Transdigm

Who Knew An Aircraft Parts Makers Could Make So Much Money?

TransDigm Group is the leading global designer, producer, and supplier of engineered aircraft
components for use on commercial and military aircraft worldwide. The world aircraft market as
measured by revenue passenger miles has been growing at a 6% CAGR since 1970. The
company’s customers include distributors of aerospace components; commercial airlines; large
commercial transport and regional and business aircraft original equipment manufacturers
(OEMs); various armed forces; defense OEMs; system suppliers; and various other industrial
customers. Transdigm was founded in 1993, bought in 2003 by Warburg Pincus, and IPOed in
March 2006. Warburg Pincus stills holds roughly 40% of the company.

Cash Generation
Business Results
-SGA Steady between 10-11% of sales (Gross Margins Roughly 10% more than ebitda margins)
-Net Income Margins roughly 20%
Game Plan
-New Business Development
--Ex. Designed products for Boeing Dreamliner, Airbus A380
-- 24 Acquisitions since 1993
-------Consider Ebitda Multiples and what they think they can do with the business going forward
-------Acquire proprietary aerospace products with significant aftermarket content.
-Continual Cost improvement
-Value Based Pricing

Hotels All Over The Monopoly Board (Competitve Advantage)

-Competes in many small niche markets with high switching costs (if possible at all)
-90% of Transdigm’s products are proprietary (aka Transdigm designed them)
-Does not typically compete for “build to print” (you-design-we-make) contracts.
-75% of these products it is the sole source provider (monopoly)
-Have strong pricing power in aftermarket.
-Strong brand names known for excellence and safety
-Barrier to entry: The industry’s stringent regulatory, certification and technical requirements,
and the investments necessary in the development and certification of products, create barriers to
entry for potential new competitors. So long as customers receive products that meet or exceed
expectations and performance standards, we believe that they will have a reduced incentive to
certify another supplier because of the cost and time of the technical design and testing
certification process. In addition, we believe that concerns about safety and flight delays if
products are unavailable or undependable make our customers continue long-term supplier
relationships.

Management
-CEO Nicholas Howley CEO since 2003, has been with the company since its formation.
-Compensation: Based on individual performance, compensation was $1m in 2008.
-Straightforward answers to questions
-Pushed hard in conference calls to get analysts to understand that there is uncertainty in the
business model.

Short Valuation
-EPV $20.78
-Assuming 2 years of contraction in revenues then slow revenue growth, decrease in margins,
higher tax rate, and constant debt levels. Company is fairly valued at $35/share
-Assuming 2 years of contraction in revenues then 10% growth, 53% gross margins, 11% SGA,
higher tax rate, and constant debt levels. Company is worth $50/share.
Most Prominent Risks
-Large decrease in defense spending, right now reporting great results, unexpected 19% increase
in defense aftermarket spending
-$1.3 Billion in Long term debt, first maturities in 2013. Has historically had a Ebitda/Debt ratio
between 4 and five
-Warburg Pincus stealing the company out from under shareholders if it becomes significantly
undervalued (with credit crisis going on this is unlikely in the short term)

Anything you find beneficial that is not obvious

-Boeing strike led to higher margins this past year.
-Multiples on private businesses still high, hoping private owners will become more reasonsable.

Takeaway
While I don’t know what the economy will do over the next 6-18 months, Transdigm will be
stronger by all measures and will have plenty of opportunities to put good use to its cash.