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TransDigm (TDG) Q4 Earnings Beat, Revenues Improve Y/Y

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After a strong beat last quarter, TransDigm Group Incorporated (TDG - Free Report) followed up with another beat in its fourth-quarter fiscal 2016 results.

The aircraft supplier posted adjusted quarterly earnings (including stock-based compensation adjustments) of $3.10 per share, beating the Zacks Consensus Estimate of $3.07.

The figures fared even better in year-over-year comparison, registering an increase of almost 13.6% from the year-ago tally of $2.83 per share.

For fiscal 2016, the company’s adjusted earnings per share were up 27.5% to $11.49. 

Net income for the quarter came in at $154.7 million, up 9.2% from the comparable quarter a year ago. The increase in income was driven primarily by growth in net sales, robust operating margin resulting from the strength of proprietary products, continued gains from productivity efforts and favorable product mix. Also, lower effective tax rate proved conducive to the net income growth.

Inside the Headlines

Net sales for the quarter came in at $875.2 million, representing year-over-year growth of 8.1%. However, the top line fell short of the Zacks Consensus Estimate of $880 million.

The quarterly top-line growth mainly came on the back of solid contribution from previously completed acquisitions namely, PneuDraulics, Breeze-Eastern and Data Device Corporation. These acquisitions contributed $88.6 million to the sales.

Sturdy growth in commercial aftermarket revenues (up about 6.5% from the prior year) boosted revenues. While commercial OEM sales remained flat, Defense revenues grew 2% over the comparable period last year.

For fiscal 2016, the company’s net sales came in at $3,171.4 million, up an impressive 17.2% compared with the year ago tally. This growth largely came on the back of strategic acquisitions.

TransDigm’s EBITDA (earnings before interest, taxes, depreciation and amortization) escalated 16.6% year over year to $423.3 million, driven by robust sales.

Acquisitions

During the reported quarter, Transdigm Group closed the buyout of Young & Franklin Inc. and its subsidiaries, including Tactair Fluid Controls Inc. The deal will expand its footprint in the market of highly engineered, proprietary products, with significant aftermarket content. The Liverpool, NY-based Young & Franklin makes highly engineered valves and actuators, and almost all its products are proprietary.

The acquired business will add to TransDigm’s revenues to the extent of about $75 million, for the fiscal year ending Dec 2016. Of this, aftermarket revenues will account about 70% of the total.

The other important buyouts made this year include the $1 billion buyout of ILC Holdings Inc., the parent company of defense firm – Data Device Corporation (“DDC”) – and mission critical electromechanical systems manufacturer – Breeze-Eastern Corporation. The ILC Holdings buyout will empower TransDigm fortify its footprint in the market of highly engineered, proprietary products, with significant aftermarket content, while strengthening its presence in the military and commercial aircraft market.

Moreover, the Breeze-Eastern Corporation takeover will strengthen the company’s foothold in the aerospace industry, especially in the niche markets of highly-engineered proprietary aerospace components.

Liquidity

TransDigm ended the quarter with cash and cash equivalents of $1.59 billion, significantly up from $714 million as of Sep 30, 2015. At the end of Sep 30, 2016, the company’s long-term debt was $9.94 billion, compared with $8.11 billion at the end of Sep 2015.

Also, the company completed an offering of $1,150 million of term loans that will be maturing in 2023. These proceeds were used to partially fund a special dividend of $24.00 per share paid in Nov 2016 and to repurchase $500 million of existing 7.50% Senior Subordinated Notes due in 2021.

TRANSDIGM GROUP Price, Consensus and EPS Surprise

 

Fiscal 2017 Guidance

Concurrent with its fiscal fourth-quarter earnings release, TransDigm Group offered its fiscal 2017 guidance. The company projects net sales to be in the range of $3,515–$3,565 million. Adjusted earnings are forecast to lie within the range of $11.84–$12.12 per share. 

Also, TransDigm Group projected net income to lie in the band of $577–$593 million and EBITDA to be in the range of $1,671–$1,695 million.

As per businesses, the company believes commercial aftermarket revenues to be up between middle to high single-digit percentage and commercial OEM revenues to be up in the low to mid-single-digit percentage range. However, the company anticipates defense revenues to be flat for the fiscal year.

Our Take

TransDigm Group posted impressive fiscal fourth quarter and fiscal 2016 results, mainly on the back of positive trends in the Commercial Aftermarket business. About 90% of its sales were generated by proprietary products, that is, products for which the company owns the intellectual property. This translates into consistent and sustained revenue generation capacity through all phases of the aerospace cycle.

TransDigm has been actively working toward strengthening and enhancing its position in highly-engineered proprietary aerospace components’ niche markets. The recent acquisitions made by the company have boosted its proprietary aerospace businesses, supplementing growth. Further, the Zacks Rank #2 (Buy) company’s efforts to streamline costs will likely translate into solid margin expansion in the quarters ahead.

Other Stocks to Consider

Other favorably placed stocks in the broader sector include Arotech Corp. (ARTX - Free Report) , Northrop Grumman Corp. (NOC - Free Report) and Engility Holdings, Inc. (EGL - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Falls Church, VA-based Northrop Grumman Corp. supplies a broad array of products and services to the U.S. Department of Defense (DoD). The company has managed to beat earnings each time in the trailing four quarters, boasting an average surprise of 8.3%.

Arotech Corporation makes zinc-air batteries for military and homeland security applications. It also provides advanced high-tech multimedia training systems for law enforcement and paramilitary organizations. The company has beat earnings twice in the past four quarters and has a whopping average positive surprise of 265.3%.

Engility Holdings is engaged in providing government services in engineering, professional support and mission support to customers in the U.S. Department of Defense, Federal civilian agencies and allied foreign governments. The company has a striking earnings surprise history over the trailing four quarters, beating estimates all through. It boasts an average positive surprise of 23.2%.

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