01—Abstract
Summary
Summary of the 10-K filed November 12, 2020. Cited figures are marked; the original filing is the authoritative source.
TransDigm Group's fiscal 2020 10-K (year ended September 30, 2020) shows a company whose commercial aerospace exposure was hit hard by COVID-19, while its defense business and aftermarket-heavy model provided partial offset.
Net sales fell 2.3% to $5,103 milliona from $5,223 million, with organic sales down 13.8% driven by a 25.7% decline in commercial aftermarket and a 24.5% decline in commercial OEM. Defense sales rose, and Esterline's acquisition contributed $699 million of acquisition sales. Gross margin compressed to 51.9% from 53.8%, and net income attributable to TD Group fell 21.5% to $699 million.
EBITDA As Defined declined 6.2% to $2,278 millionb (total company, per the reconciliation), and management expects COVID-19 to weigh on sales and EBITDA into fiscal 2021. Balance sheet leverage is the central investor issue. Total debt is about $20.0 billion, equal to 124.8% of total book capitalization, and the company has a stockholders' deficit of $3,972 million.
Management raised roughly $3.1 billionc of net new borrowings in fiscal 2020 as a precautionary liquidity step, and cash rose to $4,717 million, giving cash liquidity of $5,238 million including revolver availability. Free cash flow was healthy at about $1,108 million (operating cash flow of $1,213 million less capex of $105 million), supported by a $352 million working capital release from receivables. Interest expense rose 19.8% to $1,029 million, and the company paid $1.9 billion in special dividends and dividend equivalents, with a $32.50 per-share special dividend in December 2019.
Operationally, the company retains strong pricing power and proprietary positioning: about 90% of sales are proprietary, about 80% come from sole-source products, and about 49% come from aftermarket sales. Defense rose to about 43% of sales, which the company views as a temporary mix shift. Investors should weigh the strength of the aftermarket franchise and cash generation against heavy leverage, a large goodwill and intangibles base ($7.9 billiond goodwill and $2.6 billion intangibles), continued commercial aerospace uncertainty, and ongoing U.S. government audit and pricing scrutiny.
02—Key points
Key Highlights
- Net sales declined 2.3% to $5,103 million, with organic sales down 13.8% as commercial aftermarket (-25.7%) and commercial OEM (-24.5%) fell sharply due to COVID-19 and the 737 MAX slowdown, partly offset by a 2.5% rise in defense sales.
- Gross margin fell to 51.9% from 53.8%, and net income attributable to TD Group declined 21.5% to $699 million, with EPS of $8.96 versus $13.84 a year earlier.
- EBITDA As Defined fell 6.2% to $2,278 million, and the company expects COVID-19 to continue to have a significant adverse impact on sales, net income and EBITDA As Defined into fiscal 2021.
- Total indebtedness is about $20.0 billion (124.8% of book capitalization) after roughly $3.1 billion of net new borrowings in fiscal 2020; the stockholders' deficit widened to $3,972 million.
- Liquidity is strong at $5,238 million (cash of $4,717 million plus $521 million of revolver availability), and operating cash flow rose to $1,213 million, though special dividends and dividend equivalents consumed $1.9 billion.
- Business quality remains high: about 90% of sales are proprietary, about 80% are sole-source, and about 49% come from aftermarket, with defense rising to about 43% of sales as commercial markets recover.
- Backlog declined to $3,145 million from $3,437 million, reflecting commercial weakness, while defense backlog increased; the company also faces ongoing U.S. government audits and a congressional inquiry into pricing.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, TransDigm Group kept $0.14.
- Revenue$5.10B100.0%
- Cost of revenue−$2.46B48.1%
- Gross profit$2.65B51.9%
- Operating costs−$896.0M17.6%
- Operating income$1.75B34.3%
- Interest, other & tax−$1.05B20.6%
- Net income$699.0M13.7%
Where FY2020 revenue went
$5.10B- Cost of revenue: $2.46B, 48% of revenue
- Interest, other & tax: $1.05B, 21% of revenue
- SG&A: $727.0M, 14% of revenue
- Net income: $699.0M, 14% of revenue
- R&D: $130.9M, 2.6% of revenue
- Other operating costs: $38.1M, 0.7% of revenue
Kept 14% as net incomeNet income $699.0M · 14%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed November 12, 2020Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $5.10B$5.22B | −2.3% |
| Cost of Revenue | $2.46B$2.41B | +1.7% |
| Gross Profit | $2.65B$2.81B | −5.8% |
| R&D Expenses | $130.90M$116.80M | +12.1% |
| SG&A Expenses | $727.00M$748.00M | −2.8% |
| Operating Income | $1.75B$1.93B | −9.1% |
| Net Income | $699.00M$890.00M | −21.5% |
| EPS (Basic) | $8.96$13.84 | −35.3% |
| EPS (Diluted) | $8.96— | — |
| Shares Outstanding (Basic) | 57.30M56.30M | +1.8% |
| Shares Outstanding (Diluted) | 57.30M— | — |
05—Questions
Frequently Asked Questions
How much debt does TransDigm carry, and is it a concern?
Total indebtedness was about $20.0 billion at September 30, 2020, or 124.8% of total book capitalization, after about $3.1 billion of net new borrowings in fiscal 2020. Nearly all of it is variable-rate term loans or fixed-rate notes, with roughly 84% fixed-rate debt after hedging. Leverage is high, and interest expense rose 19.8% to $1,029 million, so debt service is a key risk if commercial aerospace recovery is slow. The company says it is in compliance with its covenants and that its liquidity of $5.2 billion is sufficient for near-term needs.
What drove the decline in profitability in fiscal 2020?
Lower commercial aftermarket and OEM volumes from COVID-19 reduced organic sales by $723 million. Gross margin fell 1.9 points to 51.9% because of sales mix, a full year of lower-margin Esterline sales, COVID-19 restructuring charges of $37 million in cost of sales, and foreign currency losses, partly offset by lower inventory step-up charges. Net income also benefited from a lower tax rate of about 11.7%, and other income of $46 million included business interruption insurance proceeds.
Are the special dividends a recurring feature for shareholders?
No. The company does not plan regular quarterly or annual dividends. It pays special dividends at the discretion of its Board, subject to debt covenants and Delaware surplus requirements. In fiscal 2020 it paid $32.50 per share in December 2019, and in fiscal 2019 it paid $30.00 per share. Dividend equivalent payments on vested options are also made, bringing total cash distributions to about $1.9 billion in fiscal 2020.
How is the defense business affecting the company's outlook?
Defense rose to about 43% of net sales in fiscal 2020, compared with a historical range of 29% to 37%, because commercial sales fell sharply. Management expects defense mix to normalize as commercial aerospace recovers. Defense sales depend on U.S. budget trends and carry government-specific risks, including audits, pricing reviews, a congressional inquiry, and the possibility of termination for convenience. Management assumes flat military-related sales in future years at recent high levels.
When do investors expect the commercial aerospace market to recover?
The company does not give a firm timeline. Management notes that industry consensus expects RPMs to keep recovering in 2021, but commercial aftermarket may not return to pre-pandemic levels until 2023 or later. Commercial OEM production rates are expected to stay below pre-pandemic levels, with a gradual increase over several years. The company also expects fiscal 2021 capital expenditures of $120 million to $140 million and some continued COVID-related restructuring costs, though at lower levels than in fiscal 2020.
06—Continue