TransDigm Beats Earnings, Guides Low

Zacks

Leading global designer, producer and supplier of highly engineered aircraft components, TransDigm Group Incorporated (TDG) reported third-quarter fiscal 2013 adjusted earnings per share of $1.89, beating the Zacks Consensus Estimate of $1.70 and up from $1.88 earned in the prior-year quarter. Adjusted net income for the reported quarter rose 1.9% to $103.1 million. 

However, GAAP net income came in at $76.7 million, down 15.2% year over year. GAAP earnings were 71 cents per share, down 57.7% from $1.68 in the prior-year quarter. The reduction in year-over-year earnings was mainly due to non-cash compensation cost related to the accelerated vesting of 2.4 million stock options and higher interest payments. This weakened investor sentiment, leading to a 2% drop in share price with shares eventually closing at $145.20 on Aug 6, 2013.

Revenue

Net sales in the quarter totaled $488.6 million, representing a year-over-year increase of 5.8%. Organic net sales growth was up 4.5% from the prior-year period, driven by increase in volumes from commercial original equipment manufacturer (:OEM) and defense. Growth in acquisitions for the quarter was 1.3%, driven by positive synergies from the acquisitions of Arkwin, Aerosonic and Aero-Instruments. Revenues managed to beat the Zacks Consensus Estimate of $486 million.

Margins

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (:EBITDA) margin for the quarter was up 7.0% to $231.9 million versus $216.7 million in the prior-year period.

One-time expense related to stock options reduced EBITDA by 5.3% to $192.8 million from $203.5 million in the prior-year quarter. However, despite global economic uncertainties and defense market headwinds, Adjusted EBITDA margin was strong at 47.5% primarily due strong aftermarket sales.

Balance Sheet and Cash Flow

As a result of cash outflow related to the completion of three acquisitions, cash and cash equivalents fell to $269.2 million from $680 million in the preceding quarter. TransDigm had a long-term debt of $4.3 billion at the quarter-end.

Cash from operating activities in the quarter was $267 million compared with $257.8 million in the third quarter of fiscal 2012.

Revised Outlook

TransDigm expects to reap positive synergies from its three recent acquisitions and has thus, raised its top-line outlook from the previously announced fiscal 2013 guidance. The company now expects net sales to be in the range of $1,907–$1, 927 million, up from the prior range of $1,840–$1,880 million.

However, the company believes that an additional interest burden related to $1.4 billion of new debt raised in July to pay a $22 dividend will hit its bottom line. TransDigm now expects net income to be in the range of $297–$303 million, down from $326–$338 million projected earlier.

Additionally, EPS is expected to be in the range of $2.28 to $2.40 per share (down from the previously guided range of $5.29 to $5.51) due to increase in the number of outstanding shares in the next quarter. Adjusted earnings per share are expected to be in the range of $6.74 to $6.86, down from $6.83 to $7.05 projected earlier.

TransDigm currently carries a Zacks Rank #3 (Hold). Better-placed stocks in the sector that are worth a look include Rolls Royce (RYCEY), Alliant Techsystems (ATK) and AAR Corp. (AIR). While Rolls Royce and Alliant both carry a Zacks Rank #1 (Strong Buy), AAR Corp. has a Zacks Rank #2 (Buy).

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