Aircraft-Parts Supplier Set to Test IPO Waters

Wall Street Journal

By LYNN COWAN

March 13, 2006; Page C6

The airline industry is linked in most Americans' minds to bankruptcy filings, but this week it's the focus of an initial public offering.

Aircraft-component maker TransDigm Group Inc. is hoping to raise as much as $241 million through an initial public offering of shares on the New York Stock Exchange. The Cleveland company, which makes everything from ignition systems to lavatory hardware for airplanes, sells its parts for use on both military and commercial planes.

To the casual observer, this year wouldn't seem to be the most opportune time to bring an airplane-parts supplier public. Several carriers are in Chapter 11 or they just got out. Jet-fuel prices are high. Boeing Co. and Airbus, a unit of European Aeronautic Defence & Space Co., are warning that global sales of new aircraft will decline by more than half this year, returning to their historic norm after hitting a record level in 2005.

But the U.S. airline industry has also been showing signs of improvement recently. Capacity, or available seats, has been cut, and passenger traffic is up; passenger fares are on the rise. The Air Transport Association's chief economist, John Heimlich, expects the U.S. industry to return to profitability again in 2007, after six years of losses.

And, internationally, airlines have been faring better than in the U.S., says David Strauss, U.S. aerospace and defense analyst at UBS AG.

"Basically, we are in the first stages of what is likely a multiyear up cycle," says Mr. Strauss, who believes that more airline-parts suppliers could go public. "The main things restraining the market are high fuel prices and the still-difficult shape of some North American carriers."

TransDigm is in the enviable position of deriving 90% of its net sales from proprietary products for which it owns the designs and 75% of its net sales from products for which it is the sole producer. Two-thirds of its net sales are generated from aftermarket sales -- continuing consumption of its products during the decades-long life span of an airplane, a particularly profitable and dependable revenue stream. Net income for TransDigm's fiscal 2005, which ended in September, more than doubled to $34.7 million compared with 2004; for the quarter ended in December, profit rose 41% to $9 million.

"It seems that everybody associated with airlines makes money but the airlines themselves -- lawyers, bankers, airports, accountants. Manufacturers and parts suppliers are no different," says Calyon Securities analyst Ray Neidl.

With a negative tangible book value, a debt load of $889 million, and 20% of the company's revenue going toward interest payments, TransDigm's balance sheet is highly leveraged. But the stable cash flow makes that less of a risk for investors than at most debt-laden companies, says Francis Gaskins, president of IPOdesktop.com.

"In this case, they can pull it off because they have good recurring revenues and a strong proprietary position in the products they sell," says Mr. Gaskins. "Their top-line revenue growth is not going be explosive, but it's going to be very consistent, and investors can count on it."

There are currently no other aerospace companies that have filed to do IPOs in the U.S., says capital-markets tracker Dealogic. But TransDigm is the third aerospace-related company to come public since December, a fairly swift pace for an industry that since 2000 has generated only one or two deals a year, according to Dealogic. The IPOs of Panamanian airline Copa Holdings SA and Mexican airport operator Grupo Aeroportuario del Pacifico were priced above expectations when they began trading in December and February, respectively; Copa has lost some of its first-day trading gains, but Grupo Aeroportuario's valuation has continued to increase.

Write to Lynn Cowan at lynn.cowan@dowjones.com