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Text: Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.
The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures.
As usual, I'll start with a quick overview of our consistent strategy, a few comments about the quarter, and then Kevin and Mike will expand and give more color.
To reiterate, we are unique in the industry in both the consistency of our strategy in good and bad times as well as our steady focus on intrinsic shareholder value creation through all phases of the cycle.
To summarize, here are some of the reasons why we believe this: About 90% of our net sales are generated by proprietary products, and around three quarters of our net sales come from products for which we believe we are the sole source provider.
Most of our EBITDA comes from aftermarket revenues, which generally have significant higher margins, and over any extended period of time, have typically provided relative stability through the downturns.
We follow a consistent long-term strategy.
Specifically, we own and operate proprietary aerospace businesses with significant aftermarket content.
Second, we utilize a simple, well-proven, value-based operating methodology.
Third, we have a decentralized organization structure and unique compensation system closely aligned with shareholders.
Fourth, we acquire businesses that fit this strategy and where we see a clear path to a PE-like return.
And lastly, our capital structure and allocations are a key part of our value-creation methodology.
Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market.
To do this, we stay focused on both the details of value creation as well as careful allocation of our capital.
The commercial aftermarket revenue, typically the largest and most profitable portion of our business, dropped sharply in the second half of fiscal-year 2020, as we expected, following the steep decline in air travel due to COVID.
Sharp drops have happened during other severe shocks though not to this magnitude and likely duration.
At this point, there are some indications that Q3 of our fiscal-year 2020 was the bottom.
To the positive, we saw significant sequential increases in commercial aftermarket bookings in our fiscal-year Q1, but the stalling of the air travel recovery concerns us with regards to timing.
Our commercial aftermarket simply will recover as more people worldwide fly again, though not necessarily in lockstep.
This is starting to happen slowly and somewhat erratically, but the timing of the recovery is still not clear.
In addition to safety, the two most important items we continue to focus on are the things we can, to some degree, control.
One, we are tightly managing our costs.
Our revenues were down significantly in fiscal-year 2021, Q1 versus the prior year Q1, but our costs are down about the same.
The mixed impact of low commercial aftermarket revenues continues to impact our margins, but we have been able to mitigate part of this impact.
We raised an additional $1.5 billion at the beginning of our third quarter of fiscal-year '20.
The money raised was an insurance policy for these uncertain times.
It now seems unlikely that we will need it.
We continued to generate cash in Q1 of 2021.
We generated about $275 million of positive cash flow from operations and closed the quarter with almost $5 billion of cash.
This is prior to the acquisition that we made in January.
Absent some large additional dislocation or shutdown, we should come out of this with substantial firepower.
We continue to look at possible M&A opportunities, and are always attentive to our capital allocation.
But the M&A and capital markets are always difficult to predict, but especially so in these uncertain times.
In general, on capital allocation, we still tend to lean toward caution, but we feel better now than we did six months ago for sure.
M&A activity in this last quarter was more active.
As I'm sure you saw, we made a good-sized acquisition after the quarter end.
We bought the Cobham Aero Connectivity business, which is an antenna and radio business, for a purchase price of $965 million.
I must admit, it does feel good to play some offense again.
This is a good proprietary sole-source business with high aftermarket content.
We also like the customer diversity.
As usual, we expect to get a PE-like return on this transaction.
Though we are not giving overall guidance for TransDigm, for the little less than nine months that we will own the Cobham business in fiscal '21, we expect it to contribute roughly $160 million in revenue with EBITDA as defined margins running in the 25% to 35% range.
The revenue is impacted somewhat by the historical calendar year versus fiscal-year shipment timing.
We paid for the Cobham business with cash on hand, so -- but for the tax impacts, much of this will drop right through the earnings.
We also sold two small nonproprietary former Esterline businesses that did not fit our model for about $30 million so far in 2021.
The total revenues for these businesses in fiscal-year '20 were roughly $35 million, and EBITDA was in the 10% revenue range.
We continue to investigate the sale of a few other less proprietary defense businesses that don't fit as well with our consistent long-term strategy.
At this point, it's too soon to know when or if we will sell these businesses.
We still don't have sufficient clarity to give 2021 guidance.
When the smoke clears enough for us to feel more confidence, we'll reinstate the guidance.
In general, we are planning to keep tight control on expenses and hold our organization roughly flat until we see more clear signs of a pickup.
We believe we are about as well positioned as we can be for right now.
We'll watch the market develop and react accordingly.
Now let me hand it over to Kevin to review our recent performance and to give more information on Q1 and other thoughts.
Today, I'll first provide my regular review of results by key market and profitability of the business for the quarter.
I'll also comment on fiscal 2021 outlook and some COVID-19-related topics.
Our Q1 fiscal 2021 was another challenging quarter, considering the continued slowdown across the commercial aerospace industry in a difficult global economy.
In Q1, we continued to see a significant unfavorable impact on the business from the pandemic as demand for travel has remained depressed.
Despite these headwinds, I am pleased that we were able to achieve a Q1 EBITDA as defined margin approaching 43%, which was a sequential improvement from our Q4 EBITDA as defined margin.
Now we will review our revenues by market category.
For the remainder of the call, I will provide color commentary on a pro forma basis compared to the prior year period in 2020.
That is assuming we own the same mix of businesses in both periods.
In the commercial market, which typically makes up close to 65% of our revenue, we split our discussion into OEM and aftermarket.
Our total commercial OEM market revenue declined approximately 40% in Q1 when compared with Q1 of the prior year period.
The pandemic has caused a significant negative impact on the commercial OEM market.
We are under the assumption that demand for our commercial OEM products will continue to be reduced throughout fiscal 2021 due to reductions in OEM production rates and airlines deferring or canceling new aircraft orders.
Longer term, the impact of COVID-19 is fluid and continues to evolve, but we anticipate negative impacts on our commercial OEM end market for some certain -- uncertain period of time.
On a positive note, Q1 demonstrated significant sequential bookings improvement compared to Q4, which is likely an indicator of OEM destocking slowing.
Additionally, it is encouraging that the MAX has been recertified in multiple countries and added back to route schedules, although the near-term impact to our business will likely be minimal given the low build rates.
Now moving on to our commercial aftermarket business discussion.
Total commercial aftermarket revenues declined by approximately 49% in Q1 when compared with Q1 of the prior year period.
In the quarter, the decline in the commercial transport aftermarket was primarily driven by decreased demand in the passenger and interior submarkets.
There was also a decline in the commercial transport freight market but at a less impactful rate.
On a positive note, the total commercial aftermarket revenues increased sequentially by approximately 5% when comparing the current quarter to Q4 fiscal 2020.
This increase was driven by the commercial transport aftermarket.
Our quarterly commercial aftermarket bookings were down in line with observed flight traffic declines resulting from decrease in air travel demand and uncertainty surrounding COVID.
However, Q1 also demonstrated significant sequential bookings improvement compared to Q4, and the bookings in Q1 modestly outpaced sales.
This is likely the result of destocking slowing at the airlines.
To touch on a few key points of consideration.
Global revenue passenger miles are still at unprecedented lows, though off the bottom as a result of the pandemic.
IATA's most recent forecast expects the final reported revenue passenger miles for calendar year 2020 to be 66% below 2019 and that calendar year 2021 average traffic levels will be about 50% of pre-COVID crisis levels.
Cargo demand was weaker prior to COVID-19 crisis as FTKs have declined from an all-time high in 2017.
However, a loss of passenger belly cargo due to flight restrictions and reduced passenger demand has helped cargo operations to be impacted to a lesser extent by COVID-19 than commercial travel.
Business jet utilization data was -- point to stagnant growth before the current disruption.
Now during the pandemic and in the aftermath, the outlook for business jets remains unpredictable as business jet flights were rebounding but due to personal and leisure travel as opposed to business travel.
However, now we face the typical slower winter season, and the sustainability of this trend is especially difficult to foresee.
Although the longer-term impacts of the pandemic are hard to predict, we continue to believe the commercial aftermarket will recover as long as air traffic continues to improve.
The recent approval and rollout of several vaccines will greatly aid in this recovery.
We believe there is a global pent-up demand for travel.
And in due time, passengers across the globe will return, and flight activity will increase.
Historically, personal travel has accounted for the largest percentage of revenue passenger miles, and forecasts still seem to indicate a pickup in personal travel in the back half of this calendar year, followed later by business travel.
We are hopeful this will be the case.
For now, the timing of the recovery is uncertain.
And in the meantime, we will continue to make the necessary business decisions and remain focused on our value drivers.
Now let me speak about our defense market, which traditionally are at or below 35% of our total revenue.
The defense market, which includes both OEM and aftermarket revenues, grew by approximately 1% in Q1 when compared with the prior year period.
Defense bookings declined slightly in the quarter driven primarily by a modest decline in defense aftermarket bookings.
As we have said many times, defense sales and bookings can be lumpy.
We continue to expect our defense business to expand throughout the year due to the strength of our current order book.
I'm going to talk primarily about our operating performance, or EBITDA as defined.
EBITDA as defined of about $474 million for Q1 was down 30% versus prior Q1.
EBITDA as defined margin in the quarter was just under 43%.
I am pleased that amid a disrupted commercial aerospace industry and in spite of the mix impact of low commercial aftermarket sales, we were able to expand our EBITDA as defined margin by approximately 40 basis points sequentially.
This result was made possible by our cost-mitigation efforts and a consistent focus on our operating strategy.
Now moving to our outlook for 2021.
As Nick previously mentioned, we are not in a position to issue formal fiscal 2021 sales, EBITDA as defined and net income guidance at this time.
We will look to reinstitute guidance when there is less uncertainty and we have a clearer picture of the future.
We, like most aero suppliers, remain hopeful that we will realize a more meaningful return of activity toward the second half of the calendar year.
This will be driven by increased vaccination availability and an initial recovery in personal and vacation travel.
For now, we are encouraged by the recovery in commercial OEM and aftermarket bookings in the first quarter.
As for the defense market, and as we said on the Q4 earnings call, we expect defense revenue growth in the low single-digit to mid-single-digit percent range for fiscal 2021 versus prior year.
Additionally, given the continued uncertainty in the commercial market channels and consistent with our commentary on the Q4 earnings call, we are not providing an expected dollar range for EBITDA as defined for the 2021 fiscal year.
We assume a steady increase in commercial aftermarket revenue going forward and expect full year fiscal 2021 EBITDA margin roughly in the area of 44%, which could be higher or lower based on the rate of commercial aftermarket recovery.
This includes Cobham Aero Connectivity, which should have limited dilutive effects to our EBITDA margin.
Barring any other substantial disruptions of the commercial aerospace industry recovery, we anticipate EBITDA margins will continue to move up throughout the year, with this fiscal Q1 being the lowest.
Mike will provide details on other fiscal 2021 financial assumptions and updates.
Additionally, I would like to touch on our environmental, social and governance initiatives or ESG initiative.
2020 was a year of progress for our ESG program, though we are still in the beginning of our ESG journey.
Ongoing conversations with our stakeholders have been an integral part of building and evolving our ESG efforts.
As a leader in the aerospace industry, we recognize we need to extend our industry leadership to ESG initiatives as well.
These initiatives are a priority, and we are dedicated to continuous improvement as we move forward on our ESG journey.
More information regarding our ESG initiatives can be found within our recently published 2020 Stakeholder Report that is posted on the TransDigm homepage.
Let me conclude by stating that although Q1 of fiscal 2021 continued to be significantly impacted by the pandemic's disruption of the commercial aerospace industry, I am pleased with the company's performance in this challenging time and with our commitment to drive value for our stakeholders.
There is still much uncertainty about the commercial aerospace market, but we have a strong tenured management team that is always ready to act quickly and as necessary.
The team is focused on controlling what we can control while also monitoring the ongoing developments in the commercial aerospace industry and ensuring that we are ready to respond to demand as it comes back.
I am confident that as a result of our swift cost-mitigation efforts and focus on our operating strategy, the company will emerge more strongly from the ongoing weakness in our primary commercial end markets.
We look forward to the remainder of 2021 and expect that our consistent strategy will continue to provide the value you have come to expect from us.
I'm going to quickly hit on a few additional financial matters.
So I'm not going to rehash that in detail.
For the quarter, organic growth was negative 24% driven by the commercial end market declines that Kevin mentioned.
A quick note on taxes.
The lower than expected GAAP tax rate for the quarter was driven by significant tax benefits arising from equity compensation deductions.
This is just timing.
Barring some deviations in the rates in this first quarter, our tax rate expectation for the full year is unchanged.
That is, we still anticipate our GAAP cash and adjusted tax rates to all be in the 18% to 22% range.
Moving to cash and liquidity.
We had a nice quarter on free cash flow.
Free cash flow, which we traditionally define at TransDigm as EBITDA as defined less cash interest payments, capex and cash taxes, was roughly $200 million.
We then saw an additional $70 million-plus come out of our net working capital driven by accounts receivable collections.
We ended the quarter with $4.9 billion of cash, up from $4.7 billion of cash at the end of last quarter.
Note that this was prior to the acquisition of the Cobham Aero Connectivity business, the majority of which closed on January 5.
There's one remaining piece of that acquisition, a Finland facility, representing 2% of the purchase price that's going through regulatory approvals now and should close soon.
Pro forma for the closing of this acquisition, our Q1 net debt-to-EBITDA ratio was a shade higher than 7.5 times Assuming air travel remains depressed, this ratio will continue ticking up through the end of Q2 of our fiscal 2021 when the last remaining pre-COVID quarter rolls out of the LTM EBITDA computation.
Beyond Q2 of fiscal '21, the ratio should stabilize with a potential for improvement should our commercial end markets start to rebound.
From an overall cash liquidity and balance sheet standpoint, we think we remain in good position and well prepared to withstand the currently depressed commercial environment for quite some time.

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fiscal 2021 financial guidance will not be issued at this time.
commercial air travel demand recovery is expected to continue to be slow and uneven.

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