10-QPeriod: Q3 FY2019

TransDigm Group INC Quarterly Report for Q3 Ended Jun 29, 2019

Filed August 7, 2019For Securities:TDG

Summary

TransDigm Group Inc. (TDG) reported solid revenue growth for the third quarter of fiscal year 2019, driven by both organic sales increases and significant contributions from recent acquisitions, notably Esterline. Net sales reached $1.66 billion, a substantial increase of 69% compared to the prior year quarter, primarily boosted by acquisition sales. However, profitability metrics showed a decline, with net income attributable to TD Group falling by 33.5% to $144.5 million and diluted EPS decreasing to $2.57 from $3.91 year-over-year. This profitability decline is largely attributed to increased cost of sales, particularly inventory acquisition accounting adjustments and integration costs related to acquisitions, as well as higher selling, administrative, and interest expenses. The company's balance sheet reflects the impact of its aggressive acquisition strategy, with a significant increase in debt to finance these transactions. Despite the rise in interest expenses, TransDigm maintains that its strong operational performance and cash flow generation are sufficient to cover its debt obligations. The company also announced a substantial special cash dividend of $30.00 per share, underscoring its confidence in its financial position and commitment to returning capital to shareholders.

Financial Highlights

54 data points
Beta

Revenue

$1.52B

46.9% Gross Margin

Net Income

$145.00M

9.5% Net Margin

EPS (Diluted)

$2.57

Total Assets

$17.70B

Cash & Equivalents

$2.72B

Free Cash Flow

$279.36M

Financial Statements
Beta
Revenue$1.52B
Cost of Revenue$808.00M
Gross Profit$713.00M
SG&A Expenses$252.00M
Operating Income$423.00M
Net Income$145.00M
EPS (Basic)$2.57
Shares Outstanding (Basic)56.30M

Key Highlights

  • 1Net sales for the third quarter of FY2019 surged by 69.0% to $1.66 billion, largely driven by $561.4 million in acquisition sales from Esterline, Skandia, and Extant, alongside an 11.8% increase in organic sales.
  • 2Net income attributable to TD Group decreased by 33.5% to $144.5 million for the quarter, impacted by higher cost of sales and operating expenses.
  • 3Diluted earnings per share (EPS) declined to $2.57 from $3.91 in the prior year's comparable quarter.
  • 4Cost of sales as a percentage of sales increased significantly to 54.1% from 41.9% year-over-year, due to inventory acquisition adjustments, foreign currency losses, and integration costs.
  • 5Selling and administrative expenses rose to 16.5% of sales from 11.6%, primarily due to acquisition-related expenses and stock compensation.
  • 6Interest expense increased by 44.0% to $241.3 million, reflecting higher average borrowings to finance acquisitions.
  • 7The company announced a special cash dividend of $30.00 per share, totaling approximately $1.7 billion, to be paid in Q4 FY2019.

Frequently Asked Questions

The substantial increase in net sales, up 69.0% year-over-year, is primarily driven by acquisitions, most notably the acquisition of Esterline, which contributed $561.4 million in sales. Organic sales also showed healthy growth of 11.8%.

The decline in net income and EPS is mainly due to a significant increase in the cost of sales, which rose to 54.1% of sales from 41.9% in the prior year. This was influenced by higher inventory acquisition accounting adjustments, foreign currency losses, and acquisition integration costs. Additionally, selling and administrative expenses and interest expenses have increased due to the impact of acquisitions and higher debt levels.

TransDigm has significantly increased its borrowings to finance its acquisitions. While interest expense has risen, the company states that its strong operating performance, expected to generate sufficient cash flow, along with its available borrowing capacity, should enable it to meet its debt obligations and fund future investments. The company has also demonstrated a commitment to returning capital to shareholders with a large special dividend.

The announcement of a $30.00 per share special cash dividend, totaling approximately $1.7 billion, signals management's confidence in the company's financial health and its ability to generate substantial cash flow. It also reflects TransDigm's strategy of returning capital to shareholders, prioritized after capital spending and acquisitions, as outlined in their liquidity and capital resources strategy.