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TransDigm Group Incorporated (NYSE:TDG) has been trading volatile in 2022, even as the company was able to boost revenue significantly over that time, but some of its important metrics like EPS, adjusted earnings per share and EBITDA showed signs of slowing down in comparison to results for all of 2022.
The weaker earnings numbers appear to be from the slowing down of its commercial aftermarket segment, which while positive for the reporting period, showed signs of fatigue in the fourth fiscal quarter. This probably is a result of the post-COVID cycle nearing its end.
Another potential issue I see for the longer term is the size of the company itself. In the past it has outperformed its peers in the aerospace sector via quality acquisitions, but now that the company is much larger, it’s going to take larger acquisitions to move the needle, and those types of companies aren’t as many in number as the smaller firms it acquired in the past.
Its Defense segment is also under decline, as it underperformed revenue in the prior years, and the same headwinds it faced in 2022 will still be there in 2023, and in some cases, worse.
In this article we’ll look at some of the numbers from its last earnings report, what the near-term performance of the company is likely to be, and why it needs more tailwinds in order for it to sustainably grow over the long haul.
Latest numbers
In the fourth fiscal quarter revenue was $1.5 billion, up 18 percent from the $1.28 billion in generated in the fourth fiscal quarter of 2021. For full-year fiscal 2022 revenue was $5.43 billion, up 13 percent from $4.8 billion in fiscal 2021.
Income from continuing operations was $266 million, up 27 percent from $209 million year-over-year. Earnings per share was $3.98, up 11 percent from earnings per share of $3.58 from the fourth fiscal quarter of 2021. Income from continuing operations for fiscal 2022 was $866 million, a gain of 27 percent from $681 million in fiscal 2021. Earnings per share for fiscal 2022 was $13.38, an increase of 29 percent from the $10.41 in earnings per share in fiscal 2021.
EBITDA in the quarter was $704 million, a gain of 14.8 percent over EBITDA of $613 million in the same quarter of 2021. EBITDA in fiscal 2022 was $2.5 billion, up 21 percent from EBITDA of $2 billion in fiscal 2021. EBITDA margin for 2022 was 48.7 percent, up 310 basis points from the prior fiscal year.
Adjusted net income in the reporting period $313 million, or $5.50 per share, an increase of 29 percent from adjusted net income of $248 million, or $4.25 per share in the fourth fiscal quarter of 2021.
Adjusted earnings per share for fiscal 2022 was $17.14, up 41 percent from $12.13 in adjusted earnings per share in fiscal 2021.
Cash and cash equivalents at the end of the fourth fiscal quarter was $3 billion, down from the $4.8 billion in cash and cash equivalents at the end of the fourth fiscal quarter of 2021. Long-term debt stood at $19.3 billion at the end of the reporting period. At the end of the quarter, net debt-to-EBITDA ratio was 6.4x.
Since the company had approximately 85 percent of its long-term debt hedged through 2025, it has little interest in further paying down its debt at this time.
Performance by segment
Commercial market: OEM and Aftermarket
TransDigm breaks down its Commercial Market into two categories: OEM and aftermarket, which together account for approximately 65 percent of total revenue. We’ll look first at OEM. Last, we’ll look at its Defense segment.
Commercial OEM
Revenue from commercial OEM jumped 24 percent in the fourth fiscal quarter compared to the fourth fiscal quarter of 2021, and 24 percent for full-year fiscal 2022 as measured against full fiscal 2021. Management also noted that bookings in the fourth fiscal quarter were strong in comparison to the same reporting period of 2021.
Also significant was OEM sales in the quarter were up approximately 8 percent sequentially, which means it had picked up some momentum in the reporting period.
While that looked good, there are concerns over risks associated with the production rates at some OEMs in regard to supply chain constraints and labor shortages connected to the overall aerospace sector. If that continues and/or gets worse, it’s going to put some downward pressure on the performance of commercial OEM.
Commercial Aftermarket
Revenue in its profitable Aftermarket category jumped by about 36 percent in the fourth fiscal quarter compared to the fourth fiscal quarter of 2021, and by around 43 percent for full-year 2022 compared to fiscal 2021.
The increase in commercial aftermarket revenue came from strong demand in the passenger submarket of TDG, the largest submarket the company competes in. Probably the biggest challenge I see in its aftermarket business is the fact it only grew 6 percent sequentially, which means it really started to slow down in the fourth fiscal quarter of 2022, even though it outpaced last year’s sales in the same reporting period. With it being a key catalyst for margins and earnings, any slowdown here would have a significant impact on the company, and I think that’s what’s going to happen heading into fiscal 2023 based upon the historical trend of airlines increasing repairs following crises. For that reason, I don’t see the company being able to continue to grow aftermarket at the pace it has been growing at in recent quarters.
Defense segment
The Defense segment of TDG historically accounts for approximately 35 percent of total sales for the company. OEM and aftermarket revenues in Defense were up 2 percent in the fourth fiscal quarter of 2022, compared to the fiscal fourth quarter of 2021, but was down 3 percent for all of fiscal 2022 when measured against fiscal 2021. One of the reasons for the weak performance was the typical delay in defense outlays, i.e., being slow in getting funding to projects. What was a little different for TDG this time around was the delays in funding were longer than usual. When the delays will be resolved is “hard to predict,” as management said, and will probably result in some very lumpy quarters in the near future. Booking during the quarter did increase, so over time it should increase the contribution of the Defense segment to the performance of TDG.
Concerning supply chain and Defense, this continues to be a problem concerning electronic components.
Even though the order book in the segment is stronger, if it isn’t able to mitigate its supply chain issues and funding continues to lag, it could be a tough year in its Defense segment, which has already shown signs of slowing down.
The company has guided for growth in the segment for fiscal 2023 to be in the low t0 mid-single-digit range. Anything disrupting that could result in it being down for fiscal 2023 as it was in fiscal 2022.
Conclusion
Even though TDG has been doing fairly well in 2022, I think it’s starting to show signs of slowing growth, and it’s going to get harder to perform at recent levels in the near term, and if it faces difficulty in finding the types of acquisitions that will move the needle because of its growing size, the company could face some challenging times going forward.
My major concern is with its Aftermarket segment, which did slowdown in the fourth fiscal quarter, and if the airline repair market is transitional back from crisis mode to operating like it usually does in normal times, it could be a big headwind for TDG in 2023, and it would not only cut back on revenue, but have a strong impact on margins and earnings too.
The stock has been trading volatile during 2022, and since November 10, 2022, has been rangebound from approximately $600.00 per share to $635.00 per share. I think the market is pausing to see which direction the company is going to go, and with the headwinds mentioned in this article, it looks to me like moving more to the downside and staying there until a positive catalyst strong enough to provide sustainable tailwinds emerges.
At this time, I don’t see it and think TDG could be in for a tough year.
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