TransDigm Group Inc (TDG) 2005 Q1 法說會逐字稿

Good day, and welcome to the TransDigm first quarter financial earnings results conference call. As a reminder, today’s conference is being recorded. We have on the call today Chairman and CEO Nick Howley; also, Vice President and Chief Financial Officer Greg Rufus. At this time, I’d like to turn the call over to Greg Rufus. Please go ahead, sir.

Thank you. Good afternoon. Welcome to the TransDigm conference call. I would like to thank all of you that have called in today. We will be discussing the results of operations for our first quarter fiscal year 2005, which ended January 1, 2005, along with the current market update.

Before we begin, the company would like to remind you that statements made during this call which 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 included in Item 2 regarded forward-looking statements and risk factors in the company’s Form 10-Q filed with the SEC. The Form 10-Q is available through the investor 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 to “EBITDA as defined,” which is a non-GAAP financial measure. Please see the tables and related footnotes on pages 19 and 20 in our recently filed 10-Q for a presentation of the most directly comparable GAAP measure and a reconciliation of EBITDA as defined to the most directly comparable GAAP measure.

Having taken care of these necessary disclosures, let me now introduce Nick Howley, our President and Chief Executive Officer, who will give you a market overview. Go ahead, Nick.

Good morning. Not a whole lot’s changed in the 30 days since our last call. The first quarter of ’05’s performance was just about as we expected. As I think I’ve mentioned to you before, quarterly comparisons can be impacted by large orders, mix changes, inventory fluctuations, etc., and aren’t always indicative, but we’ve only got one quarter to work with, so that’s what we’ll work with here.

If you look at the first quarter of ’05, the sales, or shipments, were up about 19 percent versus the same quarter the year before. Both commercial OEM and the after-market volume were both up nicely. If you pull the impact of acquisitions out, the base business sales, or kind of same-store sales, were up about 13 percent versus the prior-year Q1. There’s clear signs of a commercial aerospace market recovery. If you look at a quarterly basis versus the prior year, the commercial OEM and the after-market shipments were both up in double figures. The defense shipments were about flat.

As you know, we acquired Skurka Engineering for about $30 million in late December of ’04. This didn’t impact the volume or the profit for the quarter. As you likely also know, we acquired Fluid Regulator, a manufacturer of highly engineered valving, from Esterline [ph] Technologies for about $24 million in January of 2005. This is another good, proprietary aerospace component business that fits well with our existing products.

If you look at the EBITDA (when I talk about EBITDA, I’m always talking about EBITDA as defined on page 19 of our 10-Q), we had a reasonable quarter. On a year-over-year basis, that’s quarter to quarter, the absolute dollars of EBITDA as defined was up about 12 percent. However, the EBITDA margins were down a bit, at 43 percent of sales. That’s a decrease of about 3 points versus the prior year Q1. As I’ve mentioned before, the mix of products can swing quarterly margins. As I think I also told you before, I didn’t think 46 percent was a steadily sustainable EBITDA rate. In Q1, the combination of a slightly less rich product mix and the inclusion of a lower margin acquisition, brought this percentage down a little bit. As the lower-margin OEM production ramps up further and we include some other recent acquisitions, the margin will likely remain modestly down.

Our liquidity continues strong. We are about $94 million in cash at the end of December; that was after paying $30 million for an acquisition on the last day of the quarter. We’re about $100 million of [unintelligible] unrestricted revolver, and we’re in good shape with all our covenants.

As we look forward to the year, it’s really no different than it was in the last call. The financial health of the airlines continues to be a concern. As I mentioned before, most of the major carriers are in no condition to withstand any bumps in the road. Defense spending outlook is uncertain. Assuming that present trends continue, we still anticipate that ’05 revenues and EBITDA, as defined, will be higher than ’04. And also that a combination of higher OEM shipments, which are generally at lower margins; three smaller acquisitions, which all come in at somewhat lower margins; and fluctuations in inventory as they usually occur as market conditions change; will quite likely result in lower EBITDA margins overall for the year versus the prior year and fluctuations in margin and volumes as we progress through the year on a quarterly basis.

And with that, let me hand it over to Greg.

Okay, thanks, Nick. My discussion will focus on the current year’s first quarter results of operations compared to the prior year’s first quarter results. For those of you that have listened to our past quarterly conference calls, I have some good news. Except for two items in the prior year first quarter, the impact of accounting for the July ’03 merger has hooked us up through our quarterly comparisons. However, we’ve made several acquisitions which have some minor impact in the comparisons. Let me explain. Since July of ’04, we have made three acquisitions, as Nick has mentioned. Avionic Instruments was made in July of ’04; Skurka Aerospace on December 31, 2004; and just recently, Fluid Regulators, on January 28, 2005. The company paid cash for all three acquisitions. Since Skurka Aerospace was purchased the last day of the first quarter, we have only included their balance sheet in this 10-Q. Fluid Regulators happened in our second quarter; therefore, there is no impact in today’s discussion. And finally, Avionic Instruments results are included in the current year’s results of operations, but they are not included in the results of the prior year.

Now, let’s take a look at the first quarter. Net sales increased by $12.6 million, or 18.6 percent, closing at $80.3 million for the first quarter. This is compared to $67.7 million for the comparable quarter last year. This increase is primarily due to an increase in commercial and defense after-market sakes of $6 million, an increase of $4.1 million in the sales from the acquisition of Avionic Instruments, and an increase in OEM sales of $2.5 million.

Gross profit increased by $23.4 million, or 145 percent, closing at $39.5 million for the first quarter. This is compared to $16.1 million for the comparable quarter last year. This increase is attributable to the higher sales just discussed and charges included in the cost of sales in the prior year of $18.1 million pertaining to our inventory purchase price charges recorded in accounting for the July ’03 merger plus the reduction of some integration costs pertaining to the Norco acquisition, which occurred in the prior year. Gross profit as a percentage of net sales increased to 49 percent for the 13-week period from 24 percent for the comparable period last year, primarily due to the inventory purchase price charge and the integration costs just discussed.

Partially offsetting these favorable changes was the unfavorable product mix, resulting primarily from the increase in OEM sales and the dilutive effect of the lower margins associated with the purchase of Avionic Instruments.

Selling and administrative expenses increased by $1.2 million, or 17.4 percent, which is in line with our sales growth. Selling and administrative expenses as a percentage of net sales was approximately 10 percent and 11 percent for the two comparative quarters.

Amortization of intangibles decreased by $1 million to $1.8 million for the quarter just ended from $2.8 million for the comparable quarter last year. The decrease was due to the order backlog that was recorded in accounting for the merger that was subsequently fully amortized during fiscal 2004. This decrease was partially offset by an increase in amortization expense on the additional identifiable intangible assets recognized in the acquisition of Avionic Instruments.

Operating income increased by $23.2 million, ending at $29.4 million for the quarter just ended from the $6.2 million for the comparable quarter last year due to the factors we just discussed.

Net interest expense decreased slightly, by $400,000, to $12.3 million for the first quarter from $12.7 million from the comparable quarter.

The income tax provision as a percentage of income before income taxes was 37 percent for the current quarter and is comparable to 37.4 effective tax rate for the quarter ended last year.

Regarding that income, the company earned $10.8 million, or 13.4 percent of sales for the first quarter of fiscal 2005, compared to a reported loss of $4 million for the first quarter in ’04, as a result of the factors just discussed.

EBITDA, as defined on page 19, as Nick mentioned, was $34.9 million, up 11.9 percent from the prior year quarter of $31.2 million. EBITDA, as defined as a percentage of net sales, was 43.5 percent for the current quarter compared to 46.1 percent for the prior year. Although absolute dollars are greater, the margin erosion is due to product mix, as Nick just mentioned, along with the dilutive effect of Avionic acquisition. The operations are performing as expected.

Now, switching to the balance sheet, our liquidity remains stable. Our total cash balance, which includes cash equivalents and marketable securities, was $93.7 million at the end of the first quarter. This balance reflects the impact of paying $30.2 million for Skurka on the last day of the quarter. We also have $99.5 million of available revolver credit. The second quarter cash balance will be lower than the first quarter. It will be impacted by the cash acquisition of Fluid Regulators and our semiannual $17 million interest payment on the senior subordinated notes.

Operating assets and liabilities adjusted for the impacts of acquisitions discussed are within acceptable operating parameters.

And to summarize the financial performance for the first quarter, our operations are performing well. We are generating cash. And we’re 100 percent in compliance with all lending covenants.

Having said that, we’ll now open this conversation up for any questions you might have.

[Operator instructions.] And we’ll begin with Guy Baron. [silence]

--platforms you’re sort of concentrated on, and any expectations as to, say, the A-380. [silence] Hello? [silence]

Gentlemen, were you able to hear Mr. Baron’s question?

No, we weren’t.

Mr. Baron, please repeat you question for us.

All right; try it again. On the commercial OE business, or part of the business, could you maybe, Nick, give a little more color -- I remember you’ve done this in the past -- on sort of what platforms you guys are most concentrated on, and what your expectations are as it relates to the new-- to the A-380 business.

Well, we don’t have any particular concentration issue. We’ve put out some press releases in the past that gave some definition of that. But we don’t concentrate-- we don’t have a concentration problem. Like most U.S. companies, we’re a little more heavily weighted towards Boeing than we are towards Airbus, but our Airbus content has gone up pretty steadily. What was your question on the A-380?

Just-- I mean, what expectations do you have as it relates to that platform?

I think we’ll do reasonably well. I would say, if you compare it to the 333-40, our content will be up significantly, we think. I’ve got to tell you, we’re not sure; some of the smaller items are still being speced. But compared to the 747, we probably won’t do quite as well on the A-380 as we did on the 747. So it’ll be better than we do on the existing large Airbus airplanes, but not quite as well as we do on the ’47.

Okay. And then, just what’s the breakdown now on your after-market business between military and commercial?

Military makes up-- I don’t remember the exact breakdown of the after market, but military makes up about between 25 and 30 percent of our volume, or 20-- I think we just closed that. [speaks off mike]

I think around 23; it’s come done a--

23? Roughly a quarter of the volume, as a percent. I think that’s in the 10-Q, isn’t it?

In the 10-K.

Just the 10-K; right. All right. Then, just shifting to the acquisitions, quickly. It looks like Avionics generated $4.1 million of revenue in the quarter. Is that a pretty good presentation of the run rate level for the year, and is that pretty much in line with your initial expectations, or is it really doing better than you thought, going in?

How about, yes, yes, and no. [Chuckles] It’s in line-- it’s a pretty good run rate, and it’s in line with what we expected. And that’s what you’ll see.

Okay. So with Avionics and some of the other recent acquisitions, do you have any kind of a sense where-- and I understand there’s an OE mix issue, but any sense of where EBITDA margins may sort of bottom in the near term, and what kind of roll time frame do you sort of target initially for bringing those margins up to where the rest of the company is -- whatever that range may be, understanding it’s not constant.

Well, those companies do have a little heavier OEM mix. So the expectation to blend them up to a preexisting trans bine [ph], that shouldn’t be there. Overall, it’ll be diluted. But we will apply the value drivers we’ve talked about in the past and improve their margins over time. And we’ll do that on the schedule we see fit, right with management and the products that they have.

As far as the margins, I think-- I surely expect the next quarter isn’t going to get any better. And beyond that, we’ll just have to see. We’ll have some downward drag from the new acquisitions, as Greg said, which will come up over time. Also, we think some of the OEMs may be ordering out ahead of their production requirements. If that’s true, that’ll remedy itself a little as the year progresses. But we’ll just have to wait and see.

All right. And then, finally, as it relates to some of these acquisitions -- how does it change, if at all, sort of your expectations for incremental working capital and cap-ex needs this year?

Cap-ex needs, minimal. These are solid operations that have been around for a while. When you look at the incremental working capital, well, after we’ve acquired it, we shouldn’t need any more additional working capital because they’re full-functioning balance sheets with receivables, inventory, etc.

[Inaudible] volume issue.

Yes, I mean, it will go with volume. I mean, typically we have to put-- if the volume increases, you’ve got 25 to 30 cents per dollar of incremental volume and working capital.

All right, great. Thank you.

[Instructions] [Silence] Mr. Rufus, it appears there are no questions at this time.

Okay. Well, thanks for joining, everybody, and we look forward to doing this again about 90 days from now. Have a good day.