TransDigm Group Incorporated 2026 Q3 Earnings Call

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 investor 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 fiscal 2026 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. 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 three 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.

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 two 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 half a 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 intended to challenge the transaction. While we respectfully disagreed with the DOJ's decision on the matter, ultimately, the complications and hurdles that would have arisen from continuing with the acquisition through a litigation, coupled with the timeline 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 mid-size range. As always, we'll remain disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. 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 & Izant from Industrial Growth Partners for approximately $1.1 billion in cash. Prince & Izant is a leading global designer and manufacturer of highly engineered brazing alloys and specialty metal 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 Prince & Izant'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, do accretive, disciplined M&A. 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. 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're increasing our full fiscal year 2026 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 six in the presentation. The midpoint of our fiscal 2026 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 three 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 % range. We expect commercial aftermarket revenue growth to be in the low double-digit % range, and we expect defense revenue growth in the high single digit to low double-digit % 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 two 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 Simmonds Precision Products, but excludes Jet Parts Engineering and Victor Sierra Aviation acquisitions. Purpose of excluding these newly acquired businesses is for two 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 after.