Transdigm Group Incorporated (TDG) — Q3 2025 Earnings Call Transcript

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 system closely aligned with shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocation are a key part of our value creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our first earnings release, we had a decent Q3. During the quarter, we saw healthy growth in the revenues for both our commercial aftermarket and defense market channels. Commercial OEM revenues were down this quarter compared to the prior year, which Mike will discuss further in his market segment commentary. Sufficed to say, OEM revenue was a limiter for our quarterly performance, but this is only transitory and a lingering effect of the Boeing strike and continued rate ramp challenges at Airbus. Commercial aerospace market trends remain favorable. Air traffic continues to steadily progress and airline schedules remain fairly stable. In the commercial OEM market, there is still much progress to be made for OEM rates, and our results continue to be adversely affected by OEM performance. Airline demand for new aircraft remains high and the OEMs have long backlogs. OEMs are working to increase aircraft production to meet this demand. However, Boeing aircraft production rates continue to lag pre-pandemic levels, and Airbus has also encountered difficulties in ramping up production. Our EBITDA as defined margin was 54.4% in the quarter. Contributing to the strong Q3 margin is the continued growth in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q3 of over $630 million, and we ended the quarter with a cash balance of almost $2.8 billion. We expect to continue generating additional cash in our final quarter of fiscal 2025. Moving to our outlook for fiscal '25. As noted in our earnings release, we are decreasing our full fiscal year '25 sales guidance and increasing our EBITDA as defined guidance to reflect our third quarter results and our current expectations for the remainder of the year. This guidance now incorporates the recently acquired Servotronics business. At the midpoint, sales guidance was lowered by $60 million, and EBITDA as defined guidance was raised by $40 million. The sales guidance reduction is driven primarily by lower commercial OEM build rates versus our expectations and inventory destocking, which Mike will further discuss later on. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout the remainder of fiscal '25. Our current guidance for fiscal '25 is as follows and can be found also on Slide 6 in the presentation. Note that the pending acquisition of Simmonds business is excluded from this guidance until the acquisition closes. The midpoint of our fiscal '25 revenue guidance is now $8.79 billion or up approximately 11% over prior year. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the commercial OEM market, we are updating the full year growth rate assumptions as a result of lower-than-expected third quarter results and current expectations for the remainder of the year. For commercial OEM, we now expect revenue growth in the flat to low single-digit percentage range. This is a decrease from our previous guidance of low single-digit to mid-single-digit percentage range. We are not updating the full year market channel growth rate assumptions for commercial aftermarket and defense, as underlying market fundamentals have not meaningfully changed. Commercial aftermarket and defense revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial aftermarket revenue growth in the high single-digit to low double-digit percentage range, and defense revenue growth in the high single-digit to low double-digit percentage range. The midpoint of fiscal 2025 EBITDA as defined guidance is $4.725 billion or up approximately 13% with an expected margin of around 53.8%. This guidance includes about an additional 70 basis points of margin dilution from recent acquisitions compared to fiscal year '24. The midpoint of adjusted EPS is expected to be $36.74 or up approximately 8%. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal '25 financial assumptions and updates. We believe we are well positioned for the last quarter of fiscal '25. We continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Lastly, I want to express how pleased I am with our team's ability to successfully navigate the challenges of uneven demand in our commercial OEM market and deliver a healthy EBITDA as defined margin. We continue to stay focused on our core value drivers, maintaining an efficient cost structure and delivering operational excellence. Now let me hand it over to Mike Lisman, our TransDigm Group Co-COO and CEO-elect, to review our recent performance and a few other items.

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. The 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 mix of businesses in both periods. In the commercial market, which typically makes up close to 65% of our revenue, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue was down 7% in Q3 compared with the prior year period. And on a sequential basis, total commercial OEM revenues were about flat compared to Q2. In comparison to what was expected 10 months ago at the start of our 2025 fiscal year, the commercial OEM revenue performance in our third quarter was significantly softer. With regard to what is ultimately driving this performance, quite simply, the production rates at the OEMs are not as high as we'd expected. In the year-to-date period, rates have been negatively impacted by the strike at Boeing and production rate challenges at Airbus. This has reduced our commercial OEM shipments and hit our third quarter particularly hard as customers realign backlog and destocked. The impact on shipments should be temporary. There are clear signs that the negative year-over-year commercial OEM revenue trends will turn positive in time, and this is evidenced in our commercial OEM bookings results for the third quarter. Whereas revenue declined, bookings in the quarter were up compared to the same prior year period. Specifically, commercial transport bookings growth approached the double digits on a percentage basis. During the quarter, there was some softness in our biz jet and helicopter submarkets, but this is primarily timing driven. The booking levels for OEM commercial transport show that the market is recovering from the various disruptions seen over the past year, but this recovery could be a bit bumpy and uneven on a quarterly sales basis as the OEMs rightsize inventory levels. With regard to the broader commercial OEM production environment, at this time, supply chains remain the primary bottleneck in the OEM production ramp-up. We remain encouraged by the recent progress on the 737 MAX production line, and our operating units are well positioned to support the higher production rates as they occur. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 6% compared with the prior year period. This quarter, all submarkets within commercial aftermarket continued to experience positive growth. The growth across the four submarkets was varied. Freight and interior were each stronger than the total commercial aftermarket 6% growth rate, whereas the passenger and biz jet submarkets performed slightly below the overall commercial aftermarket rate of growth. Within our passenger segment, operating units with higher engine content posted very solid growth, well in excess of those with non-engine content and also considerably ahead of the 6% overall growth rate in our commercial aftermarket revenue. POS and our distributors grew in the double digits on a percentage basis this quarter. For the full year, as you saw in today's guidance, our outlook for commercial aftermarket growth of high single-digit to low double-digit percentage growth is unchanged. A final comment pertaining to our longer-term commercial aftermarket performance over the last 4 years. As we look back at our historical aftermarket growth coming out of COVID, we rebounded more quickly than we had expected in the earlier part of the recovery and then saw things moderate a bit as the recovery completed in 2024 through to today. When we analyze this full time period, the last 4 years that is, we sit today about where we should be on a volume basis given current global flight activity. Now shifting to our defense market, which traditionally is at or below 35% of our total revenue. The defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 13% compared with the prior year period. Q3 defense revenue growth was well distributed across our businesses and customer base. Additionally, we saw similar rates of growth in both the OEM and aftermarket components of our total defense market with OEM running slightly ahead of aftermarket. Defense bookings for the quarter were healthy compared to the prior year and continue to support our unchanged 2025 defense guidance of high single-digit to low double-digit revenue growth. Additionally, this quarter, we saw continued growth in U.S. government defense spend outlays, though the rate of growth has moderated a bit. As we've said many times before, defense sales and bookings can be lumpy. We know the bookings and sales will come, but forecasting them with accuracy and precision, especially on a quarterly basis is difficult. Lastly, as always, our management teams remain committed to our consistent operating strategy and successfully closing out the 2025 fiscal year. Now a few quick organizational updates. I'm happy to announce that Patrick Murphy will become our next Co-COO. He has been with TransDigm for over 10 years and will make a great partner for Joel Reiss, who will be continuing as our other Co-COO. Most recently, Patrick served as the TransDigm Executive Vice President for 6 years with direct oversight of several operating units. Additionally, he has overseen the integrations of our acquisitions of DART and the CPI businesses. Prior to becoming an EVP, Patrick was President of our HarcoSemco operating unit. He's a proven executive and a strong cultural fit. We're happy to have filled such an important position with an internally developed leader, and we continue to see our succession planning at work. I'm confident Patrick will continue running our operating units well and driving value creation across the organization. With Patrick's promotion to Co-COO, we have promoted Dave Wilmot to an Executive Vice President role. Dave is an accomplished business leader. For the past 3 years, he served as the President of our AdelWiggins operating unit. As an EVP, Dave will be responsible for overseeing six of TransDigm's operating units. Both Patrick and Dave start in their new roles effective today. Additionally, I'm pleased to announce that Armani Vadiee has been promoted to General Counsel and Chief Compliance Officer of TransDigm. He has effectively been on the team for the last 15 years, both as our VP of Global Public Sector and before that as outside counsel and partner at a DC law firm. Finally and most importantly, as you know, this is Kevin's last earnings call. I have no doubt that he will miss these calls dearly in his retirement, and you can't see it, but he's actually tearing up here in Cleveland. I'm kidding that was a joke, but now speaking seriously, I want to take a moment to thank Kevin for his exceptional leadership as our CEO. It's been a privilege to work for and learn from him over the last 10-plus years here, and I know that our entire team shares this sentiment. Under Kevin's guidance, TransDigm has created significant shareholder value, and the team here has had a lot of fun in the process. We wish Kevin all the best in his well-earned retirement. Our transition is on track, and I look forward to stepping into the CEO role on October 1, and I'm excited to continue driving the private equity-like returns our shareholders have come to expect from TransDigm.

Thank you, Mike, and good morning, everyone. I will summarize the financial highlights for the third quarter and share additional information about our current guidance. First, regarding organic growth and liquidity. In the third quarter, our organic growth rate was 6.3%, which was fueled by our commercial aftermarket and defense market channels, as Kevin and Mike mentioned. In terms of cash and liquidity, our free cash flow, defined as EBITDA minus cash interest payments, capital expenditures, and cash taxes, was approximately $715 million for the quarter, totaling about $1.9 billion year-to-date. For the full fiscal year, our free cash flow guidance remains unchanged, and we expect to generate around $2.3 billion in free cash flow for fiscal '25. Below the free cash flow line, our investment in net working capital used about $100 million this quarter due to increased accounts receivable from our third quarter shipments and higher inventory planning for the fourth quarter. For the full year, we anticipate working capital to end at approximately historical levels as a percentage of sales. We closed the quarter with about $2.8 billion in cash, and our net debt-to-EBITDA ratio stood at 4.9x, down from 5.1x at the end of the prior quarter, with around $800 million of our cash balance earmarked for the expected closing of the Simmonds Precision acquisition. We are comfortable operating within a net debt-to-EBITDA ratio range of 5 to 7x. Though we are currently at the lower end of this range, our strategy for capital deployment remains the same, and we continue to look for ways to create value for our shareholders through our leverage strategy. Our EBITDA to interest expense coverage ratio was 3.3x at the end of the quarter, providing us a solid buffer above our target range of 2 to 3x. During the quarter, we refinanced our earliest maturity debt instrument, approximately $2.7 billion in senior subordinated notes, extending the maturity from 2027 to 2033. This refinancing pushes our nearest maturity date to August 2028. Our capital allocation strategy focuses on managing our debt maturity schedule both proactively and prudently. We are about 75% hedged on our total gross debt balance of $25 billion through fiscal 2027, achieved via a mix of fixed-rate notes, interest rate caps, swaps, and collars, which give us substantial protection in the near term. Going forward, we will continue to manage our debt maturity schedule proactively and prudently, aiming to extend any near-term maturities well before their final due dates. Regarding guidance, as Kevin mentioned, we raised our midpoint EBITDA while reducing sales, which reflects the market segment changes discussed earlier. The adjusted EPS midpoint is now projected to be $36.74. We feel we are in a solid position regarding cash liquidity and our balance sheet, with sufficient flexibility to pursue mergers and acquisitions or further return cash to shareholders through dividends or share repurchases. With that, I will turn it back to the operator to begin the Q&A session.

Great. Congrats, Kevin, and best of luck in your next endeavors. I would like to ask about the aftermarket performance in the last quarter and looking ahead. You mentioned in Paris that the aftermarket was doing quite well. Did you perhaps observe a decline in the last weeks of the quarter that caught you off guard? That's my first question. My second question is regarding the aftermarket being in line with your expectations based on current flight hours. However, if we examine your aftermarket growth compared to your competitors over the past year to a year and a half, you haven't kept pace. Do you anticipate returning to an average industry growth rate for the aftermarket moving forward?

Our commercial aftermarket growth aligns with our expectations at the start of the year. We anticipated that the growth rate would moderate post-COVID. Based on our guidance for the year, which predicts high single-digit to low double-digit growth, and considering the increase in takeoffs and landings at around 3% to 4%, we are where we expected to be in terms of growth, given our product mix. Our commercial aftermarket volumes are significantly above pre-COVID levels. While we are somewhat less dependent on engines compared to some peers, we still experienced strong double-digit growth in that area this quarter. As we often note, the commercial aftermarket results can fluctuate quarterly. However, our guidance remains at high single digits to low double digits, and we are optimistic about achieving that. We'll provide guidance for next year during our November call, as we are currently in the planning phase with our operating units.

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.

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

Absolutely.

I want to discuss the aftermarket and emphasize that the full year forecast of high single to low double growth suggests that the growth rate in the fourth quarter will show a significant increase compared to the first nine months of the year. Do you have any insights on that? Or is it simply a case of there being only one quarter left in the year, leading to a cautious approach without shifting expectations too much while new revenue remains within the previous range? Additionally, regarding original equipment, should we anticipate a rebound at some point, given that production rates are currently below capacity and there will be easier comparisons, likely resulting in a much higher growth rate 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?

There's limited visibility due to the fact that many of our customers do not ship directly to Boeing and Airbus, instead going through a sub-tier. This means we don’t have clear visibility throughout the entire channel, and some customers may adjust their backlogs. However, we do not anticipate any significant challenges going forward.

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.

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?

If you examine the current rates at both Boeing and Airbus compared to where they anticipated them to be at the beginning of the year, it reflects trends in both narrow-bodies and wide-bodies at the OEMs. I believe this feedback likely came from multiple sources through the channel. As we've mentioned, we expect this situation to be temporary. The guidance indicates that we expect to see a return to positive growth in Q4.

Got it. Could you provide some details about the aftermarket performance in freight and interiors? Are interiors simply benefiting from easier comparisons? Also, what are your thoughts on freight and cargo activity in light of 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.

Yes, Kevin, you'll be missed. Congratulations on that. Regarding the quarter, could you provide some insight into your supply chain? Is it functioning better now? Are there any bottlenecks present? I have a 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. This is a bit tricky to answer, but I’ll do my best. Considering the length of the St. Louis strike, how much exposure do you have there? If it lasts 60 days like the Seattle strike, would that create any challenges for you, or is it negligible? How should we view that situation?

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.

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.

Congratulations to Mike and Kevin and everyone who has taken on new roles. I wanted to ask if you could provide insights into the OE numbers, specifically regarding whether certain products are being destocked more than others. Is there a pattern that explains this? Additionally, concerning the aftermarket, I’m curious about where the most significant weaknesses lie within the passenger sector and if you've noticed any changes in customer buying behavior.

I'll address the OEM question first. We don't have precise data by product regarding where the destocks are occurring. Overall, it's fairly uniform across the group, with no significant emphasis on any particular product area or operating unit. On the aftermarket side, the situation is similar. We often lack detailed geographic data from our distribution partners and even from our own units concerning geographic splits. Generally, there’s been a slight pullback across the board, except for engines, which have performed better than the others. Interiors also saw an increase. However, we did experience some underperformance in the non-engine passenger segment, which is the largest category within the commercial aftermarket. The growth in that area was somewhat restrained this quarter. Nevertheless, as we look ahead and forecast for the rest of the year, we don't anticipate any long-lasting issues.

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 digit 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.

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 information. Following up on Simmonds, could you provide more details on the bidding process for acquiring this from RTX? When you consider the major OEMs, many have consolidated these assets over the past couple of decades. Do you see additional chances to acquire parts of portfolios like that? Also, the choice to sell a significant business to you, TransDigm, is interesting given the historically less favorable view of your business model from customers. How do we reconcile that? I was quite surprised, and congratulations on the deal. Should we expect to see more transactions like this? How did everything unfold? I apologize for the numerous questions, but any additional insights would be appreciated.

We are pleased to have completed the acquisition of Simmonds and to have partnered with RTX on the separation of Simmonds Precision from RTX. While I can't provide many specifics about the auction process, we are excited to have secured it and are eager to finalize the acquisition as soon as possible. Regarding the potential for more carve-outs like this in the A&D sector, it's challenging to predict. However, the last couple of years have shown us that the landscape is constantly evolving. Companies may decide to break up or spin off divisions, which creates opportunities for us to deploy capital and pursue acquisitions. This trend is likely to persist for the next few years, and you may have noticed similar activity with various assets and businesses changing hands recently. The situation is always changing.

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 believe it's a matter of variability. Looking back over the past four years since COVID, we experienced strong growth that outpaced our peers in the initial quarters following the pandemic. Currently, when we assess our volumes relative to takeoffs and landings, we are performing as expected, showing nice improvement from pre-COVID levels. Analyzing the comparisons and shifts in growth percentages can be complex, so it’s challenging to break it down precisely. Overall, as we reflect on the last four years and examine our takeoffs and landings, we find ourselves in the right position.

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 an 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 weighs the margin down slightly a bit versus aftermarket.

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