The Transdigm Group, which traditionally counts heavily on commercial aviation for sales and on the commercial aftermarket for profitability, saw commercial aftermarket sales in the first fiscal quarter of 2021 down 49% from the same period of fiscal 2020, according to President and CEO Kevin Stein.
But these sales were up from the fourth fiscal quarter of 2020, and bookings for future aftermarket sales were up 5% from the prior quarter as well.
In the group’s latest earnings call in mid-February, executive chairman Nick Howley stressed how important the aftermarket is to Transdigm. Most of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) come from high margins in the aftermarket earned by proprietary Transdigm products or products for which it is the sole supplier. The company's financial goal is to offer “private equity returns with the liquidity of a public company,” Howley noted.
The commercial aviation aftermarket accounts for 28% of the Group’s revenue. Furthermore, “The commercial aftermarket is typically our most profitable business,” Howley said.
He is seeing some indications that the earlier fiscal third quarter of 2020 was the bottom of the aftermarket, and that recovery is starting to happen slowly, with an upturn expected in the second half of calendar 2021.
Meanwhile, Transdigm has been managing its costs carefully, and ended fiscal 2020 with nearly $5 billion in cash, part of which was used to acquire Cobham’s aero-connectivity business for about $965 million in cash. “We continue to look at M&A activities,” Howley said. “Although M&A is difficult to predict.” He believes Cobham’s solid aftermarket prospects should help yield EBITDA in the 25-35% range.
Stein said the quarter-to-quarter increase in the aftermarket provided some indication that airlines were at least slowing their destocking, if not actually restocking yet. Passenger and interior segments of the commercial aftermarket have been hit hardest, with sales to the cargo market down much less dramatically.
Stein cited common predictions that passenger traffic will pick up in the second half of 2021, with business travel following afterward. “We are hopeful, but the timing is uncertain.”
Defense markets, which account for 30-35% of Transdigm’s sales, were essentially flat, compared with those of the first quarter of 2020. Overall, the Group’s revenue was $1,108 in the quarter, a 24% decrease from same quarter, prior year. EBITDA was $474 million, down 30% from first quarter 2020.
Commenting on the results, UBS analyst Myles Walton said, “Strong operations continue in face of difficult environment. Fiscal first-quarter results were in-line to slightly above consensus.” Sales were in line with UBS expectations, and EBITDA was slightly ahead. “Importantly, margins were a nice upside surprise.” Walton praised management for “not sugar coating” the uncertainty surrounding commercial aviation’s future prospects.
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