Good day, and thank you for standing by. Welcome to the Q3 2025 TransDigm Group Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Jaimie Stemen, Director of Investor Relations. Please go ahead, ma'am.

Thank you, and welcome to TransDigm's Fiscal 2025 Third Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein; Co-Chief Operating Officer, Mike Lisman; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Joel Reiss. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I will now turn the call over to Kevin.

Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy, a few comments about the quarter and discuss our fiscal '25 outlook. Then Mike and Sarah will give additional color on the quarter. Before we get into the business of today, as I am nearing my retirement date of September 30, I wanted to briefly reiterate what a privilege it has been to serve as CEO of TransDigm over these past 7-plus years. TransDigm is an exceptional company, and it has been incredibly rewarding to witness its growth and the value it has created for shareholders. Mike is ready to take the helm as TransDigm's CEO, and I am confident the company will be in excellent hands under his leadership. Mike will do an outstanding job and continue delivering the kind of value that has long defined TransDigm's success. Additionally, I will remain an adviser to TransDigm to aid in any transition topics. Now moving on to the business of today. 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, specifically. 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…

Good morning, everyone. First, I'll start with an update on our capital allocation activities and priorities. In the past few months, we've signed up two M&A transactions: Servotronics and Simmonds. On July 1, we closed the acquisition of Servotronics for approximately $138 million in cash. Servotronics is a designer and manufacturer of servo valves for aerospace and defense applications. And then on June 30, we agreed to acquire the Simmonds Precision business from RTX Corporation for approximately $765 million in cash. Simmonds Precision is a designer and manufacturer of fuel and proximity sensing and structural health monitoring solutions for the aerospace and defense end markets. The business is expected to generate approximately $350 million in revenue for the 2025 calendar year. Both Servotronics and Simmonds Precision fit quite well with our existing portfolio of businesses. Regarding the current M&A activities in the pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsized range. We'll remain disciplined around our approach to M&A. 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. Fourth option, paying down debt seems unlikely at this time, though we do still take this into consideration. As always, we continue to closely monitor the credit markets and we'll be assessing opportunities to utilize leverage for general corporate purposes, which may include potential future acquisitions, share repurchases and dividends. Now moving on to 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 2024. That is assuming we own the same…

Thanks, Mike, and good morning, everyone. I'll recap the financial highlights for the third quarter and then provide some more information on the current guidance. First, on organic growth and liquidity. In the third quarter, our organic growth rate was 6.3%, driven by our commercial aftermarket and defense market channels, as Kevin and Mike have just discussed. On cash and liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes was about $715 million for the quarter, coming in at about $1.9 billion on a year-to-date basis. For the full fiscal year, our free cash flow guidance is unchanged. We continue to expect to generate free cash flow of approximately $2.3 billion in fiscal '25. Below that free cash flow line, an investment in net working capital consumed about $100 million for the quarter due to higher AR for our third quarter shipments and higher inventory planning for the fourth quarter. For the full year, we expect working capital to end roughly in line with historical levels as a percentage of sales. We ended the quarter with approximately $2.8 billion of cash on the balance sheet, and our net debt-to-EBITDA ratio was 4.9x, down from 5.1x at the end of last quarter, with approximately $800 million of the cash balance reserved for the anticipated closing of the Simmonds Precision acquisition. We are comfortable operating in the 5 to 7x net debt-to-EBITDA ratio range. And while we are currently sitting on the low end of this range, our go-forward strategy of capital deployment has not changed, and we continue to seek opportunities for providing value to our shareholders through our leverage strategy. Our EBITDA to interest expense coverage ratio ended the quarter at 3.3x, which provides us with comfortable cushion versus our target…

[Operator Instructions] Our first question is going to come from the line of David Strauss with Barclays.

Great. Congrats, Kevin, and best of luck in whatever comes next. Just want to ask about the, I guess, the aftermarket in the quarter and going forward. So I think you had talked about over in Paris that the aftermarket was progressing pretty well. I don't know if -- did you see maybe a dropoff in the last couple of weeks of the quarter that you weren't anticipating? That's the first question. And then the second question, you talked about the aftermarket basically being where you would expect it to be based on where flight hours are today. But if you look at your aftermarket growth relative to your peers over the last, call it, year, 1.5 years, you've trailed by a fair amount. Would you expect to get back to an industry kind of average growth rate on the aftermarket going forward?

Dave, it's Mike. I'll take this one. So our commercial aftermarket growth is really not all that different from what we expected at the start of the year. I think we said coming out of COVID that the growth rate in commercial aftermarket would moderate. If you take the guidance for the year, which is for growth of high single-digit to low double-digit, then consider takeoffs and landings growth of what's being seen of about 3% to 4%, we're about where we should be in terms of growth given the product mix we have. We're sitting nicely above the pre-COVID volume levels overall in the commercial aftermarket, quite a bit above the pre-COVID volume levels. I think as you know, you mentioned the peers. We weighed a bit less toward engine than some of our peers. Engine for us was very strong this quarter as well into the double digits on a percentage basis. We just weighed a bit less there than some of the peer group that I'm sure you follow. And as we always say on commercial aftermarket with regard to the specific results for this quarter, it could be a bit lumpy from time to time on a quarterly basis. But the guidance for the year is still high single digits to low double digits. And as we sit here today, we feel really good about hitting that. With regard to where it will go for next year, we'll give the guidance on the November call as we always do. We don't want to get -- we're going through the planning process right now with our operating units. So we'll do that on the November call as we always do.

Okay. And do you think, Mike, with having a little bit less engine exposure despite that, would you expect to kind of recouple on the aftermarket relative to your peers? Or do you think that continues to kind of weigh on your aftermarket growth going forward relative to your peers?

It's hard to say based on where the engine stuff goes in the next 6, 9, 12 months. But we obviously know where the flight should go given current economic conditions, and we expect continued growth from commercial aftermarket going forward. But I don't want to get into specifics just on how it will compare to the peers because we don't have that level of forecasting accuracy and precision. We're not quite that smart.

Our next question is going to come from the line of Noah Poponak with Goldman Sachs.

Congrats on the promotions and Kevin on your career, and thanks for all the time you spent with us.

Absolutely.

I guess just following -- staying on aftermarket, reiterating the full year high single to low double implies that the fourth quarter growth rate is a significant acceleration versus the first 9 months of the year. Do you have visibility into that? Or was that more just there's only one quarter left in the year and you just kind of didn't want to move everything and the new revenue falls in the old range? And then on the original equipment side, I guess, should we expect this to kind of snap back at some point because you'll have to link up to the actual production rates, which you're under at the moment, plus you'll have these very easy compares such that the growth rate should be quite high in 2026?

Yes. So I'll take the aftermarket first one. Noah, I think in the year-to-date period, as you can see in the slides, we're up about 10% year-to-date through the third quarter. So we saw something a bit in Q3 at 6%, that's lower than what we saw in the first 2 quarters of the year. But we are sitting right in the middle of the guidance range. And as we sit here today, we feel good about the high single- digit to low double-digit percentage range. Aftermarket, as you know, commercial aftermarket for us, it's pretty high on the book and ship. So you don't get a ton of forecasting visibility because a lot of it ships out in the same quarter. But as we sit here today, based on what we're seeing, we feel good about the guidance for the year and especially in light of what's been achieved year-to-date of up 10%. Second, on the commercial OEM point and the destocking that Kevin and I mentioned in the prepared comments. This should be temporary, short-lived. We don't expect a big prolonged headwind here. You can see that in the guidance for today, which implies in commercial OEM that Q4 returns to positive growth. I think in terms of what drives this, we have some customers who build up a bit of inventory, placed some orders with us, which we honored and shipped, obviously, and those were running a bit ahead of the rates where Boeing and Airbus were. But as you said, we are approaching and lapping some easier comps coming up. So again, it should be transitory, temporary with a return to growth coming up.

Do you have visibility into the length of inventory that's still in the channel? Or is it too hard to see and count that?

Not great visibility because of how our customers -- a lot of them are -- we're not shipping in the majority of instances directly to Boeing and Airbus. It goes through a sub-tier. So you don't get great visibility the whole way through the channel, and some of the customers can realign backlog. But again, we don't expect a material headwind here going forward.

Our next question is going to come from the line of Myles Walton with Wolfe.

Best wishes, Kevin, in retirement. Mike, on the aftermarket, was there a sequential decline and it's unusual, I think, for your third quarter to see that. And what are the distributor point-of-sales trends looking like?

Yes. The distributor POS, I'll take that one first, outpaced the commercial aftermarket growth rate. We were up in the double digits on a percentage basis. That tracks a bit ahead, has been tracking a bit ahead. We weighed a bit more towards engine through there, but it was above the 6% we posted for commercial aftermarket overall. And then in terms of the sequential trend for commercial aftermarket, it was about flat Q2 to Q3.

Okay. And then maybe on just the longer-term comment you made about the last 4 years, if you track it relative to volume and flight activity is about where you'd end up. Did you, in any way, adjust that for the age of the aircraft that are obviously older now proportionally and out of warranty more proportionately? Or is that just a volume of volume basis?

That's volume for volume basis. We don't slice and dice it quite that closely. The fleet is obviously weighted up 1.5 years or so in terms of age, but we didn't adjust for that.

Our next question is going to come from the line of Sheila Kahyaoglu with Jefferies.

Congratulations again to all the promotions. And Kevin, thank you for a great career. Maybe if I could follow up on the questions on OE and aftermarket once again. So on OE, the destocking, was it across both narrow-bodies and wide-bodies? And does it just clear up next quarter as Boeing's deliveries and production more closely align to each other? Is that all as simple as it is?

Well, if you look at where the rates are currently at both Boeing and Airbus versus where they expect them to be at the start of the year, it is across both narrow-bodies and wide-bodies at the OEMs. So I think in terms of what likely translated back to us through the channel, it was a bit of both as well on that front. And like we said, this should be something that's transitory. We expect to return, as you can see from the implied -- what's implied by the guidance today, a return to positive growth in Q4.

Got it. And then maybe if you could -- I think you mentioned freight and interiors are ahead on the aftermarket side. Can you give a little bit of color there? Is it just interiors lapping easy comps? And any thoughts on freight and cargo activity given tariffs?

Sure. Freight was up nicely for us into the double digits on a percentage basis, nicely ahead of where CTK growth has been in kind of the low single digits. So that's good to see. The interiors business was up in excess of freight well into the double digits, which was good to see as well. That's been the one subsegment for us of commercial aftermarket where it lends itself a bit more probably towards discretionary spend, but some of the airlines now have been taking on a bit more of the interior refurb work. So we've seen a nice uptick there on the interior side.

Our next question is going to come from the line of Ronald Epstein with BofA.

Yes, Kevin, you'll be missed. So congrats on the same. On the quarter, can we kind of -- we've peeled back the onion a lot on kind of the aftermarket stuff. But how about your own supply chain? What are you seeing there? Is that flowing better? Are there any bottlenecks there? And then I have one quick follow-up after that.

I'd say on the supply chain, it continues to get better, not quite back to maybe how things were hummed, if you rewinded the clock all the way back 7 years to 2018, 2019. Not quite that good, but a heck of a lot better than we were 12 months ago, 24 months ago and continues to get better. The common pain points are the ones I'm sure you hear about from a lot of the folks you cover. Castings still are an issue. Certain electronic components are as well, but it all continues to get better and has over the course of this year.

Got it. And then -- and this is sort of a tricky one to answer, but I'll try to frame it in a way. Depending how long the St. Louis strike is, how much exposure do you have there? If this one ends up being 60 days like the one in Seattle, is that at all a headwind for you guys? Is it just nothing? I mean how should we think about that?

Well, it is a headwind, albeit a lot smaller than you would expect from like a Boeing strike on the commercial OEM side, just given our defense OEM exposure. You guys know the splits within that defense bucket, rough justice between aftermarket and OEM and then what Boeing comprises assuming were something like market weighted. So it is a headwind. There's no denying that, but a much, much smaller one than the Boeing Seattle area strike was.

Got it. And if it just ends up being, I don't know, 2 or 3 weeks, it's even less so, right? I mean just an obvious statement. But is there like a cutoff where it's like it's gone long enough, it's like we should all worry about it or I don't know?

No, it's hard to say on the impact on this fiscal year. We'll see how long it goes. Obviously, we're hoping for a quick resolution here, just so it doesn't disrupt any supply chains too much.

Our next question will come from the line of Scott Mikus with Melius Research.

Congrats, Kevin. Mike, Kevin, Sarah, a quick question on M&A. I mean you talked about the higher engine content operating units having better growth. So just given that the legacy engines are flying longer than expected and the expected future growth on both the LEAP and GTF, do you maybe prioritize engine content when it comes to M&A?

I don't think so. We can only swing at the pitches that are thrown to us. As we've said many times before, and all things being equal, maybe if you had two side-by-side, engine would look better. But you don't get that opportunity necessarily. You guys know how we target the M&A stuff, 20% IRR, focused on components, same as it's always been. So you don't necessarily get to grocery shop and pick the exact type of components you want off the shelf. We can only swing at the pitches that are thrown.

Okay. And then this seems kind of like a crazy question to ask, but we're seeing publicly traded aftermarket companies trading at EV to EBITDA multiples in the mid-20s, sometimes above 30. Your stock is now trading in the low 20s. So is selling assets and buying back your own stock on the table?

I think we're very happy to own all the businesses we own. We've got 52 great operating units, look forward to making it 53. And I don't want to comment too much just on other valuations of other companies. That's your guys' job, I think.

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

Congrats, Mike and Kevin and to all those that were given new roles. I was wondering if inside the OE numbers, is there anything you can speak to where -- if you could categorize certain products that are being destocked more heavily than others? Is there any thread to that, that explains it? And then on the aftermarket side, also wondering, within passenger, where the pockets of relative weakness are greatest? And if you're seeing any change in customer buying behavior?

So I'll take the OEM one first. We don't get great data by product on the OEM side in terms of where the destocks are coming from. I'd say it's generally just pretty consistent across the group. It wasn't disproportionately weighted to any one product area or any select group of operating units more so than any others. And then on the aftermarket side, I would say it was a similar answer. We don't get great geographic data through our distribution partners or even from our own operating units all the time just in terms of geographic splits. But it was generally a little bit of pullback across the group with the exception being obviously engine, which nicely outpaced the rest of our groups. Interiors were up as well. Where we saw a bit of underperformance was on that non-engine passenger segment, as I mentioned in my commentary and the growth, that's the biggest bucket within commercial aftermarket. That's where the growth was a little bit more muted this quarter. But again, nothing that we -- as we look out here and forecast through the balance of the year, nothing that we see persisting for too, too long.

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

Congratulations, Kevin and Mike again. Maybe just to pivot over to the defense business. Mike, can you provide any more color on bookings that you saw? You called out specifically sort of better growth on the OEM side. But what are you seeing in bookings in the OEM business? And on your short-cycle defense aftermarket piece, maybe that lagged a little bit, but how did that look as well in the quarter?

Defense bookings were very strong. We look at all the bookings. We don't ever look at just 1 quarter because you can get lumpiness across all the end markets. But year-to-date, defense bookings are up really nicely, well in excess of the shipments, which obviously indicates pretty good growth for next fiscal year. I'd say it's pretty broadly evenly distributed across our operating units. We've seen growth across the group. A couple of units stand out in particular, but generally pretty evenly distributed. So really nice growth on the defense side.

And on the shorter cycle aftermarket, anything on defense in particular in this maybe third quarter as it relates to second quarter or any areas where you maybe saw better growth on that piece?

No, nothing really stood out in particular on the defense aftermarket side. It can be a bit noisy. As we mentioned, the outlays, I think this quarter from U.S. DoD slowed a little bit. It was kind of high single digits area to something like in the low single digits area. That takes a while to trickle through. Sometimes it's just noise. But no standout performers on the defense aftermarket side, pretty broadly distributed again, just like the OEM.

Our next question comes from the line of Kristine Liwag with Morgan Stanley.

Kevin, congrats on your well-deserved retirement, and congrats to everyone's promotions. I guess you've really built an operating business that's an envy of all in the industry, especially with your record margins. I guess, can you give us an update regarding the competitive landscape? There had been previously attempts from the OEMs to kind of create second sourcing for some of your products. Like how successful has that been? And also, historically, you've been fairly defensive versus PMAs, but any sort of update on what you're seeing in that landscape would be really helpful.

It's Mike, Kristine. I'll take that one. I would say, we've not really seen any material changes here on the OEM side or the PMA side from second sources. At the operating unit level, this is something our teams are always tracking the FAA database and other things just to make sure we're not losing share. And in the aggregate, we haven't seen any material headwind. I think on the PMA side, the reason that is, is as we've said before, generally, we just got slightly lower price points for most of our products. Some of them are consumable, not all of them, but many of them are, and that just lends itself to, I think, less PMA competition from time to time, something might pop up, but really not anything material at the TransDigm level. Similar story on the OEM second sourcing side. But we're always monitoring it like crazy. We have our op units. We tell them they should be paranoid about this. We don't want to lose volume ever, aftermarket or OEM.

Super helpful color. And maybe following up on Simmonds, I mean, being able to buy this from RTX, can you talk -- give a little bit more color regarding the bidding process? And when you look at the big OEMs, a lot of them have really rolled up these assets in the past 20 years. Do you see more opportunities on picking off pieces of portfolio like that? And ultimately, I mean, the decision to sell a fairly sizable business to you, TransDigm when historically, there's been a less favorable narrative on your business model from the customer side. How do we square the circle here? I mean, very surprised. And by the way, congratulations on that deal. But should we see more of this? And how did that all play out? Sorry, a lot of questions there, but any color would be helpful.

We're very happy to have signed up the acquisition of Simmonds and partnered work with RTX on the carve-out of Simmonds Precision from RTX. I can't comment too much specifically on the auction process. We don't get that many details with regard to how the process played out, but we're excited and happy to have won it. We look forward to getting the acquisition closed. We're working towards making that happen as quickly as we can. With regard to your broader comments about whether or not there could be more carve-outs of this type from businesses across the supply landscape in the A&D world. It's always hard to say and forecast what happens there. But if there's anything, I think we've realized in the last couple of years, and you know just from covering the space, the landscape is always shifting. There are folks who might be breaking up or spinning off divisions from time to time, and that creates opportunities for us as we just sit and try to deploy capital and buy more things. And I don't think that dynamic is going to end. That probably will continue for a couple of years to come. And you probably -- I'm sure you guys see that yourselves when you just think about some of the assets and businesses that have sold in the last couple of years. It's always shifting.

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

Mike, just to follow up on David's earlier question. The aftermarket growth has been softer than other airframe peers like Collins and Honeywell over the last 6 quarters or so. So I understand the point on not having the same growth as the engine companies. But again, it's also underpacing the airframe companies. So is there anything unique to TransDigm's portfolio you can point to that's driving that? Or would you just say, hey, this is natural lumpiness that's going to run its course and we'll recouple even with those of the airframes?

I think it's lumpiness. When you go back over the last 4 years coming out of COVID and just look at where we rallied and how we rallied and grew, we outgrew the peer group in the first early quarters coming out of the COVID rebound. And when we look at the volumes and where we sit currently versus takeoffs and landings, we are about where we should be, nicely up from the pre-COVID level. And when it comes to the comps and stuff to read across a couple of different percentage points, delta or changes in disparities and growth, that's kind of -- it's hard to splice and dice it quite that closely. But generally, over the span of the last 4 years as we sit here today and just look at takeoffs and landings, we're sitting where we should be.

Our last question is going to come from the line of João Santos with UBS. João Santos: So regarding margins, it improved again. Was this mostly driven by aftermarket business mix? Or are you seeing sustainable efficiency gains in other areas of the business as well? And if OE ramps faster now, do you see much margin headroom ahead? How do you see that?

Yes. Let me take. This is Sarah. I'll give you answer on the margins. Yes. So you can see, obviously, we increased our guidance for Q4, if you look at the margins, and this might be what you're asking is from Q3 to Q4. It looks like the margins decline. Obviously, we hope to be conservative with our margin guidance. We do have a mix on OEM coming into Q4. But like I say, we hope to be conservative on that.

And the OEM ramps up in Q4, obviously, that just weights the margin down slightly a bit versus aftermarket.

Thank you. And I would now like to hand the conference back over to Jaimie Stemen for closing remarks.

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

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