TransDigm (TDG) Q1 2026 Earnings Call Transcript

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Date

Tuesday, Feb. 3, 2026 at 11 a.m. ET

Call participants

• Chief Executive Officer — Michael Lisman
• Co-Chief Operating Officer — Patrick Murphy
• Chief Financial Officer — Sarah Wynne
• Director of Investor Relations — Jaimie Stemen

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Takeaways

• Organic growth rate -- 7.4% reported, driven by all market channels.
• Commercial OEM revenue -- Increased approximately 17%, supported by higher Airbus and Boeing build rates, and a recovery from prior Boeing production disruptions.
• Commercial transport OEM revenue -- Rose 18%, reflecting a bounce back from the previous year's Boeing slowdown.
• Commercial aftermarket revenue -- Increased about 7%, with all submarkets showing positive growth; commercial transport aftermarket up 8%.
• Defense market revenue -- Grew roughly 7%, with OEM slightly outpacing the aftermarket, and new business wins cited in both domestic and international markets.
• Bookings -- Strong across commercial OEM, commercial aftermarket, and defense; in several channels, bookings ran ahead of sales and exceeded internal expectations, notably with commercial transport OEM bookings up in the high-teens percentage range.
• EBITDA as defined margin -- 52.4%, including about 2 percentage points dilution from recent acquisitions.
• Operating cash flow -- Generated over $830 million in the quarter; ended with a cash balance above $2.5 billion.
• Pro forma M&A liquidity -- "Pro forma for the announced acquisitions, we have significant M&A firepower and capacity remaining, approaching $10 billion."
• Full-year revenue guidance (midpoint) -- $9.94 billion (up about 13%), with market channel assumptions of high single-digit to mid-teens commercial OEM growth, high single-digit commercial aftermarket growth, and mid- to high-single-digit defense growth.
• Full-year EBITDA as defined guidance (midpoint) -- $5.21 billion (up approximately 9%), with expected margin near 52.4%.
• Adjusted EPS guidance (midpoint) -- $38.38 projected for the fiscal year.
• Free cash flow -- Guidance unchanged at approximately $2.4 billion for the year; Q1 free cash flow reported just under $900 million.
• Net working capital -- Consumed about $30 million in Q1, with full-year expectations in line with historical percentages of sales.
• Capital allocation priorities -- "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." Paying down debt is a lesser priority at this stage.
• Net debt-to-EBITDA ratio -- 5.7x at quarter-end, down from 5.8x in the prior quarter, within the operational target range of 5x-7x.
• Acquisitions signed -- Stellant Systems ($960 million, $300 million revenue in 2025), Jet Parts Engineering, and Victor Sierra Aviation ($2.2 billion combined, $280 million revenue in 2025, both focused on proprietary aerospace aftermarket and PMA parts); all deals pending close and excluded from fiscal 2026 guidance.
• Share repurchases -- Over $100 million deployed for common stock repurchases in the quarter, aligned with historical return targets.
• POS at distributors -- Grew double digits on a percentage basis, while distribution inventory contraction provided a Q1 headwind of "a couple of percentage points."
• Key contract wins -- Chelton awarded multimillion-dollar antenna contract for Lockheed Martin C-130J program; IrvinGQ secured a $24 million U.S. Department of Defense deal for naval decoy systems with a four-year delivery horizon.
• Servotronics and Simmonds integration -- Ongoing, led by experienced executives, with early indications described as positive for both recent acquisitions.
• Management statement on PMA market share loss -- Co-COO Murphy said, "We see no material loss in this space from either USM or PMAs."
• Recent margin performance -- Q1 margin "Our EBITDA as defined margin was 52.4% in the quarter," aided by cost reductions and a favorable mix, with guidance incorporating what management called "a bit of conservatism."
• Mix headwind -- Approximately 0.5%-1% expected margin dilution in fiscal 2026 from OEM and defense mix.
• Debt structure -- 75% of the $30 billion gross debt is fixed through fiscal 2029, providing "plenty of protection at least in the immediate term."
• Acquisition margin dilution -- Management confirmed recent and pending deals are expected to produce approximately 2 percentage points of margin dilution, consistent with historical experience.

Summary

TransDigm Group (NYSE:TDG) reported 7.4% organic growth in the first quarter, with double-digit gains in both commercial OEM revenue and bookings. Three strategic acquisitions representing nearly $3.2 billion in purchase value and $580 million in annual revenue were signed but excluded from current guidance. Guidance for both full-year sales and EBITDA as defined was raised by $90 million and $60 million, respectively, reflecting higher expectations for demand across all channels. Management indicated significant available liquidity following the quarter’s results and recent acquisitions, while reiterating the company’s core capital allocation strategy and ongoing pursuit of additional M&A.

• Bookings outpaced sales in all key channels, setting up backlog support for revenue targets.
• Each announced acquisition is expected to close in the coming quarters, but margins from new PMA-focused businesses are not "model these as getting where -- anywhere close to the TransDigm margin level," according to Michael Lisman.
• Distribution inventory trends present near-term variability, but management expects this headwind to ease and potentially become a tailwind in subsequent quarters.
• Defense segment delivered evenly distributed growth, with robust international and domestic demand, and notable new contract wins in advanced systems and naval defense applications.
• The company’s fixed debt coverage and net debt-to-EBITDA position preserve flexibility for further acquisitions without near-term balance sheet risk.

Industry glossary

• PMA (Parts Manufacturer Approval): Federal Aviation Administration (FAA) certification allowing companies to manufacture and sell replacement or modification aircraft parts.
• USM (Used Serviceable Material): Components that have previously been in service and are resold for reuse, typically in aircraft maintenance or repair.
• POS (Point of Sale) at distributors: The rate at which parts are sold from distributors to end customers, used as an indicator of underlying demand.
• CAM (Commercial Aftermarket): TransDigm’s internal term for sales of parts and services to support aircraft in operation as opposed to original equipment manufacturers (OEM).
• Book-to-bill ratio: A measure of bookings (orders received) compared to sales (product shipped), with a ratio>1 indicating strong order momentum.

Full Conference Call Transcript

Michael 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 '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 has 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 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 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. 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. 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 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 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 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. 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 Stellant, 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 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 '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.

Patrick Murphy: 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 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% 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 uneven 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 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 lumpy. 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 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. 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 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 Simmonds Precision.

Both integrations are being led by experienced EVPs, 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 be 2 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.

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.

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 and liquidity. In the first quarter, 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, as we traditionally define as EBITDA less 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 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 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 Simmonds 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 Jaimie, our Director of Investor Relations.

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

Ellen Page: 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?

Michael Lisman: 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.

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

Myles Walton: 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 [ fallen short of ] 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?

Michael Lisman: Sure. So a couple of things on the POS point. We do, through the POS channel weighed 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 CAM 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?

Patrick Murphy: Yes. I mean one of the -- we see that's a 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 are. Biz jet is 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.

Michael Lisman: And all of the submarkets were -- when you strip out the business yet, which was obviously at 1% and dug 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.

Myles Walton: 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 Simmonds' significant growth underlying year-on-year, and that's what's driving most of that differential?

Sarah Wynne: Yes. Myles, this is Sarah. I'll take that one. Yes, 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.

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

Gavin Parsons: 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?

Michael Lisman: 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. You 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, 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 what -- the point we were trying to raise in the prepared comments.

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

Michael Lisman: 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.

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

Noah Poponak: 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?

Michael Lisman: 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 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 CAM growth, we look at a rolling 12-month average stat. 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, it 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. This 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.

Noah Poponak: 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?

Michael Lisman: 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 contracting a bit.

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

Michael Lisman: 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.

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

Scott Mikus: 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-ing your OEM parts, because you could then retaliate in PMA or DER their parts as well?

Michael Lisman: 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.

Scott Mikus: 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?

Michael Lisman: Potentially, but our business 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.

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

Robert Stallard: Just a couple for me. 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?

Michael Lisman: 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. We think we paid fair prices, but nothing that was too high given the valuation environment we're in today.

Robert Stallard: And on the pricing?

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

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

Scott Deuschle: 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?

Patrick Murphy: 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, those are 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.

Scott Deuschle: 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 there? Or can it all just be done by the typical TransDigm playbook of running them as their own entities?

Michael Lisman: 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.

Operator: Your next question comes from the line of Ronald Epstein with Bank of America.

Jordan Lyonnais: This is Jordan Lyonnais on 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?

Michael Lisman: That's not necessarily how we looked at it in terms of overall TransDigm. Again, we footed 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 footing 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.

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

Gautam Khanna: 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?

Michael Lisman: 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 the TransDigm level.

Gautam Khanna: 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?

Michael Lisman: 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 they've done, we know it, obviously through our 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.

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

Michael Lisman: 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.

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

Kenneth Herbert: 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?

Patrick Murphy: 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 bleed 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.

Kenneth Herbert: 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?

Patrick Murphy: 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.

Michael Lisman: 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.

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

Seth Seifman: 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 Simmonds in there for more or less the entire quarter and margin usually moved up through the year. Is there -- other than conservatism? Is there anything to be aware of regarding why that margin wouldn't ascend through the year?

Michael Lisman: 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 here on the margins included too. And we'll aim to be there.

Seth Seifman: 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?

Michael Lisman: 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 can expect something like that with these 3 new op units as well.

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

Kristine Liwag: 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 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.

Michael Lisman: 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 like and 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 mom and pop 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.

Kristine Liwag: 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?

Michael Lisman: 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, Kristine. 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.

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

Jaimie Stemen: 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.

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

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