01—Abstract
Summary
Summary of the 10-K filed November 14, 2014. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) closed fiscal 2014 (year ended September 30, 2014) with net sales of $2,372.9 milliona, up 23.3% from $1,924.4 million, of which roughly $292.5 million came from acquisitions (Airborne Global and Elektro-Metall Export) and the remainder from organic growth of about 8.1%.
Gross margin fell to 53.4% from 54.5%, largely because lower-margin acquired sales diluted the mix, while income from operations rose 23.8% to $927.8 millionb. Net income was $306.9 million, but it included $131.6 million of refinancing costs tied to the June 2014 redemption of the 7.75% 2018 Notes, and diluted EPS rose to $3.16 from $2.39 after participating-security dividend equivalents were deducted. The central investor issue is leverage.
In June 2014 the company issued $2.35 billionc of 6.0% (2022) and 6.5% (2024) senior subordinated notes and $825 million of Tranche D term loans to fund a $25.00 per share special dividend, following a $22.00 special dividend in July 2013. Total indebtedness reached about $7.47 billion, roughly 126% of total capitalization, and stockholders' deficit widened to $(1.56) billion. Management puts the debt-to-EBITDA As Defined ratio at about 7.0x, at the high end of its historical 3.5x to 7.0x range.
Most of the debt is floating-rate, though swaps cover a large share of the term loan. Interest expense rose 28% to $347.7 milliond. Operationally, the business remains highly aftermarket-driven, with about 55% of sales from aftermarket and about 90% from proprietary products, and the top ten customers contributing about 43% of sales.
Boeing alone accounted for about 13%. Backlog reached $1,195 million, up from $1,081 million, and the company repurchased $159.9 million of stock in fiscal 2014 under a new $250 million authorization announced after year end. Management expects fiscal 2015 capital expenditures of $60 to $65 million and says the Airborne and EME acquisitions, about 6% of assets and sales, were excluded from the internal control assessment.
02—Key points
Key Highlights
- Net sales rose 23.3% to $2,372.9 million, with about $292.5 million from acquisitions (Airborne, EME) and organic growth of about 8.1%.
- Income from operations grew 23.8% to $927.8 million, but gross margin contracted 110 bps to 53.4% as lower-margin acquired sales diluted the mix.
- Net income rose 1.4% to $306.9 million after $131.6 million of refinancing costs; diluted EPS was $3.16 versus $2.39.
- Total debt was about $7.47 billion (roughly 126% of total capitalization), and leverage was about 7.0x debt to EBITDA As Defined, the top of the company's historical range.
- The June 2014 $25.00 special dividend, funded with new debt, pushed stockholders' deficit to $(1.56) billion, and interest expense rose 28% to $347.7 million.
- About 55% of sales came from aftermarket, about 90% from proprietary products, and roughly three-quarters from sole-source products; the top ten customers accounted for about 43% of sales.
- Backlog increased to $1,195 million from $1,081 million, mostly from acquisitions, and the company repurchased $159.9 million of stock during the year under a new $250 million authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, TransDigm Group kept $0.13.
- Revenue$2.37B100.0%
- Cost of revenue−$1.11B46.6%
- Gross profit$1.27B53.4%
- Operating costs−$340.1M14.3%
- Operating income$927.8M39.1%
- Interest, other & tax−$620.9M26.2%
- Net income$306.9M12.9%
Where FY2014 revenue went
$2.37B- Cost of revenue: $1.11B, 47% of revenue
- Interest, other & tax: $620.9M, 26% of revenue
- Net income: $306.9M, 13% of revenue
- R&D: $42.3M, 1.8% of revenue
- SG&A: $276.4M, 12% of revenue
- Other operating costs: $21.3M, 0.9% of revenue
Kept 13% as net incomeR&D $42.3M · 1.8%Other operating costs $21.3M · 0.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed November 14, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $2.37B$1.92B | +23.3% |
| Cost of Revenue | $1.11B$874.84M | +26.3% |
| Gross Profit | $1.27B$1.05B | +20.8% |
| R&D Expenses | $42.30M$32.10M | +31.8% |
| SG&A Expenses | $276.45M$254.47M | +8.6% |
| Operating Income | $927.82M$749.46M | +23.8% |
| Net Income | $306.91M$302.79M | +1.4% |
| EPS (Basic) | $3.16$2.39 | +32.2% |
| Shares Outstanding (Basic) | 56.99M55.08M | +3.5% |
05—Questions
Frequently Asked Questions
How much debt does TransDigm carry and how levered is it?
Total indebtedness was about $7.47 billion at September 30, 2014, roughly 126% of total capitalization after the debt-funded dividends. Management reports a debt to EBITDA As Defined ratio of about 7.0x, the high end of its 3.5x to 7.0x historical range. Most of the borrowings are floating-rate under the senior secured credit facility, although swaps fix about $2.1 billion of the term loan.
Why did gross margin decline in fiscal 2014?
Gross margin fell 1.1 percentage points to 53.4%. The acquired businesses (mainly Airborne and EME) generated gross profit of about 37% of their sales, below the company's typical level, which reduced consolidated gross margin by roughly 2 percentage points. Lower stock compensation and acquisition-related costs partly offset this.
What drove the large refinancing charge and what does it mean for future interest costs?
The $131.6 million charge consisted of a $121.1 million premium to redeem the 7.75% 2018 Notes and $10.5 million of debt issue cost write-offs. The company replaced those notes with 6.0% 2022 and 6.5% 2024 notes and added $825 million of Tranche D term loans, which lowers the blended cash rate to about 5.3% from 5.6%. Interest expense still rose because total borrowings grew substantially.
How concentrated is the customer base and what are the main end-market risks?
Boeing accounted for about 13% of fiscal 2014 net sales, and the top ten customers accounted for about 43%. Business jet manufacturers represented about 26% of sales. The company also depends on the U.S. defense budget (roughly 30% of sales), and most of its aftermarket business has no guaranteed minimum volume. Management assumes flat to modestly lower military sales in future years.
What is the capital allocation outlook?
The company says it does not expect regular dividends but may pay additional special dividends at board discretion, subject to debt covenants and Delaware surplus limits. It repurchased $159.9 million of stock in fiscal 2014 and announced a new $250 million repurchase program in October 2014. Fiscal 2015 capital expenditures are expected to be $60 to $65 million, and the company continues to pursue acquisitions, which would likely be debt-financed.
06—Continue