TransDigm Group Inc (TDG) 2004 Q4 法說會逐字稿

(OPERATOR INSTRUCTIONS).Good day, and welcome to the TransDigm fourth quarter year-end 2004 earnings release conference call. Today’s call is being recorded.

At this time, I would like to turn the call over to Vice President and Chief Financial Officer, Mr. Greg Rufus. Please go ahead sir.

Thank you. Good day ladies and gentlemen, welcome to the TransDigm conference call. I would like to thank all that have called in today. We will be discussing the results of operations for our fiscal year 2004, which ended September 30, 2004 along with the current market update.

Before we begin, the Company would like to remind you that statements made during this call that are not historical facts are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statement.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information under the caption “Special Note Regarding Forward-Looking Statements and Risk Factors” in the Company’s latest annual report on Form 10-K filed with the SEC. The Form 10-K is available through the Investors’ section of our website or through the SEC’s website at www.SEC.gov.

The Company would also like to advise you that during the course of the call, we will be referring EBITDA as defined, which is a non-GAAP financial measure. Please see the tables on pages 14 through 16 and related footnotes of our recently-filed 10-K for a presentation of the most directly comparable GAAP measure and a reconciliation of EBITDA as defined to the most directly comparable GAAP measure.

Now, having taken care of the necessary disclosures let me now introduce Nick Howley, our President and Chief Executive Officer who will first give a current market overview.

Good morning. Well, 2004 was a good year for TransDigm. The fiscal year performance was modestly better than we expected at the beginning of the year. I think as I’ve mentioned to you before the quarter-to-quarter comparisons can be impacted by things like large orders or mix changes or inventory fluctuations in the system, things like that. I’m going to focus primarily on the full-year numbers versus the prior year. I believe it’s more helpful to understanding the business for the year.

If I adjust the volume for acquisition impact, you’ll see there’s a slight revenue drop versus 2003. This is due entirely to the large 2003 Airbus cockpit security retrofit. This is almost offset in its entirety by the rising commercial aerospace revenues as the market starts to pick up and some other new business comes in. If you remove the impact of the cockpit security retrofit and acquisitions, the base sales were up about 10 percent versus the prior year, and that’s kind of a same-store basis.

On the positive side, we saw clear signs of a commercial aerospace market recovery. On the other side, on the not as positive we did see some softness in the Defense business. On a full-year basis versus the prior year, commercial OEM shipments were about flat; commercial after-market shipments were up steadily through the year; and military shipments were down a little year-over-year.

Let me give you just a little more color on those segments. In the commercial transport OEM world, that’s the Boeing Airbus-size airplanes, though the shipments were about flat, we’re starting to see a clear increase in the booking rates. In the regional and biz-jet OEM sector, the shipments were up slightly versus the prior year, but the bookings picked up more. The bookings are a mix of rising business jet orders and lower or decreasing regional aircraft orders as both Canada Air and Embraer are soft along with their production rates.

In the commercial after-market we saw just continuing improvement through the year. The year was up in the double digits on a full-year basis. As I mentioned, in the Defense sector shipments and bookings were down a little versus the strot [ph] of the prior very strong year.

As you may or may not know, we acquired Avionics Instruments for $21 million in the middle of the fourth quarter, or actually toward the end, this did not significantly impact the volume or profit for the year. As you may also know, we acquired Skurka Engineering, a manufacturer of AC/DC specialized motors for about $30 million in late December 2004. This is another good proprietary aerospace component business and fits well with our product strategy.

If you look at our EBITDA, and when I talk about EBITDA I’m always talking about EBITDA as defined, and there’s also a pretty good reconciliation on page 18 of the 10-K, we had a good year. ON the year-over-year basis, the absolute dollars of EBITDA as defined were up about 12 percent on a volume increase of about 3 percent.

Full-year EBITDA margins were strong at 46 percent of sales. That’s an increase of about 4 margin points versus the prior year. As I mentioned to you before, the mix of product can swing quarterly margins. I don’t know that 46 percent is a steadily sustainable margin. It was a good mix of products in ’04.

The major factors that impacted our performance are very similar to those I discussed in the other quarters. We continue to get productivity improvements or take costs out of our business. Our proprietary positions are strong and well protected. We have a very broad base of commercial and military platform applications, both in the after market and at the OEM. And there are clear signs of a beginning commercial aerospace recovery.

We ended the fiscal year, that’s the end of September, with about $100 million in cash. That was after paying a little over $20 million for an acquisition in July. We have about $100 million of undrawn and unrestricted revolver, and we are in good shape with all of the covenants.

As we look forward to 2005, the financial health of the airline continues to be a concern, the whole airline industry. Most of the major carriers are in no condition to withstand any additional perturbations in the market or from outside events. Also I’ll say Defense spending outlook is uncertain. Assuming the current market trends continue, however, we anticipate that 2005 revenues and EBITDA dollars as defined will be higher in ’05 than they were in ’04.

However, the combination of higher OEM shipments, which are generally lower margin, the acquisition of 2 small businesses with somewhat lower margins, and fluctuations in customer inventories that frequently occur as market conditions change may result in a somewhat lower EBITDA margin overall, and I suspect some fluctuations in margins as we proceed through the year.

And with that, let me hand this over to Greg to go through his part of the presentation, and then we’ll take questions.

Okay, thanks Nick. Today’s discussion will focus on the full-year results of operations for FY ’04 compared to FY ’03. As most of you who follow TransDigm on a quarterly basis know, these past 2 fiscal reporting periods have been very active. During these periods, we have had both financing items and operating items that have impacted our reported results in a way in which the GAAP results as presented could make it difficult to compare to the operational results between the 2 fiscal years. I will attempt to isolate these issues, and hopefully you’ll conclude that the underlying operations are performing very well versus the prior year.

First, let me explain the reporting dynamics of the financing actions impacting these 2 periods. TransDigm completed a merger on July 22, 2003. With this transaction, we recorded a one-time merger charge of approximately $176 million in the fourth quarter of 2003. This impacts the comparability between the 2 periods. We also recorded inventory purchase accounting adjustments, along with increases in non-cash items, such as amortization, depreciation, and stock option and deferred compensation costs all related to the merger. We started recording these expenses in the fourth quarter of 2003, and they continued for the full year in FY ’04. All of these items have a significant impact when comparing current and prior year results.

Considering operating impacts on the reported results, there are 3 items which impact the comparability between the 2 periods being discussed today. First, we enjoyed a significant one-time cockpit security retrofit program with Airbus, which we have discussed in the past. These shipments occurred during FY ’02 and FY ’03 with the majority of the shipments occurring in FY ’03. Although we are on the go-forward OEM production with Airbus and are currently recognizing an after-market stream of revenue resulting from the retrofit, the prior year retrofit itself is non-repeat business and impacts the comparability between the 2 years.

Second, as Nick mentioned we acquired Norco in February of ’03, which is about the mid-point of our fiscal year. We have the full year’s activity recorded in FY ’04.

And third, we acquired Avionic Instrument in July of ’04, which also impacts year-to-year comparability.

Now that I’ve laid out these events, I will now give a brief overview of our reported results and discuss the changes in results of our operations between FY ’04 and FY ’03.

Net sales increased by $7.4 million or 2.5 percent to a total of $300.7 million for the fiscal year just ended compared to $293.3 million for the fiscal year September ’03. Net sales increased primarily due to an increase in after-market sales of $19.9 million; $12.8 million of increased sales is due to the acquisitions of Norco and Avionic Instrument that we just discussed. And there was an increase of $3.5 million in OEM sales. These increases in net sales were partially offset by a decrease of $28.8 million of non-repeat sales in the prior year that supported the cockpit security retrofit program.

Gross profit increased by $10.1 million to $136.5 million for the fiscal year ended September 30 ’04 from $126.4 million for the fiscal year ended ’03. This increase is attributable to the higher sales just discussed, favorable product mix in ’04, the strength of the Company’s proprietary products and market positions, and the decrease of non-recurring integration costs pertaining to the Norco acquisition. Partially offsetting these increases in gross profit was a net increase of $5.6 million resulting from inventory purchase price accounting charges pertaining to the merger.

Gross profit as a percentage of net sales increased to 45.5 percent for the fiscal year from 43.1 percent for the prior year. Gross profit increased 8 percent on a sales increase of only 2.5 percent. This expansion of margin is principally due to the favorable product mix, the continuing cost control measures and productivity savings, and the strength of the Company’s proprietary products and market positions. Partially offsetting the higher gross profit margin was the net increase of non-recurring charges resulting from the acquisitions discussed of $4.1 million or 1.3 percent of sales.

Selling and administrative expenses increased $5.8 million or 23 percent to $31.2 million or 10.4 percent of sales for the fiscal year just ended compared to $25.4 million or 8.7 percent of sales for the prior fiscal year primarily due to the increase of $4.5 million or 1.5 percent of sales of deferred compensation plan expenses that were pushed out to the Company from TD Holding. The deferred compensation costs were incurred by the Company in connection with certain employees’ participation in 2 deferred compensation plans of TD Holding established contemporaneously with the mergers.

Amortization of intangibles increased by $7.4 million to $10.3 million for the fiscal year ended from $2.9 million for the prior fiscal year ended primarily due to the increase in amortization of other intangible assets resulting from the recognition of a full year of amortization expense on the additional identifiable intangible recognized in accounting for the merger. As mentioned, prior year expenses of the merger represented a one-time charge that was recorded in fiscal 2003 as a result of the merger.

Income from operations increased $172.9 million to $95 million for the fiscal year just ended compared to the $77.9 million loss from operations from the fiscal year ended primarily due to the expenses of the merger recorded in fiscal ’03 and the other factors just discussed.

Interest expense increased by $11.1 million or 29.5 percent to $48.9 million for the fiscal year just ended compared to the prior year. This increase was primarily caused by the issuance of $400 million of 8-3/8 senior subordinated notes in July of ’03 in connection with the merger, resulting in an additional interest expense of $10.7 million; an increase in the weighted average of borrowing level of the Company’s existing senior credit facilities to approximately $294 million in fiscal ’04 from approximately $205 million in fiscal ’03 primarily due to the mergers, partially offset by the interest rates during the year, which resulted in an additional interest expense of $1.5 million. And a $1.5 million decrease in interest charges in ’04 resulting from the February ’03 repayment of all of Holding’s outstanding 12 percent paid-in-kind notes totaling $32.8 million.

Income tax provision as a percent of income before income taxes was 36 percent for the fiscal year just ended compared to 37 percent for the prior fiscal year. The Company earned $29.6 million for the fiscal year ended September 30, 2004 compared to a net loss of $72.8 million for the fiscal year ended September 30, 2003 as a result of the factors just discussed.

Hopefully, as you review and assess our results of operations, the above discussion will help you understand our core operating results. I’d like to now switch topics and discuss a few items on the balance sheet. As Nick mentioned, we finished the year with $99 million of cash, cash equivalents and marketable securities, an increase of $80 million from the beginning of the year. Included in this increase is approximately $38 million of income tax refund relating to the ’03 merger and the use of approximately $22 million to acquire Avionic Instrument in July. The net decrease of $13 million of inventory resulted from approximately $18 million of reduction resulting from inventory step-up amortization recorded from the merger offset by the impact of the acquisition and normal requirements.

The increase in accounts receivable is mostly attributable to the strong fourth quarter sales compared to the prior year, and a minor increase due to the acquisition. And to summarize, our base operations are performing well. We’re generating cash, and we’re 100 percent compliant with all covenants.

Having finished the formal part of this, we’ll now turn the conversation open for questions.

Thank you. (OPERTAOR INSTRUCTIONS). And there are no questions at this time. I’m sorry we do have one that just came in. Guy Baron, Credit Suisse First Boston.

Hi good morning, it’s actually Guy Baron. A couple of quick questions if I could. Nick you sort of talked a bit about the expectations for next year with revenues and EBITDA being up. Can you maybe give us a little more color in terms of what you see, the components of your base business, commercial, OEM, after-market, military sort of feeding into that expectation versus simply the acquisitions that you’ve just made coming online this year?

Yes I’m not going to give you much more clarity on an exact number, but I can give you -- we expect the Defense business will be flat to down a little again. That’s always tough to predict, but it’s coming off some pretty high numbers and we don’t expect that to hold. Time will tell.

I expect the OEM business in the commercial transport will continue to rise though that’s the toughest margins there. In the regional and biz-jet business, it’s mixed at least in our assessment. The business jet OEMs will continue to rise in our view, at least a number of them will. The regional OEMs are going to be tough. That’s likely coming down.

In the commercial after market, which is the biggest sector we would expect to see continuing growth somewhere in the revenue passenger mile range.

All right, and then just switching gears to the acquisition front you sort of after the acquisition by Wahlberg [ph] and the financing for a good year, you’d noted on a number of occasions that you were seeing an M&A environment with sort of limited available targets and evaluations which didn’t necessarily make sense at the time. You’ve now completed 2 acquisitions over the last 6 months. What are seeing that’s different in this environment where you are clearly able to find targets and find them at the right price?

I think there are a couple of things going on. One, we’re -- to use the expression, we’re beating the bushes pretty hard right now, so we may be seeing things a little more than we might have seen otherwise. I also think there are some more businesses for sale, though they tend to be at the smaller size rather than the larger size. We haven’t seen much in the, I’ll say $50 million revenue and up. We’ve tended to see smaller things. And when they can fit, you can frequently get a little better buys there. Does that help?

It does. All right, thank you very much.

You know, a good business of reasonable size gets bid up in price pretty well still.

Were you seeing other bidders for Skurka?

I’m not going to talk about each one.

All right, thanks.

(OPERATOR INSTRUCTIONS). And there are no further questions at this time.

Well, I’d like to thank everybody for calling in. Hopefully in about a month or so we’ll be issuing our first quarter results and having another call. Thank you everybody.

And that will conclude today’s conference call. Thank you for your participation.