TransDigm Group Incorporated, a leading global designer, producer and supplier of highly engineered aircraft components, today reported results for the third quarter ended July 3, 2021, which continue to be unfavorably impacted by the COVID-19 pandemic. TransDigm also announced today that W. Nicholas (Nick) Howley, previously TransDigm’s Executive Chairman, transitioned to non-executive Chairman of the Board of Directors effective August 6, 2021. More information regarding the transition is provided later in this release.
Third quarter highlights include:
Fiscal 2021 financial guidance remains suspended at this time.
Net sales for the quarter increased 19.2%, or $196 million, to $1,218 million from $1,022 million in the comparable quarter a year ago. Organic sales growth was 15.1%. Net acquisition and divestiture sales growth was $42 million over the comparable quarter a year ago.
Income from continuing operations for the quarter increased $322 million to $317 million from a loss from continuing operations of $(5) million in the comparable quarter a year ago. The increase in income from continuing operations primarily reflects the increase in net sales described above, lower effective tax rate, the net gain on sale recognized as a result of the divestitures completed during the third quarter of fiscal 2021, and lower COVID-19 restructuring costs.
Adjusted net income for the quarter increased 120.5% to $194 million, or $3.33 per share, from $88 million, or $1.54 per share, in the comparable quarter a year ago.
EBITDA for the quarter increased 56.3% to $572 million from $366 million for the comparable quarter a year ago. EBITDA As Defined for the quarter increased 31.8% to $559 million compared with $424 million in the comparable quarter a year ago. EBITDA As Defined as a percentage of net sales for the quarter was 45.9%, representing sequential improvement versus the second fiscal quarter of 2021.
“Trends in the commercial aerospace industry are encouraging and have increasingly shown signs of recovery in recent months with vaccination rates expanding and air traffic improving, especially in certain domestic markets. We also saw another quarter of sequential improvement in our commercial aftermarket revenues,” stated Kevin Stein, TransDigm Group’s President and Chief Executive Officer. “Additionally, I am very pleased that we continue to sequentially expand our EBITDA As Defined margin as a result of continued recovery in our commercial aftermarket revenues as well as careful management of our cost structure and focus on our operating strategy in this challenging commercial environment.”
The current quarter effective tax rate was (30.0)% compared to 113.5% for the comparable period of fiscal 2020. The effective tax rate in the current quarter was positively impacted by the release of the valuation allowance applicable to the net interest deduction limitation carryforward and the discrete impact of excess tax benefits associated with share-based payments. For the full 2021 fiscal year, the Company expects the effective tax rate to be in the range of 0% to 3% and the adjusted tax rate to be in the range of 18% to 20%.
On April 27, 2021, TransDigm completed the divestiture of the Technical Airborne Components business (“TAC”) to Searchlight Capital Partners for approximately $40 million in cash.
On June 30, 2021, TransDigm completed the divestiture of its ScioTeq and TREALITY Simulation Visual Systems (“ScioTeq and TREALITY”) businesses to OpenGate Capital for approximately $200 million in cash. ScioTeq and TREALITY were acquired by TransDigm in March 2019 as part of the Esterline Technologies acquisition.
The net gain on sale recognized during the third quarter of fiscal 2021 as a result of the ScioTeq and TREALITY and TAC divestitures was approximately $68 million.
The financial results of the ScioTeq and TREALITY and TAC businesses for all periods under TransDigm’s ownership will remain classified as continuing operations in accordance with U.S. generally accepted accounting principles.
Net sales for the thirty-nine week period ended July 3, 2021 declined 10.5%, or $411 million, to $3,519 million from $3,930 million in the comparable period a year ago.
Income from continuing operations for the thirty-nine week period ended July 3, 2021 was $473 million, a decrease of 14.3% compared to $552 million in the comparable period a year ago. The decrease in income from continuing operations primarily reflects the decline in net sales described above, along with higher non-cash stock compensation expense and interest expense, partially offset by a lower effective tax rate and the net gain on sale recognized as a result of the divestitures completed during the third quarter of fiscal 2021.
GAAP earnings per share were reduced in fiscal 2021 and 2020 by $1.24 per share and $3.22 per share, respectively, as a result of dividend equivalent payments made during each year. As a reminder, GAAP earnings per share are reduced when TransDigm makes dividend equivalent payments pursuant to the Company’s stock option plans. These dividend equivalent payments are made during the Company’s first fiscal quarter each year and also upon payment of any special dividends.
Adjusted net income for the thirty-nine week period ended July 3, 2021 decreased 30.7% to $460 million, or $7.88 per share, from $664 million, or $11.57 per share, in the comparable period a year ago.
EBITDA for the thirty-nine week period ended July 3, 2021 decreased 13.6% to $1,414 million from $1,637 million for the comparable period a year ago. EBITDA As Defined for the period decreased 12.8% to $1,552 million compared with $1,780 million in the comparable period a year ago. EBITDA As Defined as a percentage of net sales for the current period was 44.1%.
Please see the attached tables for a reconciliation of income (loss) from continuing operations to EBITDA, EBITDA As Defined, and adjusted net income; a reconciliation of net cash provided by operating activities to EBITDA and EBITDA As Defined, and a reconciliation of earnings (loss) per share to adjusted earnings per share for the periods discussed in this press release.
Fiscal 2021 Outlook
Given the considerable uncertainty around the extent and duration of business disruptions related to the COVID-19 pandemic, and how that will continue to impact operations, the Company will not provide fiscal year 2021 guidance at this time.
Transition of W. Nicholas Howley from Executive Chairman to Non-Executive Chairman
TransDigm also announced today the transition of Mr. Howley from TransDigm’s Executive Chairman to Chairman of the Board of Directors, effective August 6, 2021.
As Chairman and Chair of the Executive Committee, Mr. Howley will continue to focus his efforts primarily on matters relating to capital allocation, mergers and acquisitions, corporate strategy, and leadership of the Board of Directors.
This transition timeline is accelerated by roughly one year, as Mr. Howley’s previous employment agreement anticipated his transition from Executive Chairman to Chairman in December 2022. Mr. Howley intends to continue in the Chairman role through at least fiscal 2024, which is the same commitment time period as his previous employment agreement.
Mr. Howley stated, “The duration of my time commitment with TransDigm will continue through at least 2024 – unchanged by this action. The orderly transition outlined in my previous employment agreement is proceeding well and ahead of schedule, and after three years, now seems like an appropriate time to move into the next phase. Over the past three years, Kevin and his team have dealt well with many significant issues, including both the highly successful integration of Esterline Technologies, our largest acquisition to date, and the unprecedented COVID-19 situation. I look forward to continuing as Chairman of the Board and working with Kevin on TransDigm’s consistent strategy of creating long term intrinsic value for our shareholders. As part of this effort, I will maintain a particular focus on capital allocation, mergers and acquisitions, and major strategic issues.”
“I have benefited tremendously as the CEO of TransDigm from the overlap with Nick in his Executive Chairman role,” stated Kevin Stein, TransDigm Group’s President and Chief Executive Officer. “I look forward to a continuing partnership with Nick in his role as Chairman and to continuing together the exceptional value generating strategy that has been the cornerstone of this organization since Nick and Doug Peacock founded TransDigm in 1993.”
Earnings Conference Call
TransDigm Group will host a conference call for investors and security analysts on August 10, 2021, beginning at 11:00 a.m., Eastern Time. To join the call, dial (833) 397-0943 and enter the passcode 7297154. International callers should dial (720) 405-3217 and use the same passcode. A live audio webcast can be accessed online at http://www.transdigm.com. A slide presentation will also be available for reference during the conference call; go to the investor relations page of our website and click on “Presentations.”
The call will be archived on the website and available for replay at approximately 2:00 p.m., Eastern Time. A telephone replay will be available for one week by dialing (855) 859-2056 and entering the passcode 7297154. International callers should dial (404) 537-3406 and use the same passcode.
About TransDigm Group
TransDigm Group, through its wholly-owned subsidiaries, is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. Major product offerings, substantially all of which are ultimately provided to end-users in the aerospace industry, include mechanical/electro-mechanical actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, specialized AC/DC electric motors and generators, batteries and chargers, engineered latching and locking devices, engineered rods, engineered connectors and elastomer sealing solutions, databus and power controls, cockpit security components and systems, specialized and advanced cockpit displays, engineered audio, radio and antenna systems, specialized lavatory components, seat belts and safety restraints, engineered and customized interior surfaces and related components, advanced sensor products, switches and relay panels, thermal protection and insulation, lighting and control technology, parachutes, high performance hoists, winches and lifting devices, and cargo loading, handling and delivery systems.