01—Abstract
Summary
Summary of the 10-K filed November 18, 2011. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (NYSE: TDG) reported fiscal 2011 (year ended September 30, 2011) net sales of $1,206.0 milliona, up 45.7% from $827.7 million, with net income of $172.1 million (EPS $3.17, including $0.37 from discontinued operations).
Roughly $378 millionb of growth came from acquisitions: $276.2 million from acquired businesses (McKechnie Aerospace, Talley Actuation, Schneller Holdings in fiscal 2011, plus Dukes and Semco in fiscal 2010) and about $102 million, or 12.3%, from organic growth. Gross margin fell to 54.8% from 57.2%, largely because acquisitions carried purchase accounting and integration costs and diluted margins by roughly 4 percentage points. Commercial aftermarket sales rose 22.1% organically, and commercial OEM sales rose 12.0%.
Management says about 56% of sales came from aftermarket and that over 90% of sales came from proprietary products. The balance sheet changed substantially. Total assets rose to $4.51 billionc from $2.68 billion, driven by goodwill of $2.60 billion and the McKechnie acquisition, which cost about $1.27 billion.
Total debt reached $3.14 billiond, about 79.5% of total capitalization, and the debt-to-EBITDA-As-Defined leverage ratio was about 5.3x. In December 2010 the company refinanced its debt with $1.6 billion of 7 3/4% senior subordinated notes due 2018 and a $1.55 billion term loan. Interest expense rose 65% to $185.3 million, and a $72.5 million refinancing charge reduced pre-tax income.
Operating cash flow was $260.6 million. Cash rose to $376.2 million, and $237 million remained available on the revolver. Management expects fiscal 2012 capital expenditures of $25 to $30 million.
The key investor considerations are the heavy leverage, the reliance on acquisitions for growth (with a $737 million backlog and an $84 million Harco Laboratories acquisition pending), exposure to defense budgets and airline cycles, and the concentration of sales with Boeing (about 14%). The company also disclosed that it excluded McKechnie Aerospace from its internal control assessment and is still integrating its systems. A new $100 million share repurchase authorization was announced, but no shares had been bought as of year-end.
02—Key points
Key Highlights
- Net sales grew 45.7% to $1,206.0 million, with about 33 percentage points from acquisitions and 12.3% organic growth, driven by commercial aftermarket sales up 22.1%.
- Gross margin declined to 54.8% from 57.2% because of acquisition-related purchase accounting and integration costs, which diluted margin by about 4 points.
- Net income rose 5.3% to $172.1 million, or $3.17 per share; the 2011 result included a $72.5 million refinancing charge and $19.9 million of net income from discontinued operations.
- Total debt rose to $3.14 billion (about 79.5% of capitalization), with leverage of about 5.3x debt to EBITDA As Defined and a weighted average borrowing rate of about 5.9%.
- Approximately 56% of net sales came from aftermarket, and over 90% came from proprietary products. About 75% came from sole-source positions, supporting pricing and margin durability.
- Goodwill of $2.6 billion and intangibles of $828 million make up roughly 76% of total assets, creating impairment risk if performance weakens.
- Backlog increased to $737 million from $467 million, and the pending $84 million Harco Laboratories acquisition extends the company's acquisition-led growth strategy.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, TransDigm Group kept $0.14.
- Revenue$1.21B100.0%
- Cost of revenue−$544.8M45.2%
- Gross profit$661.2M54.8%
- Operating costs−$174.1M14.4%
- Operating income$487.1M40.4%
- Interest, other & tax−$315.0M26.1%
- Net income$172.1M14.3%
Where FY2011 revenue went
$1.21B- Cost of revenue: $544.8M, 45% of revenue
- Interest, other & tax: $315.0M, 26% of revenue
- Net income: $172.1M, 14% of revenue
- R&D: $19.3M, 1.6% of revenue
- SG&A: $133.7M, 11% of revenue
- Other operating costs: $21.0M, 1.7% of revenue
Kept 14% as net incomeR&D $19.3M · 1.6%Other operating costs $21.0M · 1.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed November 18, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $1.21B$827.65M | +45.7% |
| Cost of Revenue | $544.84M$354.59M | +53.7% |
| Gross Profit | $661.18M$473.07M | +39.8% |
| R&D Expenses | $19.30M$13.90M | +38.8% |
| SG&A Expenses | $133.71M$94.92M | +40.9% |
| Operating Income | $487.13M$363.07M | +34.2% |
| Net Income | $172.13M$163.44M | +5.3% |
| EPS (Basic) | $3.17$2.52 | +25.8% |
| Shares Outstanding (Basic) | 53.33M52.92M | +0.8% |
05—Questions
Frequently Asked Questions
How much of TransDigm's fiscal 2011 revenue growth came from acquisitions versus the core business?
Net sales rose $378.4 million (45.7%) to $1,206.0 million. Acquisitions (McKechnie Aerospace, Talley Actuation, Schneller Holdings, and the full-year effect of Dukes and Semco) contributed $276.2 million, or about 33.4%. Organic growth contributed $102.2 million, or 12.3%, led by commercial aftermarket (up $73.7 million, or 22.1%) and commercial OEM (up $22.2 million, or 12.0%). Defense sales were roughly flat, up $1.6 million.
Why did gross margin decline, and is the decline likely to persist?
Gross margin fell to 54.8% from 57.2%. Management attributes about 4 points of the decline to acquisitions, which carried inventory purchase accounting adjustments of $18.1 million and integration costs. Acquired businesses also tend to carry different product mix and lower margins. As those costs roll off and McKechnie is integrated, margins could recover, but the filing does not provide a quantified outlook.
How leveraged is TransDigm, and what are the main risks from its debt?
Total debt was $3.14 billion at September 30, 2011, about 79.5% of total capitalization, with a leverage ratio of about 5.3x EBITDA As Defined. About $3.1 billion of the debt is fixed-rate senior subordinated notes or floating-rate term loans; roughly $1.54 billion is floating rate, and a one-point rate increase would add about $15.4 million in annual interest. Three swaps fix the rate on $353 million from December 2012 through June 2015 at 5.17%. The credit agreements contain restrictive covenants, and a default could allow lenders to accelerate repayment.
What is the outlook for TransDigm's key end markets?
Management expects continued RPM growth in commercial aftermarket, a recovery in business jet OEM production, and increased large commercial OEM sales tied to Boeing and Airbus order announcements. Defense sales are expected to be flat to modestly down from current high levels as U.S. military spending normalizes. Boeing accounted for about 14% of sales, and the top ten customers accounted for about 43%.
Does TransDigm pay dividends or have a buyback program, and what are the constraints?
The company does not expect to pay regular dividends; the last cash dividend was a $7.65 special dividend in October 2009, funded by debt. The board authorized a $100 million share repurchase program in August 2011, but no shares had been repurchased as of September 30, 2011. Any future dividends or buybacks depend on board discretion and are limited by debt covenants, which restrict distributions to shareholders.
06—Continue