01—Abstract
Summary
Summary of the 10-K filed November 15, 2013. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) reported fiscal 2013 (year ended September 30, 2013) net sales of $1,924.4 milliona, up 13.2% from $1,700.2 million, with organic sales growth of 3.5% and the remainder from acquisitions (Whippany Actuation, Arkwin, Aerosonic in fiscal 2013 and AmSafe, Harco, Aero-Instruments in fiscal 2012).
Gross margin declined to 54.5% from 55.6%, and income from continuing operations fell 6.8% to $302.8 millionb. Diluted EPS dropped to $2.39 from $5.97, but this comparison is distorted by the $3.11 per share dividend equivalent charge against the numerator and the prior-year level; net income was $302.8 million. Selling and administrative expenses rose 26.2%, driven by acquisition costs and roughly $21 million of accelerated stock compensation from the June 2013 market sweep provision.
The most important development for investors is the capital structure shift. TransDigm paid two special cash dividends totaling $34.85c per share ($664.3 million in October 2012 and $1,155.8 million in July 2013, about $1.99 billion in total dividend payments), funded by new debt. Total indebtedness rose to approximately $5.73 billion from $3.62 billion, and stockholders' equity turned to a deficit of $(336.4) million.
Management reports a debt leverage ratio of about 6.4x EBITDA As Defined ($900.3 milliond), and interest expense rose 27.7% to $270.7 million. Roughly 106% of total capitalization is now debt, and the company states it does not plan regular dividends, so future special dividends remain at board discretion and subject to debt covenants. Offsetting these concerns, the business profile remains strong: about 53% of sales come from aftermarket, roughly 90% from proprietary products, and about three-quarters from sole-source products.
Backlog grew to $1,081 million from $833 million, and management expects fiscal 2014 capital expenditures of $40-45 million. Investors should weigh the attractive aftermarket economics against the high leverage, floating-rate exposure (partly hedged), and dependence on acquisitions for growth.
02—Key points
Key Highlights
- Net sales rose 13.2% to $1,924.4 million; organic growth was 3.5% and acquisitions contributed $184.1 million.
- Gross margin declined to 54.5% from 55.6%, partly due to unfavorable OEM versus aftermarket mix and lower retroactive pricing adjustments.
- Income from continuing operations fell 6.8% to $302.8 million, weighed down by higher interest expense and $30.3 million of refinancing costs.
- Two special dividends totaling $34.85 per share (about $1.99 billion including dividend equivalents) were funded primarily with new debt, pushing total indebtedness to $5.73 billion.
- Stockholders' equity moved to a deficit of $(336.4) million, and debt leverage was about 6.4x EBITDA As Defined.
- About 53% of net sales came from aftermarket and about 90% from proprietary products, supporting durable, higher-margin revenue.
- Backlog increased to $1,081 million from $833 million, and the company completed three acquisitions in fiscal 2013 for roughly $483 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, TransDigm Group kept $0.16.
- Revenue$1.92B100.0%
- Cost of revenue−$874.8M45.5%
- Gross profit$1.05B54.5%
- Operating costs−$300.1M15.6%
- Operating income$749.5M38.9%
- Interest, other & tax−$446.7M23.2%
- Net income$302.8M15.7%
Where FY2013 revenue went
$1.92B- Cost of revenue: $874.8M, 45% of revenue
- Interest, other & tax: $446.7M, 23% of revenue
- Net income: $302.8M, 16% of revenue
- SG&A: $254.5M, 13% of revenue
- R&D: $32.1M, 1.7% of revenue
- Other operating costs: $13.5M, 0.7% of revenue
Kept 16% as net incomeSG&A $254.5M · 13%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed November 15, 2013Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $1.92B$1.70B | +13.2% |
| Cost of Revenue | $874.84M$754.49M | +16.0% |
| Gross Profit | $1.05B$945.72M | +11.0% |
| R&D Expenses | $32.10M$27.90M | +15.1% |
| SG&A Expenses | $254.47M$201.71M | +26.2% |
| Operating Income | $749.46M$699.77M | +7.1% |
| Net Income | $302.79M$324.97M | −6.8% |
| EPS (Basic) | $2.39$5.97 | −60.0% |
| Shares Outstanding (Basic) | 55.08M53.88M | +2.2% |
05—Questions
Frequently Asked Questions
Why did diluted EPS fall so sharply to $2.39 from $5.97?
The decline is largely due to a $171.2 million dividend equivalent payment charged against earnings available to common shareholders, which reduced it by $3.11 per share. Net income also fell 6.8%, driven by higher interest expense, refinancing costs, and about $16.6 million after-tax of accelerated stock compensation. The prior year also benefited from favorable retroactive pricing adjustments.
How much debt does TransDigm carry, and is it manageable?
Total indebtedness was about $5.73 billion at September 30, 2013, roughly 106% of total capitalization because of the dividends. Management reports a leverage ratio of about 6.4x EBITDA As Defined, which is within its historical range of 3.5x to 6.5x. Interest expense of $270.7 million covered by EBITDA of about $900 million implies coverage of roughly 3.3x, but the high leverage increases sensitivity to rate changes and economic downturns. About $3.08 billion of floating-rate term loans is partly hedged, with a hypothetical 1% rate increase adding roughly $30.8 million in annual interest.
Will TransDigm pay regular dividends going forward?
No. Management states it does not anticipate paying regular quarterly or annual cash dividends. Any future special dividends are at the board's discretion and depend on earnings, capital needs, and debt covenant restrictions. The company paid special dividends in October 2012 and July 2013 and cautions investors not to rely on special dividends recurring.
What drives TransDigm's business and how much of it is recurring?
TransDigm designs proprietary aerospace components with sole-source positions on about three-quarters of sales. Around 53% of fiscal 2013 sales came from aftermarket, which historically carries higher gross margins and more stable demand over aircraft lifecycles of roughly 30 years. Commercial OEM, aftermarket, and defense sales are the main channels, and Boeing accounted for about 12% of sales.
What are the key risks highlighted in the filing?
Key risks include cyclicality in airline traffic and OEM production, customer concentration (top ten customers were about 41% of sales), dependence on U.S. defense budgets, reliance on acquisitions for growth and the integration risk that comes with them, and the substantial debt load with covenant restrictions. The company also carries about $1.19 billion of intangible assets and $3.34 billion of goodwill, which could require write-downs if returns fall short.
06—Continue