SlowAppreciation Posted February 23, 2017 Share Posted February 23, 2017 https://www.wsj.com/articles/where-are-the-toilets-order-glut-stretches-giant-jet-makers-to-limit-1487885428 Link to comment Share on other sites More sharing options...
Grenville Posted February 24, 2017 Share Posted February 24, 2017 For whatever it's worth, Transdigm sells an additional 300mln of 6.5% 2025 notes at 101.5%. Link to comment Share on other sites More sharing options...
Liberty Posted February 25, 2017 Share Posted February 25, 2017 For whatever it's worth, Transdigm sells an additional 300mln of 6.5% 2025 notes at 101.5%. They had stopped their previous offering when Andrew Left published his piece, so that's probably them getting back to it. Link to comment Share on other sites More sharing options...
matthylland Posted March 7, 2017 Share Posted March 7, 2017 Does anyone here go to TDG shareholder meetings? I have held the stock for a few years now and never made it. I really thought I'd make it to this years'...but it didn't happen. Is it an event worth going? Any worthwhile notes or comments? Link to comment Share on other sites More sharing options...
Liberty Posted March 7, 2017 Share Posted March 7, 2017 TDG being hit again today. Here's what I found: Link to comment Share on other sites More sharing options...
hooplaer23 Posted March 9, 2017 Share Posted March 9, 2017 Does anyone else have thoughts on the Citron report that came out today? I am pretty skeptical about the section related to Bratenahl Capital. After looking around the website, its seems like this is just the family office for Nick Howley and that they invest mostly just in other PE funds with some occasional co-investments. The diagram points out investments in Odyssey and Berkshire, both well-respected PE firms that have been investors in TDG in the past. It wouldn't be surprising to me that Howley's family office would then make an investment in those funds. I just don't see how that allows TDG to commit some sort of fraud, and I guess I don't see why its a big deal that Nick Howley set up the entity rather than his son who now runs it? Link to comment Share on other sites More sharing options...
Grenville Posted March 9, 2017 Share Posted March 9, 2017 The point that I'd like more info on is the breakdown of their EBITDA between Commercial & Defense. I haven't been able to find it yet. They breakdown revenues into Commercial OEM, Aftermarket & Defense but not EBITDA. Link to comment Share on other sites More sharing options...
walkie518 Posted March 9, 2017 Share Posted March 9, 2017 The Citron report appears to insinuate that there may be self-dealing. However, the report does not uncover any new information. It only asks for TDG to respond to its questions, regardless of merit. If I were Howley and there was indeed no self-dealing, I wouldn't give Citron the time of day. As far as I can tell, clerical errors happen and Citron is grasping at straws. Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted March 9, 2017 Share Posted March 9, 2017 The Citron report appears to insinuate that there may be self-dealing. However, the report does not uncover any new information. It only asks for TDG to respond to its questions, regardless of merit. If I were Howley and there was indeed no self-dealing, I wouldn't give Citron the time of day. As far as I can tell, clerical errors happen and Citron is grasping at straws. Completely agree. They point out one interesting detail I didn't know but fail to mention the mechanism they used to inflate prices. Without that explanation, all they really have is a lot of different font sizes and colors. However, there's probably pretty high odds that TDG is ripping off the USG in some form or fashion. The margins are just too high and the USG is too large of a customer for this to not be true. How and how much are vital questions that no one seems to have the answers to (at least we know Citron doesn't). If someone figures out how and how much with respect to the USG then I'd guess TDG is going to be in serious trouble as a going-concern. Nice job LongHaul for pointing out the EBITDA contribution question and other red flags for awhile now. I bet the answers to your early questions are going to be a big story at some point. Link to comment Share on other sites More sharing options...
walkie518 Posted March 9, 2017 Share Posted March 9, 2017 However, there's probably pretty high odds that TDG is ripping off the USG in some form or fashion. The margins are just too high and the USG is too large of a customer for this to not be true. How and how much are vital questions that no one seems to have the answers to (at least we know Citron doesn't). If someone figures out how and how much with respect to the USG then I'd guess TDG is going to be in serious trouble as a going-concern. There is always someone else on the other side of the table. The government has the right to terminate existing contracts, reduce the value of those contracts, and audit costs associated with its TDG contracts unilaterally. These are unfair terms. Shouldn't TDG be paid a premium to enter a one-sided contract? Alternatively, shouldn't the government division responsible for inking the deal be checking commercial pricing considering the circumstances? Link to comment Share on other sites More sharing options...
hooplaer23 Posted March 9, 2017 Share Posted March 9, 2017 You can estimate an upper bound for U.S. government EBITDA using some of the disclosures the company made on the last call. They stated that $210 million (7% of revenue) is sold either directly to the U.S. government or through brokers or distributors. The company did about 1.5 billion in EBITDA as defined last year. If you assume that the $210 million in revenue generates 100% EBITDA margins (which it obviously doesn't), that would be about 14% of total EBITDA. The company also disclosed on the call that 18% out of its total 30% defense sales is to OEMs. It seems unlikely to me that this business would face the same type of scrutiny as the direct U.S. government sales, but I guess it is possible. Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted March 10, 2017 Share Posted March 10, 2017 I don't really understand what you mean unilaterally. TDG voluntarily bids on direct contracts or voluntarily bids to be the subcontractor and is well aware who the end-user is at the timing of the bid. I'm not familiar with military contracts but my loose understanding is that there are guidelines covering reasonable and unreasonable profit margins. Sole source contracts seem to be given out in effort to stabilize profit margins for the contractor and simplify the supply chain for the government/military. I'm guessing there is language to deal with cases where the contract (or government) abuses these situations. I don't think the details are knowable (at least I definitely don't know them) but I think you are making assumptions of the details with your questions. No one is making TDG bid on these or buy companies that have. I checked 4q16 call again and I didn't see any mention of % of sales to the government. Do you mind pointing me to where you see this? The 02/2017 presentation says defense revenue is 32%, which seems more reasonable. For BZC, USG was 19% of direct sales but end-user of 74%. I believe BZC is still responsible to the USG for all or essentially all 74% of those sales, even if they aren't direct. Considering the majority of global defense spending is by the US and TDG is HQ'd in the US, I would guess the US military is the end-user of 50% to 75% of defense sales. Probably closer to 75%. If we use $1b of sales and say 10%-12% operating margins as a 'reasonable margin' (which is what Lockheed and others earn) then we are left with ~$2.3b in commercial sales and $1.25b in operating income (54% operating margins). I'm guessing defense margins are more than 'reasonable' which is why I'm guessing they are ripping off the USG. Link to comment Share on other sites More sharing options...
cmlber Posted March 10, 2017 Share Posted March 10, 2017 I don't really understand what you mean unilaterally. TDG voluntarily bids on direct contracts or voluntarily bids to be the subcontractor and is well aware who the end-user is at the timing of the bid. I'm not familiar with military contracts but my loose understanding is that there are guidelines covering reasonable and unreasonable profit margins. Sole source contracts seem to be given out in effort to stabilize profit margins for the contractor and simplify the supply chain for the government/military. I'm guessing there is language to deal with cases where the contract (or government) abuses these situations. I don't think the details are knowable (at least I definitely don't know them) but I think you are making assumptions of the details with your questions. No one is making TDG bid on these or buy companies that have. I checked 4q16 call again and I didn't see any mention of % of sales to the government. Do you mind pointing me to where you see this? The 02/2017 presentation says defense revenue is 32%, which seems more reasonable. For BZC, USG was 19% of direct sales but end-user of 74%. I believe BZC is still responsible to the USG for all or essentially all 74% of those sales, even if they aren't direct. Considering the majority of global defense spending is by the US and TDG is HQ'd in the US, I would guess the US military is the end-user of 50% to 75% of defense sales. Probably closer to 75%. If we use $1b of sales and say 10%-12% operating margins as a 'reasonable margin' (which is what Lockheed and others earn) then we are left with ~$2.3b in commercial sales and $1.25b in operating income (54% operating margins). I'm guessing defense margins are more than 'reasonable' which is why I'm guessing they are ripping off the USG. In the opening remarks to the Q4 call they said only 7% of revenue is direct from the USG. 5% is direct to foreign friendly governments. And 18% is to defense OEMs which typically have much lower margins than after market. So it's 7% of revenue "in question" for a company with 45% margins and you think this may be the difference between going concern or not? The first Citron scare piece noted that 10 years ago the USG was trying to reduce TDGs pricing power, and 10 years later they've accomplished what? That's either just bureaucracy at its finest, or there's a reason they can't just lower TDGs prices at will. Let's assume for a second that TDG is ripping off the USG. Any speculation as to what the USG can do? These parts have no alternative suppliers. So besides ground aircraft in need of miantence, can they force a private company to supply parts? Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted March 10, 2017 Share Posted March 10, 2017 Moody's rates them CCC and they have 7x LT debt/EBITDA. I wasn't really making a bold call. Link to comment Share on other sites More sharing options...
cmlber Posted March 10, 2017 Share Posted March 10, 2017 Moody's rates them CCC and they have 7x LT debt/EBITDA. I wasn't really making a bold call. Moody's has probably rated them CCC since the stock was $30. Link to comment Share on other sites More sharing options...
hooplaer23 Posted March 10, 2017 Share Posted March 10, 2017 I'm not sure where you are seeing them rated by Moody's as CCC. On Moody's website their LT Corporate Family has been mostly B1 with a few years recently at B2 dating back to 1999. They were upgraded from B2 to B1 last year. Some of the company's subordinated debt is rated CCC+ at S&P, but their issuer rating is B. Link to comment Share on other sites More sharing options...
Liberty Posted March 10, 2017 Share Posted March 10, 2017 Seen on Twitter: https://embed.kumu.io/f78cefeaa3361f2d64a2a3aa7182cdff#aero-pre Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted March 13, 2017 Share Posted March 13, 2017 I'm not sure where you are seeing them rated by Moody's as CCC. On Moody's website their LT Corporate Family has been mostly B1 with a few years recently at B2 dating back to 1999. They were upgraded from B2 to B1 last year. Some of the company's subordinated debt is rated CCC+ at S&P, but their issuer rating is B. You are right! Thanks for the correction. Lazy mistake. ---- As to Bratenahl, can anyone speculate on how this would affect the company's operations? It makes you wonder if margins would be greater without these extra entities?! Are they skimming or hiding money, or are they really just benign? ---- Speaking of high margins, I think the government contracts are the major risk here. It's well-known that the Pentagon has been struggling with breaking away from sole source contracts. TDG's rise almost mirrors the US's entrance into Middle East wars and the huge uptick in sole source contracts awarded by the Pentagon. More than 50% of all Pentagon contracts are sole source. I doubt anyone will make friends calling for a Pentagon spending audit but who knows. Also, I'm pretty sure this is the report Citron referenced: http://www.dodig.mil/audit/reports/FY06/06-055.pdf http://aviationweek.com/awin/pentagon-ig-faults-us-navy-sole-source-supply-contracts http://aviationweek.com/defense/pentagon-leads-us-sole-source-contracting http://www.nextgov.com/defense/2016/08/pentagons-contract-spending-problem/131008/ To give you an idea of the confusion: http://www.motherjones.com/politics/2015/05/b00k-arms-dudes-guy-lawson-pentagon-contracting https://www.washingtonpost.com/investigations/pentagon-buries-evidence-of-125-billion-in-bureaucratic-waste/2016/12/05/e0668c76-9af6-11e6-a0ed-ab0774c1eaa5_story.html?utm_term=.5ec97cef85f6 In many ways, the aerospace industry appears to work a lot like the pharma industry and it seems ideal for preventing folks from looking into any bad behavior. Hundreds of billions of dollars in contracts are probably monitored on software systems older than me (not just DoD but Boeing, Lockheed, ect) Link to comment Share on other sites More sharing options...
cmlber Posted March 13, 2017 Share Posted March 13, 2017 As to Bratenahl, can anyone speculate on how this would affect the company's operations? It makes you wonder if margins would be greater without these extra entities?! Are they skimming or hiding money, or are they really just benign? Nick Howley has hundreds of millions of dollars outside of TDG, is it that strange that he has a family office? I actually laughed out loud when I saw that chart from Citron. Link to comment Share on other sites More sharing options...
Liberty Posted March 21, 2017 Share Posted March 21, 2017 https://khanna.house.gov/media/press-releases/release-rep-khanna-calls-investigation-aerospace-defense-contractor-business Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted March 21, 2017 Share Posted March 21, 2017 https://khanna.house.gov/media/press-releases/release-rep-khanna-calls-investigation-aerospace-defense-contractor-business Well that was fast! I bet whistleblower claims are going to be the next big alpha-driver for hedge funds. You get a free option on the possibility the government uses your research to collect $ and it helps your short position. Link to comment Share on other sites More sharing options...
Jurgis Posted March 21, 2017 Share Posted March 21, 2017 https://khanna.house.gov/media/press-releases/release-rep-khanna-calls-investigation-aerospace-defense-contractor-business Well that was fast! I bet whistleblower claims are going to be the next big alpha-driver for hedge funds. You get a free option on the possibility the government uses your research to collect $ and it helps your short position. Cause it worked so well for Ackman wrt HLF. ;) Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted March 21, 2017 Share Posted March 21, 2017 Let's assume for a second that TDG is ripping off the USG. Any speculation as to what the USG can do? These parts have no alternative suppliers. So besides ground aircraft in need of miantence, can they force a private company to supply parts? This is a good question and I'm not sure what the answer is. Obviously there's this call for an investigation, but I think the USG's only recourse is clawbacks of overpayment + some fine for overcharging. Maybe they could cancel some contracts and/or block them from bidding in the future but that would only be on a limited basis and not until alternative parts are available. Best I can tell, TDG doesn't rely on patents as much as they do relationships/LT contracts. Best I can tell, TDG is still entitled to 'reasonable profit' (which seems to vary between 8% and 12% - I'd guess they mean pre-tax margin?). One of the issues I have with getting negative on TDG compared to VRX is TDG's business is legitimately great. They truly do have the best-of-breed suppliers and deserve a lot of their monopolies. I would buy them at some price. I keep going back and forth on whether TDG faces any real threat to their operations. Even if they were fined and EBITDA contracted, they could always raise more equity to continue to earn above average ROE. Current shareholders would definitely feel the pain but I don't see $0 as a realistic outcome. This is definitely in the too hard pile for me, but it's interesting to look at. Cause it worked so well for Ackman wrt HLF. ;) Too soon! Link to comment Share on other sites More sharing options...
Jurgis Posted March 21, 2017 Share Posted March 21, 2017 Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule. Someone can do math of how much profit TDG would lose on that. If TDG contracts went to cost+, USG would not need to cancel their contracts with TDG and look for alternative suppliers. Win win. :P Link to comment Share on other sites More sharing options...
Larry Posted March 21, 2017 Share Posted March 21, 2017 Just jumping in here. I dont know why we are talking so much about their defence business, some shorts are even speculating that this would sink the company. Last time I checked commercial aftermarket still makes almost 40% of their revenue and I bet it's much higher % of their EBITDA. That segment has always been the most important reason for me to be invested in Transdigm and I haven't seen any reason this story would have changed somehow. Link to comment Share on other sites More sharing options...
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