01—Abstract
Summary
Summary of the 10-K/A filed February 10, 2010. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group Inc. (TDG) filed this Form 10-K/A (Amendment No. 1) for fiscal year ended September 30, 2009, on February 10, 2010, to restate its basic and diluted earnings per share (EPS) and weighted-average share counts.
The restatement was driven by a change from the treasury stock method to the two-class method, under which vested stock options with non-forfeitable dividend equivalent rights are treated as participating securities. The restatement does not change reported net income, net sales, or the balance sheet. It lowers restated diluted EPS for fiscal 2009 to $3.10a from $3.23 as originally reported, with the denominator rising to 52.5 million shares from 50.5 million.
Management also concluded that internal control over financial reporting was not effective as of September 30, 2009, because of a material weakness in applying the two-class method. The company says that weakness has since been remediated. Operationally, the fiscal 2009 results were solid.
Net sales rose 6.7% to $761.6 millionb, gross profit reached $429.3 million (a 56.4% margin), operating income grew 12.1% to $335.4 million, and net income increased 22.4% to $162.9 million. Growth came largely from acquisitions, including Acme Aerospace, Aircraft Parts Corporation, CEF Industries, and the Woodward HRT and Unison product lines. EBITDA As Defined, the company's covenant-based non-GAAP measure, was $374.7 million.
Operating cash flow was $197.1 millionc. Leverage remains high: total debt was $1.357 billion against $819 million of stockholders' equity, and the consolidated leverage ratio was approximately 3.5x EBITDA As Defined. For investors, the key points are the solid earnings momentum and the restated per-share figures, which are lower but do not affect cash flow or the underlying business.
The material weakness disclosure is a governance concern worth monitoring. Subsequent events are also important: in October 2009 the company issued $425 milliond of additional 7 3/4% senior subordinated notes and paid a special dividend of $7.65 per share (about $374.6 million), plus roughly $30.3 million in dividend equivalent payments to option holders. That recapitalization increases leverage and is a central consideration for equity holders.
02—Key points
Key Highlights
- EPS restated under the two-class method: fiscal 2009 basic and diluted EPS fell to $3.10 from originally reported $3.36 basic and $3.23 diluted, with the share denominator increased to 52.5 million from 50.5 million. Net income is unchanged at $162.9 million.
- Material weakness: management revised its ICFR conclusion to 'not effective' as of September 30, 2009, solely due to the two-class EPS calculation error. The company states this has been remediated, and disclosure controls were also deemed not effective.
- Strong fiscal 2009 growth: net sales rose 6.7% to $761.6 million, operating income rose 12.1% to $335.4 million, and net income rose 22.4% to $162.9 million.
- Margins remain high: gross margin was 56.4% in fiscal 2009, and EBITDA As Defined was $374.7 million, up about 12.5% year over year.
- Acquisition-driven expansion: 2009 acquisitions included Acme Aerospace (about $40.7M), Aircraft Parts Corp (about $66.9M), and the Woodward HRT product line (about $48M), with additional acquisitions in 2008 including CEF Industries and the Unison product line.
- Leverage and capital structure: total debt was $1.357 billion at September 30, 2009, the consolidated leverage ratio was about 3.5x, and an October 2009 subsequent event added $425M of 7 3/4% notes to fund a $7.65/share special dividend (about $374.6M).
- Cash generation: operating cash flow was $197.1 million, capital expenditures were $13.2 million, and year-end cash was $190.2 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, TransDigm Group kept $0.21.
- Revenue$761.6M100.0%
- Cost of revenue−$332.2M43.6%
- Gross profit$429.3M56.4%
- Operating costs−$93.9M12.3%
- Operating income$335.4M44.0%
- Interest, other & tax−$172.5M22.7%
- Net income$162.9M21.4%
Where FY2009 revenue went
$761.6M- Cost of revenue: $332.2M, 44% of revenue
- Interest, other & tax: $172.5M, 23% of revenue
- Net income: $162.9M, 21% of revenue
- R&D: $12.6M, 1.7% of revenue
- SG&A: $80.0M, 11% of revenue
Kept 21% as net incomeR&D $12.6M · 1.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-K/AFY2009filed February 10, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $761.55M$713.71M | +6.7% |
| Cost of Revenue | $332.21M$327.78M | +1.4% |
| Gross Profit | $429.35M$385.93M | +11.2% |
| R&D Expenses | $12.60M— | — |
| SG&A Expenses | $80.02M$74.65M | +7.2% |
| Operating Expenses | $93.95M$86.65M | +8.4% |
| Operating Income | $335.40M$299.28M | +12.1% |
| Net Income | $162.90M$133.13M | +22.4% |
| EPS (Basic) | $3.10— | — |
05—Questions
Frequently Asked Questions
Why did TransDigm restate its earnings per share if net income didn't change?
The company previously used the treasury stock method to account for in-the-money stock options in its EPS calculation. Under the two-class method, vested options with non-forfeitable dividend equivalent rights are 'participating securities' and must be included in the denominator. This increases the share count (to 52.5 million from 50.5 million for fiscal 2009) and lowers EPS, while net income, revenue, and cash flow are unaffected.
What does the material weakness mean for investors?
Management concluded that internal control over financial reporting was not effective as of September 30, 2009, because the EPS calculation was not correctly applied under the two-class method. The auditor's opinion on internal control was revised to adverse. The company states the issue has been remediated through a new review process for identifying participating securities. Investors should consider whether the control environment is reliable and whether further restatements are possible.
How much debt does TransDigm carry and how does it affect the equity story?
Total debt was about $1.357 billion at September 30, 2009, consisting of $780 million in term loans and $575 million in 7 3/4% senior subordinated notes, plus a premium. The company was in covenant compliance, with a consolidated leverage ratio of about 3.5x. In October 2009 it issued another $425 million of notes at a discount and used the proceeds to fund a $7.65 per share special dividend, which increases leverage and reduces the cushion for future acquisitions or downturns.
What drove the fiscal 2009 earnings growth?
Net income rose 22.4% to $162.9 million on 6.7% sales growth to $761.6 million, with operating income up 12.1% to $335.4 million. Growth reflected both acquisitions completed in 2008 and 2009 and improved operating margins, with gross margin at 56.4%. Interest expense fell about 9% to $84.4 million, which also helped net income.
Is the restatement a sign of deeper financial problems?
The financial restatement appears to be limited to the EPS denominator and does not alter reported revenue, net income, balance sheet totals, or cash flows. The filing describes the cause as a methodology change in EPS calculation rather than an accounting error in the underlying business results. Investors should still note the control weakness and the lower restated EPS when comparing performance over time.
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