10-QPeriod: Q2 FY2019

TransDigm Group INC Quarterly Report for Q2 Ended Mar 30, 2019

Filed May 8, 2019For Securities:TDG

Summary

TransDigm Group Inc. (TDG) reported its second quarter fiscal year 2019 results, demonstrating significant top-line growth driven by the recent acquisition of Esterline Technologies Corporation. Net sales increased by 28.2% to $1,195.9 million compared to the prior year's quarter. This growth was a combination of organic sales increases across defense, commercial OEM, and commercial aftermarket segments, alongside substantial acquisition sales from Esterline and other prior acquisitions. While revenue surged, the company experienced a slight decrease in gross profit margin to 55.1% from 57.2% year-over-year. This was attributed to increased cost of sales related to acquisitions, including inventory purchase accounting adjustments, and higher stock compensation expense, partially offset by foreign currency gains and lower acquisition integration costs. Despite these margin pressures, net income attributable to TD Group saw a modest increase of 3.1% to $202.4 million, with diluted earnings per share rising to $3.60. The company also highlighted its significant debt load, increased by recent financing activities, and the strategic priority of using cash for acquisitions, capital spending, and shareholder returns.

Financial Highlights

54 data points
Beta

Revenue

$1.17B

55.7% Gross Margin

Net Income

$202.00M

17.3% Net Margin

EPS (Diluted)

$3.60

Total Assets

$17.80B

Cash & Equivalents

$2.83B

Free Cash Flow

$103.00M

Financial Statements
Beta
Revenue$1.17B
Cost of Revenue$518.00M
Gross Profit$650.00M
SG&A Expenses$160.00M
Operating Income$468.00M
Net Income$202.00M
EPS (Basic)$3.60
Shares Outstanding (Basic)56.30M

Key Highlights

  • 1Net sales for the second quarter of fiscal year 2019 reached $1,195.9 million, a significant increase of 28.2% year-over-year, largely driven by the acquisition of Esterline and other prior acquisitions.
  • 2Organic sales grew across key segments, including defense (18.3%), commercial OEM (9.6%), and commercial aftermarket (7.3%) for the thirteen-week period.
  • 3Gross profit margin slightly decreased to 55.1% from 57.2% in the prior year's quarter, impacted by acquisition-related costs and inventory adjustments.
  • 4Net income attributable to TD Group increased by 3.1% to $202.4 million, with diluted EPS rising to $3.60.
  • 5EBITDA As Defined was $571.8 million, representing a strong 47.8% of net sales.
  • 6The company completed the significant acquisition of Esterline Technologies Corporation on March 14, 2019, which is being integrated into operations.
  • 7Total outstanding borrowings increased substantially due to financing activities related to the Esterline acquisition, with interest expense rising by 24.9% for the quarter.

Frequently Asked Questions

The primary driver of TransDigm's revenue growth in the second quarter of fiscal year 2019 was the significant acquisition of Esterline Technologies Corporation, which closed on March 14, 2019. This, combined with previous acquisitions and organic sales growth across defense and commercial segments, led to a 28.2% increase in net sales.

While the Esterline acquisition contributed significantly to revenue, it also impacted profitability metrics. The cost of sales increased due to acquisition-related costs and inventory purchase accounting adjustments. This led to a decrease in the gross profit margin to 55.1% from 57.2% in the prior year's quarter. However, the company managed to increase net income attributable to TD Group by 3.1%.

The company acknowledges its substantial indebtedness, which increased significantly due to debt financing for the Esterline acquisition. Interest expense also rose accordingly. However, TransDigm believes its core value-driven operating strategies will continue to generate strong margins and sufficient cash flow to meet its interest obligations and liquidity needs, while also allowing for opportunistic investments, strategic acquisitions, and shareholder returns.

TransDigm is involved in a consolidated securities class action lawsuit alleging false or misleading statements related to sales to the U.S. government. The company is also facing a shareholder derivative action. TransDigm is vigorously defending these matters, believes they are without merit, and expects to have sufficient insurance coverage. They do not anticipate a material adverse impact on their financial condition or results of operations, but acknowledge the difficulty in predicting the outcome.