HEI Earnings Call

SamaraWelcome to the HEICO Corporation Second Quarter 2026 Financial Results Call. My name is Samara, and I will be your operator for today's call. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include, among others, the severity, magnitude, and duration of public health threats, our liquidity and the amount and timing of cash generation, lower commercial air travel, airline fleet changes, or airline purchasing decisions, which could cause lower demand for our goods and services, product specification costs and requirements, which could cause an increase in our cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space, or homeland security spending by U.S. and/or foreign customers, or competition from existing and new competitors, which could reduce our sales.

SamaraOur ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth. Product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales. Cybersecurity events or other disruptions of our information technology systems could adversely affect our business and our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals and achieve operating synergies from acquired businesses. Customer credit risk, interest, foreign currency exchange, and income tax rates, and economic conditions, including the effects of inflation within and outside of the aviation defense, space, medical, telecommunications, and electronics industries, which could negatively impact our costs and revenues. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement.

SamaraWhether as a result of new information, future events, or otherwise, except to the extent required by applicable law. I now turn the call over to Victor Mendelson, HEICO's co-chairman and co-chief executive officer.

Victor MendelsonThank you very much, Samara, and good morning and thank you to everyone on this call. We thank you for joining us and we welcome you to HEICO's second quarter fiscal '26 earnings announcement teleconference. As you've heard, I'm Victor Mendelson, HEICO's co-chairman and co-chief executive officer, and I'm joined here this morning by my fellow co-chairman and co-chief executive officer, Eric Mendelson, as well as our executive vice president and CFO, Carlos Macau. Before we get into our record results, uh, let's take a moment to thank the people who produced yet another set of records for HEICO. And that's our team members. Uh, it's your resolute dedication, your diligent efforts, and your focus on exceeding customer expectations that produce these results. We know you are what makes HEICO unique, and we're also grateful to call you our colleagues and our friends. We are excited about the opportunities ahead and our company's future with you.

Victor MendelsonWe further thank our customers for your confidence and your support. We know you are why we exist. And we extend our sincere gratitude to the brave servicemen and women, past and present, of the United States Armed Forces and allied military forces around the world, including HEICO team members, customers, vendors, and their family members. With Memorial Day just behind us, we honor and remember those who made the ultimate sacrifice in service to our country and to our allies. We remain deeply grateful for their courage, for their dedication and commitment to protecting the freedoms we all enjoy. HEICO is very proud to support the United States and its allies' defense needs.

Victor MendelsonUh, so, so getting to our results, our record second quarter fiscal '26 results probably speak for themselves. And we'll delve into the details shortly. Uh, and though we are certainly proud of this quarter's results, as well as the many preceding quarters where we repeatedly set records, it's the future that energizes us most. HEICO is, as they say, firing on all engines. Business is very strong for us virtually across the board, including in our biggest markets: commercial aviation, defense, and space. Orders continue at record or near record levels for us in nearly all of these markets. These markets are themselves growing, and they're growing rapidly. People are traveling ever more and ever more. And while short-term shocks like the current—just war—might create short-term disruption in the inexorable upward trend, the short-term disruptions are by definition always brief, with more planes in the sky and an ever-increasing need for what HEICO cost-effectively provides.

Victor MendelsonAnd I should add that that list of what we provide keeps on growing. Fuel prices eventually settle back, spurring even more growth.

Victor MendelsonAnd in defense, our country and its allies have recognized the need to invest more in defense and to replace depleted stocks. We are now experiencing this in our defense sales, in our defense orders, and in our defense backlog. We expect this to continue and to have a multi-year tail for which we are very well prepared. In space, the industry is rocketing ahead, pun intended, and so are we. Our presence on key programs, both in the new space and traditional realms, continues growing. Innovation and quality are crucial. They are crucial in everything we do and in every market we serve. We've maintained full investment in our engineering and production capabilities to handle what we're experiencing. Our company supports both historical customers as well as the new disruptors in the defense tech, new space, and new commercial aircraft models. HEICO has always been and will always be where the industry goes and where it grows.

Victor MendelsonThe adaptability has been one of our key traits since we took over the company roughly 36 years ago. When I ask people for words they associate with HEICO, the most common word is trust. They trust that our company will deliver real and sustainable growth, that will deliver innovation, that will deliver quality, that will deliver real cash. That's very important. Real cash. And we will do all of this honestly, among other things. They call it the HEICO culture, and, and we like that. So our most recent quarterly and year-to-date results are just another manifestation of the HEICO culture. And summarizing those results, today we emphasize that consolidated net income, operating income, and net sales in the second quarter of fiscal 26 are again record results for HEICO, increasing by 49%, 41%, and 25% respectively compared to the second quarter fiscal 25. The electronic technologies group set all-time quarterly operating income and net sales records in the second quarter fiscal 26, improving 56% and 34% respectively over the second quarter of fiscal '25.

Victor MendelsonThese increases principally reflect strong 17% organic growth driven by increased shipments and more demand for most of the Electronic Technologies Group's products, as well as contributions from our fiscal '25 and '26 acquisitions. The Flight Support Group also set all-time quarterly operating income and net sales records in the second quarter of fiscal '26, improving to 31% and 21% respectively over the second quarter of fiscal '25. And I might add that the second quarter of fiscal '25 itself was extremely strong, as have been all the quarters surrounding it. These increases principally reflect strong 19% organic growth from increased demand across all of our product lines, as well as the contributions from our fiscal '26 acquisitions. Consolidated net income increased 49% to a record $233.8 million, or $1.66 per diluted share, in the second quarter fiscal '26, up from $156.8 million, or $1.12 per diluted share, in the second quarter fiscal '25.

Victor MendelsonVery notably, our cash flow provided by operating activities increased 43% to $292 million— as I said, real cash— in the second quarter of fiscal '26, up from $204.7 million in the second quarter of fiscal '25. That strong cash generation remains a hallmark of our strategy, and it does permit us to invest in our people and our growth, while increasing shareholder value.

Victor MendelsonConsolidated EBITDA increased 37% to $408.3 million in the second quarter fiscal '26, up from $297.7 million in the third quarter fiscal '25. Meanwhile, our net debt to EBITDA ratio was 1.74 times as of April 30th, '26, as compared to 1.6 times as of October 31st, '25. This increase results from our successful completion of 4 acquisitions so far in fiscal '26.

Victor MendelsonIn April, we announced that 3 of our subsidiaries, 3D Plus, Exxelia, and VPT, supplied mission-critical electronic components on NASA's Artemis II mission, which successfully marked NASA's return to deep space human exploration. We congratulate NASA and the thousands of people behind this landmark mission and are honored that our subsidiaries were selected as trusted suppliers on a historic program, as they are on many other key and historic programs.

Victor MendelsonI guess you could say we are over the moon on this one. I'm getting some groans from that pun here in the room. I dedicate that one, by the way, to Rob Stallard. Our recent acquisition activity also remained brisk. In April, we completed two more acquisitions. The Flight Support Group acquired 80% of the stock of Sherwood Avionics and Accessories, which is an FAA and EASA Part 145 repair station specializing in the maintenance, repair, and overhaul of complex mission-critical mechanical and electromechanical components for defense and select commercial aviation platforms. The purchase price was paid with a combination of mostly cash using proceeds from a revolving credit facility and some shares of HEICO Class A common stock. The Electronic Technologies Group acquired 90% of the stock of Southwest Antennas, Inc., which is a well-known and very well-regarded designer and manufacturer of high-performance, rugged, and mission-critical antennas primarily for ground-based defense and law enforcement applications.

Victor MendelsonThe purchase price was paid in cash using proceeds from our revolving credit facility. We expect both of these acquisitions to be accretive to our earnings within the year following the acquisition. In addition, we have an excellent potential acquisition pipeline consisting of great potential transactions, both large and small. And I now turn the call over to Eric Mendelson, my fellow co-chair and co-CEO, to go into some more details about the business. Eric.

Eric MendelsonThank you very much, Victor. Before reviewing the numbers, I would first like to recognize and thank HEICO's outstanding team members around the world for delivering another exceptional quarter. What HEICO continues to accomplish is remarkable. And on behalf of our leadership, the board of directors, and shareholders, we sincerely thank all of our team members for their continued commitment to our company, our customers, and to one another. The Flight Support Group's net sales increased 21% to a record $929.4 million in the second quarter of fiscal '26, up from $767.1 million in the second quarter of fiscal '25. The net sales increase in the second quarter of fiscal '26 reflects strong organic growth of 19% as well as the impact from our fiscal 2026 acquisitions. The organic net sales growth reflects impressive double-digit organic growth across all of our product lines.

Eric MendelsonFlight Support Group's operating income increased 31% to a record $243.1 million in the second quarter of fiscal '26, up from $185 million in the second quarter of fiscal '25. The operating income increase principally reflects the previously mentioned net sales growth SG&A expense efficiencies realized from the net sales growth, and an improved gross profit margin. The improved gross profit margin principally reflects a more favorable product mix and higher net sales volume within our aftermarket replacement parts product line. Flight Support Group's operating margin increased to 26.2% in the second quarter of fiscal '26, up from 24.1% in the second quarter of fiscal '25. The operating margin increase reflects a decrease in SG&A expenses as a percentage of net sales, primarily driven by the previously mentioned SG&A expense efficiencies and the previously mentioned improved gross profit margin.

Eric MendelsonDuring the second quarter, at our customer's request, we pulled forward some defense-related sales that had previously been scheduled for delivery later in this fiscal year. The incremental margin on these sales improved our second quarter operating margin by approximately 60 basis points.

Eric MendelsonGiven that the acquisition-related intangible amortization expense consumed approximately 240 basis points of our operating margin in the second quarter of fiscal '26, the FSG's cash margin before amortization, or what we internally call EBITA, was approximately 28.6%, which has been consistently excellent and is 160 basis points higher than the comparable FSG cash margin of 27.0% in the second quarter of fiscal '25. While we remain grateful for these margins, we are particularly proud that we did so while simultaneously delivering significant cost savings, outstanding service, and incredibly fast turnaround times to our customers. Victor eloquently spoke of trust in his opening comments, and these results once again show both our customers and shareholders that we can satisfy their objectives.— not at the expense of one another, but simultaneously— and continue to build upon the trust placed in HEICO and our culture.

Eric MendelsonI have never been more optimistic on the FSG's future. The incredible value we deliver to customers each day clearly is durable and in high demand. Now I will discuss the second quarter results of the Electronic Technologies Group. Wow! The Electronic Technologies Group sales— net sales increased 34% to a record $459.5 million in the second quarter of fiscal '26, up from $342.2 million in the second quarter of fiscal '25. The net sales increase reflects strong organic growth of 17% and the impact from our fiscal '26 and '25 acquisitions. The double-digit net sales growth is mainly attributable to increased demand for our other electronics, defense, aerospace, and space products.

Eric MendelsonThe Electronic Technologies Group operating income increased 56% to a record $121.8 million in the second quarter of fiscal '26, up from $77.9 million in the second quarter of fiscal '25. The, the operating income increase principally reflects the previously mentioned net sales growth, an improved gross profit margin, and SG&A expense efficiencies realized from the net sales growth. The improved gross profit margin principally reflects the previously mentioned higher net sales and a more favorable product mix of our aerospace products.

Eric MendelsonThe Electronic Technologies Group's operating margin improved to 26.5% in the second quarter of fiscal '26, up from 22.8% in the second quarter of fiscal '25. The operating margin increase reflects the previously mentioned improved gross profit margin and a decrease in SG&A expenses as a percentage of net sales, primarily driven by the previously mentioned SG&A expense efficiencies. Importantly, and this is really important, before acquisition-related intangibles amortization expense, our operating margin was 30.6%. Yes, 30.6%, as intangibles amortization consumed around 410 basis points of our operating margin. And is 390 basis points higher than the comparable ETG cash margin of 26.7% in the second quarter of fiscal '25. As we discussed last quarter, the ETG's operating margin is extremely sensitive to shipping mix, and we continue to expect volatility in our operating margin consistent with history.

Eric MendelsonOn a true operating basis, these are excellent margins, and we are very pleased with this quarter's profitability while simultaneously satisfying our customers with industry-leading quality and turnaround time at very competitive prices. We continue to expect overall GAAP operating margins between 22% and 24% for all of fiscal '26 based on the group's current composition of companies. And now I turn the call back to my fellow co-chairman and co-CEO, Victor Mendelson, for his comments on the future outlook in closing remarks.

Victor MendelsonEric, thank you very much. Um, we expect the HEICO culture will continue propelling us forward, and for the remainder of fiscal '26, we anticipate increased sales in both the Flight Support and Electronic Technologies Group to continue to be supported by our underlying demand for our products and contributions from recent acquisitions. Our capital allocation approach remains opportunistic with a focus on balancing organic growth and acquisitions while maintaining liquidity and financial flexibility. I should also point out that acquisition activity remains robust, as we've talked about a little bit already in this call, across both operating segments. And that's supported by a healthy pipeline of potential opportunities we are currently evaluating. Our long-term acquisition strategy remains unchanged. You're all familiar with it, and we continue to focus on identifying high-quality businesses that complement our existing operations, strengthen our market positions, and support our long-term growth objectives.

Victor MendelsonAs always, We will remain disciplined in our approach and will only pursue acquisitions that meet our strategic and financial criteria and that we believe will create meaningful long-term value for all of our shareholders. So at this point, I'm going to turn the call back over to Samara to introduce the questions. This is the question and answer section of the call.

SamaraThank you, Samara. Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question, and we'll take our first question from Larry Solo with CJS Securities.

Larry SolowHey, thanks. Good morning, guys. Eric, I think you described it really well by just the one word, wow. Really, really impressive quarterly results. I'm sure your dad's smiling up above. I guess first question, just on, Eric, for you, just on FSG. Can you just kind of give us the really impressive growth on the organic side? Can you just run down the mix between the commercial and the defense side, I mean, on the parts side and what drove that growth and nice step up from last quarter other than the pull forward, did the, you know, do you think you know, does this feel sustainable? Is there anything unusual in there?

Eric MendelsonOr— uh, yes. So, uh, Larry, thank you very much. We are really proud about the, uh, the performance that we had in the second quarter across the entire business, both in the FSG as well as the ETG. Uh, and, you know, frankly, you know, I've commented many times in the past that I think we've got some of the greatest group of sandbaggers that I've ever had the pleasure of knowing. I joke around and call them sandbaggers, but actually I think they're really trying to estimate what they think is reasonable going forward. And frankly, they more than sandbaggers, they're really super talented and they have very aggressive goals and they always seem to outperform. And that's what really happened in this quarter. Breaking down the organic growth by product line, when you look at Parts, it's around 22%. Specialty Products is 21% and Component Repair is about 10%. And you may say, well, why is Component Repair so much lower than the others.

Eric MendelsonOne is it's an extremely competitive business, as everybody knows. But number two, it's dependent on getting parts in from suppliers in order to complete these components. And if we're missing a single part, we can't build an assembly. And so as a result, there are still significant supply chain issues. I mean, there's no question that it's getting better, but we've got massive backlogs in all of our 22 FAA-approved repair stations. And frankly, a lot of them are waiting on parts. So I think that the component repair organic growth, or I know the component repair organic growth would have been higher had it not been for the parts delays. But it is also a competitive business in all fairness.

Carlos MacauOne thing also, Larry, I might want to mention, this is Carlos. I mentioned it last quarter, just keep in mind, you know, we have been seeing a lot more DER and PMA-friendly repairs with the acquisition of Wencor. So the one dynamic that brings to us is as we can populate these repairs with more PMA product, we have less top line but more bottom line growth. In other words, it's a more profitable repair without having to charge customers for the high-priced OEM parts. So keep that in mind also.

Larry SolowYeah, no, no, absolutely. And I think, you know, the defense specialty side, that's Great numbers. And I think they're actually not that big of a surprise, obviously, with what's going on today in the world on the defense side. But the commercial aviation and the parts growth this quarter, really strong in what we feel like is a little bit of a slowdown just on the demand side, just from travel or a little bit. Have you seen any slowdown in travel? And is it just— are you guys just continuing to take market share gains as oil prices continue to rise and companies look for discounts? Is that— Is that even stronger in this period?

Eric MendelsonYeah, I think it is market share gains. We have done exceptionally well. I'm glad Carlos mentioned what he did about the component repair business and adding PMA and DER to those component repairs. I mean, I can tell you, I was at the MRO show roughly a month ago and I'm on the phone with customers all the time and they are, I would literally use the word clamoring for more parts. Um, right. We— I have never seen both our, uh, internal operations, uh, folks, our salespeople, as well as customers literally pushing us to do significantly more. And, uh, yes, you know, with regard to the war in Iran, that has impacted some sales, uh, to the Middle East, but you can see that we've well overcome them elsewhere. And that's because of our market share gains and just the tremendous enthusiasm in what we're providing, uh, you know, on certainly on the commercial aerospace side, but frankly also on the defense side, um, where we've been extraordinarily strong in that area.

Eric MendelsonWe did have a situation where a customer asked for us to pull forward some sales that we had originally planned for in the second half of this year. And so that did boost the second quarter a little bit. We disclosed about 60%— 60 basis point improvement in our margin as a result of that because we've got the fixed cost associated with running the business. We just move the sales forward. So as a result, you know, we have that kind of impact. But the demand is just very, very strong across both our commercial and defense business.

Larry SolowGreat. Thanks. I appreciate that color.

Eric MendelsonThank you.

SamaraAnd we'll take our next question from Peter Arment with Baird.

Peter ArmentYeah, good morning, Victor, Carlos. Nice results again. Eric, I guess sticking with you, just maybe if you could level set us a little bit. I know historically, you know, more of your revenue from FSG comes out of North America, but Middle East exposure, maybe if you've seen any behavior changes, or maybe just give us any color, you know, just on globally how you're seeing regional demand. Thanks.

Eric MendelsonYeah, Peter, it's a great question, and all of the areas remain very strong. I mean, there has been a little bit of a slowdown. I don't have the percentage number here, and I wouldn't want to give a misleading answer because, you know, the Middle East as a percentage of our total sales is, you know, relatively small. But, you know, we have seen strength really across the board. And I think one of the other things that's important to note is that whenever there's angst or concern, anxiety, whatever, with regard to commercial aviation, airlines realize that they've got to get more serious and cut costs. And that always helps us in the long term. We end— there ends up being more interest in our products. We get approved in more spaces. And that in order to, you know, greater future revenue and earnings. So, you know, to answer your question, nothing significant in the Middle East, but, you know, tremendous knock-on effect around the world where people realize that, you know, they got to cut costs and there's no reason why they shouldn't buy more of our product line.

Eric MendelsonYou know, we've got the quality, we've got the turn time, and certainly we have the price, and it's just a matter of them, you know, doing what they got to do in order to buy these parts.

Peter ArmentGot it. Appreciate the color. And then, yeah, appreciate that. And Victor, and just maybe quickly on kind of the space end market, which historically has kind of been a little more volatile, but the demand signals continue to be really robust there. Maybe if you could just describe how, you know, what you're seeing from a demand signal and just kind of the capacity to support that. Thanks.

Victor MendelsonYeah, thank you. I think your question was specifically on space, right? So commercial space. So space, I would say actually both defense and commercial orders are strong. I mean, the demand outlook is nice for that. But, you know, you'll recall that historically it's somewhat volatile for us. And I would expect to continue that to be the case. So somewhat volatile but continuing up and, if you will, to the right and a positive place for us.

Victor MendelsonAnd that, by the way, in a sense, maybe a little bit of a metaphor in ETG generally. You know, if you look at the ETG business, we don't panic when it's a lower quarter like it was in the first quarter. We don't become overjoyed or manic when it's great as it was in the second quarter. You know, we're looking for a certain growth rate over time and over the course of the year. So we feel really good about that, given the backlogs that we have, by the way, and the order flow that we've seen—record backlogs and record orders.

Peter ArmentGot it. Thanks, Victor. Thanks, guys.

Victor MendelsonThank you.

SamaraAnd we'll take our next question from Ken Herbert with RBC Capital Markets.

Ken HerbertYeah, hi, good morning, gentlemen. Great results. Maybe just first on the ETG segment, are these margins reflecting just purely timing of maybe some obviously better mix benefit in the quarter, or is there anything else you would call out as maybe structurally we should think about? And Carlos, it sounds like you're maybe thinking about the margins for the segment could be a little bit better moving forward here relative to prior commentary?

Victor MendelsonWell, you know, a couple of things. I think I'm looking at it as the first half of the year, right? That's the way I look at it. It's, you know, the 90-day slices of time, while they're important, I don't think they're necessarily always entirely reflective of where the business is going. So I look at the first half of the year with first quarter being weaker than it should have been, uh, the second quarter being very strong, and I, I look at that average, um, and, and I think we, we continue to target the same, uh, growth, uh, rates in the ETG over time, and maybe we'll do better. I mean, the order book certainly, I would say, is continues to amaze me. And I would say we'll continue to look for that 22% to 24% GAAP margin, which as you heard is 400-some-odd basis points higher. And, you know, what we really look at and think of how the business runs. And I think there's potential to do better on the margin, but I would just encourage people to not get too excited yet.

Victor MendelsonAnd like Eric said, it's not sandbagging. But our businesses are conservative. And, you know, talk to our folks, they're pretty conservative. Carlos, I don't know if you have something to add to that.

Carlos MacauI would just say, you know, we were blessed with a quarter where all the verticals or industry plays had double-digit organic growth. And when that happens, you know, we're going to post nice margins. That doesn't always happen, right? And so it is a lumpy business. And so to Victor's point, I think for the 6-month period, the margins in the segment were 23.5%. And I think that, But, you know, that's pretty damn good. And my sense is that if we continue to catch this high growth, you know, we'll probably be towards the high end of the overall range we've given you. But, you know, we don't want to overpromise something. And I think it's better to weigh on conservatism in that regard.

Ken HerbertThanks, Carlos. And just if I could, you've got obviously defense exposure in each of the operating segments. It sounds like there was some pull forward or accelerated shipments in FSG, maybe ETG as well. But I'm just curious across the segments, if you can talk about your defense bookings, maybe across defense, what was booked to bill for the company in the quarter and or maybe just trends you're seeing in bookings because it clearly sounds like acceleration in defense, you know, is what we're seeing across both the segments.

Eric MendelsonYeah, Ken, that's— this is Eric. That's a great question. Unfortunately, I don't have the booking information in front of me at the moment, but I can tell you it's been very strong, uh, in, in all of the areas, uh, aerospace as well as defense, you know, in terms of the end markets. Um, it's been incredibly strong, and I can tell you that conversations about additional business has also been very strong. Uh, so we, you know, if a lot of those conversations end up turning into orders, which we're hopeful they will, I think you're going to see continued growth, continued significant growth over on our defense side. We, we have a unique suite of products. We deliver on time. Our costs are very reasonable, outstanding quality, and I think we're in a very, very good position to continue to fill our government needs as well as those of the needs of our allies. And we're, we're very optimistic on that.

Carlos MacauYou know, it's interesting, Ken, from a, from a macro standpoint, we continue to be about, on a consolidated basis, just a tick under 30% defense of our sales, and that's been pretty consistent. Maybe a percent higher this quarter comparatively to the, you know, Q2 of '25. So, so I would say our defense business is growing at a nice clip, but what I'm trying to imply to you is that the rest of the business is keeping pace too. They are— all the verticals are growing at a really nice clip. So, um, it's not just defense that's pushing the, uh, the cart up the hill, if you would. It's, it's, it's all the verticals really firing on all cylinders.

Ken HerbertThanks, Carlos. Yeah, great results, everybody. Thank you.

SamaraAnd we'll take our next question from Jonathan Siegman with Stifel.

Victor MendelsonHey, good morning, John.

Jonathan SiegmanThank you. Good morning. Thank you for taking the question and great results. On the comments on missile defense interceptors, just would— you've in the past mentioned great positions on some of the exquisite programs like Standard Missile and PAC-3. You also mentioned having some supply arrangements with some of the new emerging players. Is that specifically in missile defense? Is your product competitive? Any kind of— how does that rank in the growth vectors for the company that you're excited about? Thank you.

Victor MendelsonYeah, the— on the defense tech program, so it's a number of our subsidiaries are supplying into the defense tech firms.

Victor MendelsonThey're applied on a variety of programs. I don't think it's just limited to missile defense in the defense tech sector. I think it's actually pretty broad. I wouldn't— it certainly does include some missile defense in that sector, and it would make sense given and the other things that we supply. But that business, I believe, will continue to be a growing business for us, as it will be of the overall market. I don't think the historical programs are going away anytime soon. I think they still have a very important role, but the defense tech ones will continue to grow.

Eric MendelsonI agree. This is Eric. Just to add to what Victor just said, In addition to the missile defense in the new tech area, we also are very active in the drone and the unmanned missile business. So I think that continues to remain very strong. I mean, don't get me wrong that the, you know, the exquisite legacy programs continue to be of tremendous importance to us and are major drivers of the success of the company. And frankly, the ability to intercept some of the most dangerous weapons— the only way you can take it down is with these very complex, expensive programs. And those continue to be very, very important to Heico. But I think the comment is that we are also exposed on the new defense tech space. So as that gains business, HEICO is going to be able to serve that market as well.

Jonathan SiegmanThank you. And then I'll just slip another fun one for you. Just, uh, there is a proposal to go to just reporting earnings twice a year instead of 4 times. Given the, given the lumpiness and the results and the kind of the consternation after, after last quarter, just kind of any thoughts on whether reporting only twice a year would be appropriate for the company.

Victor MendelsonYou know, I think this is something that we have to see. It's definitely a possibility, definitely something that we'll talk about and our audit committee will talk about, but I think we have to really get a little more definition on where things are going and what shareholders would like to see. You know, there's, there's, um, there are advantages and disadvantages to each, so I think we'll have to really understand those better, but I wouldn't—.

Eric MendelsonI don't think we made up our minds yet. Yeah, and this is Eric, you know, I can say that from an operational perspective, reporting quarterly I think is a good thing because it gets people 4 times a year to hurry up and get things done and to make sure they close out the quarter strong. And if they only have 2 opportunities to do that, I don't think that in general for industry, I mean, while it would be convenient from a corporate perspective for the corporations to report semi-annually, I think from an operating perspective, having the cadence where you've got to do your shipments monthly and then you've got to report quarterly, I think in general for industry is a good thing. That's my only, you know, my two cents. I think a lot of our operating people may not be excited for me to say that, but that's what I believe.

Victor MendelsonAnd the countervailing view on that, of course, is it causes a lot of short-termism, and 90-day slots of time, and an overfocus on that. So we're going to have to discuss that and review the advantages and disadvantages.

Jonathan SiegmanGood luck with the rest of the year. Thank you.

Victor MendelsonThank you.

SamaraAnd we'll take our next question from John Godin with Citi.

John GodinHey, guys. Thanks for taking my question. Eric, I wanted to just maybe ask like a bigger picture question about this idea of peak aftermarket that's, you know, I would say skeptics are focused on, basically whether, you know, aftermarket-heavy players like yourselves have been over-earning in recent years and Of course, the implication is there's some sort of revenue or margin cliff. At the same time, Eric, you're saying things like— and I don't mean to misquote you, but never been more optimistic about FSG's future. I heard you say customers are clamoring for parts. So there's obviously just a big delta there. I was hoping you could just take a second to reflect on it. What are the skeptics missing? Because you've been doing this a long time and, as you mentioned, set a lot of records along the way.

Eric MendelsonYeah, I think, John, I really appreciate your question. I think the skeptics really should be more focused on people who are engaged in the parts trading business. You know, people who have big inventories of existing product that is not in production are going to be hurt as there are, if there are, increased retirements of those parts. Uh, and I can understand them being concerned. I think it is— that concern is massively misplaced when applied to a company like HEICO, because the newer generation of equipment that we are coming out with is significantly more expensive than the older generation that it is replacing, number one. And number two, there's a lot more of it. So, you know, I've heard people say, oh, you know, 757 is, you know, and the engines on it is very important to HEICO. Excuse me for saying this, but that is BS. That is just absolute nonsense. There is zero truth to that. I won't come out and say what percentage of our sales are from 757, but it's de minimis.

Eric MendelsonAnd for HEICO, I think the reason why I am more optimistic about the future is because I see all of these products and I see how expensive they are. And, you know, that's why I think we're going to do very well. We have a new product development generation ability. And that new product development area, it has got more product than they can possibly handle. In speaking with our operating folks last week and going over the backlogs in those areas, I mean, we've got more parts than we've ever had, and we have customers literally begging us to do significantly more. And with the price of the new generation equipment, I think we're going to do extraordinarily well. So that's why I'm very optimistic. People who are in the parts trading business, I think they've got a different dynamic that is not HEICO's dynamic. Yes, we have a small parts trading and extremely successful parts trading business within HEICO, but it's very small relative to our flight support group, and that's intentional.

Eric MendelsonWe want to focus on developing proprietary parts, proprietary repairs, doing outstanding distribution, specialty manufacturing. That's our business.

John GodinThat was fantastic. I don't think I can follow up on that, so I'll just leave it there.

Eric MendelsonThanks. Thank you very much.

SamaraAnd we'll take our next question from Sheila Kahyaoglu with Jefferies.

Sheila KahyaogluGreat. Good morning, guys, and thank you. I have 3 questions. Morning, Sheila. Morning. The first one is to Victor and the second one as well. Victor, what did you have for breakfast? And secondly, what did ETG have for breakfast all quarter long? You know, like, how do you think about what really accelerated versus Q1 and how that demand continues in your various end markets within ETG into the second half?

Eric MendelsonAnd by the way, Sheila, this is Eric. So I just have to tell you what Victor ate for breakfast was money.

Victor MendelsonI had high protein breakfast, egg whites with whole wheat toast and some avocado. But, and what did ETG eat for breakfast? Maybe it's money. But in all seriousness, and I thank you, by the way, for your generous comments. In all seriousness, You know, I've been alluding over the quarters to the very strong order rate, the backlog, the shipping rate, and the fact that some quarters are stronger and weaker than others. And, you know, we just— we have a very strong order book. It continues to grow. And that's a reflection in all the markets, interestingly enough. I guess at the end of the day, it comes down to a combination of two things. One, what we get, what we design and sell to our customer, you know, what we produce and do for our customers, and their need, which seems to be growing in the markets, all the markets that we serve. And I'm excited about defense for, as I mentioned, we see a tail on this.

Victor MendelsonYou know, I know these framework agreements are still being worked on and, and we're not sure where they all stand, but we have seen both an increase in orders over the last few months for a lot of those programs, the historical programs that we've talked about, as well as new programs and R&D on those, and a lot of inquiry from our customers about how can you 6x, how can you 4x, how can you 10x your production of certain components, and what does that look like, and give us a quotation for it. So it just feels like a good, a good moment.

Sheila KahyaogluGreat. And Eric, one for you to follow up on John's question, if possible. You know, I know like a lot of misconceptions about what's going on in the aftermarket. Any color you could give us, whether that's geography or when the aftermarket— and it's still hot— when the aftermarket was really strong, people thought about engine versus airframe. How are you seeing demand changes as capacity utilization comes down?

Eric MendelsonYeah, we're seeing tremendous demand across, across the business. You know, our PMA business is roughly 3/4 non-engine, roughly 1/4 engine, and, you know, sort of in that area. And we've seen just tremendous demand across the board. As I mentioned, Middle East a little bit lower, but that, you know, if you look at the total across the board, that's not as impactful to us. And frankly, as that flying gets absorbed by the European and the North American carriers and other Asian carriers, I think we're seeing a bit of an offset there. So just sort of a rerouting around the world while this conflict is ongoing and hopefully gets resolved quickly. But it is strength really across the board for us.

Sheila KahyaogluThank you. Thanks, Sheila.

SamaraAnd we'll take our next question from Mariana Perez Mora with Bank of America.

Mariana Perez MoraGood morning, everyone.

Victor MendelsonGood morning. How are you? Doing great.

Mariana Perez MoraSo I'm going to switch gears a little bit to the industrial aero derivative engines.

Mariana Perez MoraYou have owned that business for a full quarter now. Could you please discuss what were the surprises, both to the upside and like the negative surprises getting into that vertical?

Eric MendelsonMariana, I'm sorry, the phone had cut out. You're saying with regard to which?

Mariana Perez MoraOh, can you hear me better? Yes. Oh, perfect. So on aero derivative engines, the industrial ones. You have been in the business for an entire quarter. What were the surprises, both to the upside or the downside, as you get deeper into that end market?

Eric MendelsonYeah, we are very excited about that. I mean, as you've seen, the aeroderivative market is incredibly strong. The industrial gas turbine market is very strong. Those are the two areas that Ethos, which is now part of Wencor, satisfies. And we think that that's going to be a very, very strong market for us. You know, we've been working on this for a while, you know, studying that business and negotiating on the transaction roughly a year ago. So we're just delighted that it's part of the HEICO stable. I think they've got tremendous capability in Connecticut, in South Carolina, and then also in Aberdeen, Scotland. I visited that facility this quarter and really great people, great technology, focus. I think we are going, we are very well positioned as the AI boom increases demand for power generation. I think Ethos is going to be in, and HEICO, in a great position to be able to pick up that business. So I'm very happy with it.

Mariana Perez MoraPerfect. And then on defense, you just did the Southwest Antennas acquisition and mentioned a little bit about your strategy of what you acquire on defense, or more like robust businesses, mature businesses. But how strong is that pipeline? And how competitive are the prices to be able to acquire those targets, especially in a market where, as you discussed, there is a lot of demand, recapitalization around the world, governments that are more open to have new entrants, both from the innovative point of view, but also, I don't know, double, triple source for resiliency? What is the role you want to play there? Where— what areas are you looking at and how competitive you could be in a market that I could imagine is relatively expensive today?

Victor MendelsonYeah, so we're looking at components or subcomponents that are used in next-level systems. That's been our strategy since we started doing defense. We've obviously been very successful at Having said that, pricing for assets for businesses has definitely increased over time. I think more people are attracted to it. They realized what we realized long ago. Having said that, we continue to pay reasonable and fair prices, and we're looking for businesses that are not so much mature as they are growing businesses that have excellent placement and secure placement within their markets or within their product set, but very importantly that they're growing businesses. And so we, as you can see, we've continued to be able to do that. I think it will be a competitive market as it's always— or as it's become over the past number of years. It's not a recent thing. It's probably been that way for about 10 years now.

Victor MendelsonAnd our pipeline is kind of, in a sense, filled with those kinds of companies. In particular, by the way, I should add that we are the best buyer for a seller who is looking for a good home for the business. That's really, I would say, our particular strength is that people who want an owner or a partner that often will allow them to continue to own part of the business. Few people, few companies do that. That's not going to resell in a few years. When we buy, we buy to own forever. Private equity is going to flip you out and it's going to put pressure on to achieve short-term results. We don't do that. So somebody who's built a business for maybe decades and in a sense their name is on the door, they love the business, they want an owner who's going to continue it in the same place with the same products, the same people, the same approach to life.

Victor MendelsonThose people are generally attracted to us, and I think there are enough of them who want to transact with us that it works.

Eric MendelsonAnd Mariana, adding on to what Victor just so well said, if you look in our 10-K, we have third, as of the end of last year, we had 31 partners, 31 minority partners in our businesses. You know, in order to develop a corporate culture and a structure to be able to work with partners, to be able to share and cooperate and be collaborative, that is not something that just happens overnight. And we've been doing this for nearly 30 years. Had partners. And we understand how to work with partners, how to create a win-win. As Victor said, when private equity buys a business, they're just looking to find the right time to sell. For us, all of our businesses are intended to be owned in perpetuity. We don't sell them. And that goes to all of the decisions that we make with regard to operating the companies and the investments that our partners want to make. And these partners have spent their lives building these companies and they really care about where they are going.

Eric MendelsonAnd that's why, you know, as Victor said, that's our greatest differentiator. I would also add to your comment about pricing going up that the aerospace and defense industry over the last number of years has attracted a lot of new entrants because people think, oh, this is a place, this is an easy place to make money. And of course, you know, we came out of the— the whole industry came out of COVID so it came off of a relatively low bottom, which caused people to get very excited about it. But one of the other things that we're able to do, since we've made about 110 acquisitions, we have a tremendous depth of knowledge into what makes a business work and what doesn't. And I can tell you that the aerospace and defense industry is littered with private equity and other corporate deals where people overpaid and they are significantly underperforming. And HEICO has been very careful to not go into those pitfalls.

Eric MendelsonAnd as Victor said, when we find a business that is looking for a long-term owner, there is no better home than HEICO. And I think with regard to pitfalls, we see books on companies that want to come to market, or they want to start talking early about coming to market, and you really have to understand the subtleties of that. And I think, you know, one day there's going to be quite a shakeout with regard to those businesses.

Mariana Perez MoraI do agree that, that, that is your secret sauce when you go to, to acquire, and that's a culture that is hard to mimic, uh, if it's not like coming from within. Um, if I may, one more follow-up, um, on this new agreements, and you mentioned the framework agreements before, there is a lot of like talk around like cash neutrality But you generally don't approach businesses that way. You actually care about like operating profit and free cash flow generation. What is your appetite to acquire businesses that are less profitable than your core, at least for the near term?

Victor MendelsonLook, as a rule of thumb, we, we don't like to acquire businesses with less than a 20% operating or as we call it EBITA margin. There have been exceptions to that which we've made where we felt that the margin would improve, or we bought a money-losing business and we were consolidating with something else and we knew that the margin would be much higher than that in short order. So those are the exceptions if there is something extremely strategic that we think will get to those margins, but the likelihood of us just buying something that we think will remain sub-20% operating margin in, let's say, perpetuity or for the foreseeable future is unlikely for us.

Eric MendelsonAnd look, we've also got a very strong balance sheet and we're able to make investments. But the way that we have to anchor and justify those investments is with concrete long-term agreements. And, you know, assuming that we can get those, and we've been able to get a number of those. We are willing and able to spend the capital, hire the people, expand the facilities around the world to be able to do this. So, you know, it's really a matter— I think the U.S. government would be well served, you know, with regard to these multiyear framework deals, you know, to make sure that the industry has got the money, can really rely on that. Because if you look historically within aerospace and defense, it, it runs in boom-bust cycles. And that's not good when it comes to hiring or for capital allocation. And if the Department of War comes forward with these multi-year procurements, I think that that's going to be extremely helpful to both the Department of War as well as to the companies and most importantly to the voters and to the people who this really impacts.

Mariana Perez MoraThank you so much for the color.

Victor MendelsonThank you. Thank you.

SamaraWe'll take our next question from Scott Mikus with Melius Research.

Matt MarottoloGood morning. This is Matt Marottolo on for Scott Mikus. Good morning. One question for Eric. So you acquired the 777 AIMS and 737-NG via product lines a little over a year ago from Honeywell. So you now support Boeing's new builds on the 777 Classic and 737-NG derivatives like the PAE7, in addition to servicing the aftermarket. If Boeing and Airbus were to launch next-gen narrowbodies later this decade or in early 2030s, Would your operating units bid for work packages so they're specced into the program from inception?

Eric MendelsonFirst of all, I have to compliment you with your knowledge of the business because it's exceptional and you nailed it. And you're absolutely correct in everything that you said. And yes, we definitely would. You know, I can't comment specifically on whether those particular products we would bid in terms of work packages. But I could tell you across Heico, we do have very good capability to be able to develop additional products. And for example, in our Gables Engineering subsidiary, and they've got the ability and are, you know, I think would be able a phenomenal partner to develop additional products for both the airframers as well as for the avionics subsystem suppliers. We are in a great position to be able to support both, and that's what, that's what we currently do. Um, with regard to the aftermarket for the products which you mentioned, yes, of course, over time, that is, if you will, a melting ice cube, and those products will decrease in demand.

Eric MendelsonBut frankly, we have been very, very happy with the performance of those businesses, and we think that there is a massive amount of business to be had over the next many decades on those programs. And, and I do also have to just to call out frankly to the, the folks over at Sunshine Avionics who are probably on this call who have done a marvelous job on the display unit and the AIMS and the VIA business. I mean, what we've heard from our partner on that business that the integration that Sunshine Avionics accomplished on those programs has been the best that they've ever seen and that was due to a tremendous amount of hard work focusing on the details. And I can tell you that Carlos, Victor, and I are just absolutely grateful to the people at Sunshine and Luis Morell over at HEICO Parts and Repair who made all of this happen.

Matt MarottoloPerfect. Thanks, guys. We'll leave it at one. Congrats on the quarter again. Thank you.

SamaraThank you. We'll take our next question from Gautam Khanna with TD Cowen.

Gautam KhannaHey, thank you. Good morning and great margins.

Eric MendelsonThank you. Thank you.

Gautam KhannaJust to follow up on your earlier comment about a bit of a pull forward on sales, did you— could you quantify how much you think that was? Not just from a margin standpoint, from a sales standpoint.

Eric MendelsonYeah. Hi, Gautam, it's Eric. It's about— You know, roughly between $15 and $20 million.

Gautam KhannaGotcha. And, you know, I wanted to ask, since the, you know, fuel prices have gone up since the beginning of the war, have you seen new customers approach HEICO about PMA parts? Or I'm just curious if you've seen a change in customer behavior to take advantage of the lower-cost offering that you guys have. Is that—.

Eric MendelsonThe simple one-word answer to that is yes, we have. Okay. In many different markets. I mean, I obviously can't go into the details, but I had a call with the head of a customer who we've been talking to for many years about doing product and it would be a new business and I think, you know, very, very powerful for us. Look, it's just continued— I think we've got a lot of kinetic energy built up at HEICO. We've got a lot of customer goodwill. We've got the ability to design these parts and repairs. The customers want it. We are not a threat to our OEM competitors. We're also in the OEM business. This just supplements what they do. There's always a demand, you know, some people want to stay in whatever, the Ritz-Carlton and the Four Seasons, and other people have a budget, you know, whatever, for a Marriott and a Hilton. And we at HEICO can support both. So I think in the, on the commercial side, we're very strong.

Eric MendelsonOn the defense side, incredibly entrepreneurial and high-performing, cost-conscious, high-quality. And we've got tremendous ability in that area and tremendous ability to scale. So I think we're just in a very good place.

Gautam KhannaAnd are you seeing those customers Are they also saying, hey, you know, can you reverse engineer these parts? Like, are they giving you new product development ideas at a quicker pace than was the case prior to the conflict?

Eric MendelsonSame answer. Yes. Yes. 100%. They are. Because they realize, you know, if you continue doing what you've done in the past, you'll get the same thing. And, you know, what's the old Thomas Edison quote? The definition of insanity is trying, you know, is trying the same thing over and over again expecting different results. And they know that if they want to get high-quality, short turn times at better prices, HEICO's the answer.

Gautam KhannaAnd last one, I think it's fair to assume, but since the quarter Demand has also been very good, it sounds like, right? There has not been a deceleration. Correct. If you're willing to— Correct. Okay, great. Correct. Thank you.

Eric MendelsonYou know, with the exception I have mentioned about, of course, the Middle East, you know, that, that, that's a little bit lower. But in general, your statement is correct.

Gautam KhannaExcellent. Thank you, guys. Thank you, Gautam. Nice Gautam.

SamaraAnd we'll take our next question from David Strauss with Wells Fargo.

Josh KornHi, good morning. This is Josh Korn on for David. Thanks for taking the question. So we talked about margins a lot earlier. Any way you could quantify the— how much the mix impact was in each segment versus kind of the other levers? Thanks.

Carlos MacauYeah, I would say— this is Carlos— I would say both segments experienced favorable mix during the quarter, and that also was coupled with high volume growth. So there wasn't, uh, you know, a lever, or it felt like for the quarter is a little unique, but all verticals, all and markets were pushing at similar paces. So there's nothing really to call out that was unique or unusual. I think it was just a situation where, you know, candidly, we're busting at the seams. And when that happens, we're going to get some margin expansion. And, you know, some of that again is due to mix. And a lot of it, Eric mentioned it earlier, we do get a lot of leverage, incremental margin growth on our fixed cost base because one, our fixed costs are very low. And, you know, our G&A spend was down as a percent of revenue. So You know, that's going to continue, by the way. I think as we continue to grow and add more volume, our relatively flat structure allows us to get a little margin expansion as a result of that.

Carlos MacauWe don't have to hire 7 different more layers of vice presidents to manage the business. Our guys manage to juggle many balls at one time and get things done. So that's the story. You know, I know what you're searching for. There's nothing— there's not one area that I would call out as being more impactful than the other. It was just a solid push across the entire platform.

Josh KornOkay, great. Thank you. I'll stick to one. Thanks.

SamaraAnd we'll take our next question from Louis Raffetto with Wolfe Research.

Louis RaffettoHey, good morning, guys. Hey, Louis. Um, so maybe Carlos, you, you talked about the GAAP margins in ETG being 22% to 24%. Given what we've seen this year and over the last few years in FSG, how should we think about the margin potential there?

Carlos MacauI knew somebody was going to ask. It's a good question and one that we've pondered quite a bit here. I do think that what we're seeing now, two things with the incredible growth that we're seeing in our aftermarket business and the surge, if you would, in some of the military business in the FSG. I do think that we've got a little bit more of a stable margin lift. If I was pressed to give you a range, my thinking right now is probably 24% to 26% is that those two end posts that I think we'll float between. And, you know, depending on any given 90-day period, you know, if we have one vertical outperforming the other, we'll migrate to the higher or low end of that range. But I think that's kind of where we're at. And yes, it's my thinking on that has come up a little bit from prior quarters.

Carlos MacauAll right. I appreciate that.

Louis RaffettoAnd maybe Eric, I know obviously you've sort of given us the color on the accelerated deliveries. Just to be clear, was that— does that flow through the specialty products or is that through the parts? You know, you called out the 20% organic growth. So just curious.

Eric MendelsonI'm sorry, can you say your question one more time? I'm a little confused.

Louis RaffettoSure. So you said that you had 20% organic growth in aftermarket replacement parts and also through specialty products. I'm just curious, the incremental kind of $15 to $20 million of pull forward, was that flowing through specialty products or is that flowing through the parts business?

Eric MendelsonYeah, that would be, um, probably be a little bit in both the way we end up accounting for it.

Louis RaffettoOkay, great. Thank you.

Eric MendelsonBut, but, but it was all, it was all defense. It was, it was all the defense, defense market.

SamaraAnd we'll take our— Thank you. We'll take our next question from Gavin Parsons with UBS.

Gavin ParsonsThank you. Morning.

Eric MendelsonMorning. Hi, Gavin. Guys, how many PMA parts are you introducing annually now, and what would be the considerations to taking that number higher? Uh, you know, I'd say we're in the 500 area, and, um, we've got the ability to do more. Uh, you know, we've got to scale the whole thing. Um, you know, there always is the question, do we do more or do we pick higher value potential product. I mean, that's always up for consideration, but, you know, I'd say it's in the 500 area. And the other thing that's important to also understand is that when we're developing these parts, you know, sometimes we do so in conjunction with our principals. So sometimes they hold the PMA, sometimes we hold the PMA. And the other thing which is really important is the DER repairs because, you know, the DER repairs basically can frequently or very frequently perform the same function, you know, the same effective function as a PMA part, and we achieve the sales through that channel.

Gavin ParsonsOh, mute button. Thanks, guys. Appreciate it.

Eric MendelsonThanks, Gavin. Thanks, Gavin.

SamaraAnd at this time, I will turn the conference back to Victor Mendelson for any additional or closing remarks.

Victor MendelsonThank you very much, Samara. Thank you, everybody, for being on the call. We look forward to talking with you on our next call. And if in between you have other questions, feel free to contact us. Thank you very much for your confidence and your support. Have a good day.

SamaraAnd this concludes today's call. Thank you for your participation. You may now disconnect.