Tax reform has been a critical element of earnings season over the past month, and companies like TransDigm Group (NYSE:TDG) have seen huge one-time items related to the changing tax laws affect their particular businesses. Yet the bigger question for TransDigm has been whether growth in the aerospace industry would still translate into higher sales and profits for the components supplier.

Coming into Tuesday's fiscal first-quarter financial report, investors wanted to see modest but still substantial growth in the company's core business to go with any tax-related gains that it might enjoy on a one-time basis. TransDigm's fundamental performance didn't quite live up to expectations, leaving some to wonder whether the company is doing the most to cash in on an extremely favorable environment for aircraft-related businesses. Let's take a closer look at TransDigm Group and what its latest report says about its future.

Wire harness with about two dozen connections attached to a long spine of metal.

Image source: TransDigm Group.

TransDigm gains minimal altitude

TransDigm Group's fiscal first-quarter results disappointed many of those familiar with the company. Revenue growth once again slowed from previous periods, coming in up 4% to $848 million, which was slower than investors had wanted to see. Adjusted net income doubled from year-earlier levels but omitted the positive impact of tax reform. Taking that into account, adjusted earnings of $2.62 per share missed the consensus forecast among those following the stock for $2.79 per share on the bottom line.

Tax reform had a definite beneficial impact on TransDigm. The company suffered a slight $23.1 million charge from having to pay tax on deemed repatriated earnings. But revaluation of net deferred tax liabilities resulted in a boost of $170.2 million, leading to a net benefit of $147.1 million.

TransDigm's results revealed considerable disparities among the company's key segments. As we've seen in past quarters, the commercial aftermarket business had the best results from a top-line perspective, with pro forma revenue rising 10% from the prior year's quarter. However, sales to original equipment manufacturers on the commercial side were flat from year-ago levels. TransDigm also said that its defense business wasn't able to generate any growth compared to the first quarter of fiscal 2017.

TransDigm also faced mixed performance internally. On one hand, the component manufacturer kept seeing gross margin rise, with better sales of proprietary products. Higher borrowings, however, weighed on interest expense levels, offsetting some of the gains in operating income.

What's ahead for TransDigm?

CEO Nicholas Howley was pleased with TransDigm's performance. "The commercial aftermarket revenues were particularly encouraging," Howley said, "with our commercial transport aftermarket revenues up low double-digit percent, offset slightly by lower growth in the business jet and helicopter aftermarket." He also noted that its operating strategy is still producing additional shareholder value.

TransDigm expects more balanced growth in 2018. Commercial aftermarket and OEM sales should both climb by mid-single digit percentages, with defense lagging slightly behind with low- to mid-single digit percentage gains. Beyond that, though, TransDigm kept most of its previous guidance for fiscal 2018 unchanged, including revenue of between $3.645 billion and $3.725 billion. Adjusted earnings got a new range of $16.95 to $17.59 per share for the year, solely reflecting the adjustments required for tax reform rather than any overall business gain.

Given the performance in the aerospace industry recently, TransDigm's results didn't seem to take full advantage of the company's opportunities. Investors will want to see better results going forward in order to have full confidence in TransDigm's prospects for 2018 and beyond.

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