Leaders of TransDigm Group, a key provider of niche aerospace and defense parts, said on May 5 they will lay off up to 25% of their workforce and take other actions as the company conserves cash to ride out the collapse in commercial air travel due to the COVID-19 pandemic.
The layoffs expand on and include an initial 10% cut that TransDigm unveiled in early February in response to Boeing halting production of the 737 MAX, and also because of a general downturn in commercial air traffic that emerged a year before the novel coronavirus erupted.
Meanwhile, TransDigm took out $1.5 billion in new debt financing in April to buffer against a business falloff. That infusion brought the company’s cash balance to $4.2 billion as of March 28.
“This is a great company with outstanding products and market positions,” Executive Chairman Nick Howley said. “The only way you get in trouble here is if the situation becomes much worse than anyone expects and you run out of fuel or cash. We’re filling our tanks as full as we can at a reasonable price.”
As of September 2019, the end of its last fiscal year, TransDigm counted roughly 18,300 full-time, part-time and temporary employees from business units in continuing operations. It was not immediately clear how many or what type of workers will be affected. Some remaining workers will be furloughed, and the company is “substantially” cutting cash compensation for its senior management for the rest of fiscal 2020.
For the fiscal second quarter that ended March 28, TransDigm reported net sales of $1.44 billion, up 23.5% from the year before. Net income from continuing operations was $323 million, up 61.5%.
TransDigm expects the novel coronavirus to have a “significant” impact on its sales, pretax earnings and net income this fiscal year, and it already withdrew earlier guidance for full-year financial results. “We believe that the COVID-19 pandemic will also adversely impact our commercial OEM sales over the long term,” the company said in its latest quarterly report May 5.
Revenue has been roughly divided in thirds among defense, commercial OEM and commercial aftermarket segments. The company, which prides itself on providing private equity-like returns for its shareholders, is a serial acquirer and prefers proprietary products with large aftermarket exposure. More than 90% of annual revenue last fiscal year stemmed from proprietary parts, and three-quarters of pretax earnings were based in the aftermarket.
That playbook ran well during the historic supercycle that followed the 2008 financial crisis and Great Recession and made TransDigm a trendsetter. But Howley acknowledged that acquisitions will be harder in the near term because owners will not want to sell proprietary suppliers unless they can command supercycle-like acquisitions prices, which buyers such as TransDigm will make sure to avoid. Still, TransDigm remains ready for more mergers and acquisitions (M&A), he said.
“I doubt we will need this money, but better to stay safe in this environment,” Howley said of the $1.5 billion in new financing. “We hope to come out of this with a lot of firepower. We continue to look at possible M&A opportunities and are always attentive to our capital allocation.”
