01—Abstract
Summary
Summary of the 10-K filed November 15, 2010. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) closed fiscal 2010 (ended September 30, 2010) with net sales of $827.7 milliona, up 8.7% from $761.6 million, and net income of $163.4 million, roughly flat versus $162.9 million a year earlier.
Gross margin expanded to 57.2% from 56.4%, and operating income rose 8.2% to $363.1 millionb. Acquisitions (Dukes Aerospace, Semco, and prior deals) contributed $73.8 million of sales, while organic sales declined 1.0%, driven by a $18.7 million drop in business-jet OEM sales partly offset by a return to growth in commercial aftermarket and defense. Interest expense rose 33% to $112.2 million following the October 2009 issuance of $425 million of 7 3/4% senior subordinated notes, which funded a $7.65 per share special dividend (about $405 million including dividend equivalents).
The balance sheet is considerably more leveraged. Total debt reached $1.77 billionc, about 75% of total capitalization, and stockholders' equity fell to $593 million from $819 million because of the special dividend. Management reports a debt leverage ratio of about 4.3x.
Cash flow from operations was $197.3 milliond, and capital expenditures were $12.9 million. Goodwill and intangibles total roughly $1.97 billion, about 74% of total assets, which creates impairment risk if returns fall short. The most consequential subsequent event is the September 25, 2010 agreement to acquire McKechnie Aerospace for about $1,265 million in cash on a cash-free, debt-free basis.
The company expects to add about $1.3 billion of debt, pushing pro forma leverage to roughly 84% of capitalization. Closing is subject to regulatory approvals and was expected before calendar year-end 2010. Investors should weigh the growth and aftermarket-mix benefits of this deal against the step-up in leverage and integration risk.
02—Key points
Key Highlights
- Net sales rose 8.7% to $827.7M, with acquisitions contributing $73.8M; organic sales fell 1.0%.
- Gross margin improved to 57.2% (from 56.4%), and operating income grew 8.2% to $363.1M.
- Net income was $163.4M (EPS $2.52 after two-class allocation), roughly flat year over year, as interest expense rose 33% to $112.2M.
- Total debt rose to $1.77B (about 75% of capitalization) after the $425M notes issuance that funded a $7.65/share special dividend.
- Stockholders' equity declined to $593M from $819M, reflecting the dividend and dividend equivalents.
- Pending $1.265B cash acquisition of McKechnie Aerospace would add roughly $1.3B of debt, lifting pro forma leverage to about 84% of capitalization.
- Backlog increased to $467M from $402M, and about 60% of sales were aftermarket, which carries higher and more stable margins.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, TransDigm Group kept $0.20.
- Revenue$827.7M100.0%
- Cost of revenue−$354.6M42.8%
- Gross profit$473.1M57.2%
- Operating costs−$110.0M13.3%
- Operating income$363.1M43.9%
- Interest, other & tax−$199.6M24.1%
- Net income$163.4M19.7%
Where FY2010 revenue went
$827.7M- Cost of revenue: $354.6M, 43% of revenue
- Interest, other & tax: $199.6M, 24% of revenue
- Net income: $163.4M, 20% of revenue
- R&D: $13.9M, 1.7% of revenue
- SG&A: $94.9M, 11% of revenue
Kept 20% as net incomeR&D $13.9M · 1.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed November 15, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $827.65M$761.55M | +8.7% |
| Cost of Revenue | $354.59M$332.21M | +6.7% |
| Gross Profit | $473.07M$429.35M | +10.2% |
| R&D Expenses | $13.90M$12.60M | +10.3% |
| SG&A Expenses | $94.92M$80.02M | +18.6% |
| Operating Expenses | $110.00M$93.95M | +17.1% |
| Operating Income | $363.07M$335.40M | +8.2% |
| Net Income | $163.44M$162.90M | +0.3% |
| EPS (Basic) | $2.52$3.10 | −18.7% |
| Shares Outstanding (Basic) | 52.92M— | — |
05—Questions
Frequently Asked Questions
Why did TransDigm's interest expense and debt rise so sharply in fiscal 2010?
In October 2009 the company issued $425 million of 7 3/4% senior subordinated notes and used the proceeds to fund a $7.65 per share special dividend and related dividend equivalent payments. Total debt increased to about $1.77 billion, and net interest expense rose 33% to $112.2 million.
What is the McKechnie acquisition and how would it change the company's financial profile?
TransDigm agreed on September 25, 2010 to buy McKechnie Aerospace for about $1,265 million in cash, cash-free and debt-free. Management expects to add about $1.3 billion of debt, which would raise indebtedness to roughly 84% of total capitalization on a pro forma basis. The deal is subject to regulatory approval and is not guaranteed to close.
How dependent is TransDigm on a few customers and on commercial aerospace cycles?
Boeing (including Aviall) accounted for about 14% of fiscal 2010 net sales, and the top ten customers represented about 48%. Business-jet OEM sales fell sharply in the downturn, and the company notes that roughly 20% of sales come from OEM manufacturers, which are historically cyclical. Aftermarket sales (about 60% of the total) provide more stability.
Is the company's profitability and cash generation strong enough to service its debt?
Operating cash flow was $197.3 million in fiscal 2010 and EBITDA As Defined was $411.6 million, supporting interest coverage of roughly 3.6x on EBITDA. Management reports that its leverage covenant was met, with a Consolidated Leverage Ratio of about 4.2x and no mandatory excess cash flow prepayment required. However, the higher debt load after McKechnie would substantially reduce the financial cushion.
06—Continue