Transdigm Group Incorporated (TDG) — Q1 2026 Earnings Call Transcript

Thank you, and welcome to TransDigm's Fiscal 2026 First Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's 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 Investors section of our website, or 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. This will be the first time you're hearing from our new co-COO, Patrick Murphy, but he's hardly a new guy around TransDigm, having served as an Executive Vice President for the last 6 years and as President at our HarcoSemco operating unit in Connecticut prior to that. 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 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 long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation as well as careful allocation of our capital. As you saw from our earnings release, we had a good start to our fiscal year. Our Q1 results ran ahead of our expectations, and we raised our sales and EBITDA defined guidance for the year. During the quarter, we saw solid growth in revenue for our commercial OEM channel, and healthy growth in both our commercial aftermarket and defense market channels. Bookings in the quarter were strong across all of these three market channels. Commercial aerospace trends remained favorable. Air traffic continues to steadily grow, and airline schedules remain fairly stable as well with takeoffs and landings growing in the 4% range year-over-year. Within the commercial aftermarket, a quick note on our growth in this market channel over the last 12 months. While our growth rates have hit and continue to hit our own expectations, there is a lag in TransDigm's growth versus the broader market of probably 5 to 6 percentage points. As we have said many times before, it is not unusual for us to see this, and we have lived through brief periods like this before. Regarding what is driving it, as we run the math, roughly half of the 5 or 6 percentage point growth gap is from our underexposure on engine content versus the rest of market, and the remaining half comes from lumpiness in our distribution channel and at airlines, with this latter piece owing to our earlier and higher recovery versus the broader market as we came out of COVID. The second piece, the lumpiness, can be hard to quantify exactly. Switching to the commercial OEM market, there is still much progress to be made for OEM rates. However, it is good to see both Boeing and Airbus steadily ramping up their production rates. They expect to continue doing so in the coming months and quarters. Airline demand for new aircraft remains high, and the OEMs have long backlogs. The OEM production rate recovery to date has been bumpy, and we're planning for it to remain so. We remain encouraged by the progress we're currently seeing and have seen over the last several quarters. Our EBITDA as defined margin was 52.4% in the quarter, which includes about 2 full percentage points of dilution from recent acquisitions. Contributing to this solid Q1 margin is the continued growth in our commercial aftermarket, along with our 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 Q1 of over $830 million, and we ended the quarter with a cash balance of over $2.5 billion. Next, an update on our capital allocation activities and priorities. In the past 5 weeks, we have signed up the acquisition of 3 new operating units and 2 separate M&A transactions: Stellant Systems, Jet Parts Engineering, and Victor Sierra Aviation. On December 31, we announced that we had agreed to acquire Stellant Systems from Arlington Capital Partners for approximately $960 million in cash. Stellant is a designer and manufacturer of high-power electronic components and subsystems serving the aerospace and defense end market. The business generated approximately $300 million in revenue for the 2025 calendar year. Then on January 16, we announced that we had agreed to acquire two businesses, Jet Parts Engineering and Victor Sierra Aviation, from Vance Street Capital for approximately $2.2 billion in cash. Jet Parts Engineering is a designer and manufacturer of aerospace aftermarket solutions, primarily proprietary OEM alternative parts and repairs. Victor Sierra is a designer, manufacturer and distributor of proprietary PMA and other aftermarket parts serving the commercial aerospace end market, primarily the general aviation and business aviation sectors. Collectively, Jet Parts and Victor Sierra generated approximately $280 million in revenue for the 2025 calendar year. As you know, we've been a player in the PMA space for many years through our existing operating units, which often work directly with the airlines on their PMA efforts, most of which are focused on developing better technical solutions for the airline customers. We see PMA as a small but growing subsector within commercial aerospace that serves an important need for the airlines. Jet Parts and Victor Sierra will add to our existing PMA revenue and further enhance our partnership with these airlines. We look forward to owning all three businesses, Stellant, Jet Parts, and Victor Sierra. These are good businesses with proprietary products that generate significant aftermarket revenue and align well with TransDigm. Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsize range. While we are very happy to be adding Jet Parts and Victor Sierra into the fold, the primary M&A focus at this time remains on acquiring proprietary OE component aerospace businesses. As always, we will remain focused and disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. So consistent with past practice, I will not be saying too much on what is currently active in our funnel. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, do accretive, disciplined M&A. Third, return capital to our shareholders via buybacks or dividends. The fourth option of paying down debt seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options. We exited the quarter with a sizable cash balance and our recent capital allocation actions still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Pro forma for the announced acquisitions, we have significant M&A firepower and capacity remaining, approaching $10 billion. Moving to our outlook for fiscal 2026. As noted in our earnings release, we are increasing our full year '26 sales and EBITDA as defined guidance to reflect our strong first quarter results, and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $90 million, and EBITDA defined guidance was raised $60 million. We are still early in our fiscal year, and considerable risk remains. But I am quite encouraged and optimistic about how things appear to be shaping up these first 4 months. The guidance assumes no additional acquisitions or divestitures. Our current guidance for fiscal 2026 is as follows and can also be found on Slide 6 in today's presentation. Note that the pending acquisitions of Stellant, Jet Parts Engineering, and Victor Sierra are all excluded from this analysis until each acquisition closes. The midpoint of our fiscal 2026 revenue guidance is now $9.94 billion, or up approximately 13% over the prior year. In regard to the market channel growth rate assumptions that this revenue guidance is based on, we are not updating the full year market channel assumptions for our three primary end markets: commercial OEM, commercial aftermarket, and defense. Underlying market fundamentals have not meaningfully changed for any of these markets. The revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the high single digit to mid-teens percentage range, which is highly dependent on the evolution of the production rates in the commercial OEM environment, commercial aftermarket revenue growth to be in the high single-digit percentage range, and defense revenue growth in the mid-single-digit to high single-digit percentage range. The midpoint of fiscal 2026 EBITDA defined guidance is now $5.21 billion, or up approximately 9%, with an expected margin of around 52.4%. We are very pleased with our margin performance in the year-to-date period, and we are running ahead of where we thought we'd be. Adjusting for the two dilutive factors we discussed last quarter, the margins in our base businesses improved nicely in our first fiscal quarter, more than we had expected. As a reminder, the dilutive factors are approximately 200 basis points of margin dilution from our recent acquisitions and about 0.5 percentage point to 1 full percentage point of dilution from commercial OEM and defense mix headwind. The midpoint of adjusted EPS is now expected to be $38.38. We believe we are well positioned for the remainder of fiscal 2026. We'll continue to closely watch how the aerospace and capital markets develop and react accordingly. We are pleased with the company's performance this quarter. It is a good start to the fiscal year. Our teams remain focused on our value drivers, cost structure, and operational excellence. We look forward to the remainder of fiscal '26 and expect that our disciplined, consistent strategy will continue to deliver the value you have come to expect from us. Now let me hand it over to Patrick Murphy, our TransDigm Group Co-COO, to review our recent performance and a few other items.

Good morning, everyone. I'll start with our typical review of results by key market categories. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period 2025. That is assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the recent acquisition of Simmonds Precision Products; the pending acquisitions of Stellant, Jet Parts Engineering, and Victor Sierra are excluded. In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 17% in Q1, compared with the prior year period. As we anticipated, commercial OEM revenue in the first quarter showed strong growth as we supported higher build rates. Commercial transport OEM revenues, which exclude the biz jet submarket, were up 18% over the comparable prior year period. As you will recall, Boeing experienced production issues in late 2024 that resulted in a drop in OEM demand in our first fiscal quarter last year. Our Q1 FY '26 growth is driven by the increase in the Airbus and Boeing OEM build rates and the bounce back from the Boeing production disruption in the prior year. Commercial OEM bookings in the quarter were up compared to the same prior year period and ran ahead of our expectations, significantly outpacing sales. Commercial transport bookings growth was up into the high teens percentage for the first quarter. The bookings levels for commercial transport OEM continued to show that the market is recovering from the various disruptions seen over the past year and a half. However, the OEM recovery to this point has been bumpy and uneven on a quarterly basis, and we expect that to continue as OEMs in our Tier 1 and Tier 2 customers rightsized inventory levels. We remain encouraged by the continued progress of the 737 MAX production line as well as the overall progress we are seeing at both Boeing and Airbus as they ramp their production rates. Our operating units are well positioned to support the higher production rates as they occur. The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production build rates for the 2026 fiscal year. Our fiscal 2026 commercial OEM revenue guidance range, which as Mike mentioned, is unchanged, is high single digit to mid-teens percentage growth, and contemplates reasonable risks around the Boeing and Airbus rates. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 7% compared with the prior year period. This quarter, all submarkets within commercial aftermarket experienced positive growth. Our commercial transport aftermarket revenue growth, which excludes our biz jet submarket, was up 8% driven by solid growth at all four of the transport submarkets: freight, interiors, engine, and passenger. Overall, we saw strength in commercial aftermarket transport across a large majority of our operating units. Q2 bookings in commercial aftermarket were also strong, running ahead of our expectations, solidly outpacing sales and supporting the full year growth outlook. Additionally, POS at our distributors grew in the double digits on a percentage basis this quarter. As Mike already mentioned, our commercial aftermarket revenue growth guidance is unchanged, and with positive leading indicators in bookings, book-to-bill ratio, and distribution sales, we fully expect 2026 commercial aftermarket growth in the high single-digit percentage range. Additionally, as we have said before, our operating units continue to vigilantly monitor market share and competitive losses. We see no material loss in this space from either USM or PMAs. Now shifting to our defense market. Defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 7% compared to the prior year period. Over the past year, we have seen strong growth in defense, driven by new business wins and strong performance by our teams in both domestic and international markets, driven by the growth in defense spending around the world. Q1 defense revenue growth was well distributed across our businesses and customer base. We saw similar rates of growth in both OEM and aftermarket components of our total defense market, with OEM running slightly ahead of aftermarket. Defense bookings for the quarter were robust, up year-over-year, higher than our expectations and significantly surpassing sales for the period. Bookings started the year strong and continue to support our unchanged 2026 defense guidance for mid-single digit to high single-digit revenue growth. As we have said many times before, defense sales and bookings can be lumpy. We are confident that the bookings and sales will meet our expectations, but forecasting them with accuracy and precision, especially on a quarterly basis, is difficult. Overall, we are encouraged by the backlog that is building in our defense market segment. Moving on to our value drivers. We continue to see strong success winning new business at our operating units, and I would like to highlight a few new business program wins from last quarter. Our Chelton business was awarded a multimillion-dollar contract from Lockheed Martin to supply their latest generation very high-frequency, ultra-high frequency antenna system. These systems are used in line with the upgraded radios that are now standard fit for production on C-130J aircraft. In December, the IrvinGQ business was awarded a $24 million contract from the U.S. Department of Defense for the provisioning of floating decoy systems to protect the U.S. Navy Arleigh Burke Destroyers. These systems are used as one of the last lines of defense for ships under missile attack. The U.S. DOD has requested these deliveries to start in FY '26, with an overall program period of performance over the next 4 years. Just a quick update on our acquisition integration activities. We continue to make good progress integrating our two most recent acquisitions: Servotronics and Simmonds Precision. Both integrations are being led by experienced EVPs, and we have augmented the existing teams with seasoned individuals from other TransDigm operators to accelerate their progress. It's still early, but our experience to date indicates that these are going to be two very good additions. I'd like to wrap up by recognizing the concerted efforts of our operating teams during the first quarter of fiscal '26. We are pleased with the solid operational performance our teams delivered for our shareholders this quarter. The teams continue to execute on our value drivers, and it was a good start to our fiscal '26. As we progress further into the year, our management teams remain focused on our consistent operating strategy, delivering on new business opportunities, and meeting increased customer demand for our products. With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne.

Thanks, Patrick. Good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 7.4%, and all market channels contributed to this growth, as previously discussed by Mike and Patrick. On cash and liquidity, free cash flow, as we traditionally define it, is EBITDA less cash interest payments, CapEx, and cash taxes, which was just under $900 million for the quarter. This is higher than our average free cash flow conversion due to the timing of our interest and tax payments in the quarter. This will normalize throughout the year as these payments pick up next quarter. We expect to steadily generate significant additional cash throughout the remainder of fiscal 2026. Our free cash flow guidance is unchanged, and we continue to expect free cash flow of approximately $2.4 billion for fiscal 2026. As a reminder, this guidance does not include the pending acquisitions or interest expense from any potential debt issuance to fund those acquisitions. Below that free cash flow line, an investment of net working capital consumed approximately $30 million for the quarter. For the full year, we expect working capital to end roughly in line with historical levels as a percentage of sales. We ended the quarter with approximately $2.5 billion of cash on the balance sheet after paying for the Simmonds acquisition at the beginning of the quarter. Our net debt-to-EBITDA ratio was 5.7x, down from the 5.8 at the end of last quarter. While we don't target a specific amount of cash that we like to have on hand, our current balance and available debt capacity provide ample liquidity to fund the recently announced pending acquisitions through a likely combination of cash on hand and new debt issuance, based on our strategy of operating in the 5 to 7x net debt-to-EBITDA ratio range. Our net debt-to-EBITDA target range also preserves plenty of capacity for additional acquisitions should opportunities arise along with other capital deployment options. Regarding our debt, our capital allocation strategy is to both grow actively and prudently manage our debt maturity stacks by keeping near-term maturities well extended. In addition, approximately 75% of our $30 billion gross debt balance is fixed through fiscal 2029. This is achieved through a combination of fixed rate notes, interest rate swaps, caps, and collars. This provides us plenty of protection at least in the immediate term. Our EBITDA to interest expense coverage ratio ended the quarter at 3.1x, which provides us with a comfortable cushion versus our target range of 2 to 3. Additionally, during Q1, we took advantage of a dip in the share price and opportunistically deployed a little over $100 million of capital for repurchases of our common stock. These share repurchases are anchored in the same targeted return criteria we have consistently applied over the years. We continue to seek the best opportunities for providing value to our shareholders through our capital allocation strategy. We think we remain in a good position with adequate flexibility to continue to pursue M&A opportunities or return cash to our shareholders via share buybacks and/or additional dividends during the course of fiscal 2026. With that, I'll hand it back to Jaimie, our Director of Investor Relations.

Before we open the line for Q&A, I'd ask everyone in the queue to consider your fellow analysts and ask one question only so we can get to as many people as possible today. Operator, can you please open the line?

It's actually Ellen speaking for Sheila this morning. Looking at your profitability this quarter, it surpassed expectations given that fiscal Q1 is usually seasonally weaker, and it aligns with your guidance for the year. How are you approaching the challenges and opportunities throughout the year and the timing of profitability? What is driving that strength in the quarter?

Sure. We had a stronger start to the year on the margin front than we thought. The 52.4% that we came in at on EBITDA was a bit better than we expected. In terms of what contributed to that, while commercial OEM did have a strong growth quarter, it was up 17% on a pro forma basis, as Patrick said, that was a little bit light of where we thought it would come in, a couple of points. So we got a bit of a tailwind on the margin just from the mix that came with that. Then separate from that, the teams at our operating units have done a really good job in terms of getting cost out, productivity projects, driving a higher margin for us in Q1. Hopefully, that continues for the balance of the year. There's probably a bit of conservatism embedded in the guidance too from here on out. I think as you guys know, we aim to be conservative on some of the projections. We'll see how the year evolves in terms of the growth rates as commercial OEM bounces back. As you know, that's expected to be the highest growth end market for us. So that could present a bit of a headwind, but overall, a solid start to the year.

I was wondering, maybe Mike, could you comment a bit on the distributor POS and that's been running double digits now for the last several years every quarter, but 3 of the last 5 times aftermarket has fallen short of that double-digit mark. I think it's more engine sensitive. So maybe you can confirm that, or how much of informational value there is? Then within the aftermarket growth, if you can just tell us what is lagging in that plus 8%? Is interiors in the low single digits still?

Sure. So a couple of things on the POS point. We do, through the POS channel, weigh a bit more heavily towards engines there. So that has what has been a little bit of what's contributed, driven it up. In terms of where distributors are generally, as I think we mentioned on last quarter's call. During our fiscal '25 year, we probably saw 1 to 2 percentage points of drag on the overall CAM growth from distributor inventory changes. That was a headwind at the time. Some of that persisted into our Q1 here, probably a little bit more elevated than the 1 or 2 percentage points. That should turn the corner as we head into the year. Again, it's not rare to see these kinds of movements in distributor inventory levels. So as that rebounds into the balance of fiscal '26 that continued headwind should hopefully turn into a bit more of a tailwind. In terms of the end market color, Patrick, do you want to provide a little bit of commentary?

Yes, we see a strong growth rate in our engine end market for CAM, and our expectations for airframe and airline are being met. The business jet sector is somewhat weaker, which is limiting our overall performance. However, overall results are in line with our expectations, and there was solid growth in the first quarter.

All the submarkets were performing well, except for the business jet, which was at 1% and affected our overall numbers slightly. However, all the submarkets within commercial transport achieved an 8% growth, exceeding the 7% overall CAM growth rate. It was encouraging to see uniformly distributed growth.

Just one clarification on the 7.4% overall company organic growth versus the subsectors, 17%, 7%, and 7%? I know there's pro forma versus organic. But is the takeaway that Simmonds' significant growth underlying year-on-year, and that's what's driving most of that differential?

Yes. Myles, this is Sarah. I'll take that one. Yes, if you look at the market growth segments, which are obviously pro forma for Simmonds, we do see a little bit of upside in the market segments coming from Simmonds on that piece. The other bit that's playing into that delta difference, the 7.4% of organic, that includes our non-aero market segment. It's a smaller piece but it's lower than the average 7.4%. So that's the other bit of the delta that you see going on there.

I just wanted to follow up on Myles' question on the lumpiness to make sure I'm just clear on the time frame we're talking about, and I appreciate that color. The 7% aftermarket growth rate in the quarter, so if half of 5% to 6% below peer growth was lumpiness, does that suggest that your core growth is more like 9% or 10% for aftermarket?

It really depends on how you interpret core growth. We've faced some challenges due to fluctuations in distributor activity and some inventory issues within the channel, possibly linked to the airlines. As I mentioned in my prepared remarks, it's difficult to precisely quantify the impact because detailed inventory data from airlines is often lacking, although we do receive better information from distributors. Reflecting on our performance over the last four to five quarters, if we are about five to six percentage points below the market average, roughly half of that discrepancy can be attributed to these fluctuations with both airlines and distributors. This was the key point we aimed to communicate in our prepared comments.

Was the destocking last year more specific to the first half or second half?

No, I think it was pretty uniformly distributed throughout the year. It bounces around a little bit quarter by quarter as you would guess, with as many distributors and op units as we have, but generally fairly uniformly distributed.

You mentioned aftermarket aerospace aftermarket bookings grew faster than revenue. I was hoping maybe you could quantify how much faster the bookings growth was compared to revenue, or a book-to-bill? And I don't know if you also had that for full year '25 just so we can understand if things are accelerating, decelerating, staying the same? And then as we go through the rest of the year, how much should we be taking into consideration that compares from last year in aerospace aftermarket just because Q2 is a much different comp than Q3? Or do you expect the remainder of the year's growth to be pretty even?

Yes. No, it's Mike. I'll take that one. I think you know how we look at the quarterly CAM bookings trends. We don't focus on it too much. We look at a rolling 12-month average. So I don't want to go down the path of saying too much on the quarterly bookings targets that I think everybody expects to get in every single quarter. That said, as Patrick said in his comments, prepared comments, it ran nicely ahead of what the sales growth was this quarter into the double digits. But we're not going to go and give a specific number, but good growth that we think sets us up nicely for the rest of the year. When we look at CAM growth, we look at a rolling 12-month average stat. As you look at the 2025 level, and where we sort of tracked out all the calendar last year, it was nice signals growth, was above 1.0. But again, we don't disclose the exact amount. That's what set us up well as we looked in and forecasted out FY '26 and what the growth could be, which made us somewhat confident that we'll have at least a little bit of backlog there to hit the shipments target. On the quarterly comps and where things go from here, we don't want to say too much. This sort of sounds like we're giving quarterly guidance. We'll see how the year progresses. As we give the guidance, we guide for a full year because we know how lumpy commercial aftermarket can be. We feel really good about the high single-digit guidance for the full year, but I'm hesitant to give anything that sounds like we know exactly what it's going to look like on a quarter-by-quarter basis as we get there.

Okay. I appreciate that. And just one clarification, the lumpiness in distribution being a headwind, and then the statement of POS at distribution grew double digits. What's the difference between those two comments on one being a headwind, one being a tailwind from distribution?

Well, I think the point is distributor inventory is contracted. So we're getting headwinds of selling into distributors and then their on-sale rate into the market from the distributor is higher. So the net inventory position is contracting a bit.

Do you have visibility into how much inventory of yours is left in the channel?

We track it quite a bit at the op unit level of distributors, and we think as the rest of the year shapes up, this should be something that instead of a headwind should hopefully become more of a tailwind for us as we head out through Q2 through Q4. We did take a bit of a headwind in Q1, a couple of percentage points.

Mike, a quick question on the Jet Parts Engineering and Victor Sierra acquisition. That should accelerate your commercial aftermarket growth, but was part of the rationale also to deter other companies from PMA-ing your OEM parts, because you could then retaliate in PMA or DER their parts as well?

No. No. We bought these businesses because we think they're fundamentally good businesses on which we can make a 20% IRR. The same TransDigm logic we've always applied to M&A, the businesses will run and operate themselves. And that's why we bought these two companies.

Okay. And then thinking about the deal model, normally, you let your operating units run autonomously. But is there upside to your deal model if Jet Parts Engineering and Victor Sierra start distributing the PMAs from your other operating units?

Potentially, but our businesses run themselves. So anything of that sort would have to be an arm's length agreement between the op units and those businesses. That certainly wasn't in our acquisition case and not what we banked on. I think, as you guys know, our 53 businesses, going on 56, will run themselves independently.

Just a couple for me. First of all, on the acquisitions. they looked a bit pricey. And I was wondering if that was reflective of broader M&A market trends in aerospace and defense at the moment. And then secondly, do you expect to see similar opportunities for value-based pricing readjustments going forward?

On the valuation multiples, ideally, you would want to acquire assets for less than their actual cost. However, the market dictates prices, and in the current climate, we need to invest more to acquire these businesses. The amount we paid is not something we consider excessive. It aligns with our target of approximately 20% internal rate of return. We are satisfied with our acquisitions, believe we paid reasonable prices, and do not feel that we overpaid considering today’s valuation landscape. And on the pricing, I think it's going to be similar playbook as we've deployed our acquisitions over time at TransDigm. Basically, no change there.

Patrick, I think in your prepared remarks, you mentioned that you've seen no material share loss from PMAs. I guess within that, what would you define as material? Is it less than 1% share loss per year?

We just think that's something small and it's not something that we're seeing. Our operating units are where they're sort of fighting this or looking for that potential risk to pop up. Right now, our teams are delivering very well to the market. They're satisfying the demand for all of our customer needs. Our on-time delivery has improved significantly over the last few quarters over the last year, and I think we're well positioned to defend ourselves there and it's just not something that we see as an issue.

Okay. And then just to clarify, does Jet Parts currently have many PMAs on existing TransDigm products? And is there any kind of conflict of interest that needs to be managed through there? Or can it all just be done by the typical TransDigm playbook of running them as their own entities?

Yes. I think the playbook is they'll run themselves as their own entities. That's the game plan for all of our businesses. Consistent with how we do it here, and there's no significant or sizable overlap to your other question.

This is Jordan Lyonnais on for Ron. On Jet and Victor, if we look out 3 years and you start to realize revenue synergies, do you guys have a target or an idea of how much you would like to see your PMA business grow? Or what percentage of the portfolio you'd be comfortable with?

That's not necessarily how we looked at it in terms of overall TransDigm. Again, we footed as we bought these businesses, we modeled it up and we built a 5-year LBO model, same approach we've always taken and ask ourselves, can we hit 20% IRR at the price we have to pay. And we think that's the case with both of these businesses, but we're not footing necessarily to a total percentage growth target for TransDigm's overall CAM in year 5. We think these are great businesses. That's why we bought them. We think there's a good growth trend here in PMA. It's something that's not going to see explosive growth, but it's probably going to grow a little bit above the market. This gives us position in that space and a way to benefit from that growth. Again, we look forward to getting both deals closed and owning these businesses and then watching them continue to grow.

Just to follow up on the PMA acquisitions, I'm interested to know if the margin structure of that kind of business aligns with that of TransDigm's core business. When we examine companies like HEICO, their segment margins in the related business are about half of that. I understand there might be differences in accounting or other factors, but I'm wondering if there are any structural limitations to increasing the margins of the acquired businesses to meet the company average.

We think these are great businesses. We're excited to own them both. In terms of margin targets, we did not model these as getting anywhere close to the TransDigm margin level. There's good volume growth here. That's part of what drives and helps you get to the 20% IRR. But in terms of how we model these businesses up, we did not model the margins getting to the TransDigm level.

Okay. And do you know if those businesses have an engine, if you will, internally to constantly develop new PMA parts? And if so, kind of at what rate they've been introducing new PMA parts per year?

Yes. And they both do. They've got engines in both businesses that do this. That's what drives the growth, and they've got a solid track record of having done it. In terms of the exact numbers they've done, we know it, obviously through our diligence. It's good sizable growth they drive every year through those efforts. And we're not going to disclose the exact numbers, but it's pretty sizable introductions that drive good revenue growth.

Okay. And last one, just quickly on M&A beyond that what you've announced, how would you characterize the pipeline?

Just as I said in the comments, active in the small to midsize range. We're working away at it. M&A is impossible to predict. We're working hard.

Mike, and Patrick and Sarah, thanks for the time. Maybe Mike, just to pivot over to the commercial OE side. Can you just talk about some of the puts and takes as we think about the range of high single to mid-teens on the guide? And just to clarify, you feel like you're basically through the destock you've seen on the MAX and some of the other major programs at Boeing?

Yes, Ken, I'll take this one. This is Patrick. Yes. We do think we're through that destocking. As both Boeing had their strike issues last year, what we saw from our Tier 2 and Tier 3 customers that we're supplying, they continued to order at mixed rates. And so what that meant was there was some bleed out over the past, let's say, quarter to two quarters as they're kind of getting back to the normal pattern. That we think is done at this point in time. So we're encouraged that we're all in lockstep supporting the Boeing and Airbus build rates. As far as what we expect to see going forward, right now, there are positive indicators from Boeing and Airbus about what they can do. That should create some tailwind for us as we continue to support that. We're encouraged by what we see, but there's still risks, right. There are still things that could go wrong in the supply chain, as you heard about from some of the other companies that support this growth rate in this business segment.

Thanks, Patrick. So as we just think about the range, I guess, I don't want to put words in your mouth, but if things go according to plan, that's probably mid-teens, but the high single just reflects maybe some conservatism rightly so just sort of based on recent track record? Or how would I interpret that?

I think it's fair to say that there are other factors involved beyond just commercial transport, Boeing, and Airbus that contribute to our numbers here.

And I would add too, Ken. I mean this is a segment, as you know, the last two years, the ramp-up has been more challenged than we thought. So hopefully, our range and as broad as we made the brackets ends up being conservative at the low end, but time will tell. Past two years, you probably would have liked to have some of that cushion, and we will see whether or not this year we need it again.

I wanted to begin by mentioning that you expressed earlier a hope that the margin forecast for the year would be conservative. It seems to align with what you achieved in the first quarter, and with Simmonds being included for nearly the entire quarter, margins typically tend to improve over the year. Aside from being conservative, is there anything else to consider regarding why that margin wouldn't increase throughout the year?

I think it's a bit of conservatism and then also just we'll see where commercial OEM goes and how that ramp-up and the growth comes from there. As you guys know, that's a lower margin segment for us. So as that outgrows other things, it presents a bit of a headwind. We're early in the acquisitions. So we're probably conservative in the margins we forecasted for both those businesses as well. So time will tell. But I think it's fair to say there's a healthy dose of conservatism here on the margins included too. And we'll aim to be there.

I understand. Just to follow up, while I know you aren't providing specific guidance on acquisitions, you have previously hinted at how they might affect margins. With the addition of these three pending deals, how should we view the potential reset of margins from their current state?

Yes. We don't want to give guidance until things actually close. So we'll cross that bridge when we come to it. I think you guys know the way past acquisitions go, usually dilute you down a little bit on the margin. And it would be safe to assume that you can expect something like that with these three new op units as well.

Maybe pivoting away from commercial aerospace and PMAs. Your defense business is now more than 40% of the portfolio. And if you look at the ecosystem, a lot of the primes have called out some of the sole-source providers in the supply chain as creating bottlenecks for the ability to convert the $540 billion record defense backlog into revenue. Your pricing model has gotten a lot of attention, but your operating excellence also is a significant variable for the company. Is this an opportunity for you to roll up some of more of these mom-and-pop shortages? How do you see that opportunity set there? Because some of the companies we're seeing that are providing these solutions, you're seeing 20% plus growth in those kinds of ecosystems. It would be great to get your perspective here.

Kristine, as you know, we focus on mergers and acquisitions by looking at both commercial and defense businesses. Our interest lies in highly engineered aerospace and defense components, irrespective of their market focus. We believe we are an excellent supplier to the Department of Defense and prime contractors due to our on-time delivery and high-quality products. Many of the businesses we acquire that work in defense typically contribute only a portion of their revenue to that sector. We enhance on-time delivery, performance, and quality, which makes TransDigm's operating units appealing and reliable partners because they are quick, adaptable, and meet their delivery commitments. This definitely adds value for those within the supply chain up to the prime level, as it ensures they receive the necessary parts to meet the demands of their customers, including U.S. and international governments. Regarding small businesses in the defense sector, we are not actively pursuing them; our approach is more geared toward larger acquisitions, without focusing on any single market. If we had our preference, we would look to acquire more in the commercial sector than in defense, as we are primarily a commercial supplier.

Super helpful. And then on the growth question on the revenue side. When you look at the backlog, we've seen the backlog for big defense primes up double-digit CAGR in the past 3 years. How conservative is your defense outlook? And what are the variables that could potentially get you through a higher revenue growth for the year versus your guidance?

Yes. I think that what you're saying is true. We're seeing some good demand. Our bookings are strong. They're ahead of expectations outpacing our sales. So if that were to continue, we could see some upside here. But these lead times are a bit longer as well, Kristine. And it's hard to anticipate exactly how that will play out over the next, say, 6 to 9 months. But over the long term, we are seeing good positive indicators in this market segment, and we're well positioned to support that.

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