TransDigm Group (NYSE:TDG) has done a good job of taking advantage of the favorable environment in the aerospace industry over the past several years. Even as those good conditions have started to give way to more challenging situations in certain parts of its business, TransDigm has sought to keep moving forward by providing the aircraft components and systems that its clients need now more than ever.
Coming into Tuesday's fiscal third-quarter financial report, TransDigm investors wanted to see significant gains in revenue that would at least partially translate into bottom-line growth as well. TransDigm delivered a bit more than most investors had expected, and it also announced that it intends to raise cash in order to refinance its debt and pay out a special dividend to shareholders. Let's take a closer look at TransDigm Group and what its results say about its future.
TransDigm Group's fiscal third-quarter results showed new signs of stronger growth for the company. Sales were up 14% to $907.7 million, which was better than the roughly $902 million that most investors were expecting to see. Adjusted net income of $181.1 million was up about 5% from the year-ago quarter, but a decline in number of shares outstanding helped lift adjusted earnings to $3.30 per share, well above the consensus forecast among those following the stock for $3.16 per share.
Taking a closer look at the report, TransDigm is still getting most of its recent growth from acquisitions. Organic sales gains weighed in at 3%, up slightly from the previous quarter, but newly acquired businesses were responsible for $87 million in sales for TransDigm.
TransDigm's various markets showed changing trends within the industry compared to what the company has seen in previous quarters. Sales to commercial original equipment manufacturers were down 1% compared to the prior year's quarter, but commercial aftermarket revenue picked up the slack with overall gains of 5% year over year. In particular, the commercial transport subsegment had strong growth of 7.5% during the quarter. TransDigm's defense business was also a good performer, seeing sales jump 8% on particularly impressive bookings during the quarter. Within the commercial aftermarket arena, passenger and freight revenue climbed sharply, but TransDigm suffered declines in its business jet and helicopter business, as well as interior products.
As we've seen in past quarters, TransDigm continues to have mixed success in maximizing its margins. Gross margin improved by nearly 2 percentage points because of the strength of TransDigm's proprietary products and improvements in productivity. Yet overhead expenses rose slightly as a percentage of revenue, and a big jump in interest expense related to higher borrowing led to a 1.5-percentage-point hit to net margin figures.
TransDigm CEO Nicholas Howley was nevertheless optimistic in his assessment of the quarter. "Our overall performance was in line with our expectations," Howley said, "with some modest puts and takes across our markets." The CEO particularly called out the defense business as growing more quickly than TransDigm had originally anticipated and saw the quarter as a good one for shareholders.
Can TransDigm fly higher?
Even with the slightly better performance than investors had expected, TransDigm didn't make any major changes to its guidance for the year. The company still expects revenue of between $3.53 billion and $3.57 billion, with adjusted earnings of between $12.09 and $12.33 per share.
Yet one move that TransDigm made could have an impact on shareholders directly. The aerospace component supplier said that it intends to borrow $1.8 billion through a term loan, using $1.2 billion to repay existing term loans as a refinancing strategy. The company also plans to use the remainder, along with cash from other sources, to fund a possible special dividend of $1 billion to $1.25 billion. TransDigm didn't commit to this move, calling it a "potential special dividend." Based on the stated range, the special dividend would amount to somewhere around $18 to $23 per share if it goes forward.
TransDigm investors seemed reasonably happy with the news, and the stock rose almost 2% in pre-market trading following the announcement. The aerospace industry is still likely to see mixed conditions going forward, and that will pose challenges for TransDigm, but the company has found ways to overcome those obstacles in the past and should continue to do so going forward.