Author Topic: TDG - Transdigm  (Read 136987 times)

Jurgis

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Re: TDG - Transdigm
« Reply #330 on: March 21, 2017, 02:52:47 PM »
I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.

Nobody is saying that TDG cannot refuse to do a cost+ deal. Sure they could. But would they really say "FU" to a big customer who actually might look for alternative source if they are told to "FU" and then that source could sell to other TDG customers.

I'd bet TDG won't say "FU". They will go for cost+, but will also dance to get the biggest + possible.

I believe there was info in Citron report that TDG itself suggested adjusting contract to cost+ for some contract where government got cost info.
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cmlber

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Re: TDG - Transdigm
« Reply #331 on: March 21, 2017, 03:13:09 PM »
I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.
Nobody is saying that TDG cannot refuse to do a cost+ deal. Sure they could. But would they really say "FU" to a big customer who actually might look for alternative source if they are told to "FU" and then that source could sell to other TDG customers.

I'd bet TDG won't say "FU". They will go for cost+, but will also dance to get the biggest + possible.

I don't think you appreciate the pricing power of a monopoly provider of hundreds of thousands of mission-critical parts.  It's not like there are ten parts and TDG is concerned the DoD could find an alternate supplier with enough time.  There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

In 2006 the DoD made an inquiry into Transdigm's pricing and concluded:

Given the constraints of a sole-source contracting environment, Defense
Logistics Agency contracting officers were unable to effectively negotiate prices for
spare parts procured from TransDigm subsidiaries.

Another option is for DLA to reengineer or develop a Government-owned
technical data package and qualify new sources to establish a competitive market
for high dollar sole-source parts. For example, DLA and the Air Force are
attempting to address TransDigm’s unreasonable prices by funding a
reengineering project to develop a fully competitive technical data package for
the oil pump assembly housing (NSN 2990-01-259-0589). That technical data
package could be solicited to other vendors to obtain reasonable prices. However,
this process is lengthy and can be expensive.


I suspect this is how negotiations went in 2006 when this investigation happened:

DoD:  This part only costs you $20 and you've been selling it to us for $100.

TDG:  Ya, and?

DoD:  We want it for $40.

TDG:  No.

DoD:  Then we're going to find another supplier.

TDG:  Ok, good luck.

10 years later TDG has compounded at 30%+/year.

Liberty

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Re: TDG - Transdigm
« Reply #332 on: March 21, 2017, 03:35:33 PM »
The real danger is the debt. If margins were to contract severely because of action by the government, they'd still have to service a pretty large debt. If the debt is, say, 6-6.5x at current EBITDA, what is it at 30% EBITDA margins? At 20% EBITDA margins? What if the aero cycle rolls over during that time? Manufacturing these airplane parts will always be a viable business, but there could be some serious pain if they had to transition to a different model.

I'm not anything will happen, but the high debt and some unanswered questions about pricing and how much EBITDA comes from which part of the business were part of my reasons for selling a little while ago around $250. Maybe I'm being overly cautious...
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Spekulatius

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Re: TDG - Transdigm
« Reply #333 on: March 21, 2017, 04:11:03 PM »
The real danger is the debt. If margins were to contract severely because of action by the government, they'd still have to service a pretty large debt. If the debt is, say, 6-6.5x at current EBITDA, what is it at 30% EBITDA margins? At 20% EBITDA margins? What if the aero cycle rolls over during that time? Manufacturing these airplane parts will always be a viable business, but there could be some serious pain if they had to transition to a different model.

I'm not anything will happen, but the high debt and some unanswered questions about pricing and how much EBITDA comes from which part of the business were part of my reasons for selling a little while ago around $250. Maybe I'm being overly cautious...

The real danger is that something is fraudulent about TDG business model, the debt will just provide to gravity to have the equity slide against zero, in the case of serious issues, just like it did with VRX.

The thing that I don't get is how they do make all these "highly proprietary" parts with only 4 % R&D. You would usually expect a huge development cost to make all these "highly proprietary" parts, but in fact the R&D cost suggest that this is not the case. How can this be?
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undervalued

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Re: TDG - Transdigm
« Reply #334 on: March 21, 2017, 04:36:32 PM »
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule.

Can you clarify what you mean by the "monopolist provider" rule?

According to DoD policy, all sole source contracts should be cost+ (same as 'reasonable profit' I've been saying). If there are multiple suppliers then the former does not necessarily apply (though it could). I think this is what Jurgis was referring to.

Can you link to a source on this?  I'm not aware that this is a policy.  I believe the policy is sole source contracts above a certain cost require the disclosure of cost information so that the DoD can negotiate cost+ deals effectively.  I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.

I think Wayne mentioned it in his article http://seekingalpha.com/article/4054392-industry-insiders-valuation-transdigm-part-1-3
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Schwab711

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Re: TDG - Transdigm
« Reply #335 on: March 21, 2017, 05:20:23 PM »
Perhaps USG could squeeze TDG contracts to cost+ based on "monopolist provider" rule.

Can you clarify what you mean by the "monopolist provider" rule?

According to DoD policy, all sole source contracts should be cost+ (same as 'reasonable profit' I've been saying). If there are multiple suppliers then the former does not necessarily apply (though it could). I think this is what Jurgis was referring to.

Can you link to a source on this?  I'm not aware that this is a policy.  I believe the policy is sole source contracts above a certain cost require the disclosure of cost information so that the DoD can negotiate cost+ deals effectively.  I haven't seen anywhere that would prevent a supplier from refusing to do a cost+ deal though.

Here's one of the manuals I was referencing:
http://www.ruffinpc.com/pdfs/dcaap7641_90.pdf

I know there is a more recent version but I haven't had time to read through the differences yet. I originally started with the earlier manual because I was interested in early M&A. For our purposes, it's probably better to use the current manual:
http://www.dcaa.mil/DCAAM_7641.90.pdf

Either way, this journal references the 'recommendation':
http://aaajournals.org/doi/pdf/10.2308/ogna-50558?code=aaan-site (p.2, 1st paragraph)

Information on "Pricing Considerations":
http://www.acq.osd.mil/dpap/dars/pgi/pgi_htm/PGI215_4.htm
>  See PGI 215.404-3(a)(vi)

FAR 15.404-4(c)(4) [referenced above]:
https://www.law.cornell.edu/cfr/text/48/15.404-4

There's also new legislation that I don't fully understand yet but I believe the above is current.

hooplaer23

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Re: TDG - Transdigm
« Reply #336 on: March 21, 2017, 05:48:37 PM »
The debt levels at 30% EBITDA margins instead of 47% margins would obviously be very problematic for the company, but for that to happen, you have to believe there will be a significant change in the company's business model beyond its sales to the U.S. government (i.e. to other governments and more importantly to its commercial customers).  As I described in a previous post, the company indicated that approximately $210 million of its sales were to the U.S. government (both direct and through distributors).  In 2016 the company had 3.2 billion in revenue and $1.5 billion in EBITDA as defined.  Even if the U.S. government sales were 100% EBITDA margin (which seems implausible), and that entire $210 million in EBITDA went away, the company would still be earning $3 billion in revenue and $1.3 billion in EBITDA, or 43% margins. 

You could argue that sales to domestic defense OEMs like Boeing and Lockheed, which account for 12% of revenue ($380 million) could also face margin pressure, but these sales likely had lower EBITDA margins to be begin with.  Using the same scenario where these revenues are 100% EBITDA margin (again they aren't in reality), if you cut revenue and EBITDA by another $400 million you would get $2.6 billion in revenue and $0.9 billion in EBITDA, or about 35% EBITDA margins. 

 I am not saying that it is impossible that this scrutiny could flow over into its commercial aftermarket business, although I believe that is unlikely.  But my point is to highlight the draconian assumptions you have to make on the defense side to even get to 35% EBITDA margins if you assume no change to the commercial business.   

cmlber

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Re: TDG - Transdigm
« Reply #337 on: March 21, 2017, 07:26:28 PM »
Here's one of the manuals I was referencing:
http://www.ruffinpc.com/pdfs/dcaap7641_90.pdf

I know there is a more recent version but I haven't had time to read through the differences yet. I originally started with the earlier manual because I was interested in early M&A. For our purposes, it's probably better to use the current manual:
http://www.dcaa.mil/DCAAM_7641.90.pdf

Either way, this journal references the 'recommendation':
http://aaajournals.org/doi/pdf/10.2308/ogna-50558?code=aaan-site (p.2, 1st paragraph)

Information on "Pricing Considerations":
http://www.acq.osd.mil/dpap/dars/pgi/pgi_htm/PGI215_4.htm
>  See PGI 215.404-3(a)(vi)

FAR 15.404-4(c)(4) [referenced above]:
https://www.law.cornell.edu/cfr/text/48/15.404-4

There's also new legislation that I don't fully understand yet but I believe the above is current.

Those links discuss the thresholds where a company is required to disclose cost data.  There is no requirement that TDG supply the government with products under cost+ contracts.  There is only a requirement to share cost information, under the theory that this will make it easier to negotiate, for products with sales above a certain threshold. 

thefatbaboon

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Re: TDG - Transdigm
« Reply #338 on: March 22, 2017, 01:45:48 AM »
My mind keeps going back to the slide from the last investor day (page 21). 

90% of total commercial aftermarket revenues are made from the sale of parts that sell less than $2m per year.  Across all the various major airlines like BA or AA that ends up being maximum $135,000 per year per part per airline.


HopeIsNotAStrategy

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Re: TDG - Transdigm
« Reply #339 on: March 22, 2017, 10:06:43 AM »

There are literally hundreds of thousands of parts, many of which have proprietary technology.  The biggest PMA supplier, Heico, which controls more than 50% of the market for generic parts (i.e. OEM knock offs) tells investors that they have the capacity to produce 300-500 parts per year. 

Been following HEI for awhile, newer on TDG. Thanks everyone for all of the very helpful info in this thread. Agree cmlber with your 2/9/2016 comment that the combination of "sole-source aftermarket in niche, low dollar categories" is crucial and a durable moat, but just a note on the barrier to PMA knockoffs. HEI has said that they can only do 300-500 new PMA parts per year not because they could not get more parts through the approval process, but because they cannot sell the new parts; they are maxing out on what airlines are willing to incrementally adopt from a new supplier. Customer adoption is the barrier, not the number of parts TDG has vs HEI's ability to penetrate them.