Good day, and welcome to the Q4 2026 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. To ask a question, you will need to press star one one on your touchtone telephone. Please note, this call may be recorded. I would like to turn the call over to Mary Hartman, Director of Investor Relations. Please go ahead.
Thank you, and welcome to TransDigm's fiscal 2026 fourth quarter earnings conference call. Presenting on the call this morning are TransDigm's Chief Executive Officer, Mike Lisman, Chief Operating Officer, Joel Reiss, and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Patrick Murphy. 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 our investor section of our website 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 reconciliations. I will now turn the call over to Mike.
Good morning, and thanks for calling in today. We have a full agenda for this morning's call as we are giving our guidance for our new fiscal year, so I am going to abbreviate our usual strategy overview and get right down to business. I will start with a quick reminder of how we run the company and think about capital allocation, then comment on our fourth quarter, and then walk through our fiscal 2027 outlook. Joel and Sarah will follow with additional color on our operations and financials, respectively. As those of you who have followed us for a long time know, TransDigm's approach is consistent and unchanged. We own and operate highly engineered proprietary aerospace businesses with significant aftermarket content. We run those businesses with a simple value-based operating methodology, a decentralized organizational structure, and a unique compensation system.
Combined with disciplined capital allocation, this approach is designed to deliver private equity-like returns with the liquidity of a public market, and over our history, it has consistently delivered. Now, some comments on our fourth quarter. We wrapped up fiscal 2026 with a good finish. The team executed exceptionally well, with all three of our major end markets delivering double-digit growth for both the quarter and the full year. Revenue and EBITDA As Defined for the year exceeded our most recent guidance. In commercial aftermarket, demand remains healthy despite elevated oil prices and RPKs below what we forecasted when we first gave fiscal 2026 guidance a year ago. As we've said before, aftermarket demand doesn't move in lockstep with RPKs. In past short-term disruptions like this one, we've typically seen demand return to trend line once the situation resolves, meaning demand recovers as if the disruption had not occurred.
We view the current environment as a short-term air pocket, not a source of long-term demand destruction for commercial aerospace. Consistent with our long-term focus, we took advantage of the air pocket's effect on our share price to repurchase approximately $940 million of TransDigm stock in the quarter, bringing fiscal 2026 total repurchases to $2.75 billion. As you'll hear in more detail shortly, our outlook for commercial aftermarket into fiscal 2027 remains positive, and we're on track for continued growth. Our operating units have done a solid job of helping their customers catch up on pent-up maintenance demand these last several months and continue to provide excellent service. This means high-quality parts on time to their airline-end customers. Commercial OEM is trending favorably as production rates at Boeing and Airbus continue to increase.
Our results for the quarter and the year reflect that strength, and our guidance assumes the momentum carries into fiscal 2027. Finally, defense delivered its third consecutive quarter of double-digit growth. As we've noted on prior calls, we built a very healthy backlog in defense this year, which sets us up well for another strong performance in fiscal 2027. Our EBITDA As Defined margin was 53% in the quarter, our highest of the year, driven by higher volumes and excellent execution from our teams. That includes roughly 2 percentage points of dilution from recent acquisitions. As a reminder, new acquisitions typically dilute margins in the near term, and we expect these margins to then improve over time. We also generated strong cash flow in the fourth quarter and ended the year with nearly $2.3 billion in cash. Next, an update on our capital allocation activities and priorities.
Fiscal 2026 was a successful year for capital allocation, with over $7 billion deployed through M&A and share repurchases. M&A deployed approximately $4.4 billion in the fiscal year on high-quality companies, including Simmonds Precision Products, Jet Parts Engineering, Victor Sierra Aviation, and most recently, Prince & Izant, which just closed in late September. Along with our four new standalone acquisitions, we invested nearly $440 million in 12 smaller acquisitions, which we term bolt-on acquisitions. These bolt-ons may not be large enough to exist as standalone operating units within TransDigm, but they are exceptional businesses and tuck nicely into one of our existing operating units. The bolt-on M&A activity has been another effective way to fuel the growth of our existing operating units.
Across our 57 businesses, we have capable, experienced teams who know and cover their product space very well, and this often results in the identification of good businesses that want to come into the TransDigm fold as a long-term home. When this happens, our op unit teams drive the acquisition process and integrate the acquired target into their business. We will continue to source smaller targets like these, along with our traditional standalone acquisitions. While TransDigm's corporate M&A team remains focused primarily on new standalone operating unit acquisitions, we also have 57 op unit teams working to drive bolt-on acquisitions for their respective businesses. Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our model, and as usual, the potential targets are mostly in the small and mid-size range.
I'd like to take a moment to discuss how our M&A efforts have evolved over time. For more than 30 years, we've been busy in the acquisition business and gradually broadened the funnel of products that meet our criteria. In the early years, the focus was mechanical components, then broadened into avionics through the acquisition of businesses like Avtech, followed by interior components with businesses like AmSafe, Schneller, and Pexco, and later, select electronic products with acquisitions such as Data Device Corporation. More recently, we broadened into aerospace test and measurement and PMA. There have been unwavering constants the whole way through. First, our returns have remained high, 30% + equity IRRs using the same returns framework we have long utilized. Second, and probably most importantly, we have remained disciplined in our approach to M&A.
This has meant a gradual broadening of the funnel rather than a rapid one, and the pursuit of mid-sized M&A targets as a percentage of our enterprise value, rather than the larger so-called company-defining acquisitions that often become business school case studies when they fail. As we look out over the coming years, I expect these elements of our M&A approach to remain the same, high returns and a disciplined process that broadens our funnel gradually. The capital allocation priorities at TransDigm are unchanged. First, we reinvest in our businesses. Second, do accretive, disciplined M&A. Third, return capital to our shareholders via buybacks or dividends. A fourth option, paying down debt, seems unlikely at this time, but we continue to consider it. We are always evaluating all four of these options.
As we sit here today, we have significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Specifically, we have substantial M&A firepower and capacity remaining in excess of $10 billion. Moving to our outlook for fiscal 2027, our guidance can be found on slide seven of the presentation for today. It includes our most recent acquisition, Prince & Izant, and assumes no additional acquisitions or divestitures. The midpoint of our revenue guidance is $12.05 billion, up approximately 14% over prior year. As a reminder, and consistent with past years, our first quarter has about 10% fewer working days than the following quarters, so we expect Q1 revenue, EBITDA As Defined, and EBITDA As Defined margin to be lower than the rest of the year. Our revenue guidance is based on the following market channel growth rate assumptions.
We expect commercial OEM revenue growth in the high single-digit to low double-digit percentage range, and we expect commercial aftermarket revenue growth in the high single-digit percentage range. We expect defense revenue growth in the high single-digit percentage range as well. The midpoint of fiscal 2027 EBITDA As Defined guidance is $6.27 billion, or up approximately 13% to the prior year, with an expected margin of around 52%. That margin figure includes approximately 2 full percentage points of dilution related to recent acquisitions. The midpoint of adjusted EPS is expected to be $47.51, and Sarah will discuss the financial assumptions behind our guidance in more detail shortly. We believe we're well-positioned as we enter fiscal 2027, and we will continue to closely watch how the aerospace and capital markets develop and adjust as needed.
I would like to wrap up my comments by emphasizing how pleased we are with the company's performance this year. Our teams continued to provide their customers with excellent service while also driving significant growth and expanded margins across the business. We remain focused on delivering for customers and shareholders in fiscal 2027. With that, I will hand it over to Joel Reiss to review our recent performance and a few other items.
Good morning, everyone. I will start with our typical review of results by key market category. For the remainder of the call, I will provide commentary on a pro forma basis compared to the prior year period in 2025. That is, assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the acquisitions of Simmonds Precision Products, Jet Parts Engineering, and Victor Sierra Aviation, but excludes the Prince & Izant acquisition, which closed in late September at the end of our fiscal year. For the fiscal 2027 guidance, all completed acquisitions are considered, including Prince & Izant. In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 15% for both Q4 and for the full fiscal year compared with the prior year periods.
Commercial OEM wrapped up the year with another strong performance. Commercial transport OEM revenues, which exclude the biz jet market, were up 25% over the comparable prior period. The strength is driven by the increased production rates at Boeing and Airbus. Our operating units executed well in support of this year's ramp-up, and we are well prepared for the next rate step-up. Commercial OEM bookings posted another quarter of solid growth compared to the same prior year period, significantly outpacing sales. The strength of our bookings, both in the fourth quarter along with the full year, provides good momentum carrying into fiscal 2027. Consistent with prior years, the commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the stated Airbus and Boeing build rates for the fiscal 2027 year.
Now, moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 17% in Q4 and 14% for the full year compared with the prior year periods. Excluding Jet Parts Engineering and Victor Sierra Aviation, growth rates for both Q4 and the full year would have been the same. This marks three quarters in a row of double-digit revenue growth within commercial aftermarket. Nearly all sub-markets delivered strong performances in the quarter. Our commercial transport aftermarket revenue growth, which excludes our business jet sub-market, was up 16%, driven by solid growth in the sub-markets of engineering, passenger, and interiors. The business jet market also had an exceptionally strong quarter, up 20% versus prior year Q4. Commercial aftermarket bookings exceeded sales for the full fiscal year, and Q4 bookings were up double digits over the prior year quarter.
Additionally, point of sale at our distributors maintained a healthy growth rate versus the prior year quarter, and total months on hand at our major distributors was effectively unchanged. To date, we have not yet seen a meaningful impact on our commercial aftermarket orders given the elevated oil prices and tension in the Middle East impacting RPKs. The demand remains healthy, and we continue to monitor the situation in close partnership with our customers. As always, we will quickly take appropriate action if needed. Now, shifting to our defense market. Defense market revenue, which includes both OEM and aftermarket revenues, grew by approximately 12% in Q4 and 10% for the full year compared with the prior year periods.
The defense market tends to have lumpy order and delivery cycles, but the 2026 fiscal year stood out for delivering consistently strong sales throughout the year while also building a healthy backlog heading into the new fiscal year. As noted in prior quarters, this is driven by a combination of new business wins and excellent operational execution by our teams. Q4 defense revenue growth was well distributed across our businesses and customer base. Defense bookings for the full year significantly surpassed the prior year and support the guidance for high single-digit revenue growth in fiscal 2027. Additionally, the U.S. government spending environments remain strong, with outlays up considerably over the prior year. While the overall defense environment and demand is favorable, the timing at the quarterly level remains difficult to predict with accuracy.
Looking ahead, we are confident that the defense business is well-positioned to deliver strong results in fiscal 2027. Before moving on from defense, I'd like to briefly address the pending right-to-repair legislation since we've received a number of questions on it since our last call. First, let me be clear. The Department of War and our defense customers are very important to us. We support the department's goal of keeping the war fighters' equipment ready and available, and whatever form the final legislation takes, we will work with the department to comply with it and support its implementation. We remain committed to delivering high-quality parts on time. The House passed FY 2027 NDAA and the Senate Armed Services Committee's version both include provisions on the government's access to technical data and repair. The two versions differ in important ways, and we understand the final bill is still being worked out.
Key details, including whether and how any requirements apply to existing contracts and flow down through the supply chain, won't be known until final language is enacted and the department issues implementing regulations. Based on what we know today, we do not expect this to have a material impact on our business for three reasons. First, the vast majority of our new product development, commercial and defense, is self-funded, developed at our own expense. The designs and technical data behind our products are TransDigm's intellectual property. Second, much of our portfolio is relatively low price per unit, and our parts tend to be replaced rather than repaired. Third, the overall exposure is small. Our direct sales to the U.S. government are historically approximately 6% of total sales, and we estimate the portion that could lend itself to repair is less than 1% of total sales.
We have supplied, and we will continue to supply, the manuals and technical information the government needs to properly install, maintain, train on, and operate our products. Turning to capital expenditures and productivity. We anticipate CapEx of about $380 million in fiscal 2027, an increase of about $100 million from FY 2026. In FY 2027, about 70% of our capital expenditures will be on new business and productivity-driven projects. Payback for cost reduction projects remains about two years. We have over 230 new automation projects planned for the year, a 55% increase from fiscal 2026. We continue to see a long runway of opportunities for cost savings in our high-mix, low-volume manufacturing operations. We also anticipate a significant increase in the number of AI-driven projects in our businesses, with targeted projects across our operating units in all functional areas. These productivity efforts are showing up in our results.
Excluding businesses acquired in fiscal 2025 and 2026, our headcount is roughly flat versus fiscal 2024, even as commercial OEM production rates, which carry higher labor content, have increased significantly over that period. Moving on to new business, one of our key value drivers. During the quarter, we continue to see strong new business momentum. Q4 was our highest new business quarter of the year and was up significantly from Q4 of fiscal 2025. We saw good new business activity across our end markets, but the quarter was led by several large defense OEM awards. These included content on next-generation and current production fighter programs, support for unmanned aircraft and collaborative combat aircraft, missile defense, and space-based programs, and airdrop and parachute systems for international military customers. A few specific awards to highlight.
In defense, our Chelton business received initial orders for its next-generation GPS anti-jam system on three platforms, an encouraging validation of the system's performance. IrvinGQ received $16 million in orders for its new aerial delivery systems from several European NATO members. In commercial, Korry Electronics received additional development funding from Boeing for the flight deck control panels on the 777-8 Freighter, and Calspan was awarded three jet engine test cell programs from two airline and MRO customers, together worth approximately $120 million. Turning to our recent acquisition integration activities. As Mike mentioned, it was a busy year for M&A capital deployment. Prince & Izant closed in September, and we are well underway with the integration, which is being led by Executive Vice President Mike Carney. Prince & Izant is another high-quality addition to TransDigm, and we are happy to have them join the team.
Finally, I would like to recognize our team's exceptional performance during fiscal 2026. Their execution drives the results and the consistent quality returns you've come to expect from us. With that, I'd like to turn it over to Chief Financial Officer Sarah Wynne.
Thanks, Joel, and good morning, everyone. I'll review a few additional financial matters for fiscal 2026 and then cover our expectations for fiscal 2027. First, a few additional fiscal 2026 data points on organic growth, taxes, and liquidity. In the fourth quarter, our organic growth rate was approximately 14%, and all market channels contributed to this growth, as previously discussed by Mike and Joel. On taxes, our GAAP and adjusted tax rates finished the year within their expected ranges. On cash and liquidity, free cash flow, which we traditionally define as EBITDA less cash interest payments, CapEx, and cash taxes, was approximately $2.8 billion for the year. This is ahead of our guidance of approximately $2.6 billion, driven by the strong operating performance discussed earlier.
Below that free cash flow line, an investment in net working capital consumed approximately $460 million of cash for the full year, and net working capital ended the year roughly in line with historical levels as a percentage of sales. We ended the year with a cash balance of $2.3 billion, and our net debt-to-EBITDA ratio ended the year at 5.9 x, just slightly above the prior quarter end of 5.8 x. Fiscal 2026 was a record year for share buybacks, with approximately 2.3 million shares repurchased at an average price of $1,187 per share, for a total of $2.75 billion. We continue to apply the same targeted return criteria we have used consistently over the years, and we expect these repurchases to meet or exceed our long-term return objectives.
Throughout the fiscal year, we completed financings both to raise new debt for M&A and to proactively refinance our nearest-term maturity, extending it from 2028 to 2035. We continue to actively monitor the interest rate environment closely. Approximately 75% of our $35 billion gross debt is fixed or hedged through fiscal 2029, through a combination of fixed rate notes, swaps, and collars, which provides meaningful cushion against near-term rate movements. Our EBITDA to interest expense ratio becomes a greater focus point as we move into a higher interest rate environment. Our goal is to maintain a 2x-3x coverage, staying closer to the high end of the range in environment of rising rates. As of the end of fiscal 2026, the EBITDA to interest expense ratio was 3x , which provides a comfortable cushion in the current elevated rate backdrop.
In addition to the increased interest rate market, there has been volatility this year in the debt markets. We will closely continue to monitor those conditions. While we are still comfortable operating into 5x-7x net debt-to-EBITDA ratio range, and currently sit in the mid-range of that target, we will likely be conservative in our decision-making as we evaluate capital deployment options. Next, on our fiscal 2027 expectations, I will give some more detail on the financial assumptions around interest expense, taxes, and share count. Please note that all of my comments here include completed acquisitions, including the most recently closed, Prince & Izant. Net interest expense is expected to be about $2.255 billion in fiscal 2027, equating to a weighted average interest rate of approximately 6.5%.
On taxes, our fiscal 2027 GAAP cash and adjusted tax rates are all anticipated to be in the range of 22%-24%. On the share count, we expect our weighted average shares outstanding to be 56.7 million shares in fiscal 2027. With regard to liquidity and leverage for fiscal 2027, as we would traditionally define free cash flow from operations at TransDigm, which again is EBITDA As Defined less cash interest payments, CapEx, and cash taxes, we estimate this metric to be around $2.9 billion in fiscal 2027. We estimate our net debt-to-EBITDA ratio will delever by at least a turn to below 5x at the end of fiscal 2027. This assumes no further acquisitions or divestitures and no share repurchases or dividends.
On a final note, we think we remain in a strong position with adequate flexibility to continue to pursue M&A opportunities or return cash to our shareholders via share buybacks and/or dividends during the course of fiscal 2027. With that, I will hand it back to Mary Hartman, our Director of Investor Relations.
Before we open the line for Q&A, I would ask everyone in the queue to consider your fellow analysts and ask one question only, so we can get to as many people as possible. Operator, can you please open the line?
Thank you. As a reminder, to ask a question, please press star one one. If your question has been answered and you would like to remove yourself from the queue, press star one one again. Our first question comes from Sheila Kahyaoglu with Jefferies. Your line is open. Sheila, if your telephone is muted, please unmute.
Thank you. Sorry about that. Good morning, guys, and thank you so much for the time.
Morning.
Morning, Mike. For the first question, since you highlighted 12 product line acquisitions, I think most people probably didn't pick up on that, 16 acquisitions in total in 2026, including the four large ones. Can you update us on your aperture from M&A? You mentioned PMA, test and measurement of late, and obviously Prince & Izant is [now]. If you could talk about the competitive position with that one in particular. Thank you.
Sure. So it was a busy year on the M&A front. We are very happy to have deployed $4.4 billion in total across both the full standalone acquisitions as well as the bolt-ons that I mentioned. We hope to continue driving that kind of activity going forward. We are primarily focused on the aerospace and defense sector as we look to invest from here on out in M&A, as you guys know. That's where the focus remains, and that's where it's going to be going forward. As we think about broadening the aperture within aerospace and defense, we've continued to do that. The branch outs we did on PMA this year, so far, so good. We are about six months in. And on test and measurement with Calspan and Raptor, so far, so good as well.
We are confident that we can continue to layer on additional sub-sectors and broaden out within aerospace and defense as more time evolves. With regard to the competitive environment in M&A, in the second part of your question, Sheila, there has always been competition. At the end of the day, if you think the team here, and we fundamentally believe this, can drive the best results on these businesses, that should mean you can pay the most for them and still earn an attractive IRR. Just like there has always been competition, there is competition today. A little bit at the small end, at the high end too, but that was the case a decade ago, that was the case two decades ago. We feel good about being able to still win and prevail in M&A auctions, and we proved that this year with the performance.
Awesome. Thank you.
Thank you. Our next question comes from David Strauss with Wells Fargo. Your line is open.
Morning. Thanks for the question. Mike, your high single-digit aftermarket growth guidance for next year, where would you peg that relative to the market? You think you are growing in line with the market, or you think you are undergrowing?
We think we're certainly growing in line with the market for the segments that we represent. Obviously, we'll see how the year evolves, but we feel good about the guidance we're giving here today. Our op units went through a detailed bottoms-up build process and feel that we're at least growing in line with the market, and then hopefully aim to, through a couple new business opportunities that hit this year, we could outperform and do better than that.
Great. Thanks very much.
Sure.
Thank you. Our next question comes from Ronald Epstein with Bank of America Merrill Lynch. Your line is open.
Hey. Good morning, guys. Mike, just wanted to touch base on, as you look into the next year, from a supply chain perspective, is there anything that you have as watch items, anything you're keeping an eye on in terms of materials, printed circuit boards, whatever? Is there anything that could be potentially tight as we go into the next year?
This is Joel. As we look at the supply chain, we have a couple watch items. Several operating units have flagged the printed wire boards, so the kind of fundamental part you use for PCBs as an item they're seeing some extended lead times, as well as some electronic components. We're also watching the rare earth metals, as the transition with the Department of War over to not being able to use Chinese-based rare earth for that. Those are really the two areas. Beyond that, we're not seeing any significant, and even those, it is not having a material impact on the business as we look at it today.
Cool. Thank you.
Thank you. Our next question comes from Myles Walton with Wolfe Research. Your line is open.
Thanks. Good morning. Mike, of the $4.4 billion of deals you did this year, can you give us a rough estimate of how many of those or how much of that purchase could get to company average EBITDA margins over time, of course? And what is the acquired incremental revenue in your 2027 outlook? Thanks.
Hey, Myles. We're in the early innings of these businesses. We're glad to own all of them: Simmonds, Jet Parts, Victor, and Prince & Izant. In the fullness of time, I think you know the playbook. We tend to acquire businesses. They come into the fold and weigh us down from a margin standpoint. We certainly saw that this year. It's a full 2 percentage points in 2026 and then again in 2027. We like buying things that we can then improve, and we'll aim to do that with these four businesses as well as the 12 bolt-ons. So we got 16 in total to chew on now and improve over time. In the fullness of time, we'll see, but we expect to be able to get these margins, march them up over time.
On the second part of your question, what was it again, Myles?
The total revenue, total acquired revenue in the fiscal 2027 revenue guidance. Thanks.
We've not historically disclosed this, but in the press release for each deal, when we announce it, when we close it, we give an estimate. I think what we provided in the press release is we gave a rough justice estimate for 2026 calendar year or 2025. You can assume for each of the four a good pace of growth off of that. We've historically not given an exact revenue amount in the guidance for the years after we've acquired the businesses, and we're not going to deviate from that past approach. But all these businesses are growing at a good clip, and we're happy to own each and every one of them.
Okay. Thank you.
Thank you. Our next question comes from Robert Stallard with Vertical Research. Your line is open.
Thanks so much. Good morning.
Morning.
Mike, this might be for you. On the FY 2027 guidance for the aerospace aftermarket, a bit of a slowdown versus this year. Is there any particular driver to that, such as a lower expectation for RPM growth?
Yeah, I mean, I think their expectation is that RPKs are certainly slowing down. We use a bottoms-up forecast. Our operating units discuss with various airline customers, our distributors, to put together our number, and I think they work together to put together a pretty realistic number. I will say, when we look at our CAM number, as Mike said, it does not move quite in lockstep with the RPKs. This year, the RPKs came in lower than what we and all of the analysts were forecasting, but CAM still came in for us right around 14% or so. For the year, our bookings exceeded sales, which was solid. Our Q4 bookings came in well. We finished the year with distributor point of sales still growing nicely and months on hand finishing out roughly where we started.
As we look at it, I think we feel good about the guidance that we have given. Overall, the RPKs, I mean, I think what we see today is kind of what we have anticipated it being for the year.
We put the most faith, Rob, as you know, in that bottoms-up build that our op units put together. Not the headline RPKs, but the bottoms-up build that they put together at a detailed part number level.
Okay. That is great. Thank you very much.
Thank you. Our next question comes from Kristine Liwag with Morgan Stanley. Your line is open.
Hey, good morning, everyone. Just wanted to look at capital deployment. This year, you guys bought back $2.8 billion of shares, which is, I think, the highest you've ever done in a full year. When you think about where the stock price is, how do you balance between doing more buybacks for next year versus special dividends, which is also an avenue that you've looked at historically?
Morning, Kristine. We look at all of the options, and we always consider all of them. I think you guys know the priorities. It's first, reinvest in our businesses, second, M&A, third, return capital to shareholders, dividends or buybacks, and then fourth, pay down debt. When it comes to the third bucket, we look at both, we debate both. Historically, and this was true this year, when we step out and tend to do more share repurchases is when we see some kind of disconnect between what we think the intrinsic actual value is of the shares and where it's trading at in the market. When we see something like a 20% IRR or better, we're likely to step out and be more aggressive on the share repurchases. That was the case this year. That's why we dialed it up a bit more on that front.
I think going forward, it's always hard to say what the balance will be between the two, because we don't know where stock prices will trade and where our stock goes, but we'll continue to think about things the same way and probably pursue a mix of both. But again, it sort of depends on where the share price IRRs are. This year, it looked good, so we leaned in.
Mike, with that, do you want to share what your calculation is of what you think intrinsic value of your shares are worth?
Yeah, we can't say too much on exactly what we think the stock is worth, but I think you can look at what we did this year, the action we took, leaning in in terms of share repurchases, and if a company who historically hasn't done a lot of it does a historically high amount of $2.75 billion, hopefully that action says something about what we think the intrinsic real value of the shares is. We would not have done that if we didn't see a really good, solid return that's at least as good as or better than the 20% IRR we target on our M&A deals.
Great. And thanks, Mike.
Sure.
Thank you. Our next question comes from Gautam Khanna with TD Securities. Your line is open.
Yeah. Hey, thanks, Mike. I was wondering if you could give us any insight, having worked now with the administration. Remember the Stellant acquisition was blocked over what seemed to be a fairly trivial amount of product overlap. Do you have a sense for what that might allow from an M&A perspective for you guys? Because you've got a lot of components, you're going to come across acquisitions that have overlap in the DoD side of things. Just wanted to get a sense if you have any better read from why that deal was blocked, and does it actually have any implications for the M&A you're looking at in the pipeline? Thanks.
Yeah, Gautam, morning. We think this was a one-off situation, and practically won't change anything in terms of how we look at the M&A landscape going forward with regard to what we pursue. As we said in some prior comments, it's always hard to come to agreement on exactly how someone might define a certain market. There's going to be no change from us going forward in terms of what we think the M&A landscape and the available opportunity and aperture is for us. We again think Stellant was a one-off given the unique circumstances at play there. Over time, we've gotten, as you know, 150, if you include the product line acquisitions, deals done, and we've probably had three or so that didn't cross the finish line for reasons like this. We see no reason to be concerned here.
Jet Parts, Victor Sierra, Prince & Izant all closed, and those filings were made after the Stellant one. Again, we think a one-off and no change to course going forward here.
Thank you.
Sure.
Thank you. Our next question comes from Ken Herbert with RBC Capital Markets. Your line is open.
Yeah. Good morning, Mike and team. Maybe Mike, I wanted to see if you can comment on how your PMA portfolio performed relative to your broader aftermarket growth in either the full year or the quarter. Then specifically as a follow-up, how do you view PMA as a source of growth into 2027, say, when we think about potential interest in broadening your portfolio into engine or other markets and the outlook within the broader TransDigm portfolio?
Yeah, I will take that one, Ken. I would say the PMA growth this year, as we track it at the businesses we have acquired that specialize in this space, is solid. That is why we acquired Jet Parts and Victor Sierra. We are very glad to own them. These are good businesses that, as we have said, are growing at a good clip. Not explosive growth, but a little bit ahead of what the overall rate for commercial aftermarket growth might be for the sector at large. So, we are happy to own both businesses, and we are six months into it. So far, so good out of the gate. We do not break out with regard to the PMA opportunities that our existing other businesses pursue separately.
Generally, rough sense from just knowing what folks are targeting and how we are doing there based on more anecdotal cases and evidence, we think we are doing pretty well. As you guys know, we have op units that specialize in a range of different product areas, and they get approached from their airline customers at times for help when there is an issue. They lean in, develop a part, usually a better mousetrap than the existing solution, because there is some failure or something with that component that makes the airline unhappy. When that happens, we step in, work with the airline to design something that is better, and have done a solid job and seen some growth there as a result. With regard to the second part of your question and what it means for growth going forward, we remain positive here.
As you guys know, across our existing portfolio of businesses, we do not see too much PMA competition given the nature of our price points and where we sit, and there has not been any material market loss here. But with the businesses we own and more playing offense with regard to PMA market capture, we feel pretty good about going forward, the share we will be able to gain, both directly through Jet Parts and Victor Sierra, but then also within our other 55 businesses, the work they do on the PMA front too.
Hey, Mike. Appreciate it. If I could, would you view PMA as a way to get maybe more engine exposure over time?
Certainly could be. I think anything across an aircraft is fair game when it comes to PMA.
Thank you.
Sure.
Thank you. Our next question comes from Scott Mikus with Melius Research. Your line is open.
Good morning. Mike, in the slide deck, you have the charts that have commercial OEM sales mix of 65% commercial transport, 35% biz jet heli. Your aftermarket mix is 80/20 in favor of commercial transport. Should we expect over time the aftermarket mix to start reflecting what the current commercial OEM mix is? If that does happen, is there any implications for margins?
I would say, Scott, I am not sure we have exactly looked at this and modeled it out to definitively answer the question. Obviously, we weigh a little bit more towards commercial transport on the OEM side. In the fullness of time, I would think you could see things get closer to where the OEM is. To be honest, we have not gone and crunched the math on this to really answer that question conclusively.
Okay, that is fine. I will stick with one. Nice quarter, by the way.
Thank you.
Thank you. Our next question comes from Gavin Parsons with UBS. Your line is open.
Thanks. Morning.
Morning.
You mentioned that pent-up maintenance demand has kind of supported this year or last year. I thought that was interesting given the year before had some destocking, so I was hoping you could maybe expand on that a bit, and if you have any sense for when that pent-up demand might be satisfied.
I think we've continued to see good growth, and I think that's one of the key reasons that we hear back from our customers. The MRO market for engines continues to be strong for us. As we look, the backlogs there are still long. The year before, we had seen it a few of our businesses where they had kind of straightened, lengthened the maintenance cycles on some, and we saw that return back to more normal levels this year, and don't expect to see that return back. Right now, as we look at it, I think the keys we look across our products is the demand stays strong.
Okay. No restocking or destocking in the 2027 aftermarket guide?
No, we don't. As we've looked at it, we did not see any significant change this year. A lot of customer conversations around this, certainly across our distributors, as I highlighted earlier. Our months on hand at the beginning of the year and the ending point of the year are almost exactly the same. We are not hearing anything from customers where there was any significant Certainly no significant stocking up. If anything, there's probably some level of stock decrease in a few areas around the world. Whether that will return in 2027, I don't think we've modeled that level of detail that that would come back. But overall, I don't think we see that as really being a key driver for fiscal 2027.
Okay. Very helpful. Appreciate it.
Thank you. Our next question comes from Jonathan Siegmann with Stifel. Your line is open.
Good morning. Thanks for taking my question.
Morning.
Always appreciate your consistent comments on interest rates and the hedge book. The 75% hedge fixed figure is held for three years. Can you give some color on when do you plan to extend that past fiscal 2029? Then how do higher interest rates today change or not change your thinking about how you structure the fixed and variable part of your debt? Thank you.
Hi, morning. This is Sarah. I will take that one. Yeah, on the 75% hedge, we certainly want to be at least a couple of years out, so we are glad to be out through fiscal 2029. Whenever we go out and raise more debt, if it is loans, we want to continue to hedge those. So that is kind of a rolling forward look that we do on those hedges. Obviously, it is fixed notes are fixed, so it is really on those loans that we continue to make sure are hedged. So continuing to look at that, and we did another hedging where we did some extra swaps this quarter as well. So continue to look through that one. We also want to keep, obviously, the maturities pushed out.
When we think of the whole capital allocation strategy, another big piece is keeping the maturities out at least a couple of years as well. That helps us with the rising interest rates. Obviously, you're seeing it, and we're seeing it this year. Our rates are forecast to be about 6.5% versus 6.1%. The hedging protects us. Obviously, if the rates continue to go up, say they went up another 1%, we only see like 20 basis points on that. That whole strategy helps protect us on the rising rates. But we'll continue to watch it, and that's obviously one of the fundamental guardrails that we have in our capital allocation strategy. I'll let Mike chime in if he has anything else from just a global capital standpoint.
I think Sarah hit most of it. I would emphasize this is a continual process that she and her team are always going through, and the hedges are not episodic events where we enter into it once a year or so. It's a continual process where we're looking at it and rolling on new hedges as appropriate throughout the course of a year, so that three, four years out, you're 75%- 80% locked in and fixed, and we'll continue to have a bias to do that. Sometimes, it could go against you slightly in a declining rate environment, but then you eventually catch up, and the bias from our end has always been to lock it in to get the certainty, and that's not likely to change going forward. We'll probably stay 75%- 80% ballpark fixed as we look out in the coming years.
Thanks for the comments.
Thank you. We have time for one last question, and that question comes from Matt Akers with BNP. Your line is open.
Yeah. Hey, good morning, guys. Thanks for the question. Could you touch more on the margin kind of walk into 2027, going from 53% Q4 to 52% next year? How much of that is just layering on Prince & Izant? Is there any kind of a mix issue? And just generally, how are you thinking about sort of margin expansion in the organic business as you talked about in the past?
Yeah, sure. Morning, Matt. It's Mike. I'll take that one. So we're really happy with the margin improvement our base businesses are driving year-over-year into fiscal 2027. As you guys know, we've long targeted 1%-1.5% of annual improvement, and we're absolutely seeing that in our base businesses. It's hard to see it in the consolidated TransDigm metrics we publish publicly because of the acquisition dilution from Prince & Izant, Jet Parts, Victor Sierra, and the other bolt-on acquisitions we mentioned.
So the 2026 margin of 52.7% going to 2027 guide of 52.0%, when you adjust out the 2 full percentage points of dilution from that year-over-year comparison for the EBITDA margins, you come up with a base level of improvement in the starting stores of something, an amount that fits squarely between the brackets of what I mentioned, 1.0%-1.5% of annual improvement. So we're still getting it, and we like to see that, by the way. We like to see large acquisitions coming into the fold. We like buying good businesses that we can then improve over time and march the margins up. So we're seeing that in fiscal 2027.
Out beyond fiscal 2027, if you're looking for something to plug into a model, I think it's fair game to assume that on the base businesses we own, the starting stores, you continue to get that 1%- 1.5% of annual improvement. That's what our teams drive toward and what we expect to get going forward.
Great. Thanks. That is helpful.
Thank you. This concludes the question-and-answer session. I would like to turn the call over to Mary Hartman for closing remarks.
Thank you all for joining today. This concludes the call. We appreciate your time and have a great rest of your day.
Thank you for your participation. You may now disconnect.