The aerospace industry has done extremely well for years now, and even with controversy surrounding major accidents involving key manufacturers in the industry, suppliers who provide aerospace parts and components have done quite well. TransDigm Group (NYSE:TDG) has enjoyed unprecedented success in supplying key goods that go into new aircraft, and investors have been pleased by the results.
Coming into Tuesday's fiscal third-quarter financial report, TransDigm investors expected huge revenue gains following the acquisition of Esterline, along with more-modest rises in earnings. Results were better than most had expected, and the company also declared a special dividend that will deliver huge amounts of cash to shareholders.
Fiscal third-quarter results made investors happy. Revenue soared 69% to $980.7 million, even better than the 61% growth rate that most of those following the stock had hoped to see. Adjusted net income climbed 25% to $278.4 million, and the resulting earnings of $4.95 per share easily topped the $4.30 consensus forecast among investors.
On a segment basis, TransDigm saw all of its biggest businesses do well. Revenue at commercial original equipment manufacturing (OEM) saw sales climb 10% year over year, with particularly good performance from TransDigm's business jet and helicopter unit. In the commercial aftermarket segment, sales climbed 8% on strength in the commercial transport area. Defense saw the biggest jump, climbing 19% as the company did well in both the OEM and aftermarket areas.
However, the Esterline acquisition had huge effects on TransDigm's numbers. Gross margin plunged more than 12 percentage points because Esterline's lower margins hurt the combined company, even though the margin figures for TransDigm's legacy businesses saw continued improvement. Esterline's businesses also had higher overhead costs, and the borrowing for the acquisition boosted net interest expense by 44%. All that made TransDigm's bottom-line gains all the more impressive.
CEO Kevin Stein summed things up: "Our legacy business continues to thrive, driven by continued growth across all major end markets. The Esterline integration is proceeding well, and results have exceeded our expectations in the first full quarter under our ownership."
A big payday for investors
Yet a lot of attention in the report went toward the fact that TransDigm had agreed to a substantial sale of assets. A couple of weeks ago, it said it would sell its Souriau-Sunbank Connection Technologies business to Eaton (NYSE:ETN) for $920 million. Executive chairman W. Nicholas Howley noted that Souriau-Sunbank, an interconnect solutions business, was one of several acquired from Esterline that didn't necessarily align well with TransDigm's overall strategy.
Now, TransDigm has decided to return cash and a whole lot more to shareholders in a big special dividend. Shareholders of record as of Aug. 16 will receive $30 per share, representing about 6% of the company's share price. Given the number of shares outstanding, the roughly $1.7 billion in cash that will go out will dramatically exceed the proceeds from the Souriau-Sunbank sale. TransDigm said that it has the liquidity to handle the special dividend.
It also increased its full-year guidance again. Revenue is now seen coming in between $5.5 billion and $5.55 billion, up $65 million to $105 million from its previous range. New adjusted earnings projections of $17.93 to $18.25 per share would be between $1.10 and $1.46 per share higher than what TransDigm projected just three months ago. The moves reflect better conditions than expected in the commercial OEM and defense areas.
Shareholders celebrated the windfall, and the stock soared 14% at midday following the announcement. With so many things going right for TransDigm, it looks poised to hold its altitude and keep delivering strong results for the rest of the year and beyond.