TransDigm Beats, Raises Guidance - Analyst Blog

TransDigm Group Incorporated (TDG) reported third quarter earnings per share from continuing operations of 86 cents, beating the Zacks Consensus Estimate of 78 cents. Excluding non-cash compensation costs of 2 cents, adjusted earnings per share was 88 cents compared with 83 cents in the prior-year quarter.

Revenue

Total revenue was $214.2 million, an increase of 12.8% year over year. The revenue reported by the company was almost inline with the Zacks Consensus Estimate of $214 million.

The company’s strong top-line and bottom-line performance reflected an upturn in global air traffic. Sales in Commercial aftermarket were significantly above sales in the prior-year quarter and also increased sequentially. Defense revenue in the quarter was flat compared with the third quarter of 2009 and increased moderately from the prior quarter. Revenue from Commercial OEM continued to be low during the quarter.

Income & Expenses

The company delivered a strong operating performance. Total operating expense increased to $27.1 million from $22.7 million in the prior-year quarter. However operating income increased by 11.9% due to higher revenue. EBITDA was $105.8 million (49.4% of revenue), up 11.7%. Adjusted net income for the quarter was $46.5 million, up 6.5%.

Balance Sheet & Cash Flow

Cash and cash equivalents was $258.4 million with long-term debt of $1,771.1 million. Cash flow from operations was $155.3 million compared with $129.0 million in the prior-year quarter.

Acquisition

During the quarter, acquisitions related expenses were 3 cents per share. Subsequent to the end of the quarter, on August 6, 2010, TransDigm announced that it has entered into an agreement to acquire the stock of Semco Instruments Inc., headquartered in Valencia, California. Semco manufactures proprietary, highly engineered components for the aerospace industry. The company expects the acquisition to close during the fourth quarter of fiscal 2010.

Outlook

Led by an improving market conditions and no further planned acquisition, the company increased its fiscal 2010 revenue guidance to the range of $817 million to $825 million from $804 million to $835 million. EBITDA is anticipated in the range of $404 million to $408 million (up from prior expectation of $393 million to $408 million) compared with $375 million in fiscal 2009 and net income in the range of $158 million to $160 million (up from prior expectation of $150 million to $155 million) compared with $163 million in fiscal 2009. Earnings per share are expected to be in the range of $2.40 to $2.44 per share on weighted average shares outstanding of 53.0 million (up from prior expectation of $2.25 to $2.35 per share) compared with $3.10 in fiscal 2009.

TransDigm has large, renowned customers in the aerospace/defense sector. These include: (1) distributors of aerospace components; (2) worldwide commercial airlines, including national and regional airlines; (3) large commercial transport and regional and business aircraft OEMs; (4) various armed forces of the United States and friendly foreign governments; (5) defense OEMs; (6) system suppliers; and (7) various other industrial customers.

However, the military and defense market depends on government budget trends, particularly the DOD budget. In addition to the normal business risks, its supply of products to the United States government is subject to unique risks that are largely beyond its control. A significant decline in U.S. military expenditures in the future could result in a reduction in the amount of products sold to the various agencies and organizations of the U.S. government.

TransDigm Group Incorporated is a leading global designer, producer and supplier of highly engineered aircraft components used on nearly all commercial and military aircraft in service today. Its business is well diversified due to the broad range of products it offers to its customers. Major competitors of TransDigm are Goodrich Corp. (GR), Honeywell International Inc. (HON) and United Technologies Corp. (UTX).

We currently maintain our Neutral recommendation on TransDigm, with a Zacks #4 Rank over the next one-to-three months.