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TDG - Transdigm

stahleyp

By stahleyp
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Sharad Newbie

Sharad

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I think i remember a chart from one of their presentations where like ~75% of EBITDA As Defined comes from the aftermarket. My biggest concern based on the article would be if Boeing / Airbus start getting more and more into the aftermarket

 

When a company moves out of its core competency, most of the time, bad things happen. I know BA would look like they would do well with acquisitions of aftermarket parts suppliers, but what looks logical in theory could be an epic failure in practice. Home Depot attempted to step into FAST's space, and had to spin off HD Supply after it failed to make money. I'd think BA entering the market could longer term prove to be a bullish thing for TDG, if you think about how difficult it is to master valuation, efficient merging, creating synergies and matching corporate cultures. I don't recall BA being a major acquirer in the past, so is it in their DNA? If not, any potential investment in the aftermarket space could present a great opportunity for TDG, especially if shares fell in sympathy.

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Leverage Capabilities Newbie

Leverage Capabilities

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I think i remember a chart from one of their presentations where like ~75% of EBITDA As Defined comes from the aftermarket. My biggest concern based on the article would be if Boeing / Airbus start getting more and more into the aftermarket

 

When a company moves out of its core competency, most of the time, bad things happen. I know BA would look like they would do well with acquisitions of aftermarket parts suppliers, but what looks logical in theory could be an epic failure in practice. Home Depot attempted to step into FAST's space, and had to spin off HD Supply after it failed to make money. I'd think BA entering the market could longer term prove to be a bullish thing for TDG, if you think about how difficult it is to master valuation, efficient merging, creating synergies and matching corporate cultures. I don't recall BA being a major acquirer in the past, so is it in their DNA? If not, any potential investment in the aftermarket space could present a great opportunity for TDG, especially if shares fell in sympathy.

 

Totally agree. I'd also guess that Airbus, Bombardier, etc. would no longer purchase parts from a now BA-owned suppler. If these companies compete against TDG, that would give TDG even more pricing power for these other OEMs.

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Jerry Capital Newbie

Jerry Capital

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TransDigm Group Incorporated (NYSE: TDG) announced today that it has entered into a definitive agreement to acquire Extant Components Group Holdings, Inc. ("Extant"), a portfolio company of Warburg Pincus LLC, for approximately $525 million. TransDigm expects to finance the acquisition primarily through a combination of cash on hand and existing availability under its revolving credit facility.

 

Extant expects to derive 80% of its revenue from the aftermarket, with nearly all of the revenue from proprietary and sole source products. The revenue is derived from a mix of military and commercial applications, with the majority of the revenue coming from the military end market

 

https://www.prnewswire.com/news-releases/transdigm-to-acquire-extant-aerospace-300615835.html

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Liberty Newbie

Liberty

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Fiscal Q3:

 

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2362418

 

Highlights for the third quarter include:

 

Net sales of $980.7 million, up 9.2% from $897.7 million;

Net income from continuing operations of $217.4 million, up 28.0% from $169.8 million;

Earnings per share from continuing operations of $3.91, up 26.5% from $3.09;

EBITDA As Defined of $487.1 million, up 8.8% from $447.6 million;

Adjusted earnings per share of $4.01, up 19.0% from $3.37; and

Revisions to fiscal 2018 financial guidance.

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walkie518 Newbie

walkie518

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Fiscal Q3:

 

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2362418

 

Highlights for the third quarter include:

 

Net sales of $980.7 million, up 9.2% from $897.7 million;

Net income from continuing operations of $217.4 million, up 28.0% from $169.8 million;

Earnings per share from continuing operations of $3.91, up 26.5% from $3.09;

EBITDA As Defined of $487.1 million, up 8.8% from $447.6 million;

Adjusted earnings per share of $4.01, up 19.0% from $3.37; and

Revisions to fiscal 2018 financial guidance.

drop must be on guidance change?

 

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Leverage Capabilities Newbie

Leverage Capabilities

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Will need to dig into ESL a little more, but I'm getting ~12x '19E EBITDA (consensus) which is at the high end of their target multiple (9-12x). I'd say given how hot the M&A markets have been overall, this isn't a terrible price to pay. Will be curious to see how easy it is to get to their targeted 50% multiple reduction.

 

I guess we won't be getting another special dividend any time soon

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Liberty Newbie

Liberty

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Q4:

 

http://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2386031

 

Net sales of $993.3 million, up 17.1% from $848.0 million;

Net income from continuing operations of $196.0 million, down 37.2% from $312.0 million;

Earnings per share from continuing operations of $3.05, down 33.7% from $4.60;

EBITDA As Defined of $486.7 million, up 21.2% from $401.5 million;

Adjusted earnings per share of $3.85, down 31.0% from $5.58, with the prior year period including $2.65 per share of one-time favorable impact from the enactment of tax reform; and

Upward revision to fiscal 2019 financial guidance.

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khturbo Newbie

khturbo

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I might as well respond to this here. I'm the person that posted the joke gif above. The tweet about doing more than reading one article was too snappy on my part, I do admit.

 

I talked with Tepper about the company privately as I mentioned might be better on the twitter thread.

 

First and foremost, if you're interested in the company and haven't read the Dod IG report, that's the first thing you should do. The whole thing is at the bottom of this page:

 

https://www.dodig.mil/reports.html/Article/1769041/review-of-parts-purchased-from-transdigm-group-inc-dodig-2019-060/

 

Read the whole report at the link at the bottom, not just the summary.

 

First and foremost, the actual business impact isn't super enormous. Using some data from the report, it seems like the revenue run-rate is in the $100-150mm range to the DoD. If they legislated tomorrow the 15% margin that they use then TDG's EBITDA might go down by $50mm, which would be a ~$15 / share in impact. They've legislated thing to go the other way where they increased the TINA thresholds, so the odds of this are pretty slim, even longer term.

 

More importantly, I think it's important to address his claim that Transdigm is "evil." Lots of people think this or think that their customers hate them or whatever.

 

If you know aerospace, you know how important on time delivery is. Just look at what happened to Airbus when they had trouble with their engine supplier. They couldn't deliver their planes. I read an article a little while back about the US government owning 2x the number of F-35s that they need to be combat ready because they know that lots of planes will be waiting on parts and repairs. Those planes cost $100mm a piece. One of the things that Transdigm is very, very good at is delivering on time. There was a slide in a presentation a few years back showing on-time delivery in the mid 90% range. Anyone that knows manufacturing knows that's incredibly high. So when they take over a company, they significantly improve on time delivery metrics. Prices go up as well. But it's not just like the customer is getting screwed. They're getting the parts when they need them, which is much more important than some extra price on such a cheap part.

 

Secondly, and very importantly, these aren't true monopolies. If you talk to the people that run these businesses, there are market mechanisms where they would lose their positions if they increased prices too much. In some cases it might take 2-3 years, but it can still happen. This is much different than in a situation like pharma where in some cases no one else is allowed to make a drug and you have an absolute monopoly. In aerospace, it's a current monopoly, sure, but with abuse you lose your position. Commercial companies go around OEMs all the time as we've seen with Heico. There are other mechanisms besides PMA parts. If you realize that there are other options, then you realize that charging a lot doesn't force your customer to use you long term, and you realize that it's hard to be evil when your customer has a choice.

 

Knowing that you can switch suppliers, but also knowing it's a long, difficult process, is it a surprise that the DoD hasn't done this historically? When they aren't exactly spending their own money? They did a similar report in 2006, so they obviously know about TDG. They could have done any number of things to stop working with TDG in the meantime, but they haven't. They keep coming to TDG and saying they need a part tomorrow, so TDG charges a high price. They've asked for a partial refund, which I'm sure TDG will grant. If they really want to stop working with TDG, they are free to do so.

 

I think the notion that TDG is evil is inseparable from the notion that there's nowhere to turn besides them, which is incorrect. If TDG all of a sudden said that one random part would cost $10mm, do you think that TDG would sell lots of those parts? Obviously not. TDG doesn't do this because they'd lose all of their sales in short order.

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Jurgis Newbie

Jurgis

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If you ask me, the report is damning. The military has a mechanism to single source parts provided that essentially a cost plus method is used and Transdigm appears to abuse it.

 

Looks like Valeant to me.

 

Not to defend Transdigm, but:

 

- Like you say, military has power and mechanism. So if they want, they should kick Transdigm's butt. If they don't, then they themselves are part of problem (of transferring taxpayers' money to TDG).

- Unlike patients in Valeant's case, I have little sympathy for airlines or aircraft manufacturers or whatever other companies that source replacement parts. They are also big boys and can kick TDG's butt if they want. If they don't, then they themselves are part of problem (of transferring their shareholders' money to TDG).

 

BTW, I'm not arguing against what khturbo said. It's possible that there are legit reasons to pay TDG through the nose. But if TDG is extorting, then its customers are not as powerless as patients who have to pay pharmas through the nose.

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khturbo Newbie

khturbo

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If you ask me, the report is damning. The military has a mechanism to single source parts provided that essentially a cost plus method is used and Transdigm appears to abuse it.

 

Looks like Valeant to me.

 

Not to defend Transdigm, but:

 

- Like you say, military has power and mechanism. So if they want, they should kick Transdigm's butt. If they don't, then they themselves are part of problem (of transferring taxpayers' money to TDG).

- Unlike patients in Valeant's case, I have little sympathy for airlines or aircraft manufacturers or whatever other companies that source replacement parts. They are also big boys and can kick TDG's butt if they want. If they don't, then they themselves are part of problem (of transferring their shareholders' money to TDG).

 

BTW, I'm not arguing against what khturbo said. It's possible that there are legit reasons to pay TDG through the nose. But if TDG is extorting, then its customers are not as powerless as patients who have to pay pharmas through the nose.

 

That's exactly right. There are mechanisms to pick other suppliers. Customers aren't powerless, which makes the whole argument that TDG is evil / Valeant incorrect.

 

@spekulatius - this is a question of scale. There were sales numbers in the report, and you can back into TDG's revenue to DoD is in the range of $100-150mm. If you take the margins down to cost of capital, which would require direct legislation, which itself would be legislation going the other way than recent legislation that just passed, then the loss in EBITDA would be about half of that. TDG's EBITDA is $2bb before the ESL acquisition. This isn't exactly doomsday.

 

And just to be clear, they don't break any laws. They don't report cost for a specific set of parts, which is within their legal right to do as the laws are currently written. Again, it will take new legislation to change that.

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Gregmal Newbie

Gregmal

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Whenever there is a big, unique case or event, many times the ripple effect is that people end up seeing future things/events/cases in a manner tainted by that event. Whether it be the GFC, or on an individual scale, Valeant, there is always going to be a story that sells, built around something else being "the next (insert GFC, housing bubble, VRX, etc)". But from experience, the next "GFC, VRX" is almost always NEVER the next GFC, VRX.

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Spekulatius Newbie

Spekulatius

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Whenever there is a big, unique case or event, many times the ripple effect is that people end up seeing future things/events/cases in a manner tainted by that event. Whether it be the GFC, or on an individual scale, Valeant, there is always going to be a story that sells, built around something else being "the next (insert GFC, housing bubble, VRX, etc)". But from experience, the next "GFC, VRX" is almost always NEVER the next GFC, VRX.

 

It’s not the same than Valeant, but it rhymes. Heavily regulated  market and protected product, government customer, price gouging, Rollup strategy, highly levered Balance sheet. It doesnt mean that it will blowout, but all the ingredients are there.

 

I agree the military has power it can exercise. Just from my experience , the defense business is somewhat clubby. I think there is also the revolving door issue where a lot of retirees from the military find a second carrier in the defense sector and they don’t want to poison the well...

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Liberty Newbie

Liberty

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fiscal Q2:

 

https://www.transdigm.com/investor-relations/news-releases/news-article/?myartid=2397456

 

Net sales of $1,195.9 million, up 28.2% from $933.1 million;

Net income from continuing operations of $202.4 million, up 0.3% from $201.8 million;

Earnings per share from continuing operations of $3.60, down 0.8% from $3.63;

EBITDA As Defined of $571.8 million, up 23.5% from $463.1 million;

Adjusted earnings per share of $4.21, up 11.1% from $3.79; and

Upward revision to fiscal 2019 sales, EBITDA As Defined and adjusted earnings per share guidance.

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NzA2NTIxfENoaWxkSUQ9NDE5MTc0fFR5cGU9MQ==&t=1

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walkie518 Newbie

walkie518

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Stein was a little smug and Howley was arguing a point, Fahey is here and there... he seems to argue that there isn't sufficient regulation to handle

 

not sure how I feel here... my guess is if Uncle Sam gets a discount, commercial OEMs eat the increase?

 

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