Transdigm Group Incorporated

Good day and thank you for standing by. Welcome to the TransDigm Group third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to Mary Hartman, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransTimes Fiscal 2026 Third Quarter Earnings Conference Call. Presenting on the call this morning are TransTimes President and Chief Executive Officer Mike Lisman, Co-Chief Operating Officer Patrick Murphy, and Chief Financial Officer Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer Joel Reiss. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. Before we begin, the company would like to remind you that statements made during this call, which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the investor section of our website or at sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income, and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I will now turn the call over to Mike.

Good morning, and thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. Second, make a few comments about the quarter. And third, discuss our fiscal 26 outlook. Then Patrick and Sarah will give some additional color on the quarter. To reiterate, we believe we are unique in the industry in both the consistency of our strategy in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues which generally have significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocation are a key part of our value creation methodology. Our longstanding 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 capitals. As you saw from our earnings release, we delivered another solid quarter with Q3 results exceeding expectations. As a result, we are raising guidance for the year. During the quarter, we saw healthy growth in revenue, both sequentially and compared to the prior year, in all three of our market champs, commercial OEM, commercial aftermarket, and defense. In commercial aftermarket, we delivered a strong performance in Q3 with the commercial transport component of our commercial aftermarket growing 18% versus the prior year period. Further, given the strong performance seen to date as well as our current expectations for Q4, we raised our commercial aftermarket guidance for the year. Note that we are seeing this healthy growth despite the overall decline in RPMs arising from the conflict in the Middle East. from which we have yet to see any material impact. In the commercial OEM market, sales have increased well into the double digits as production rates at Boeing and Airbus have continued to steadily rise over the past few quarters. And lastly, our defense end market saw a double-digit revenue increase this quarter and continues to build backlog that will drive growth as we finish fiscal 2026 and head into our fiscal 2027. Our EBITDA's defined margin was 52.8% in the quarter, which includes more than full two percentage points of dilution from recent acquisitions. This is an improvement sequentially from Q2 with higher volumes and strong performance across all market champs. The sequential margin improvement is in spite of margin headwind of about half a percentage point in the quarter related to the newly acquired JetParts and Victor Sierra operating units. Our acquisitions continue to contribute meaningfully as well and over time should see an expansion in their respective operating margins. Additionally, we had strong operating cash flow generation in Q3 of over $700 million and ended the quarter with nearly $2.8 billion in cash. Before I get into our usual capital allocation update, I would like to quickly provide some additional color on our withdrawal from the acquisition of Stellent in mid-July. This was a difficult decision that came after the Department of Justice notified us that they intended to challenge the transaction. While we respectfully disagreed with the DOJ's decision on the matter, ultimately, the complications and hurdles that would have arisen from continuing with the acquisition through litigation, coupled with the timeline constraints in the stock purchase agreement, contributed to our decision to withdraw and pursue other targets. At the end of the day, we will always be practical and prioritize the best long-term use of our shareholders' capital and our management resources. We felt we did that here. And the outcome, though disappointing, won't impact our future M&A approach. We are always actively working away on new targets.