01—Abstract
Summary
Summary of the 10-K filed November 16, 2012. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (NYSE: TDG) reported fiscal 2012 (year ended September 30, 2012) record results, with net sales up 41% to $1,700.2 milliona, driven by about $352 million of acquisition sales (AmSafe, Harco, Aero-Instruments) and 11.8% organic growth.
Gross margin expanded to 55.6% from 54.8%, and income from continuing operations more than doubled to $325.0 millionb, or $5.97 per share. EBITDA As Defined rose to $809.0 million from $589.9 million, and operating cash flow reached $413.9 million. Backlog grew to $833 million from $737 million.
The balance sheet is highly leveraged. Total indebtedness was $3,619.1 millionc, about 74.8% of total capitalization, and the company cites a debt leverage ratio of roughly 4.5x. Most of the debt is floating-rate term loans, partly hedged by $353 million of forward-starting swaps fixing rates at 5.17%.
Goodwill and intangibles together represent about 77% of total assets, which raises impairment risk if returns fall short of expectations. Subsequent to year-end, TransDigm amended its credit facility to add a $150 milliond term loan and issued $550 million of 5 1/2% senior subordinated notes due 2020. Those proceeds, plus existing cash, fund a special cash dividend of $12.85 per share (about $663.5 million, paid November 2012), with dividend equivalent payments of about $36.0 million.
The company also agreed to buy the Goodrich Pump & Engine Control Systems business for about $236 million. Investors should weigh strong growth and margins against elevated leverage, customer concentration (Boeing 13% of sales, top ten customers 43%), and dependence on acquisitions for growth.
02—Key points
Key Highlights
- Net sales rose 41.0% to $1,700.2 million, with organic growth of 11.8% and acquisitions contributing $351.9 million
- Gross margin improved to 55.6% (from 54.8%); net income rose 88.8% to $325.0 million, or $5.97 per diluted share
- EBITDA As Defined increased 37% to $809.0 million; operating cash flow was $413.9 million, up from $260.4 million
- Total debt of $3,619.1 million equals about 74.8% of total capitalization, with a leverage ratio of roughly 4.5x
- Aftermarket represents about 55% of sales, and about 75% of sales come from sole-source products, supporting revenue durability
- Backlog increased to $833 million from $737 million, aided by acquisitions of about $62 million
- Post-year-end: $663.5 million special dividend of $12.85 per share funded by a $150 million term loan add-on and $550 million of 5 1/2% notes; $236 million GPECS acquisition agreed
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, TransDigm Group kept $0.19.
- Revenue$1.70B100.0%
- Cost of revenue−$754.5M44.4%
- Gross profit$945.7M55.6%
- Operating costs−$245.9M14.5%
- Operating income$699.8M41.2%
- Interest, other & tax−$374.8M22.0%
- Net income$325.0M19.1%
Where FY2012 revenue went
$1.70B- Cost of revenue: $754.5M, 44% of revenue
- Interest, other & tax: $374.8M, 22% of revenue
- Net income: $325.0M, 19% of revenue
- R&D: $27.9M, 1.6% of revenue
- SG&A: $201.7M, 12% of revenue
- Other operating costs: $16.3M, 1.0% of revenue
Kept 19% as net incomeR&D $27.9M · 1.6%Other operating costs $16.3M · 1.0%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed November 16, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $1.70B$1.21B | +41.0% |
| Cost of Revenue | $754.49M$544.84M | +38.5% |
| Gross Profit | $945.72M$661.18M | +43.0% |
| R&D Expenses | $27.90M$19.30M | +44.6% |
| SG&A Expenses | $201.71M$133.71M | +50.9% |
| Operating Income | $699.77M$487.13M | +43.7% |
| Net Income | $324.97M$172.13M | +88.8% |
| EPS (Basic) | $5.97$3.17 | +88.3% |
| Shares Outstanding (Basic) | 53.88M53.33M | +1.0% |
05—Questions
Frequently Asked Questions
Why did TransDigm's revenue and earnings grow so sharply in fiscal 2012?
Most of the growth came from acquisitions completed in fiscal 2011 and 2012, most notably McKechnie Aerospace, Talley Actuation, Schneller, Harco, AmSafe, and Aero-Instruments. Acquisitions contributed about $352 million of the $494 million increase in net sales. Organic growth of 11.8% was led by commercial OEM sales (up 23.6%), commercial aftermarket (up 6.2%), and defense (up 8.9%). Earnings also benefited from lower interest-related refinancing charges compared with fiscal 2011.
How much debt does TransDigm carry, and what are the main risks?
Total indebtedness was $3,619.1 million at September 30, 2012, of which about $2.02 billion was floating-rate term loans and $1.6 billion was 7 3/4% senior subordinated notes due 2018. Subsequent to year-end, another $150 million of term loans and $550 million of 5 1/2% notes were added, increasing debt further. Rising interest rates would raise interest expense, since a one-point increase would add about $20 million annually on the unhedged term loans. Covenant breaches could allow lenders to accelerate repayment and proceed against collateral, so the leverage level is a central risk.
What is the special dividend, and why is it relevant to investors?
On October 15, 2012, the board declared a special cash dividend of $12.85 per share, totaling about $663.5 million, paid in November 2012, plus about $36.0 million in dividend equivalent payments on options. It is a one-time return of capital, not a recurring dividend; management states it does not expect to pay regular dividends. The payment is financed by new debt, so it increases leverage. Its effect on shareholders depends on whether the company can keep generating cash to service its higher debt load.
How concentrated is TransDigm's customer base, and how dependent is it on aftermarket sales?
Boeing, including its Aviall distribution subsidiary, accounted for about 13% of fiscal 2012 net sales, and the top ten customers accounted for about 43%. About 55% of sales came from aftermarket products, which the company says have historically carried higher and more stable gross margins than OEM sales. Most aftermarket customers have no long-term contracts or minimum purchase commitments, so volumes can change with airline activity and fleet utilization.
What are the main growth drivers and the key acquisition under way?
Growth drivers include the commercial aftermarket tied to rising revenue passenger miles, increased large commercial OEM production by Boeing and Airbus, and continued defense demand, though management expects military sales to decline modestly from historic highs. The company's strategy relies on acquiring proprietary aerospace component businesses. Its pending acquisition is the Goodrich Pump & Engine Control Systems business for about $236 million, expected to close around late 2012 or early 2013 subject to DOJ and European Commission approval. Investors should note that the company has said its growth depends on finding acquisitions at acceptable prices and integrating them effectively.
06—Continue