Triumph Group loses against debt (NYSE:TGI)

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Chances for faster recovery lifted aerospace and defense ‘A&D’ stocks after FDA authorized treatment for coronavirus In Monday. However, the debates around the effectiveness of the treatment show that the return to normal is linked to the development of a vaccine.

Low price multiples are attracting value investors who cite a strong defense budget and higher air cargo demand as reasons to expect a reversal in A&D stocks. Short-term traders are also drawn to the industry as technical analysis tools signal oversold tags.

So that you can find A ruby ​​under the rubble, weak demand for air travel combined with high fixed costs has resulted in large cash outflows, pushing many A&D balance sheets deeper into the red, making it nearly impossible for some companies to build shareholder value in the years to come. One such company is Triumph Group Inc (New York stock market :TGI).

Company overview

TGI is a manufacturer of a wide range of jet components. Its products end with commercial and military aircraft manufactured by Boeing (bep), Northrop Grumman (NOC), and Lockheed Martin (LMT) among others. The company’s industry and association with big names in A&D paint an exciting picture of rocketry, stealth technology and supersonic aircraft projects using cutting-edge, world-transforming innovations. The reality is different.

Cost-cutting initiatives have cut company expenses to the bone, resulting in deteriorating employee morale. The company stopped investing in R&D since March 2017. For years, the company’s capital expenditures were not enough to replace its aging facilities, equipment and assets after the company cut spending in capital of 60%.

TGI’s extensive product catalog has grown due to years of merger and acquisition deals that have transformed the company into a complex web of companies with overlapping scope and operations. Duplicated back-office processes and overlapping operations increased costs and caused production delays. Gulf Stream put TGI on the non-bidder list before management reestablished the relationship.

Recovery plan

TGI’s long-awaited turnaround plan in 2016, which aimed to increase organic sales, profit margins and reduce debt, yielded mediocre results at best. Now success is even less likely.

Recently, as part of its restructuring efforts, TGI sold 2 non-core businesses for around $100 million, but it’s too little too late. The company will struggle to sell more assets at satisfactory prices during this down cycle.

Balance sheet

With long-term debt of over $2 billion, TGI is one of the most indebted companies in the A&D industry. Its debt ratio is three times that of Lockheed Martin and more than double that of Boeing.

TGI’s new $700m debt issuance at 8.875% earlier this month will increase annual interest payments by ~$122m to ~$155m by my estimate.

JP Morgan downgraded TGI to underweight citing rising debt and aviation issues. Rating services Moody’s and Standard and Poor’s respectively assigned B2 and B- ratings to the latest debt issuance.

Revenue Trends

Historically, new aircraft production has generated approximately 90% of TGI’s revenue, while approximately 10% has been related to MRO (both commercial and military) maintenance, repair and overhaul services. In the coming quarters, MRO activity will represent a larger share of TGI’s sales as airlines scale back their route expansions.

Package delivery companies like UPS (UPS) and FedEx (FDX) will become more important customers as new e-commerce trends drive demand for air travel.

Army revenue will increase due to increased defense budget for fiscal year 2021. In total, the company estimates $1.85 billion in revenue for this fiscal year, down 35% year-over-year.

Can TGI repay its debt?

TGI has volatile profit margins due to restructuring and impairment costs related to its turnaround efforts. Over the last 5 years, the annual EBITDA margin has varied from -22% to 8.21%.

Adding the costs related to the restructuring gives a picture of the future profitability of the company, in the normal course of business. Below is a table showing the EBITDA adjustment

Source: Company filings. Figures in thousands

With an EBITDA margin of 9%, TGI will barely pay interest expense, which will prevent it from creating value for investors. TGI’s problems run deeper since this analysis does not take into account depreciation, amortization, restructuring, loss on sale of assets and impairment of intangible assets.

Summary

Weak demand for air travel combined with high fixed costs resulted in large cash outflows, pushing TGI’s balance sheet deeper into the red. As a result, TGI will struggle to create shareholder value in the years to come.

Management’s turnaround initiatives cut expenses to the bone, hurting competitiveness and employee morale. The company is unlikely to succeed in implementing its turnaround plan in the current down cycle.

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