01—Abstract
Summary
Summary of the 10-K filed November 13, 2017. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) reported fiscal 2017 (year ended September 30, 2017) net sales of $3,504.3 milliona, up 10.5% year over year, with organic growth of 2.4% and acquisitions contributing 8.1%.
Gross margin expanded to 56.6% from 54.5%, and income from operations rose 16.7% to $1,479.8 millionb. Net income was $596.9 million, but EPS fell to $7.88 from $10.39 because of a $31.7 million loss from discontinued operations (the Schroth business, divested after a Department of Justice settlement tied to its acquisition) and $159.3 million of dividend equivalent payments allocated to participating securities. EBITDA As Defined reached $1,710.6 million, a 14.4% increase.
The central investor issue is leverage. TransDigm funded $2.58 billionc of special dividends ($24.00 per share in October 2016 and $22.00 per share in August 2017), along with about $390 million of share repurchases, largely through new term loans and notes. Total indebtedness reached roughly $11.8 billion, or 133.5% of total book capitalization, and the company reported a stockholders' deficit of $2.95 billion.
Its debt leverage ratio was about 6.9x EBITDA As Defined at year-end. Interest expense rose 24.5% to $602.6 milliond, and all $7.0 billion of term loans carry floating rates, partly hedged through swaps and caps. Cash fell to $650.6 million from $1,587.0 million.
The business is supported by a strong aftermarket franchise: about 55% of fiscal 2017 sales came from aftermarket, roughly 90% of sales came from proprietary products, and about 80% came from sole-source products. Backlog rose to $1,669 million from $1,554 million, largely due to acquisitions.
Management has signaled continued capital returns, including a new $650 million buyback authorization approved in November 2017. Investors should weigh that shareholder-friendly capital deployment against a highly levered balance sheet, dependence on the U.S. defense budget and two large customers (Airbus 13% and Boeing 11% of sales), and continued acquisition-driven growth.
02—Key points
Key Highlights
- Net sales rose 10.5% to $3,504.3 million, with organic sales up 2.4% and acquisitions contributing $255.7 million, mainly from the Third Quarter 2017 acquisitions and Schroth.
- Gross profit margin expanded 2.1 points to 56.6%, and income from operations grew 16.7% to $1,479.8 million.
- Net income of $596.9 million was offset by a $31.7 million loss from discontinued operations (Schroth, including a $32.0 million impairment), which lowered basic and diluted EPS to $7.88 from $10.39.
- EBITDA As Defined grew 14.4% to $1,710.6 million, with Power & Control EBITDA As Defined of $981.0 million (50.4% margin) and Airframe EBITDA As Defined of $726.6 million (50.4% margin).
- Total indebtedness of about $11.8 billion represents 133.5% of book capitalization after $2.58 billion in special dividends and roughly $390 million in buybacks; the company reported a stockholders' deficit of $2.95 billion and a debt leverage ratio of about 6.9x.
- Interest expense rose 24.5% to $602.6 million, and the $7.0 billion of term loans are floating-rate, so higher rates would raise debt service costs (roughly $67 million per 100 basis points).
- Approximately 55% of sales came from aftermarket and about 80% from sole-source products; a new $650 million share repurchase program was authorized on November 8, 2017.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, TransDigm Group kept $0.17.
- Revenue$3.50B100.0%
- Cost of revenue−$1.52B43.4%
- Gross profit$1.98B56.6%
- Operating costs−$501.8M14.3%
- Operating income$1.48B42.3%
- Interest, other & tax−$886.0M25.3%
- Net income$596.9M17.0%
Where FY2017 revenue went
$3.50B- Cost of revenue: $1.52B, 43% of revenue
- Interest, other & tax: $886.0M, 25% of revenue
- Net income: $596.9M, 17% of revenue
- R&D: $73.8M, 2.1% of revenue
- SG&A: $412.6M, 12% of revenue
Kept 17% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed November 13, 2017Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $3.50B$3.17B | +10.5% |
| Cost of Revenue | $1.52B$1.44B | +5.3% |
| Gross Profit | $1.98B$1.73B | +14.8% |
| R&D Expenses | $73.80M$58.60M | +25.9% |
| SG&A Expenses | $412.56M$382.86M | +7.8% |
| Operating Income | $1.48B$1.27B | +17.0% |
| Net Income | $596.89M$586.41M | +1.8% |
| EPS (Basic) | $7.88$10.39 | −24.2% |
| Shares Outstanding (Basic) | 55.53M56.16M | −1.1% |
05—Questions
Frequently Asked Questions
Why did EPS decline even though net income grew?
Net income rose 1.8% to $596.9 million, but EPS fell to $7.88 from $10.39 for two reasons. First, the company recorded a $31.7 million loss from discontinued operations, mainly a $32.0 million impairment on Schroth, which was classified as held-for-sale after a Department of Justice settlement. Second, $159.3 million of dividend equivalent payments was allocated to participating securities (vested options) under the two-class method, reducing income available to common stockholders to $437.6 million. Income from continuing operations per share was $8.45.
How leveraged is TransDigm, and what are the risks?
Leverage is very high. Total indebtedness was about $11.8 billion at September 30, 2017, equal to 133.5% of total book capitalization, and the debt leverage ratio was about 6.9x EBITDA As Defined. The company has a stockholders' deficit of $2.95 billion because special dividends and buybacks were debt-funded. Nearly all of the $7.0 billion of term loans bear floating rates (LIBOR plus 3.00%, with a 0.75% floor), so rising rates would increase interest costs; a one-point rise would add about $67 million annually, partly offset by swaps and caps. If revolver usage exceeds 25% of commitments, a maximum net leverage covenant applies. Management says cash flow from operations is sufficient to cover interest obligations.
What is driving TransDigm's growth and margins?
Growth has two sources: organic growth of 2.4% (commercial aftermarket up 3.0% and defense up 4.4%, with commercial OEM roughly flat) and acquisitions, which added about 8.1 points in fiscal 2017. Gross margin expanded to 56.6% because acquired businesses carried about a 60% gross margin, and because higher volume spread fixed overhead more widely. The company's model focuses on proprietary, sole-source products with aftermarket content, and about 55% of sales came from the aftermarket, which has historically offered higher and more stable margins than OEM sales.
How much capital has been returned to shareholders, and what remains available?
In fiscal 2017 TransDigm paid $2.58 billion in special cash dividends ($24.00 per share in October 2016 and $22.00 per share in August 2017) and repurchased about 1.72 million shares for roughly $390 million. As of September 30, 2017, $360.2 million remained under the $600 million repurchase program, and the Board authorized a new $650 million program on November 8, 2017. Regular quarterly dividends are not expected. Future special dividends and buybacks depend on covenant capacity under the credit agreement and indentures, and Amendment No. 3 permitted up to $1.3 billion of payments within 60 days and up to $1.5 billion over twelve months.
What customer and government concentration risks should investors consider?
Airbus (including Satair) accounted for about 13% of fiscal 2017 net sales and Boeing (including Aviall) about 11%. The top ten customers represented about 46% of sales. Defense is about 34% of total sales and depends on U.S. Department of Defense budgets, and most government contracts can be terminated for convenience. A DOD Inspector General audit of prices paid for some subsidiaries' products is also underway, which could lead to refunds or cost-based pricing. Most aftermarket customers have no long-term purchase commitments, so demand can shift with airline profitability and flight hours.
06—Continue