TDG - NYSE

Good day and thank you for standing by. Welcome to Q2 2025 TransDigm Group Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jaimie Stemen, Director of Investor Relations. Please go ahead.

Thank you, and welcome to TransDigm's fiscal 2025 second 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 investor 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 reconciliation. I will now turn the call over to Kevin.

Good morning. Thanks for calling in today. First, I'll start off with a brief overview of our recent organizational announcement, then a 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. As you may have seen, we announced this morning that I will retire at the end of TransDigm's 2025 fiscal year. Beyond that, I will continue to serve as an advisor to the company through March 31, 2026 to help facilitate the leadership transition. Additionally, I will continue to serve as a member of TransDigm's board of directors. It has been a privilege to lead TransDigm as CEO these past seven years. TransDigm is an exceptional company, and I immensely enjoyed the opportunity to see it grow and generate value for its shareholders. I look forward to finishing out my last few months as CEO and continuing my involvement with TransDigm's board member. I will be leaving TransDigm in very good hands, as Mike Lisman has been elected by the board of directors to be our new CEO effective October 1, 2025. At that time, Mike will become responsible for all operational and financial matters. All our operating executives, as well as the CFO, will report to Mike. This succession planning has been in the works for some time, and we were very excited to promote an internally developed, long-tenured employee into the position of CEO. Mike has served as TransDigm co-COO since May of 2023. Prior to that, he held several positions across the company, including that of CFO and Executive Vice President, with direct operational oversight for a number of our operating units. Mike also previously held role as the lead of TransDigm's M&A team and as a Business Unit Manager at our Aero Fluid Products operating unit. Mike understands our unique culture and process and embraces our long-term value-generating strategy. He has contributed substantially to the value that TransDigm has created over his tenure. Mike is an excellent choice to lead TransDigm. I am confident he will do an outstanding job and continue to create the kind of value that has been the long-term hallmark of TransDigm. 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 PE-like returns. And lastly, our capital structure and allocation are a key part of our value creation methodology. Our long-term 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 have a strong Q2. During the quarter, we saw a healthy growth in the revenues for both our commercial aftermarket and defense market channels. Commercial OEM revenues this quarter were about flat with the prior year. Sequentially, both revenues and bookings improved in all three of our major market channels. Commercial aerospace market trends remain favorable. It's currently a very dynamic macroeconomic environment, but to this point, airline schedules continue to be 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 OEM backlog remains considerable. OEMs are working to increase aircraft production to meet this demand. Boeing aircraft production rates are still well below pre-pandemic levels, though, and the nearly two-month-long machinist strike last fall further delayed the recovery. However, there has been steady progress in Boeing's production rates, which is a positive sign. Our EBITDA as defined margin was 54% in the quarter. Contributing to this strong Q2 margin is the continued strength in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we ended the quarter with a strong cash balance of over $2.4 billion. We expect to steadily generate significant additional cash throughout the remainder of 2025. Next, an update on our capital allocation activities and priorities. During Q2, we opportunistically deployed just over $50 million of capital via open market repurchases of our common stock. This equates to approximately 40,000 of our shares at an average price of $1,250 per share. Additionally, after the quarter end, we deployed about $130 million of capital in early April to repurchase just over 100,000 of our shares at an average price of $1,241 per share. We view these purchases like any other capital investment and expect that they will meet or exceed our long-term return objectives. Regarding the current M&A activities and pipeline, we continue to actively look for M&A opportunities that fit our model. As we look out over the immediate time horizon, we continue to see an expanding pipeline of potential M&A targets, and we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and midsize range, and TransDigm remains disciplined in our approach to M&A. I cannot predict or comment on possible closings, but we remain confident that there is a long runway for acquisitions that fit our portfolio. The capital allocation priorities of 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 share purchases or dividends. A fourth option, 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, but both M&A and capital markets are difficult to predict. As always, we continue to closely monitor the capital markets and remain opportunistic. As mentioned earlier, we ended the quarter with a sizable cash balance of over $2.4 billion. We have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Moving to our outlook for fiscal '25, the guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout fiscal '25. Although we saw strong second quarter results, we are not changing our full year financial guidance for fiscal 2025 at this time. This may be conservative in time to tell. The guidance incorporates the impact of recently enacted U.S. and non-U.S. tariffs. Based upon what we know today, we do not anticipate a material headwind from tariffs that we are unable to mitigate. As you know, TransDigm is largely a domestic manufacturer with limited exposure to low-cost country sources. The full year guidance assumes no significant macroeconomic impacts or other factors such as an economic recession that could affect our business. Additionally, we do not know what the indirect impact of tariffs could have on other parts of the aerospace supply chain, including OEM production rates. Our guidance can be found on slide 6 in the presentation, and I will also discuss here. The midpoint of our fiscal '25 revenue guidance is $8.85 billion or up approximately 11%. In regards to the market channel growth rate assumptions that this revenue guidance is based on for the commercial OEM market and defense market, we are updating the full year growth rate assumptions to reflect second quarter results and current expectations for the remainder of fiscal '25. For commercial OEM, we now expect revenue growth in the low single-digit to mid single-digit percentage range. The previous commercial OEM revenue guidance was mid single-digit percentage range. For defense, we now expect revenue growth in the high single-digit to low double-digit percentage range. The previous defense revenue guidance was high single-digit percentage range. We are not updating the full year market channel growth rate assumptions for commercial aftermarket as underlying market fundamentals have not meaningfully changed. Commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumption of revenue growth in the high single digit to low double digit percentage range. The midpoint fiscal 2025 EBITDA as defined guidance is $4.685 billion or up approximately 12% with an expected margin of around 52.9%. This guidance includes about an additional 70 basis points of margin dilution for recent acquisitions compared to fiscal '24. While we had a strong EBITDA margin result in the second quarter of fiscal year '25, margins can be lumpy and may fluctuate over the next couple of quarters. Again, this could be conservative. The midpoint of our adjusted EPS is expected to be $36.47 or up approximately 7%. Sarah will discuss in more detail shortly the factors impacting EPS along with some other fiscal '25 financial assumptions and updates. As the current environment is very dynamic, we will continue to evaluate our guidance and closely monitor our primary end markets as the year progresses. We believe we are as well positioned as we can be for the remainder of fiscal '25. As usual, we will continue to closely watch how the aerospace and capital markets continue to develop and react accordingly. Let me conclude by stating that I'm very pleased with the company's performance this quarter. We remain focused on our value drivers, cost structure, and operational excellence. We looked forward to the second half of fiscal '25 and providing the value you have come to expect from us. Now, let me hand it over to Mike Lisman, our TransDigm 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 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'll split our discussion into OEM and aftermarket. Our total commercial OEM revenue was about flat in Q2 compared with the prior year period. Sequentially, total commercial OEM revenues grew by about 17% compared to Q1. Bookings in the quarter were just slightly down compared to the same prior year period with the softness driven by our BizJet and helicopter submarkets. The bookings levels for OEM commercial transport were roughly in line with our expectations prior to the Boeing strike with the growth rate in the low single digits for the quarter, giving us confidence that the commercial OEM market is recovering from the disruptions of approximately two quarters ago. OEM supply chain and labor challenges persist but continue to improve. Despite government actions regarding tariffs and concerns around a potentially weakening economic environment, aircraft production backlogs are large enough that at this time, supply chains remain the primary bottleneck in the OEM production ramp up. We remain encouraged by the progress of the 737 MAX production line. As in prior quarters, the commercial OEM guidance we're giving here today contains an appropriate level of risk around the MAX production build rate for the balance of the '25 fiscal year. We remain optimistic that 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 13% compared with the prior year period. This quarter, all submarkets within commercial aftermarket experienced positive growth. The growth across the four submarkets was varied but not significantly disconnected from what we had anticipated. Business jet, freight, and interior were each stronger than the total commercial aftermarket 13% growth rate, whereas the passenger submarket performed slightly below the overall commercial aftermarket rating 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 13% overall growth rate in our commercial aftermarket revenue. For the full year and as you saw in today's guidance, our outlook for commercial aftermarket growth of high single digit to low double digit growth is unchanged. We are watching the economic environment closely. Several airlines have announced potential capacity reductions for the '25 calendar year and in some instances pulled their financial guidance. At this time, despite these announcements and growing economic concerns, we are seeing no material weakness in our commercial aftermarket order book versus prior expectations. The bookings are coming in at about the pace we thought they'd be, so we are therefore not changing our guidance. Additionally, a few points of note. Q2 bookings in commercial aftermarket were strong, running ahead of our expectations, significantly outpacing sales, and supporting the full year growth outlook. Additionally, our Q2 point of sales data through our distribution partners, which can be a decent leading indicator, was up significantly, well into the double digits on a percentage basis. As mentioned, we're monitoring our commercial aftermarket bookings rates closely, and should these booking rates decline from what we are seeing at present as a result of economic softening and ensuing airline schedule reductions, we will revise our guidance accordingly on future earnings calls. Now turning to broader market dynamics and referencing the most recent IATA traffic data for March. Global revenue passenger miles have continued to surpass pre-pandemic levels since February of 2024. RPKs in March were up 3.3% versus prior year. The growth rate improved slightly versus what was seen in February. ASKs were up 5.3%, and the passenger load factor for March came in at about 81%. IATA currently expects traffic to reach 113% of 2019 levels in 2025, and to surpass prior year traffic by 8%. Time will tell if the IATA forecast is too aggressive, as a few other forecasters are predicting a growth rate a couple points lower. Regardless of the exact growth rate, we remain ready to meet the demand. Domestic travel also continues to surpass pre-pandemic levels, though March posted marginal growth compared to the prior year, and the most recently reported traffic data, global domestic air traffic, was up about 1% compared to 2024 and up about 8% compared to 2019. Domestic air travel in March was unfavorably impacted by declines in both the U.S. and Australia. International traffic continues to trend upwards and has been above pre-pandemic levels for the past several months. In the most recently reported data for March, international travel was up 4.9% compared to 2024 and about 3% above pre-pandemic levels. In March, most international markets saw growth, though it was slower growth than prior months. North America and the Middle East were the only regions that saw slightly lower international traffic than prior year. 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 9% compared with the prior year period. Q2 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 the aftermarket. Defense bookings for the quarter and year-to-date significantly outpaced sales to support the full year guidance for defense revenue growth. Additionally, this quarter, we saw continued growth in U.S. government defense spend outlays. As we've said many times before, defense sales and bookings can be lumpy. We know the bookings and sales will come, forecasting them with accuracy and precision, especially on a quarterly basis, is quite difficult. As Kevin mentioned earlier, we are revising defense expectations upward and now expect revenue growth for this year to be in the high single-digit to low double-digit percentage range. Lastly, I'd like to wrap up by expressing how pleased I am by our operational performance in the second quarter of fiscal 2025. Our operating unit teams did an exceptional job executing on our value drivers, and this generated the strong results delivered in the second quarter. Our management teams remain committed to our consistent operating strategy and servicing the growing demand for our products as we continue through the balance of the year. With that, I'd like to turn it over to our CFO, Sarah Wynne.

Thanks, Mike, and good morning, everyone. I'll recap the financial highlights for the second quarter and then provide some more information on the current guidance. First, on organic growth and liquidity. In the second quarter, our organic growth rate was 7%, driven by our commercial aftermarket and defense market channels, as Kevin and Mike just discussed. On cash on liquidity, free cash flow, which we traditionally defined as EBITDA less cash interest payments, CapEx, and cash taxes, was close to $340 million for the quarter. This is lower than our normal quarterly free cash flow conversion due to the timing of the interest and tax payments. We anticipated this dip. As you may recall, our first quarter free cash flow came in higher at over $800 million. For the full fiscal year, our free cash flow guidance is unchanged. We continue to expect to generate free cash flow of approximately $2.3 billion in fiscal 2025. Below that free cash flow line, an investment in networking capital consumed about $190 million for the quarter due to the higher AR for our second quarter shipments and higher inventory planning for the back half of the year. 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 $2.4 billion of cash on the balance sheet and our net debt-to-EBITDA ratio was 5.1 down from 5.3 at the end of the last quarter. While we don't target a specific amount of cash that we like to have on hand, we have sufficient capital available through both cash on hand as well as incremental debt capacity to support all potential M&A activity in the pipeline. As a reminder, we are comfortable operating in the five to seven times net debt-to-EBITDA ratio range and while we're currently sitting on the low end of this range, our go forward strategy of capital deployment has not changed. Our EBITDA to interest expense coverage ratio ended the quarter at 3.4 times, which provides us with comfortable cushion versus our target range of two to three. Regarding our debt, our nearest term of maturity is over two years out due November 2027 and we remain approximately 75% hedged on our total $25 billion gross debt balance through fiscal 2027. This is achieved through a combination of fixed rate notes, interest rate caps, swaps and collars. This provides us plenty of protection at least in the immediate term. As Kevin mentioned, during the quarter, we opportunistically repurchased approximately 40,000 shares along with an additional 100,000 shares during the first week of April during the depressed stock price. This totals 500 million in deployed capital for repurchases on a year to-date basis when combined with the first quarter repurchases. We continue to seek the best opportunities for providing value to our shareholders through our leverage strategy. On a go forward basis, we expect to continue both proactively and prudently managing our debt maturity stacks which for us means pushing out any near term maturities well in advance of the final maturity date. With regards to the guidance, as Kevin mentioned, we have maintained our prior financial guidance for fiscal 2025. A quick note on the evolving tariff environment. As Kevin mentioned, TransDigm is largely a domestic manufacturer with limited exposure to low cost country sourcing. From an operations perspective, our 51 operating unit teams are driving their own actions to alleviate the majority of any negative headwinds through a combination of measures including but not limited to USMCA exemptions, cost reduction initiatives and supply chain resourcing to name a few. Each operating unit has developed a course of action in this regard that is specific to its own circumstances and situation. We believe we'll remain in a good position from an overall cash, liquidity and balance sheet standpoint with adequate flexibility to pursue M&A or continue to return cash to our shareholders via dividends or share repurchases. With that, I'll turn it back to the operator to kick off the Q&A.

[Operator Instructions]. Our first question comes from the line of Robert Stallard from Vertical Research.

Thanks so much, good morning.

Morning.

Good morning.

First of all, I'm not sure if you're going to be able to answer this, Kevin. There's been some talk in the press that you were interested in purchasing Jeppesen from Boeing and obviously didn't. So I was wondering if you could comment on that situation?

We look at all aerospace targets that come along. And our approach is, we look for aerospace businesses that have high aftermarket content and are proprietary products, as we've always discussed. And the Jeppesen business ticked those boxes without a doubt, highly engineered product, very important to the aerospace world. So we were very serious in it. But also in our approach is a very disciplined process. We don't, and we can't overvalue and pay up. I don't want to comment too much on the process or what happened specifically with Jeppesen or the bid. But we must stay disciplined in our approach to ensure we continue to drive the returns our shareholders have expected from us. And that means sometimes you have to say no to deals.

Yes. And then just quickly on the tariff situation, you've commented, Sarah commented about some of the mitigation actions you're taking, but you didn't mention price. Do you think you'll be in a situation where you won't need to pass on digital costs to customers?

Yes, I don't know if that is going to be the case. All value drivers are always in play. But we have a very small insignificant really impact from the tariffs today. So we're not spending a lot of time wringing our hands over the impact TransDigm.

Okay, that's great. Thanks so much.

Thank you. One moment for our next question. Our next question comes from the line of Scott Mikus from Melius Research.

Good morning. Kevin, I wanted to ask on the capital deployment. So are we getting to the point with the amount of cash that this business is generating at share repos or special dividends are going to be a regular part of capital allocation going forward in addition to M&A?

Well, I think it's always been part of our capital allocation strategy. In my prepared comments, I went through our basic priorities. First invest in our own businesses and make sure we're funding all of the productivity and new product projects that are available, then looking at accretive M&A that meets our discipline criteria, and then yes, looking for opportunities to return through either special dividends or repurchases. And we always look at all of those options when it's time to return capital, I look at it as it belongs to the shareholders and it's our job to get it back to you as quickly as possible. Recently, we saw a disruption in the share price and we opportunistically capitalized on that to put some money to work on the shareholders' behalf. We still believe that special dividends and share repurchases are the right way to get capital back if there's not immediate and sizable M&A opportunities on the horizon or that we have more coverage than we need for what we see coming.

Okay. And then in the opening remarks, it was mentioned that you're operating units with higher engine content. We're seeing better pull through in the commercial aftermarket. So I'm just curious, is there any meaningful margin differential in commercial aftermarket sales to the engine supply chain versus the airframe side?

No. No meaningful difference on engine versus non-engine.

Okay. Thanks for taking the questions.

Thank you. One moment for our next question. Our next question comes from the line of Kristine Liwag from Morgan Stanley.

Hey, Mike, Kevin, with EBITDA guidance and change for the full year, there's an implied step-down in margin from 2Q for the second half of the year. Can you discuss what items could potentially pressure margins or how much conservatism is baked in?

There's definitely conservatism baked in, because we don't know how the world always unfolds and we don't want to get out over our skis too far. We're comfortable with what we've guided and the market segmentation that we're providing, so hopefully it turns out to be conservative, but that's the way we tend to forecast and communicate what we're looking at in the future.

Great. I think also I was remiss to start off with saying congratulations to both of you, Kevin and Mike. Kevin, we'll miss you, and Mike, welcome to your new role, very excited for this change. I guess one of the questions I'm getting from investors is as you transition to the new CEO role, Mike, are there priorities that are different than what Kevin had previously looked at, and how do we think about this transition?

Thanks, Christine. First off, I don't think any meaningful changes are coming. Obviously, Kevin and I have been on the same page for the last many years. I've worked for Kevin directly for seven or eight years, so I think we'll continue to run the same playbook here on the value drivers at TransDigm operationally and then no material changes in terms of capital deployment action, so I think it will be a lot of the same going forward that you've seen in the prior years from TransDigm.

Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of David Strauss from Barclays.

Hi. Good morning, and congratulations. This is Josh Korn on for David.

Good morning.

Good morning. You mentioned the performance of the aftermarket, submarket in the quarter. Can you give us an idea of where each of those four are on a volume basis relative to pre-pandemic levels?

Sure. So all four performed well this quarter, as we said, experiencing significant growth, and we're pretty across all four for the most part above where we were pre-pandemic. The one exception to that would be the interior side of the business, where it's not rebounded to peak volume levels that we're seeing pre-COVID at the peak of the airline retrofit cycle, but all the others are above where they were previously.

Okay, thanks. And then wanted to ask about defense, where you raised the outlook. Is there any specific domain or area where you're seeing especially strong bookings that gave you confidence? Thanks.

No, I would say it's pretty uniform across all of our businesses. We've continued to see good strength on the defense side, and it's evenly spread across both the OEM and the aftermarket. It's not been weighted to just one or the other. So it's been quite uniform, and we remain optimistic on where that's heading going forward just based on what we've seen come in on the booking side.

Okay. Thank you for taking the questions.

Thank you. One moment for our next question. Our next question comes from the line of Sheila Kahyaoglu from Jefferies.

Good morning, guys, and congrats, Kevin and Mike. So maybe just following up on the margins, if that's okay, 54% margins in Q2, just pretty strong, implies that the second half is around 52%, so 200 basis points down in the second half, but if we assume OE margins are around 20% EBITDA margins, that only makes up for about half of it. So I'm just wondering what you're factoring in to the conservativeness. Is it tariffs? Is it OE really picking up? Is it aftermarket flowing? If you could comment on that.

Yes, I think it's Mike, Sheila. I think, as Kevin said earlier, it's mainly conservatism. There's no tariff headwind or anything to that sort. And then the other factor that plays in here is obviously just a bit of a makeshift in the second half versus the first half because you have the commercial OEM picking up, which as you pointed out comes in at lower margins, so we'll see a bit of that in the second half, but hopefully it proves conservative as things play out here over the next five months.

Great. And then maybe on the aftermarket with 13% in the second quarter, how do we think about the puts and takes within the four submarkets as we head into the second half of the year? What are you guys seeing with the booking momentum?

All four were up nicely, as I mentioned, across the four submarkets. The engine continues to be the strong outperformer, and we expect to see continued growth across the four in the back half as we sit here today and look out at what we're hearing from our customers on the commercial aftermarket side.

Awesome. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Ken Herbert from RBC Capital Markets.

Yes. Hi. Good morning and congratulations, Kevin and Mike.

Thanks.

Thanks.

Maybe on the aftermarket, the first question, was there any either in the calendar first quarter, fiscal second quarter, or in the month of April, did you see any pre-buy activity with any airlines around the world just looking to get ahead of sort of this tariff risk perhaps and anything unusual that you may have seen through any of the channels in the year so far?

We did not see anything unusual, Ken. We don't get great insight into this, obviously, through the distributors of the airlines on why they're placing orders, but we didn't see any meaningful pre-buy to get ahead of any tariffs or anything of that sort.

Okay. That's helpful. And obviously, you did a lot of work around Jeppesen, and I'm just curious, Mike, maybe as you go forward, how do you think about maybe M&A in more software-related businesses? Because this obviously would have been a material step change for you, but I think a nice sort of representation or logical step in the evolution of TransDigm. But are you maybe more open now to doing less traditional acquisitions? Do you feel like you've got a better understanding of opportunities? Maybe help us understand how you're thinking about sort of within aerospace broadening now the M&A approach after obviously going through this process?

Well, I don't want to say too much to comment on other deals that were active in the market, but generally, as Kevin said, we look at all aerospace deals, whether it's hardware, software. And generally, what we're looking for is an EBITDA stream that has the attributes like our base components business. And if we find that on the software side, it's not necessarily something we would shy away from doing and venturing into. But we always look at, and as we've always done, we stress a five-year model where we target a certain return. And if we don't see a high likelihood of achieving that on certain opportunities we'll always be disciplined and stand out. So we're not going to launch down some path where we're certainly moving into software or anything of that sort. But as always, we'll always look at everything in the aerospace world, whether it's hardware or software, and see if there's a path on a sticky enough earning stream to generate a PE-like return.

Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Myles Walton from Wolfe Research.

Thanks. Good morning. I was wondering if you could comment on the OEM growth rate change. And was it more on the business shed and helicopter bookings? It almost sounded like you were more confident in what you were seeing at Boeing. So if you just add color to that?

Yes, that's right, Myles. We nudged it down slightly versus prior quarter, as you saw in the guidance for this morning. And it was mainly driven by the heli weakness that we saw. The commercial transport side, as we mentioned in the prepared comments, actually did quite well on the booking side this quarter. So we're seeing good progress on that front. And what really nudged it down was more of the submarkets that fit within that bucket that are non-commercial transport.

And then just one other one. If you look at the guidance, this is the second quarter you've reiterated, I think the longest stretch without a raise in a while, was there something about this year where you're seeing more incoming headwinds absorbing contingency? Or was there maybe a little less contingency in the '25 guidance looking out?

On the guidance overall across the submarkets, or just commercial OEMs specifically?

Sorry. M&M's across the EBITDA of the company?

Generally, I think we always build in a decent amount of conservatism and try to obviously modify it as we go through the course of the year by submarket on the revenue guide. And we made some slight tweaks this quarter that netted to kind of a push on the impact towards the overall guidance. But I don't think we did anything differently this year than we've done in prior years in terms of the amount of error band around the revenue growth estimates by submarket.

All right. Congrats again.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Peter Arment from Baird.

Yes, thanks again. Congrats, Kevin and Mike. Hey, Mike. I think last quarter you kind of gave us kind of a snapshot of how the order rates were doing. I think purchase orders were running about 50% of kind of the rate 38 target at Boeing. Maybe you could just give us an update if you don't want comments specifically on that, just maybe in general how OE purchase orders are going? Thanks.

Yes, I would say it's varied across our op units, I think, just based on the type of component they have and where Boeing is with the inventory position. And I think Boeing has said as much publicly just with regard to how they're approaching the supply base. It's very component specific. But generally, we're in and around sort of that 30 rate per month ballpark on the max that you would expect we are at. But there are some puts and takes across our 51 op units around that rate, and it varies a bit. But when you put it all together, that's about what we're seeing.

Appreciate that. I'll leave it one. Thanks guys.

Thank you. One moment for our next question. Our next question comes from the line of Seth Seifman from JP Morgan.

Thanks very much, and congratulations to Kevin and Mike. I wanted to ask first about the M&A environment. We're definitely in a much more volatile financial market environment. We may, to some degree, be headed into a more volatile macro environment. In terms of the way you run your LBO models and the expectations that you think that potential sellers might have? How is this environment that we've seen over the past couple of months sort of affecting that environment, and specifically your thoughts about how you model that?

I'll answer, and Mike can jump in. The one change I've seen over the last, I don't know, couple of years is just the willingness for people to pay up for targets. We've seen some aggressive multiples for acquisitions. That's about the only change I've seen, and maybe it's just we're being victims of our own success. People have seen the market and are now in the space. But that hasn't changed our approach. We're swinging at and looking at everything that comes along in the aerospace world and comfortable that we can continue to meet our EBITDA-acquired needs on a yearly basis going forward. We don't see any change to that approach.

Okay, great. And then just as a follow-up, in the aftermarket, which is a place obviously where investors are focused on potential risks given what some airlines have been saying about capacity, if we thought about this kind of high single, low double pace that you have, and we think about the distinct risks that are out there, whether it's U.S. carriers talking about reducing their capacity growth expectations, maybe it's some disruption in sales to China, how do you order those risks and the types of capacity cuts they've been talking about in the U.S.? How much of a headwind does that represent to that high single, low double pace that you're running at really consistently now?

Well, as we sit here today, based on the order book. We're not seeing any change in our commercial aftermarket bookings. We're seeing continued strength, actually, of those bookings into April, which is good to see. Like you guys, we read the news headlines. And even though we're not seeing it today, if it were to come about through some kind of change in the economic conditions overall, that there was going to be a downturn or a blip of a bit, we'd look to go and be very nimble and quick just in terms of how we react to it in going after our own cost structure. But as we sit here today, we're not seeing that.

Great. Very helpful. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Noah Poponak from Goldman Sachs.

Hey, good morning, everyone.

Morning.

Morning.

Congrats on the new roles. And Kevin, thanks for all the time you've spent with all of us over the last few years.

Of course.

I guess more than a few, but thank you. I wanted to just stay on M&A because you guys have referenced a very busy pipeline for a while now. And you've done some deals, some nice deals last year, but it's been not a particularly torrid pace and a lot of things in the small to smaller side of medium category as opposed to larger. You just referenced what's happening with valuation. We all saw the Jeppesen multiple. Are you just looking at a lot of assets that late in the process, the multiple is just too high? Or are there other reasons things are falling out earlier in the funnel? Just trying to square up or has what you've done lined up with your definition of a very busy pipeline?

I think it has lined up with a very busy pipeline. We have looked at a tremendous number of large targets, public companies, large privates, things that have gone for upwards of $10 billion or more. We've looked at them all, but again, our approach is to stay disciplined. We've been very busy. We've screened a tremendous number of businesses. And if things fall out for certain reasons, so be it, we must stay disciplined in our approach. That's what's led to the quality of returns over a very long, many year run. And I don't want to change that approach and I know Mike doesn't either. So we're not desperate to do deals. We are rather busy and continue to evaluate. Last year was an incredible year, the second best EBITDA acquired year we've ever had. And yes, unfortunately we haven't closed on a few things that have come along, but the year is not over yet and we remain very optimistic and we're very busy, just as busy today as we were six months ago or a year ago. So, sometimes it doesn't translate into closed deals, but it's a very active time. And to a first approximation, I don't worry about what it costs to acquire a business. If it meets our criteria, then we should be bidding on it. But in the case of some of the ones we're talking about, the operations existed outside of our core competency and strengths. So it didn't make sense to venture outside of our comfort zone on some of them. But we remain very active and valuating a lot of targets.

Okay. I appreciate all that detail. And just as one follow-up, Sarah, can you just square me up on free cash flow? I think for a few years, you've talked about it in absolute terms, but also then excluding a working capital build. What are you expecting for the full year on free cash and an income conversion? And is it now the same number, whether we're including or excluding working capital or is there still a working capital headwind this year?

I think it's still the same as we thought at the beginning of the guidance. You obviously saw the networking capital change for this quarter, which was high, but if you look at it on a year-to-date basis, we're kind of in line with the percent of sales as we'd expect to be, so no change for the entity year, we expect to. And the year, we're just over $2.3 billion with this networking capital after that free cash flow number in line as a percentage of sales.

Okay. Thank you very much.

Thank you. One moment for our next question. Our next question comes in the line of Gautam Gohana from TD Securities.

Yes, good morning and congrats, Mike and Kevin.

Morning.

Good morning, Gautam.

So I wanted to ask, you mentioned the delta between the engine aftermarket and the non-engine. Have you seen any change in behavior of late with respect to discretionary aftermarket? Is that presumably with all the capacity cuts and you're hearing some of the U.S. airlines talk about curtailing maintenance spend. Is that where you're seeing some change in customer behavior or weaker orders, or maybe you could elaborate on kind of the order of magnitude, not just for the quarter, but since the quarter?

Yes. Gautam, its Mike. No, first, we've not seen any behavioral difference between what's discretionary versus non-discretionary. Our biggest discretionary bucket within commercial aftermarket is probably our interiors business, but to-date, that's continued to perform quite well with no signs of slowing down or pulling back. So we remain optimistic on the growth outlook for the balance of the year and aren't seeing any weakness.

Okay. That's encouraging. Just curious on just the pricing dynamics, given tariffs, I'm just curious, like what the -- are you seeing any incremental elasticity on those parts? Do you expect to? It's presumably you're going to have to, on the margin, raise prices a little bit more than you otherwise would. I don't want to put words in your mouth, but is that what we should expect a little bit steeper pricing action to offset the tariffs?

Yes, I think overall, as Sarah and Kevin said in the prepared remarks, we're largely a domestic manufacturer. We don't expect some kind of material headwind from the tariffs here. And we're pursuing a lot of cost savings and other actions internally to make sure there's no net impact on the EBITDA line.

Okay. And then just the last one on the M&A pipeline, which you did talk about. Just anything kind of in the later stages at this point that you can point to?

We can't comment on that. We can't comment on things that are in the process. We're evaluating a bunch of companies right now. That's constantly the case every day, but we can't comment on where things are in the process.

Fair enough. I appreciate it.

You just don't know if it's going to close, and that's the only thing that matters at the end of the day.

Fair point. Thanks, guys. I appreciate it.

Thank you. One moment for our next question. Our next question comes from the line of Ronald Epstein from Bank of America.

Hey. Good morning, guys.

Good morning.

Maybe circling up on a topic, I don't think anybody's really kind of hit yet. So what are you guys seeing in kind of the pulse on freight and cargo? We've heard the ship-borne cargo is way down. Are you seeing anything in those end markets, given what's going on with the tariffs?

Our freight business continued to perform well in the second quarter. The rate of growth within freight actually exceeded the 13% overall for the commercial aftermarket. I think you guys follow the data points as much as we do. CTKs are up kind of in the low single-digit kind of ballpark through the first calendar quarter. So, growth continues despite some of the macroeconomic concerns that we read about in the news headlines. But our business, as far as commercial aftermarket goes in that submarket, actually performed pretty nicely ahead of what CTKs are doing in the broader market. We've seen some lumpiness in orders there before, but it was good to see the strength this past quarter.

Okay, got it. And then maybe as a follow-on. There's been a lot of talk lately about software-enabled hardware. Have you guys been kind of more interested in looking into that as a net market for you all, where I know a lot of what you do, I guess software wouldn't be really relevant for, but I guess there's some stuff that would be. And the BOD has been pushing in that direction, and we're seeing that more broadly in commercial markets. Is there something there for you all to do in kind of software-driven hardware?

I think as far as the M&A landscape goes, we evaluate deals as we always have. We look and target for a 20% IRR, and that hasn't changed and is not going to change going forward. And if we find companies that tick the boxes in terms of the characteristics that we want them to have and we see a clear path to generating that kind of return, we're going to go after it.

Got it. All right. Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Jason Gursky from Citi.

Hey, good morning, everybody. Mike, Kevin, congrats from me as well. Mike, look forward to working more closely with you. I just wanted to bring up a topic I've been trying to cover with everybody this quarter. Obviously, there is change afoot at DOD in particular. We've seen some executive orders come down on a whole litany of things, but the one that kind of has piqued my interest is on a rewriting of the federal acquisition regulation and DFARS on the defense side as well. And I would love to just get your big-picture thoughts here on what you understand to date on what's changing and, secondly, how that might impact the business over the longer term and what are the risks and opportunities to this kind of change in regulatory environment that it looks like we're about to go through on the defense side? Thanks.

Yes, I guess I'm not sure how significant changes will be in the regulatory environment on DOD acquisition, DLA acquisition. We continue to work very closely with the DOD, DLA through working groups where we meet at senior levels on procurement initiatives and continuing the communication. So it's not something that has been raised yet from their level. We tend to not speculate on what might come but rather stay informed and react when it does. So I don't have any comment beyond that necessarily. I'm not trying to be unhelpful.

Yes, fair enough. So early days, it sounds like.

Very early.

Yes, understood. We'll be watching this one, I think, for a while. Maybe just a quick follow-up then. I'm just wondering from a competitive perspective what you're seeing out there in the market as far as PMAs and whether there's been any change in either your approach to PMA parts or whether you've seen a noticeable difference and pick up an investment from others in the market?

We have not seen a meaningful uptick in PMAs across our businesses in terms of others trying to BMA [ph] our product. It's always something we've come at in the past. We're not a huge target on that front, just given the nature of our products. And we haven't seen any increase in the most recent months or quarters, nothing really of note.

Yes, understood. Thank you very much.

Thank you. One moment for our next question. Our next question comes from the line of Michael Charmoli from Truist Securities.

Hey, morning or afternoon, guys. Thanks for squeezing me in. Congrats, Kevin, Mike. Maybe just back to Seth's line of questioning on the aftermarket and the order book. Order book is strong, but what would you guys say is the typical lead time that you have? We're seeing the carriers make changes to capacity cutting routes. That order book, do you start to see any changes or weakening post capacity cuts? Is it three months? Is it six months? Just trying to gauge sort of the visibility you have there. And I'll just keep it to that one question.

Sure. So, it's Mike. As I mentioned, we've seen continued strength over the last couple weeks and months, so no change coming in. But it is something that books and ship, as we've said many times before, on a tighter timeline than, say, the OEM parts of our business. So, trust justice, a larger percentage of the commercial aftermarket bookings that come in every quarter ship out within that same quarter than you would find on the OEM side. I don't think we've provided an exact percentage in the past, but it's a meaningful percentage of the bookings that are received that end up shipping out. So, that's why we look at it and monitor it so closely on the booking side. But again, we're continuing to see bookings growth at this point in time.

Okay. And your proxy, I mean, is it capacity? Is it traffic? Is it takes off and landings? I mean, what are you guys monitoring most closely that you think correlates and drives that aftermarket business?

Yes. We look at all of them, and the fact of the matter is they're all pretty tightly correlated at this point in time. But the best gauge is probably takeoffs and landings. We look at all of them.

Okay. Thanks, guys.

Thank you. That concludes today's presentation. I would now like to turn the conference back over to Jaimie Stemen for closing remarks.

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