TransDigm Group Inc (TDG) 2005 Q3 法說會逐字稿

Good day and welcome to this TransDigm third-quarter financial earnings results conference call. Today's call is being recorded. At this time I would like to turn the call over to the Vice President and Chief Financial Officer, Mr. Greg Rufus. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. I would like to thank all of you that have called in today. We will be discussing the results of operations for the first nine months of fiscal 2005, which ended July 2, 2005, along with the current market update.

But before we begin, the Company would like to remind you that statements made during this call which are not historical in fact 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 regarding forward-looking statements and risk factors in the Company's latest Form 10-Q filed with the SEC. The Form 10-Q 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 to EBITDA. Specifically it is EBITDA as defined, which is a non-GAAP financial measure. Please see the tables and related footnotes on pages 20 and 21 of our recently filed 10-Q for a presentation of the most directly comparable GAAP measure and a reconciliation of EBITDA as defined to that measure.

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

Good morning. The business situation and the performance in the quarter just ended were substantially consistent with our previous conversation. Q3 '05 was generally a good quarter. Performance was just about as we expected. As I have mentioned to you periodically in these calls, quarterly comparisons can be a little distorting sometimes here in that they can be impacted by large orders, mix changes, inventory fluctuations in the system, and some modest amount of seasonality. As a result, I'm going to focus as I normally do on the year-to-date numbers.

The nine months sales are up about 25% versus the nine months the previous year. This increase is just about equally split between acquisitions and growth in our base business. Both the commercial and the defense shipments continue up year-over-year. If I pull out the impact of the acquisitions, the first nine months were up 12 months versus the prior year, just about half of the 25 -- 12%, excuse me.

The commercial market pickup continues. On the year-to-date basis versus the prior year and again, this is on base business, the commercial OEM shipments are up about 25%. They are rising faster than the production rates are rising at the OEMs. The commercial aftermarket shipments were up about 8%. The commercial bookings continue to run ahead of shipments, which tends to bode well. We see some inventory buildup at select customers. This isn't unusual in an upturn but bears close watching as we go forward. That is commercial customers I'm talking about now.

The defense shipments were up about 9%. The bookings however were a little weaker in the third quarter. The sustainability is uncertain and quarter-to-quarter numbers are particularly difficult to predict in the defense world.

We acquired the Eaton Aerospace productline in late June. This is a good proprietary Aerospace component business that fits well with our existing motor business, Skurka. Both are located in Los Angeles and we'll be consolidating the Eaton operation into Skurka over the next three to six months.

Our Fluid Regulators acquisition is almost completed the consolidation into our AeroControlex business. As I mentioned before, the Eaton motor productline is just in the early stages of consolidation and not much has proceeded yet.

If I look at the EBITDA and once again when I talk about EBITDA, I am always talking to EBITDA as defined on page 20 of our 10-Q. We had a pretty good first nine months. On a year-over-year basis, the absolute dollars of EBITDA as defined were up about 17%. As I mentioned last quarter, the EBITDA margins were down somewhat at 44% of sales. That is a decrease of about 3 points versus the prior year nine months. As I also mentioned before, I did not think the 46 to 47% prior year percent was steadily sustainable.

The OEM business tends to be at lower margins and as the OEM production rates run up rapidly and they actually take orders ahead of the production rates, that tends to lower the average margin a little bit. Also the acquisitions tend to dilute the margins at least initially.

Our liquidity remains strong. We have $87 million in cash and equivalents at the end of June. That is after paying about $65 million in cash for three acquisitions so far this year. We have about $100 million of undrawn and unrestricted revolver and we are in good shape with all the covenants.

As the look forward, the same type of factors that I mentioned at the last call, the financial health of the airlines continues to be a concern. We watch them carefully, especially Delta and Northwest, and defense spending is spotty. If I take out the impact of the three acquisitions, we still anticipate the 2005 revenues and EBITDA as defined to be higher than they were in '04. And the combination of higher OEM shipments generally at lower margins and some fluctuations in inventories that often occur as market conditions change, will likely result in a somewhat lower EBITDA margin overall than we saw the previous year. Greg?

I will supplement this now with a little more detail tied into the financials. As we mentioned, today's discussion will focus on the current year-to-date results of operations compared to the prior year's cumulative nine months.

As stated in prior discussions, since the fourth quarter of FY '04, TransDigm has made four acquisitions, Avionic Instruments in July '04; Skurka Aerospace on December 31 '04; Fluid Regulators on January 28 '05; and an Aerospace motor productline from Eaton Corporation on June 30, '05. The Company paid cash for all four acquisitions. Individually the separate results of the acquisitions mentioned are not significant and therefore no pro forma results are included in the 10-Q; however, collectively they do have an impact in today's discussions, which compares current year results including these acquisitions to the first nine months of the prior year, which excludes these acquisitions.

Looking at our results for the first three quarters I am pleased to report that net sales increased by $53.4 million or 24.7%. We entered the first three quarters of the year at $269.3 million, from 215.9 million for the comparable period last year. The increase is primarily due to the acquisitions just mentioned, which collectively totaled $27.6 million an increase in OEM sales of 14.9 and an increase in aftermarket sales of 10.9 million for the period.

Gross profit increased by $38.8 million ending the first three quarters of the year at $132.4 million from 93.6 million for the comparable period last year. This increase is primarily attributable to higher sales discussed and unfavorable charges recorded during fiscal 2004. Let me remind you in FY '04, $18.1 million or 8.4% of net sales was included in cost of sales in the first three months of that year. This pertained to the inventory purchase price adjustment recorded in accounting for the July 2003 merger. Also there was $1.2 million or 0.5 margin point of sales of non-recurring integration costs pertaining to the Norco acquisition in the prior year, which was a onetime expense.

Gross profit as a percentage of sales increased 5.9 margin points to 49.2% of sales for the first three quarters of this year, compared to 43.3% for the comparable period last year principally due to the prior year inventory purchase price adjustment and the non-recurring charges just mentioned. Also this increase in gross profit as a percent of sales was partially offset by the less favorable product mix and the dilutive effect of lower margins associated with the acquisitions that Nick just talked about.

Selling and administrative expenses increased by 5.8 million to 27.8 million for the first three quarters of this year from 22 million from the comparable period last year primarily due to the acquisitions and higher sales discussed. And selling and administrative expenses as a percentage of net sales was approximately 10% for both periods.

Amortization of intangibles decreased by $2.7 million to 5.8 million for the period just ended, compared to 8.5 million for the prior year. The decrease was due to the amortization of order backlog that was recorded at fair market value in accounting for the July 2003 merger that was subsequently fully amortized during fiscal 2004. The decrease was partially offset by an increase in amortization expense on the additional identifiable intangible assets recognized in connection with the acquisitions discussed earlier.

Operating income increased by 35.7 million, ending the first three quarters at $98.7 million from $63 million for the comparable period last year due to the factors just discussed. Interest expense increased $1 million to 37.9 million for the current period from 36.9 million for the comparable period last year principally due to an increase in the short-term interest rate on borrowings under the Company's credit facility.

Income tax expense as a percentage of income before income taxes was 38% for the current period, compared to a 37% effective tax rate for the comparable period last year. The increase in income tax expense as a percentage to income before taxes was primarily due to the adoption of a change in the Ohio tax code effective July 1, 2005 resulting in an adjustment to noncurrent deferred income tax assets and liabilities and a net charge to income tax expense of $0.5 million.

Regarding net income, the Company earned 37.9 million for the first three quarters of 2005, compared to 16.5 million for the same period last year as a result of the factors we have just discussed.

EBITDA as defined on page 20 of our 10-Q is $118.2 million, up 16.8% from the prior-year period of 101.2 million. EBITDA as defined as a percentage of net sales was 43.9% for the current period, compared to 46.9% for the prior-year period. Although absolute dollars are greater, the margin erosion is due to product mix as Nick mentioned along with the dilutive effect of the acquisitions. Overall the operations are performing as expected.

Switching to the balance sheet, our liquidity remains stable. Our total cash balance, which includes cash equivalents and marketable securities, was $87.5 million at the end of the first three quarters of this year. This reflects the impact of paying 63.1 million in cash for the three acquisitions during this year. We also have $99.5 million of available revolver credit.

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

To summarize, our operations are performing well. We are generating cash and we are in 100% compliance with all lending covenants.

With that, we will now open it up for any questions you may have.

(OPERATOR INSTRUCTIONS) Sarah Thompson, Lehman Brothers.

It is actually Lawrence Jalon (ph) on behalf of Sarah. Just a quick question. Given the strength of the aerospace market and your strong performance, can you comment on any potential plans to go public?

We are -- let me just say I can't give much of a comment on it. We always evaluate what options we have. We are owned by a private equity firm and we are always evaluating what options we have to maximize the equity value.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Bob Franklin (ph), Prudential.

Can you just give us any more color? You said that the bookings in defense were a little bit weaker and you were wondering about the sustainability.

I would say -- I focus more on what I said after that, that it is very tough to predict at least in our business or in our experience quarter-to-quarter ordering patterns in the defense. Generally our view is that it ran substantially up after 9/11; has been at a pretty high level, and it is a level that is tough to sustain. So the orders kind of bounce around from quarter-to-quarter, but we don't think we are going to see much growth there.

Okay, well growth may not be the issue so much as sustainability.

And as I said, we are somewhat concerned about the sustainability.

Did you give us -- I think at one point you said -- I don't know on this call but I have written down in my notes that 12% of your business is U.S. Government. Is that about right?

I don't recall giving that --.

No. Not on this call. I might have pulled it off a 10-K or (multiple speakers).

I don't know what we have disclosed on that. No. We really don't disclose or break out government military sales like that.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Joseph Campbell, Lehman Brothers.

Yes, following up on that same line of questioning, I wondered if there was any differences across the various traditional TransDigm or the acquisitions with regard to strength or weakness in the military buying activity?

I will say it's spotty. I can't say there's any difference between the acquired businesses and the historical businesses. We are finding defense ordering for now and probably for the last year to be kind of spotty. We get a good quarter at one operating unit and a bad quarter in another one and it kind of bounces around.

Great. Thanks very much.

(OPERATOR INSTRUCTIONS) It appears there are no further questions at this time. Mr. Rufus, I would like to turn the conference back over to you for any additional or closing remarks.

We would like to thank everybody and I would like to remind you we are a September 30 close. So our 10-K will not be issued until some time late November, early December and we will follow that up with another conference call a couple weeks after that.

This concludes today's presentation. Thank you for your participation.