01—Abstract
Summary
Summary of the 10-K filed November 19, 2019. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group (TDG) closed fiscal 2019 (ended September 30, 2019) with net sales of $5,223.2 milliona, up 37.0% year over year, driven by $1,010.5 million of acquisition sales (chiefly the $3.9 billion Esterline acquisition closed March 14, 2019) and 10.5% organic growth.
Gross margin fell to 53.8% from 57.1% due to acquisition inventory step-up charges ($76.9 millionb) and the mix effect of Esterline. Net income attributable to TD Group declined 7.0% to $889.8 million, and diluted EPS from continuing operations dropped to $12.94 from $16.28, largely because fiscal 2018 benefited from a $176.4 million Tax Cuts and Jobs Act remeasurement gain. Adjusted EBITDA As Defined rose 28.9% to $2,418.8 million, and the company reports a total-debt-to-EBITDA leverage ratio of about 7.0x.
The balance sheet is highly leveraged. Total debt reached $16.9 billionc, 120.7% of total book capitalization, and TD Group carries a stockholders' deficit of $2.9 billion. The company paid $30.00 per share in special dividends (roughly $1.7 billion in cash) during fiscal 2019, funded partly with new debt, including $4.0 billion of 6.25% secured notes and $550 million of 7.50% notes.
Subsequent to year-end, TransDigm agreed to issue $2.65 billiond of 5.50% senior subordinated notes due 2027 to refinance $1.15 billion of 6.00% notes due 2022, and it expects to close the sale of Souriau-Sunbank to Eaton for about $920 million in the first quarter of fiscal 2020. The EIT divestiture to KPS Capital for about $190 million closed in September 2019. Backlog rose to $3.44 billion from $2.03 billion, and the company reports an 83% fixed-rate debt mix.
Key risks flagged in the filing include heavy reliance on the commercial aftermarket and aircraft flight hours, concentration in U.S. defense spending (about 37% of sales), The Boeing Company (about 11% of sales), a securities class action tied to U.S. government pricing practices, an ongoing DoD Inspector General audit and a House Oversight inquiry, and integration risk from Esterline. The filing also discloses a fire at the Niort, France facility in August 2019 that suspended operations and is expected to take up to 18 months to rebuild. Management's stated capital allocation priorities are internal capex, acquisitions, special dividends or buybacks, and debt reduction, with a $650 million buyback authorization still unused.
02—Key points
Key Highlights
- Net sales grew 37.0% to $5.22 billion, with organic growth of 10.5% and $1.01 billion from acquisitions, primarily Esterline.
- Gross margin contracted 330 bps to 53.8% due to $76.9 million of inventory step-up amortization and Esterline mix, while operating income rose 16.4% to $1.93 billion.
- Net income attributable to TD Group fell 7.0% to $889.8 million, and diluted EPS from continuing operations declined to $12.94 from $16.28, reflecting lapping of the fiscal 2018 tax benefit.
- Adjusted EBITDA As Defined increased 28.9% to $2.42 billion; reported leverage is about 7.0x total debt to EBITDA As Defined.
- Total debt of $16.9 billion equals 120.7% of book capitalization, and the stockholders' deficit widened to $2.9 billion after $1.7 billion of special dividends.
- Backlog increased to $3.44 billion from $2.03 billion, and about 52% of sales came from aftermarket revenue, which has historically carried higher margins.
- Post-year-end actions include a $2.65 billion 5.50% notes offering to refinance $1.15 billion of 6.00% notes and the pending $920 million sale of Souriau-Sunbank to Eaton.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, TransDigm Group kept $0.17.
- Revenue$5.22B100.0%
- Cost of revenue−$2.41B46.2%
- Gross profit$2.81B53.8%
- Operating costs−$883.0M16.9%
- Operating income$1.93B36.9%
- Interest, other & tax−$1.04B19.8%
- Net income$890.0M17.0%
Where FY2019 revenue went
$5.22B- Cost of revenue: $2.41B, 46% of revenue
- Interest, other & tax: $1.04B, 20% of revenue
- Net income: $890.0M, 17% of revenue
- SG&A: $748.0M, 14% of revenue
- R&D: $116.8M, 2.2% of revenue
Kept 17% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed November 19, 2019Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $5.22B$3.81B | +37.0% |
| Cost of Revenue | $2.41B$1.63B | +47.7% |
| Gross Profit | $2.81B$2.18B | +29.0% |
| R&D Expenses | $116.80M$73.80M | +58.3% |
| SG&A Expenses | $748.00M$450.00M | +66.2% |
| Operating Income | $1.93B$1.66B | +16.4% |
| Net Income | $890.00M$957.00M | −7.0% |
| EPS (Basic) | $13.84$16.20 | −14.6% |
| Shares Outstanding (Basic) | 56.30M55.60M | +1.3% |
05—Questions
Frequently Asked Questions
Why did gross margin decline in fiscal 2019 even though sales grew strongly?
Gross margin fell 3.3 percentage points to 53.8%, mainly because of $76.9 million of inventory purchase-accounting step-up charges from the Esterline acquisition, which compared with $7.1 million in fiscal 2018. Esterline's product mix and the amortization of its acquired loss-contract reserves also weighed on margin, partly offset by organic volume leverage and higher-margin acquired sales.
Why did EPS fall even though operating income increased?
Operating income rose 16.4%, but interest expense climbed 29.7% to $859.8 million because of the debt used to finance Esterline and the special dividends. Fiscal 2018 also included a $176.4 million benefit from the U.S. Tax Cuts and Jobs Act, while the 2019 effective tax rate was 20.9%. Together these items pushed diluted EPS from continuing operations down to $12.94 from $16.28.
How leveraged is TransDigm, and what are the main debt risks?
Total debt was $16.9 billion at September 30, 2019, or 120.7% of book capitalization, with a leverage ratio of about 7.0x EBITDA As Defined. About $7.5 billion of term loans carry variable LIBOR-based rates, though swaps hedge a large share and 83% of total debt is fixed. The credit agreement requires a net leverage covenant if revolver usage exceeds 35%, and LIBOR is expected to be phased out by 2021, which creates refinancing and rate uncertainty.
What is the outlook for the Souriau-Sunbank sale and the 2027 notes offering?
TransDigm expects to close the $920 million sale of Souriau-Sunbank to Eaton in the first quarter of fiscal 2020, pending French foreign investment approval. The $2.65 billion 5.50% notes due 2027 settled on November 13, 2019; proceeds will redeem the $1.15 billion 6.00% notes due 2022, with the remainder available for general corporate purposes, including acquisitions, dividends, or buybacks.
What government and regulatory risks could affect TransDigm's earnings?
About 37% of sales come from defense customers, and U.S. Government contracts can be terminated for convenience or repriced after audits. TransDigm voluntarily refunded $16 million after a DoD Inspector General audit, another audit is underway, and a House Oversight Committee inquiry is ongoing. A securities class action alleging misleading statements about government sales practices is also pending; management believes it is without merit and that insurance coverage is sufficient.
06—Continue