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Citron Research March 9, 2017 Page 1 of 13 TransDigm and Bratenahl March 9, 2017 Citron Exposes More Undisclosed Relationships at TransDigm What the Company and Its Analysts Call "A Game" Is Actually Illegal Price Target: $140 Citron predicts that after this report makes its rounds, TransDigm’s (NYSE:TDG) days of exploiting and deceiving the Federal Government are numbered. Valeant Pharmaceuticals has recently hit prices lower than some ever thought was imaginable. As Citron observes today, at $12 per share, that stock is down over 95% from its highs just months prior to Citron’s reporting on Philidor. The questions then turn to: “How did so many ‘smart’ people get it so wrong?” and “When could this possibly happen again?" While we are sure there will be many books written on these questions, we can narrow it down to a small checklist. The ‘smart’ money got Valeant wrong by: Disregarding a roiling political climate disrupting "business as usual" Underestimating the financial frailty of a “roll up” Discounting the dangers of a small customer base (PBMs) Putting too much trust in the company’s CEO But the most important rule the ‘S mart Money’ missed was simple:

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Page 1: Citron Exposes More Undisclosed Relationships at TransDigmcitronresearch.com/wp-content/uploads/2017/03/TDG-Citron-part-2... · Citron Exposes More Undisclosed Relationships at

Citron Research March 9, 2017 Page 1 of 13 TransDigm and Bratenahl

March 9, 2017

Citron Exposes More Undisclosed Relationships at TransDigm

What the Company and Its Analysts Call "A Game" Is Actually Illegal

Price Target: $140

Citron predicts that after this report makes its rounds, TransDigm’s (NYSE:TDG) days of exploiting and deceiving the Federal Government are numbered.

Valeant Pharmaceuticals has recently hit prices lower than some ever thought was imaginable. As Citron observes today, at $12 per share, that stock is down over 95% from its highs just months prior to Citron’s reporting on Philidor. The questions then turn to:

“How did so many ‘smart’ people get it so wrong?”

and

“When could this possibly happen again?"

While we are sure there will be many books written on these questions, we can narrow it down to a small checklist. The ‘smart’ money got Valeant wrong by:

Disregarding a roiling political climate disrupting "business as usual"

Underestimating the financial frailty of a “roll up” Discounting the dangers of a small customer base (PBMs) Putting too much trust in the company’s CEO

But the most important rule the ‘Smart Money’ missed was simple:

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Citron Research March 9, 2017 Page 2 of 13 TransDigm and Bratenahl

When the CEO starts being evasive, covering up instead of coming clean, and smoke starts appearing ...

GET THE F*** OUT!!!

All points in the above checklist apply directly to TransDigm. Today Citron exposes the “game changer” – one of the many TransDigm secrets that CEO Nick Howley does not want Wall Street to know. Citron strongly advises that investors not rely on analysts to inform them when the game is over. It was a Jefferies analyst who insisted Valeant was a buy with a $172 target after the entire Philador mess was revealed. Nobody told them the game was over.

Now look what they're saying about TransDigm.

That's the game they're talking about here. What the Jefferies analyst deems is smart is more accurately described as ... illegal.

... In addition, since Transdigm operates as individual business units, it does not ‘bundle’ its products together. This strategy deters the buyer from taking advantage of asking for a quantity discount.

--- Jefferies Analyst Defending TransDiogm, January 23, 2017

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Citron Research March 9, 2017 Page 3 of 13 TransDigm and Bratenahl

First, we must give credit to The Capitol Forum; in particular, their excellent work exposing the tactics TransDigm used to circumvent the fair bidding process of the US Government. As an answer to why twelve subsidiaries submitted incorrect ownership information that is required to be updated yearly, the company just tried to float the excuse that it was merely ... A CLERICAL ERROR.

How stupid does TransDigm think you are?

Below is the exact form the company is required to file -- It couldn’t be simpler. It does not take a professional gumshoe to understand that TransDigm is hiding its ownership of subsidiaries to artificially inflate gross margins while avoiding price scrutiny from the Federal Government. The role of the OIG and TransDigm will be addressed in future reports. This form is required to be filed under penalty of perjury as part of the Government's bidding qualification process.

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Citron Research March 9, 2017 Page 4 of 13 TransDigm and Bratenahl

“By submitting this registration, you are certifying the information is accurate and complete. Knowingly providing false or misleading information may result in criminal prosecution under Section 1001, Title 18 of the United States Code. Criminal Penalties could include imposition of a fine, imprisonment, or both. You may be subject to other penalties as well, including, but not limited to, administrative remedies, such as suspension and debarment; ineligibility to participate in programs conducted under the authority of the Small Business Act; or civil liability under the False Claims Act.”

After the first Citron report, the big questions circling were “Does TransDigm have a captive distributor” or “Is there an entity that we should be aware of that we

are not?” “Is there anything that is being covered up?”

Introducing Bratenahl Capital Partners

As listed on its website, Bratenahl is a private equity firm founded in 2003 by Michael Howley, son of TransDigm's CEO Nick Howley. While not listed in his 10-K biography, but picked up by Bloomberg, Walter Nicholas (Nick) Howley is a "Board Member and Member of [the] Advisory Committee" of Bratenahl.

But like everything else at TransDigm, this is not as it appears to be. Bratenahl Capital is actually a family office for Nick Howley. Citron believes that Howley is the only investor in this fund, which holds ownership interests in numerous aviation businesses.

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Citron Research March 9, 2017 Page 5 of 13 TransDigm and Bratenahl

While the website says that Bratenahl was founded by Michael Howley in 2003 - that is actually a LIE. Michael was born in November of 1982, which makes him 21 years old at the founding of Bratenahl, a student at Washington Jefferson College.

From Michael’s FINRA registration, note that he was not the founder of Bratenahl in 2003:

The $500,000 question then becomes:

So who is the actual founder of Bratenahl? The two words you do not see on the website: Nick Howley

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Citron Research March 9, 2017 Page 6 of 13 TransDigm and Bratenahl

In fact, every piece of evidence that Citron can find points to Nick Howley being the founder and sole shareholder of Bratenahl Capital. Here’s the astonishing evidence we have compiled that shows Walter Nicholas

Howley (WNH), and Bratenahl Capital Partners (BCP), are one and the same:

The two General partners which own Bratenahl Capital Partners (BCP) are

Valentine LLC and W.N.H., L.L.C.

W.N.H. very likely stands for “Walter Nicholas Howley”

When BCP was incorporated, Walter Nicholas Howley’s (WNH) home

address was used as the address for the General Partners and later, when

WNH purchased a new home, another filing was done with the Ohio SOS

changing the address of BCP and the General Partners to WNH’s new home

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Citron Research March 9, 2017 Page 7 of 13 TransDigm and Bratenahl

address.

The address, principal place of business for BCP from 2003 through October

6, 2011 were the homes of Walter Nicholas Howley (WNH).

The registered agent for process of legal service for BCP L.L.C., W.N.H L.L.C.

and Valentine L.L.C. as filed with the OHIO SOS have always been WNH’s

home address. The General Partners’ initial address on Government filings

also shows WNH’s address being used for BCP:

http://www2.sos.state.oh.us/reports/rwservlet?imgc12g&Din=200309000974

So we ask: Why doesn't Nick Howley’s name appear anywhere on the Bratenahl website?

Well, it did – before it was taken down!

You can look at an archived copy from just months ago here: http://web.archive.org/web/20161015121357/http:/bratenahlcapital.com/team And compare it to what today’s site looks like, with a conspicuously absent Nick Howley here: http://bratenahlcapital.com/team/

Nick – why did you go into hiding?

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Citron Research March 9, 2017 Page 8 of 13 TransDigm and Bratenahl

Now we’ll ask the questions that could blow the dark and dirty web of TransDigm wide open. This chart is part of what we already know. Now it’s time for the company to come clean and tell the public what it doesn’t know.

Note to TransDigm: We know the answer to many of these questions already. Which of the two of us will wind up providing answers to analysts and the investing public?

Have the company’s auditors Ernst & Young ever looked into Bratenahl? Why the lies about who started and who controls Bratenahl? Does Bratenahl own a whole or part of any TransDigm distributors? Does Bratenahl own any entity that helps TransDigm orchestrate and/or

obfuscate billing with the Department of Defense? Has Bratenahl ever been involved in the sale of a company to TransDigm?

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Citron Research March 9, 2017 Page 9 of 13 TransDigm and Bratenahl

The work of The Capitol Forum has made it clear that Transdigm has intentionally used illegal tactics to inflate margins while avoiding price scrutiny from the U.S. Government.

Citron will issue further reports in the near future that expose the enormous margins TransDigm subsidiaries earn selling parts to the Defense Department. TransDigm will be forced to confront the one obvious question they desperately want to avoid answering: "What percentage of EBITDA comes from the U.S. Department of Defense?" (Not what percentage of Gross Revenues...)

We look forward to the company stating this disclosure metric, not an analyst hypothesis.

We will also be discussing the role of the OIG, and the recent initiatives from Boeing to control its own supply chain. We have received no help from management, as they are posturing as a company that has something to hide.

In their most recent conference call, management offered 33

responses stating that they simply “don’t know”. Again, does

management want us to believe that they’re this stupid?

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Citron Research March 9, 2017 Page 10 of 13 TransDigm and Bratenahl

33 times is enough to put Jeff Spicoli to shame.

Here are all 33 of the statements that TRANSDIGM’s management made on its recent conference call:

1. The truth of the matter is, Carter, I don't know.

2. I don't remember the answer to that.

3. At some point, yes. I don't know what the exact quarter-for-quarter is in each quarter going forward, but as I said, it's hard to exactly pin that to what exactly did in the quarter

4. I just don't know the answer to that.

5. Yes, I don't know if that is an exact cutoff but…

6. If your question is, do I know it's going to ship in the fourth quarter, I do not.

7. Obviously, we don't know yet.

8. I don't know what the price will be but I don't see any indication that the pricing has changed.

9. I just don't remember if it was zero or 1% one or something like that.

10. I don't know the exact number there. One of the reasons I don't know the exact number is it sometimes is a little informal rather than -- the bigger the order gets, the more formal that gets and the smaller ones are a little more informal.

11. I don't -- the answer is I don't exactly know that answer but I do not believe there is any

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Citron Research March 9, 2017 Page 11 of 13 TransDigm and Bratenahl

substantial difference.

12. I'm not -- the answer as I sit here is I do not know that.

13. I just don't know how to speculate on where we go other than I think you can -- I think you know pretty well how we think about this and I don't see any change in the way we look at it.

14. I'm going to pass to Terry on the pro forma versus GAAP growth, because I'm not sure I understand it.

15. I don't know the answer

16. I don't think it's materially different. I'd use roughly the same percents.

17. There is a little bit of an estimate because you don't know if there's a cut in 2018 that could ripple back into 2017 and you have a little bit of a guess on whether there will be inventory movement.

18. I don't think there is -- I don't know the exact number on the provisioning, but I do not think it's very significant.

19. Something like that. That is the total average. I don't think the military's way off of that. I don't have the exact number here

20. I don't know the answer to that.

21. Presumptively, that means there is some share gain but I have to admit I don't know what the number is.

22. I don't think so. There's nothing that I can really point out that I have any confidence in, in that.

23. In the commercial, I don't -- I'm not sure of the answer to that.

24. I don't think there's a material difference.

25. I can't -- obviously, I can't -- I don't know what somebody might do in the fullness of time.

26. I just don't know what someone might do.

27. I can't be certain of that.

28. That is -- I can't answer that generically. That is very fact and circumstance specific.

29. We haven't gotten that level of detail.

30. I don't want to answer that because I don't -- I mean it's -- I just, I haven't done the math; I don't know the answer.

31. I don't have the math on it.

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Citron Research March 9, 2017 Page 12 of 13 TransDigm and Bratenahl

32. We don't disclose the price. We just don't disclose -- (multiple speakers).

33. I'm not sure I'm not sure what it is.

Q4 Earnings Call Transcript, Feb 15, 2017

http://seekingalpha.com/article/4043537-transdigm-group-tdg-q1-2017-results-earnings-call-transcript?part=single

How do you think this quote from President Trump that began his recent address to Congress plays in TransDigm's boardroom?

This is becoming so textbook that we're pointing out the obvious...

After recent criticism about disclosures to the U.S. Government and to Wall Street (euphemism for “got busted lying”), TransDigm has now “coincidentally” decided to repurchase $600 million in stock. Instead of giving Wall Street answers, they give us even more leverage (because 7X EBITDA wasn’t enough?!?).

“We've saved taxpayers

hundreds of millions of

dollars by bringing down

the price of the fantastic

new F-35 jet fighter, and

will be saving billions

more dollars on contracts

all across our

Government”

--- President Donald Trump,

2017 address to Congress

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Citron Research March 9, 2017 Page 13 of 13 TransDigm and Bratenahl

This is very similar to a company we know who tried to buy Allergan. When the takeover was rebuffed because Allergan called Valeant a “house of cards”, Valeant "responded" ... with a $2 billion share repurchase program. Needless to say...

Valeant's stock is down 85% from the day it announced its Buyback. Can history repeat itself?

We think it can and will.

The Stark Conclusion

The answers to our above questions are crucially important to the investing public. Why?

AT BEST: Citron believes the company needs to inform its auditors of any and all relationships that could exist between Brantenahl, TransDigm, its distributors, subsidiaries and all other related party entities to TransDigm and Bratenahl. The company needs to perform a full internal investigation. The company’s auditors should immediately put everything on hold until these questions are answered satisfactorily.

AT WORST: Well, we know what happens. We’ve seen the story before.

Cautious Investing to All!