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# TransDigm Group (TDG): Business, Risks and Management's Discussion, Fiscal 2026 Third Quarter TransDigm's fiscal year ends September 30. The third quarter of fiscal 2026 is the thirteen weeks ended June 27, 2026. All amounts are in US dollars. ## Business *From the fiscal 2025 Form 10-K (fiscal year ended September 30, 2025), accession 0001260221-25-000081.* TransDigm designs, makes and sells highly engineered aircraft components. Its parts are on nearly every commercial and military aircraft in service. The company estimates that about 90% of fiscal 2025 net sales came from proprietary products, and about 55% came from the aftermarket, mostly commercial and military. That aftermarket share is the core of the model. Once a part is designed into an aircraft, TransDigm earns replacement and repair revenue for the 25 to 30 years the aircraft flies. A platform can stay in production for 20 to 30 years, so the company puts a product's life cycle at more than 50 years. Management says aftermarket revenue has historically earned higher gross profit and been more stable than sales to original equipment manufacturers (OEMs). By market channel, TransDigm says commercial aftermarket (commercial, regional, business jet and general aviation) generally makes up 30% to 35% of annual net sales. Commercial OEM makes up 25% to 30%, and defense, which covers defense OEM work and aftermarket sales to the U.S. and friendly foreign governments, about 35% to 40%. In fiscal 2025, the segment note reports $2,804 million of commercial and non-aerospace aftermarket sales, $2,106 million of commercial and non-aerospace OEM sales, $3,761 million of defense sales and $160 million of non-aviation sales, out of $8,831 million in total. The company reports three segments: - **Power & Control** ($4,559 million of fiscal 2025 net sales): systems and components that supply or control power on the aircraft. Products include actuators and controls, ignition systems and engine technology, specialized pumps and valves, power conditioning devices, AC/DC motors and generators, batteries and chargers, databus and power controls, sensors, hoists, winches, cargo-handling systems and microwave electronic components. Customers include engine and power-system suppliers, airlines, maintenance providers and military buying agencies and depots. - **Airframe** ($4,112 million): non-power airframe and cabin products. These include latching and locking devices, engineered rods and connectors, elastomer seals, cockpit security systems and displays, audio, radio and antenna systems, lavatory components, seat belts and restraints, interior surfaces, thermal insulation, lighting, parachutes, and flight, wind-tunnel and engine testing equipment and services. - **Non-aviation** ($160 million): seat belts for ground transportation, actuators for space applications, actuators and fuel valves for land-based gas turbines, refueling systems for mining and construction equipment, and turbine controls for energy and oil and gas. TransDigm's strategy rests on two things. The first is an operating method built on three "value drivers": winning profitable new business, continually cutting costs, and pricing engineered products to reflect their value. The second is selective acquisition of proprietary aerospace businesses with significant aftermarket content. Since its founding in 1993, the company has acquired 95 businesses and various product lines. No customer accounted for more than 10% of fiscal 2025 net sales, but the top ten accounted for about 40%. Net sales to foreign customers were $3,296 million in fiscal 2025. At September 30, 2025, TransDigm had about 16,500 employees, about 15% of them unionized. It had roughly 120 manufacturing facilities in 25 U.S. states and 14 other countries, and its headquarters is in Cleveland, Ohio. Sales tend to be lowest in the first fiscal quarter because holidays reduce the number of working days. TransDigm says it varies its leverage to optimize equity returns and to pursue acquisitions. It returns capital through special dividends and share repurchases and does not pay a regular dividend. Total debt was $30,015 million at September 30, 2025, and TD Group stockholders' deficit was $9,686 million. Excess cash is allocated in this order: capital spending, acquisitions, special dividends or share repurchases, and debt prepayment. ## Risk factors *From the fiscal 2025 Form 10-K, accession 0001260221-25-000081. The fiscal 2026 third-quarter 10-Q (accession 0001260221-26-000053) reports no material changes to these risk factors.* - **Concentration in aerospace and defense.** The business is almost entirely aerospace and defense, so a disruption in that industry could hurt TransDigm more than more diversified peers. Commercial demand depends on revenue passenger kilometers, the size and age of the global fleet, the share of the fleet that is out of warranty, and airline profitability. When airlines are under pressure, they draw down spare-parts inventories and defer purchases. - **Leverage and covenants.** TransDigm carries a very large debt load. All of its term loans and its receivables securitization facility pay floating rates tied to Term SOFR, which the company partly hedges with swaps and collars. The credit agreement and note indentures limit additional borrowing, distributions, investments, asset sales and mergers. A default could accelerate the debt and let secured lenders take the collateral, including cash. Servicing the debt depends on future cash generation, and refinancing could come at higher rates. - **Acquisition dependence.** Much of TransDigm's growth has come from acquisitions. Growth depends on finding targets at acceptable prices, getting regulatory approval and integrating the businesses. Deals can dilute margins and add debt, amortization and possible impairment charges. Goodwill was $10,612 million (46% of total assets) at September 30, 2025, and other identifiable intangible assets were $3,454 million (15%). - **U.S. Government as customer.** The government can terminate contracts for convenience, suspend or debar suppliers, and audit costs. Most of TransDigm's U.S. Government contracts are firm-fixed-price, so the company bears cost overruns. The Department of Defense periodically audits prices paid for its subsidiaries' products. An audit could push prices to cost plus a nominal fee or lead the government to find other suppliers. Defense sales also depend on defense budgets and spending priorities. - **Fixed-price and uncommitted sales.** Most aftermarket customers have no long-term contracts. Many OEM contracts can be ended on short notice and carry no minimum quantities. Multi-year fixed-price contracts leave TransDigm exposed to raw-material, tax and labor cost inflation. - **OEM cyclicality and supply chain.** Sales to Boeing, Airbus and business-jet makers have historically gone through downturns. Shortages of supplier components or raw materials are hard to fix quickly because aviation-authority and OEM certification makes switching suppliers slow. - **Regulation, export controls and approvals.** Selling products requires FAA, Department of Defense, foreign-agency and OEM certifications. Exports are governed by ITAR, EAR and OFAC sanctions rules, and losing approvals or breaking these rules could restrict foreign sales. - **International operations.** Risks include war, sanctions (the company is monitoring the Russia–Ukraine conflict and related aviation-sector sanctions), currency, tariffs and trade policy, and anti-corruption compliance. - **Product liability and reputation.** A product failure could lead to injury or death claims that insurance may not fully cover. A crash linked to a TransDigm part could damage its reputation with customers. - **Cybersecurity and data protection.** TransDigm has experienced data-security incidents, though none had a material financial impact. It handles classified and sensitive data, and it expects threats to grow as attackers use AI. - **People and succession.** The company depends on skilled engineering and manufacturing staff and on succession planning for senior management. Work stoppages are a particular risk because it keeps finished-goods inventory low. - **Other.** These include environmental remediation liabilities at sites where TransDigm is a potentially responsible party, changes in tax law (including OECD Pillar Two minimum-tax rules adopted in Canada, the U.K. and Germany), climate-related regulation and physical risk to facilities, and the irregularity of special dividends. TransDigm does not plan to pay regular quarterly or annual dividends. ## Management's discussion: fiscal 2025 *From the fiscal 2025 Form 10-K, accession 0001260221-25-000081.* Fiscal 2025 net sales rose 11.2% to $8,831 million from $7,940 million. Organic sales grew $615 million (7.7%), driven mainly by defense and the commercial aftermarket, and acquisitions added $276 million, or 3.5 points of the 11.2% growth, as acquisition sales rose to $321 million from $45 million. Commercial aftermarket sales grew because air travel demand was strong, and global traffic remained above pre-pandemic levels with record load factors in some markets. Commercial OEM sales fell compared with fiscal 2024. Boeing and Airbus production stayed well below pre-pandemic rates because of supply-chain and labor problems, and the effect on TransDigm's operating units was uneven. Defense sales rose on continued U.S. Government spending outlays. Management said tariffs had no significant effect in fiscal 2025 and were not expected to have one in fiscal 2026, because TransDigm is mainly a domestic manufacturer. Gross margin widened to 60.1% from 58.8%. Selling and administrative expenses fell $35 million to $945 million, largely because non-cash stock compensation was lower. Net interest expense rose 22.2% to $1,572 million because of higher borrowings and lower interest income. The effective tax rate was 21.1%, compared with 22.6%. Net income attributable to TD Group rose to $2,074 million from $1,714 million. Earnings per share were $32.08, compared with $25.62, after a $3.58-per-share reduction for dividend equivalent payments. EBITDA As Defined, the company's non-GAAP profit measure, rose 14.1% to $4,760 million, a margin of 53.9% compared with 52.6%. By segment, Power & Control sales grew 15.0% to $4,559 million, with EBITDA As Defined of $2,595 million (a 56.9% margin). Airframe sales grew 8.0% to $4,112 million, with EBITDA As Defined of $2,210 million (53.7%). Operating cash flow was $2,038 million and capital expenditures were $222 million. Capital deployment was dominated by special dividends: - A $75.00-per-share special dividend declared in fiscal 2024 was paid in October 2024 (about $4,216 million, plus $132 million of dividend equivalents). - A $90.00-per-share special dividend declared on August 20, 2025 was paid in September 2025 (about $5,073 million, plus $159 million of dividend equivalents). It was funded with $5,000 million of new debt issued on August 19, 2025: $500 million of 6.250% secured notes due 2034, $2,000 million of 6.750% subordinated notes due 2034 and $2,500 million of Tranche M term loans. Altogether, TransDigm completed about $11,000 million of debt financings and refinancings in fiscal 2025. It also repurchased $500 million of stock and spent about $413 million on acquisitions, net of cash acquired, including Servotronics for about $133 million. Cash fell to $2,808 million from $6,261 million. ## Current quarter: fiscal 2026 third quarter (13 weeks ended June 27, 2026) *From the fiscal 2026 third-quarter Form 10-Q, accession 0001260221-26-000053, and the August 4, 2026 earnings release (Form 8-K Exhibit 99.1), accession 0001260221-26-000052.* **Results.** Net sales rose 22.5% to $2,741 million from $2,237 million. Organic sales grew 12.6% to $2,521 million, with increases in commercial aftermarket, commercial OEM and defense. Acquired businesses added $220 million. Measured by market channel, quarterly sales including acquired businesses were: - commercial and non-aerospace aftermarket: $908 million, compared with $698 million; - commercial and non-aerospace OEM: $639 million, compared with $536 million; - defense: $1,148 million, compared with $963 million. CEO Mike Lisman said all three major channels grew by double digits. He cited commercial aftermarket growth of 17%, rising OEM build rates, and steady defense growth with a large backlog built up. Profits grew more slowly than sales. Gross margin was 59.4%, compared with 59.5%. The 10-Q attributes the higher cost-of-sales ratio mainly to the dilutive effect of the fiscal 2025 and 2026 acquisitions. Excluding acquisitions, mix (a larger aftermarket share), the value drivers and fixed-cost absorption lowered the cost ratio. Selling and administrative expenses rose $90 million to $332 million because of acquisitions and costs to support growth. Net interest expense rose 29.5% to $514 million on higher borrowings. The effective tax rate rose to 24.3% from 22.4% because share-based payments produced a smaller tax benefit. Net income rose 10% to $540 million; net income attributable to TD Group was $539 million, and earnings per share were $9.39, compared with $8.47. Adjusted earnings per share were $10.87, compared with $9.60. EBITDA As Defined rose 19% to $1,447 million, but the margin fell to 52.8% from 54.4%. Management said that, excluding acquisition dilution, the base businesses again expanded their EBITDA margins. By segment: - **Power & Control**, which now includes Simmonds and Jet Parts Engineering/Victor Sierra: sales rose 32.5% to $1,509 million, and EBITDA As Defined rose to $808 million. Its margin fell to 53.5% of segment sales from 56.7%. - **Airframe**: sales rose 12.1% to $1,186 million, and EBITDA As Defined rose to $645 million. Its margin improved to 54.4% from 53.8%. - **Non-aviation**: sales were $46 million. **Nine months.** For the 39 weeks, net sales rose 18.4% to $7,569 million: organic growth was 10.5%, and acquisitions contributed $506 million. Net income was $1,521 million and earnings per share were $25.20, compared with $24.31. EBITDA As Defined was $3,981 million, a 52.6% margin compared with 53.8%. Operating cash flow was $1,691 million, compared with $1,531 million. Investing outflows of $3,370 million included $3,159 million for acquisitions and $205 million of capital expenditures. **Market backdrop.** Management said commercial aftermarket demand stayed strong even though conflict in the Middle East had softened industry capacity and traffic. TransDigm is watching the conflict's effects on energy prices, supply chains, inflation and air travel. So far it has not seen a significant change in aftermarket orders compared with levels before the conflict, and it does not expect a material adverse effect for at least the rest of fiscal 2026. Boeing and Airbus continue to raise production steadily. Defense grew on higher domestic and international spending, but management still calls the military spending outlook very uncertain. **Acquisitions completed in fiscal 2026 to date:** - **Simmonds Precision Products** (fuel and proximity sensing and structural health monitoring, based in Vergennes, Vermont): about $757 million in cash, closed October 6, 2025, and bought from RTX's Goodrich unit. - **Jet Parts Engineering and Victor Sierra Aviation Holdings** (proprietary PMA and OEM-alternative aftermarket parts and repairs, almost entirely commercial aftermarket): about $2.2 billion in cash, closed April 7, 2026, for about 95% of JPE and 96% of VSA. Management holds the remaining stakes, subject to put and call options running through fiscal 2033. - **Other bolt-on acquisitions** totaling $257 million in cash. **Financing and capital returns.** On February 13, 2026, TransDigm issued $1,200 million of 6.125% senior subordinated notes due 2034 and $800 million of Tranche N term loans (Term SOFR plus 2.50%) to fund the JPE/VSA purchase. On April 17, 2026, it issued another $500 million of the 6.125% 2034 notes (at 100.375%) and $1,000 million of additional Tranche N term loans, intended for the Stellant acquisition, share repurchases and general corporate purposes. In the quarter, TransDigm repurchased 809,101 shares at an average $1,208.20, about $1.0 billion. Year-to-date repurchases reached 1,496,383 shares for $1,807 million, and $3,981 million of buyback authorization remained at June 27, 2026. At quarter-end, total debt was $33,485 million, term loans were $12,868 million, about 75% of gross debt was fixed-rate, and cash liquidity was $3,637 million ($2,773 million of cash plus $864 million of revolver availability). No term loan or note matures before August 2028. **Guidance (raised August 4, 2026).** Fiscal 2026 guidance was raised and excludes Prince & Izant: - net sales of $10,470 million to $10,550 million, up from the May 5, 2026 range of $10,300 million to $10,420 million and the initial November 2025 range of $9,750 million to $9,950 million; - net income of $2,102 million to $2,150 million; - earnings per share of $35.38 to $36.21; - EBITDA As Defined of $5,490 million to $5,550 million (a margin of about 52.5%); - adjusted earnings per share of $40.62 to $41.46. The market assumptions are now commercial OEM growth in the mid-teens percent, commercial aftermarket in the low double digits, and defense from high single digits to low double digits. Management said bookings had exceeded expectations. ## Subsequent events *From the subsequent-event disclosures in the fiscal 2026 third-quarter Form 10-Q (Notes 2 and 8, and MD&A "Significant Transactions of Fiscal 2026 and Subsequent Events"), accession 0001260221-26-000053.* - **Stellant Systems: deal abandoned.** On December 30, 2025, TransDigm agreed to buy all of Stellant Systems, Inc. for about $960 million in cash. On July 13, 2026, it said it had withdrawn from the deal. The April 17, 2026 debt raised partly to fund this purchase was not subject to special mandatory redemption and remains outstanding. - **Prince & Izant: agreement signed.** On July 27, 2026, TransDigm agreed to buy all of Prince & Izant for about $1.1 billion in cash, subject to U.S. regulatory approvals and customary closing conditions. The third-quarter earnings release describes the company as a maker of highly engineered brazing alloys and specialty metal components, serving mainly aerospace and defense, aeroderivative turbine and transportation markets. Fiscal 2026 guidance excludes it. The deal was pending when the 10-Q was filed. TransDigm later reported that it closed on September 28, 2026 (Form 8-K, accession 0001260221-26-000064). - **Receivables securitization facility.** On July 10, 2026, TransDigm raised the facility's capacity to $1,000 million from $725 million and extended its maturity to July 9, 2027. It drew an additional $25 million in July 2026.