TransDigm Group Incorporated (TDG) Earnings

Management highlights

- Core Strategy Summary * TransDigm maintains a consistent long-term strategy focused on intrinsic shareholder value creation across aerospace cycles, targeting private equity-like returns with public market liquidity * 90% of net sales come from unique proprietary products, with most EBITDA generated from higher-margin, more stable aftermarket revenue * Strategy priorities: own/operate proprietary aerospace businesses with high aftermarket content, use a proven value-based operating methodology, maintain decentralized organization with shareholder-aligned compensation, pursue disciplined acquisitions fitting the model, and optimize capital structure and allocation - Operational Highlights & M&A Updates * All three segments delivered healthy year-over-year and sequential revenue growth, with overall Q3 results exceeding market expectations * The company withdrew from the planned acquisition of Stellent in mid-July after the Department of Justice announced it would challenge the transaction; management views this as a one-off outcome that will not change future M&A approach, and will prioritize alternative uses of shareholder capital * TransDigm announced a binding agreement to acquire Princeton IZANT for $1.1 billion in cash; Princeton IZANT is a leading designer/manufacturer of highly engineered brazing alloys and specialty medical components primarily serving aerospace and defense end markets, expected to generate ~$360 million in 2026 calendar year revenue, and fits TransDigm's acquisition criteria * Recent acquisition integration is progressing ahead of plan: Simmons Precision (acquired at the start of fiscal 2026) is outperforming expectations, and JetParts and Victor Sierra (closed early Q3) are integrating smoothly * Multiple innovation-driven new business wins were secured in Q3, including a full touch-free lavatory product suite line fit award, a qualified replacement battery for a critical fighter aircraft system, a precision landing gear actuator for a new unmanned combat aircraft, and an upgraded audio indicator for U.S. Forest Service aircraft; these wins are expected to deliver substantial new revenue over the next three years - Capital Allocation * Priorities are unchanged: 1) reinvest in existing businesses, 2) pursue disciplined M&A, 3) return capital to shareholders via buybacks or dividends; paying down debt is not a near-term priority * TransDigm has over $10 billion in remaining M&A capacity and ample liquidity, ending Q3 with $2.8 billion in cash and a net debt-to-EBITDA ratio of 5.8x, within the target 5-7x range * ~$980 million was deployed for open market share repurchases in Q3, bringing year-to-date repurchases to $1.8 billion at an average purchase price of $1,208 per share * 75% of gross debt is fixed rate through fiscal 2029, providing protection against near-term interest rate volatility

Guidance

- Full fiscal 2026 guidance has been raised to reflect stronger-than-expected Q3 performance and current Q4 expectations * Revenue guidance midpoint is increased by $150 million to $10.51 billion, representing ~19% YoY growth * EBITDA guidance midpoint is increased by $100 million to $5.52 billion, representing ~16% YoY growth, with an expected full-year EBITDA margin of ~52.5% (including over 200 basis points of dilution from recent acquisitions) * Free cash flow guidance is increased from $2.5 billion to ~$2.6 billion * Adjusted EPS guidance midpoint is now $41.04 - Segment growth assumptions for full fiscal 2026 were also raised: * Commercial OEM: mid-teens percentage growth * Commercial aftermarket: low double-digit percentage growth (up from prior guidance of high single-digit growth) * Defense: high single-digit to low double-digit percentage growth - Management expects Boeing and Airbus production ramps to continue into Q4 fiscal 2026 and fiscal 2027, with TransDigm well positioned to support this growth - On a constant mix basis, the base business continues to target 100 to 150 basis points of annual organic margin improvement, a target that remains unchanged

Segment performance

All results below are pro forma, excluding newly acquired JetParts Engineering and Victor Sierra Aviation to highlight base business performance: 1. Commercial OEM: Total revenue increased 17% year-over-year (YoY). Commercial transport OEM (excluding bizjets) grew 25% YoY, driven by rising production rates at Boeing and Airbus. Bookings outpaced sales, with a solidly positive book-to-bill ratio and double-digit commercial transport booking growth. This segment contributes approximately 20-25% of total company revenue. 2. Commercial Aftermarket: Total revenue increased 17% YoY, with commercial transport aftermarket (excluding bizjets) growing 18% YoY. Strength was broad-based across engine and passenger interior submarkets, while freight was flat. Distributor point-of-sale grew 10%+ YoY, and bookings exceeded expectations for the third consecutive quarter. Approximately 90% of TransDigm's net sales come from proprietary products, with most EBITDA derived from this higher-margin aftermarket segment. This segment contributes roughly 45-50% of total company revenue. 3. Defense: Total revenue (combining OEM and aftermarket) grew 11% YoY, with aftermarket growth slightly outpacing OEM growth. Growth was well distributed across all businesses and customers, and bookings increased both YoY and sequentially, outpacing sales. This segment contributes approximately 25-30% of total company revenue. For the overall third quarter, adjusted EBITDA margin was 52.8%, including over 200 basis points of dilution from recent acquisitions. Operating cash flow was over $700 million, ending the quarter with $2.8 billion in cash. Year-to-date free cash flow hit $2.1 billion.

Risks & headwinds

- The proposed U.S. right-to-repair legislation for the defense sector is still evolving, so management cannot yet assess its final impact; any material impact will depend on the final terms of the law - While jet fuel prices have risen and some airlines have adjusted short-term capacity following the Middle East conflict, no material impact on TransDigm's business has been observed to date; the situation continues to be monitored closely - Commercial OEM guidance includes an appropriate level of risk related to Boeing and Airbus's ability to maintain planned production rates through the end of fiscal 2026 - Supply chain conditions are generally solid, but lingering constraints in some areas continue to be monitored - M&A outcomes are inherently unpredictable, and regulatory scrutiny can occasionally derail planned transactions, as seen with the withdrawn Stellent acquisition - Quarterly defense revenue and bookings can be lumpy quarter-to-quarter, creating near-term volatility

Analyst Q&A

• Q: Does the blocked Stellent acquisition change TransDigm's approach to defense M&A, and what is the current state of the M&A pipeline? /

  A: Management views the Stellent outcome as a one-off, not indicative of future regulatory outcomes for defense deals. Out of 100 historical acquisitions, this is only the third blocked for regulatory reasons. The blocked transaction will not change the overall M&A strategy, and the pipeline remains active across both commercial and defense aerospace, with most prospective targets still in the small-to-mid-size range.

• Q: Given concerns that TransDigm has saturated its core aerospace and defense market, would management consider expanding acquisition target selection to other industrial markets that fit its proprietary/aftermarket criteria? /

  A: TransDigm will remain primarily focused on its core aerospace and defense end market, which represents 95% of current revenue and is the sector management knows best. Management has already closed more than $3 billion in core market acquisitions in fiscal 2026 and sees ongoing strong opportunities in aerospace and defense, so that will remain the focus for the foreseeable future. While expansion beyond core is not impossible long-term, it is not a current priority.

• Q: How does mix shift impact ongoing margin expectations, and what is the current target for organic margin improvement? /

  A: The target for 100 to 150 basis points of annual organic margin improvement on a constant mix basis remains unchanged, and this target has held through the current year. While faster growth in the slightly lower-margin commercial OEM segment creates a small mix headwind, it typically only impacts margin by a few tenths of a percentage point, which is not material enough to prevent TransDigm from hitting its margin targets.

• Q: What is the scale of the defense business SKU portfolio, and how vulnerable would it be to new right-to-repair rules allowing third-party repairs? /

  A: Management notes the right-to-repair legislation is still evolving, so it cannot assess impact until a final version is set. Broadly, the defense business has tens of thousands to hundreds of thousands of SKUs, not just a few thousand, with most parts being broadly derived from commercial technologies. A more concrete discussion will be possible once the legislation is finalized.