TransDigm to Acquire Semco - Analyst Blog

TransDigm Group Inc. (TDG) has announced an all-cash deal to purchase the outstanding equity shares of Semco Instruments Inc. for $73.5 million. The transaction is expected to close in the fourth quarter of 2010 after meeting customary closing conditions.

 

Semco, which has manufacturing bases in California and Mexico, designs and builds precision components for turbo-prop, turbo-fan, and turbo-shaft aircraft engine providers. It makes sensors, thermocouples and other products for ERJ 170/190, ATR 42/72, Dash-8, the Cessna, Lear and Raytheon family of aircraft. Major clients are Pratt Whitney, Hamilton Sundstrand and Sikorsky which are part of United Technologies Corporation (UTX), Honeywell International Inc. (HON), General Electric Company (GE), and the US government. Revenues for 2009 were $38 million.

 

The company 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) various 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 certify another supplier because of the cost and time of the technical design and testing certification process. In addition, concerns about safety and flight delays if products are unavailable or undependable are reasons for its customers to stick to 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 items 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, changes in the profitability of the commercial airline industry, among other factors.

 

Some carriers have also parked or retired 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 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 net sales for fiscal year 2009 were generated by proprietary products, whose designs it owns. In addition, for fiscal year 2009, TransDigm 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.