01—Abstract
Summary
Summary of the 10-K filed November 15, 2016. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) closed fiscal 2016 (year ended September 30, 2016) with net sales of $3,171.4 milliona, up 17.1% year over year, and net income of $586.4 million, up 31.1%.
Growth was split between organic sales (+2.0%, to $2,762.2 millionb) and acquisitions (Breeze-Eastern, Data Device Corporation and Tactair, contributing $409.2 million). Gross margin expanded to 54.5% from 53.6%, and EBITDA As Defined rose 21.4% to $1,495.2 million. Aftermarket revenue is roughly 54% of sales, and the company estimates its products are installed on about 95,000 aircraft, which supports the durability of its earnings.
The balance sheet and capital allocation are the central investor concerns. Total indebtedness reached about $10.2 billionc, 106.8% of total book capitalization, and stockholders' equity is negative at -$651.5 million. Debt rose by roughly $1.8 billion in fiscal 2016 to fund acquisitions and a prior-year special dividend.
The company's debt-to-EBITDA leverage ratio was about 6.8x at year-end. Subsequent to year-end, TransDigm added $1.15 billiond of Tranche F term loans to fund a tender for its 7.50% 2021 notes and a $24.00 per share special dividend, with a total cash payment of about $1.4 billion in the first quarter of fiscal 2017. Management says it does not plan regular dividends, so future shareholder returns will depend on special distributions and debt capacity.
Key risks are concentration and cyclicality. The top ten customers represented about 45% of sales, with Airbus at about 13% and Boeing at about 12%. Defense sales (about 30%) depend on U.S. budget trends, and most U.S. government contracts can be terminated for convenience.
The company's floating-rate term loans total about $5.2 billion, and a 1-point rate increase would raise annual interest costs by about $52 million. Goodwill and intangibles together make up roughly 69% of total assets, which creates impairment risk if performance weakens.
02—Key points
Key Highlights
- Net sales grew 17.1% to $3,171.4 million, with 2.0% organic growth and $409.2 million from acquisitions led by Breeze-Eastern and Data Device Corporation.
- Gross margin improved to 54.5% from 53.6%, and EBITDA As Defined rose 21.4% to $1,495.2 million, reflecting strong aftermarket mix and pricing discipline.
- Net income rose 31.1% to $586.4 million, and diluted EPS reached $10.39 versus $7.84, helped by the adoption of ASU 2016-09 (about $43.6 million of tax benefit).
- Total debt of about $10.2 billion equals 106.8% of book capitalization, with a leverage ratio of about 6.8x. Stockholders' deficit is -$651.5 million.
- About 54% of sales come from aftermarket products, and roughly 80% come from sole-source positions, supporting recurring, higher-margin revenue.
- Post-year-end financing of $1.15 billion of new term loans funded a tender for the 2021 notes and a $24.00 special dividend, with about $1.4 billion of total cash paid in Q1 FY2017.
- Customer concentration is significant: the top ten customers account for about 45% of sales, with Airbus at 13% and Boeing at 12%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, TransDigm Group kept $0.18.
- Revenue$3.17B100.0%
- Cost of revenue−$1.44B45.5%
- Gross profit$1.73B54.5%
- Operating costs−$460.3M14.5%
- Operating income$1.27B40.0%
- Interest, other & tax−$681.3M21.5%
- Net income$586.4M18.5%
Where FY2016 revenue went
$3.17B- Cost of revenue: $1.44B, 46% of revenue
- Interest, other & tax: $681.3M, 21% of revenue
- Net income: $586.4M, 18% of revenue
- SG&A: $382.9M, 12% of revenue
- R&D: $58.6M, 1.8% of revenue
- Other operating costs: $18.8M, 0.6% of revenue
Kept 18% as net incomeSG&A $382.9M · 12%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed November 15, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $3.17B$2.71B | +17.2% |
| Cost of Revenue | $1.44B$1.26B | +14.8% |
| Gross Profit | $1.73B$1.45B | +19.2% |
| R&D Expenses | $58.60M$48.30M | +21.3% |
| SG&A Expenses | $382.86M$321.62M | +19.0% |
| Operating Income | $1.27B$1.07B | +18.0% |
| Net Income | $586.41M$447.21M | +31.1% |
| EPS (Basic) | $10.39$7.84 | +32.5% |
| Shares Outstanding (Basic) | 56.16M56.61M | −0.8% |
05—Questions
Frequently Asked Questions
Why is TransDigm's stockholders' equity negative, and does that matter for investors?
The deficit results from a leveraged recapitalization model. The company has repeatedly funded special dividends and share repurchases with debt, and it has accumulated large acquisition-related goodwill and intangibles. A negative book equity is not in itself a solvency problem, but it reflects a high-leverage capital structure: total debt is about 106.8% of book capitalization, and the company relies on continued access to credit markets and on cash flow to service about $10.2 billion of debt.
How much cash did TransDigm return to shareholders, and will it continue?
In fiscal 2016 the company paid only about $3.0 million in dividend equivalents and repurchased about $207.8 million of stock. In October 2016 it declared a $24.00 special dividend, costing about $1.4 billion in total cash. Management says it does not expect regular quarterly or annual dividends and will decide on special dividends at the board's discretion, subject to debt covenants. Investors should not treat these payouts as recurring.
How exposed is TransDigm to interest rate increases?
Most of its term loan debt is floating rate, with about $5.2 billion outstanding at a weighted average rate of 4.2%. Interest rate swaps and caps hedge a portion of this exposure. Management estimates that a hypothetical 1-percentage-point increase in rates would add roughly $52 million in annual interest cost. Fixed-rate senior subordinated notes make up the remainder of the debt.
What drove the 2016 growth, and how sustainable is it?
Most of the 17.1% growth came from acquisitions, including Data Device Corporation (acquired June 2016) and Breeze-Eastern (January 2016). Organic growth was a more modest 2.0%, with commercial aftermarket up 6.1% and commercial OEM down 1.1%. The company's model depends on continued acquisitions, which are funded with debt. Sustaining growth therefore requires both steady aftermarket demand and continued access to acquisition targets and financing.
What are the main risks tied to government and defense exposure?
Defense accounts for roughly 30% of sales. The U.S. government can unilaterally suspend the company from new contracts, terminate existing contracts for convenience, reduce contract values, and audit costs. Pricing reviews could require refunds or cost-based pricing. Defense demand also depends on the DOD budget, which management says is highly uncertain after historically high spending. A significant reduction in U.S. military spending would reduce demand for certain of the company's products.
06—Continue