TransDigm Group Inc (TDG) has announced an all-cash deal to purchase McKechnie Aerospace Holdings Inc. for $1.27 billion. The purchase price takes into account the retirement of all outstanding debt of the target. The transaction is expected to close in the fourth quarter of 2010 after meeting customary closing conditions.
 
McKechnie has major manufacturing capabilities in the OEM and aftermarket segments for the entire range of Boeing and Airbus aircrafts as well as many regional and business jets.  The company provides much of the content in the new Boeing 787, Airbus A380 and A350.
 
McKechnie’s revenues for 2010 are expected to be higher than $300 million with EBITDA margins of a minimum of 30%.  The business, consisting of seven major operating units, targets commercial aerospace markets throughout the world.
 
Approximately 66% of the revenues are sourced from the commercial transport OEM and aftermarkets; 15% from business and regional jet OEM and aftermarkets, and 15% from the defense segment. Aftermarket revenues account for 40% of the total business with the remaining sourced from aerospace OEM markets.  Less than 15% of revenues are sourced from military establishments.  The company employs about 1,500 employees in various locations.
 
TransDigm has large and renowned customers in the aerospace/defense sector. These include: (1) distributors of aerospace components; (2) worldwide commercial airlines, including national and regional airlines; (3) large commercial transport and regional and business aircraft OEMs; (4) the  armed forces of the United States and friendly foreign governments; (5) defense OEMs; (6) system suppliers and (7) various other industrial customers.

The industry’s stringent regulatory, certification and technical requirements, and large investments necessary for the development and certification of products, create barriers to entry for potential new competitors. As long as customers receive products that meet or exceed expectations and performance standards, they will have little or no incentive to change suppliers because of the cost and time involved for technical design and testing certification process. In addition, concerns about safety and flight delays if products are unavailable or unreliable are reasons for customers to continue long-term supplier relationships.
TransDigm’s business is sensitive to the number of flight hours of its customers’ planes, the size and age of the worldwide aircraft fleet and customers’ profitability. These are, in turn, affected by general economic conditions. Its business is directly affected by changes in revenue passenger miles (RPMs), the size and age of the worldwide aircraft fleet and, to a lesser extent by the changes in profitability of the commercial airline industry, among other factors.
RPMs and airline profitability have historically correlated with the general economic environment. National and international events also play a key role. As a result of the substantial reduction in airline traffic resulting from these events, the airline industry incurred, and some in the industry continue to incur, large losses and financial difficulties.
Some carriers have also parked or mothballed a portion of their fleets and have reduced workforces and flights. During periods of reduced airline profitability, some airlines may delay purchases of spare parts, preferring instead to deplete existing inventories.

TransDigm Group Inc is a leading global designer, producer and supplier of highly engineered aircraft components for use on nearly all commercial and military aircraft in service today. Its business is well diversified due to the broad range of products it offers to its customers.

More than 95% of the company’s net sales for fiscal year 2009 were generated by proprietary products. In addition, for fiscal year 2009, the company generated approximately 80% of its net sales from products for which it is the sole source provider.
 
We currently have a Neutral recommendation on TransDigm Group Inc.

 
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