Author Topic: TDG - Transdigm  (Read 136558 times)

hooplaer23

  • Newbie
  • *
  • Posts: 23
Re: TDG - Transdigm
« Reply #310 on: March 09, 2017, 02:18:30 PM »
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. 


Schwab711

  • Hero Member
  • *****
  • Posts: 1539
Re: TDG - Transdigm
« Reply #311 on: March 09, 2017, 05:19:19 PM »
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.

cmlber

  • Sr. Member
  • ****
  • Posts: 454
Re: TDG - Transdigm
« Reply #312 on: March 09, 2017, 07:14:02 PM »
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? 

Schwab711

  • Hero Member
  • *****
  • Posts: 1539
Re: TDG - Transdigm
« Reply #313 on: March 09, 2017, 07:29:24 PM »
Moody's rates them CCC and they have 7x LT debt/EBITDA. I wasn't really making a bold call.
« Last Edit: March 09, 2017, 07:32:38 PM by Schwab711 »

cmlber

  • Sr. Member
  • ****
  • Posts: 454
Re: TDG - Transdigm
« Reply #314 on: March 09, 2017, 07:37:40 PM »
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. 

hooplaer23

  • Newbie
  • *
  • Posts: 23
Re: TDG - Transdigm
« Reply #315 on: March 10, 2017, 10:09:21 AM »
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.

Liberty

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 11274
  • twitter.com/libertyRPF
    • twitter.com/libertyRPF
Re: TDG - Transdigm
« Reply #316 on: March 10, 2017, 11:10:24 AM »
"Most haystacks don't even have a needle." |  I'm on Twitter  | This podcast episode is a must-listen

Schwab711

  • Hero Member
  • *****
  • Posts: 1539
Re: TDG - Transdigm
« Reply #317 on: March 12, 2017, 09:46:35 PM »
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)

cmlber

  • Sr. Member
  • ****
  • Posts: 454
Re: TDG - Transdigm
« Reply #318 on: March 13, 2017, 07:59:34 AM »
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. 

Liberty

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 11274
  • twitter.com/libertyRPF
    • twitter.com/libertyRPF
"Most haystacks don't even have a needle." |  I'm on Twitter  | This podcast episode is a must-listen