10-QPeriod: Q1 FY2007

TransDigm Group INC Quarterly Report for Q1 Ended Dec 30, 2006

Filed February 13, 2007For Securities:TDG

Summary

TransDigm Group Inc. reported a strong first quarter for fiscal year 2007, with net sales increasing by 22.5% to $122.7 million and net income surging by 126.3% to $20.3 million compared to the prior year period. This significant growth was driven by a combination of organic sales expansion, particularly in the commercial aftermarket and business jet segments, and contributions from recent acquisitions, including CDA and Sweeney. The company also benefited from a lower effective tax rate due to the retroactive reinstatement of the research and development tax credit. Financially, TransDigm demonstrated improved operational efficiency, with cost of sales decreasing as a percentage of net sales due to a favorable product mix and productivity gains. Selling and administrative expenses also decreased as a percentage of sales, largely due to the absence of non-recurring charges from the prior year, despite increased costs associated with higher sales volume. The company successfully managed its debt structure following a June 2006 refinancing, leading to a decrease in interest expense despite higher overall borrowings. The company ended the quarter with a robust backlog of $261.6 million, signaling continued demand for its products.

Key Highlights

  • 1Net sales increased by 22.5% to $122.7 million for the thirteen-week period ended December 30, 2006, compared to $100.1 million in the prior year period.
  • 2Net income more than doubled, rising 126.3% to $20.3 million ($0.43 diluted EPS) from $8.98 million ($0.19 diluted EPS) in the prior year period.
  • 3Gross profit margin improved to 51.9% from 49.2% year-over-year, driven by favorable product mix and productivity.
  • 4Selling and administrative expenses as a percentage of sales decreased from 13.1% to 9.9%, largely due to the lapping of prior year non-recurring expenses.
  • 5Interest expense decreased by 10.1% to $17.8 million, reflecting the benefits of the June 2006 debt refinancing and a lower average interest rate.
  • 6The company completed the acquisition of CDA InterCorp for $45.3 million, adding to its portfolio of engineered aerospace components.
  • 7Sales order backlog increased to $261.6 million as of December 30, 2006, up from $225.0 million in the prior year, indicating strong future demand.

Frequently Asked Questions

Revenue growth was driven by a combination of organic sales increases, particularly in commercial aftermarket sales and commercial OEM sales (driven by business jet demand), and contributions from recent acquisitions like CDA and Sweeney. The company noted a continuing recovery in the commercial aftermarket.

TransDigm successfully refinanced its debt structure in June 2006. Despite an increase in average borrowings, interest expense decreased due to a lower average interest rate achieved through the refinancing. The company also entered into an interest rate swap to hedge against variable rate fluctuations.

The report notes a pricing review by the DOD Office of Inspector General concerning certain sole source spare parts. While TransDigm believes its pricing is fair and reasonable, the report recommended a voluntary refund of approximately $2.6 million and the negotiation of 'Strategic Supplier Alliances' with cost-based pricing for future government purchases. Management believes this will not have a material adverse effect on the company's financial condition, but it could potentially reduce future revenue and profitability from certain government supply arrangements.

The company adopted SAB 108 and SFAS 158. The adoption of SAB 108 did not have a material impact. The adoption of SFAS 158 is not expected to have a material impact on the company's consolidated financial position or results of operations. The company is still analyzing the impact of FIN 48.