01—Abstract
Summary
Summary of the 10-K filed November 9, 2018. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) reported fiscal 2018 (year ended September 30, 2018) net sales of $3,811.1 milliona, up 8.8% from $3,504.3 million, with organic growth of 5.5%.
Gross profit rose to $2,177.5 millionb (57.1% of sales, up 0.5 points), and income from operations reached $1,654.9 million (43.4% of sales). Net income more than doubled in relative terms to $957.1 million, but was flattered by a one-time $146.4 million net tax benefit from the Tax Cuts and Jobs Act, which drove the effective tax rate down to about 2.4%. Diluted EPS was $16.20 versus $7.88 a year earlier.
Growth was led by commercial aftermarket sales (up 9.0% organically) and defense sales (up 5.3%), and about 60% of net sales came from aftermarket revenue. The balance sheet is highly leveraged. Total indebtedness was about $12.9 billionc, or 116.3% of total book capitalization, and the stockholders' deficit was $1.8 billion.
The debt leverage ratio was about 6.9x EBITDA As Defined. Fiscal 2018 included about $1.1 billiond in net new borrowings and $1.0 billion of acquisitions (Kirkhill, Extant, Skandia), and cash rose to $2.07 billion. Subsequent to year-end, TransDigm agreed on October 9, 2018 to acquire Esterline Technologies for about $4 billion ($122.50 per share in cash), financed mainly with cash on hand and a commitment for a senior secured term facility of up to $3.7 billion.
The deal is expected to close in 2019, subject to Esterline shareholder approval and regulatory clearances. Investors should weigh the strong cash generation and aftermarket franchise against the heavy debt load, the pending transaction's integration risk and added leverage, and the ongoing securities class action tied to U.S. government sales practices.
No dividends were declared in fiscal 2018, and no share repurchases were made under the $650 million program. Management's stated capital allocation priorities remain capital spending, acquisitions, special dividends or buybacks, and debt prepayment, with special dividends permitted subject to debt covenants.
02—Key points
Key Highlights
- Net sales grew 8.8% to $3,811.1 million, with 5.5% organic growth led by commercial aftermarket (+9.0%) and defense (+5.3%) sales.
- Gross margin expanded to 57.1% (from 56.6%), and income from operations rose to $1,655.0 million (43.4% of sales).
- Net income of $957.1 million (EPS $16.20) was boosted by a one-time tax benefit from the Tax Cuts and Jobs Act, cutting the effective tax rate to about 2.4%.
- Total debt of about $12.9 billion equals 116.3% of book capitalization, with leverage around 6.9x EBITDA As Defined and a stockholders' deficit of $1.8 billion.
- Pending acquisition of Esterline Technologies for about $4 billion ($122.50/share cash), with a commitment for a senior secured term facility of up to $3.7 billion, expected to close in 2019.
- Approximately 60% of net sales came from aftermarket, and about 80% came from sole-source products, supporting high-margin, recurring revenue.
- Cash rose to $2.07 billion, and operating cash flow was $1,022.2 million. No dividends or buybacks were made in fiscal 2018.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, TransDigm Group kept $0.25.
- Revenue$3.81B100.0%
- Cost of revenue−$1.63B42.9%
- Gross profit$2.18B57.1%
- Operating costs−$522.0M13.7%
- Operating income$1.66B43.4%
- Interest, other & tax−$698.0M18.3%
- Net income$957.0M25.1%
Where FY2018 revenue went
$3.81B- Cost of revenue: $1.63B, 43% of revenue
- Net income: $957.0M, 25% of revenue
- Interest, other & tax: $698.0M, 18% of revenue
- R&D: $73.8M, 1.9% of revenue
- SG&A: $450.0M, 12% of revenue
Kept 25% as net incomeR&D $73.8M · 1.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed November 9, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $3.81B$3.50B | +8.8% |
| Cost of Revenue | $1.63B$1.52B | +7.5% |
| Gross Profit | $2.18B$1.98B | +9.7% |
| R&D Expenses | $73.80M$73.80M | 0.0% |
| SG&A Expenses | $450.00M$412.56M | +9.1% |
| Operating Income | $1.66B$1.48B | +11.6% |
| Net Income | $957.00M$596.89M | +60.3% |
| EPS (Basic) | $16.20$7.88 | +105.6% |
| Shares Outstanding (Basic) | 55.60M55.53M | +0.1% |
05—Questions
Frequently Asked Questions
How did TransDigm perform financially in fiscal 2018?
Net sales increased 8.8% to $3.81 billion, gross profit rose 9.7% to $2.18 billion (57.1% margin), and net income increased to $957.1 million. Much of the net income increase came from a one-time tax benefit under the Tax Cuts and Jobs Act, so underlying earnings growth was lower than the headline figure.
How leveraged is TransDigm, and what are the risks?
Total indebtedness was about $12.9 billion at September 30, 2018, roughly 116% of book capitalization, with a debt leverage ratio of about 6.9x. Nearly all term loan debt carries variable rates (about $7.6 billion, where a 1-point rate increase would add roughly $76 million of annual interest), and covenants restrict additional debt, dividends and asset sales. The Esterline deal would add significant new borrowings.
What is the Esterline acquisition and how will it be financed?
On October 9, 2018, TransDigm agreed to buy Esterline Technologies for $122.50 per share in cash, a total transaction value of about $4 billion including debt. It is expected to be funded primarily with existing cash and new term loans under a commitment of up to $3.7 billion. Closing is expected in 2019, subject to Esterline shareholder approval and regulatory approvals.
Does TransDigm pay dividends, and is it buying back stock?
TransDigm does not pay regular dividends. It has paid periodic special dividends, most recently $22.00 per share in August 2017, but declared none in fiscal 2018. A $650 million share repurchase program was authorized in November 2017, and none of it was used in fiscal 2018. Any future special dividends or buybacks depend on the board's discretion and on restrictions in debt agreements.
What are the main legal and business risks investors should watch?
TransDigm faces a consolidated securities class action and a related shareholder derivative suit alleging misleading statements about business practices in U.S. government sales; management believes the claims lack merit and that insurance is sufficient. Other key risks include dependence on large customers (Airbus about 11% and Boeing about 10% of sales), exposure to U.S. defense budgets, reliance on acquisitions for growth, and cyclical airline and OEM demand.
06—Continue