01—Abstract
Summary
Summary of the 10-K filed November 25, 2008. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) closed fiscal 2008 (year ended September 30, 2008) with net sales of $713.7 milliona, up 20.4% from $592.8 million, and net income of $133.1 million, up 50.2%.
Growth was a mix of organic (about 8.8% excluding acquisitions) and acquired sales from CEF, ATI, and Bruce Industries. Operating income rose 28% to $299.3 millionb, and EBITDA As Defined reached $333.1 million, or 46.7% of sales. Diluted EPS was $2.65, versus $1.83 in fiscal 2007.
Roughly 60% of sales came from aftermarket, about 90% from proprietary products, and about 75% from sole-source positions, which supports the company's high-margin, recurring revenue profile. The balance sheet is highly leveraged. Total debt was about $1,357 millionc, roughly 67.5% of total capitalization, with $780 million of floating-rate term loans and $575 million of 7 3/4% senior subordinated notes due 2014.
Interest rate swaps cover $450 milliond of the term loans. Operating cash flow of $189.6 million comfortably covered capex of $10.9 million and interest expense of $92.7 million, and cash rose to $159.1 million. Goodwill and intangibles together account for roughly 76% of total assets, which creates impairment risk.
The company also disclosed a $50 million buyback authorization in October 2008 and a pending DOD Inspector General pricing review. The outlook is more cautious. Management expects 2009 commercial OEM production may peak and decline, RPMs may be flat to modestly negative, and a Boeing strike will cost two to three months of fiscal 2009 commercial OEM output.
Defense demand is expected to grow modestly. Investors should weigh strong margins and cash generation against heavy debt, customer concentration (Boeing about 14% and Honeywell about 10% of sales), and cyclical exposure to airline activity.
02—Key points
Key Highlights
- Net sales rose 20.4% to $713.7 million, with about 8.8% organic growth, and net income rose 50.2% to $133.1 million.
- EBITDA As Defined of $333.1 million (46.7% margin) and operating income up 28% to $299.3 million reflect strong pricing power on proprietary, sole-source products.
- About 60% of net sales came from aftermarket, which carries higher and more stable gross margins than OEM sales.
- Total debt of about $1.36 billion equals roughly 67.5% of total capitalization, with $780 million floating-rate term loans partly hedged by $450 million of swaps.
- Operating cash flow rose to $189.6 million, and cash ended the year at $159.1 million, with $198.5 million of revolver capacity available.
- Acquisitions of CEF ($84.8 million) and Unison's magneto product line ($68.2 million) added products and roughly $34 million to backlog, which reached $417.8 million.
- Management flagged a likely 2009 peak in commercial OEM deliveries, a Boeing strike cost of two to three months of production, and a DOD pricing review involving five divisions with a $2.6 million refund recommendation.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, TransDigm Group kept $0.19.
- Revenue$713.7M100.0%
- Cost of revenue−$327.8M45.9%
- Gross profit$385.9M54.1%
- Operating costs−$86.7M12.1%
- Operating income$299.3M41.9%
- Interest, other & tax−$166.2M23.3%
- Net income$133.1M18.7%
Where FY2008 revenue went
$713.7M- Cost of revenue: $327.8M, 46% of revenue
- Interest, other & tax: $166.2M, 23% of revenue
- Net income: $133.1M, 19% of revenue
- SG&A: $74.7M, 10% of revenue
- Other operating costs: $12.0M, 1.7% of revenue
Kept 19% as net incomeOther operating costs $12.0M · 1.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed November 25, 2008Financial Statements
05—Questions
Frequently Asked Questions
How concentrated is TransDigm's customer base?
Boeing (including Aviall) accounted for about 14% of fiscal 2008 net sales and Honeywell about 10%, so the top two customers represented roughly 24%. The top ten customers represented about 46%. Components are used across a broad installed base of aircraft, which the company says limits dependence on any single airframe.
How much debt does TransDigm carry and how is it structured?
Total debt was about $1,357 million at September 30, 2008. It consisted of $780 million of term loans under the Senior Secured Credit Facility, maturing in June 2013 and floating-rate, plus $575 million of 7 3/4% senior subordinated notes due 2014. A $200 million revolver, of which $198.5 million was available, matures in June 2012. Swaps fix the rate on $450 million of the term loans through 2009 and 2011. A one-point rise in rates would add about $7.8 million of annual interest cost.
What risks does the recent 2009 outlook present?
Management expects commercial OEM production may peak in 2009 and then decline, that airline traffic (RPMs) may be flat to modestly negative in 2009, and that a Boeing strike will cut two to three months of fiscal 2009 commercial OEM output. Defense spending is expected to grow modestly. Because aftermarket demand is tied to flight hours and fleet activity, a sustained airline downturn could slow the high-margin aftermarket revenue that drives results.
Is there a material risk to the company's goodwill and intangible assets?
Goodwill was about $1,354.8 million and identifiable intangibles about $356.2 million, together roughly 76% of total assets of $2,255.8 million. Management tested for impairment at fiscal year-end and found none, but a significant decline in projected cash flows could require write-downs that would reduce reported earnings and equity.
What capital allocation steps has the company announced?
The company spent $154.2 million on acquisitions in fiscal 2008 and expects fiscal 2009 capex of $15 to $20 million. In October 2008 the Board authorized repurchases of up to $50 million of common stock. The company pays no regular dividend, and restrictive covenants in its debt agreements limit distributions. Future acquisitions may be funded with more debt.
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