TransDigm(TDG) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 FY2023, including balance sheets, income, cash flows, and notes on acquisitions, debt, and segment performance Condensed Consolidated Balance Sheets As of December 31, 2022, total assets increased to $18,489 million, while total liabilities slightly decreased to $21,817 million, leading to an improved stockholders' deficit of $(3,328) million Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2022 | Sep 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $3,288 | $3,001 | | Total current assets | $5,929 | $5,649 | | Goodwill | $8,719 | $8,641 | | Total Assets | $18,489 | $18,107 | | Liabilities & Stockholders' Deficit | | | | Total current liabilities | $1,408 | $1,426 | | Long-term debt | $19,375 | $19,369 | | Total liabilities | $21,817 | $21,873 | | Total stockholders' deficit | $(3,328) | $(3,766) | Condensed Consolidated Statements of Income For Q1 FY2023, net sales grew 17.0% to $1,397 million, driving a 39.9% increase in net income to $228 million, and diluted EPS reaching $3.33 Statement of Income Summary (in millions, except per share data) | Metric | Q1 FY2023 (ended Dec 31, 2022) | Q1 FY2022 (ended Jan 1, 2022) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $1,397 | $1,194 | 17.0% | | Gross Profit | $793 | $661 | 20.0% | | Income from Operations | $590 | $455 | 29.7% | | Net Income Attributable to TD Group | $228 | $163 | 39.9% | | Diluted EPS | $3.33 | $1.98 | 68.2% | Condensed Consolidated Statements of Cash Flows For Q1 FY2023, net cash from operating activities increased to $377 million, with $41 million used in investing and $65 million in financing, reflecting debt refinancing Cash Flow Summary (in millions) | Activity | Q1 FY2023 (ended Dec 31, 2022) | Q1 FY2022 (ended Jan 1, 2022) | | :--- | :--- | :--- | | Net cash provided by operating activities | $377 | $279 | | Net cash used in investing activities | $(41) | $(25) | | Net cash used in financing activities | $(65) | $(225) | | Net increase in cash and cash equivalents | $287 | $26 | | Cash and cash equivalents, end of period | $3,288 | $4,813 | Notes to Condensed Consolidated Financial Statements The notes provide critical details supporting the financial statements, including the $359 million DART Aerospace acquisition, debt refinancing, strong segment growth, and legal contingencies - On May 25, 2022, the Company acquired DART Aerospace for a total purchase price of $359 million in cash[15] - On December 14, 2022, the Company refinanced approximately $1,725 million in Tranche G term loans with new Tranche H term loans maturing in February 2027, bearing interest at Term SOFR plus 3.25%[40] Net Sales by Segment (in millions) | Segment | Q1 FY2023 | Q1 FY2022 | | :--- | :--- | :--- | | Power & Control | $725 | $650 | | Airframe | $637 | $506 | | Non-aviation | $35 | $38 | | Total Net Sales | $1,397 | $1,194 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong Q1 FY2023 performance, highlighting 17.0% net sales growth from commercial aerospace recovery, expanded gross profit margin, and robust liquidity with extended debt maturities Results of Operations Net sales increased by $203 million (17.0%) in Q1 FY2023, driven by strong commercial aftermarket and OEM sales, leading to a gross profit margin improvement to 56.8% Net Sales Change Analysis (in millions) | Sales Type | Q1 FY2023 | Q1 FY2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Organic sales | $1,375 | $1,194 | $181 | 15.2% | | Acquisition sales | $22 | $— | $22 | 1.8% | | Net sales | $1,397 | $1,194 | $203 | 17.0% | - The increase in organic sales was primarily driven by a $115 million (33.5%) rise in commercial aftermarket sales and a $53 million (21.0%) increase in commercial OEM sales, reflecting the continued recovery in air travel and aircraft production[98] - Gross profit as a percentage of net sales increased by 1.4 percentage points to 56.8%, primarily due to fixed overhead costs being spread over higher production volume and a favorable sales mix with higher commercial aftermarket sales[100] Business Segments Both Power & Control and Airframe segments showed strong growth in Q1 FY2023, driven by commercial aerospace recovery and the DART acquisition, with significant increases in net sales and EBITDA As Defined EBITDA As Defined by Segment (in millions) | Segment | Q1 FY2023 | Q1 FY2022 | % Change | | :--- | :--- | :--- | :--- | | Power & Control | $401 | $328 | 22.3% | | Airframe | $312 | $226 | 38.1% | | Non-aviation | $14 | $14 | 0.0% | | Total segment EBITDA As Defined | $727 | $568 | 28.0% | - The Airframe segment's EBITDA As Defined from acquisitions increased by $6 million due to the impact of the DART acquisition[108] Liquidity and Capital Resources The company maintained a strong liquidity position with substantial cash and available credit, generating significant operating cash flow, and strategically managed its debt by refinancing term loans to extend maturities Cash Liquidity as of December 31, 2022 (in millions) | Component | Amount | | :--- | :--- | | Cash and cash equivalents | $3,288 | | Availability on revolving credit facility | $779 | | Total Cash liquidity | $4,067 | - The company's capital allocation priorities are: (1) capital spending, (2) acquisitions, (3) special dividends and/or stock repurchases, and (4) debt prepayment[113] - There is no maturity on any tranche of term loans or notes until May 2025, providing significant financial flexibility[117] Quantitative and Qualitative Disclosure About Market Risk No material changes to market risks were reported for Q1 FY2023 compared to the fiscal year ended September 30, 2022 - Market risks have not materially changed for the first quarter of fiscal year 2023 compared to the fiscal year ended September 30, 2022[165] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2022, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of December 31, 2022, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures are effective[166] - No changes in internal control over financial reporting occurred during the fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[167] PART II OTHER INFORMATION Legal Proceedings The company reports no material adverse effect from legal proceedings, including the settlement of a derivative lawsuit and disagreement with a DOD OIG audit report recommending a $20.8 million refund - A derivative complaint filed in 2021 regarding director compensation was settled, with the court approving the settlement on November 10, 2022, and is not expected to have a material adverse impact[77][78] - In response to a DOD OIG audit report recommending a voluntary refund of $20.8 million, TransDigm disagrees with the report's methodology and conclusions and has not recorded a loss contingency as of December 31, 2022[79][80][81] Risk Factors No material changes to risk factors were reported compared to the Form 10-K filed on November 10, 2022 - There have been no material changes to the risk factors described in the Form 10-K filed on November 10, 2022[171] Unregistered Sales of Equity Securities and Use of Proceeds The company made no stock repurchases in Q1 FY2023, with $1,288 million remaining available under the $2,200 million stock repurchase program - No stock repurchases were made during the first quarter of fiscal 2023[173] - As of December 31, 2022, $1,288 million remains available for repurchase under the existing $2,200 million stock repurchase program[173] Other Information Halle Martin, General Counsel, retired effective February 3, 2023, with a Separation and Consulting Agreement allowing continued stock option vesting and consulting services - Halle Martin, General Counsel, retired on February 3, 2023. A Separation and Consulting Agreement was executed, allowing for continued vesting of certain stock options and providing for future consulting services[174] Exhibits This section lists exhibits filed with the Form 10-Q, including Credit Agreement amendments, subsidiary guarantors, and SOX certifications