TransDigm increases leverage to issue special dividends
TransDigm (TDG) has increased the size of its existing term loan facility by $650 million to facilitate a one-time special dividend of $24 per share. According to the company’s guidance, its fiscal 2016 EBITDA (earnings before interest, tax, depreciation, and amortization) is expected to be ~7.4x.
However, it’s important to note that TransDigm has a bloated leverage structure by design rather than by necessity. In its investment conference held in June this year, the company’s management stated that it uses debt to generate “private-equity-like returns.” The company’s track record of generating free cash flow supports its capacity for the debt it currently has on its balance sheet.
TransDigm acquires Young & Franklin
On the September 23, 2016, TransDigm completed its acquisition of Young & Franklin and its subsidiaries for $260 million. Young & Franklin is a manufacturer of highly engineered valves and actuators, and all of its revenue is derived from proprietary products.
This business strategy is similar to TransDigm’s. TransDigm derives ~90% of its sales from its proprietary products. Young & Franklin’s revenue is expected to be ~$75 million in the year ending December 2016, with 70% of its revenue coming from the aftermarket.
In terms of end markets, 70% of Young & Franklin’s revenue is derived from the aerospace (XAR) end market, and the rest comes from the industrial gas turbine market. Major programs on which Young & Franklin’s products find a place include Embraer’s (ERJ) E2 and Phenom 300 and Legacy 450/500 programs, Bombardier’s (BBDRF) Challenger and Global programs, and Lockheed Martin’s (LMT) C130J and Bell UH1 (TXT) programs.