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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 off with a quick overview of our strategy, a few comments about the quarter, and then Kevin and Mike will expand and give more color.
To reiterate, we're 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 aerospace cycle.
To summarize, here are some of the reasons why we believe this.
About 90% of our sales are generated by proprietary products, and over [ 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 significantly higher margins and over any extended period of time have typically provided relative stability in 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 second -- a simple, well-proven, value-based operating methodology.
Third, we have a decentralized organization structure and a unique compensation system closely aligned with our shareholders.
Fourth, we acquire businesses that fit this strategy and where we see a clear path to PE-like returns.
And lastly, our capital structure and allocation of our capital are key parts 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 have to stay focused on both the details of value creation, as well as careful allocation of our capital.
We see a bit more light at the end of the tunnel but are still in a pretty tough commercial aerospace market environment.
On a positive note, we saw another significant sequential increase in quarterly commercial aftermarket bookings in Q2.
This is the second quarter in a row with a significant step-up.
The stalling of the air travel recovery that concerned us last quarter, though still spotty, looks somewhat better now but may have pushed a ramp-up a quarter or so out.
The two most important operating items we have focused on through this downturn were on the things we can, to some degree, control: one, tightly managing our cost, and I think we have this well in hand; second, assuring substantial liquidity, and this also seems well in hand.
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 allocation.
Both the M&A and the capital markets are always difficult to predict and especially so in times like these.
But in Q2, we acquired the Cobham Aero Connectivity business for an enterprise value of $965 million.
On the divestiture front, in the last 60 days, we signed agreements to sell three additional, less proprietary and mostly defense businesses for about $240 million.
Collectively, these businesses have revenues of roughly $180 million and EBITDA margins in the low 20%.
We expect to receive all the proceeds in Q3.
We still have one primarily defense business that we are currently considering for sale.
At this time, I do not anticipate that we will make any significant dividend or share buybacks for the next three or four quarters or at least until the commercial market show stronger signs of a rebound and our leverage level settles down a bit, but we'll keep watching and see if our view changes over time.
We believe we are about as well-positioned as we can be right now, and we'll watch for market developments and react accordingly.
And now let me hand it over to Kevin to review our performance.
Today, I will first provide my regular review of results by key market and profitability of the business for the quarter.
I'll also comment on recent acquisition activity and fiscal 2021 outlook.
During our Q2 fiscal 2021 quarter, there continued to be a significant unfavorable impact on our business as a result of the reduced demand for travel due to the pandemic.
However, the commercial aerospace industry has continued to show signs of recovery in recent months with the distribution of the COVID-19 vaccine and increasing air traffic, especially in certain domestic markets.
In our business, we saw another quarter of sequential improvement in commercial aftermarket revenues with total commercial aftermarket revenues up 12% over Q1.
Additionally, I am very pleased that we continue to sequentially expand our EBITDA as defined margin as a result of careful management of our cost structure and focus on our operating strategy in this challenging commercial environment.
Now we will review our revenue by market category.
For the remainder of the call, I will provide color commentary on a pro forma basis compared to the period -- the prior-year period in 2020.
That is assuming we own the same mix of businesses in both periods.
This market discussion now includes the recent acquisition of Cobham Aero Connectivity and removes the impact of any divestitures completed by the end of Q2.
In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket.
Our total commercial OEM market revenue declined approximately 43% in Q2 when compared with Q2 of the prior-year period.
We continue to assume the demand for our commercial OEM products will be significantly reduced throughout the remaining half of 2021 due to reductions in OEM production rates and the airlines deferring or canceling new aircraft orders.
Longer term, the commercial aerospace market is fluid and continues to evolve.
We anticipate a depressed commercial OEM end market for some uncertain period of time when compared to pre-COVID levels.
However, recent commentary from Airbus on potential A320 rate ramps in 2022 and beyond are certainly encouraging.
On a positive note, Q2 bookings demonstrated strong sequential improvement of over 20% compared to Q1 bookings and solidly outpaced sales.
As we mentioned last quarter, the bookings improvement we are seeing is likely an indicator of OEM destocking slowing.
Now moving on to our commercial aftermarket business discussion.
Total commercial aftermarket revenues declined by approximately 39% in Q2 when compared to prior-year Q2.
This quarterly decline was primarily driven by decreased demand in our passenger and interior submarkets.
However, our commercial transport freight market returned to modest growth and slightly offset this decline.
To repeat, sequentially, total commercial aftermarket revenues grew approximately 12% in Q2, another encouraging data point.
Commercial aftermarket bookings were still down this quarter compared to the same prior-year period.
However, the bookings declined less than the observed flight traffic declines with freight and business jet bookings continuing to improve.
Q2 bookings sequentially improved almost 30% and solidly outpaced sales.
This is likely the result of destocking slowing in airlines, increased flight activity and future planning.
To touch on a few key points of consideration, global revenue passenger miles are still low though off the bottom and now recovering.
IATA's most recent forecast expects that calendar-year 2021 revenue passenger miles will be 57% below 2019, but we are cautiously optimistic.
There was an uptick in domestic air traffic in March and April, and the airlines are seeing strength in bookings that will drive summer flight schedules.
Certain airlines have already announced domestic wide-body routes to serve the anticipated demand this summer.
IATA does forecast a strong second half of calendar 2021 with a rebound in domestic travel in the U.S. back at 2019 levels of revenue passenger miles and China well above that level.
There is also potential for international travel openings more as governments consider revising travel restrictions.
For cargo demand, this was weaker prior to the COVID-19 crisis as FTKs have declined from the all-time high in 2017.
However, a loss of passenger belly cargo and the pickup in e-commerce has helped cargo operations to recover quicker than commercial travel.
Business jet utilization data has shown that activity in certain regions has rebounded to pre-pandemic or better levels.
This is due to personal and leisure travel as opposed to business travel at this time.
It remains to be seen if business jet utilization will continue to expand, but current trends are encouraging, We believe there is a global pent-up demand for travel.
We see evidence of this demand through the recovery in domestic travel, specifically in the U.S. and China, and the optimism of airlines for the summer season.
Domestic travel is currently benefiting from international travel restrictions and could offset some lost international travel in the market.
In due time, with vaccine distribution and lifting of travel restrictions, passenger demand across the globe will increase.
Historically, personal travel has accounted for the largest percentage of revenue passenger miles.
And forecasts still indicate a more meaningful pickup in personal travel in the back half of this calendar year, followed later by business travel, and we are hopeful this will be the case.
Now let me speak about our defense market, which, traditionally, is at or below 35% of our total revenue.
The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 8% in Q2 when compared with the prior-year period.
Our defense order book remains strong, and we continue to expect our defense business to expand throughout the remainder of the year.
Moving now to profitability.
I'm going to talk primarily about our operating performance or EBITDA as defined.
EBITDA as defined of about $519 million for Q2 was down 23% versus prior Q2.
EBITDA as defined margin in the quarter was approximately 43.5%.
We were able to improve our EBITDA as defined margin approaching 100 basis points sequentially despite the acquisition dilution from the recent Cobham acquisition of about 100 basis points as well.
Next, I will provide a quick update on our recent acquisition.
The Cobham acquisition integration is progressing well under the leadership of one of our experienced EVPs, Joel Reiss.
We have now owned Cobham a little over four months, and we are pleased with the acquisition thus far.
We have split Cobham into two operating unions -- units: Canyon AeroConnect located in Prescott, Arizona; and Chelton Limited, located in Marlow, U.K. Two experienced TransDigm presidents are leading the integration of these two operating units.
Now moving to our outlook for 2021.
We are still not in a position to issue formal fiscal 2021 sales EBITDA as defined in net income guidance at this time.
We will look to reinstitute guidance when we have a clearer picture of the future.
We, like most aero suppliers, are hopeful that we will realize a more meaningful return of activity in the second half of the calendar year.
For now, we are encouraged by the recovery in our commercial OEM and aftermarket bookings in the first half of our fiscal year, along with the improvement we have seen in our commercial aftermarket revenues.
As for the defense market and an update to our defense revenue growth comments on the Q4 and Q1 earnings calls previously, we now expect defense revenue growth in the mid-single-digit percent range for fiscal 2021 versus prior year.
The previous expectation communicated for fiscal 2021 defense revenue growth was low to mid-single-digit growth.
Additionally, given the continued uncertainty in the commercial market channels and consistent with our past commentary, we are not providing an expected dollar range for fiscal 2021 EBITDA as defined.
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 a dilutive effect to our EBITDA margin from Aero -- from the Cobham Aero Connectivity acquisition.
Mike will provide details on other fiscal 2021 financial assumptions and updates.
Let me conclude by stating that I am pleased with the company's performance in this challenging time for the commercial aerospace industry and with our commitment to driving values for our stakeholders.
The commercial aerospace market is -- its recovery is under way, and current trends are encouraging.
There is still uncertainty about the pace of the recovery, but the team remains focused on controlling what we can control.
We are closely monitoring the ongoing developments in the commercial aerospace industry and ensure that we remain ready to meet the demand as it returns.
We look forward to the remaining half 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 for the quarter and then also the full fiscal year.
For the quarter, organic growth was negative 20%, driven by the declines in our commercial end markets and despite some healthy defense growth in the quarter.
On taxes, our expectation for the full year is unchanged.
That is, we still anticipate our GAAP cash and adjusted rates to be in the 18% to 22% range.
Regarding tax rates out beyond FY '21, we're monitoring potential changes in the U.S. tax code under the new administration, and we'll provide some guidance on our future rate expectations once any legislation is finalized.
On interest expense, we now expect the full-year charge to be $1.06 billion, reduced from prior guidance, primarily for the refinancing activity completed this year.
Moving over to cash and liquidity.
We had another quarter of positive free cash flow.
Free cash flow, which we traditionally define at TransDigm as our EBITDA as defined less cash interest payments, cash capex and cash taxes, was roughly $146 million.
For the full fiscal year, we expect to continue running free cash flow positive as we define this metric.
In line with our prior November guidance, we still expect this amount to be in the $800 million area, maybe a little better for our fiscal '21.
We ended the second quarter with $4.1 billion of cash, down from $4.9 billion at last quarter's end.
Note that last quarter's $4.9 billion balance was prior to the Cobham acquisition for an enterprise value of $965 million that closed on January 5.
Pro forma for the closing of this acquisition, our Q2 net debt-to-LTM-EBITDA ratio was 8.2 times.
With our last pre-COVID quarter now having rolled out of the LTM EBITDA computation, we believe that the net debt-to-EBITDA ratio as of our second quarter end is at or very close to its peak.
In subsequent quarters, it should, at worst, remain relatively stable but more likely start to show gradual improvement as our commercial end markets 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.
Lastly, and shifting gears from financial matters, I'd like to provide a quick update on our ongoing U.S. DoD IG audit.
We've been actively engaged with the IG office with some ebbs and flows and continue to work through the audit process, and our best assessment and based upon what we see.
This ongoing audit appears to be similar in scope to our prior audits.
While it's difficult to know exactly when a final report could be issued publicly, we expect that this might happen sometime during Q3 or Q4 of our fiscal '21.

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fiscal 2021 financial guidance remains suspended at this time.

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