loan with an interest rate swap, which steps down to $150 million in September 2008. The company's EBITDA-based covenant compliance is a material term, and a default could trigger acceleration of the debt.
What drove the large improvement in net income?
Net income rose to $88.6 million from $25.1 million, largely because fiscal 2006 included a $48.6 million one-time refinancing charge. Operating income also rose from higher sales and gross margin improvement, with cost of sales falling to 47.9% of sales from 49.1%, partly due to product mix and productivity gains. Investors should note that the prior-year comparison is distorted by these one-time items.
What are the main risks to the business highlighted in the filing?
The main risks include high customer concentration (Boeing about 16% and Honeywell about 11% of sales), exposure to cyclical airline traffic and fleet size, U.S. defense budget dependence, and a DOD Inspector General pricing review that recommended a voluntary refund of about $2.6 million and could lead to cost-based pricing or alternative suppliers. Goodwill and intangibles are about 76% of total assets, so any impairment would be significant. Product liability exposure from component failures is also a risk.
Will TransDigm pay dividends, and who controls the company?
TransDigm does not expect to pay regular cash dividends in the foreseeable future, and its debt agreements restrict distributions. Warburg Pincus, through TD Group LLC, beneficially owns about 45% of the outstanding common stock and has board representation, so it can significantly influence matters requiring stockholder approval. Since the May 2007 secondary offering, TD Group is no longer a 'controlled company' under NYSE rules.
04—Continue