TransDigm Group Inc

NYSE:TDG

Earnings Call Analysis

Strong Quarter with Raised Guidance and Active M&A

TransDigm reported a robust third quarter, exceeding expectations and raising the full-year 2024 guidance. Revenues and bookings were strong across all major market channels—commercial OEM, commercial aftermarket, and defense. EBITDA margin reached 53.3%, bolstered by the commercial aftermarket sector. The company generated over $600 million in operating cash flow, ending the quarter with nearly $3.4 billion in cash. Recent acquisitions totaled over $2.2 billion, expected to contribute $125 million to fiscal 2024 revenue. Full-year revenue guidance increased to $7.9 billion with a 22% EBITDA growth, reaching $4.13 billion at a 52.3% margin.

Strong Quarter Performance

The company delivered robust results in the third quarter of fiscal 2024, with organic growth of 14.6%. All major market channels, including commercial OEM, commercial aftermarket, and defense, saw growth, bolstered by favorable trends in the commercial aerospace market. The EBITDA margin for the quarter was strong at 53.3%, largely due to the strength in the commercial aftermarket segment .

Revenue Growth and Guidance

Revenue projections for fiscal 2024 have been adjusted upwards. The midpoint of the fiscal '24 revenue guidance is now $7.9 billion, representing approximately 20% growth. Specifically, commercial OEM revenue growth is expected to be around 20%, and commercial aftermarket revenue growth in the mid-teens percentage range . Defense market revenue growth has been revised to high teens from the previous mid-teens .

Key Acquisitions

Three significant acquisitions were completed this quarter: SCI Industries, the Electron Device business of communications, and Power Industries. These acquisitions, amounting to over $2.2 billion, are expected to add about $125 million to fiscal 2024 revenue with a combined margin approaching 30% .

Cash Flow and Financial Position

Operating cash flow for Q3 exceeded $600 million, contributing to a cash balance of almost $3.4 billion by the end of the quarter. For fiscal 2024, the company expects free cash flow to be slightly above $2 billion. The net debt-to-EBITDA ratio remains comfortable at 4.7x .

Capital Allocation Strategy

The company continues to prioritize reinvesting in its businesses, executing disciplined M&A, and returning capital to shareholders via share buybacks or dividends. It maintains significant liquidity to support these activities, thanks to a strong cash position .

Challenges and Risk Management

While the commercial aerospace market shows robust demand and recovery, OEM production rates remain below pre-pandemic levels, posing a risk. However, OEM supply chain and labor challenges are gradually improving . The company remains focused on its value drivers and operational excellence to navigate these risks.

Future Outlook

The company has increased its adjusted EPS guidance to $33.02, reflecting a rise of about 28% over the prior year. Cash and liquidity levels provide adequate flexibility for further M&A or capital returns. Despite some concerns in defense and OEM sectors, overall market conditions appear favorable, supporting the upward revised guidance .

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone, and thank you for standing by. Welcome to the Third Quarter 2024 TransDigm Group Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I will hand the call over to the Director of Investor Relations, Jaimie Stemen.

[Jaimie Stemen, executive]

Thank you, and welcome to TransDigm's Fiscal 2024 Third Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's President and Chief Executive Officer, Kevin Stein; Co-Chief Operating Officer, Joel Reiss; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Mike Lisman. 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 Investors 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 reconciliations.

I will now turn the call over to Kevin.

[Kevin Stein, executive]

Good morning. Thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. A few comments about the quarter and discuss our fiscal '24 outlook. Then Joel and Sarah will give additional color on the quarter.

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 a unique compensation system closely aligned with shareholders. Fourth, we acquire businesses that fit the 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-standing 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 had a strong quarter. Our Q3 results ran ahead and we once more raised our guidance for the year. Commercial aerospace market trends remain favorable as the industry continues to recover and progress towards normalization. Robust demand for travel persists and global air traffic continues to surpass pre-pandemic levels. Airline demand for new aircraft also remains high and the OEMs are working to increase aircraft production. However, OEM aircraft production rates remain well below pre-pandemic levels. There is still much progress to be made for OEM rates and our results continue to be adversely affected in comparison to pre-pandemic production.

In our business, during the quarter, we saw a healthy growth in our revenues and bookings for all three of our major market channels, commercial OEM, commercial aftermarket and defense. Revenues also sequentially improved in all three of these market shares. Our EBITDA as defined margin of 53.3% in the quarter. Contributing to this strong Q3 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 had strong operating cash flow generation in Q3 of over $600 million and ended the quarter with almost $3.4 billion of cash. We expect to continue generating additional cash in our final quarter of fiscal 2024.

Next, an update on our capital allocation activities and priorities. This has been a busy and exciting quarter for M&A. During the quarter, we completed the acquisitions of SCI Industries and the Electron Device business of communications and power industries. Subsequent to the quarter closed on July 31, we closed the acquisition of [ Raptor Scientific ]. Further details of each individual acquisition can be found in the previously published press releases on TransDigm's website.

In the aggregate for these 3 acquisitions, we have deployed over $2.2 billion of capital in the past 3 months. The unique product and service offerings of each acquisition exhibit the earnings stability and growth potential that are consistent with our existing portfolio of businesses. These three acquisitions fit well with our long-standing strategy, and we expect each of these businesses to meet or exceed our long-term return objectives. We expect these three acquisitions in total to contribute about $125 million to our fiscal year '24 revenue and a combined margin approaching 30%.

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 time horizon, we continue to see an expanding pipeline of potential M&A targets. As we demonstrated this year, we do not see this environment slowing in the near term. As usual, the potential targets are mostly in the small and midsize range, I cannot predict or comment on possible closings, but remain confident that there is a long runway for acquisitions that fit our portfolio.

The capital allocation priorities at 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 buybacks 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 almost $3.4 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 2024. As noted in our earnings release, we are increasing our full year '24 sales and EBITDA as defined guidance to reflect our strong third quarter results and our current expectations for the remainder of the year, as well as to include the recent acquisitions of [ SEI ] Industries, the [ CPI ] Electron Device business and [ Raptor Scientific ]. Please note that each of these acquisitions closed recently, our preliminary expectation for each business will be refined as necessary over the coming months.

At the midpoint, sales guidance was raised $160 million, and EBITDA as defined guidance was raised $85 million. The guidance assumes no additional acquisitions or divestitures and is based on current expectations for continued performance in our primary commercial end markets throughout the remainder of fiscal 2024. Our current guidance for fiscal '24 is as follows and can also be found on Slide 6 in the presentation.

The midpoint of our fiscal '24 revenue guidance is now $7.9 billion or approximately 20%. In regards to the market channel growth rate assumptions that this revenue guidance is based on, for the defense market, we are updating the full year growth rate assumptions as a result of our strong third quarter results and current expectations for the remainder of the year.

For Defense, we now expect revenue growth in the high teens percentage range. This is an increase from our previous guidance of mid-teens percentage range. We are not updating the full year market channel growth rate assumptions for commercial OEM and commercial aftermarket as underlying market fundamentals have not meaningfully changed. Commercial OEM and commercial aftermarket revenue guidance is still based on our previously issued market channel growth rate assumptions. We expect commercial OEM revenue growth of around 20% and commercial aftermarket revenue growth in the mid-teens percentage range.

The midpoint of our EBITDA as defined guidance is now $4.13 billion or up approximately 22%, with an expected margin of 52.3%. This guidance includes slightly under 125 basis points of margin dilution from recent acquisitions. The midpoint of our adjusted EPS is increasing primarily due to the higher EBITDA defined guidance and is now anticipated to be $33.02, or up approximately 28% over prior year. Sarah will discuss in more detail shortly the factors impacting EPS, along with some other fiscal '24 financial assumptions and updates.

We believe we are well positioned for the last quarter of fiscal '24. We continue to closely watch how the aerospace and capital markets continue to develop, and we will react accordingly.

Let me conclude by stating that I'm very pleased with the company's performance this quarter and throughout the recovery for the commercial aerospace industry. We remain focused on our value drivers, cost structure and operational excellence.

Now let me hand it over to Joel Reiss, our TransDigm Group Co-COO, to review our recent performance and a few other items.

[Joel Reiss, executive]

Thanks, Kevin, and good morning. 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 2023. 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 will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 23% in Q3 compared with the prior year period. Sequentially, total commercial OEM revenues grew by about 7% compared to Q2. Bookings in the quarter were healthy compared to the same prior year period, and these booking levels continue to support the commercial OEM guidance for revenue growth of around 20% for fiscal '24.

OEM supply chain and labor challenges persist, but appear to be improving. As many of you know, concerns have arisen over the past few months around the expected 737 MAX production rate ramp. Time will tell how this plays out. As we shift to both [ Boeing ] as well as their sub tiers, the impact across our businesses is somewhat varied. In general, we are seeing monthly bill rates as low as [ 20 ] and as high as [ 42 ] for parts with extended lead times. Overall, we would estimate an average build rate at the end of Q3 of about 25 aircraft per month.

The commercial OEM guidance we are giving today contains an appropriate level of risk around the MAX production build rate for the balance of our fiscal year. We do expect the OEM challenges will have an impact on how quickly they ramp up to their target rates. While we are not yet providing guidance for 2025, we do expect their production rate ramp-up will be slower than we had previously expected.

Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 11% compared with the prior year period. Sequentially, total commercial aftermarket revenues grew by about 5% compared to Q2. As a reminder, our commercial aftermarket is made up of 4 submarkets: passenger, interior, freight and business jet. I would like to provide a bit more color than is historically typical on our commercial aftermarket submarkets.

Growth in our passenger submarket, which is our largest was up about 16% versus the prior year period. This submarket continues to perform exceptionally well. Year-to-date, as of our June quarter end Passenger submarket revenues were up 21% over the comparable prior year period. This compares favorably to the latest IATA passenger traffic data, which shows a year-over-year growth in June of 9.1%.

For fiscal Q3, our interior submarket increased roughly 8% when compared to the prior year period. This is primarily driven by repair sales as interior refurbishments have not yet returned to 2019 levels.

For fiscal Q3, our business jet submarket increased roughly 10% when compared to the prior year period and reverses the lower number we saw in Q2, highlighting the lumpiness of our commercial aftermarket in any one period. Business Jet does remain a watch item due to the temporary business jet flight activity. These increases were partially offset by declines in our freight submarket, which was down roughly 8%. The freight decline was primarily a result of the continued return of [ belly ] capacity consistent with what we have discussed on our past few earnings calls. On a sequential basis, freight was up 7%.

For the full year, and as you saw in today's guidance, our outlook for commercial aftermarket growth in the mid-teens is unchanged. We saw a number of elements in our Q3 results that make us confident here. Mainly Q3 bookings [ to ] commercial aftermarket were strong, running in line with our expectations and outpacing sales and supporting the full year growth outlook. Additionally, our Q3 point of sales data through our distribution partners was up roughly 25% from the same period last year.

Finally, a reminder, commercial aftermarket can be lumpy on a quarterly basis, both revenue and bookings. We do expect that as passenger traffic has returned to pre-pandemic levels, the commercial aftermarket rate of growth will continue to moderate. Note that our guide for mid-teens growth across our total commercial aftermarket still incorporates a continued drag from both cargo and the business jet submarkets for the balance of the year.

Turning to broader market dynamics and referencing the most recent IATA traffic data for [indiscernible]. Global revenue passenger miles have continued to surpass pre-pandemic levels since February 2024. June 2024 air traffic was up 3% of the 2019 levels. IATA currently expects traffic to reach 104% of 2019 levels this year and to surpass prior year traffic by 12%.

Domestic travel also continues to surpass 2019 levels. In the most recently reported traffic data for June, global domestic air traffic was up 10% compared to prepandemic levels, domestic air travel growth has been driven significantly by outsized growth in China, which was up 22% in June compared to 2019.

Shifting over to the U.S. domestic travel for June was up about 6% from 2019 air traffic levels.

International traffic has generally hovered slightly above or below pre-pandemic levels for the past few months. In the most recently reported data for June, inter casual travel was just slightly below prepandemic levels. This is a significant improvement from the 88% of 2019 levels 1 year ago.

In summary, for the commercial aftermarket, we continue to see strong growth in our passenger and interior submarkets indicative of the continuing positive trends in passenger trends. We expect our freight [indiscernible] market to remain light in year-over-year comparisons based on current trends in the underlying market. Business jet remains a watch item and may continue to bounce around.

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 13%, compared with prior year period, and is up 20% year-to-date versus the prior year period. Q3 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 aftermarket running slightly ahead of OEM.

Defense bookings in the quarter were also strong compared to the same prior year period, supporting the revised defense revenue guidance for the full year. Additionally, we saw growth in the U.S. government defense spending outlays during Q3. We are hopeful we will continue to see steady growth here. But as we have said many times before, defense sales and bookings can be lumpy. Forecasting them with accuracy and precision on a quarterly basis is difficult.

As Kevin mentioned earlier, we now expect our defense market revenue growth for this year to be in the high teens percent range. This updated guidance for defense primarily reflects the stronger-than-expected Q3 defense sales as well as the good Q3 bookings.

Next, I will provide a quick update on our recent acquisitions of SEI and the CPI Electron Device business. The SEI and CPI Electron Device business acquisition integrations are both progressing well under the leadership of one of our experienced Executive Vice President, Patrick Murphy. We have owned SEI and the CPI Electron Device businesses for a little over 2 months, and we are pleased with each acquisition thus far.

SEI has been bolted on to one of our existing operating units, [ dark aerospace ]. We have split the CPI Electron Device business into two operating units. Microwave power products located to [ Palo Alto ] and Woodland, California and CPI of Electron Device business located in Beverly, Massachusetts and Middlesex U.K. Although very early in our ownership of these businesses, we are pleased by what we are seeing in the businesses.

In closing, I'd like to express how pleased I am by our operational performance in the third quarter of fiscal 2024. Our management teams remain committed to our consistent operating strategy and servicing the robust demand for our products as we continue through the remainder of the year.

With that, I would like to turn it over to our Chief Financial Officer, Sarah Wynne.

[Sarah Wynne, executive]

Thanks, Joel, and good morning, everyone. I'll recap the financial highlights for the third quarter and then provide some more information on the guidance update.

First, on organic growth and liquidity. In the third quarter, our organic growth rate was 14.6% and all market channels contributed to this growth, as Kevin and Joel just discussed.

On cash and liquidity, free cash flow, which we traditionally defined as EBITDA less cash interest payments, CapEx and cash taxes was roughly $700 million for the quarter, coming in around $1.6 billion on a year-to-date basis. For the full fiscal year, we now expect to generate free cash flow slightly above $2 billion.

Below that free cash flow line, net working capital consumed $84 million, and we continue to expect our annual dollars invested in net working capital to roughly align with historical levels as a percentage of sales. We ended the quarter with approximately $3.4 billion of cash on the balance sheet, and our net debt-to-EBITDA ratio was 4.7x, similar to last quarter, which was at 4.6x, as we paid approximately $1.5 billion for acquisitions in Q3, primarily for the CPI acquisition that we closed on June 6.

In addition, we closed on the Raptor acquisition after the quarter on July 31 and deployed $655 million for that acquisition. Pro forma for the Raptor acquisition, the Q3 quarter end cash balance would have been approximately $2.7 billion. While we don't target a specific amount of cash that we'd like to have on hand, we are happy to have cash available to support M&A, especially given the timing of closing of some of these can be difficult to predict.

We continue to be comfortable operating in the 5 to 7x net debt-to-EBITDA ratio range. And while we are currently sitting slightly below the low end of this range, our go-forward strategy, capital deployment has not changed. And we continue to seek the best opportunities for providing value to our shareholders through our leverage strategy.

Our EBITDA to interest expense coverage ratio ended the quarter at 3.5x, which provides us with comfortable cushion right against that target range of 2 to 3x. We continue to closely monitor our debt stacks and repriced approximately $3.6 billion of our term loan debt to a more favorable rate [ SOFR plus 2.5 ] our capital allocation strategy always to both proactively and prudently manage their debt maturities [indiscernible].

Our nearest term maturity is November 27, which gives us plenty of protection, at least in the short test. In addition, approximately 75% of our $22 billion gross debt balance is fixed through fiscal 2027. This is achieved through a combination of fixed rate notes, interest rate caps swaps and collars. This continues to provide us adequate cushion against any rising rates, at least in the immediate term.

With regard to guidance, as Kevin mentioned, we increased our midpoint sales and EBITDA by $160 million and $85 million, respectively. Given the strong quarter along with our current expectations for the year, including the newly closed acquisitions. Our adjusted EPS guidance is now $33.02 compared to the prior guidance of $32.42 in support of the higher EBITDA.

As we sit here today, from an overall cash liquidity and balance sheet standpoint, we think we remain in good position with adequate flexibility to continue pursuing M&A opportunities or return cash to our shareholders by dividend or repurchases.

With that, I'll turn it back to the operator to kick off the Q&A.

[Operator]

[Operator Instructions] And it comes from the line of Robert Spingarn with Melius Research.

[Scott Mikus, analyst]

This is Scott Mikus on for Rob Spingarn. Kevin, Mike, Joel Sarah. Typically, you announced a capital allocation decision when you report fiscal fourth quarter results in November. So I'm curious, given that we might have a potential change in administration, and potentially an FTC that might be more open to M&A, does that change your thought process for capital deployment and maybe keeping a little extra dry powder on the balance sheet for M&A going into 2025?

[Sarah Wynne, executive]

Sure. I'll take that one. Yes, I mean, I think last year, we did do something [indiscernible] Currently, as we sit here today, obviously, we're coming close to closing out fiscal '24 here. We've got few billion dollars of cash. I think we'll look to make that decision as we close out '24 but heading into the fiscal '25, so sometime by the end of the calendar year.

[Scott Mikus, analyst]

Okay. And then airlines have been flagging overcapacity in the passenger market, especially in the U.S., but at the same time, Boeing and Airbus are struggling to ramp up their deliveries. So for the commercial aftermarket products, you mentioned the strong orders from distributors, but have you seen any change in order flow directly from the airlines?

[Joel Reiss, executive]

I think for the quarter, we saw some changes, but nothing significant. As you said -- as we've noted, the POS from distribution partners was very strong for the quarter. And I think the -- we had solid book-to-bill in the quarter as well as we have for the full year within commercial. And I think overall, there has -- we have not seen any, what I would say, significant change in their patterns. And think that's set us up well for Q4.

[Operator]

And our next question is from the line of Robert Stallard with Vertical Research.

[Robert Stallard, analyst]

It's probably for Kevin or Joel. I was wondering if you could dig a little bit more into the freight aftermarket and whether there are any specific customers that are perhaps moving things around here as they retire older planes or anything in that, whether that's having an impact on your aftermarket bookings and revenues?

[Joel Reiss, executive]

I really think this is just driven from the change back to where we were back in 2019. In 2019, the vast majority of freight was through belly capacity. During the COVID time period, it was a big switch over to dedicated freighters. Obviously, with the international markets recovering, it has pretty quickly and dramatically swung back to belly capacity.

So for us, this really impacts us with typically more lower-margin products. Things like the [ ULD ] type products. So although it impacts us more from a revenue standpoint, the actual EBITDA impact is significantly less than the way it shows up from a revenue standpoint. But it really is just the difference of the mix of products that you see on belly passenger freight capacity versus the dedicated freighters.

[Robert Stallard, analyst]

Right. And then as a follow-up, one for Sarah. In your language, you said you're trying to cushion against rate rises. But looking at this the other way, it looks like rates could be coming down. What sort of opportunity do you see going forward to restructure the debt and reduce your interest cost if the Fed does start to move?

[Sarah Wynne, executive]

Yes. I mean we're -- as you know, and as I said, we're 75% hedged. We've done a lot of financing already this year. So we're already in a pretty good position, our next maturity dates until 2027. Because of all the recent refinancing, we've got some breakage fees that would have to pay if we wanted to try and reduce any of the rates on any of the stuff we've done recently. But then it just becomes a math exercise, right?

If the rates drop substantially, we could go after some of those loans and refinance with the [ break fees ] and if the math makes sense. But obviously, as you know, we're always looking at this stuff opportunistically.

[Operator]

That comes from the line of Ken Herbert with RBC Capital Markets.

[Kenneth Herbert, analyst]

Maybe for Joel or Kevin, can you explain the discrepancy between the strong growth you saw on the point-of-sale side in the aftermarket relative to the passenger growth up 16%?

[Joel Reiss, executive]

There's a slightly different probably mix of products in terms of where products are shipped out. I don't know that there's any dramatic difference. Obviously, our sales include sales to the distribution partners. There's probably some level of inventory destocking that happened as well, which would have impacted us a little bit in terms of how we sell product into the distribution piece.

I don't know that there was anything dramatic. From a full year basis, we're up roughly 21% in the passenger submarket and the POS is up about that same amount. So some of it is a timing piece as well in terms of by quarter for point-of-sale versus when we're selling the product. I don't know if there's anything beyond that was really significant.

[Kenneth Herbert, analyst]

Okay. That's helpful. And if I could, on the interiors piece, some improvement there, it sounds like certainly sequentially, but are you seeing anything yet that gives you any confidence or any visibility on timing of when you might see more of these sort of the retrofit or upgrade beyond just sort of the repair sales starting to accelerate?

[Joel Reiss, executive]

I think when we started fiscal '24, we were thinking we would start to see it this year. I think at this point, we don't know. We're seeing some smaller quantities of products now. I don't think we know. And obviously, as we're putting together the 2025 numbers, we'll know better as we put together the guidance for that. But at this point, it's probably wasn't as good as we had thought it would be this year and certainly has pushed to the right.

Part of the challenge is, there's just not enough aircraft in that can be pulled out of service to do an entire interior refresh. Any planes that you can pull out of service. And certainly, there's some level of impact from the fact the OEMs aren't delivering enough new aircraft for them the airline to be able to [indiscernible] some number of planes out of service to do that work. So that certainly has an impact on us as well.

[Operator]

Our next question is from the line of Ron Epstein with Bank of America.

[Ronald Epstein, analyst]

Are there any watch areas in your own supply chain that you're keeping an eye on in terms of areas where there could be shortages? Where you want to deploy some of your own people to help out suppliers, that kind of thing?

[Joel Reiss, executive]

So what I would say today is we probably see more issues than we did back in 2019. Overall, it's improved significantly over the past 2 years. Today, it's probably the same caster characters you would hear from others, castings and electronic components are probably the final two areas.

One of the great benefits of our highly decentralized structure is, we have 50 separate teams that work closely with their specific supply chain groups and stay close to them as needed. But overall, I think we've continued to see it improve quarter-over-quarter. And when it will get back to 2019 or before levels, I don't know. But I think we continue to see good progress.

[Ronald Epstein, analyst]

Good. And then maybe just one follow-up. When you look at the M&A environment now, and we just had that at your Investor Day not too long ago. Has there been much of a change? I mean, is there more stuff out there? Are there more opportunities out there? Or it's about how it was just a couple of months ago?

[Kevin Stein, executive]

I think it's about what it was a couple of months ago. We see some good businesses possibly coming to the market next year. But between now and the end of the year, there's a good collection of stuff that we're evaluating. Again, it's difficult to predict when things meet the criteria, but we continue to work hard on it, looks the same. We're very busy. We're adding resources, as I commented on last quarter, and it continues the same and the at least near-term horizon, we remain very busy on the M&A front of this year has been an unbelievable year for EBITDA acquired. This will be our second best M&A year on record. So it's been very encouraging.

[Ronald Epstein, analyst]

Got it. Got it. And then maybe just one last one. How do you guys think about book-to-bill? I mean if you were to give sort of a sense broadly for the whole company, what is the book-to-bill for the company?

And what's that look like for commercial versus defense? Because defense has been doing quite well as well?

[Kevin Stein, executive]

Yes. We usually don't get into parsing this out. I would say year-to-date, our book-to-bill was well above 1. The business is growing and expanding. The only area in the recent quarter that maybe wasn't as strong was commercial OEM, which I think everyone would expect given what we're reading about [ ink ].

But yes, defense is running very strong, but so is commercial aftermarket and commercial OEM, we have strong book-to-bill and backlog that we've amassed throughout the year. It's been a very positive year on that front.

[Operator]

And it comes from the line of Scott Deuschle with Deutsche Bank.

[Scott Deuschle, analyst]

Kevin, does the aftermarket comp in the fourth quarter get any easier on the freight side? Or is that fairly consistent with what you saw this quarter?

[Joel Reiss, executive]

I think it's fairly consistent from what we saw this quarter. I don't -- I was just looking at the number, and it looks pretty similar.

[Scott Deuschle, analyst]

Okay. And then Joel, do you get the sense that some business units are seeing OEM inventories of their product building up for platforms like the 87 or 37? Or do you feel like they're doing a good job of assuring that doesn't happen and matching their shipments to the actual OEM production rates?

[Joel Reiss, executive]

Again, when you have 50 operating units, I think this is somewhat varied. Part of the key is you have to ship to the delivery date. And so if we see that they're trying to order more than we think is needed or getting inventory, but we do work to negotiate if we can, to have them push out the orders, so we don't end up kind of in this significant rise in fall level. Ultimately, the OEM is not willing to make the change, then you still have to ship the product in line with what that is. But we do work hard to deal with that when we can.

[Operator]

Our next question comes from the line of David Strauss with Barclays.

[David Strauss, analyst]

The absolute EBITDA, adjusted EBITDA guidance for the full year, if I just take what you've done year-to-date, would seem to imply very little sequential improvement in the fourth quarter, even though I would assume you're going to pick up $20 million, $30 million in acquired EBITDA relative to Q2 -- or relative to Q3. So I guess, what am I missing in that math?

[Kevin Stein, executive]

Yes, it's a good question. We looked at it, and we always aim to be conservative. We just did a pile of acquisitions. We need to get in there and look at them in more detail. And also defense is where we're seeing more of the growth. We don't make quite as much money on the defense side.

So it's a mixture of conservatism in what we think the markets look like. We're certainly not predicting a difficult we're just being somewhat conservative and practical in how we look at the year unfolding.

[David Strauss, analyst]

Okay. Got it. And hit your -- hit the mid-teens forecast for the aftermarket for the full year, how much sequential aftermarket growth do you need in the fourth quarter relative to Q3?

[Kevin Stein, executive]

I mean, I think it looks like our bookings. Our bookings are ahead of our shipments last quarter. I think we're in a good place. We're at mid-teens right now for the year. I think the way the bookings are unfolding, we shouldn't have any problem getting mid-teens for the year.

[Operator]

Our next question comes from the line of Gabby Kristine Liwag with Morgan Stanley.

[Kristine Liwag, analyst]

Kevin, maybe on M&A, since discussing the widening aperture of M&A at the Analyst Day, but clearly staying focused on A&D, can you discuss more of that pipeline of logistics of pipeline of targets? I mean as you weigh into this slightly broader pool, how deep is it? Are you seeing kind of maybe [ two extra ] opportunities you would have seen if you're [indiscernible] stated your focus? Any sort of directional or magnitude of size would be helpful.

[Kevin Stein, executive]

Yes. I don't think that it is creating another TransDigm out there in some of these other markets like helicopter accessories that we've been successful in recently and the testing certification and instrumentation area of aerospace and defense. We want to stay in aerospace and defense. This will only ever so slightly broadens our aperture. We're looking for other solid places in aerospace and defense to put capital to work. And we think these are great areas. They're not going to double the market of TransDigm, however, but provide nice additional acquisition opportunities for us.

[Kristine Liwag, analyst]

Okay. Yes. That's helpful. And if I could add another question on PMA. I mean there's more cost consciousness from airlines, especially in light of the recent profit cuts. At the same time, we're seeing more PMA players enter the industry seeing your success in commercial aerospace aftermarket and the success of PMA focused business models like [ HEICO ]. Your portfolio has historically been more defensible and very defensible against PMA players. And in fact, you do PMA yourself as well. Like are you seeing anything different this time in this cycle?

[Kevin Stein, executive]

I don't think so. We continue to monitor this. Obviously, used material is not a player in the aftermarket because of limited claims being scrapped out. As far as PMA goes, we monitor it constantly. The very -- the massive lion's share of our products are very complicated products that don't tend to lend themselves to PMA nor do they have the volumes necessary in many of these cases to lend themselves to PMA.

Like I've said, like our team has said many times and we said at our Investor Day, we continue to monitor this closely. The [ FAA ] publishes a -- all of the PMAs approved and we can follow it very closely. And to date, haven't seen anything that causes -- that gives us concern.

[Operator]

Our next question comes from the line of Myles Walton with Wolfe Research.

[Myles Walton, analyst]

Kevin, in your comments, you mentioned that lower OEM production continued to weigh on TransDigm's results, which, I think, is a statement of obvious on sales. But I'm curious, are your OEM margins also below pre-pandemic levels?

And maybe if you can comment on the benefit of some OEM pricing negotiations into year-end and what that might do for you to help if OEM is faster growing in '25 than aftermarket?

[Kevin Stein, executive]

Yes. I think on the OEM side, we're always working on contracts with OEMs as they expire. But as we have always clearly stated the lion's share of our profits come from the aftermarket. On the OEM side, I would say we're probably similar in profitability to where we have been historically. We have seen an awful lot of inflation that we need to account for in renegotiating of contracts and we're working on that right now, but no real update to provide. Yes.

[Myles Walton, analyst]

And then one detail, follow if I could. The EBITDA raise, I think, implies organically was $50 million on $35 million in sales. Is there something in other income or other areas that helped make that 100% -- greater than 100% incremental margins?

[Kevin Stein, executive]

No. We don't -- Sarah is shaking her head at me. There's nothing that is nonbusiness related to that, that we can quickly identify.

[Operator]

Our next question comes from the line of Noah Poponak with Goldman Sachs.

[Noah Poponak, analyst]

Just going back to this topic of opening up the aperture or not on M&A, Kevin. I guess if I zoom out and if we're looking at your total funnel or I guess maybe the things in the funnel that are [ posted ] to the finish line than not? Or if you define it as your likely next 5 to 10 acquisitions, are we still looking at the majority of your deals are going to be -- are likely to be the classic in your wheelhouse, airplane parts, aftermarket rich [indiscernible] and dual source, proprietary? Or could it be that the majority are in this category of opening the aperture?

[Kevin Stein, executive]

The vast majority will always be as we would say, right down the fairway components, aftermarket content, what we've historically done, and that's what the bulk -- the absolute lion's share of everything that we're looking at for the future. The -- that's why I don't want to oversell the opening of the aperture, but it's just smart other places to put money to work, but the bulk of our M&A activity will still be in the component business that you've seen us acquire around for our history.

[Noah Poponak, analyst]

Okay. Great. And Sarah, do you have a number on how much acquisition margin dilution there is in the fourth quarter EBITDA margin?

[Sarah Wynne, executive]

Yes, 3 new ones. It would be just over 100 basis points.

[Noah Poponak, analyst]

Okay. Great. And then just one other one for you is, if you got to $2 billion on the full year free cash, you'd be a little over 100% conversion. I can't recall where that stands in terms of being how it's defined with working capital.

Is that including or excluding? And how much working capital use are you looking at for the full year now?

[Sarah Wynne, executive]

Yes. For the full year working capital, I think we're like about [ $200 million ] full year, so we've got just another quarter to go. So maybe you throw a bit more there, but I think we're generally trying to track it as a percent of sales.

[Noah Poponak, analyst]

And the $2 billion would be including that or excluding that head...

[Sarah Wynne, executive]

No, no, sorry. That would be excluding it.

[Operator]

Our next question comes from the line of Jason Gursky with Citi.

[Jason Gursky, analyst]

Kevin, I was wondering if you wouldn't mind going back to [ Myles' ] question about the negotiations that you have going on with some of your OEM customers. Just curious in the context of so many disparate operations that you have going on, do you go one by one through each contract at every single 1 of your business units? Or is there a kind of a bigger bang, broader negotiation that's going on here?

I know you've just suggested you don't want to get out ahead of your skis on the timing of things. But I think just understanding what the shape of that might look like for all of us because that's, I think, an important part of your margin store and your ability to increase margins going forward, that 100, 150 basis points and you talked about renegotiations at the Investor Day as being kind of a key tenet to making sure that continues to happen.

[Joel Reiss, executive]

Yes. So with our think and act like an owner, a highly decentralized structure, we like the idea that every one of our operating units is the ones that sit and have to negotiate the contract. They're the ones who have to live with them. There's really only a couple that are kind of larger, more corporate-driven, that we've obviously referred to Boeing in the past.

Other than that, I mean, these are really contracts, OEM contracts that are negotiated operating unit by operating unit.

[Jason Gursky, analyst]

Okay. Great. And then just as a quick follow-up in. I'm just kind of curious what you're seeing on the hiring side of things and your ability to get the right people in the right places and what the trend line has been there here recently.

[Joel Reiss, executive]

Yes. I think we continue to see that improve. I think turnover has largely, for us, gone back to where we were back in to 2019 time frame. I think hiring has also significantly improved that the vast majority of our operating units and locations. And I think we've highlighted before, typically highly skilled engineers are harder than other positions. I don't know that that's changed materially so.

But I think, overall, I think it's quite a bit better today than it was a couple of years ago.

[Operator]

Our next question comes from the line of Ellen Page with Jefferies.

[Ellen Page, analyst]

Just going back to the dilution from M&A. It seems like it's 100 bps or so next year. How do we think about the puts and takes to profitability given mix might not be as favorable?

[Joel Reiss, executive]

Could you repeat that question? You broke up.

[Ellen Page, analyst]

Sorry. Just going back to the dilution from M&A. As we think about fiscal '25, how do we think about the puts and takes to EBITDA margin given a 100 bps of dilution and potentially less favorable mix?

[Joel Reiss, executive]

Yes. We don't want to get into our '25 forecast just yet. We'll cover that on the next quarter call. Our teams, as you know, we practice bottoms-up forecasting and then we roll that out to you. So our teams are going through that process right now. Obviously, a lot depends on future acquisitions and the dilution that we will see. Right now, it's 125 basis points of dilution -- yes, for '24. That will wind down into '25, but also depends on the acquisitions that we complete. So difficult to forecast.

You agree with that, Sarah?

[Sarah Wynne, executive]

Yes, absolutely.

[Operator]

And it's from the line of Seth Seifman with JPMorgan.

[Unknown Analyst]

This is [indiscernible] on for Seth. How should we start thinking about the commercial aftermarket growth in fiscal year '25, given the capacity growth is slowing and travel started to catch up to pre-COVID levels? Is the double-digit growth rate sustainable? Or should we start seeing some more headwinds?

[Kevin Stein, executive]

We don't want to get into -- and I know that's what -- there's a lot of interest in what will next year look like. And we'll offer that to you guys next quarter. We're still unpacking that ourselves as we look forward. Obviously, it's still a growing and exciting markets, and we'll give you more of that flavor on our next call.

[Unknown Analyst]

Great. Yes. Understood. And then are there any specific programs or areas that are driving the strong growth in defense aftermarket this year?

[Joel Reiss, executive]

No, it's actually been pretty widespread across almost every one of our defense businesses. There's a couple that have had some larger bookings. But across when we look at it from a revenue standpoint, there isn't really any one significant program that's driven the number.

[Operator]

Our next question comes from the line of Gautam Khanna with TD Cowen.

[Gautam Khanna, analyst]

I have two questions. One, I was curious on the OEM contract renegotiations, renewals. When do some of those big contracts actually expire is that at the end of this year. So that's sort of the time frame? Or I'm just curious like how much time do we have before we know the outcome of those?

[Joel Reiss, executive]

Well, first, we always have some number of LTA contracts that are expiring, a typical OEM contracts are up in 3 to 5 years. I think one that Kevin had referred to was a Boeing one that we're currently negotiating. That expires at the end of this year. It reflects a certain group of our businesses, not all of them, Beyond that, there's always some number every single year of OEM contracts that come up for renewal or renegotiation.

[Gautam Khanna, analyst]

Okay. That's helpful. And that's a...

[Kevin Stein, executive]

To handle a lot of those renegotiations on the -- they involve all the sites as well as some coordination from the top. So all of our sites are involved in this process.

[Gautam Khanna, analyst]

Got you. That's helpful. I also want to just ask on the commercial aero aftermarket. Is there any thematic thing you're seeing within the data on types of products, whether they're discretionary, nondiscretionary, however you want to characterize it? Where you're seeing relative strength?

[Joel Reiss, executive]

The only thing I'd say is the engine shops, obviously, are well booked out. I think [indiscernible] businesses are doing extremely well. It's really much more varied after that. I was looking at that same data as there's some significant difference between discretionary versus non and there really is not. I think it's just probably the nature of how much inventory the [indiscernible] airlines are carrying and the specific needs on that one part, but there wasn't any significant difference when I looked at the data between discretionary and not.

[Operator]

And it's from the line of Gavin Parsons with UBS.

[Gavin Parsons, analyst]

Just wanted to pull a little bit on what strong bookings and aftermarket means given kind of the language has been strong with a pretty wide range of aftermarket growth rates. So just any comment on if that's bookings above revenue? I appreciate that can be lumpy.

[Joel Reiss, executive]

Yes. We've booked basically, I think, certainly on a full year basis in this quarter, [ CAM ] bookings were ahead of shipments. I don't remember if that was true every quarter this year, but certainly was true this quarter and any year-to-date. And actually, from a year-to-date basis, even in our freight market, we've booked better that we have shipped out.

[Gavin Parsons, analyst]

Okay. That's helpful. And I don't know what typical is nowadays, but would you say you have more or less visibility into kind of next quarter's aftermarket growth than typical?

[Joel Reiss, executive]

I think what we've said before is our aftermarket is lumpy. We -- this is a highly booked to ship business. And I don't know that there's a dramatic change in terms of what percentage books in the quarter and shifts out. It's actually remained somewhat the same. But we have no visibility to what orders are going to show up that quarter until they do. It's why we always talk about the lumpiness of the booking and shipment number.

[Operator]

And it's from the line of Michael Ciarmoli with Truist Securities.

[Michael Ciarmoli, analyst]

Joe, maybe just to stay on that topic. I mean -- and even kind of going back to Ron's question on the book-to-bill, I mean, there's -- capacity is tight in the marketplace, engine shops are scheduled out. The airlines aren't getting new planes. I mean, would you say as you close out this year, and I can appreciate all the short-cycle commentary. But do you think visibility is better than normal?

Just kind of given what's going on in the OE kind of supply chain challenges and the extended nature of some of these shop visits that are really scheduled way out?

[Joel Reiss, executive]

I don't think there's a significant change. Our lead times in the aftermarket are relatively short, certainly in comparison to the commercial loan we have [ for ] the defense side. And so we don't get a dramatic amount of visibility. A significant portion of the orders that we shipped in Q4 will book in Q4. So although the engine shops may be booked out several quarters or years, we don't get the same level of orders based on the volume of work they're doing. We may be able to use that to give us some level of guidance or comfort on what orders we may expect, but we don't get extra visibility.

[Michael Ciarmoli, analyst]

Got it. Got it. And then just, Kevin, one more back to M&A on this opening of the aperture. I mean you've got -- you said a couple of times, 50 different operating units. You've got a lot of scale. Are you thinking or finding that it may be more challenging to stay in that middle of the fairway on airline parts, just given what kind of antitrust or regulatory issues might crop up and you're kind of opening up the aperture to kind of steer clear of some of those issues?

[Kevin Stein, executive]

Yes. I don't see it as something new in the marketplace in terms of [ HSR ] review or anything. I think we've always tried to be smart about our M&A portfolio. So we're not opening the aperture because of trying to get deals through, it's a desire to consume more capital on M&A if there are good aerospace and defense-type businesses, in that larger market that makes sense for us. So it's simply just taking advantage of what we're finding in the marketplace that we believe matches our very disciplined criteria.

We still see a tremendous number of opportunities down the fairway in the traditional components of aerospace and defense. And there are so many parts that are on an airplane that we don't supply yet, there are still a [ fast ] number we can continue to look for in the marketplace. So as I look out, there's a lot of opportunity ahead of us still.

[Operator]

And it's from the line of Peter Arment with Baird.

[Peter Arment, analyst]

Kevin or Joel, maybe can you just comment on -- you called out the biz jet market is kind of a watch item. You've had really only 1 negative quarter of growth, and that was in Q2 and your aftermarket. Otherwise, the last kind of 4 quarters, you've had good growth, but you're calling it out. Just maybe you could just provide a little more color on what you're seeing there?

[Joel Reiss, executive]

I think it's just being driven by the larger kind of data pool we see the data comes out every month from the FAA in terms of takeoffs and landings and -- it had picked up. I think it was at one point like 120% of 2019 levels, and it's kind of modulated now closer to like 103%, 104% or something like that. So I just think we're seeing an overall slowing in the takeoffs and landings. And so I think we generally think when you see that moderating or [indiscernible] or decreasing, it's going to translate into us into lower shipments. I think that's the reason we've kind of called it out as a watch item.

[Operator]

And it comes from the line of Pete Skibitski with Alembic Global.

[Peter Skibitski, analyst]

I just want to return to this topic of growing global airline traffic but some pricing pressure at the airlines. Just was wondering if you guys are -- you touched on it earlier, but I just was wondering if you're seeing any trend of airlines tightening their belts maybe with discretionary spend? And I don't know if you could bifurcate for us on the aftermarket, your sort of discretionary exposure versus more mandatory? Or should we think of it that your price points tend to be kind of low enough that it's kind of not an area -- your products are not an area where an airline would look to tighten its belt?

[Kevin Stein, executive]

I think in general, our price point in the aftermarket is pretty low. We say a couple of thousand dollars per price points per part in the aftermarket. So it doesn't lend itself to maybe as much scrutiny at times. But we continue to operate -- deliver the highest quality, best delivery performance possible in the industry.

If there's any slowdown, maybe as Joel commented on, in some of the discretionary aftermarket places. Are there any -- what airline activity is out there we've certainly read and seen comments from many of you that the airlines are trying to manage inventory closely. We haven't necessarily seen any of that translate to our business, but it continues to be a watch item. And we're always looking for any changes. Things seem relatively business as usual.

[Operator]

And it comes from the line of Bert Subin with Stifel.

[Bert Subin, analyst]

Maybe just a follow-up, Joel, on the -- you've had a lot of questions on the sort of how commercial aftermarket is progressing. Is there any color you can provide just from a regional standpoint because we've seen a little bit of a divergence in capacity trends globally. Is that impacting sort of your geographic mix?

[Joel Reiss, executive]

Sorry, I missed the middle part of your question, if you could just repeat it again sorry.

[Bert Subin, analyst]

Sure. I was just asking from a geographic standpoint, we've seen capacity growth at least relative to 2019 levels, diverge a bit whether you're looking at the Middle East or Asia or North America or Europe. I'm curious if that's translated into sort of any change in your typical geographic mix of sales in the aftermarket?

[Joel Reiss, executive]

No. I mean, first, we don't get great data by region for inventory and demand as it goes through distributors or through OEMs [indiscernible] to the airlines. So I don't know if we've looked at it a few times to try to figure that out. I don't know that we're seeing anything significantly different one region to the next that I would try to call it out and note it as material.

[Bert Subin, analyst]

Got it. And Kevin, just a follow-up for you. On the M&A side, a few of your recent deals have focused more on the testing equipment and services side. I'm just curious what's your postmortem is? And how those deals are progressing and sort of what your interest is to continue building into those spaces?

[Kevin Stein, executive]

Those -- the acquisitions, Calspan, was our first foray into that. And I would say that Calspan is running at or ahead of our acquisition model. So it's a successful acquisition to date. And we would continue to look favorably on testing, certification, instrumentation businesses. And that's why we looked at Raptor and why we will continue to look at that space.

But our core is still components for -- that have aftermarket content, much like CPI, the largest acquisition we've done in the year was a traditional component business. And that will continue to be our focus. Some of these other pieces are interesting, and we spent time explaining them so that you understand how it fits into our disciplined acquisition strategy, which these other businesses clearly do.

[Operator]

Thank you. And with that, I will conclude the Q&A session for today, and we'll turn the call back to Jaimie Stemen for closing remarks.

[Jaimie Stemen, executive]

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

[Operator]

And thank you all for participating in today's conference. You may now disconnect.