TransDigm Group Stock

Good day, and thank you for standing by. Welcome to the TransDigm Group Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Mary Hartman, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDigm's Fiscal 2026 Third Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Mike Lisman; Co-Chief Operating Officer, Patrick Murphy; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Joel Reiss. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.

Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I will now turn the call over to Mike.

Good morning, and thanks for calling in today. First, I'll start off with the usual quick overview of our strategy; second, to make a few comments about the quarter; and third, discuss our fiscal 2016 outlook. Then Patrick and Sarah will give some additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.

To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocation are a key part of our value creation methodology.

Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we delivered another solid quarter with Q3 results exceeding expectations. As a result, we are raising guidance for the year. During the quarter, we saw healthy growth in revenue, both sequentially and compared to the prior year in all 3 of our market channels, commercial OEM, commercial aftermarket and defense. In commercial aftermarket, we delivered a strong performance in Q3 with the commercial transport component of our commercial aftermarket growing 18% versus the prior year period.

Further, given the strong performance seen to date as well as our current expectations for Q4, we raised our commercial aftermarket guidance for the year. Note that we are seeing this healthy growth despite the overall decline in RPMs arising from the conflict in the Middle East, from which we have yet to see any material impact. In the commercial OEM market, Sales have increased well into the double digits as production rates at Boeing and Airbus have continued to steadily rise over the past few quarters. And lastly, our defense end market saw a double-digit revenue increase this quarter and continues to build backlog that will drive growth as we finish fiscal 2026 and head into our fiscal 2027.

Our EBITDA as defined margin was 52.8% in the quarter, which includes more than full 2 percentage points of dilution from recent acquisitions. This is an improvement sequentially from Q2 with higher volumes and strong performance across all market channels. The sequential margin improvement is in spite of margin headwind of about 0.5 percentage point in the quarter related to the newly acquired Jet Parts and Victor Sierra operating units. Our acquisitions continue to contribute meaningfully as well and over time, should see an expansion in their respective operating margins. Additionally, we had strong operating cash flow generation in Q3 of over $700 million and ended the quarter with nearly $2.8 billion in cash.

Before I get into our usual capital allocation update, I would like to quickly provide some additional color on our withdrawal from the acquisition of Stellent in mid-July. This was a difficult decision that came after the Department of Justice notified us that they intend to challenge the transaction. While we respectfully disagree with the DOJ's decision on the matter, ultimately, the complications and hurdles that would have arisen from continuing with the acquisition through litigation, coupled with the time line constraints in the stock purchase agreement contributed to our decision to withdraw and pursue other targets.

At the end of the day, we will always be practical and prioritize the best long-term use of our shareholders' capital and our management resources. We felt we did that here, and the outcome though disappointing, won't impact our future M&A approach. We are always actively working away on new targets.

Next, an update on our capital allocation activities and priorities. Regarding the current M&A activities in the pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsize range. As always, we'll remain disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. So consistent with past practice, I will not be saying too much on what is currently active in our funnel. Last week, we announced that we agreed to acquire Prince on Izan from Industrial Growth Partners for approximately $1.1 billion in cash. Prince and Izan is a leading global designer and manufacturer of highly engineered brazing alloys and specialty medical components used across a range of advanced performance and high cost of failure applications.

The company primarily supports the aerospace and defense, aeroderivative turbine and transportation end markets. It is expected to generate approximately $360 million of revenue for the 2026 calendar year. We've tracked this Cleveland-based company for some time now, and Princi's highly engineered solutions and excellent customer service align well with TransDigm's acquisition strategy. We look forward to getting the transaction closed and welcoming the company into the fold. The capital allocation priorities at TransDigm are unchanged.

Our first priority is to reinvest in our businesses; second, to accretive, disciplined M&A; and third, return capital to our shareholders via buybacks or dividends. The fourth option, paying down debt seems unlikely at this time though we do still take this into consideration. We are continually evaluating all of our capital allocation options. As we sit here today, we have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Specifically, we have substantial M&A firepower and capacity remaining in excess of $10 billion.

Moving to our outlook for fiscal 2026. As noted in our earnings release, our business outlook has continued to strengthen. We are increasing our full fiscal year '26 sales and EBITDA as defined guidance to reflect another solid quarter of results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $150 million and EBITDA as defined guidance was raised $100 million. Current guidance for fiscal 2026 is as follows and can be also found on Slide 6 in the presentation.

The midpoint of our fiscal '26 revenue guidance is now $10.51 billion or up approximately 19% over the prior year. With regard to the market channel growth rate assumptions in this revenue guidance the full year market channel assumptions for our 3 primary end markets are also being increased to account for our results to date and expectations for the final quarter. The updated revenue guidance provided today is based on the following market channel growth rate assumptions. We expect commercial OEM growth in the mid-teens percentage range. We expect commercial aftermarket revenue growth to be in the low-double-digit percentage range, and we expect defense revenue growth in the high-single-digit to low-double-digit percentage range.

The midpoint of fiscal 2026 EBITDA as defined guidance is now $5.52 billion or up approximately 16% versus the prior year, with an expected margin of around 52.5%. We're very pleased with our margin performance in the year-to-date period and continue to perform ahead of our expectations. As discussed in prior quarters, the guidance includes more than 2 full percentage points of margin dilution related to recent acquisitions compared to the prior fiscal year quarter. The midpoint of adjusted EPS is now expected to be $41.04. We believe we're well positioned for the last quarter of fiscal 2026. We'll continue to closely watch how the aerospace and capital markets develop and react accordingly.

Lastly, I'd like to reiterate how pleased we are with the company's performance this quarter. Our teams remain focused on our value drivers, cost structure and operational excellence. We will continue to control what we can control and expect that our disciplined, consistent strategy will deliver the value you have come to expect from us. With that, I will now hand it over to Patrick Murphy, TransDigm's Co-COO, to review our recent performance and a few other items.

Good morning, everyone. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2025. That is assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the acquisition of Simmons Precision Products but excludes jet parts engineering and Victor Sierra Aviation acquisitions. Purpose of excluding these newly acquired businesses is for 2 reasons. First, we are still working through the integration and aligning their data into our reporting structure. Second, we want to highlight the strong aftermarket performance of our base business.

Beginning with the fiscal 2027 guidance, Jet Parts and Victor Sierra will be included in the pro forma reporting. In the commercial market, we will split our discussion into OEM and. Our total commercial OEM revenue increased approximately 17% in Q3 compared with the prior year period. As we anticipated, Commercial OEM added another quarter of strong revenue growth. Commercial transport OEM revenues, which excludes the BizJet submarket were up 25% over the comparable prior period. This is primarily driven by the production improvements at Boeing and Airbus and our teams are well positioned to support the increasing bill rates.

As Boeing and Airbus bus production rates continue to climb, we anticipate continued strength in the commercial OEM market. Commercial OEM bookings posted another quarter of solid growth compared to the same prior year period, significantly outpacing sales. Commercial Transport bookings had double-digit growth for the third quarter, which represents another quarter of consistent growth for the commercial OEM market. As you know, Commercial OEM bookings is an important leading indicator for our commercial OEM business, and we are pleased that our book-to-bill rate remained solidly positive in Q3. Today's commercial OEM guidance assumes that the OEMs maintain their rates for the remainder of our 2026 fiscal year. The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk the production build rates for the 2026 fiscal year.

Fiscal '26 commercial OEM revenue guidance range, as Mike mentioned, is increasing to the mid-teens percentage growth range based on the performance to date, current outlook for the remainder of our fiscal year. Now moving in to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 17% compared with the prior year period. As a reminder, this excludes our newly acquired Jet Parts Engineering and Victor Sierra Aviation businesses. This quarter, nearly all submarkets delivered strong performances in the quarter. Our commercial transport aftermarket revenue growth, which excludes our bizjet submarket was up 18%, driven by solid growth in the transport submarkets of engine, passenger and interiors, while freight was roughly flat for the quarter.

Q3 bookings and commercial aftermarket delivered ahead of our expectations for the third quarter in a row. Bookings continue to support full year growth outlook, and we are well positioned to execute our fourth quarter. Additionally, POS at our distributors also grew double digits on a percentage basis this quarter. As Mike already mentioned, we are raising our commercial aftermarket revenue growth guidance from high-single-digit to low-double-digit range up to the low-double-digit range based on our strong performance through Q3 as well as our current backlog and outlook for the remainder of the year. I also wanted to comment briefly on the conflict in the Middle East.

While jet fuel prices have risen from pre-conflict levels and select airlines have adjusted capacity in the short term, we have not yet seen any meaningful slowdown in our commercial afterward. We continue to monitor the situation in close partnership with our customers and will take all appropriate actions if something changes. Now shifting to our defense market. Defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 11% compared with the prior year period. Over the past year, we have seen strong growth in the defense market, driven by a combination of new business wins and excellent operational execution from our teams. This positions us well for continued growth in the defense market.

Q3 defense revenue growth was well distributed across our businesses and customer base. Both OEM and aftermarket components in our defense market were up versus the prior year with aftermarket running slightly ahead of OEM. Defense bookings for the quarter increased nicely, up both year-over-year and sequential and outpacing sales for the period. Our strong bookings this year support our guidance of high-single digits to low-double digits. As we have said many times before, defense sales and bookings can be lumpy, especially quarter-to-quarter, but the current environment remains positive for defense spending and the global defense outlook continues to indicate this end market will remain solid heading into next year.

Moving on to our value growth. I wanted to touch on a few new business wins that the teams have secured in the last quarter, specifically driven by highly engineered innovative technical solutions. Adam's right Aerospace was recently awarded a major line fit position with a leading airframe or for its complete touch-free laboratory product suite. The award covers the full portfolio, including a touchless faucet, touchless flush switch and touchless waste bin door. These products incorporate next-generation sensors and robust aircraft-specific designs engineered to withstand the demanding high-use environment of moderate aircraft laboratories.

The Avionics instruments team was engaged by a major supplier of fighter aircraft to develop a new battery for a critical aircraft system when the previous supplier was unable to sustain the program. The battery powers main aircraft operations during addition and flight, enabling the platform to carry out diverse and complex missions. Our team took the program from design through qualification and into production in under 2 years, giving the customer a qualified production-ready replacement that kept the war fighter mission ready. Our electronic business developed a precision electromechanical actuator engineered to control landing gear deployment and retraction on a new unmanned combat aircraft. Compact mission-critical design combines high loan capability, precise motion control, reliable performance in demanding flight environments.

Canyon Aero Connect developed a new audio indicator capability for its AMU 50 digital audio control system back to meet the new U.S. forest service aircraft requirement, enhancing pilot situational awareness by providing a visual indication of incoming radio transmissions regardless of audio volume or mute status. These innovation-driven new product wins will deliver substantial new business revenue over the next 3 years from prototype and LRIP orders as the teams work toward full production brand.

Now a quick update on our acquisition integration activities. Simmons Precision which was acquired at the beginning of our fiscal year, continues to progress nicely and ahead of our expectations. Jet Parts and Victor Sierra acquisitions closed early in the third quarter and are also progressing on tons. We have experienced EVPs signed each of the operating units and are very pleased with the team's progress to date. Still early in our ownership, but these businesses are a good conflict meant to our existing portfolio, and we are excited that they are a part of TransDigm.

I would like to wrap up by recognizing the strong contributions of our operating units during the third quarter of fiscal '26. Our management team stayed focused on our consistent operating strategy, executing our value drivers, working hard to satisfy our customers' growing demand. We are truly pleased with the impressive results our teams delivered for our shareholders this quarter. With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne.

Thanks, Patrick, and good morning, everyone. I'll recap the financial highlights for the third quarter and then provide some more information on the guidance. First, on organic growth and liquidity. In the third quarter, our organic growth rate was approximately 13% and all market channels contributed to this growth as previously discussed by Mike and Patrick. On casual liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx, cash taxes was approximately $870 million for the quarter, coming in at $2.1 billion on a year-to-date basis. For the full fiscal year now, we expect our free cash flow guidance to be closer to $2.6 billion, an increase from the prior guide of $2.5 billion. .

Below that free cash flow line, the net working capital consumed approximately $160 million of cash in the quarter. For the full year, we expect working capital to end roughly in line with historical levels as a percentage of sales. We ended the quarter with a cash balance of $2.8 billion and our net debt-to-EBITDA ratio ended the quarter just slightly up from the prior quarter of 5.8x. This cash balance together with our available debt capacity gives us ample liquidity to fund the pending Prints and Izen acquisition. More broadly, our strategy is to operate in the 5 to 7x net debt-to-EBITDA ratio range, which preserves capacity for additional acquisitions and other capital deployment as opportunities arise.

Regarding our debt, our capital allocation strategy is to both proactively and prudently manage our debt maturity stacks by keeping net term maturities well expanded. In addition, approximately 75% of our $33.7 billion gross debt balance is fixed through fiscal 2029. This is achieved through a combination of fixed rate notes, interest rate swap caps and calls. This provides meaningful cushion against any near-term rate move. Our EBITDA to interest expense coverage ratio ended the quarter at 3x, which provides us with comfortable cushion versus our target range of 2 to 3. During the quarter, we continued to apply the same targeted return criteria we have consistently applied over the years, and that led us to opportunistically deploy about $980 million of capital via open market repurchases of our common stock.

This equates to approximately 800,000 shares at an average purchase price of approximately $1,208 per share. Including our first and second quarter repurchase activity, year-to-date repurchases now total $1.8 billion. We expect these repurchases to meet or exceed our long-term return objectives. We continue to seek the best opportunities for providing value to our shareholders through our capital allocation strategy. We think we remain in a strong position to do that with adequate flexibility to continue to pursue M&A opportunities or return cash to our shareholders via share buyback and/or additional dividends. With that, I'll hand it back to Mary Hartman, our Director of Investor Relations.

Before we open the line for Q&A, I'd ask everyone in the queue to consider your fellow analysts and ask 1 question only so we can get to as many people as possible. Operator, can you please open the line?

[Operator Instructions] Our first question comes from Robert Stallard with Vertical Research.

Mike, this might be a question for you. There's been some legislation moving through the Congress on this whole right to repair issue on the defense side. Do you think this could have any implications for TransDigm down the line?

Rob, this is Patrick. I'll take that. The proposed bill is still evolving. So we don't want to presume or comment until it becomes final. Obviously, I think you know this will impact a broad base of companies, platforms, and products. But right now, we're not in a position to really comment on something that hasn't become law. .

Our next question comes from Ken Herbert with RBC Capital Markets.

I just wanted to ask on -- yes, Mike, maybe on Stellent, did that DOJ review have any impact on your desire for incremental defense M&A? And maybe if you could provide a little bit more detail on what you're seeing in terms of the M&A pipeline today around the end market exposures.

Yes, Ken, this came via the HSR process in the U.S. and a couple of things. First, we think it's a one-off not in any way indicative of our ability to get future deals through. In fact, the Jet parts and Victor Sierra transactions, both of which closed successfully, those approvals were actually filed after Stellant 1 was filed and submitted. And I think you know, you followed us for a long time out of 100 acquisitions in our history, this is the third 1 that didn't cross the finish line for these kinds of reasons. It just happens from time to time. We are working with a regulatory authority that took a slightly different view on the nature and sensitivity of the overlap. But it's always hard as you know, how the market gets defined is tough. -- these can take different views on that, and we were unfortunately not able to come to agreement on this one. .

With regard to how it affects future strategy. As I tried to address in the comments, it doesn't on the M&A front. We're seeing a lot of activity presently across both commercial and defense markets in aerospace and the team -- our M&A team remains very busy, looking through a current list of targets.

Our next question comes from Gavin Parsons with UBS.

Guys, usually, your aftermarket activity lags flight activity by maybe a couple of quarters. So just -- it sounds like you have good visibility for this quarter, but thoughts on why the strength and why the disconnect relative to flight activity if that will catch up to you.

Yes. It's probably 1 of the things we're -- you're right. Our backlog, our leading indicators put us in a good position to deliver the current quarter and fiscal year. It's tough to say whether -- what that will mean in the future, right? Things continue to evolve. One quarter is really hard for us to predict 3, 4 quarters out at this point in time. So we can only control what we control. Our aftermarket sort of books and shifts, 50% or so in the same quarter, and that's what we've got the most visibility to at this time.

And I'd just add, Gavin, we're -- as Patrick and I both said in our comments, we're just we're just not seeing any material impact on our business from what's going on in the Middle East and some of the changes in RPM and take off and land a great yet.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Maybe just to follow up on the last question. Can you talk about commercial aftermarket in the quarter, up 17% versus the 14% in Q2 -- can you just parse out the drivers of that maybe across engines? You mentioned freight is flat. How is interiors and framework? And if you could just discuss the moving pieces there.

Yes, Sheila, I would just say that in general, we're seeing a broad-based demand across all our platforms and customers. We are seeing some more strength in engine and passenger which is a bigger part of our aftermarket. And we're seeing good strength though in Interiors. Rate, we've seen good strength all year. Q3 was a little lighter than we had seen earlier, but overall good across all submarkets. .

Our next question comes from Kristine Liwag with Morgan Stanley.

Mike, the stock's valuation seems relatively range bound for some time. And the concern has been that with TransDigm size, you might be increasingly difficult to find aerospace acquisitions that are large enough to move the needle. And look, you've announced a few of these, but the stock still not moving. I guess in the past, the market awarded TransDigm with more of a premium multiple because of the focus on aerospace defense, but now that this perceived ceiling appears to be contributing to more discounted valuation. I was wondering what your appetite is for potentially broadening out the targets and look at other industrial markets that meet the business characteristics of your criteria, which are proprietary with strong aftermarket, just because if you look at companies like Amphenol, I mean they're even trading at a higher multiple than you and they've got -- they're able to apply their playbook. -- in a much larger addressable market just outside of aerospace and defense.

Sure. Happy to take that one. I'd say a couple of things. At this time, we remain primarily focused on looking at the aerospace and defense sector, that is 95% of our current revenue. It is what we do. It's the sectors we know. Year-to-date, we've done -- once Prince and Izan gets closed, well north of $3 billion of acquisitions of companies that primarily serve our core aerospace and defense end market. that's where the M&A team is currently spending the bulk of their time. In the fullness of time, could we potentially branch out and consider other things, that's always a potential chance. But as we sit here today, the focus remains on aerospace and defense, and that's where -- that's what's getting the bulk of our time.

We're pretty excited about Jen Barts and Victor here. As Patrick mentioned in some of the comments, it's early innings there. We're excited about Prince and Ian look forward to getting that 1 closed as well. And we still see good opportunities from here on out in sort of our core fairway of aerospace and defense, and it's where the focus is going to remain at this time.

Our next question comes from David Strauss with Wells Fargo.

Mike, could you just talk on the margin performance year-to-date and what you're expecting in Q4? I know you've talked about like 200 basis points of dilution from deals and the headwind from ROE really at growth, but it looks like you're going to come in more like 140, 150 bps down year-over-year, so a lot less than kind of what's implied by those different moving pieces. So if you could just touch on the performance year-to-date, and Q4 looks like you're implying a little bit down relative to Q3.

David, this is Sarah. I'll answer maybe the latter part of your question and let Mike kind of fill in on some more color detail there. Obviously, we're glad to increase our guidance EBITDA margins up to 25.5%, an extra 20 basis points on that. And obviously, Q3 came in strong at 52.8%. So it does imply drop for Q4. Hopefully, on -- for the Q4, we hope to be conservative. We've got a full quarter now of Jets and Vector, but we just got them, and we have some strong OEM and other growth there. So hopefully, some conservatism on that. If you look at it year over prior year, yes, there's a 200 basis point increase because obviously, we've got Simmons in Q1, so we've got a 4-year cement and then also with Jetstar halfway through that year as well. So that plays into some of the dilution. But I'll let Mike chime in on any other color on the market.

Yes, David, I would just add the -- we got a lot of dilution because of the acquisitions we completed that weighed us down more than 2 full percentage points, so that's contributed. We're in the early innings of owning those businesses just for a couple of months or so. So we certainly don't want to get out over our skis in terms of the margin assumptions for Q4. We don't think we gave any -- on the margins incredibly aggressive guidance as we sit here today for Q4. As you know, we'll always push it here and try to outperform and do better. We think that's certainly in the cards for Q4.

Our next question comes from Myles Walton with Wolfe Research. .

I was hoping you Jet parts and big Sierra. I know you mentioned it wasn't in the pro forma breakdown by end market, but I guess I thought it was all commercial aftermarket -- and then could you comment on what you saw actually in the almost full quarter of ownership of growth relative to your 17% market growth in commercial?

Yes. Myles, it's Mike. I'll take that one. We're early in owning the businesses. As Patrick said in his comments, the intent was nothing more than to show the strong commercial aftermarket performance of our base businesses, the core starting stores, from TransDigm at the start of the year, and that was the goal. With regard to whether Jet Parts or Victor Sierra, we're in or out for the quarter, it doesn't materially change the percentage growth that we saw. All businesses are performing well. I think you know on Jet Parks and Victor Sierra, as we said on prior earnings calls, -- these are businesses that are growing at a really good clip, not explosive growth, but growth that's a little bit ahead of what the broader aerospace and defense components landscape you're seeing -- we're happy to own them.

We're happy to be able to partake in some of that growth. It's a critical part of why we bought these businesses, and we're happy to own them. And so far, it's been so good in the first a couple of months of ownership.

Our next question comes from Scott Mikus with Melius Research.

Mike, printing, it provides brazing alloys that are often nickel or cobalt based and used in engines. Just given the advanced materials, is it fair to assume that Princen izen has significantly higher content on the 737 MAX and the A320neo relative to the predecessor programs given that they were reengines?

I would say we've not specifically disclosed content on recent acquisitions on specific platforms. As we said in the comments, this is a good business, we're excited to own it. It serves primarily our end markets, proprietary content unique to the applications they serve really customized stuff in terms of the chemistry and formulations they bring and provide to the end customer. It's mostly aftermarket, serving a large installed base. We're familiar with the applications across some of our existing businesses. And it's got decent content on within aerospace and defense on engine platforms, things like fuel nozzles, rocket engines, so good content sort of right down the fairway for us in terms of fit with broader transit. I'm excited to own it. .

Our next question comes from Gautam Khanna with TD Securities.

Was wondering because you've done some buybacks year-to-date, how you prioritize special dividends? Like how likely are we to see one of those given the other things you've commented about with the M&A pipeline. This is about the time where one gets announced if there is to be one. So just your view on buybacks versus dividends in the absolute M&A.

Sure. This is Sarah. I'll take that one. Yes. Yes, you're right. And obviously, we continue to assess both options of buybacks and dividends. Obviously, on the buybacks, it's got to follow the criteria of meeting the same IRR returns. So that's what plays into our thinking on repurchases. And then as we look to dividends, Ultimately, we're sitting comfortably at the midpoint of our net debt-to-EBITDA ratio range of 5 to 7 and so we'll continue to see what makes the most sense as we evaluate both of those options, which we do. We obviously want to maximize the shareholder value with these decisions. And so as we look to close out both the fiscal year and the calendar year, we'll look to make what makes the most sense on those decisions.

Our next question comes from Seth Sieifman with JPMorgan.

I wanted to follow up on one of the margin questions that David asked earlier. Coming into this year, you talked about dilution, not just from the M&A but also from mix. And I guess the -- maybe the aftermarket has turned out a little bit better than expected this year. But as we go forward, how do you think about mix as a component of what we should expect for margin? When I was listening to the last quarter's call, it seemed like you kind of still expect that 150 basis points expansion in the organic business, almost regardless of mix. So maybe if you can update us on your thoughts about mix and how it affects margin. .

Yes. I would say, constant mix, the target is the same for year-over-year margin improvement. We've always been able to and continue to this year in our base businesses drive margin improvement on a constant mix basis of 1 percentage point or slightly better, maybe up to 1.5 percentage. That's unchanged. That's not going to change anytime in the near future, either going forward. We expect to be able to continue to drive that same kind of performance. With regard to whether or not you take a bit of headwind from mix shift, that can happen from time to time. It amounts to like a couple tenths of a point though on the margin, usually not anything material. At least that's what we're seeing year-to-date with both commercial OEM and aftermarket growing, albeit OEM a little bit better. So a slight headwind, but nothing that weighs you down and we think will prevent us from hitting something close to our targets or within the goalposts, the 2 ends of the target range that I provided.

Our next question comes from Ronald Epstein with Bank of America.

This is Alex Preston on for Ron this morning. Just on commercial OE, you explained the assumptions behind the 26 guide, but I'm curious if you can maybe comment on your view on the OE ramps into 4Q, i fiscal '27? And maybe more broadly, if you can update us on the supply chain if conditions are still easing as in prior quarters or if there are any areas where there are maybe lingering issues still?

Yes. This is Patrick Murphy. Yes. Obviously, as we mentioned, we're pretty excited about the growth that we're seeing from Airbus and from Boeing as they ramp up those growth rates year-over-year. It's been a nice boost to us this year. Our bookings continue to be a good leading indicator. And as we look at Q4, this is still a strong part of our business. Now as we get into 2027, we believe that Boeing and Airbus are well positioned to continue to march along the path that they've put forth, and we're in a great position to support them on that. So we just are seeing positive growth here along the lines that Boeing and Airbus are communicating and our businesses are in line to support that.

The supply chain as a whole we think is reasonably solid, but it's something we continue to monitor, right? This is a very broad-based supply chain. You see the same things out there that we see. Our suppliers have performed well enough to continue to keep us in a good position, and that's what we aim to do for Boeing and Airbus.

Our next question comes from Scott Dueschle with Deutsche Bank.

Mike or Patrick, just to follow up on Rob's earlier question and to ask it another way. Can you give us a sense as to how many SKUs, the defense business sells and the average volume on those SKUs? Like is this the 1,000 SKU business in which 100 repairs or PMAs could have a big impact on your growth? Or is it more like a 50,000 SKU business where it would be a lot harder for third-party repairs impact your growth? .

Yes, Scott, it's Mike. I'll take that one. On the -- the legislation is changing quite a bit. So we're hesitant, as Patrick said, to step out and try to assess its final form just because there are so many moving parts right now. It's really hard to step out and opine. But broadly speaking, our defense business in aggregate is numerous SKUs, think tens of thousands, hundreds of thousands, not just thousands. But a big bucket of parts sold, largely derived from commercial technologies, and that's what comprises the bulk of what we provide to defense customers, not just in the U.S. but also globally.

So I think as the legislation comes into more final form on future calls, we'll be in a better position to give more have more of a concrete discussion on it.

That concludes today's question-and-answer session. I'd like to turn the call back to Mary Hartman for closing remarks.

Thank you all for joining us today. This concludes the call. We appreciate your time, and have a good rest of your day. .

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Good day, and thank you for standing by. Welcome to the TransDigm Group Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mary Hartman, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDigm's Fiscal 2026 second quarter earnings conference call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Mike Lisman; Co-Chief Operating Officer, Joel Reiss; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Patrick Murphy. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.

Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website or at sec.gov.

The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations.

I will now turn the call over to Mike.

Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy; second, make a few comments about the quarter; and third, discuss our revised fiscal '26 outlook. Then Joel and Sarah will give some additional color on the quarter.

To reiterate, we believe we are unique in the industry in both the consistency of our strategy and both good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.

To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity equity-like returns. And lastly, our capital structure and allocation are a key part of our value-creation methodology.

Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we delivered a good quarter. Our Q2 results ran ahead of our expectations, and we once again raised our guidance for the year.

During the quarter, we saw solid growth in revenue, both sequentially and compared to the prior year in all 3 of our market channels, commercial OEM, commercial aftermarket and defense. Bookings in the quarter also meaningfully surpassed shipments across all 3 of these market channels. Through February, commercial aerospace market trends have been favorable with takeoffs and landings increasing in the 4% ballpark year-over-year and RPM growth trending in the 4% to 7% range. In March and April, activity took a step back as a result of the conflict in the Middle East with global RPM growth slowing to 2.1% for the month of March and takeoffs and landing cycles dipping into slightly negative territory. However, excluding the Middle East, March RPM growth was 8%, highlighting strong demand in other regions of the world.

Time will tell how flight activity is impacted for the remainder of the fiscal year given the current dynamic market environment and evolving situation in the Middle East. To date, we have not seen a significant change in commercial aftermarket ordering activity relative to levels prior to the start of the conflict, including from the Middle Eastern Airlines most directly impact, but we remain cautious here. Ultimately, the impact felt will depend upon the duration of the conflict.

Note that we are increasing our commercial aftermarket guidance today despite this market uncertainty. This is to reflect the strong performance seen in our fiscal second quarter and our best gaps at how we will finish the year as we sit here today.

As mentioned and as you saw in our results, Commercial aftermarket growth rebounded in Q2 from prior recent quarter growth rates. It was good to see the stronger performance, and it is a reminder of the lumpiness we can at times see in this particular market channel. In the commercial OEM market, Boeing and Airbus are continuing to ramp production rates. Airline demand for new aircraft remains high with backlogs increasing. The OEM production rate recovery to date has been bumpy. We are encouraged by the consistent improvements being made each quarter as well as our bookings pace.

Additionally, our defense end market saw a double-digit revenue increase this quarter and also built a sizable amount of backlog that will drive continued growth as we head into the back half of our fiscal 2026 and into fiscal 2027. Our EBITDA as defined margin was 52.6% for the quarter, which includes slightly less than 2 full percentage points of dilution from recent acquisitions. Contributing to the solid Q2 margin performance is the growth in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, improvements in operating margins at our recent acquisitions, Servotronics and Simmonds are running slightly ahead.

Next, an update on our capital allocation activities and priorities. Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsize range. As always, we will remain disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. So consistent with the past practice, I will not be saying too much on what is currently active in our M&A funnel.

We are pleased to have closed the acquisitions of Jet Parts Engineering and Victor Sierra shortly after the quarter ended. We continue to work towards a closing on Stellant and look forward to owning this business in the not-too-distant future.

The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses; second, to accretive, disciplined M&A; and third, return capital to our shareholders via buybacks or dividends. A fourth option paying down debt seems unlikely at this time, though we do still take this into consideration.

We are continually evaluating all of our capital allocation options. Our recent capital allocation actions still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Pro forma for the announced acquisitions, we have significant M&A firepower and capacity remaining in excess of $10 billion.

Moving over to our outlook for fiscal 2026. As noted in our earnings release, we are increasing our full year '26 sales and EBITDA as defined guidance to reflect our strong second quarter results and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $420 million and EBITDA as defined guidance was raised $210 million. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout fiscal 2026.

Note that the large majority of this guidance increase is coming from the solid and better-than-expected performance in our base business. With a much smaller portion of the total guidance increase coming from our inclusion of Jet Parts and Victor Sierra now that we officially own both businesses.

Our current guidance for fiscal 2026 is as follows and can also be found on Slide 6 in the presentation for today. Note that the pending acquisition of Stellant is excluded from this guidance until the acquisition closes.

The midpoint of our fiscal '26 revenue guidance is now $10.36 billion or up approximately 17% over the prior year. In regard to the market channel growth rate assumptions that this revenue guidance is based on, we are now updating the full year market channel assumptions for our 3 primary end markets: commercial OEM, commercial aftermarket and defense to account for the better than originally forecasted results in our first half and current expectations for the second half of our fiscal year.

The updated revenue guidance provided today is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the low double digit to mid-teens percentage range. The growth seen here remains dependent on the evolution of the production rates in the commercial OEM environment. We expect commercial aftermarket revenue growth to be in the high single-digit to low double-digit percentage range with this growth dependent upon the dynamic and evolving situation in the Middle East. And lastly, we expect defense revenue growth in the high single-digit percentage range.

The midpoint of fiscal 2026 EBITDA defined guidance is now $5.42 billion, were up approximately 14%, with an expected margin of around 52.3%. We are very pleased with our margin performance in the year-to-date period, and we are running ahead of where we thought we'd be. Adjusting for the 2 dilutive factors we discussed last quarter, the margins in our base businesses steadily improved in our second quarter, more than we had expected. As a reminder, the diluted factors are approximately 200 basis points of margin dilution from our recent acquisitions and about 0.5 percentage point to 1 full percentage point from commercial OEM and defense mix headwind.

While the margin dilution for the full year from recent acquisitions increased due to the inclusion of Jet Parts and Victor Sierra, the overall dilution remains in the 2% area, plus or minus, due to the slightly better-than-planned performance at Servatronics and Simmonds, each of which we've now owned for more than 6 months.

The midpoint of adjusted EPS is now expected to be $39.52. We believe we are well positioned for the second half of our fiscal '26. We'll continue to closely watch how the aerospace and capital markets develop and react accordingly.

We're pleased with the company's performance this quarter and our teams remain focused on our value drivers, cost structure and operational excellence. While the current market backdrop as we sit here this morning, is quite a bit less certain, more unpredictable than usual, we'll continue to control what we can control and expect that our disciplined, consistent strategy will deliver the value you have come to expect from us. We look forward to the second half of our fiscal 2026.

Before handing the call over to Joel, I'm excited to share 2 recent promotions to EVP. Eric Hilliard has been promoted to EVP of M&A and is now leading our efforts on the acquisition front. Eric has been with TransDigm for over a decade and held leadership roles at 2 of our largest operating units. Most recently, he served as President of our extent Aerospace business, overseeing many product line acquisitions. M&A remains a key pillar of growth for TransDigm, and Eric will continue to fuel this important pipeline.

The second promotion to EVP is Mike Carty. Mike joined TransDigm going on 15 years ago and has worked at 5 different TransDigm's operating units, including serving as President at 2, Adams right Aerospace and Electromech technologies. Mike's proven record championing TransDigm's culture and driving value in the organization makes him a great fit for this role. We are always excited to promote from within our organization, demonstrating our commitment to internal talent development and thoughtful succession planning. These are well-earned promotions, and we look forward to Eric and Mike carrying the TransDigm culture going forward.

With that, I'll now hand it over to Joel Reiss, our TransDigm Group Co-COO, to review our recent performance and a few other items.

Good morning. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2025, that is assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the recent acquisition of Simmonds Precision Products, but excludes the Stellant, Jeff Parts Engineering and Victor Sierra Aviation acquisitions.

In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 12% in Q2 compared with the prior year period. Commercial OEM revenue in the second quarter showed strong growth as we continue supporting higher build rates. Commercial transport OEM revenues, which exclude the business jet submarket were up 19% over the comparable prior year period. As Boeing and Airbus production rates continue to increase, we expect continued strength in the commercial OEM demand. Commercial OEM bookings in the quarter also showed solid growth, compared to the same prior year period, significantly outpacing sales.

Commercial transport bookings were up nearly 20% in the second quarter. We are pleased to see consistent growth several quarters in a row for the commercial OEM market. We remain encouraged by the continued progress of both Boeing and Airbus as they ramp their production rates. Our operating units are well positioned to support the higher production rates as they occur.

The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production build rates for the 2026 fiscal year. Our fiscal 2026 commercial OEM revenue guidance range, which as Mike mentioned, is increasing to low double-digit to mid-teens percentage growth range is based on the first half performance and the current outlook in the second half of our fiscal year.

Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 14% compared with the prior year period. This quarter, all submarkets within commercial aftermarket experienced positive growth, our commercial transport aftermarket revenue growth, which excludes our biz jet submarket was up 16%, driven by solid growth in all 4 of the transport submarkets, freight, interiors, engine and passenger. We saw strength in commercial aftermarket transport across most of our operating units.

Q2 bookings in commercial aftermarket were also strong, running ahead of our expectations, solidly outpacing sales and supporting the full year growth outlook. Additionally, point of sale at our distributors also grew in double digits on a percentage basis this quarter.

We are raising our commercial aftermarket revenue guidance to the high single-digit to low double-digit range supported by strong bookings, a solid book-to-bill ratio and double-digit distribution point-of-sale growth in the quarter. As all of you know, the conflict in the Middle East has increased both oil and jet fuel prices as well as the availability of jet fuel in certain regions. Time will tell how long jet fuel prices remain elevated and what the ultimate impact will be on commercial air traffic. This tree tells us that any effect on the commercial aftermarket will lag a bit, with the amount of lag varying across our operating units given the specific nature of the products of each unit.

To date, we have not experienced any meaningful impact. However, we recognize that the uncertainty in the broader market adds risk to our second half. We are cautious and watchful closely monitoring commercial aftermarket business, activity across our companies.

Now shifting to our defense market. Defense market revenue, which includes both OEM and aftermarket revenues grew by approximately 11% compared with the prior year period. The past year has been strong for defense, with Q2 delivering another solid quarter. New business wins and elevated demand, both domestically and internationally along with our solid operational performance, by teams were all contributing factors. Q2 defense revenue growth was well distributed across our businesses and customer base.

Both OEM and aftermarket components in our defense market were up to the prior year with aftermarket running slightly ahead of OEM. Defense bookings for the quarter increased nicely of year-over-year and outpacing sales for the period. Bookings started the year strong and continue to support our updated full year 2026 defense guidance of high single-digit revenue growth.

The current environment is positive for defense spending. As we've said many times before, defense sales and bookings can be lumpy, especially quarter-to-quarter. We are encouraged by recent booking levels and current backlog in our defense market segment and remain confident in our ability to support the increased demand.

Beyond our core commercial and defense performance, I want to touch on an exciting moment for our team and space. We were very proud to contribute to the success of the recent Artemis-II mission. TransDigm operating units were present across the spacecraft in addition to our most visible product, which were the 3 reentry parachutes provided by Airborne Systems North America, we also provided a plated insulation from Kirkhill, astronaut restrains from AmSafe, quick disconnects from AdelWiggins, motors from CDA, electronic components from DTC and power-related products for PDC.

Now moving on to our value drivers. We continue to see strong success winning new business at our operating units, and I would like to highlight 2 new business program wins from last quarter. Airborne Systems was awarded a multimillion dollar contract for Intuitive systems for a reusable reentry parachute system. This product will support Zephyr, a reusable inorbit manufacturing satellite. In March, DDC was awarded a multimillion dollar contract from Hindustan Aeronautics Limited for a series of electronic components, including our Rugged ARIN429-PCi Vezanine cards and multi-protocol avionic cards for their like combat helicopter. These components will be used in their mission computer, digital, video over-corder system, radio altimeter, avionics computing system and integrated communication systems.

Now a quick update on our acquisition integration activities. We continue to make good progress at both Servetronics and Simmonds Precision. We are about 2 quarters in our ownership, and we're very pleased by what we are seeing so far. The jet parts in Victor's Sierra acquisitions closed after the quarter end. As we said previously, we are adding 2 solid, well-run growing businesses into the fold with this acquisition. We are excited about both of these businesses and are confident they will be a good fit into our company.

I'd like to wrap up by emphasizing how pleased I am with the team's performance through the first half of fiscal 2026. We delivered good results for the shareholders this quarter and executed a solid operational performance. The teams continue to execute on our value drivers, and we look forward to the second half of our fiscal year. Our management teams remain focused on our consistent operating strategy and value drivers, and we're well positioned to convert our strong backlog and bookings in the second half results.

With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne.

Thanks, Joel, and good morning, everyone. I'll recap financial highlights for the second quarter and then provide some more information on the guidance. First, on organic growth and liquidity. In the second quarter, our organic growth rate was approximately 11%, and all market channels contributed to this growth, as previously discussed by Mike and Joel.

On cash and liquidity, free cash flow, which we traditionally defined as EBITDA less cash interest payments, CapEx and cash taxes was approximately $350 million for the quarter. This is lower than our average quarterly free cash flow conversion due to the timing of our interest and tax payments in the quarter. We anticipated this as you may recall, and our Q1 free cash flow came in higher at just under $900 million. For the full fiscal year, we now expect our free cash flow guidance to be closer to $2.5 billion, an increase from the prior guide of $2.4 billion. This guidance includes the post-quarter completion of Jet Parts and Victor Sierra and the interest expense associated with the $1.5 billion debt issuance raised in April in support of the acquisitions and repurchases.

Below that free cash flow line, an investment of net working capital consumed approximately $170 million for the quarter. For the full year, we expect working capital to end roughly in line with historical levels as a percentage of sales.

We ended the quarter with a sizable cash balance of $3.9 billion, which includes $2 billion of cash from new debt raised in Q1. That debt was proactively raised for the acquisition of Jet Parts Engineering, Victor Sierra, which closed on April 7 following the quarter end. Our net debt-to-EBITDA ratio ended the quarter just slightly down from the prior quarter at 5.6x. Pro forma for the closing of the acquisitions, our net debt-to-EBITDA ratio was 5.9x. The specific amount of cash we preferred to have on hand there is based on current market conditions. Our current balance and available debt capacity provides ample liquidity to fund pending and future acquisitions through unlikely combination of cash on hand and new debt issuance based on our strategy of operating in the 5 to 7 net debt-to-EBITDA ratio range.

Our net debt-to-EBITDA target range also preserves plenty of capacity for additional acquisitions should opportunities arise along with other capital deployment options. Regarding our debt and our capital allocation strategy, is to both proactively and prudently manage our debt maturity steps by keeping near-term maturities well extended. In addition, approximately 75% of [ $33.7 billion ] gross debt balances fixed through fiscal 2029. This is achieved through a combination of fixed rate notes, interest rate swaps, caps and collars. This provides us plenty of protection at least in the immediate term.

Our EBITDA to interest expense coverage ratio ended the quarter at 3x, which provides us a comfortable cushion versus our target range of 2 to 3x. Additionally, during Q2 continuing into the first week of April, we opportunistically deployed about $800 million of capital via open market repurchases of our common stock. This equates to approximately 670,000 shares at an average purchase price of below $1,200 per share. Including our Q1 repurchase activity, these recent repurchases bring the total amount of stock buybacks in the year-to-date period of $950 million. These share repurchases are grounded in the same targeted returns criteria we have consistently applied over the years and expect this will meet or exceed our long-term return objectives.

We continue to seek the best opportunities for providing value to our shareholders through our capital allocation strategy. We think we remain in good position with adequate flexibility to continue to pursue M&A opportunities or return cash to our shareholders via share buybacks and/or additional dividends during the course of fiscal '26.

With that, I'll hand it back to Mary Hartman, our Director of Investor Relations.

Before we open the line for Q&A, I'd like to ask everyone in the queue to consider your fellow analysts, and ask 1 question only so we can get to as many people as possible. Operator, can you please open the line?

[Operator Instructions] Our first question comes from the line of Ken Herbert with RBC.

Maybe, Mike, just to kick it off, you obviously went through a lot of detail in what you've seen or not seen so far in response to the higher fuel prices and airlines behavior regarding the aftermarket. But just wanted to follow up on your comment on lag as you think about this. If we are in a situation where crude remains elevated, just how would you expect that to flow through your business? It sounds like you're not seeing much risk in '26, but how do we think about this into '27? And maybe what could the potential downside be? Or how are you thinking about this today?

This is Joel. So in -- about half of our can shipments in any quarter should in the same quarter. And so the fact that we're not seeing a significant impact in April gives us a level of confidence in Q3. Obviously, as it rolls forward, we've got less in the backlog at each quarter. As we look at it, the Middle East today is somewhere in the 6% to 10% range as you look at our series of data. And we haven't seen the impact yet. We know it will come in terms of the rest of the world.

Engine business has continued to be strong. And as of today, I don't -- I think we've provided good confidence in the our guidance by taking the number up for the balance of the year. We will talk about '27 until we release the guidance next year.

Our next question PAUSE comes from the line of Scott Mikus with Melius Research.

Very nice results. I think this was your highest pro forma organic growth rate in the commercial aftermarket since early 2024. I mean you mentioned all submarkets grew. I'm just curious, was there any strength, normally strong sales in any particular submarket like a rebound in interiors? Or was it kind of channel inventories normalizing?

So I said engine and passenger, which are our 2 largest submarkets, were both strong. All of them were favorable. But those were the 2 that were to highlight. Just looking through the op units, I don't think there was any significant rebounding. We didn't have the headwind that we had highlighted, I think, the last couple of quarters of some destocking that had happened. So that helped us out, but it was good across the board.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

Just one follow-up there. Can we sort of feel like we're at the end of this channel destock if the channel bought at the same rate as the total or do you still not know for sure? And then could you talk about where margins go beyond this year because there's obviously some pressure on the margin this year as you bring in some newly acquired revenue. But a lot of times in your history when you have newly acquired revenue, it's initially dilutive to the margin, but then you have faster than normal margin expansion in the medium term beyond that as you are able to gain a lot of value from what you acquired, is there a way to think about where the margins go, '27, '28 versus last year or what the expansion can look like '27, '28?

I'll take the first part of your question. So just a quick reminder, roughly 75% of our camp shipments go direct to an airline or through an OEM to the airline. 25% roughly is what goes through our distribution partners.

Yes. I don't think you're going to hear the destocking piece inventory for us in the distribution space was up a little bit over Q1, but not significantly with strong POS of that, I think, is a good indicator for us as we look at it going forward. So in terms of how much inventory is in the actual channel, you never get the feedback of how much airline you're holding. But we're not hearing anything anecdotally that would lead us to believe that, that is a significant either headwind or tailwind.

Yes. Noah, as Joel said, the big driver on the CAM growth was strong pull-through in the 75% of our CAM that goes direct. So it was nice to see that this quarter, and that's what drove it.

The second part of your question on the EBITDA margins from here and just where they go, I'll take that one. I think going forward, you sort of -- you know what we target here, and it's the same playbook we work with our op units. We expect sequential improvement on a same-store sales basis, apples-to-apples business mix of, call it, 1 percentage point to maybe 1 percentage point and half with margin improvement year-over-year. And that same expectation historically is what we deploy going forward as well.

Obviously, there will be some noise as we finish out this year and next year due to the acquisition dilution because we have more coming into the fold than we typically would have, and that will let us down. But once you walk the starting stores, if you will, the expectation across [ 55 going on 56 of ] our OP units is margin improvement year-over-year in the range I sort of mentioned. And I think that if you're trying to come up with an assumption to build into a model, that's sort of the rate of improvement we'd expect going forward. You could do maybe towards the high end of that range as more acquisitions come into the fold, we'll see. We'll give the 2027 guidance as we give it, but the historical framework still holds on the future margin improvement.

Our next question comes from the line of David Strauss with Wells Fargo.

Mike, on the previous call, you talked about how your aftermarket estimates lagged the peer group by about 5 to 6 points because of your distribution exposure and less relative engine exposure. How do you see that gap closing going forward, the time frame-wise, what do you think about where you're growing in line to potentially above your peer group average on the aftermarket side?

No, I think it's hard to say exactly how things progress from here with regard to commercial aftermarket, given what's going on in the broader environment. Generally speaking though, if you go back the last quarter, we talked about the 5 to 6 percentage points of lag coming half from engine and then half just from some noise in the distribution channel with inventory levels. On the first piece with engines, we'll see where that goes. As Joel referenced, our engine businesses are growing quite nicely towards the higher end of the range across our submarkets. So it's good to see that, and we are benefiting from the broader growth trends in Engine.

On the second piece with regard to the inventory and the channel position, most of that noise is behind us. That will go away going forward. So instead of it -- the headwind that presented in the past should be more of a tailwind. So going forward, that's sort of the framework for us as we round out the balance of this year and head into next year.

Our next question comes from the line of Scott Deuschle with Deutsche Bank.

Joel, could you share an update in terms of what you're seeing with respect to your own supply chain performance? And then more specifically, are there any parts of your supply chain where you're seeing meaningful extensions in lead times or your supplier lead times pretty stable for most of these subsidiaries?

Yes. I think right now, I think the supply chain has largely kind of returned to where it was pre-COVID. We had our business unit meetings a couple of weeks ago where we sit with 50 of our 50-plus op units. I don't think anybody highlighted a core issue or a supply chain was affecting our businesses are performing into the 90-plus percent range in the [ cam ] space. I mean we're very high 90% range, close to not quite 100, but high 90s.

I think for the vast majority, supply chain has returned to normal, you always are going to have subsuppliers who fall down. But that was not something we heard a lot of. So I think we're -- I can't use that as an excuse for our lack of performance if that was to happen. So good performance by our suppliers.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies.

Great quarter, Mike. Maybe just addressing the aftermarket issue. Your aftermarket was really good in the quarter, but there's a spare thesis around all the aftermarket suppliers that it will be difficult in 2027. You raised the '26 aftermarket guidance to low double digits. Maybe if you could just talk about what underlying assumptions you've built with that regard in place in terms of the macro environment, whether it's retirement. Can you give us a little bit more detail there?

So in terms of -- for the balance of the year, we don't provide any specific guidance to operating units. We do a bottoms-up forecast. So each of our operating units takes a look at their own unique position in the market, their inventory, what they're hearing from their customers and that becomes the -- our guidance based on what we see. Engine performance -- engine businesses continue to have high level of confidence in what they're seeing, not a lot of open slots in the MRO space. Our passenger businesses, which kind of lagged a little bit last year had been doing far better this year than last year. And I think that's certainly part of the reason for the better growth this year. But beyond that, the result of our guidance is really just based around the confidence that our operating units and the good solid bookings quarter that we had.

And Sheila, just one quick thing to add. I would say, too, we'll see how this conflict and market disruption develops in time. But the vast majority historically of disruptions of this type have been pretty sharp and then it corrects pretty quickly on the other side of it. There's no kind of permanent demand disruption. So we'll see how -- or sorry, demand destruction. So we'll see how the current conflict in the Middle East goes out and the impact it has, but I'd expect a sharp correction on the other side of it once things are resolved.

Our next question comes from the line of Myles Walton with Wolfe Research.

The first clarification in the question. Of the $210 million EBITDA raise is about $50 million of that from the PMA acquisitions that have closed. And then more of the question, in terms of that sequential margin for EBITDA from -- in 2Q from 1Q, it was a touch down, and I'm curious if you looked at that and had sort of thoughts on why that was. It looked like maybe there was slightly more acquisition contribution that was perhaps a drag. But if you have better color.

Yes. Miles, it's Mike. First on the Jet Parts and Victor Sierra, we've not provided exactly a breakout in the past just on what's coming from the acquisitions in terms of the guidance rates versus performance of the base business. But rough justice, the large majority of the increase as we mentioned in the prepared remarks, came from better performance in our base businesses. That's what's driving the bulk of the guidance raise. And then a smaller amount came from Jet Parts and Victor Sierra in the year. But 70%, 80%, the vast majority of it, again, came from better performance in the base businesses.

Second part of your question on the margin change and just the delta quarter-over-quarter. I think we went from something like 52.4% last quarter to 52.6%, this quarter in our second quarter. And a couple of puts and takes and some movement here. Obviously, first, with 53 businesses, there's some noise and variability in sequential quarters that happens from time to time. We saw that this quarter. Second, we weighted up slightly in Q2 from the better commercial aftermarket versus expectations. So that probably helped us to the upside.

And then obviously, the commercial OEM to third piece sort of grew nicely too, and that went against us the opposite way and probably weighted us back down a little bit. So you rack it all together and we ticked up a bit by 0.2 point and there's just some -- a little bit of noise because of those 3 factors, but still good to see the improvement on a quarter-over-quarter sequential basis.

Our next question comes from the line of Michael Goldie with BMO Capital Markets.

How have the customer conversations and the tone of those conversations evolve as the war has persisted? And has there been any notable variation across the geographies?

Of the EVPs that I've talked to and [indiscernible] talked to, [indiscernible] hearing anything dramatic. Certainly, the Middle East carriers are -- I mean they're significantly impacted their RPKs are down 50-plus percent. So certainly, their behavior is probably a little bit different. I don't think we're hearing anything dramatically different from other business -- from other airlines outside of the Middle East today.

Our next question comes from the line of Peter Arment with Baird.

Nice results. Mike or Joel, maybe could you comment -- you gave us some comments on the individual verticals on commercial aftermarket. But obviously, we've seen some major disruption on the freight side of things, and I know that can be a head fake on overall results. But just any comment on freight and historically how that market channel has done or when you think about your operations going forward?

So [indiscernible] is one of our smaller submarkets. I would say of the submarkets, it was the one that lagged the most. It still had double-digit growth, and we saw a little bit of slowdown in POS, but at the same time, our distributor partners had higher bookings than what they had the previous quarter. So freight right now seems to be tracking along with what we'd expect. It's still better than double-digit growth. But admittedly, it's not at the same level that the engine and passenger submarkets are driving it.

Our next question comes from the line of Matt Akers with BNP Paribas.

I wanted to ask about aircraft retirement and how you sort of think of that? I mean has been pretty low, but conceivably, the fuel costs stay high, we start to deliver more airplanes. Maybe we see a bit of a pickup there. So just curious how you're thinking about your exposure to some of those older aircraft maybe closer to retirement and just sort of how do you think the business performs through that?

Yes, Matt, it's Mike. We'll obviously see how this develops over time. To date, there hasn't been any kind of spike in the retirement rate. It's actually below the historical average by I think about 0.5 percentage point or so. So no big spike yet. As we've said in the past, when it comes to retirements and the impact of USM on our businesses, we really don't see much of an impact here. We've not historically when the retirement rate has picked up. A lot of that is just because of the price points of our products. They tend to be generally quite a bit below what folks target the part out shops target that is for USM. So we've historically not seen much of an impact.

We don't take comfort and get complacent in that, though, we're out there just to making sure, obviously, that nothing has changed, especially as our mix of businesses has changed a bit to via acquisitions, but we don't expect a huge impact here from retirements if there was a slight uptick.

Our next question comes from the line of Sebastian Rivera with Stifel.

This is Sebastian on for Jon Siegmann today. A lot of ground already covered here, but would love to maybe just double-click on the guidance raise. I appreciate the color that I was kind of given already. But if you could maybe provide any color on how you're looking at the combined growth profile for JP, DSA in 2026, That would be super helpful.

Sure. It's Mike. These are great businesses. We're excited to own them. We're in the very early innings. We're about a month in. So still assessing the businesses, working with the teams, but we're obviously very optimistic about the growth trend here for both companies. They operate in the PMA space. This is a good submarket within commercial aftermarket. It's growing nicely. It's not explosive growth, but it's growth that's a little bit above trend for that overall space. So we're excited to now own both businesses and be able to take advantage of that and continue the trend up into the right for both Jet Parts and Victor Sierra expanding their footprint and the work they do with the airlines and their end customers.

Our next question comes from the line of Gautam Khanna with TD Cowen Securities.

Two questions and they're quick. One, any evidence in the discretionary aftermarket is slowing anywhere. And if you could just characterize how big that is as a percentage of your aftermarket? And just quickly on the M&A pipeline, is it -- are you seeing a good mix of both aerospace and defense-oriented firms? Or is it concentrated one way or the other?

So we haven't provided before any kind of split between discretionary, nondiscretionary work. What I would say is, I don't believe we've seen any material shift though in either area. Q2 bookings were our all-time high in terms of CAM bookings, and we saw good solid growth across the board. And there was nothing that I heard at our meeting a week or so ago that would have led me to have a different view as of today.

Gautam, it's Mike. On the second part of your question on M&A, I'd say we're seeing a good mix of both. Most of the companies we come across have a mix of both. Obviously, I think you know the bias from our end would be to buy more commercial rather than defense. That remains the case going forward. But we look at both. We're seeing a good mix of both [indiscernible] and it's not necessarily tilting one way or the other. Active mostly is the small to midsize range too, as we said in the prepared remarks.

Thank you. This concludes the Q&A portion of today's call. I would now like to turn the call back over to Mary Hartman for closing remarks.

Thank you all for joining us today. This concludes the call. We appreciate your time, and have a good rest of your day.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Hello, and welcome to the Q1 2026 TransDigm Group Inc. Earnings ConferenceCall. [Operator Instructions] Please be advised that today's conference is being recorded.

It is now my pleasure to introduce Director of Investor Relations, Jamie Stemen.

Thank you, and welcome to TransDigm's Fiscal 2026 First Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's Chief Executive Officer, Mike Lisman; Co-Chief Operating Officer, Patrick Murphy; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Joel Reiss. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.

Before we begin, the company would like to remind you that statements made during this call which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website, or sec.gov.

The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reciliations.

I will now turn the call over to Mike.

Good morning, and thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. Second, make a few comments about the quarter; and third, discuss our fiscal '26 outlook. Then Patrick and Sarah will give some additional color on the quarter. This will be the first time you're hearing from our new co-COO, Patrick Murphy, but he's hardly a new guy around TransDigm, having served as an Executive Vice President for the last 6 years, and as President at our [ HarcoSemco ] operating unit in Connecticut prior to that.

To reiterate, we believe we are unique in the industry in both the consistency of our strategy, in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy.

First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocation are a key part of our value creation methodology.

Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation, as well as careful allocation of our capital. As you saw from our earnings release, we had a good start to our fiscal year. Our Q1 results ran ahead of our expectations, and we raised our sales and EBITDA defined guidance for the year.

During the quarter, we saw solid growth in the revenue for our commercial OEM channel, and healthy growth in both our commercial aftermarket and defense market channels. Bookings in the quarter were strong across all of these three market channels. Commercial aerospace trends remained favorable. Air traffic continues to steadily grow, and airline schedules remain fairly stable as well with takeoffs and landings growing in the 4% ballpark year-over-year.

Within commercial aftermarket, a quick note on our growth in this market channel over the last 12 months. While our growth rates has hit and continue to hit our own expectations, there is a lag in TransDigm's growth versus the broader market of probably 5 to 6 percentage points. As we have said many times before, it's not odd for us to see this, and we have lived through [ grace ] periods like this before. With regard to what is driving it as we run the math, roughly half of the 5 or 6 percentage point growth gap is from our underexposure on engine content versus the rest of market, and the remaining half comes from lumpiness in our distribution channel and at airlines, with this latter piece owing to our earlier and higher recovery versus the broader market as we came out of COVID. The second piece, the lumpiness, can be hard to quantify exactly.

Switching to the commercial OEM market, there's still much progress to be made for OEM rates. However, it is good to see both Boeing and Airbus steadily ramping up their production rates. They expect to continue doing so in coming months and quarters. Airline demand for new aircraft remains high and the OEMs have long backlogs. The OEM production rate recovery to date has been bumpy, and we're planning for it to remain so. We remain encouraged by the progress we're currently seeing and have seen over the last several quarters.

Our EBITDA as defined margin was 52.4% in the quarter, which includes about 2 full percentage points of dilution from recent acquisitions. Contributing to this solid Q1 margin is the continued growth in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q1 of over $830 million, and we ended the quarter with a cash balance of over $2.5 billion.

Next, an update on our capital allocation activities and priorities. In the past 5 weeks, we have signed up the acquisition of 3 new operating units and 2 separate M&A transactions. [ Stellant Systems ], Jet Parts Engineering, and [ Victor Sierra Aviation ]. On December 31, we announced that we had agreed to acquire [ Stellant ] Systems from [ Arlington ] Capital Partners for approximately $960 million in cash. Stellent is a designer and manufacturer of high power electronic components and subsystems serving the aerospace and defense end market. The business generated approximately $300 million in revenue for the 2025 calendar year.

And then on January 16, we announced that we had agreed to acquire two businesses, Jet Parts Engineering and Victor Sierra Aviation, from [ Vance ] Street Capital for approximately $2.2 billion in cash. Jet Parts Engineering is a designer and manufacturer of aerospace aftermarket solutions, primarily proprietary OEM alternative parts and repairs. [ Victor Sierra ] is a designer, manufacturer and distributor of proprietary PMA and other aftermarket parts serving the commercial aerospace end market, primarily the general aviation and business aviation sectors. Collectively, Jet Parts and Victor Sierra generated approximately $280 million in revenue for the 2025 calendar year.

As you know, we've been a player in the PMA space for many years through our existing operating units, which often work directly with the airlines on their PMA efforts, most of which are focused on developing better technical solutions for the airline customers. We see PMA as a small but growing subsector within commercial aerospace that serves an important need for the airlines. Jet Parts and Victor Sierra will add to our existing PMA revenue can further enhance our partnership with these airlines. We look forward to owning all three businesses, Stellant, Jet Parts and Victor Sierra. These are good businesses with proprietary products that generate significant aftermarket revenue and align well with TransDigm.

Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our [indiscernible]. As usual, the potential targets are mostly in the small and midsize range. And while we are very happy to be adding Jet Parts and Victor Sierra into the fold, the primary M&A focus at this time remains on acquiring proprietary OE component aerospace business. As always, we will remain focused and disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. So consistent with past practice, I will not be saying too much on what is currently active in our [indiscernible].

The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, to accretive, disciplined M&A. And third, return capital to our shareholders via buybacks or dividends. The fourth option paying down debt seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options. We exited the quarter with a sizable cash balance and our recent capital allocation actions still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements, or other opportunities, in the readily foreseeable future. Pro forma for the announced acquisitions, we have significant M&A firepower and capacity remaining, approaching $10 billion.

Moving to our outlook for fiscal 2026. As noted in our earnings release, we are increasing our full year '26 sales and EBITDA as defined guidance to reflect our strong first quarter results, and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $90 million, and EBITDA defined guidance was raised $60 million. We are still early in our fiscal year, and considerable risk remains. But I am quite encouraged by and optimistic on how things appear to be shaping up these first 4 months. The guidance assumes no additional acquisitions or divestitures. Our current guidance for fiscal 2026 is as follows and can also be found on Slide 6 in today's presentation. Note the pending acquisitions of Stellent, Jet Parts Engineering and Victor Sierra are all excluded from this analysis until each acquisition closes.

The midpoint of our fiscal 2026 revenue guidance is now $9.94 billion, or up approximately 13% over the prior year. In regard to the market channel growth rate assumptions that this revenue guidance is based on, we are not updating the full year market channel assumptions for our three primary end markets: commercial OEM, commercial aftermarket and defense. Underlying market fundamentals have not meaningfully changed for any of these markets.

The revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the high single digit to mid-teens percentage range, which is highly dependent on the evolution of the production rates in the commercial OEM environment, commercial aftermarket revenue growth to be in the high single-digit percentage range, and defense revenue growth in the mid-single-digit to high single-digit percentage range.

The midpoint of fiscal 2026 EBITDA defined guidance is now $5.21 billion, or up approximately 9%, with an expected margin of around 52.4%. We are very pleased with our margin performance in the year-to-date period, and we are running ahead of where we thought we'd be. Adjusting for the two dilutive factors we discussed last quarter, the margins in our base businesses improved nicely in our first fiscal quarter, more than we had expected. And as a reminder, the dilutive factors are approximately 200 basis points of margin dilution from our recent acquisitions, and about 0.5 percentage point to 1 full percentage point of dilution from commercial OEM and defense mix headwind. The midpoint of adjusted EPS is now expected to be $38.38.

We believe we are well positioned for the remainder of fiscal 2026. We'll continue to closely watch on the aerospace and capital markets develop and react accordingly. We are pleased with the company's performance this quarter. [ It is a ] good start to the fiscal year. Our teams remain focused on our value drivers, cost structure and operational expense. We look forward to the remainder of fiscal '26 and expect that our disciplined, consistent strategy will continue to deliver the value you have come to expect from us.

Now let me hand it over to Patrick Murphy, our TransDigm Group Co-COO, to review our recent performance and a few other items.

Good morning, everyone. I'll start with our typical review of results by key market categories. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period 2025. That is assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the recent acquisition of [indiscernible] Precision Products, the pending acquisitions of Stellant, Jet Parts Engineering and Victor Sierra are executed.

In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 17% in Q1, compared with the prior year period. As we anticipated, Commercial OEM revenue in the first quarter showed strong growth as we supported higher [ build ] rates. Commercial transport OEM revenues, which excludes the biz jet submarket were up 18% over the comparable prior year period. As you will recall, Boeing experienced production issues in late 2024 that resulted in a drop in OEM demand in our first fiscal quarter last year. Our Q1 FY '26 growth is driven by the increase in the Airbus and Boeing OEM build rates, and the bounce back from the Boeing production disruption in the prior year.

Commercial OEM bookings in the quarter were up compared to the same prior year period, and ran ahead of our expectations, and significantly outpaced sales. Commercial transport bookings growth was up into the high teens percentage for the first quarter. The bookings levels for commercial transport OEM continued to show that the market is recovering from the various disruptions seen over the past 1.5 years. However, the OEM recovery to this point has been bumpy, and an EBIT on a quarterly basis, and we expect that to continue as OEMs in our Tier 1 and Tier 2 customers rightsized inventory levels.

We remain encouraged by the continued progress of the 737 MAX production line as well as the overall progress we are seeing at both Boeing and Airbus as they ramp their production rates. Our operating units are well positioned to support the higher production rates as they occur. The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production build rates for the 2026 fiscal year. Our fiscal 2026 commercial OEM revenue guidance range, which as Mike mentioned, is unchanged, is high single digit to mid-teens percentage growth, and contemplates reasonable risks around the Boeing and Airbus rates.

Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 7% compared with the prior year period. This quarter, all submarkets within commercial aftermarket experienced positive growth. Our commercial transport aftermarket revenue growth, which excludes our biz jet submarket, was up 8% driven by solid growth at all 4 of the transport submarkets, freight, interiors, engine and passenger. Overall, we saw strength in commercial aftermarket transport across a large majority of our operating units.

Q2 bookings in commercial aftermarket were also strong, running ahead of our expectations, solidly outpacing sales and supporting the full year growth outlook. Additionally, POS at our distributors grew in the double digits on a percentage basis this quarter. As Mike already mentioned, our commercial aftermarket revenue growth guidance is unchanged, and with positive leading indicators in bookings, book-to-bill ratio, and distribution sales, we fully expect 2026 commercial aftermarket growth in the high single-digit percentage range. Additionally, as we have said before, our operating units continue to vigilantly monitor market share and competitive losses. We see no material loss in this space from either USM or PMAs.

Now shifting to our defense market. Defense market revenue which includes both OEM and aftermarket revenues, grew by approximately 7% compared to the prior year period. Over the past year, we have seen strong growth in defense, driven by new business wins and strong performance by our teams in both domestic and international markets, driven by the growth in defense spending around the [indiscernible]. Q1 defense revenue growth was well distributed across our businesses and customer base. We saw similar rates of growth in both OEM and aftermarket, components of our total defense market, with OEM running slightly ahead of afterwards.

Defense bookings for the quarter were robust, up year-over-year, higher than our expectations and significantly surpassing sales for the period. Bookings started the year strong and continue to support our unchanged 2026 defense guidance for mid-single digit to high single-digit revenue growth. As we have said many times before, defense sales and bookings can be low. We are confident that the bookings and sales will meet our expectations, but forecasting them with accuracy and precision, especially on a quarterly basis, is difficult. Overall, we are encouraged by the backlog that is building in our defense market segment.

Moving on to our value drivers. We continue to see strong success winning new business at our operating units, and I would like to highlight a few new business program wins from last quarter. Our [indiscernible] business was awarded a multimillion dollar contract [indiscernible] to supply their latest generation very high-frequency, ultra-high frequency antenna system. These systems are used in line with the upgraded radios that are now standard fit for production on C-130J aircraft.

In December, the Urban GQ business was awarded a $24 million contract from the U.S. Department of Defense for provisioning of floating decoy systems to protect the U.S. Navy [indiscernible] destroyers. These systems are used as one of the last lines of defense for ships under missile attack. U.S. DOD have requested deliveries to start in FY '26, the overall program period of performance over the next 4 years.

Just a quick update on our acquisition integration activities. We continue to make good progress integrating our two most recent acquisitions. [ Servotronics ] and [indiscernible]. Both integrations are being led by experienced [ DVPs ], and we have augmented the existing teams with seasoned individuals from other TransDigm operators to accelerate their progress. It's still early, but our experience to date indicates that these are going to two very good additions.

I'd like to wrap up by recognizing the concerted efforts of our operating teams during the first quarter of fiscal '26. We are pleased with the solid operational performance our teams delivered for our shareholders this quarter. The teams continue to execute on our value drivers and it was a good start to our fiscal [ '26 ] sales. As we progress further into the year, our management teams remain focused on our consistent operating strategy, delivering on new business opportunities, and meeting increased customer demand for our products.

With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne.

Thanks, Patrick. Good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance. First, on organic growth in [indiscernible].

In the first quarter, our organic growth rate was 7.4% and all market channels contributed to this room as previously discussed by Mike and Patrick. On cash and liquidity, free cash flow, as we traditionally define [indiscernible] cash interest payments, CapEx and cash taxes was just under $900 million for the quarter. This is higher than our average free cash flow conversion due to the timing of [indiscernible]. This will normalize throughout the year as these payments pick up next quarter. We expect to steadily generate significant additional cash throughout the remainder of fiscal 2026. Our free cash flow guidance is unchanged, and we continue to expect free cash flow of approximately $2.4 billion for fiscal 2026.

As a reminder, this guidance doesn't include the pending acquisitions or interest expense from any potential debt issuance to fund those acquisitions. Below that free cash flow line, an investment of net working capital consumed approximately $30 million for the quarter. For the full year, we expect working capital tool to end roughly in line with historical levels as a percentage of sales. We ended the quarter with approximately $2.5 billion of cash on the balance sheet after paying for the [ Simmons ] acquisition at the beginning of the quarter. Our net debt-to-EBITDA ratio was 5.7x, down from the [ 5.8 ] at the end of last quarter. While we don't target a specific amount of cash that we like to have on hand, our current balance, and available debt capacity, provides ample liquidity to fund the recently announced pending acquisitions through a likely combination of cash on hand and new debt issuance, based on our strategy of operating in the 5 to 7x net debt-EBITDA ratio range.

Our net debt-to-EBITDA target range also preserves plenty of capacity for additional acquisitions should opportunities arise along with other capital deployment options. Regarding our debt, our capital allocation strategy is to both grow actively, and prudently, manage our debt maturity stacks by keeping near-term maturities well extended. In addition, approximately 75% of our $30 billion gross debt balance is fixed through fiscal 2029. This is achieved through a combination of fixed rate notes, interest rate swaps, caps and collars. This provides us plenty of protection at least in the immediate term.

Our EBITDA to interest expense coverage ratio ended the quarter at 3.1x, which provides us with comfortable cushion versus our target range of 2 to 3. Additionally, during Q1, we took advantage of a [ dip ] in the share price and opportunistically deployed a little over $100 million of capital for repurchases of our common stock. These share repurchases are anchored in the same targeted return criteria we have consistently applied over the years. We continue to seek the best opportunities for providing value to our shareholders through our capital allocation strategy.

We think we remain in good position with adequate flexibility to continue to pursue M&A opportunities, or return cash to our shareholders via share buybacks, and/or additional dividends during the course of fiscal 2026.

With that, I'll hand it back to Jamie, our Director of Investor Relations.

Before we open the line for Q&A, I'd ask everyone in the queue to consider your fellow analysts and ask one question only so we can get to as many people as possible today. Operator, can you please open the line?

[Operator Instructions] And our first question comes from the line of Sheila Kahyaoglu with Jefferies.

It's actually Ellen on for Sheila this morning. Just -- looking at your profitability in the quarter, it was better than expected given fiscal Q1 is typically seasonally weaker, and it's in line with your guidance for the year. How are you thinking about the puts and takes through the year and the cadence of profitability? And what is kind of what's driving that strength in the quarter?

Sure. We had a stronger start to the year on the margin front than we thought, the 52.4% that we came in at on EBITDA was a little bit better than we expected. In terms of what contributed to that, while commercial OEM did have a strong growth quarter, it was up 17% on a pro forma basis, as Patrick said, that was a little bit light of where we thought it would come in a couple of points. So we got a bit of tailwind on the margin just from the mix that came with that.

And then separate from that, the teams at our op units have done a really good job in terms of getting cost out productivity projects, driving a higher margin for us in Q1. Hopefully, that continues for the balance of the year. There's probably a bit of conservatism embedded in the guidance, too, from here on out. I think as you guys know, we aim to be conservative on some of the projections. We'll see how the year evolves in terms of the growth rates as commercial OEM bounces back. As you know, that's expected to be the highest growth end market for us. So that could present a bit of a headwind, but overall, a solid start to the year.

And our next question comes from the line of Myles Walton with Wolfe Research.

I was wondering maybe, Mike, could you comment a bit on the distributor POS and that's been running double digits now for the last several years, every quarter, but 3 of the last 5 times aftermarket has [indiscernible] that double-digit mark. I think it's more engine sensitive. So maybe you can confirm that, or how much of information value there is? Then within the aftermarket growth, if you can just tell us what is lagging in that plus 8%? Is interiors in the low single digits still?

Sure. So a couple of things on the POS point. We do, through the POS channel weigh a bit more heavily towards engine there. So that has what has been a little bit of what's contributed, driven it up. In terms of where distributors are generally, as I think we mentioned on last quarter's call. During our fiscal '25 year, we probably saw 1 to 2 percentage points of drag on the overall [indiscernible] growth from distributor inventory changes. That was a headwind at the time. Some of that persisted into our Q1 here, probably a little bit more elevated than the 1 or 2 percentage points. That should turn the corner as we head into the year. Again, it's not rare to see these kind of movements in distributor inventory levels. So as that rebounds into the balance of fiscal '26 that continued headwinds should hopefully turn into a bit more of a tailwind.

In terms of the end market color, Patrick, do you want to provide a little bit of commentary?

Yes. I mean one of the -- we see that's a really solid growth rate on our end market for CAM, as well as our airframe and airline being in line with what our expectations are. Biz jet's a little bit lighter here, and that's what's kind of holding us back. But overall, these are well within our expectations, and it was good growth in the first quarter.

And all of the submarkets where -- when you strip out the business yet, which was obviously at 1% and drug us back a little bit. All of some markets within commercial transport at 8% for commercial transport [indiscernible] above sort of the 7% overall [ CAM ] growth rate for all of them. So good to see uniformly distributed growth.

Just one clarification on the 7.4% overall company organic growth versus the subsectors. [ 17, 7 and 7 ]? I know there's pro forma versus organic. But is the takeaway that [ Simmons ] is significant growth underlying year-on-year, and that's what's driving most of that differential?

Yes. Myles, this is Sarah. I'll take that one. Yes, if you look at the market growth segments, which are obviously performance for [ Simmons ], we do see a little bit of upside in the market segments coming from Simmons on that piece. The other bit that's playing into that delta difference, the [ 7.4 ] of organic, that includes our non-aero market segment. It's a smaller piece but it's lower than the average [ 7.4 ]. So that's the other bit of the delta DC going on there.

Our next question comes from the line of Gavin Parsons with UBS.

I just wanted to follow up on Myles' question on the lumpiness to make sure I'm just clear on the time frame we're talking about, and I appreciate that color. The 7% aftermarket growth rate in the quarter, so if half of 5% to 6% below peer growth was lumpiness, does that suggest that your core growth is more like 9% or 10% for aftermarket?

I guess it depends how you define core growth. We've taken a bit of a headwind just because of the distributor lumpiness and some of the inventory in the channel, potentially the airlines. And it's -- as I tried to address in the prepared remarks, it's hard to quantify that exactly in what it might be because you don't get great inventory data from the airlines [indiscernible] do from distributors, but not always from the airlines in terms of great detail on exactly what they have.

As we rack up the math over the last 4, 5 quarters or so, with 4 or 5 or 6 percentage points [ light ] versus where the rest of the market is, about half of that is this kind of lumpiness, both at airlines and at the distributors. And that's what -- the point we were trying to raise in the prepared comments.

Was the destocking last year more specific to the first half or second half?

No, I think it was pretty uniformly distributed throughout the year. It bounces around a little bit quarter-by-quarter as you would guess, with as many distributors and op units as we have, but generally fairly uniformly distributed.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

You mentioned aftermarket -- aerospace aftermarket bookings grew faster than revenue. I was hoping maybe you could quantify how much faster the bookings growth was compared to revenue, or a book-to-bill? And I don't know if you also had that for full year '25 just so we can understand if things are accelerating, decelerating, staying the same?

And then as we go through the rest of the year, how much should we be taking into consideration that compares from last year in aerospace aftermarket just because 2Q is a much different comp than 3Q? Or do you expect the remainder of the year's growth to be pretty even?

Yes. No, it's Mike. I'll take that one. I think you know how we look at the quarterly [ CAM ] bookings trends. We don't focus on it too much. We look at a rolling 12-month average. So I don't want to go down the path of saying too much on the quarterly bookings targets that I think everybody expects to get it every single quarter.

That said, as Patrick said in his in his comments, prepared comments, it ran nicely ahead of what the sales growth was this quarter into the double digits. But we're not going to go and give a specific number, but good growth that we think sets us up nicely for the rest of the year. When we look at [ TAM ] growth, we look at a rolling 12-month average staff. And as you look at the 2025 level, and where we sort of tracked out all the calendar last year, it was nice signals growth, was above 1.0. But again, we don't disclose the exact amount. That's what set us up well as we looked in and forecasted out FY '26 and what the growth could be made us somewhat confident that we'll have at least a little bit of backlog there to hit the shipments target.

On the quarterly comps and where things go from here, we don't want to say too much to sort of sounds like we're giving quarterly guidance. We'll see how the year progresses. As we give the guidance, we guide for a full year because we know how lumpy commercial aftermarket can be. We feel really good about the high single-digit guidance for the full year, but I'm hesitant to give anything that sounds like we know exactly what it's going to look like on a quarter-by-quarter basis as we get there.

Okay. I appreciate that. And just one clarification, the lumpiness in distribution being a headwind, and then the statement of POS at distribution grew double digits. What's the difference between those two comments on one being a headwind, one being a tailwind from distribution?

Well, I think the point is distributor inventory is contracted. So we're getting headwinds of selling into distributors and then their on sale rate into the market from the distributor is higher. So the net inventory position is attracting a bit.

Do you have visibility into how much inventory of yours is left in the channel?

We track it quite a bit at the op unit level of distributors, and we think as the rest of the year shapes up, this should be something that instead of a headwind should hopefully become more of a tailwind for us as we head out through Q2 through Q4. We did take a bit of a headwind in Q1, a couple of percentage points.

And our next question comes from the line of Scott Mikus with Melius Research.

Mike, quick question on the Jet Parts Engineering and Victor Sierra acquisition. That should accelerate your commercial aftermarket growth, but was part of the rationale also to deter other companies from PMA and your OEM parts, because you could then retaliate in PMA or DER their [indiscernible] as well?

No. No. We bought these businesses because we think they're fundamentally good businesses on which we can make a 20% IRR. The same TransDigm logic, we've always applied to M&A, the businesses will run and operate themselves. And that's why we bought these two companies.

Okay. And then thinking about the deal model, normally, you let your operating units run autonomously. But is there upside to your deal model if Jet Parts Engineering and Victor Sierra start distributing the PMAs from your other operating units?

Potentially, but our business has run themselves. So anything of that sort would have to be an arm's length agreement between the op units and those businesses. That certainly wasn't in our acquisition case and not what we banked on. I think, as you guys know, our 53 businesses and going on 56 will run themselves independently.

And our next question comes from the line of Robert Stallard with Vertical Research.

Just a couple for me. First of all, on the acquisitions. [indiscernible] little bit pricey, and I was wondering if that was reflective of broader M&A market trends in aerospace and defense at the moment. And then secondly, do you expect to see similar opportunities for value-based pricing readjustments going forward?

I guess on the valuation multiples, you're always -- theoretically, you'd love to buy things for lower than you actually have to pay for them. But at a certain point, the market is what it is, and we have to pay up, especially in the current environment to own these businesses. What we did pay is not anything that we view as too high. Again, it [indiscernible] to math that basically results in the same 20% sort of IRR we always targeted. So we're happy to own the businesses. We think we paid fair prices, but nothing that was too high given the valuation environment we're in today.

And on the pricing?

And on the pricing, I think it's going to be similar playbook as we deploy our acquisitions over time at TransDigm. Basically, no change there.

And our next question comes from the line of Scott Deuschle with Deutsche Bank.

Patrick, I think in your prepared remarks, you mentioned that you've seen no material share loss from PMAs. I guess within that, what would you define as material? Is it less than 1% share loss per year?

We just think that, that's something small and it's not something that we're seeing. Our operating units is where they're sort of fighting this, or looking for that potential risk to pop up. And those are the ones of the teams that are really considering what they should be doing.

Right now, our teams are delivering very well to the market. They're satisfying the demand for our -- for all of our customer needs. Our on-time delivery has improved significantly over the last few quarters over the last year, and I think we're well positioned to defend ourselves there and it's just not something that we see as an issue.

Okay. And then just to clarify, does Jet Parts currently have many PMAs on existing TransDigm products? And is there any kind of conflict of interest that needs to be managed through their work, [indiscernible] all just be done by the typical TransDigm playbook of running them as their own entities?

Yes. I think the playbook is they'll run themselves as their own entities. That's the game plan for all of our businesses. Consistent with how we do it here, and there's no significant or sizable overlap to your other question.

And our next question comes from the line of Ronald Epstein with Bank of America.

This is [indiscernible] for Ron. On Jet and Victor, if we look out 3 years and you start to realize revenue synergies, do you guys have a target or an idea of how much you would like to see your PMA business grow? Or what percentage of the portfolio you'd be comfortable with?

That's not necessarily how we looked at it in terms of overall TransDigm. Again, we put as we bought these businesses, we modeled it up and we built a 5-year [ LBO ] model, same approach we've always taken and ask ourselves, can we hit 20% IRR at the price we have to pay. And we think that's the case with both of these businesses, but we're not putting necessarily to a total percentage growth target for TransDigm's overall [ CAM ] in year 5.

We think these are great businesses. That's why we bought them. We think there's a good growth trend here in PMA. It's something that's not going to see explosive growth, but it's probably going to grow a little bit above the market. This gives us position in that space and a way to benefit from that growth. And again, we look forward to getting both deals closed and owning these businesses and then watching them continue to grow.

And our next question comes from the line of Gautam Khanna with TD Cowen.

Just to follow up on the PMA acquisitions. I'm curious if the margin structure in that type of business mirrors that of TransDigm's core business. Because when we look at companies like [ HEICO ], their segment margins in the related business are like half that. Admittedly, that's -- I'm sure there's differences in accounting, or what have you, but I'm just curious, is there any structural limitation to moving the margins of the acquired businesses up towards the company average?

We think these are great businesses. We're excited to own them both. In terms of margin targets, we did not model these as getting where -- anywhere close to the TransDigm margin level. There's good volume growth here. That's part of what drives and helps you get to the 20% IRR. But in terms of how we model these businesses up, we did not model the margins getting to getting to the TransDigm level.

Okay. And do you know if the -- those businesses have an engine, if you will, internally to constantly develop new PMA parts? And if so, kind of at what rate they've been introducing new PMA parts per year?

Yes. And they both do. They've got engines in both businesses that do this. That's what drives the growth, and they've got a solid track record of having done it. In terms of the exact numbers that you've done -- we know it, obviously [indiscernible] diligence, it's good sizable growth they drive every year through those efforts. And we're not going to disclose the exact numbers, but it's pretty sizable introductions that drive good revenue growth.

Okay. And last one, just quickly on M&A beyond that what you've announced, how would you characterize the pipeline?

Just as I said in the comments, active in the small to midsize range. We're working away at it. M&A is impossible to predict. We're working hard.

And our next question comes from the line of Ken Herbert with RBC Capital Markets.

Mike, and Patrick and Sarah, thanks for the time. Maybe Mike, just to maybe pivot over to the commercial OE side. Can you just talk about some of the puts and takes as we think about the range of high single to mid-teens on the guide? And just to clarify, you feel like you're basically through the destock you've seen on the MAX and some of the other major programs at Boeing?

Yes, Ken, I'll take this one. This is Patrick. Yes. We do think we're through that destocking. So as the both -- as Boeing had their strike issues last year, what we saw from our Tier 2 and Tier 3 customers that we're supplying, they continue to order at kind of mixed rates. And so what that meant was there was some lead out over the past, let's say, quarter to 2 quarters as they're kind of getting back to the normal pattern. That, we think, is done at this point in time. So we're encouraged that we're all in lockstep supporting the Boeing and Airbus build rates.

As far as what we expect to see going forward, right now, there are positive indicators from Boeing and Airbus about what they can do. And that should create some tailwind for us as we continue to support that. We're encouraged by what we see, but there's still risk, right. There's still -- there are still things that could go wrong in supply chain, as you heard about from some of the other companies that support this growth rate in this business segment.

Thank Patrick. So as we just think about the range, I guess, I don't want to put words in your mouth, but if things go according to plan, that's probably mid-teens, but the high single just reflects maybe some conservatism rightly so just sort of based on recent track record? Or how would I interpret that?

I think that's fair to say as well as there are some other -- it's not all just commercial transport, Boeing and Airbus that factors into our number here.

And I would add too, Ken. I mean this is a segment, as you know, the last 2 years, the ramp-up has been more challenged than we thought. So hopefully, our range and as broad as we made the brackets ends up being conservative at the low end, but time will tell. Past 2 years, you probably would have liked to have some of that cushion and we'll see whether or not this year we need it again.

And our next question comes from the line of Seth Seifman with JPMorgan.

I wanted to start off. I think you said a little bit earlier, you hope the margin forecast for the year would be conservative. I think it's probably around what you did in the first quarter and had Simmons in there for more or less the entire quarter and margin usually moved up through the year. Is there -- are other than conservatism? Is there anything to be aware of regarding why that margin wouldn't ascend through the year?

I think it's a bit of conservatism and then also just we'll see where commercial OEM goes and how that ramp up and the growth comes from there. As you guys know, that's a lower margin segment for us. So as that outgrows other things presents a bit of a headwind. We're early in the acquisitions. So we're probably conservative in the margins we forecasted for both those businesses as well. So time will tell. But I think it's fair to say there's a healthy dose of conservatism on the margins included too. And we'll aim to be there.

Right. Okay. And then just following up. I know you're not guiding for the acquisitions, but in the past, I think maybe you've given -- you foreshadowed a little bit what impact acquisitions could have on margin. When we bring in these three pending deals, how do we think about where the margin resets to from where it is now?

Yes. We don't want to give guidance until things actually close. So we'll cross that bridge when we come to it. I think you guys know the way past acquisitions go usually dilute you down a little bit on the margin. And it'd be safe to assume that you could expect something like that with these 3 new of units as well.

And our final question comes from the line of Kristine Liwag with Morgan Stanley.

Maybe pivoting away from commercial aerospace and PMAs. Your defense business is now more than 40% of the portfolio. And if you look at the ecosystem, a lot of the primes have called out some of the sole source providers in the supply chain as creating bottlenecks for the ability to convert the $540 billion record defense backlog into revenue.

Your pricing model has gone a lot of attention, but you're operating excellence also is a significant variable for the company. Is this an opportunity for you to roll up some of more of these [ mom-and-pops ] shortages. How do you see that opportunity set there? Because some of the companies we're seeing that are providing these solutions, you're seeing 20% plus growth in those kinds of ecosystems. It would be great to get your perspective here.

Kristine, I think you know what we -- from an M&A standpoint, we go out and we look at commercial and defense businesses. We're looking for highly engineered aerospace and defense components, and that's how we size it up, regardless of whether they're doing commercial or defense work. We think we're a great supplier to Department of Defense directly, as well as to the primes in terms of on-time delivery and high-quality products. A lot of the businesses we acquire that do defense work, it's usually a bit of their revenue.

We get the on-time delivery, the performance up, the quality up, and that's why I think folks generally [indiscernible] enjoy working with TransDigm op units because they're fast, nimble and they do what they say they're going to do, and hit the delivery dates. We think that's definitely value add to the folks who are in the supply chain up to the prime level, because it gets them the parts they need to satisfy their end customer, which is the U.S. or international governments.

In terms of [indiscernible] op shops and M&A and supporting them is, we're not actively out targeting from an M&A standpoint, [ mom-and-pops ] in the defense world. It is more larger acquisition focused and again, not focused on any one end market. It's commercial and defense. And if we had our pick, we aim to buy more commercial rather than defense. We're primarily a commercial supplier.

Super helpful. And then on the growth question on the revenue side. When you look at the backlog, we've seen the backlog for big defense primes up double-digit CAGR in the past 3 years. How conservative is your defense outlook? And what are the variables that could potentially get you through a higher revenue growth for the year versus your guidance?

Yes. I think that what you're saying is true. We're seeing some good demand. Our bookings are strong. They're ahead of expectations outpacing our sales. And so if that were to continue, we could see some upside here. But these lead times are a bit longer as well perceived. And it's hard to anticipate exactly how that will play out over the next, say, 6 to 9 months. But over the long term, we are seeing good positive indicators in this market segment, and we're well positioned to support that.

I'll now hand the call back over to Director of Investor Relations, Jaimie Stemen, for any closing remarks.

Thank you all for joining us today. This concludes the call for today. We appreciate your time, and have a good rest of your day.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.

Good day, and thank you for standing by. Welcome to the Q4 2025 TransDigm Group Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Jaimie Stemen, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDigm's Fiscal 2025 Fourth Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Mike Lisman; Co-Chief Operating Officer, Joel Reiss; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Patrick Murphy.

Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information.

Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations.

I will now turn the call over to Mike.

Good morning, and thanks for calling in today. First, I'll start off with the usual quick overview of our strategy; second, make a few comments about the quarter; and third, discuss our fiscal 2026 outlook. Then Joel and Sarah will give additional color on the quarter.

To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle.

To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns.

We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology.

Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital.

As you saw from our earnings release, we closed out the year with a good quarter. During the fourth quarter, we saw healthy growth in the revenue for our commercial aftermarket channel, robust growth in our defense market channel. And finally, as expected, our commercial OEM revenues returned to a growth position following the brief destocking trends we saw last quarter. For the full year, our fiscal 2025 revenue and EBITDA as defined margins surpassed our most recently published guidance.

Commercial aerospace market trends remain favorable. Air traffic continues to steadily progress and airline schedules remain fairly stable with takeoffs and landings growing in the 3% to 4% ballpark year-over-year. In the commercial OEM market, there is still much progress to be made for OEM rates, and our results continue to be adversely affected by OEM performance. Airline demand for new aircraft remains high and the OEMs have long backlogs. OEMs are working to increase aircraft production to meet this demand, but the recovery to date has been bumpy and will likely remain so.

Our EBITDA as defined margin was 54.2% in the quarter. Contributing to this solid Q4 margin is the continued growth in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q4 of over $500 million, and we ended the quarter with a cash balance of over $2.8 billion and over $2 billion pro forma for the Simmonds acquisition. We expect to steadily generate significant additional cash throughout fiscal 2026.

Next, an update on our capital allocation activities and priorities. During our full fiscal '25 and continuing into October, we are pleased to have allocated approximately $7 billion of capital in the aggregate across M&A and return of capital to our shareholders. Specifically, these activities included the acquisitions of Servotronics, Simmonds Precision.

Products and approaching $300 million of other small tuck-in acquisitions as well as a special dividend of $90 per share and $600 million of share repurchases. The dividend of $90 per share was our largest to date. As you know, we are continuously assessing our capital allocation options, and we were very pleased to return this capital to our shareholders. The recent share repurchases, including $100 million in October, are rooted in the same targeted returns math we have consistently applied over the years.

Regarding the current M&A activities in the pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsized range. As always, we will remain disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. So consistently with past practice, I will not be saying too much on what is currently active in our funnel.

The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses; second, do accretive disciplined M&A; and third, return capital to our shareholders via buybacks or dividends. A fourth option paying down debt seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options, but both M&A and the capital markets are difficult to predict. We exited fiscal 2025 with a sizable cash balance and our recent capital allocation actions still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future.

Now moving on to our outlook for fiscal 2026. This guidance incorporates the recently acquired Simmonds Precision Products business, which we are very excited to now own but which comes into the TransDigm fold at a profitability level below that of our typical acquisition. The guidance assumes no additional acquisitions or divestitures during the year.

Our initial guidance for fiscal 2026 is as follows and can be found on Slide 7 in today's presentation. The midpoint of our fiscal '26 revenue guidance is $9.85 billion or up approximately 12% over the prior year. As a reminder, and consistent with past years, with about 10% or so fewer working days than the subsequent quarters, fiscal '26 Q1 revenues, EBITDA and EBITDA margins are anticipated to be lower than the other three quarters of 2026.

This revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the high single-digit to mid-teens percentage range, which is highly dependent on the evolution of the production rates in the commercial OEM environment. Commercial aftermarket revenue growth is expected to be in the high single-digit percentage range and defense revenue growth in the mid-single-digit to high single-digit percentage range.

The midpoint of our fiscal 2026 EBITDA as defined guidance is $5.15 billion or up approximately 8% with an expected margin of around 52.3%. This guidance includes an additional 200 basis points of margin dilution from recent acquisitions compared to fiscal '25. Additionally, some commercial OE and defense mix headwind in the range of 0.5 percentage point to a full percentage point is further reducing our margins versus fiscal '25. Adjusting for these two dilutive factors, the margins would have increased more versus fiscal '25 and in line with the margin improvement we would typically expect on our base business. We anticipate EBITDA margins will move up throughout the year with Q1 being the lowest and sequentially lower than Q4 of fiscal '25. The midpoint of adjusted EPS is expected to be $37.51. We believe we are well positioned as we enter our fiscal '26.

We'll continue to closely watch how the aerospace and capital markets develop and react accordingly. We are pleased with the company's performance this year in 2025. Our team successfully navigated the challenges of uneven demand in our commercial OEM market throughout the year to deliver a healthy EBITDA as defined margin.

Looking to our new fiscal year, we remain focused on our value drivers, cost structure and operational excellence. We look forward to fiscal '26 and expect that our consistent strategy will continue to provide the value you've come to expect from us.

Now let me hand it over to Joel Reiss, our TransDigm Group Co-COO, to review our recent performance and a few other items.

Good morning, everyone. I'll start with our typical review of our results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2024. That is assuming we own the same mix of businesses in both periods. The market discussion excludes the recent acquisition of Simmonds Precision Products. In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased 7% in Q4 and was down 1% for the full year fiscal 2025 compared with the prior year periods.

As we anticipated, commercial OEM revenue in the fourth quarter returned to positive growth as we supported higher build rates. However, overall, the commercial OEM revenue performance for the full year was softer than we originally expected for fiscal 2025. The year-over-year decline in commercial OEM revenue was primarily driven by the negative impact to OEM build rates that resulted from the Boeing strike and production ramp-up challenges at Airbus.

Bookings in the quarter were up compared to the same prior year period. Commercial transport bookings growth was up over 20% for the fourth quarter. The bookings levels for OEM commercial transport show that the market is recovering from the various disruptions seen over the past year or so. But as we have said before, this recovery could be a bit bumpy and uneven on a quarterly basis as the OEMs and our Tier 1 and Tier 2 customers rightsize inventory levels.

We are encouraged by the progress of the 737 MAX production line as well as the FAA's approval for Boeing to increase its production rate. Our operating units are well positioned to support the higher production rates as they occur. The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production build rates for the 2026 fiscal year. Our fiscal 2026 commercial OEM revenue guidance range of high single-digit to mid-teens percentage growth contemplates reasonable risks around the Boeing and Airbus rates.

Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 11% in Q4 and 10% for the full year compared with the prior year period. Sequentially, total commercial aftermarket revenues were up 5% in Q4. This quarter, all submarkets within the commercial aftermarket experienced positive growth. Our commercial aftermarket, excluding our biz jet submarket was up 13%, driven by solid growth in freight, interiors and engines.

Bookings across all submarkets were up compared to the prior year period and POS at our distributors grew in double digits on a percentage basis this quarter. For the full year, the 10% revenue growth for commercial aftermarket was in line with our original expectations. Each of the submarkets performed about as expected with strong performance from our interior submarket and from the operating units with higher engine content within the passenger submarket. Our operating units continue to monitor market share and competitive losses, and we see no material change in this space from either USMs or PMAs.

As Mike already mentioned, we expect 2026 commercial aftermarket revenue growth in the high single-digit percentage range. Regarding how commercial aftermarket revenue is likely to progress throughout the fiscal 2026, Q1 is expected to be the lowest quarter of the year on a sales dollar basis as there are roughly 10% fewer working days than in other quarters.

Now shifting to our defense market. Defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 16% in Q4 and 13% for full year fiscal 2025 compared with the prior year periods. We have seen strong growth in defense driven by new business wins and strong performance by our teams in both domestic and international markets. Q4 defense revenue growth was well distributed across our businesses and customer base although we saw similar rates of growth in both the OEM and aftermarket components of our total market with aftermarket running slightly ahead of OEM.

Defense bookings for the quarter and full year significantly surpassed the comparable prior year periods and support our 2026 guidance for mid-single to high single-digit revenue growth. Additionally, this quarter, we saw continued growth in the U.S. government defense spend outlays. As we have said many times before, defense sales and bookings can be lumpy. We know the bookings and sales will come, but forecasting them with accuracy and precision, especially on a quarterly basis is difficult.

We anticipate capital expenditures of about $300 million in fiscal 2026. About 2/3 of our capital expenditure spending is on new business and productivity-driven projects. Typical payback for cost reduction projects is just a couple of years. We have over 150 new automation projects planned for the year. We continue to see the cost of automation technology decrease year-over-year. We are a high mix, low-volume manufacturer and our continued success taking on new automation tasks and assembly, machining, polishing and painting is exciting.

As a result of our continued focus on productivity in both the factory and offices, we anticipate our headcount will remain roughly flat despite the increase in commercial and defense OEM work content during the year.

We also had good, continued success winning new business this year. I can't get into specifics, but several operating units have been awarded content on the F-47, and we believe this will be an excellent platform for us. Hopefully, in upcoming quarters, I'll be able to provide more specifics.

To highlight a few new business programs I can talk about, in September, the U.S. Army placed its first large production order for Airborne Systems' glide modulation canopy, marking a major milestone following nearly two years of successful test and evaluation. This product represents a significant technological advancement over the current generation system used by the U.S. Army and Air Force. This new product allows jumpers to more precisely target landings in confined areas. The initial order value at $5 million begins the full transition to the new canopy in all future procurements. Airborne will deliver the first canopies in February 2026 to the U.S. Army Military Free Fall School where all new jumpers will be trained on this new upgraded system.

In August, the U.K. Ministry of Defense awarded a $30 million contract to IrvinGQ for an advanced aerial delivery system. This new system term PRIBAD, enables the RAF's Atlas A400 aircraft to air drop a rigid whole boat up to 40-meter long and weighing up to 12 tonnes. In addition, Auxitrol Weston reached an agreement with Rolls-Royce to supply its complete sensor suite on the Trent XWB-84 enhanced performance engine for the A350-900. This agreement encompasses OEM supply and power-by-the-hour support to operators, ensuring that the proven reliability of our sensors continues to contribute to the success of all XWB engine variants.

We are making good progress integrating our two most recent acquisitions, Servotronics and Simmonds Precision. Both integrations are being led by experienced EVPs. We have augmented the existing teams with seasoned individuals from other TransDigm operating units to accelerate their progress. It's still early, but our experience to date indicates that these are going to be two very good additions to TransDigm.

Lastly, I'd like to finish by recognizing the strong efforts and accomplishments of our operating unit teams during fiscal 2025. It was a good year, and we are pleased with the operating performance they delivered for our shareholders. As we enter our new fiscal year, our management teams remain committed to our consistent operating strategy and servicing the strong demand for our products.

With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne.

Thanks, Joel, and good morning, everyone. I'm going to review a few additional financial matters for fiscal 2025 and then also our expectations for fiscal '26.

First, a few additional fiscal '25 data points on organic growth, taxes and liquidity. In the fourth quarter, our organic growth rate was approximately 11%, and all market channels contributed to this growth as previously discussed by Mike and Joel. On taxes, our GAAP and adjusted tax rates finished the year within and slightly better than their expected ranges. On cash and liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes was roughly $2.4 billion for the year, slightly above our expected estimate of $2.3 billion. Below that free cash flow line, investment of net working capital consumed approximately $330 million on a full year basis. And the final net working capital ended the year roughly in line with historical levels as a percentage of sales.

We ended the year with approximately $2.8 billion of cash on the balance sheet or approximately $2 billion when pro forma for the completion of the Simmonds acquisition. At year-end, our net debt-to-EBITDA ratio was 5.8x, and up from the 5.9x at the end of last quarter after returning capital to our shareholders via a $90 per share dividend. While we don't target a specific amount of cash that we like to have on hand, we have sufficient capital available through both cash on hand and as well as incremental debt. Capacity to support all potential M&A in the pipeline.

Over the course of fiscal '25, we did a fair bit of proactive financing. We pushed out our nearest term maturities in 2027 to 2028. Additionally, we reduced the interest rate on two of our loans. We also raised $5 billion to fund the aforementioned $90 dividend paid out in September. Our EBITDA to interest expense coverage ratio ended the quarter at 3.2x, and which provides us with comfortable cushion versus our target range of 2x to 3x.

We continue to be comfortable operating in the 5% to 7% net debt-to-EBITDA ratio range. Our go-forward strategy of capital deployment has not changed, and we continue to seek the best opportunities for providing value to our shareholders through our leverage strategy.

Our capital allocation strategy is to both proactively and prudently manage our debt maturity stacks by keeping the nearest term maturities far out. In addition, approximately 75% of our $30 billion gross debt balance is fixed through fiscal 2029. This is achieved through a combination of fixed rate notes, swaps and collars.

Next, on the fiscal '26 expectations, I'm going to give some more details on the financial assumptions around interest expense, taxes and share count. A special note that all of my comments and data here include the acquisition of Simmonds. Net interest expense is expected to be about $1.9 billion in fiscal '26, and this equates to a weighted average interest rate of approximately 6.3%. This estimate assumes an average SOFR rate of 3.8% for the full year. On taxes, our fiscal '26 GAAP cash and adjusted tax rates are all anticipated to be in the range of 22% to 24%. On the share count, we expect our weighted average shares outstanding to be 58.5 million shares in fiscal '26. With regards to liquidity and leverage for fiscal '26, as we would traditionally define our free cash flow from operations at TransDigm, which again means EBITDA as defined less cash interest payments, CapEx and cash taxes, we estimate this metric to be close to $2.4 billion.

After paying for the Simmonds acquisition and assuming no additional acquisitions or capital market transactions, we would end the year with around $4 billion of cash on the balance sheet, which would imply a net debt-to-EBITDA ratio of approximately 5x at the end of fiscal '26. We will continue to watch this ratio along with the cash interest coverage ratio as we actively pursue options for maximizing value to our shareholders through our capital allocation strategy.

In summary, we think we remain in good position with adequate flexibility to pursue M&A or return cash to our shareholders via share buybacks and/or additional dividends during the course of fiscal '26.

With that, I'll hand it back to Jamie, our Director of Investor Relations.

Before we open the line for Q&A, I ask everyone in the queue to consider your fellow analysts and ask one question only so we can get to as many people as possible, that it is our Q4 call and there's a lot of material to cover today.

Operator, can you please open the line?

[Operator Instructions] And our first question comes from Scott Mikus of Melius Research.

Mike, when Kevin was CEO, the company opened up the M&A aperture by expanding into test and measurement businesses, but they were still primarily aerospace related. You're still early in your career and could be leading TransDigm for quite a while. Is there a possibility that under your tenure, TransDigm takes a more serious look at acquisitions outside of aerospace and defense where you're still comfortable that you can hit your 20% IRR target?

So we did two branches outside of the core legacy aerospace hardware business under Kevin, Calspan and Raptor. Both it's early innings, but it seems so far so good. So we're looking for additional things potentially in that space as the experience to date has generally been a positive one.

Over time, well, let's focus on today. As we sit here today in terms of what our M&A group, what I'm spending time on from an M&A standpoint, it's not branched out materially from anything that you'd expect to see, which is similar to what we've always targeted in the past, aerospace and defense components businesses. That's where the vast majority of the focus is.

In the fullness of time, could you continue to potentially branch out and look at things under the umbrella, but similar to test and measurement that are right down traditionally our fairway. That could be the case, but we're not there yet. As we sit here today, the focus is more of where it's always been.

Okay. And then you talked about the strength in orders in the aftermarket. Were there any noticeable trends among the four submarkets there, whether it's freight, interior, biz jet, helicopter, passenger? Just any pockets of strength or pockets of weakness you saw?

This is Joel. I'll take that. I don't think we've seen any dramatic changes as we got out of the quarter. Certainly, refurb business for interiors picked up more this year. It kind of lagged the year before. As we highlighted in the comments, engine has been strong for us all year as it was last year. And I think freight, which struggled the year before also was pretty solid for us this year.

And our next question comes from Robert Stallard of Vertical Research.

Just a couple from me on the 2026 guidance. First of all, on defense, that's a big slowdown for '26 versus what you've recently experienced for 2025. So I was wondering if you can give some more clarity on that.

And then on the aerospace aftermarket, are you assuming a normal level of TransDigm pricing as you move into '26?

So, on the defense side, I'm hopeful we're being conservative on it. We had good solid bookings last year and good growth across the various aspects of the company. Defense is lumpy for us. And so unlike the commercial aftermarket with relatively quick book and ship, it's a little bit less predictable on the defense side. So we're going to generally be a little bit more conservative there. We've had two solid growth years in a row in defense, and I think we like where we're sitting today.

On the commercial aftermarket side, I don't think we're planning to make any change in how we approach pricing. Our goal is to offset the inflationary increases that we see and put a bit of real price on top of that. I'm not sure we're going to -- just similar to what we've done in past years, not looking to make any change.

And our next question comes from Ken Herbert of RBC CM.

Mike and Sarah, I appreciate the comments on the margin dilution from the recent acquisitions. Two questions really. First, how do we think about the ability to get the recent acquisitions up to sort of TransDigm margins? Do they have that capability? And what's the time frame to think about that?

And then second, just wanted to confirm, excluding those, I think you've typically talked about sort of 50 to 100 basis points of annual margin expansion. Is that what we would normally expect, obviously, aside from the dilution of the acquisitions?

Yes. Ken, it's Mike. I'll lead off and then Sarah can chime in if I miss anything. If you exclude the two dilutive factors, the acquisitions and also the OEM mix shift, you do get at an underlying margin improvement trend for our base businesses that is squarely between the brackets of what you guys would expect of the 1%, 1.5% kind of range when you adjust those two things out. So we are seeing exactly the kind of margin improvement year-over-year, we've come to expect and you've come to expect.

With regard to the two acquisitions, Simmonds and Servotronics, the margins came into the fold at a low level, but these are great products. We're very excited to own both businesses. In the fullness of time, we see nothing fundamentally different about these two businesses versus what we've acquired in the past that should prevent us from being able to march the margins upward. The exact time line over which that happens is varied. And obviously, it doesn't happen overnight, but there's nothing different about these businesses that should prevent us in the fullness of time from getting the margins up to where we like them to be.

And our next question comes from Kristine Liwag of Morgan Stanley.

You guys touched on your contract award for the F-47. I was wondering, can you give more color on your content in this program? And how does this compare to your content on other fighter programs like the F-18, F-22, F-35?

Look, I'm not sure that we can comment on how successful the programs will be. Ultimately, the DoD awarded Boeing fighter jet as the next-generation fighter. We take it seriously, and our teams have been actively working to win good content on the planes. How successful will be? I'm hopeful it will be great. Exactly where it's going to end up, we have no idea.

I think we've historically not disclosed which specific op units won which content and that level of detail. But it seems like it's going to be a really good program for us, as Joel said in his prepared comments.

Great. I guess the origin of that question is just really understanding with the focus on your contracting styles and defense, it's a positive surprise to know that you've been winning more contracts like for something like the F-47. So it's really more just to try to understand what your conversation with customers are like and kind of confirm that you're not in a no-fly zone type environment for new defense contracts.

No, absolutely not.

Yes, I think actually across the company, I think we had more new business awards in the defense market last year than we did on the commercial side. We develop good solutions. I mean I think this is the key as customers come to us because we can generate a product for them that solves a problem that they can't solve or we solve better than someone else. These are competitive awards. And I think we like where we stand. We work to come up with good solutions that generate value for our customers.

And our next question comes from Myles Walton of Wolfe Research.

I was wondering if we could chat about the CapEx and headcount comments you made. The CapEx looks like it's set to double just over the last couple of years. And you mentioned some of the automation investment. But I guess how much of that is automation to facilitate better productivity versus higher output? And is it more military or commercial?

And the headcount, can you just clarify, are you saying flat headcount inclusive of the additional heads from Simmonds, which closed after the quarter?

I'll take the latter part. Yes. So we look at everything in this case on a pro forma basis. So adding the headcount in from Simmonds as we kind of look out at the growth we expect to see for commercial and defense OEM during the year, we don't think we'll have to add it's not that it's no one, but relatively few people across the company and still handle the volume growth, the high single-digit to mid-teen growth within the commercial OEM and on the defense side.

When it comes to the CapEx question, I don't know specifically which is defense and which is commercial. Our operating units look at projects depending on need and where we can get an excellent return. It ends up being a combination. Sometimes it's to handle more capacity. Sometimes it's a way to basically drive out cost. If it's just capacity, though, we're typically not thinking of that as productivity. We ultimately should be able to do the work we're doing today, but with fewer people with higher yields that we have today or to in-source work that potentially is being done on the outside.

Okay. And just one quick follow-up on cash flow. What is the working capital investment or source that you're expecting in '26?

Yes. For '26, I'd expect similar to prior years, which is as a percentage of sales, around 2.5%, 3%, somewhere around there for next year.

And our next question comes from Sheila Kahyaoglu of Jefferies.

Maybe if I could ask on the commercial aftermarket, Mike, if you want. Commercial aftermarket, 11% in the quarter, accelerated from the 6% in Q3. So how much of that was an engine hold up, whether it was at distributors or whatnot? And as we think about '26, how do we think about passenger versus freight engines and interiors?

So we do a bottoms-up forecast each of our op units, same kind of approach we've used in the past. Our operating units look at this on a customer-by-customer basis. The try to get information around inventory and demand, and that basically builds up what becomes the guidance that we provide. If I was looking at like the takeaways, not the guidance that we give them, but kind of the takeaways back.

On the freight side, I think we continue to expect to see good steady growth kind of what we saw this year, available cargo tons were up in the 3% to 4% year per year. I think most folks are thinking that's going to be the same.

I mentioned interiors. Interiors, we saw refurbs kind of kick in on the U.S. regionals. I think the general feedback that we're hearing is that we expect that to continue, but with Asia and the Middle East becoming a bigger piece of refurbs. Engines have had two solid years of growth. I think our teams are optimistic, but probably a bit conservative around how that's going to continue to go.

On the passenger side, we had a strong '24 and obviously a bit weaker '25. We think that will rebound a lot. That was on the avionics side and don't see a reason that won't continue. And biz jet, I think we expect kind of more of the same.

And our next question comes from Gavin Parsons of UBS.

If you look at your OEM kind of underlying volume, the organic basis, revenue is up kind of 15%, 20% from 2019. But do you feel like on a volume basis, you're pretty aligned with OEMs at this point?

You're talking about the commercial OEM market are aligned with their build rates. So no more inventory destock. Is that the fundamental issue you're trying to get at, Gavin?

Yes, thanks.

I think as we sit here today, Joel can chime in. We don't see much headwind coming in the way of further inventory destock. As we said last quarter, we expected this to be a temporary phenomenon that lasted for a quarter or two. We saw the blip last quarter. We don't expect much more of a headwind coming into this year. So the growth rate in commercial OEM side should be sort of what we gave in the guidance, high single digit to mid-double digit.

We put probably a wider bracket around that than you typically would do, mainly just because of the way the ramp-up has been challenged so far to date. We always try to be appropriately conservative, and we've been stung a bit in the last two years by unforeseen events, and we don't want to get out over our skis here on the commercial OEM side this year.

On the 200 basis points of M&A dilution, maybe you can correct my math here, but it seems like you're assuming very little margin contribution from M&A.

What do you mean margin contribution by M&A?

He is talking about the acquisitions.

You get to 200 basis points. Yes.

Yes. Yes, we are expecting very lower than our average acquisition margins coming in for those two.

I think that's where, Gavin, they're just -- they're each coming into the fold, as we said in the prepared remarks that probably a lower margin than you'd typically see of the average TransDigm acquisition. But in the fullness of time, we think these businesses have great potential, and that's going to improve and ramp up significantly.

Our next question comes from Seth Seifman of JPMorgan.

I guess following up on the issue of underlying margin expansion and the mix headwinds you talked about for this year that limit the underlying margin expansion. Given increasing production rates over the next several years, it seems like that's a headwind to the underlying margin expansion that's going to persist or potentially accelerate. And so at least for the next couple of years in this decade, the underlying margin expansion potential in the business is limited by a differential between OE and aftermarket growth rates as it is this year?

I would say it's limited. I think we still expect to get year-over-year margin improvement. If historically, we've kind of bounded it in the percent, 1.5% range. We'll see where things go with the OEM ramp-up here and how that compares to future commercial aftermarket growth as well as what happens on the defense side.

But the margin should continue to improve year-over-year going forward. Depending on the OEM, if it continues to outgrow aftermarket and defense, you could see a bit of a headwind, but we're talking about something that usually amounts to a couple of tenths of a point. It's not something that swings you negatively so much so that year-over-year margin improvement is not seen. We should still see it, to be crystal clear.

Great. Great. And just a quick clarification. I think you mentioned earlier in the call, $300 million of other small tuck-in M&A. Is that end stuff that remains organic? Or is there an inorganic component of the sales that's coming in '26 from that additional M&A?

It's a mix across a range of our op units. It's really a mixed bag of different op units that are doing small tuck-in bolt-on acquisitions for their specific businesses. Some are at extend, but several of them are not. And these -- we basically folded in as part of our planning process, they execute the deals during the year.

And our next question comes from Scott Deuschle of Deutsche Bank.

Mike, can you share any detail on the average contract duration at Simmonds? Just trying to get a sense for the timing at which future pricing actions layer into results.

Yes. I still think we're in the early innings of what this is. I think they've got the kind of typical range of contracts that you'd expect to see over the bulk of our businesses, some relatively short and some life of program. I don't think this -- when you look at it, it looks dramatically different from what we expect to see from any acquisition we do.

Okay. And Joel, just to follow up on Myles' question. Should we expect this decoupling of sales growth from headcount growth to continue beyond '26 as you make additional automation investments? Or should those realign more closely as we exit '26?

I think we're hopeful that if we continue to drive automation projects, we're still in the early days of doing artificial intelligence within our -- within the office side. I think we're optimistic that we can hold headcount certainly below the rate that our sales increase goes, how successful we are. I mean our operating unit teams focus on productivity is one of our 3 value drivers, and they work hard to drive our sales per employee higher each year. And so they certainly are focused on how to best do that.

And our next question comes from Gautam Khanna of TD Cowen.

I just had two quick ones. One, I was curious if you could give us an update on the sell-in versus sell-through through how the distributors that you own what they saw on aftermarket, I may have missed it.

And then secondly, I just wanted to get your broader thoughts on the War Secretary's acquisition reform speech that he gave last week. How, if at all, do you think it would impact TransDigm?

Yes. So, on the distribution point of sale, it was up more than our underlying commercial aftermarket. A couple of reasons. Within our point-of-sale and distribution, it does overweight a little bit more to engine than base TransDigm. So, if you kind of reset it, the numbers would look about the same. It's just the mix of what the products are.

We also had allowed inventory to drop a bit within the distribution channel at the end. We finished the year with about half a year less of inventory in terms of half a month, sorry, of less of inventory at the channel at the end of September than where we were the previous year. That was probably a 1- or 2-point impact to CAM last year.

When it comes to the Secretary's comments, I think we're optimistic. We approach defense as a commercial manufacturer. We invest the time and effort, the money to develop new products. to qualify products. We bid them as firm fixed price contracts where we take the risk if something goes on. So I think we're well positioned and hopeful similar to what we've done this year with other defense wins is that we have the ability to develop good solutions for customers and generate real value.

I think as you guys know, we're not doing the big cost-plus work here. We're fast, nimble at the op unit level, easy to work with and mostly selling commercial type solutions.

And our next question comes from Ronald Epstein of Bank of America.

Two, a follow-up. The first one, yes, just following up on the last question, Gautam's question and also Kristine's, I think, trying to get at. So if you can say -- so F-47 is the first major new program we've seen in a while. if you can answer this, was your experience bidding for the work on it any different than it was on any previous programs? I mean I think the fear out there is, and you probably understand this, that somehow that the DoD is doing things that are going to make things somehow less profitable or something like that. I mean was the bidding process sort of how you would expect it? Or was it somehow different than it was in the past?

I think the way our -- obviously, we have a multitude of op units who are all participating in awards like this and frequently interact with the primes and others on the defense side. And the process was similar to what we've seen in the past and didn't play out with any big changes versus what we'd expect.

Good to know. Good to know. And then maybe just as a follow-on, and people have been talking about this. There is a case out there that somehow that TransDigm just won't grow their aftermarket business like maybe some peers will because you guys don't have enough engine exposure that somehow you're too big to do M&A and have it be meaningful. How would you respond to that? I mean if someone confronted you with that and said, hey, you know what, you guys are just getting too big and nothing is really going to move the needle, and that is sort of the bear case. How would you respond to that?

I think we're the type who just puts our heads down and goes out and finds ways to create value. That's it. The proof is in the pudding, the results we drive here as a team and not handwaving responses. We'll just put our heads down and go to work.

Got it. Got it. And if I may, is it safe to infer from that, like if an environment you got into that something just wasn't working, you'd make some changes, right?

Well, we're always -- we're going to do. We're going to operate the business to go and create value and do what we can to drive prudent long-term value for our shareholders with whom we're closely aligned.

And our last question comes from Jonathan Siegmann of Stifel.

Just on defense, just a lot of talk about new missile programs and drones. You guys have highlighted your good positions on the Predator and the Patriot. Just where do you fit on some of these newer, lower-cost programs? Is that an opportunity for TransDigm, recognizing you're not going to be on the lowest, smallest end, but how about some of these new programs on the medium size and cost range?

Yes. I don't want to provide any specifics because I don't know what we can or can't say on some of these similar like the F-47. We've got some really solid wins on some of the programs you're referring to. Again, they're looking for good, highly engineered products that solve problems that provide features that other folks can't. We have a lot of engineers. I mean, roughly, what, 15% of our entire corporation are on the engineering side, designing and developing products.

So, yes, I think we've got some really solid wins that hopefully, we'll be able to talk to in upcoming quarters and some of the programs you're referring to. So I think we like our opportunities there.

This concludes our Q&A session. I would like to now turn it back to Jaimie Stemen for closing remarks.

Thank you all for joining us today. This concludes the call. We appreciate your time, and enjoy the rest of your day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.