Q1 2026 TransDigm Group Inc Earnings Call

February 3, 2026

Speaker #1: Hello and welcome to the Q1 2026 TransDigm Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode.

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Speaker #1: today's conference is being recorded . It is now my pleasure to introduce Director of Investor Relations , Jaimie Stemen .

Jaimie Stemen: Thank you, and welcome to TransDigm's fiscal 2026 Q1 earnings conference call. Presenting on the call this morning are TransDigm 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 Investor section of our website or at sec.gov.

Speaker #2: Thank you and welcome to Trans AMS Fiscal 2026 Earnings first quarter Conference Call . Presenting on the call this morning are TransDigm Group Chief Executive Officer and Michael 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 .

Q1 2026 TransDigm Group Inc Earnings Call

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Q1 2026 TransDigm Group Inc Earnings Call

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Tuesday, February 3rd, 2026 at 4:00 PM

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Mike Lisman: 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 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 six years and as President at our hardcore SEM cooperating 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.

Mike Lisman: 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 longstanding goal is to give our shareholders private equity-like returns with the liquidity of a public market.

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 longstanding goal is to give our shareholders private equity-like returns with the liquidity of a public market.

Mike Lisman: 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 as 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 remain 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.

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 as 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 remain 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.

Mike Lisman: While our growth rates have 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 brief 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 the market. 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. This second piece, the lumpiness, can be hard to quantify exactly.

Mike Lisman: 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 two 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.

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 two 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.

Mike Lisman: 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 five weeks, we have signed up the acquisition of three new operating units and two separate M&A transactions: Stellant Systems, Jet Parts Engineering, and Victor Sierra Aviation. On 31 December, we announced that we had agreed to acquire Stellant Systems from Arlington Capital Partners for approximately $960 million in cash. Stellant 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.

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 five weeks, we have signed up the acquisition of three new operating units and two separate M&A transactions: Stellant Systems, Jet Parts Engineering, and Victor Sierra Aviation. On 31 December, we announced that we had agreed to acquire Stellant Systems from Arlington Capital Partners for approximately $960 million in cash. Stellant 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.

Mike Lisman: Then on 16 January, 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.

Then on 16 January, 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.

Mike Lisman: 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 and 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 model. 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 businesses. As always, we will remain focused and disciplined around our approach to M&A.

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 and 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 model. 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 businesses. As always, we will remain focused and disciplined around our approach to M&A.

Mike Lisman: 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. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, do a creative, 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. 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.

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. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, do a creative, 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. 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.

Mike Lisman: 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 as 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 four 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 Stellant, Jet Parts Engineering, and Victor Sierra are all excluded from this analysis until each acquisition closes.

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 as 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 four 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 Stellant, Jet Parts Engineering, and Victor Sierra are all excluded from this analysis until each acquisition closes.

Mike Lisman: 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 digits to the 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 digits percentage range. And defense revenue growth in the mid-single digits to high single digits percentage range.

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 digits to the 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 digits percentage range. And defense revenue growth in the mid-single digits to high single digits percentage range.

Mike Lisman: The midpoint of fiscal 2026 EBITDA as 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 at our base businesses improved nicely in our first fiscal quarter, more than we had expected. As a reminder, the dilutive factors are approximately 200 basis points of margin dilution from our recent acquisitions and about half a percentage point to one full percentage point of dilution from commercial OEM and defense mixed 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.

The midpoint of fiscal 2026 EBITDA as 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 at our base businesses improved nicely in our first fiscal quarter, more than we had expected. As a reminder, the dilutive factors are approximately 200 basis points of margin dilution from our recent acquisitions and about half a percentage point to one full percentage point of dilution from commercial OEM and defense mixed 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.

Mike Lisman: 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 quarter. It is a good start to the fiscal year. Our teams remain focused on our value drivers, cost structure, and operational excellence. We look forward to the remainder of fiscal 2026 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 category. 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.

Mike Lisman: For reference, the market discussion includes the recent acquisition of Simmonds Precision Products. The pending acquisitions of Stellant, Jet Parts Engineering, and Victor Sierra are excluded. In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 17% Q1 compared with the prior year period. As we anticipated, commercial OEM revenue in the first quarter showed strong growth as we supported higher bill frames. Commercial transport OEM revenues, which excludes the BizJet 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 FY26 growth is driven by the increase in the Airbus and Boeing OEM bill rates and the bounce back from the Boeing production disruption in the prior year.

For reference, the market discussion includes the recent acquisition of Simmonds Precision Products. The pending acquisitions of Stellant, Jet Parts Engineering, and Victor Sierra are excluded. In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 17% Q1 compared with the prior year period. As we anticipated, commercial OEM revenue in the first quarter showed strong growth as we supported higher bill frames. Commercial transport OEM revenues, which excludes the BizJet 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 FY26 growth is driven by the increase in the Airbus and Boeing OEM bill rates and the bounce back from the Boeing production disruption in the prior year.

Mike Lisman: 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% for Q1. The bookings levels for commercial transport OEM continue to show that the market is recovering from the various disruptions seen over the past year and a half. However, the OEM recovery to this point has been bumpy and uneven on a quarterly basis, and we expect that to continue as OEMs and our tier one and tier two customers right-size 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.

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% for Q1. The bookings levels for commercial transport OEM continue to show that the market is recovering from the various disruptions seen over the past year and a half. However, the OEM recovery to this point has been bumpy and uneven on a quarterly basis, and we expect that to continue as OEMs and our tier one and tier two customers right-size 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.

Mike Lisman: The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production bill 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 BizJet submarket, was up 8% driven by solid growth in all four 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.

The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production bill 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 BizJet submarket, was up 8% driven by solid growth in all four 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.

Mike Lisman: 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 with the prior year period.

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 with the prior year period.

Mike Lisman: 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 world. 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 aftermarket. 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.

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 world. 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 aftermarket. 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.

Mike Lisman: 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 Chelton business was awarded a multimillion-dollar contract from Lockheed Martin 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 the C-130J aircraft. In December, the IrvinGQ 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 Arleigh Burke destroyers.

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 Chelton business was awarded a multimillion-dollar contract from Lockheed Martin 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 the C-130J aircraft. In December, the IrvinGQ 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 Arleigh Burke destroyers.

Mike Lisman: These systems are used as one of the last lines of defense for ships under missile attack. U.S. DOD have requested these deliveries to start in FY26, the overall program period of performance over the next four years. Just a quick update on our acquisition integration activities. We continue to make good progress integrating our two most recent acquisitions, Servotronics and Simmonds Precision Products. Both integrations are being led by experienced DVPs, and 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 today indicates that these are going to be 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 2026. We are pleased with the solid operational performance our teams delivered for our shareholders this quarter.

These systems are used as one of the last lines of defense for ships under missile attack. U.S. DOD have requested these deliveries to start in FY26, the overall program period of performance over the next four years. Just a quick update on our acquisition integration activities. We continue to make good progress integrating our two most recent acquisitions, Servotronics and Simmonds Precision Products. Both integrations are being led by experienced DVPs, and 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 today indicates that these are going to be 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 2026. We are pleased with the solid operational performance our teams delivered for our shareholders this quarter.

Mike Lisman: The teams continue to execute on our value drivers, and it was a good start to our fiscal 2026. 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 Q1 and then provide some more information on the guidance. First, on organic growth and liquidity. In Q1, our organic growth rate was 7.4%, and all market channels contributed to this growth, as previously discussed by Mike and Patrick. On cash and liquidity, free cash flow, which we traditionally define as non-discretionary cash interest payments, CapEx, and cash taxes, was just under $900 million for the quarter.

Mike Lisman: This is higher than our average free cash flow conversion due to the timing of our interest and tax payments in the quarter. 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 in net working capital consumed approximately $30 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.

This is higher than our average free cash flow conversion due to the timing of our interest and tax payments in the quarter. 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 in net working capital consumed approximately $30 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.

Mike Lisman: 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 5.7 times 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 7 times net debt-EBITDA ratio range. Our net debt-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 proactively and prudently manage our debt maturity stacks by keeping near-term maturities well extended.

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 5.7 times 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 7 times net debt-EBITDA ratio range. Our net debt-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 proactively and prudently manage our debt maturity stacks by keeping near-term maturities well extended.

Mike Lisman: 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 3.1 times, which provides us with comfortable cushion versus our target range of two to three. 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 returns 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.

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 3.1 times, which provides us with comfortable cushion versus our target range of two to three. 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 returns 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.

Mike Lisman: 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 Jaimie, 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? As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment, please. And our first question comes from the line of Sheila Kahyaoglu with Jefferies. Hi, guys. It's actually Ellen for Sheila this morning. Thanks for the question.

Mike Lisman: 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 costs 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, solid start to the year. Great. Thanks. I'll leave it there. Thank you.

Mike Lisman: And our next question comes from the line of Miles Walton with Wolfe Research. Yeah, good morning. 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, TransDigm's aftermarket has fallen short of that double-digit mark. I think it's more engine-sensitive, so maybe you can confirm that or how much information value there is. And then within the aftermarket growth, if you can just tell us what it is lagging in that +8%, is interiors in a low single digit still? Sure. So a couple things on the POS point. We do, through the POS channel, weigh a bit more heavily towards engines there, so that has been a little bit of what's contributed and driven it up.

Mike Lisman: I mean, one of the we see that really solid growth rate on our engine end market for CAM, as well as our airframe and airline being in line with what our expectations. Our 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 Q1. All the submarkets were, when you strip out the business jet, which was obviously at 1% and dragged us back a little bit, all the submarkets within commercial transport at 8% for commercial transport were 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%.

Mike Lisman: I know there's pro forma versus organic, but is the takeaway that Simmonds is significant growth underlying year on year, and that's what's driving most of that differential? Yeah. Hi, Miles. This is Sarah. I'll take that one. Yeah, if you look at the market growth segments, which are obviously pro forma for Simmonds, we do see a little bit of upside in the market segments coming from Simmonds 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 that you see going on there. Thank you. Thank you. And our next question comes from the line of Gavin Parsons with UBS. Thank you. Morning. Morning.

Mike Lisman: I just wanted to follow up on Miles' question on 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 distributor lumpiness and some of the inventory in the channel, potentially the airlines. And as I tried to address in the prepared remarks, it's hard to quantify that exactly and what it might be because you don't get great inventory data from the airlines. You do from distributors, but not always from the airlines in terms of great detail on exactly what they have.

Mike Lisman: As we rack up the math over the last 4 or 5 quarters or so, if we're 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 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'd guess, with as many distributors and op units as we have, but generally fairly uniformly distributed. Okay. Appreciate it. Thank you. And our next question comes from the line of Noah Popanek with Goldman Sachs. Hey, good morning, everyone. Morning, Noah. You mentioned aerospace aftermarket bookings grew faster than revenue.

Mike Lisman: 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 2025, 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 Q2 is a much different comp than Q3, or do you expect the remainder of the year's growth to be pretty even? Yeah, 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.

Mike Lisman: 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 headwind of selling into distributors, and then their on-sale rate into the market from the distributor is higher. So the net inventory position is contracting 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 at 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.

Mike Lisman: And we did take a bit of a headwind in Q1, a couple percentage points. I understand. Okay. Thank you. Sure. Thank you. And our next question comes from the line of Scott Mikus with Melius Research. Morning. Morning, Scott. 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 PMAing your OEM parts because you could then retaliate in PMA or DER there for parts 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.

Mike Lisman: 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 businesses 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. All right. Thank you. Thank you. And our next question comes from the line of Robert Stallard with Vertical Research. Thanks so much. Good morning. Morning, Rob. Just a couple from me.

Mike Lisman: First of all, on the acquisitions, they looked a 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? Thank you. 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 foots to math that basically results in the same 20% sort of IRR we always targeted. So we're happy to own the businesses.

Mike Lisman: We think we paid fair prices, but nothing that was too high given the valuation environment we're in today. And on the pricing? Oh, and on the pricing, I think it's going to be the similar playbook as we deploy in our acquisitions over time at TransDigm. Basically, no change there. Okay. That's great. Thanks, Mike. Thank you. And our next question comes from the line of Scott Deuschle with Deutsche Bank. Hey, good morning. 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.

Mike Lisman: Those are the ones 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 all of our customer needs. Our on-time delivery has improved significantly over the last few quarters and over the last year, and I think we're well positioned to defend ourselves there. It's just not something that we see as an issue. Okay. 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, and it'll just be done by the typical TransDigm playbook of running them as their own entities? Yeah, I think the playbook is they'll run themselves as their own entities.

Mike Lisman: 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. All right. Thank you. Thank you. And our next question comes from the line of Ronald Epstein with Bank of America. Hey, good morning. This is Jordan Lyonnais on for Ron. Good morning. Boeing and Airbus, if we look out three 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 footed this. We bought these businesses. We modeled up, and we built a five-year LBO model. Same approach we've always taken.

Mike Lisman: 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 tying 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 a 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. Got it. Thank you so much. Thank you. Our next question comes from the line of Gautam Khanna with TD Cowen. Hi, good morning, guys. Morning.

Mike Lisman: 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 half that. Admittedly, 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 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 modeled these businesses up, we did not model the margins getting to the TransDigm level. Okay.

Mike Lisman: And do you know if 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? Yeah, 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 they've done, we know it obviously through our diligence. It's good, sizable growth they drive every year through those efforts. But 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 which 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.

Mike Lisman: There are still things that could go wrong in the supply chain, as you've heard about from some of the other companies that support this growth rate in this business segment. Thanks, 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? Yeah, 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 two years, the ramp-up has been more challenged than we thought.

Mike Lisman: And then just following up, I know you're not guiding for the acquisitions, but in the past, I think maybe you've given or 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? Yeah, 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. It usually dilutes you down a little bit on the margin, and it'd be safe to assume you can expect something like that with these three new op units as well. Right. Okay. Very good. Thanks. Thank you. And our final question comes from the line of Kristine Liwag with Morgan Stanley. Hey, good morning, everyone.

Mike Lisman: 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 gotten a lot of attention, but your operating excellence also is a significant variable for the company. Is this an opportunity for you to roll up some more of these mom-and-pop 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%+ growth in those kinds of ecosystems. It would be great to get your perspective here. Sure, Kristine.

Mike Lisman: I think you know, when we, from an M&A standpoint, go out and 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 the 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 like and enjoy working with TransDigm operating units because they're fast, nimble, and they do what they say they're going to do and hit the delivery dates.

Mike Lisman: 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 US or international governments. In terms of mom-and-pop shops and M&A and supporting them, 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'd aim to buy more commercial rather than defense. We're primarily a commercial supplier. Thanks. 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 growth in the past three years.

Mike Lisman: How conservative is your defense outlook, and what are the variables that could potentially get you to a higher revenue growth for the year versus your guidance? Yeah, 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, Kristine, and it's hard to anticipate exactly how that will play out over the next, say, six to nine months. Over the long term, we are seeing good, positive indicators in this market segment, and we're well positioned to support that. Thank you very much. Thank you. Thank you. 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.

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Q1 2026 TransDigm Group Inc Earnings Call

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