TransDigm's Q4 2025 Earnings Call: Contradictions Highlight Diverging Views on Defense Growth, Aftermarket Projections, and M&A Strategy

Date of Call: November 12, 2025

Financials Results

• Revenue: Midpoint fiscal 2026 revenue guidance $9.85B, up approximately 12% YOY
• EPS: Adjusted EPS midpoint $37.51 for fiscal 2026 (midpoint guidance)

Guidance:

• Midpoint fiscal 2026 revenue $9.85B (~+12% YOY).
• FY26 EBITDA as defined midpoint $5.15B (~+8%); expected EBITDA margin ~52.3% (includes ~200bps acquisition dilution and ~0.5–1.0ppt OEM/defense mix headwind).
• Q1 expected to be the lowest quarter (≈10% fewer working days); margins to start lower and improve sequentially.
• Market growth assumptions: commercial OEM high single‑digit to mid‑teens; commercial aftermarket high single‑digit; defense mid‑ to high‑single‑digit.
• Adjusted EPS midpoint $37.51; net interest ≈$1.9B (avg rate ~6.3%); tax rate 22–24%; shares ~58.5M.
• CapEx ≈$300M; estimated free cash flow ≈$2.4B; pro forma year‑end cash ≈$4B (net debt/EBITDA ≈5x).

Business Commentary:

• Strong Financial Performance and Margin Expansion:
• TransDigm Group reported a solid Q4 margin of 54.2% and strong operating cash flow generation of over $500 million.
• Growth in the commercial aftermarket and diligent focus on operating strategy contributed to the margin expansion.

• Commercial OEM Market Recovery:
• Commercial OEM revenues returned to growth, increasing by 7% in Q4.

• This was driven by higher build rates following destocking trends observed last quarter.

• Defense Market Growth:

• Defense market revenue grew by 16% in Q4 and 13% for the full year.
• Growth was supported by new business wins and strong performance across both OEM and aftermarket components.

• Capital Allocation Strategy:
• TransDigm allocated approximately $7 billion across M&A and shareholder returns in fiscal 2025.
• This strategy reflects the company's focus on disciplined M&A, reinvesting in businesses, and returning capital to shareholders.

Sentiment Analysis:

Overall Tone: Positive

• Management: "we closed out the year with a good quarter"; Q4 EBITDA as defined margin was 54.2%; "strong operating cash flow generation in Q4 of over $500 million"; fiscal '26 revenue guidance midpoint $9.85B (+~12%) and EBITDA midpoint $5.15B (+~8%), signaling confidence in growth and cash generation.

Q&A:

• Question from Scott Mikus (Melius Research LLC): Mike, when Kevin was CEO, the company opened up the M&A aperture by expanding into test and measurement businesses, but they were still primarily aerospace related. You're still early in your career and could be leading TransDigm for quite a while. Is there a possibility that under your tenure, TransDigm takes a more serious look at acquisitions outside of aerospace and defense where you're still comfortable that you can hit your 20% IRR target?
  Response: Focus remains on aerospace and defense component businesses; may consider adjacent areas like test & measurement over time, but no material branching out today.

• Question from Scott Mikus (Melius Research LLC): Okay. And then you talked about the strength in orders in the aftermarket. Were there any noticeable trends among the four submarkets there, whether it's freight, interior, biz jet, helicopter, passenger? Just any pockets of strength or pockets of weakness you saw?
  Response: No dramatic changes; interiors refurb activity picked up, engines strong, and freight improved versus the prior year.

• Question from Robert Stallard (Vertical Research Partners, LLC): Just a couple from me on the 2026 guidance. First of all, on defense, that's a big slowdown for '26 versus what you've recently experienced for 2025. So I was wondering if you can give some more clarity on that. And then on the aerospace aftermarket, are you assuming a normal level of TransDigm pricing as you move into '26?
  Response: Defense guidance is intentionally conservative given lumpiness despite strong bookings; commercial aftermarket pricing approach unchanged—aim to offset inflation plus modest real price.

• Question from Kenneth Herbert (RBC Capital Markets, Research Division): Mike and Sarah, I appreciate the comments on the margin dilution from the recent acquisitions. Two questions really. First, how do we think about the ability to get the recent acquisitions up to sort of TransDigm margins? Do they have that capability? And what's the time frame to think about that? And then second, just wanted to confirm, excluding those, I think you've typically talked about sort of 50 to 100 basis points of annual margin expansion. Is that what we would normally expect, obviously, aside from the dilution of the acquisitions?
  Response: Excluding acquisition and mix effects, underlying margin improvement is in the ~1–1.5% range; Simmonds and Servotronics can be moved toward TransDigm margins over time, but timelines vary.

• Question from Kristine Liwag (Morgan Stanley, Research Division): You guys touched on your contract award for the F-47. I was wondering, can you give more color on your content in this program? And how does this compare to your content on other fighter programs like the F-18, F-22, F-35?
  Response: Cannot disclose specific unit-level content; management is actively pursuing and hopeful the program will be meaningful for the company.

• Question from Myles Walton (Wolfe Research, LLC): I was wondering if we could chat about the CapEx and headcount comments you made. The CapEx looks like it's set to double just over the last couple of years. And you mentioned some of the automation investment. But I guess how much of that is automation to facilitate better productivity versus higher output? And is it more military or commercial? And the headcount, can you just clarify, are you saying flat headcount inclusive of the additional heads from Simmonds, which closed after the quarter?
  Response: Headcount is expected roughly flat on a pro forma basis including Simmonds; CapEx is a mix of automation for productivity and some capacity projects determined by unit needs.

• Question from Myles Walton (Wolfe Research, LLC): Okay. And just one quick follow-up on cash flow. What is the working capital investment or source that you're expecting in '26?
  Response: Expect working capital roughly 2.5%–3% of sales, similar to prior years.

• Question from Sheila Kahyaoglu (Jefferies LLC, Research Division): Maybe if I could ask on the commercial aftermarket, Mike, if you want. Commercial aftermarket, 11% in the quarter, accelerated from the 6% in Q3. So how much of that was an engine hold up, whether it was at distributors or whatnot? And as we think about '26, how do we think about passenger versus freight engines and interiors?
  Response: Guidance built bottoms-up by units; freight expected steady growth, interiors saw stronger refurbs (including Asia/Middle East), engines strong but management remains cautiously optimistic, passenger avionics expected to rebound.

• Question from Gavin Parsons (UBS Investment Bank, Research Division): If you look at your OEM kind of underlying volume, the organic basis, revenue is up kind of 15%, 20% from 2019. But do you feel like on a volume basis, you're pretty aligned with OEMs at this point?
  Response: No further inventory destock is expected; commercial OEM headwinds seen as temporary and guidance reflects a recovery with a wider bracket due to ramp uncertainties.

• Question from Gavin Parsons (UBS Investment Bank, Research Division): On the 200 basis points of M&A dilution, maybe you can correct my math here, but it seems like you're assuming very little margin contribution from M&A.
  Response: Yes—these recent acquisitions came in at materially lower-than-average acquisition margins (~200bps dilution), though management expects improvement over time.

• Question from Seth Seifman (JPMorgan Chase & Co, Research Division): I guess following up on the issue of underlying margin expansion and the mix headwinds you talked about for this year that limit the underlying margin expansion. Given increasing production rates over the next several years, it seems like that's a headwind to the underlying margin expansion that's going to persist or potentially accelerate. And so at least for the next couple of years in this decade, the underlying margin expansion potential in the business is limited by a differential between OE and aftermarket growth rates as it is this year?
  Response: Margins should still improve year-over-year; OEM outgrowth can create modest headwinds (a couple tenths), but it doesn't negate expected underlying margin gains.

• Question from Seth Seifman (JPMorgan Chase & Co, Research Division): Great. Great. And just a quick clarification. I think you mentioned earlier in the call, $300 million of other small tuck-in M&A. Is that end stuff that remains organic? Or is there an inorganic component of the sales that's coming in '26 from that additional M&A?
  Response: It's a mixed bag of small tuck-ins across operating units; some will add inorganic sales and were folded into planning.

• Question from Scott Deuschle (Deutsche Bank AG, Research Division): Mike, can you share any detail on the average contract duration at Simmonds? Just trying to get a sense for the timing at which future pricing actions layer into results.
  Response: Simmonds has a typical mix of contract durations—some short, some life‑of‑program—nothing dramatically different from prior acquisitions.

• Question from Scott Deuschle (Deutsche Bank AG, Research Division): Okay. And Joel, just to follow up on Myles' question. Should we expect this decoupling of sales growth from headcount growth to continue beyond '26 as you make additional automation investments? Or should those realign more closely as we exit '26?
  Response: Management expects automation and productivity initiatives to keep headcount growth below sales growth and to raise sales per employee over time.

• Question from Gautam Khanna (TD Cowen, Research Division): I just had two quick ones. One, I was curious if you could give us an update on the sell-in versus sell-through through how the distributors that you own what they saw on aftermarket, I may have missed it. And then secondly, I just wanted to get your broader thoughts on the War Secretary's acquisition reform speech that he gave last week. How, if at all, do you think it would impact TransDigm?
  Response: Distributor POS outpaced underlying aftermarket due to engine-weighted mix; channel inventory was ~0.5 month lower year-over-year (~1–2 point impact to CAM); management is optimistic about acquisition reform and believes TransDigm's commercial, firm‑fixed‑price approach positions it well.

• Question from Ronald Epstein (BofA Securities, Research Division): Two, a follow-up. The first one, yes, just following up on the last question, Gautam's question and also Kristine's, I think, trying to get at. So if you can say -- so F-47 is the first major new program we've seen in a while. if you can answer this, was your experience bidding for the work on it any different than it was on any previous programs? I mean I think the fear out there is, and you probably understand this, that somehow that the DoD is doing things that are going to make things somehow less profitable or something like that. I mean was the bidding process sort of how you would expect it? Or was it somehow different than it was in the past?
  Response: Bidding and award process for F‑47 proceeded similarly to past programs; no material changes observed.

• Question from Ronald Epstein (BofA Securities, Research Division): Good to know. Good to know. And then maybe just as a follow-on, and people have been talking about this. There is a case out there that somehow that TransDigm just won't grow their aftermarket business like maybe some peers will because you guys don't have enough engine exposure that somehow you're too big to do M&A and have it be meaningful. How would you respond to that? I mean if someone confronted you with that and said, hey, you know what, you guys are just getting too big and nothing is really going to move the needle, and that is sort of the bear case. How would you respond to that?
  Response: Management's response: focus on execution and value creation—continue M&A and operational initiatives where returns meet the firm's disciplined targets and will adjust if things aren't working.

• Question from Jonathan Siegmann (Stifel, Nicolaus & Company, Incorporated, Research Division): Just on defense, just a lot of talk about new missile programs and drones. You guys have highlighted your good positions on the Predator and the Patriot. Just where do you fit on some of these newer, lower-cost programs? Is that an opportunity for TransDigm, recognizing you're not going to be on the lowest, smallest end, but how about some of these new programs on the medium size and cost range?
  Response: TransDigm has solid, but undisclosed, wins on several newer programs and believes its engineering depth and commercial approach create opportunities in medium‑cost defense platforms.

Contradiction Point 1

Defense Growth Expectations

It involves differing expectations for defense growth, which could impact investor expectations and strategic planning for the company.

What caused the significant decline in defense growth for 2026 compared to 2025? - Robert Stallard(Vertical Research Partners, LLC)

2025Q4: Defense growth is lumpy, and guidance is conservative. However, TransDigm remains optimistic about defense opportunities. - Joel Reiss(Co-Chief Operating Officer)

Can you provide more details on defense bookings and short-cycle aftermarket growth? - Kenneth George Herbert(RBC Capital Markets)

2025Q3: Defense bookings were strong year-to-date, indicating good growth for the next fiscal year. - Michael J. Lisman(Co-COO)

Contradiction Point 2

Aftermarket Growth Expectations

It involves differing expectations for commercial aftermarket growth, which could impact investor expectations and strategic planning for the company.

Would TransDigm pursue acquisitions outside aerospace and defense during your tenure? - Scott Mikus(Melius Research LLC)

2025Q4: The fourth-quarter aftermarket growth is expected to be within the guidance range of high single-digit to low double-digit. - Michael J. Lisman(CEO, President & Director)

Can you provide an update on aftermarket performance for the quarter and future outlook? Were there any unexpected declines recently? - David Egon Strauss(Barclays Bank PLC)

2025Q3: The commercial aftermarket growth is as expected, slightly moderating from the early COVID rebound. - Michael J. Lisman(Co-COO)

Contradiction Point 3

Commercial Aftermarket Growth Trends

It involves the reported trends in the commercial aftermarket, which are crucial for understanding market dynamics and revenue growth.

Were there trends in strength or weakness among the four commercial aftermarket submarkets? - Scott Mikus (Melius Research LLC)

2025Q4: No dramatic changes in the commercial aftermarket. Interiors saw more activity this year, and engine performance remains strong. Freight, previously weak, showed improvement. - Joel Reiss(Co-Chief Operating Officer)

How do commercial aftermarket segments compare to pre-pandemic levels? - Josh Korn (Barclays)

2025Q2: All four segments performed well, with most above pre-pandemic levels except for interiors, which have not fully recovered. - Kevin Stein (President & CEO)

Contradiction Point 4

M&A Strategy

It involves the company's M&A strategy and its focus on specific areas, which is critical for growth and strategic direction.

Will TransDigm pursue acquisitions outside aerospace and defense during your leadership? - Scott Mikus (Melius Research LLC)

2025Q4: It's probably not our current focus area. So we are aware of some of the companies out there in the defense side of that, but we are not -- I think it's probably unlikely that that's where we'd go with our current M&A focus. - Michael Lisman(CEO, President & Director)

What M&A opportunities do you see, and how does aerospace and defense compare to other industrials in the mix? - Ron Epstein (BofA Securities, Research Division)

2025Q1: We are still going to be focused on these core aerospace and defense areas, but we see a good opportunity for the test and measurement side of the business. - Kevin Stein(President & CEO)