TransDigm (TDG) Q4 2026 Earnings Call Transcript

DATE

Tuesday, Nov. 10, 2026

CALL PARTICIPANTS

• Director of Investor Relations - Mary Hartman
• Chief Executive Officer - Michael Lisman
• Chief Operating Officer - Joel Reiss
• Chief Financial Officer - Sarah Wynne
• Co-Chief Operating Officer - Patrick Murphy

TAKEAWAYS

• Net Sales -- $2,988 million for the fourth quarter, an increase of 23% driven by double-digit growth across three major end markets.
• Adjusted EPS -- $12.44 for the fourth quarter, representing 15% growth compared to $10.82 in the prior year.
• Fiscal 2027 Revenue Guidance -- $11.95 billion to $12.15 billion, reflecting an anticipated 14% increase at the midpoint.
• EBITDA As Defined -- $1,583 million for the quarter, up 20% from $1,320 million in the prior year quarter.
• EBITDA As Defined Margin -- 53% for the fourth quarter, which includes approximately 2 percentage points of dilution from recent acquisitions.
• Fiscal 2027 EBITDA As Defined Guidance -- $6.195 billion to $6.345 billion, with an expected margin of approximately 52.0%.
• M&A Capital Deployment -- $4.4 billion in fiscal 2026, used for four stand-alone acquisitions and 12 bolt-on acquisitions.
• Share Repurchases -- $2.75 billion for the full fiscal year, involving the repurchase of 2.3 million shares at an average price of $1,187 per share.
• Quarterly Share Repurchases -- $943 million in the fourth quarter, consisting of 820,000 shares at an average price of $1,150.
• Commercial OEM Revenue -- 15% growth for the fourth quarter and full year, supported by increased production rates at Boeing and Airbus.
• Commercial Aftermarket Revenue -- 17% growth in the fourth quarter, driven by a 16% increase in commercial transport and a 20% rise in the business jet submarket.
• Defense Market Revenue -- 12% growth in the fourth quarter, reflecting consistently strong sales and the building of a healthy backlog.
• Fiscal 2027 CapEx Guidance -- $380 million, an increase of $100 million from fiscal 2026 to support new business and productivity projects.
• Net Interest Expense Guidance -- $2.255 billion for fiscal 2027, based on a weighted average interest rate of approximately 6.5%.
• Debt Hedging -- 75% of the $35 billion gross debt is fixed or hedged through fiscal 2029.
• Net Debt-to-EBITDA Ratio -- 5.9x at fiscal year end, with management expecting to delever to below 5 by the end of fiscal 2027.
• Free Cash Flow -- $2.8 billion for fiscal 2026, exceeding previous guidance of $2.6 billion due to strong operating performance.
• Fiscal 2027 Free Cash Flow Guidance -- $2.9 billion, assuming no further acquisitions, divestitures, or share repurchases.
• Organic Sales Growth -- 14% for the fourth quarter, with all market channels contributing to the expansion.
• U.S. Government Direct Sales -- Approximately 6% of total sales, with less than 1% of total sales identified as potentially subject to repair legislation.
• Prince & Izant Acquisition -- $1.07 billion cash purchase price for the designer of brazing alloys and specialty metal components, which closed in Sept. 2026.
• New Business Wins -- $120 million for three jet engine test cell programs awarded to the Calspan business by airline and maintenance customers.

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RISKS

• Joel Reiss stated, "several operating units have flagged the printed wire boards, so the kind of fundamental part you use for PCBs, as an item, they're seeing some extended lead times as well as some electronic components," identifying these as specific supply chain watch items.

SUMMARY

TransDigm Group Incorporated (NYSE:TDG) reported fourth quarter net sales that rose 23% to $2.988 billion, exceeding the previous guidance range. Management stated that the company deployed over $7 billion in capital during fiscal 2026 through a combination of four major acquisitions and a record level of share repurchases. For the new fiscal year, the company provided revenue guidance with a midpoint of $12.05 billion and anticipated a consolidated EBITDA As Defined margin of approximately 52.0%. Executives indicated that the business maintains significant liquidity with over $10 billion in M&A capacity and expects net debt-to-EBITDA to decline to below 5 by the end of fiscal 2027.

• CEO Michael Lisman stated, "demand recovers as if the disruption had not occurred," referring to historical performance of aftermarket orders following short-term market air pockets.
• COO Joel Reiss indicated that the company plans to increase its automation projects by 55% in fiscal 2027, with over 230 projects focused on cost reduction and productivity.
• CFO Sarah Wynne stated, "Approximately 75% of our $35 billion gross debt is fixed or hedged through fiscal 2029," providing protection against near-term interest rate volatility.
• Management addressed right to repair legislation, noting that design and technical data behind the majority of products is company-funded intellectual property.
• The company highlighted that its headcount remains roughly flat compared to fiscal 2024 levels when excluding recent acquisitions, despite significant increases in commercial OEM production rates.
• CEO Michael Lisman stated, "we have substantial M&A firepower and capacity remaining in excess of $10 billion," noting a focus on small and midsize targets.

INDUSTRY GLOSSARY

• EBITDA As Defined: A non-GAAP measure used by TransDigm that adds back non-cash compensation, acquisition-integration costs, and refinancing expenses to EBITDA.
• RPK (Revenue Passenger Kilometers): A metric used in the airline industry to measure traffic by multiplying the number of revenue-paying passengers by the distance traveled.
• PMA (Parts Manufacturer Approval): An FAA approval for the design and production of modification or replacement parts for aircraft.
• NDAA (National Defense Authorization Act): Annual U.S. federal law that specifies the budget and expenditures of the Department of Defense.
• Simmonds Precision Products: A business acquired by TransDigm in fiscal 2026 specializing in aerospace components.
• Prince & Izant: A recently acquired manufacturer of highly engineered brazing alloys and specialty metal components.
• Bolt-on Acquisition: Smaller acquisitions integrated into existing operating units rather than maintained as stand-alone businesses.

Full Conference Call Transcript

Operator: Good day, and welcome to the Q4 2026 TransDigm Group Inc. Earnings Conference Call. [Operator Instructions] Please note this call may be recorded. I would now like to turn the call over to Mary Hartman, Director of Investor Relations. Please go ahead.

Mary Hartman: Thank you, and welcome to TransDigm's Fiscal 2026 Fourth Quarter Earnings Conference Call. Joining on the call this morning are TransDigm's Chief Executive Officer, Mike Lisman; Chief Operating Officer, Joel Reiss; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Patrick Murphy. 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 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 Mike.

Michael Lisman: Good morning, and thanks for calling in today. We have a full agenda for this morning's call as we're giving our guidance for our new fiscal year, so I'm going to abbreviate our usual strategy overview and get right down to business. I'll start with a quick reminder of how we run the company and think about capital allocation, then comment on our fourth quarter and then walk through our fiscal 2027 outlook. Joel and Sarah will follow with additional color on our operations and financials, respectively. As those of you who have followed us for a long time know, TransDigm's approach is consistent and unchanged. We own and operate highly engineered proprietary aerospace businesses with significant aftermarket content.

We run those businesses with a simple value-based operating methodology, a decentralized organizational structure and a unique compensation system. Combined with disciplined capital allocation, this approach is designed to deliver private equity-like returns with the liquidity of a public market and over our history, it is consistently delivered. Now some comments on our fourth quarter. We wrapped up fiscal 2026 with a good finish. The team executed exceptionally well with all 3 of our major end markets delivering double-digit growth for both the quarter and the full year. Revenue and EBITDA As Defined for the year exceeded our most recent guidance.

In commercial aftermarket, demand remains healthy despite elevated oil prices and RPKs below what we forecasted when we first gave fiscal 2026 guidance a year ago. As we've said before, aftermarket demand doesn't move in lockstep with RPKs. In past short-term disruptions like this one, we've typically seen demand return to trend line once the situation resolves, meaning demand recovers as if the disruption had not occurred. We view the current environment as a short-term air pocket, not a source of long-term demand destruction for commercial aerospace.

Consistent with our long-term focus, we took advantage of the air pocket's effect on our share price to repurchase approximately $940 million of TransDigm stock in the quarter, bringing fiscal 2026 total repurchases to $2.75 billion. As you'll hear in more detail shortly, our outlook for commercial aftermarket into fiscal 2027 remains positive and we're on track for continued growth. Our operating units have done a solid job of helping their customers catch up on pent-up maintenance demand these last several months and continue to provide excellent service. This means high quality parts on time to their airline end customers. Commercial OEM is trending favorably as production rates at Boeing and Airbus continue to increase.

Our results for the quarter and the year reflect that strength and our guidance assumes the momentum carries into fiscal 2027. Finally, defense delivered its third consecutive quarter of double-digit growth. As we've noted on prior calls, we built a very healthy backlog in defense this year, which sets us up well for another strong performance in fiscal 2027. Our EBITDA As Defined margin was 53% in the quarter, our highest of the year, driven by higher volumes and excellent execution from our teams. That includes roughly 2 percentage points of dilution from recent acquisitions. As a reminder, new acquisitions typically dilute margins in the near term, and we expect these margins to then improve over time.

We also generated strong cash flow in the fourth quarter and ended the year with nearly $2.3 billion in cash. Next, an update on our capital allocation activities and priorities. Fiscal 2026 was a successful year for capital allocation over $7 billion deployed through M&A and share repurchases. M&A deployed approximately $4.4 billion in the fiscal year on high-quality companies, including Simmonds Precision Products, Jet Parts Engineering, Victor Sierra Aviation, and most recently, Prince & Izant, which just closed in late September. Along with our 4 new standalone acquisitions, we invested nearly $440 million in 12 smaller acquisitions, which we term bolt-on acquisitions.

These bolt-ons may not be large enough to exist as stand-alone operating units within TransDigm, but they are exceptional businesses and tuck nicely into 1 of our existing operating units. The bolt-on M&A activity has been another effective way to fuel the growth of our existing operating units. Across our 57 businesses, we have capable experienced teams who know and cover their product space very well and this often results in the identification of good businesses that want to come into the TransDigm fold as a long-term home. When this happens, our op unit teams drive the acquisition process and integrate the acquired target into their business.

We will continue to source smaller targets like these, along with our traditional stand-alone acquisitions. While TransDigm's corporate M&A team remains focused primarily on new stand-alone operating unit acquisitions, we also have 57 op unit teams working to drive bolt-on acquisitions for their respective businesses. Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our model. And as usual, the potential targets are mostly in the small and midsize range. I'd like to take a moment to discuss how our M&A efforts have evolved over time. For more than 30 years, we've been busy in the acquisition business and gradually broadened the funnel of products that meet our criteria.

In the early years, the focus was mechanical components, then broadened into Avionics through the acquisition of businesses like Avtech, followed by interior components with businesses like AmSafe, Schneller and Pexco, and later select electronic products with acquisitions such as Data Device Corporation. More recently, we broadened into aerospace test and measurement and PMA. And there have been unwavering constants the whole way through. First, our returns have remained high, 30% plus equity IRRs using the same returns framework we have long utilized. Second, and probably most importantly, we have remained disciplined in our approach to M&A. This has meant a gradual broadening of the funnel rather than a rapid one.

And the pursuit of mid-sized M&A targets as a percentage of our enterprise value, rather than the larger so-called company-defining acquisitions that often become business school case studies when they fail. As we look out over the coming years, I expect these elements of our M&A approach to remain the same. High returns and a disciplined process that broadens our funnel gradually. The capital allocation priorities at TransDigm are unchanged. First, we reinvest in our businesses; second, do accretive, disciplined M&A; and third, return capital to our shareholders via buybacks or dividends; and fourth option paying down debt seems unlikely at this time, but we continue to consider it. We are always evaluating all 4 of these options.

As we sit here today, we have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Specifically, we have substantial M&A firepower and capacity remaining in excess of $10 billion. Moving to our outlook for fiscal '27, our guidance can be found on Slide 7 of the presentation for today. It includes our most recent acquisition Prince & Izant, and assumes no additional acquisitions or divestitures. The midpoint of our revenue guidance is $12.05 billion, up approximately 14% over prior year. As a reminder, and consistent with past years, our first quarter has about 10% fewer working days than the following quarters.

So we expect Q1 revenue, EBITDA As Defined and EBITDA As Defined margin to be lower than the rest of the year. Our revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the high single-digit to low double-digit percentage range. And we expect commercial aftermarket revenue growth in the high single-digit percentage range. We expect defense revenue growth in the high single-digit percentage range as well. The midpoint of fiscal 2027 EBITDA As Defined guidance is $6.27 billion or up approximately 13% to the prior year with an expected margin of around 52%. That margin figure includes approximately 2 full percentage points of dilution related to recent acquisitions.

The midpoint of adjusted EPS is expected to be $47.51, and Sarah will discuss the financial assumptions behind our guidance in more detail shortly. We believe we're well positioned as we enter fiscal 2027 and we'll continue to closely watch how the aerospace and capital markets develop and adjust as needed. I'd like to wrap up my comments by emphasizing how pleased we are with the company's performance this year. Our teams continued to provide their customers with excellent service, while also driving significant growth and expanded margins across the business. We remain focused on delivering for customers and shareholders in fiscal 2027.

With that, I'll hand it over to Joel Reiss to review our recent performance and a few other items.

Joel Reiss: Good morning, everyone. I'll start with our typical review of results by key market category. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period in 2025. That is assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the acquisitions of Simmonds Precision Products, Jet Parts Engineering and Victor Sierra Aviation but excludes the Prince & Izant acquisition, which closed in late September at the end of our fiscal year. For the fiscal 2027 guidance, all completed acquisitions are considered, including Prince & Izant. In the commercial market, we will split our discussion into OEM and aftermarket.

Our total commercial OEM revenue increased approximately 15% for both Q4 and for the full fiscal year compared with the prior year periods. Commercial OEM wrapped up the year with another strong performance Commercial transport OEM revenues, which exclude the biz jet market, were up 25% over the comparable prior period. The strength is driven by the increased production rates at Boeing and Airbus. Our operating units executed well in support of this year's ramp-up, and we are well prepared for the next rate step up. Commercial OEM bookings posted another quarter of solid growth compared to the same prior year period, significantly outpacing sales.

The strength of our bookings both in the fourth quarter, along with the full year, provides good momentum carrying into fiscal 2027. Consistent with prior years, the commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the stated Airbus and Boeing build rates for the fiscal 2027 year. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 17% in Q4 and 14% for the full year compared with the prior year periods. Excluding Jet Parts Engineering and Victor Sierra Aviation, growth rates for both Q4 and the full year would have been the same.

This marks 3 quarters in a row of double-digit revenue growth within commercial aftermarket, nearly all submarkets delivered strong performances in the quarter. Our commercial transport aftermarket revenue growth, which excludes our business jet submarket, was up 16%, driven by solid growth in the submarkets of engineering, passenger and interiors. The business jet market also had an exceptionally strong quarter, up 20% versus prior year Q4. Commercial aftermarket bookings exceeded sales for the full fiscal year and Q4 bookings were up double digits over the prior year quarter. Additionally, point-of-sale at our distributors maintained a healthy growth rate versus the prior year quarter and total months on hand at our major distributors was effectively unchanged.

To date, we have not yet seen a meaningful impact on our commercial aftermarket orders given the elevated oil prices and tension in the Middle East impacting RPKs. The demand remains healthy, and we continue to monitor the situation in close partnership with our customers. As always, we will quickly take appropriate action if needed. Now shifting to our defense market. Defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 12% in Q4 and 10% for the full year compared with the prior year periods.

The defense market tends to have lumpy order and delivery cycles, but the 2026 fiscal year stood out for delivering consistently strong sales throughout the year while also building a healthy backlog heading into the new fiscal year. As noted in prior quarters, this is driven by a combination of new business wins and excellent operational execution by our teams. Q4 defense revenue growth was well distributed across our businesses and customer base. Defense bookings for the full year significantly surpassed the prior year and support the guidance for high single-digit revenue growth in fiscal 2027. Additionally, the U.S. government spending environments remained strong with outlays up considerably over the prior year.

While the overall defense environment and demand is favorable, the timing at the quarterly level remains difficult to predict with accuracy. Looking ahead, we are confident that defense business is well positioned to deliver strong results in fiscal 2027. Before moving on from defense, I'd like to briefly address the pending right to repair legislation since we've received a number of questions on it since our last call. First, let me be clear, the Department of War and our defense customers are very important to us. We support the Department's goal of keeping the warfighter's equipment ready and available and whatever form the final legislation takes, we will work with the department to comply with it and support its implementation.

We remain committed to delivering high-quality parts on time. The House passed FY '27 NDAA and the Senate Armed Services Committee's version both include provision provisions on the government's access to technical data and repair. The 2 versions differ in important ways, and we understand the final bill is still being worked out. Key details, including whether and how any requirements apply to existing contracts and flow down through the supply chain, won't be known until final language is enacted and the department issues implementing regulations. Based on what we know today, we do not expect this to have a material impact on our business for 3 reasons.

First, the vast majority of our new product development, commercial and defense, is self-funded developed at our own expense, the designs and technical data behind our products are TransDigm's intellectual property. Second, much of our portfolio is relatively low price per unit and our parts tend to be replaced rather than repaired. Third, the overall exposure is small, our direct sales to the U.S. government are historically approximately 6% of total sales, and we estimate the portion that could lend itself to repair is less than 1% of total sales. We have supplied and we will continue to supply the manuals and technical information the government needs to install, maintain, train on and operate our products.

Now turning to capital expenditures and productivity. We anticipate CapEx of about $380 million in fiscal 2027, an increase of about $100 million from FY '26. In FY '27, about 70% of our capital expenditures will be on new business and productivity-driven projects. Payback for cost reduction projects remains about 2 years. We have over 230 new automation projects planned for the year, a 55% increase from fiscal '26. We continue to see a long runway of opportunities for cost savings in our high mix low-volume manufacturing operations. We also anticipate a significant increase in the number of AI-driven projects in our businesses with targeted projects across our operating units in all functional areas.

These productivity efforts are showing up in our results. Excluding businesses acquired in fiscal '25 and '26, our head count is roughly flat versus fiscal '24, even as commercial OEM production rates, which carry higher labor content have increased significantly over that period. Moving on to new business, one of our key value drivers. During the quarter, we continued to see strong new business momentum, Q4 was our highest new business quarter of the year and was up significantly from Q4 of fiscal 2025. We saw good new business activity across our end markets, but the quarter was led by several large defense OEM awards.

These included content on next-generation and current production fighter programs, support for unmanned aircraft and collaborative combat aircraft, missile defense and space-based programs and airdrop and parachute systems for international military customers. A few specific awards to highlight. In defense, our Chelton business received initial orders for its next-generation GPS anti-jam system on 3 platforms, an encouraging validation of the system's performance. IrvinGQ received $16 million in orders for its new aerial delivery systems from several European NATO members. In commercial, Korry Electronics received additional development funding from Boeing for the flight deck control panels on the 777-8 freighter, and Calspan was awarded 3 jet engine test cell programs from 2 airline and MRO customers together worth approximately $120 million.

Now turning to our recent acquisition integration activities. As Mike mentioned, it was a busy year for M&A capital deployment. Prince & Izant closed in September, and we are well underway with the integration, which is being led by Executive Vice President, Mike Harney. Prince & Izant is another high-quality addition to TransDigm, and we are happy to have them join the team. Finally, I would like to recognize our team's exceptional performance during fiscal 2026. Their execution drives our results and the consistent quality returns you've come to expect from us. With that, I'd like to turn it over to Chief Financial Officer, Sarah Wynne.

Sarah Wynne: Thanks, Joel, and good morning, everyone. I'll review a few additional financial matters for fiscal 2026 and then cover our expectations for fiscal '27. First, a few additional fiscal '26 data points on organic growth, taxes and liquidity. In the fourth quarter, our organic growth rate was approximately 14%, and all market channels contributed to this growth as previously discussed by Mike and Joel. On taxes, our GAAP and adjusted tax rate finished the year within their expected ranges. On cash and liquidity, free cash flow, which we traditionally defined as EBITDA less cash interest payments, CapEx and cash taxes was approximately $2.8 billion for the year.

This is ahead of our guidance of approximately $2.6 billion, driven by the strong operating performance discussed earlier. Below that free cash flow line and investment in net working capital consumed approximately $460 million of cash for the full year, and net working capital ended the year roughly in line with historical levels as a percentage of sales. We ended the year with a cash balance of $2.3 billion, and our net debt-to-EBITDA ratio ended the year at 5.9x, just slightly above the prior quarter end of 5.8x. Fiscal 2026 was a record year for share buybacks with approximately 2.3 million shares repurchased at an average price of $1,187 per share for a total of $2.75 billion.

We continue to apply the same targeted return criteria we have used consistently over the years, and we expect these repurchases to meet or exceed our long-term return objectives. Throughout the fiscal year, we completed financings both to raise new debt for M&A and to proactively refinance our nearest term maturity, extending it from 2028 to 2035. We continue to actively monitor the interest rate environment closely. Approximately 75% of our $35 billion gross debt is fixed or hedged through fiscal 2029, through a combination of fixed rate notes, swaps and collars, which provides meaningful cushion against near-term rate movements. Our EBITDA to interest expense ratio becomes a greater focus point as we move into a higher interest rate environment.

Our goal is to maintain a 2x to 3x coverage, staying closer to the high end of the range in an environment of rising rates. As of the end of fiscal 2026, the EBITDA to interest expense ratio was 3x, which provides a comfortable cushion in the current elevated rate backdrop. In addition to the increased interest rate market, there has been volatility this year in the debt markets. We'll closely continue to monitor those conditions. So while we're still comfortable operating in the 5 to 7 net debt-to-EBITDA ratio range and currently sit in the mid-range of that target, we will likely be conservative in our decision-making as we evaluate capital deployment options. Next, on our fiscal 2027 expectations.

I'll give some more detail on the financial assumptions around interest expense, taxes and share count. Please note that all of my comments here include completed acquisitions, including the most recently closed Prince & Izant. Net interest expense is expected to be about $2.255 billion in fiscal 2027, equating to a weighted average interest rate of approximately 6.5%. On taxes, our fiscal 2027 GAAP cash and adjusted tax rates are all anticipated to be in the range of 22% to 24%. On the share count, we expect our weighted average shares outstanding to be 56.7 million shares in fiscal '27.

With regard to liquidity and leverage for fiscal '27, as we would traditionally define free cash flow from operations at TransDigm, which again is EBITDA As Defined less cash interest payments, CapEx and cash taxes, we estimate this metric to be around $2.9 billion in fiscal '27. We estimate our net debt-to-EBITDA ratio will delever by at least a turn to below 5x at the end of fiscal '27. This assumes no further acquisitions or divestitures and no share purchases or dividends. On a final note, we think we remain in a strong position with adequate flexibility to continue to pursue M&A opportunities or return cash to our shareholders via share buybacks and/or dividends during the course of fiscal '27.

With that, I'll hand it back to Mary Hartman, our Director of Investor Relations.

Mary Hartman: [Operator Instructions] Operator, can you please open the line?

Operator: [Operator Instructions] Our first question comes from Sheila Kahyaoglu with Jefferies.

Sheila Kahyaoglu: Maybe just -- for the first question, since you highlighted 12 product line acquisitions, I think most people probably didn't pick up on that, 16 acquisitions in total in 2026, including the 4 large ones. Can you update us on your aperture from M&A? You mentioned PMA, test and measurement of late, and obviously, Prince & Izant, if you could talk about the competitive position with that one in particular?

Michael Lisman: So it was a busy year on the M&A front. We're very happy to have deployed $4.4 billion in total across both the full stand-alone acquisitions as well as the bolt-ons that I mentioned. We hope to continue driving that kind of activity going forward. We're primarily focused on the aerospace and defense sector as we look to invest from here on out in M&A, as you guys know. That's where the focus remains and that's where it's going to be going forward. As we think about broadening the aperture within aerospace and defense, we've continued to do that. The branch out we did on PMA this year, so far, so good. We're about 6 months in.

And on test and measurement with Calspan and Raptor so far so good as well. So we're confident that we can continue to layer on additional subsectors and broaden out within aerospace and defense as more time evolves. With regard to the competitive environment in M&A and the second part of your question, Sheila, there's always been competition. At the end of the day, if you think the team here and we fundamentally believe this can drive the best results on these businesses, that should mean you can pay the most for them and still earn an attractive IRR. So just like there's always been competition, there's competition today.

A little bit at the small end, at the high end, too, but that was the case a decade ago, that was the case 2 decades ago. We feel good about being able to still win and prevail on M&A auctions, and we prove that this year with the performance.

Operator: Our next question comes from David Strauss with Wells Fargo.

David Strauss: Mike, your high single-digit aftermarket growth guidance for next year, where would you peg that relative to the market? Do you think you're growing in line with the market? Or do you think you're undergrowing?

Michael Lisman: We think we're certainly growing in line with the market for the segments that we represent. Well -- obviously, we'll see how the year evolves. But we feel good about the guidance we've given here today. Our op units went through a detailed bottoms-up build process and feel that we're at least growing in line with the market and then hopefully aim to, through a couple of new business acquisitions that -- sorry, through a couple of new business opportunities that hit this year, we could outperform and do better than that.

Operator: Our next question comes from Ronald Epstein with Bank of America Merrill Lynch.

Ronald Epstein: Mike, I just wanted to touch base on, as you look into the next year, from a supply chain perspective, is there anything that you have as watch items, anything you're keeping an eye on in terms of materials, printed circuit boards, whatever? Is there anything that could be potential -- potentially tight as we go into the next year?

Joel Reiss: This is Joel. As we look at the supply chain, we have a couple of watch items, several operating units have flagged the printed wire boards, so the kind of fundamental part you use for PCBs as an item, they're seeing some extended lead times as well as some electronic components. We're also watching the rare earth metals as the transition with the Department of War over to not being able to use Chinese-based earth for that. Those are really the 2 areas. Beyond that, we're not seeing any significant. And even though it is not having a material impact on the business as we look at it today.

Operator: Our next question comes from Myles Walton with Wolfe Research.

Myles Walton: Mike, of the $4.4 billion of deals you did this year, can you give us a rough estimate of how many of those or how much of that purchase could get to company average EBITDA margins over time, of course? And what is the acquired incremental revenue in your '27 outlook?

Michael Lisman: Myles, we're in the early innings of these businesses. We're glad to own all of them, Simmonds, Jet Parts, Victor and Prince & Izant. In the fullness of time, I think you guys -- you know the playbook, we tend to acquire businesses. They come into the fold and weigh us down from a margin standpoint. We certainly saw that this year. It's a full 2 percentage points in '26 and then again in '27. We like buying things that we can then improve and we'll aim to do that with these 4 businesses as well as the 12 bolt-ons. So we got 16 in total to sort of chew on now and improve over time.

And in the fullness of time, we'll see, but we expect to totally to be able to get these margins march them up over time. On the second part of your question, what was it again, Myles?

Myles Walton: The total revenue -- total acquired revenue in the fiscal '27 revenue guidance?

Michael Lisman: Yes. We've not historically disclosed this, but in the press release for each, when we announced it when we closed it, we give an estimate. And I think what we provided in the press releases, we gave a rough justice estimate for 2026 calendar year or 2025, you can assume for each of the 4 a good pace of growth off of that. But we've historically not given an exact revenue amount in the guidance for the years after we've acquired the businesses, and we're not going to deviate from that past approach. But all these businesses are growing at a good clip, and we're happy to own each and every one of them.

Operator: Our next question comes from Robert Stallard with Vertical Research.

Robert Stallard: Mike, this might be for you. On the FY '27 guidance for the aerospace aftermarket, a bit of a slowdown versus this year. Is there any particular driver to that, such as a lower expectation for RPM growth?

Joel Reiss: Yes. I mean, I think the expectation is that RPKs are certainly slowing down. We use a bottoms-up forecast. Our operating units discussed with various airline customers or distributors to put together our number. And I think they work together to put together a pretty realistic number. I will say when we look at our TAM number, as Mike said, it doesn't move quite in lockstep with RPKs. This year, the RPKs came in lower than what we and all of the analysts were forecasting, but came -- still came in for us right around 14-or-so percent. For the year, our bookings exceeded sales, which was solid. Our Q4 bookings came in well.

We finished the year with distributor point of sales still growing nicely and months on hand finishing out roughly where we started. So as we look at it, I think we feel good about the guidance that we've given. And overall, the RPKs, I mean, I think what we see today is, kind of, what we've anticipated it being for the year.

Michael Lisman: We put the most faith, Rob, as you know, in that bottoms-up build that our op units put together, not the headline RPKs, but the bottoms-up build that they put together at a detailed part number level.

Operator: Our next question comes from Kristine Liwag with Morgan Stanley.

Kristine Liwag: I just wanted to look at capital deployment. So this year, you guys bought back $2.8 billion of shares, which is, I think, the highest we've ever done in the full year. When you think about where the stock price is, how do you balance between doing more buybacks for next year versus special dividends, which is also an avenue that you looked at historically?

Michael Lisman: Kristine, we look at all of the options, and we always consider all of them. I think you guys know the priorities. It's first, reinvest in our businesses; second, M&A; third, return capital to shareholders, dividends or buybacks; and then fourth, pay down debt. When it comes to the third bucket, we look at both. We debate both historically, and this was through this year, when we step out and tend to do more share repurchases is when we see some kind of disconnect between what we think the intrinsic actual value is of the shares and where it's trading at in the market.

And when we see something like a 20% IRR or better, we're likely to step out and be more aggressive on the share repurchases. So that was the case this year. That's why we dialed it up a bit more on that front. I think going forward, it's always hard to say what the balance will be between the 2 because we don't know where stock prices will trade and where our stock goes, but we'll continue to think about things the same way and probably pursue a mix of both. But again, it sort of depends on where the share price IRRs are this year, it looked good. So we leaned in.

Kristine Liwag: So Mike, with that, do you want to share what your calculation is of what you think intrinsic value of your shares are worth?

Michael Lisman: Yes, we can't say too much on exactly what we think the stock is worth. But I think you can look at what we did this year, the action we took leaning in, in terms of share repurchases. And if a company who historically hasn't done a lot of it, does a historically high amount of $2.75 billion, hopefully, that action says something about what we think the intrinsic real value of the shares is. We would not have done that if we didn't see a really good solid return that's at least as good as or better than the 20% IRR we target on our M&A deals.

Operator: Our next question comes from Gautam Khanna with TD Securities.

Gautam Khanna: I was wondering if you could give us any insight having worked now with the administration on -- remember the Stellant acquisition was blocked over what seemed to be a fairly trivial amount of product overlap. And do you have a sense for what that might allow from an M&A perspective for you guys? Because you got a lot of components you're going to come across acquisitions that have overlapped in the DoD side of things. I just wanted to get a sense if you have any better read from why that deal was blocked and does it actually have any implications for the M&A you're looking at in the pipeline?

Michael Lisman: Yes. We think this was a one-off situation and practically won't change anything in terms of how we look at the M&A landscape going forward with regard to what we pursue. As we said in some prior comments, it's always hard to come to agreement on exactly how someone might define a certain market. But there's going to be no change from us going forward in terms of what we think the M&A landscape and the available opportunity in aperture is for us. And we, again, think Stellant was a one-off given the unique circumstances at play there. Over time, we've, as you know, 150, if you include the product line acquisitions, deals done.

And we've probably had 3 or so didn't cross the finish line for reasons like this, but we see no reason to be concerned here. Jet Parts, Victor Sierra, Prince & Izant, all closed, and those filings were made after the Stellant one. So again, we think a one-off and no change to the course going forward here.

Operator: Our next question comes from Ken Herbert with RBC Capital Markets.

Kenneth Herbert: Maybe, Mike, I wonder to see if you can comment on how your PMA portfolio performed relative to your broader aftermarket growth in either the full year or the quarter? And then specifically as a follow-up, how do you view PMA as a source of growth into '27 say, when we think about potential interest in broadening your portfolio into engine or other markets and the outlook within that -- within the broader TransDigm portfolio?

Michael Lisman: Yes, I'll take that one, Ken. I would say the PMA growth this year as we track it at the businesses we have acquired that specialize in this space is solid. That's why we acquired Jet Parts and Victor Sierra, we're very glad to own them. These are good businesses that, as we've said, are growing at a good clip, not explosive growth, but a little bit ahead of what the overall rate for commercial aftermarket growth might be for the sector at large. So we're happy to own both businesses, and we're 6 months into it, so far, so good out of the gate.

We don't break out with regard to the PMA opportunities that our existing other businesses pursue separately. But generally, rough sense from just knowing what folks are targeting and how we're doing there based on anecdotal -- more anecdotal cases and evidence we think we're doing pretty well. As you guys know, we have op units that specialize in a range of different product areas, and they get approached from their airline customers at times for help when there's an issue. And they lean in, develop a part, usually a better mousetrap than the existing solution because there's some failure or something with that component that makes the airline unhappy.

And when that happens, we step in, work with the airline to design something that's better and have done a solid job and seen some growth there as a result. With regard to the second part of your question and what it means for growth going forward, we remain positive here. As you guys know, across our existing portfolio of businesses, we don't see too much PMA competition given the nature of our price points and where we sit, and there hasn't been any material market loss here.

But with the businesses we own and more playing offense with regard to PMA market capture, we feel pretty good about going forward, the share will be able to gain both directly through Jet parts and Victor Sierra, but then also within our other 55 businesses, the work they do on the PMA front, too.

Kenneth Herbert: Mike, appreciate it. If I could, would you view PMA as a way to get maybe more engine exposure over time?

Michael Lisman: Certainly could be. I think anything across an aircraft is fair game when it comes to PMA.

Operator: Our next question comes from Scott Mikus with Melius Research.

Scott Mikus: Mike, in the slide deck, you have the charts that have commercial OEM sales mix of 65% commercial transport, 35% biz jet/Heli. Your aftermarket mix is 80-20 in favor of commercial transport. Should we expect, over time, the aftermarket mix to start reflecting what the current commercial OEM mix is? And if that does happen, is there any implications for margins?

Michael Lisman: I'd say, Scott, I'm not sure we've exactly looked at this and modeled it out to definitively answer the question. Obviously, we weighed a little bit more towards commercial transport on the OEM side. In the fullness of time, I would think you could see things get closer to where the OEM is. But to be honest, we've not gone and crunched the math on this to really answer that question conclusively.

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

Gavin Parsons: You mentioned the pent-up maintenance demand is kind of supported this year or last year. I thought that was interesting, given the year before had some destocking. So I was hoping you could maybe expand on that a bit. And if you have any sense for when that pent-up demand might be satisfied?

Joel Reiss: I think we've continued to see good growth. And I think that's one of the key reasons that we hear back from our customers, the MRO market for engines continues to be strong for us. And as we look, the backlogs there are still long. The year before, we had seen in a few of our businesses where they had kind of straight -- lengthened the maintenance cycles on some, and we saw that return back to more normal levels this year and don't expect to see that return back. So right now as we look at it, I think the key as we look across our products is the demand stays strong.

Gavin Parsons: Okay. No restocking or destocking in the '27 aftermarket guide?

Joel Reiss: We don't. No, we don't. As we've looked at it, we did not see any significant change this year. A lot of customer conversations around this, certainly across our distributors, as I highlighted earlier, our months on hand at the beginning of the year and the ending point of the year, almost exactly the same. And we are not hearing anything from customers where there was any significant -- certainly no significant stocking up. If anything, there's probably some level of stock decrease in a few areas around the world.

Whether that will return in '27, I don't think we've modeled that level of detail that, that would come back but overall, I don't think we see that as really being a key driver for fiscal '27.

Operator: Our next question comes from Jonathan Siegmann with Stifel.

Jonathan Siegmann: Always appreciate your consistent comments on interest rates and the hedge book. The 75% hedge fixed figures is held for 3 years, can you give some color on when do you plan to extend that past fiscal '29? And then how do higher interest rates today change or not change your thinking about how you structure the fixed and variable part of your debt?

Sarah Wynne: This is Sarah. I'll take that one. Yes, on the 75% hedge, we certainly want to be at least a couple of years out, so we're glad to be out fiscal -- through fiscal 2029. Whenever we go out and raise more debt, if it's loans, we want to continue to hedge those. So that's kind of a rolling forward look that we do on those hedges. Obviously, it's fixed -- fixed notes are fixed. So it's really on those loans that we continue to make sure are hedged. We're continuing to look at that, and we did another hedging where we did some extra swaps this quarter as well. So continue to look through that one.

We also want to keep obviously the maturities pushed out. So when we think of the whole capital allocation strategy, another big piece is keeping the maturities out at least a couple of years as well. That helps us with the rising interest rates. Obviously, you've seen it, and we're seeing it this year. Our rates are forecast to be about 6.5% versus 6.1%. The hedging protects us. So obviously, if the rates continue to go up, say they went up another 1%, we only see like 20 basis points on that. So that whole strategy helps protect us on the rising rates, but we'll continue to watch it.

And that's obviously one of the fundamental guardrails that we have in our capital allocation strategy. I'll let Mike chime in if he has anything else from just a global capital standpoint.

Michael Lisman: I think Sarah hit most of it. I would emphasize this is a continual process that she and her team are always going through and the hedges are not episodic events where we enter into it once a year or so. It's a continual process where we're looking at it and rolling on new hedges as appropriate throughout the course of the year so that 3, 4 years out, you're 75%, 80% locked in and fixed and will continue to have a bias to do that.

Sometimes, it could go against you slightly in a declining rate environment, but then you eventually catch up and the bias from our end has always been to lock it in to get the certainty and that's not likely to change going forward. We'll probably stay 75%, 80% ballpark fixed as we look out in the coming years.

Operator: We have time for 1 last question, and that question comes from Matt Akers with BNP.

Matthew Akers: Can you touch more on the margin, kind of, walk into 2027 going from 53% Q4 to 52% next year? How much of that is just layering on Prince & Izant? Is there any kind of a mix issue? And just generally, how are you thinking about, sort of, margin expansion in the organic business, as you talked about in the past?

Michael Lisman: Yes. Matt, it's Mike. I'll take that one. So we're really happy with the margin improvement our base businesses are driving year-over-year into fiscal '27. As you guys know, we've long targeted 1% to 1.5% of annual improvement, and we're absolutely seeing that in our base businesses. It's hard to see it in the consolidated TransDigm metrics we published publicly because of the acquisition dilution from Prince & Izant, Jet Parts, Victor Sierra and the other bolt-on acquisitions we mentioned.

So the '26 margin of 52.7% going to '27 guide of 52.0%, when you adjust out the 2 full percentage points of dilution from that year-over-year comparison for the EBITDA margins, you come up with a base level of improvement in the starting stores of something, an amount that fits squarely between the brackets of what I mentioned, 1.0% to 1.5% of annual improvement. So we're still getting it. And we like to see that by the way. We like to see large acquisitions coming into the fold. We like buying good businesses that we can then improve over time and march the margins up. So we're seeing that in fiscal '27.

Out beyond fiscal '27, if you're looking for something to plug into a model, I think it's fair game to assume that on the base businesses we own, the starting stores, you continue to get that 1%, 1.5% of annual improvement. That's what our teams drive toward and what we expect to get going forward.

Operator: Thank you. This concludes the question-and-answer session. I'd like to turn the call over to Mary Hartman for closing remarks.

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

Operator: Thank you for your participation. You may now disconnect.

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