Good day, and thank you for standing by. Welcome to the Q4 2025 TransDigm Group Incorporated Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jamie Stiemick, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDigm's fiscal 2025 fourth Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Michael J. Lisman, Co-Chief Operating Officer, Joel Reiss, and Chief Financial Officer, Sarah L. Wynne. Also present for the call today is our Co-Chief Operating Officer, Patrick Murphy. Please visit our website at transgem.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 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 measure and applicable reconciliation. I will now turn the call over to Mike.

Good morning, and thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. Second, make a few comments about the quarter. And third, discuss our fiscal 2026 outlook. Then Joel and Sarah will give additional color on the quarter. To reiterate, we believe we are unique in the industry. In both the consistency of our strategy in both good times and bad as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy. First, we own and operate proprietary air businesses with significant aftermarket content. Second, we utilize a simple, well-proven value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocations are a key part of our value creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we closed out the year with a good quarter. During the fourth quarter, we saw healthy growth in the revenue for our commercial aftermarket channel, robust growth in our defense market channel, and finally, as expected, our commercial…

Good morning, everyone. I'll start with our typical review of our results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2024. That is assuming we own the same mix of businesses in both periods. The market discussion excludes the recent acquisition of Simmons Precision Products. In the commercial market, we'll split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased 7% in Q4 and was down 1% for the full year fiscal 2025 compared with the prior year periods. As we anticipated, commercial OEM revenue in the fourth quarter returned to positive growth as we supported higher build rates. However, overall, the commercial OEM revenue performance for the full year was softer than we originally expected for fiscal 2025. The year-over-year decline in commercial OEM revenue was primarily driven by the negative impact of OEM build rates that resulted from the Boeing strike and production ramp-up challenges at Airbus. Bookings in the quarter were up compared to the same prior year period. Commercial transport bookings growth was up over 20% for the fourth quarter. The bookings levels for OEM commercial transport show that the market is recovering from the various disruptions seen over the past year or so. But as we have said before, this recovery could be a bit bumpy and uneven on a quarterly basis at the OEMs and our Tier one and Tier two customers rightsize inventory levels. We are encouraged by the progress of the 737 MAX production line as well as the FAA's approval for Boeing to increase its production rate. Our operating units are well positioned to support the higher production rates as they occur. The commercial OEM guidance we are giving today contains…

Thanks, Joel, and good morning, everyone. I'm going to review a few additional financial matters for fiscal 2025 and then our expectations for fiscal 2026. First, a few additional fiscal 2025 data points. On organic growth, taxes, and liquidity. In the fourth quarter, our organic growth rate was approximately 11% and all market channels contributed to this growth as previously discussed by Mike and Joel. On taxes, at GAAP, adjusted tax rates finished the year within a slightly better than their expected ranges. On cash and liquidity, free cash flow which we traditionally define as EBITDA less cash interest payments, CapEx, and cash taxes, was roughly $2.4 billion for the year, slightly above our expected estimate of $2.3 billion. Below that free cash flow line, investment of networking capital consumed approximately $330 million on a full-year basis, and the final net working capital ended the year roughly in line with historical levels as a percentage of sales. We ended the year with approximately $2.8 billion of cash on the balance sheet or approximately $2 billion when pro forma'd for the completion of the Simmons acquisition. At year-end, our net debt to EBITDA ratio was 5.8 times, up from the 5.9x at the end of last quarter after returning capital to our shareholders via a $90 per share dividend. While we don't target a specific amount of cash that we like to have on hand, we have sufficient capital available through both cash on hand and as well as incremental debt capacity to support all potential M&A in the pipeline. Over the course of fiscal 2025, we did a fair bit of proactive financial. We pushed out our nearest term maturities 2027 to 2028. Additionally, we reduced the interest rate on two of our loans. We also raised $5 billion to…

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

Thank you. And our first question comes from Scott Mikus of Melius Research. Your line is open.

Good morning. Good morning, Scott. Good morning. Mike, when Kevin was CEO, the company opened up the M&A aperture by expanding into test and measurement businesses. Although they were still primarily aerospace-related. You're still early in your career and could be leading TransDigm for quite a while. Is there a possibility that under your tenure, TransDigm takes a more serious look at acquisitions outside of aerospace and defense? Or you're still comfortable that you can hit your 20% IRR target? So we did two branches outside of the core leg aerospace hardware business, under Kevin, CalSpan and Raptor. Both its early innings, but it seems so far so good. So we're looking for additional things potentially in that space as they experience the dates generally been a positive one. Over time, well, let's focus on today. As we sit here today, in terms of what our M&A group, what I'm spending time on from an M&A standpoint, it's not branched out materially from anything that you'd expect to see. Which is leg is the similar to what we've always targeted in the past, aerospace and defense components businesses. That's where the vast majority of the focus is. In the fullness of time, could you continue to potentially branch out and look at things under the umbrella, similar to test and measurement that aren't right down traditionally our fairway. That could be the case, but we're not there yet. As we sit here today, the focus is more of where it's always been. Okay. And then you talked about the strengths in orders. In the aftermarket, were there any noticeable trends among the four submarkets there, whether it's freight interior, bizjet, helicopter, passenger? Just any pockets of strength or pockets of weakness you saw? This is Joel. I'll take that. I don't think we've seen any dramatic changes we got out of the quarter. Certainly, business, for interiors picked up more this year. It kinda lagged the year before. As we highlighted in the comments, engine has been strong for us all year as it was last year. And, I think freight, struggled the year before also, was pretty solid for us this year. Alright. Thank you. Thank you.

And our next question comes from Robert Stallard of Vertical Research. Your line is open.

Thanks so much. Good morning. Morning. Just a couple from me. On the 2026 guidance. First of all, on defense, that's a big slowdown for '26 versus what you've recently experienced for 2025. So I wondering if you could give some more clarity on that. And then on the aerospace aftermarket, are you assuming a normal level of TransDigm pricing as you move into '26? Thank you. So on the defense side, I've hopeful we're being conservative on it. We had good solid bookings last year and good growth across the various aspects of the company. Defense is lumpy for us, and so unlike the commercial aftermarket with relatively quick book and ship, a little bit less predictable on the defense side, so we're gonna generally be a little bit more conservative there. We've had two solid growth years in a row in defense, and think we like where we're sitting today. On the commercial aftermarket side, I think we're planning to make any change in how we approach pricing. Our goal is to offset the inflationary increases that we see and put a bit of real price on top of that. I'm not sure we're gonna just similar to what we've done in past years, not looking to make any change. That's great. Okay. Thank you very much. Thank you.

And our next question comes from Ken Herbert of RBCCM. Your line is open.

Yes. Hi. Good morning. Mike and Sarah, appreciate the comments on the margin dilution from the recent acquisitions. Two questions really. First, how do we think about the ability to get the recent acquisitions up to sort of TransDigm margins? Do they have that capability in and what's the time frame to think about that? And then second, just wanted to confirm excluding those, I think you've typically talked about sort of 50 to a 100 basis points of annual margin expansion. Is that what we would normally expect, obviously, aside from the dilution of the acquisitions? Yeah. Ted, it's Mike. I'll lead off, and then Sarah can chime in if I miss anything. If you exclude the two dilutive factors, the acquisitions and also the OEM mix shift, you do get at an underlying margin improvement trend for our base businesses that is squarely between the brackets of what you guys would expect of the percent, percent and a half kind of range. When you adjust those two things out. So we are seeing exactly the kind of margin improvement year over year we've come to expect and you've come to expect. With regard to the two acquisitions, Simmons and Servotronics, the margins came into the fold at a low level, but these are great products. We're very excited to own both businesses. In the fullness of time, we see nothing fundamentally different about these two businesses versus what we've acquired in the past that should prevent us from being able to march the margins upward. The exact timeline over which that happens is varied and obviously, it doesn't happen overnight. But there's nothing different about these businesses that should prevent us in the fullness of time from getting the margins up to where we like them to be. Great. Thanks, Mike. Thank you. Sure.

And our next question comes from Kristine Liwag of Morgan Stanley. Your line is open.

Hey, good morning, everyone. You guys touched on your contract award for the F-47. Was wondering, can you give more color on your content in this program and how does this compare to your content on other fighter programs, like the F-18, F-22, F-35? Look. I'm not sure that we can comment on how successful programs will be. Ultimately, the DOD awarded Boeing the fighter jet as the next generation, fighter. We take it seriously, and our teams have been actively working to win good content on the planes. Successful it'll be? I'm hopeful it'll be great. Exactly where it's gonna end up, we have no idea. Well, great. Well, I'll just on we've historically not disclosed which specific op units won which content and that level of detail. But it seems like it's gonna be a really good program for us. As Joel said in his prepared comments. Great. Well, thank you. I guess, like, you know, the origin of that question is just really understanding, you know, with the focus on your contracting styles and defense, you know, it's a positive surprise to know that you've been winning more contracts, like, for something like the F-47. So it's really more just to try to understand what your conversation with customers are like, you know, and kind of confirm that, you know, you're not in a no-fly zone type environment for new defense contracts? No. Absolutely not. Yeah. I think actually across the company, think we had more new business awards in the defense market last year than we did on the commercial side. We develop good solutions. But I think this is the key as customers come to us because we can generate product for them that solves a problem that they can't solve or we solve better than someone else. These are competitive awards. And, I think we like where we stand. We work to come up with good very good solutions that generate value for our customer. Thank you very much.

Thank you. And our next question comes from Myles Walton of Wolfe Research. Your line is open.

Thanks. Good morning. Was wondering if we could chat about the CapEx and headcount comments you made. CapEx looks like it's set to double over the last couple of years. And you mentioned some of the automation investment, but I guess how much of that is automation to facilitate better productivity versus higher output and is it more military or commercial? And the headcount, can you just clarify, are you saying flat headcount inclusive of the additional heads from Simmons, which closed after the quarter? So I'll take the latter part. Yeah. We're so we look at everything in this case on a pro forma basis. So adding the headcount in from Simmons as we kind of look out at the growth we expect to see for commercial and defense OEM during the year. We don't think we'll have to add. And so that's not that it's no one, but relatively few people. Across the company, and still handle the volume growth, the high single-digit to mid-teen growth within the commercial OEM and on the defense side. When it comes to the CapEx question, I know specifically which is defense and which is commercial. Our operating units look at projects depending on need and where we can get an excellent return. It ends up being a combination. Sometimes it's to handle more capacity. Sometimes it's a way to basically drive out cost. It's just capacity, though, we're typically not thinking of that as productivity. We ultimately should be able to do the work we're doing today, but with fewer people with higher yields that we have today, were to in-source work that potentially is being done on the outside. Okay. And just one quick follow-up on cap on cap flow. What is the working capital investment or source that you're expecting in 2026? Yeah. For '26, I'd expect similar to prior years, which is, as I'm percentage of sales, you know, around two two and a half, 3%, somewhere around there for next year. Okay. Thank you. Thank you.

And our next question comes from Sheila Kahyaoglu of Jefferies. Your line is open.

If I could ask on the commercial aftermarket. Mike, if you want, commercial aftermarket, 11% in the quarter. Accelerated from the 6% in Q3. So how much of that was an engine hold up whether it was at distributors or whatnot? And as we think about 26%, how do we think about passenger versus freight, engines, and interiors? So, you know, we do a bottoms up, you know, forecast each of our op units, you know, same kind of approach we've used in the past, our operating units, you know, look at this on a customer by customer basis. They try to get information around inventory and demand. And that basically builds up what becomes the guidance that we provide. You know, if I was looking at, like, the takeaways, not the guidance that we give them, but kind of the takeaways back. On the freight side, I think we continue to expect to see good steady growth, kind of what we saw this year, the available cargo tons were up, you know, in the 3% to 4% year. Per year. I think most folks are thinking that's gonna be the same. I mentioned interiors. Interiors, saw refurbs kinda kick in on the U.S. Regionals. I think the general feedback that we're hearing is that we expect that to continue. But with Asia and the Middle East becoming a bigger piece of reefer, Engines have had two solid years of growth. I think our teams are optimistic but probably a bit conservative around how that's gonna continue to go. On the passenger side, we had a strong 24 and, obviously, a bit weaker 25. We think that'll rebound a lot. That was on the avionic side and don't see a reason that won't continue. And biz jet, I think we expect kinda more of the same. Perfect. Awesome. Thank you very much.

Thank you. And our next question comes from Gavin Parsons of UBS. Your line is open.

Thanks guys. Good morning. Good morning. If you look at your OEM kinda underlying volume, you know, the organic basis revenue is up kinda 15, 20% from 2019. But do you feel like on a volume basis, you're pretty aligned with OEMs at this point? You're talking about the commercial OEM market are realigned with their build rates? So no more inventory destock. Is that the fundamental issue you're trying to get at, Kevin? Yeah. Thanks. Okay. I think as we sit here today, Joel can chime in. I don't see much headwind coming in the way of further inventory destock as we said last quarter, we expected this to be a temporary phenomenon that lasted for a quarter or two. We saw the blip last quarter. We don't expect much more of a headwind coming into this year. So the growth rate in commercial OEM side should be sort of what we gave in the guidance, high single-digit to mid double-digit. We put probably a wider bracket around that than you typically would do mainly just because of the way the ramp-up has been challenged so far to date. We always try to be appropriately conservative, and we've been stung a bit in the last two years by unforeseen events, and we don't wanna get out over our skis here on the commercial OEM side this year. On the 200 basis points of M&A dilution, maybe you can correct my math here, but it seems like you're assuming very little margin contribution from M&A? Do you mean margin contribution by M&A? You're talking about Well, to get to 200 basis points. Yeah. Yeah. We are we are expecting very low lower than lower than our average acquisition margins coming in for those two. Okay. Appreciate it. Yep. I think that's where Gavin, they're just they're each coming into the fold as we said in the prepared remarks that probably a lower margin than you'd typically see of the average TransDigm acquisition. But in the fullness of time, we think these businesses have great potential and that's gonna improve and ramp up significantly. Got it. Thank you. Thank you.

Our next question comes from Seth Seifman of JPMorgan. Your line is open.

Thanks very much and good morning. Morning. So I guess following up on the issue of underlying margin expansion, and the mix headwinds you talked about for this year that limit the underlying margin expansion. Given increasing production rates for over the next several years, it seems like that's a headwind to the underlying margin expansion that's going to persist or potentially accelerate. And so at least for the next couple of years in this decade, the underlying margin expansion potential in the business is limited by a differential between OE and aftermarket growth rates as it is this year. I wouldn't say it's limited. I think we still expect to get year-over-year margin improvement. If historic we've kind of bounded it in the percent, percent and a half range, We'll see where things go with the OEM ramp-up here and how that compares to future commercial aftermarket growth as well as what happens on the defense side. But the margin should continue to improve year over year going forward. Depending on the OEM if it continues to outgrow aftermarket and defense, you could see a bit of a headwind, but we're talking about something that usually amounts to a couple tenths of a point. It's not something that swings you negatively mature so much so that year-over-year margin improvement is not seen. We should still see it to be crystal clear. Great. Thanks. And just a quick clarification. I think you mentioned earlier in the call, $300 million of other small tuck-in M&A. Is that extent stuff that remains organic? Or is there an inorganic component of the sales that's coming in '26 from that additional M&A? It's a mix across a range of our op units. It's really a mixed bag of different op units that are doing small tuck-in bulk on acquisitions for their specific businesses. Some are at XDENT, but several of them are not. And these we basically fold in as part of our planning process. They execute the deals during the year. Okay. Very good. Thanks very much.

Thank you. And our next question comes from Scott Deuschle of Deutsche Bank. Your line is open.

Hey, good morning. Mike, can you share any detail on the average contract duration at Simmons? Just trying to get a sense for the timing at which future pricing actions layer into results. Yeah. I still think we're in the early innings of what this is. I think they've got kind of typical range of contracts that you'd expect to see over the bulk of our business which when you look at it, it looks businesses, some relatively short and some life of program. I don't think this dramatically different from we'd expect to see from any acquisition we do. Okay. And Joel, just to follow-up on Myles' question, we expect this decoupling of sales growth from headcount growth to continue beyond 26? You make additional automation investments, or should those realign more closely? As we exit 26? Thank you. I think we're hopeful that if we continue to drive automation projects, we're still in the early days of doing artificial intelligence within our within the office side. Think we're optimistic that we can hold headcount certainly below the rate that our sales increase goes. How successful we are. I mean, our operating unit team's focused on productivity is one of our three value drivers. And they work hard to drive our sales per employee higher each year. So they certainly are focused on how to best do that. Thank you. Thank you.

And our next question comes from Gautam Khanna of TD Cowen. Your line is open.

Yes, thanks. Good morning, guys. Morning. I just had two quick ones. One, I was curious if you could give us an update on the sell-in versus sell-through, how the distributors that you own, what they saw on aftermarket. I may have missed it. And then secondly, I just wanted to get your broader thoughts on the war secretary acquisition reform speech that he gave last week how is that at all? Do you think it would impact TransDigm? Thank you. Yes. So on the distribution point of sale, it was up more than our underlying commercial aftermarket. A couple reasons. Within our point of sale and distribution, it does overweight a little bit more to engine than base TransDigm. So you kind of reset it, the numbers would look about the same. It's just the mix of what the products are. We also, had allowed inventory to drop a bit within the distribution channel the end. We finished the year with about a half a year less of inventory in terms of half a month. Sorry, of less of inventory at the channel at the September than where we were the previous year. That was probably a one or two-point impact to CAM last year. When it comes to the secretary's comments, I think we're optimistic. You know, we approach defense as a commercial manufacturer. We invest the time and effort the money to develop new products. To qualify products, We bid them as firm fixed price contracts where we take the risk if something goes on. So I think we think we're well positioned and hopeful similar to what we've done this year with other defense wins is that have the ability to develop good solutions for customers and generate real value. I think as you guys know, we're not doing the big cost plus work here. We're fast, nimble at the op unit level. Easy to work with, and mostly selling commercial type solutions. Yeah. Appreciate the answer. Thank you very much, Gus. Thanks. Thank you.

And our next question comes from Ronald Epstein of Bank of America. Your line is open.

Hey, yeah. Thanks, Two. A follow-up. The first one, yes, just following up on the last question, Gautam's question, and also Kristine's I think trying to get at so if you can say, so F-47 is the first major new program we've seen in a while. Woods, if you can answer this. Was your experience, you know, bidding for the work on it any different than it was on any previous programs? I mean, I think the fear out there is, and you probably understand this, that somehow that the DOD is doing things that are gonna make things somehow less profitable or something like that. Mean, the bidding process sort of you would expect it? Or was it somehow different than it was in the past? I think the way our obviously, we have a multitude of op units who are all participating in awards like this. And frequently interact with the primes and others. On the defense side. And the process was similar to what we've seen in the past and didn't play out with any big changes versus what we'd expect. Alright. Good to know. Good to know. And then maybe just as a follow-on and your people have been talking about this. You know, there is a case out there that somehow that TransDigm just won't grow their aftermarket business like maybe some peers will because guys don't have enough engine exposure, that somehow you're too big to do M&A, and have it be meaningful. How would you respond to that? Mean, someone confronted you with that and said, You know what? You guys are just getting too big, and, you know, nothing's really gonna move the needle. That is sort of the bear case. Right? How would you respond to that? I think we're the type who just puts our heads down and goes out and finds ways to create value. That's it. The proof's in the pudding. The results we drive here as a team and not hand waving responses. We'll just put our heads down and go to work. Got it. Got it. And if I may, is it safe to infer from that, like, if an environment you got into that something just wasn't working you'd make some changes. Right? Well, we're always we're gonna do we're gonna operate the business to go and create value and do what we can to drive prudent long-term value for our shareholders with whom we're closely aligned. Got it. Cool. Alright. Thank you very much. Thank you.

And our last comes from João Santos of Stifel. Your line is open. João Santos: Hey, good morning. Thanks for fitting me in. Just, just on defense. On defense, just a lot of talk about new missile programs and drones. You guys have highlighted your good positions on the Predator and the Patriot. Just know, where do you fit on some of these newer, lower-cost programs? Is that an opportunity for TransDigm recognizing you're not gonna be on the lowest, smallest end, but how about some of these new programs on the medium size and cost range? Thank you very much. Yeah. Wanna provide any specifics because I don't know what we can or can't say on some of these similar like the F-47. We've got some really solid wins. On some of the programs you're referring to. Again, I mean, they're looking for good, highly engineered products that solve problems. That provide features that other folks can't. We have a lot of engineers I mean, roughly what 15% of our entire corporation are on the engineering side, designing and developing products. So I think we've got some really solid wins that hopefully we'll be able to talk to in upcoming quarters and some of the programs you were referring to. So I think we like our opportunities there. Thank you. Thank you.

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

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

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