Heico Corporation

Welcome to the HICO Corporation first 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. HICO'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 costs 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. Our 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 HICO's filings with the Securities and Exchange Commission and 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, whether 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 Eric Mendelson, HICO's Co-Chief Executive Officer.

Thank you, Samara, and good morning to everyone on this call. Thank you for joining us, and we welcome you to this HICO first quarter fiscal 26 earnings announcement teleconference. I'm Eric Mendelsohn, HICO's co-chairman and co-CEO. I am joined here this morning by Victor Mendelsohn, HICO's other co-chairman and co-CEO, and Carlos Macal, our executive vice president and CFO. We received many nice comments about Victor's extemporaneous remarks as he opened our last conference call to discuss HICO's 2025 fourth quarter results. So we thought our listeners would appreciate a little insight into HICO before we discuss HICO's 2026 first quarter results. Obviously, HICO's 2026 first quarter results reflect continued growth, and we are very proud of them. especially considering that only 36 years ago, ICO had only $25 million in revenue, $2 million in earnings, and 200 team members. Our dad, Victor, and I would often question ourselves, how was our 36-year, 23% compound annual growth rate and share price possible, especially when we were rarely leveraged at more than two times EBITDA? First, we have to thank God for these results. But second, we realized that Dad always had a saying, do the right thing, which was our mantra 24-7-365 for the past 36 years. It wasn't just a saying. It was embedded in every single decision, every part sold or repaired, every company acquired, and simply everything we did. Obedience to the unenforceable became our DNA from the time Victor and I were small children to now when we are 60 and 58 years old. Doing the right thing means making honorable choices when nobody's looking. It means spending tens of millions of dollars on quality systems, not because our customers or regulators require them, but because we know it's a good investment that protects our brand. It means properly reserving for obsolete or excess inventory, not because our auditors require it, but because we know it's needed and mistakes must be learned from, recognized, learned from, and never repeated, not swept under the rug in order to protect reported earnings. These are just two of the many things that HICO has done routinely over decades and why we've never had a one-time unusual charge to earnings, whereby the economic earnings of the upcycle are largely erased following a black swan event, and investors don't realize much of the earnings never existed in the first place. Considering our terrific results, we're even more proud of them, given the added cost that many people don't appreciate, but everyone benefits from in the long run. ICA was built for long-term and sustainable cash generation, which permits our earnings and cash flow to compound decade after decade, not just year after year. We are not into programs of the year, buzzwords, or comparing ourselves to others, hoping to get a higher multiple on our shares. We're designed for long-term challenging but sustainable earnings increases. I hope this provided a little insight into Heiko's secret sauce as you listened to our first quarter results. Before reviewing our operating results in detail, I want to take a moment to thank and recognize all of the people who made our excellent performance possible. Heiko's sustained growth and consistent profitability result directly from our team members' talent, dedication, and hard work. Our team members drive our success and differentiate us from other companies. Thank you all for all of your continued commitment and for contributing to another strong, outstanding quarter. We are very proud of the first quarter results, which reflect consolidated margin expansion, record net income, and strong increases in operating income and net sales. We remain very bullish and optimistic about HICO's ability to win new opportunities in fiscal 26 and continue our growth, profitability, and strong cash generation legacy. To summarize the highlights of our first quarter of fiscal 26 record results, consolidated net income increased 13% to a record $190.2 million or $1.35 per diluted share in the first quarter of fiscal 26, up from $168 million or $1.20 per diluted share in the first quarter of fiscal 25. Consolidated operating income and net sales in the first quarter of fiscal 26 improved by 15% and 14%, respectively, as compared to the first quarter of fiscal 25. Net income attributable to HICO in the first quarter of fiscal 26 and 25 were both favorably impacted by a discrete income tax benefit from stock option exercises. The benefit in the first quarter of fiscal 26, net of non-controlling interests, was 21.8 million, or 15 cents per diluted share. as compared to $26.5 million, or 19 cents, per diluted share in the first quarter of fiscal 25. By the way, that means we got a higher benefit from the discrete income tax benefits and stock options last year as compared to this year. The Flight Support Group delivered strong results in operating income and net sales, achieving quarterly increases of 21% and 15%, respectively, as compared to the first quarter of fiscal 25. The increases principally reflect strong organic growth of 12%, driven by increased demand across all of Flight Support Group's product lines, as well as the contributions from our fiscal 25 acquisitions. The electronic technologies group net sales improved 12% as compared to the first quarter of fiscal 25. The increase principally reflects strong organic growth of 6%, driven by increased demand across most of our products, as well as contributions from our fiscal 25 and 26 acquisitions. Cash flow provided by operating activities was $178.6 million in the first quarter of fiscal 26. Operating cash flow for the quarter was negatively impacted by distributions of approximately $22.7 million to a long-term team member over 40 years, and participant in the HICO Leadership Compensation Plan, the LCP. The LCP is fully funded, and all sources of cash for these distributions are derived from investments in corporate-owned life insurance policies, which are considered investing cash inflows within our statement of cash flows. As a result, the LCP distributions are not an actual use of cash. We will have another large LCP distribution during the remainder of fiscal 26 of approximately $73 million, which will negatively impact operating cash flows. However, since the LCP, as I said, is fully funded, the distribution will continue to be net cash neutral to HICO. Consolidated EBITDA increased 14% to $312 million in the first quarter of fiscal 26, up from $273.9 million in the first quarter of fiscal 25. Our net debt to EBITDA ratio was 1.79 times as a result as of January 31, 26, as compared to 1.6 times as of October 31, 2025. The increase in our leverage ratio is a direct result of the successful completion of an acquisition during the first quarter. Acquisition activity in both operating segments remains very strong with a very healthy pipeline of opportunities. We continue to target complementary businesses that align strategically and financially focusing on disciplined accretive transactions that enhance ICO's long-term value. In January 26, we paid our regular semi-annual cash dividend of 12 cents per share. This represented our 95th consecutive semi-annual cash dividend since 1979. Now, I'd like to take a moment to discuss our recent acquisition activity. In January, our electronic technologies group acquired 100% of Axalon Aerospace's fuel containment business, which was renamed Rockmart Fuel Containment. Rockmart designs and manufactures advanced fuel containment solutions, primarily for military fixed and rotary wing aircraft. The purchase price of this acquisition was paid in cash using proceeds from our revolving credit facility, and we are very excited that Rockmark has joined the Heiko family, and we are very excited about their future contribution to Heiko's earnings. Earlier this month, the Flight Support Group acquired 100% of Ethos Energy Group Limited, Ethos provides repair solutions for engine components and accessories for various industrial gas turbine, aero derivative gas turbine, aerospace, and defense engine platforms. I'm sure everyone on this call is keenly aware of the tremendous increase in demand for power caused by the exponential demand in AI or artificial intelligence and LLMs or large language model adoption. And this power is largely expected to be created through the use of industrial gas turbines and aeroderivative gas turbines. HEICO is obviously excited to enter this market and bring our technical capability and OEM relationships to serve this growing power demand. And we believe HEICO's acquisition of Ethos provides us with the perfect platform to sell our high-quality repair solutions to satisfy these rapidly growing needs. The purchase price of this acquisition was paid with a combination of cash using proceeds from our revolving credit facility and shares of HICO Class A common stock. And this week, the Flight Support Group entered into an agreement to acquire 80% of the stock of a company that provides a range of services for commercial aviation and defense component platforms. Closing is subject to governmental approval and standard closing conditions and is expected to occur in the second quarter of fiscal 26. The remaining 20% will continue to be owned by certain members of the seller's management team. We expect these acquisitions to be accretive to our earnings within the year following the acquisition. I now turn the call over to Victor Mendelson, HICO's other co-chairman and co-CEO, to discuss the first quarter results of our flight support and electronic technologies groups in further detail. Eric, thank you very much. Before we get into the details, I echo what Eric mentioned at the outset of the call and thank our team members, the HICO team members. The results we're discussing today are a direct reflection of their talent, their discipline and commitment to execution, their collaboration and focus on excellence in all they do and all we do is truly inspiring. Flight Support Group's net sales increased 15% to $820 million in the first quarter of fiscal 26, up from $713.2 million in the first quarter of fiscal 25. The net sales increase in the first quarter of fiscal 25 stems from strong organic growth of 12% and the impact from our fiscal 25 acquisitions. The organic net sales growth reflects increased demand across all of our product lines. The flight support group's operating income increased 21% to $200.7 million in the first quarter of fiscal 25, up from $166.1 million in the first quarter of fiscal 25. The operating income increase in the first quarter of fiscal 26 was principally driven by the Previously mentioned net sales growth, SG&A expense efficiencies realized from the net sales growth and an improved gross profit margin. That improved gross profit margin principally resulted from the previously mentioned higher net sales and a more favorable product mix within our repair and overhaul parts and services product lines. The flight support group's operating margin improved to 24.5%. in the first quarter, very impressive, in the first quarter of fiscal 26, up from 23.3% in the first quarter of fiscal 25. The increased operating margin in the first quarter of fiscal 26 principally reflects a decrease in SG&A expenses as a percent of net sales, mainly reflecting the previously mentioned SG&A expense efficiencies and improved gross margin. Acquisition-related intangible amortization expense consumed 260 basis points, approximately 260 basis points of our operating income in the first quarter of fiscal 26. So the FSG's cash margin before amortization, or EBIT-A as we call it, was approximately 27.1%, which is excellent and has been consistently excellent and is 110 basis points higher than the comparable FSG cash margin of 26%. in the first quarter of 25. Obviously, we are very, very happy with the continued operational excellence and improving cash generation demonstrated by the businesses in the FSG. Now, turning to the first quarter results for the Electronic Technologies Group, the group's net sales increased 12% to $370.7 million in the first quarter of fiscal 26. up from $330.3 million in the first quarter fiscal 25. The net sales increase was occasioned by strong 6% organic growth and the impact from our fiscal 25 and 26 acquisitions. The organic net sales growth is mainly attributable to increased sales of our aerospace and defense and other electronics products, partially offset by a decrease in space product sales. The electronic technologies group's operating income was $73.2 million in the first quarter of fiscal 26, as compared to $76.5 million in the first quarter of fiscal 25. That operating income decrease principally reflects a decrease in gross profit margin, partially offset by the previously mentioned net sales growth. The decrease in gross profit margin, and this is important, resulted from a less favorable product mix of defense products and the previously mentioned decrease in net sales of space products, partially offset by the previously mentioned increase in net sales of our aerospace products. As you know, quarterly margin variability in our ETG is consistent with the group's history, and there are periods in which shipments of lower, though not low, margin products are a greater proportion of our sales than in other quarters, which is predominantly based on shipment schedules. Based on our backlogs and our shipment plans, we expect the ETG margins to improve as the year progresses, particularly in the second half of the year. The Electronic Technologies Group's operating margin was 19.8% in the first quarter fiscal 25, as compared to 23.1% in the first quarter fiscal 25 – excuse me, 19.8% in the first quarter fiscal 26 as compared to 23.1% in the first quarter fiscal 25. The decreased operating margin principally reflects the previously mentioned lower gross profit. And you may recall that we experienced similar unfavorable mixes from time to time, including the first quarter of fiscal 24. and the rest of the year was quite healthy for us, and we're expecting the same kind of thing this year. Importantly, before acquisition-related intangibles amortization expense, our operating margin was approximately 24%, as intangibles amortization consumes over 410 basis points of our margins. And that is, as you know, how we judge our businesses, and it most closely correlates to cash. On a true operating basis, these are still excellent margins, even though we would not be satisfied with them on a full year basis. The ETG's strong margins resulted in another record backlog, demonstrating both strong demand for our products and robust end markets. Our shipments and shipment mix are typically uneven during the course of the year. We experienced some of that unevenness in our shipment mix this quarter, which was not a surprise, and is a pattern we've often discussed on these calls and elsewhere. We are pleased with the quarter's organic growth and are particularly excited about the opportunities in defense, commercial aerospace, and space for the remainder of fiscal 26. And I should add that this optimism is supported by the record backlog and increasing order volumes we've experienced. Thank you, and I turn the call back over to Eric. Thank you, Victor. Our team is filled with optimism as we look at the remainder of fiscal 26. We expect continued sales momentum in both flight support and the electronic technologies group, supported by organic demand for our products, together with the impact of recent acquisitions. The current pro-business agenda in the United States continues to align well with our long-term goals, providing key markets like defense, space, and commercial aviation with a very strong tailwind in funding. We remain focused on pursuing selective acquisition opportunities that align with our growth strategy. Our disciplined focus to financial management continues to emphasize long-term shareholder value through a combination of strategic acquisitions and organic growth while preserving financial strength and flexibility. Acquisition activity remains extremely robust across both business segments, supported by an outstanding pipeline of potential opportunities currently under evaluation. Our acquisitions teams are busier than ever working on these potential transactions as one of HICO's core strengths is identifying high-quality businesses that complement and reinforce our strategic positioning. We believe HICO is the preferred buyer for sellers seeking a great home for their businesses. Consistent with our longstanding acquisition philosophy, We will only pursue opportunities that meet our strict financial and strategic criteria, are creative, and have the potential to generate durable, long-term value for our shareholders. We thank you for listening to this call. And now, Samara, if you'd like to open up the floor for questions, we're happy to answer them. Thank you.

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 star 1 to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll take our first question from Larry Solo with CJS Securities.

Great. Thanks. Good morning, everybody. I guess first question for Victor, just I think maybe the ETG putting a little pressure on the shares this morning. It sounds like, and I know you referenced Q124, it sounds like the mix issue is completely temporary. It was a pretty significant sequential drop, but... Any more color on that, your backlog, I guess the mix? Doesn't sound like you have any carbonation and we could bounce right back to that low to mid-20s range for the year.

Is that fair to say? Yeah, I think that's absolutely right. That's our expectation and based on the shipment schedules and what we have, that's what we're expecting. And it isn't unusual for us to move around. It may be lower than the average, but You know, sometimes we get the perfect storm of good shipment schedules, and sometimes we get the perfect storm of unfortunate shipment schedules. And that's why, you know, we really guide people to look at the full year on the ETG, particularly as it moves on throughout the quarters. And, you know, the experience we had on this was in, you know, multiple different products and subsidiaries, as I said, sort of the perfect storm. on the downside, if you will, on margins, very heavily mix-related, extremely heavily mix-related. And right now, what we have scheduled for shipments and what our subsidiaries are showing as the year wears on is pretty exciting. Of course, we'll have to see. There are no guarantees, I always say in life. But right now, you know, I'm feeling good about what our companies are telling us, feeling very good about what our companies are telling us.

Right, and it feels like a great environment for a lot of your companies, right, with defense, for sure.

Yeah, I mean, if you look at our orders and you look at our backlog in the group and how it's been growing, it's very exciting. And, you know, the mix of what's been growing is a nice mix. overall. So, you know, feeling good about it. Nothing's ever easy, but feeling good about it.

Yeah, sure. And while I got you right there, a pretty nice size acquisition, the Axelion, or I guess you renamed Rockmar Fuel. I think it's your third largest ever, you know, in high-dose history. So any more color on this? Is this your usual sort of type multiple and accretion we should expect over time? Yeah.

It's a very nice business. It's a supplier, and it's done a lot of business with one of our other subsidiaries, Robertson Fuel Systems. They will be operating separately, but there's a lot that they can do for each other in terms of production, smoothing out production, as well as new designs and being pretty innovative for our customers. And so that will actually – that is reporting to the Robertson business to keep things very streamlined and easy. I think it's – we expect that to be – it has been growing. We expect it to continue to grow. There's a big aftermarket, if you will, cycle to it, replacement cycle that appears to be growing. We appear to be in the early innings of that. So we're pretty happy with it. You know, as we said, we expect it to be accretive earnings in the first year of ownership. You know, we've only owned it for about a month. So, so far, it's been good. But I won't declare it a victory or anything else based on one month. I'm right now feeling pretty good about it.

Great. If I could just put one cookie for Eric, just the organic growth, still very strong, 12%, and on a difficult comp. I'm just curious, you know, historically Q1, you usually have seen some seasonal slowdown. We haven't in the last couple of years in terms of recovery and growth on the aerospace side. But just curious, you know, any thoughts on are we maybe just getting into a little more normal seasonality where Q1 actually drops a little bit from Q4, which we haven't seen in a couple of years, but we used to see if we go back.

Hi, Larry. Thank you very much for your question. I mean, you're absolutely correct. I mean, in general, if you look last year, Q1 was the lightest organic growth, likewise in 2024 as well. You know, I'm particularly proud of these results given the high comps that we had in the prior years. You know, we had very high comps basically for the last four years, and to post 12% organic growth on top of them, I think is really outstanding. And if you will, we didn't stuff the channel. There's a whole bunch of inventory that could have gone out, which didn't go out for various reasons, but we're very careful to make sure that we do what the customers want. I'm very happy with these numbers. I think They reflect very well on the group. Great.

Congrats. I appreciate that. Thank you. Thanks.

And we'll take our next question from Peter Armand with Baird.

Hey, good morning, Eric, Victor, Carlos. Nice results as usual. Thank you. Victor, maybe we could just drill in a little bit to try to understand the space kind of mix I know in the past it's been a nice margin contributor for ETG. But could you describe a little bit, I think you were a little more geo-oriented versus like the Leo market. Is that still true just given the overall mix and just how you see the overall kind of setup for Hyco given all the demand for Leo market?

Yeah, it's a very good question. Originally, the business was more heavily geo-oriented. And over time, I would say now we're more heavily LEO. And that, you know, in the businesses that were GEO originally, you know, shifting to LEO isn't cheap, right? Your margins are less. There's a lot of different, you know, product design and R&D that goes into that. But that, I think we're getting through, if you will, sort of the other side of that over the course of this year. And, you know, we still have a pretty good offering for GEO, but we go where the customers are, and that's really the LEO market. And we have some great businesses with very strong margins in LEO, too, by the way. Actually, I think now some really strong margins there. But that, as you may recall, too, has been a very uneven, very, very uneven business, I mean, from quarter to quarter. And we like space, but we're not going to be too much of a space company for that reason, and you've probably noticed that. We've limited, we've been careful how we've grown in space for that reason.

Got it. I appreciate the call there. And then, Eric, just briefly, can you give a little commentary there? A competitor bought a PMA business, and obviously – You guys still, I think, are kind of the leader in PMAs. Is this a deal that had overlap with you, or how should we view that? Thanks.

Thanks, Peter, for your question. Well, you know how the old saying goes, imitation is the highest form of flattery. And for years, you know, when we started doing this, people thought we were crazy to be in the PMA business. And then they thought we were crazy to be in the repair business and distribution and all the things we did. And those people who were smart enough to invest in Heiko did extremely well. So we think this is a sign that the PMA market is incredibly strong, and there are a tremendous number of PMA candidates out there. People have asked me, what does this mean for Heiko's competitive positioning? And we feel very strongly about Heiko's competitive positioning. You know, we have a – we've been running this company for 36 years, and we've always focused on the customer and always focused on generating value for the customer. And I would venture to guess we probably have the best customer relationships in the entire industry, and I don't anticipate that to change. and that's because we add value, we do what we say we're going to do, and people know when they work with Heiko, they're getting a top-quality product. So we still have a tremendous presence in that market. We are totally committed to it, and I think it shows that others are recognizing the value of the PMA business. Appreciate all the details. Thanks, guys. Thanks.

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

Yeah, good morning. Thank you. Hey, Eric. Thanks, Ken.

Yeah, Eric, maybe just wanted to follow up on your just comments there. I think there's a there's a belief that PMA represents one of the real secular growing markets coming out of a pandemic as the industry continues to face a lot of service challenges.

Can you just maybe comment from an industry perspective, what kind of growth you're seeing in PMA and where maybe you see specific opportunities for Heiko, either in markets you typically haven't been in or maybe with customer sets or any other ways you look at the market that help us

better frame how PMA is actually really doing broadly and for you, obviously, you know, here as we continue to see the recovery. Yeah, Ken, I would be happy to answer that. And first of all, I really recognize you as you were one of the early, one of the analysts who very early on figured out that what HICA was doing in the PMA space was uh going to be very successful both to the airlines as well as for our shareholders and team members and those who followed your advice have profited handsomely um we are very committed and have never been more excited about the pma business than we are today we are you know we've got roughly 20 000 different parts it is a huge catalog and a huge competitive advantage Because when we want to develop a new part, and there's very little stuff in this world which is truly, truly new to us. We've got this catalog. We're able to go back and reference the drawings, the specifications, the vendors, the manufacturing processes, and the barrier to entry is tremendous in doing that. So, what we really need is greater acceptance at the airlines. You know, we've spoken about this for many years. Why don't the airlines buy even more, and why don't they push us to buy even more? We're very happy with what we've done, but why isn't it even more? And I do think, to your point, that coming out of COVID, they recognize what we've said all along, that PMA isn't only about price. It's about turn times. and making sure that you've got an alternate vendor and you have the part on the shelf. I have got tremendous respect for all of our competitors who supply parts to the industry. It's a very hard industry. thing to forecast the demand for a particular part. You never know what it's going to be, and it depends on so many things, including the type of build that was done by either the airline or the repair station at the prior shop visit for the engine or the component. You know, if times were good and they had plenty of money and then they put a lot of new parts in, then when the component comes back, you're not going to need a lot of parts. But if times weren't good and they did the minimum, then you're going to need a lot of parts. And the problem is, for all of the vendors, it becomes extremely difficult to forecast in that situation. So what we've always said is that HICO provides not only top quality and outstanding value and cost savings, but we also provide availability. And this is something that has become, you know, front and center since COVID. So we're happy about that. When you look at the US, specifically the products that we're doing, our sales in the PMA business are roughly three-quarters non-engine, which would be components, airframe, interior, and about 25% engine. Our engine business is at a record level. We are doing extremely well. We are developing more engine parts. The airlines want us to develop more engine parts. I think you've written about the cost of engine overhaul, and the cost to overhaul some of these new engines is significantly higher than the cost to overhaul some of the existing engines. So we think that there's going to be tremendous opportunity for us throughout the entire value chain. And, you know, I don't want to pick on just engines, but on components as well. The newer components are extraordinarily expensive. I mean, they are off the charts nuts on the prices that they are charging. So I think that Heiko is going to do extraordinarily well. in our PMA and repair businesses as we help airlines, you know, reduce their costs and keep them somewhat manageable and provide an alternate source of supply. I can't get into obvious, you know, specific product types or manufacturer types for competitive reasons. We'd rather just go do our thing and satisfy the airlines.

appreciate all the cover Eric just to put a point on that yes you know I might just add to what Eric just said just to maybe put a few leaves on the tree if you would you know our organic growth in our aftermarket business which is our you know our parts and repair business was up organically in the teens and specialty products is in the high single digits so to echo what Eric said I mean Our end markets in aerospace are very robust, and our guys are executing. I just thought you might find that nugget helpful.

I appreciate that, Carlos. And maybe just to put a finer point on it, historically, the argument was the lessors and maybe some of the emerging market airlines didn't use PMA much. Are you seeing any shift in customer types and adoptions? Thank you. Yes, we are seeing shifts in customer types and adoptions. The airlines recognize they need this. You know, I'm aware of all sorts of activity and initiatives, which I'd rather not call out on this call for competitive reasons, but we think that they are going to benefit HICO tremendously. Great. Thank you very much.

Thank you.

And we'll take our next question from Sheila Kayalu with Jefferies.

Good morning, guys, and thank you so much. Maybe my first question, I just wanted to clarify something. I joined later on the call. With Ethos, was it paid through A-class shares? And, you know, Eric, how do we think about those distributions happening? Because I think you were mentioning it. And why was it A-class versus the common stock?

Yeah, I'd be happy to answer. So most of the consideration was cash. So I think it was roughly, Carlos knows the exact percentage, but I think it was over 80% in cash, if I'm not mistaken. Carlos, is that correct?

That's correct. It was a small quantity of A shares, and, you know, they wanted to feel like owners.

It was their request. Yeah. Look, sometimes we do this because, you know, people are very happy to own the HICO stock. The request was for A-shares, so that is why we granted the A-shares, and that was the concept there. But we're very excited about that acquisition.

Okay, got it. No, it certainly seems like the right end market to begin. And then maybe, Victor, one for you. As we think about ETG profitability going forward, I know it ebbs and flows. Is there any way you could bridge us on the margins in the quarter and, like, how to look forward?

You know, look, we continue to expect 22% to 24% gap margins in the business, which is 26% to 28% over the course of the year. So you're going to have quarters that are above and below that amount, which is, again, historically the case. I mean, there's nothing new to this. You know, I try to remind people this as often as possible, that there will be variability in the margins and the growth rate of the ETG. There's nothing that's changed. There's nothing that's fundamentally changed in the business.

Got it. Thank you.

Thank you, Sheila. And, by the way, Sheila, just to expand on what I said about ethos, you know, the sellers recognized that this market was was really a tremendously growing market. And for them to part with one of the foremost repair and overhaul shops focusing on industrial gas turbines and aero derivative gas turbines, they really wanted to be compensated. And they, you know, the request for Heichel A shares was in order to help reward them. We're very excited. Everybody's very knowledgeable about what's going on in the tower generation space. And Ethos has incredible capabilities in developing and executing on parts repairs, component repairs, and the access to that market. They've got three different facilities in Connecticut, South Carolina, and Everdeen, Scotland. So they've got great access to the market, great people, great technology. And by putting it with Heiko, I think that it's going to provide Heiko with the ability to access what is, you know, as you know, a tremendously growing market. So the A shares were just a component, if you will, a sweetener, because if they're going to part with what we think is an incredible asset, they wanted, you know, something additional. And we were able, you know, the other thing which is important, it's very easy to buy companies. But to buy companies at prices where it's accretive using cash is extremely difficult. And we were able to get this deal done at a reasonable price, and the A shares were part of that enticement.

Understood. Thank you so much.

Thank you.

And we'll take our next question from Scott Duttle with Deutsche Bank.

Hey, good morning. Victor, there's some elevated inflation right now in certain parts of the microelectronics supply chain, particularly for memory. So I was wondering if you could speak to what ETG is seeing there and if you expect to see any margin pressure there either now or in the future.

Thank you, Scott. It's a good question. We're definitely experiencing that elevated inflation rate in some of the components. We We typically are able to pass those on to our customers. I think they accept that. They understand that. But there is a lag effect, and that does take some time. You've got to work off the POs and, you know, items that are in the backlog. It is what I would consider a headwind, but more on the noise level and not particularly notable. And, by the way, it varies business by business, but overall on a consolidated basis, more in the noise limit.

Okay. Are you generally able to get all the product that you need? Like, is the supply chain itself a limiter, or is it just a cost issue?

I would say it's essentially normal, you know, what it's been outside of that supply chain crunch, which is to say that there's always something. There's always a hot list item that's late and kind of holding things up somewhere in the system. And, you know, for the most part, everything's running normal. So it's kind of like airline schedules on a typical day. There are a certain number of delays, and that's kind of how it's running now.

Okay. And then for Eric, do you see any opportunity for AI to help accelerate any of the maybe reverse engineering analysis for PMA? and the speed at which new products can be brought to market? Or alternatively, do you think AI could help yourself or your airline customers better query parts catalogs and identify new, maybe previously unexplored PMA opportunities? Just trying to better understand how HICO can use AI to sustain or even accelerate growth. Thank you.

Yeah, that question has a lot of insight, and I think the answer is definitely with regard to both developing new parts, streamlining processes. I was just up at one of our subsidiaries last week and they showed me there was a certain process in our quality acceptance area where we had multiple documents and multiple forms had to be filled out and they were able through AI to come up with a revised process which is significantly more efficient than what we were doing before. We're already using it in the operations at HICO. As far as the engineering, I think there is a lot of opportunity there and it is as well being used over in the engineering process. And I agree with you, for customers to be able to figure out what they need to buy and, you know, look at the HICO performance rate or quality rate or quality rating, how happy everybody is with us, I think that it will be a continued tailwind for HICO. I mean, there's no reason why customers aren't buying more of our product line, and I think AI will accelerate our growth. Great. Thank you. Thank you.

And we'll take our next question from Ron Epstein with Bank of America.

Hey. Good morning, guys. Hope you're doing well. Good morning.

Just as a follow-on here, if you look at some of the evolving contract structures that are going on with some of the big defense firms, in particular the seven-year framework agreements, so far we've seen you know, a handful of Lockheed, a bigger handful with RTX. What kind of impact do you expect that to have on you guys, if at all, where potentially you could get visibility on contracts out maybe seven years? And how does that impact your business, and how are you thinking about it? Yeah, Ron, good question. We think it's a net positive. We have a number of companies that supply in a lot of those programs. So it's something that gives us nice visibility into the future, helps us plan better, and, you know, on capacity, we've got really good capacity availability. It's usually a question of hiring people and bringing more people in and figuring a way to do that in different shifts. So overall, I think that's a net positive for us. And also just to add to that, in the Flight Support Group Specialty Products Division, We think that that's going to have a very good impact because we've got, you know, we produce a lot of these different components. And having the advanced visibility into what's coming down the road is going to be extremely helpful. And that's been a good tailwind for that business as well with record backlogs for middle of the fence products. Got it, got it, got it. we've talked about some supply chain stuff. I mean, have you had any impact from, you know, critical minerals or magnets or whatever else, and how have you been managing that in places where you do? Yeah, it's very, very, very minimal. It has not been a significant issue for us, and so far, we do not expect that it will become one, and In fact, there could be opportunities for us as a result of that when a new supply comes online in the U.S. vis-a-vis acquisitions and things of that nature, but that's further down the road. Got it, got it. And then maybe one more, if I can, to both of you guys. What are you seeing broadly in the acquisition market around valuation and so on and so forth? I mean, as you both know, no doubt, the sector has gotten pretty hot. And, you know, how's that impacting how you're looking at valuations and how you can do M&A going forward where it is accretive in the framework of time that you guys like? Yeah. So, Ron, it's definitely pushed multiples up over a long period of time. It isn't anything new, maybe a little bit more than historically. For us, Certainly, that's why we're working so hard to make sure that we do as well as we've done in the past. And one of the important factors with us, I think, is the seller. And is the seller someone who's looking for something unique, particularly a good home for the business, someone who's going to retain the legacy and the operations in a similar capacity as operated in the past? And that gives us a really big advantage we've discovered historically. It doesn't mean we're going to buy everything we want, but it means there's a very nice pipeline. We have to count on a little more future growth, I think, and believe in the growth stories a little more than we used to. And so we're spending more time doing that to ensure that we think we're going to get the growth out of the businesses that's estimated. And then also just to add to that for a moment, Ron, as we mentioned, our acquisition teams are busier than ever. Their pipelines are full. I would expect additional acquisition activity this year. I think our shareholders, my guess is they're going to be very happy about what we're doing. And the other key thing is that, you know, as Victor said, By differentiating ourselves and providing the best home for the seller, that has tremendous value. You know, it's very easy to go out and pay high prices and win an acquisition. It's another thing to make it work financially. And HICO is very rigorous cash flow requirements. And we model each deal on its own where it's got to support its own debt service, its own working capital needs, etc., And that's how we've been able to compound. You don't compound by going out and paying crazy prices for something. You compound by buying something that can stand on its own and is very reasonable. And when you look at some of the prices of, you know, switching topics for a moment, of some of what I believe are the defense tech businesses, I think they're extremely exaggerated. And, you know, we look for businesses that generate cash now and in the future. And paying extremely high multiples for something that really doesn't generate cash is just not what HICO is about and not what we plan on doing.

Gotcha. Cool. Thank you.

And we'll take our next question from Scott, I guess, with Nealious Research.

Morning, Eric and Victor. Good morning. Good morning. I was curious, do you have a sense of how inventory levels are at your airline customers? Because you mentioned that you didn't want to stuff inventory into the channel. And then I was also curious, within your distribution businesses, have there been any noticeable changes over the past several quarters in how fast they are moving inventory? Is the pace picked up as airlines prep for the summer travel season?

Yeah, I would say the inventory levels are very consistent to what we've seen in the past. You know, there are certain parts we're shaking the overstocked on, other parts where they're understocked on. But in general, there hasn't been a big change. As far as our distribution businesses, we've done extremely well. They are extremely busy. you know, supporting the demands of the aftermarket. But I really sort of see it very much as business as usual. And, you know, not much of a change for HICO there.

Okay. And then thinking back a year ago, a lot of us were asking about DOGE and how that could benefit your business. We're now one year into the current administration. So if you started to see the Pentagon get the ball rolling on acquiring more alternative parts to both reduce maintenance costs and improve readiness rates for military aircraft, are they at least doing it on the derivatives like the P-8s and KC-46s?

We've seen some movement there, yes. We always said that this would be a medium-term project. It's very hard to get things done. fully moving at the speed that we would like, but we are seeing good progress there and we do anticipate further progress to come. So we feel very good. You know, you look at the President's defense budget and something's got to be a bill payer for these uh you know tremendous increases and this is very logical and i i think what the secretary of war is doing makes a lot of sense and they just can't keep on paying these high prices so i'm still very optimistic uh in that regard you got it thank you thank you and we'll take our next question from john got in with city

Hey, thanks a lot for squeezing me in here. Eric, I wanted to follow up on the energy business and ethos and what you're doing there. You offered a number of data points and breadcrumbs. We see different companies across A&D attacking this in different ways. I just wanted to talk about a big picture, but the types of questions on my mind are, did you kind of go down this path based on reverse inquiries from customers? What types of components do you expect to supply? Is it based on your existing SKUs, or do you think that you're going to develop new SKUs? There are so many questions here. I can't go through all of them, but I just wanted to give you a chance to kind of talk through this a bit more.

Sure. Thank you. And I think that's a great area which, frankly, hasn't been focused on by a lot of people. We thought that this would be a great market. We've been working on Ethos now for approximately a year. So we started that project a year ago. And we saw what was going on in the industrial gas turbine space. and to a lesser extent the error derivative. And we thought that this would be a very strong area. So we went out very aggressively to work with the seller and come up with a deal that made sense. I think we also developed a very good relationship with the operating folks at the businesses, and we were definitely the preferred buyer. You know, as far as the error derivative, I mean, that makes a lot of sense. Everybody's very familiar with what HICO does and really what we can bring to some of the aero derivative parts should customers want that, as well on the industrial gas turbine parts. Both on the IGT and the aero derivative, Ethos has very strong OEM relationships. And they're approved by various OEMs to support those products, and they've been doing so for a very long time. So we are going to continue to support those channels and not offer an alternative if there is an OEM relationship there. Where there aren't OEM relationships, we'll try to form them with different companies. And if not, we think that there's very good opportunity to continue penetrating the markets there. There's just a huge demand. I mean, you see what's going on with all the power companies. And Ethos has an extremely wide array of products that it services. It does blades, vanes, all sorts of, you know, various static parts, rotating parts, components, And we think that their technology lines up perfectly with ours. And we are super excited to have made this acquisition. And we think that it's going to be extremely successful and a great entree for Heiko. If Heiko were to try to enter the industrial gas turbine or the aero derivative market on its own, it would be extremely difficult. We didn't, you know, have much of a relationship with those customers. And here, Ethos has been an incredible supplier for decades with these companies. Actually, Ethos, the genesis of it is it used to be the Wood Group Aero Accessories and Components Group. So they have decades of working with the energy companies and the turbine suppliers So, we think we've got a great platform to leverage and move forward.

And this is such a big market. I'm just kind of, this is a very big picture question, but do you see this as something that could become so large for HICO over, you know, in the fullness of time, you know, that as symbolically we might even have an IGP segment, a third segment for the first time or something like that? Could it be that big?

That would be very aspirational, so I don't want to get over my skis here and promise that, but we do have very high expectations for the business. I would say it's in early innings right now. The company's got great capability, great people, three locations, and I hope what you're saying is correct, and I'm sure that our uh team members at ethos uh and at wincor are listening to this call and um they are inspired by your uh question and outlook for it appreciate it thanks guys thank you and we'll take our next question from matthew acres with bmp paribas

Hey, good morning, guys. Thanks for fitting me in. Most of mine have been asked already, but I wanted to just touch on the balance sheet and just how you feel. You know, we'll point you times. Leverage obviously has come down quite a bit since Wentcore. I think historically you've been a little bit lower. So just how you feel. Are you comfortable at this level? Would you prefer to be lower? It sounds like there's a lot of potential M&A deals in the pipeline. So just kind of how you're thinking about the balance sheet here.

I'm happy to take that question. Our leverage right now is under two times, so I'm very comfortable at this leverage point. I expect that what we've done in the past will continue in the future. We'll continue to use a line of credit as a primary vehicle for funding acquisitions, which then affords us the opportunity to quickly pay that down and reload for the next deals. you know, we'll still use that type of a structure. Right now, our permanent debt of the bonds that we have are running less than one turn at EBITDA. So I think our capital structure is quite flexible, and we're not capital constrained. So, you know, from a balance sheet perspective, we could go higher on leverage. I think if we did that, it would be very opportunistic, and there'd have to be a pathway to generate significant cash to bring us back down in the You know, the two times, two and a half times leverage ratio. I mean, I would think that that's something that's doable for us. I don't think HICO is going to be a seven times leverage business. That's not in the cards for us. But I'm not going to rule out for an incredibly good acquisition. If we went to that level and had a pathway to get back down into the twos over a reasonable period of time, we would certainly consider that and execute on it if it was good for our shareholders.

Yeah, thank you. That's really helpful. Yeah, no, thank you, Carlos. And then I guess just one on ETGME, I guess was the government shutdown at all related to the mixed impact that you guys discussed in the quarter, or is that not the driver?

That wasn't the driver. It did have some impact a little bit, stuff shifting out, and so, you know, we'll pick up the benefit of that, you know, later on in the year, but I wouldn't call it a material impact. Thank you.

Thanks.

We'll take our next question from Gavin Parsons with UBS.

Good morning. You have Max Miller on for Gavin. Good morning. Good morning, Max. How's it going? It's pretty clear that a lot of the tightness in the aftermarket and some of the OEM pricing You see it actually increases the value proposition of a HICO alternative.

If we, you know, hypothetically flip that script, what are the implications for HICO in a world where maybe, you know, some new aircraft come online, some of the older platforms come out of the fleet and, you know, aftermarket or at least the fleet age begins to normalize a little bit?

Does that change the map for PMA utilization and where you see HICO thriving?

We don't think so. I mean, our business is always impacted by, you know, first and foremost, the growth in fleet hours or available seat miles. And then it is, you know, the subcomponents of that are you look at the age of the aircraft. I mean, you've got this 20-something thousand aircraft fleet, which is aging one year per year. And the OEMs do a really good job of making sure that they escalate prices very aggressively to make up for any of that, you know, to take advantage of that. And then when you look at the fleet retirement, you know, that typically hasn't been a big part of the equation. But it is something that we continue to look at. There are also – I think there's a very big opportunity – For all of these new aircraft that have been delivered roughly over the last 10 years, the price of the spares on those aircraft is significantly higher than on the spares on the aircraft that they replace. So if you look at line for line, you know, the same LRU on an older aircraft versus a newer aircraft, the newer ones are significantly more expensive. So all of this is to say I agree with you. I think our value proposition increases substantially, and I think that we're going to be in a very good place. We're already taking advantage of the opportunity in a lot of these markets, and I think that will continue.

Great. Thank you.

I'll leave it at that. Thank you.

And we'll take our next question from Michael Charmoldy with Truist.

Hey, morning, guys. Thanks for getting me on here and sticking around. Good morning.

Maybe quickly, Eric, just to go back to John's energy line of questioning, and I don't know if this is a quick one or a conversation for a bigger conversation for another time, but the CFM56 and its potential use in the power generation market. You've obviously got a lot of content on some of those legacy platforms. Should we expect that, assuming it gains traction in the energy marketplace? Can that be a significant tailwind in terms of those platforms? uh generating you know a materially more amount of parts you know thinking that they've got life after or additional life you know besides uh kind of in the traditional aircraft market yes i i think definitely when you look at the aero derivatives market uh there is you know tremendous life in repurposing those engines there are many companies doing that, whether it's on some of the old CS6s or the CFN56s. But the use of the HICO parts in those repairs and overhauls is, I expect, going to be substantial. So I think that there's a very good tailwind for us there.

Okay. Okay. I'll keep it at that since we're running long anyway. Thanks, guys.

Thank you. Thanks, Mike.

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

Good morning. Thanks for fitting in, and congratulations on the quarter. Thank you. Real quick, just one for Carlos.

Just looking back at space organic growth and ETG, in the queue last year, it was exceptional, $13.5 million year-over-year. So, you're going to give us how much it was down,

this quarter, in this queue, can you preview what that decline is?

The decline was, yeah, I can give you some color on that. So the decline in space organically was in the high single digits for the quarter compared to Q1 of 25. And as Victor mentioned earlier, Jonathan, it's not – It's not a result of order volume kicking down or backlog not being there. It's really just a function of shipments, always is with space. And so I wouldn't read too much into that, to be candid with you. I think you'll see some of that recover in the subsequent quarters as we catch those shipments going forward. I think that shows it has to do with that great strong comp last year. And the other question I've heard folks ask us is, You have exceptional positioning with the legacy space and defense hardware providers.

How is your penetration with new customers in this area? Are you guys able to maintain positions at these new people in space and defense? Thank you, guys. Thank you, John. That's a good question. The answer to that is yes. We picked up a number of you know, new space and defense tech customers along the way. And so far, we're holding on to them. The way we generally look at it is that we are going to supply the customer base. They need our parts, our products, regardless of who they are. And for the most part, that seems to be holding true. Thanks for the question.

Thank you.

And we'll take our next question from Tony Bancroft with Gabelli Funds.

Good morning, gentlemen. Great job. You know, mine, obviously, is revolving around the defense budget. You saw, you know, you saw the proposed potentially a $1.5 trillion budget. You know, even if that doesn't, you know, come to fruition over a number of years, it's still a big number, just, you know, just directionally, how do you see that impacting your business? Maybe just broad strokes on that. And then obviously, all the announcements earlier this year from the Department of War, the programs, you know, drug dominance, arsenal freedom, you name it, you know, how, what have you been told that you've spoken to the Department of War and just maybe your overall view on those dynamics?

Well, first, Tony, thank you very much for joining us and for your comments. We very much appreciate them. In terms of the outlook for us, the impact on us, first question that you asked, the impact on us of the increased defense budgets and some of these orders, that definitely is beneficial. I mean, obviously, the devil will be in the details ultimately where that falls over the years. But from what we see and have heard, And we talked a little bit earlier about some of these multi-year buys that the government is doing on programs. We're on both sides of the business. This applies to both the electronic technologies and flight support groups. There's definitely an impact and a benefit. And maybe we're even seeing some of that in our backlogs now. And that's a good thing. And in terms of the Golden Dome possibilities, you know, it's not that completely defined publicly, but from what we know and what we see, it consists of a lot of existing programs, particularly obviously missile defense programs, and again, we're on both sides of the business, flight support and electronic technologies. We're on a lot of those programs, and there appear to be some newer tracking and reconnaissance parts of that system. And we are, you know, from what we're told, some of the things we're selling on, I can't go on obviously specifics, but we're told that they are for Golden Dome. You know, there's no Golden Dome department. You don't get a letterhead that says Golden Dome. There's officially Golden Dome. There was this list of companies they put out as primary vendors. But remember, we're down a layer in the supplier base. And then, of course, as I've answered earlier, I mentioned, you know, the defense tech guys are participating there, it appears, in a variety of ways, and we're picking that up as well. So overall, both are positives for us, and we feel good about them on, again, both sides of the business.

Thanks so much, Rachel.

Thank you very much.

And we'll take our next question from Louis with Wolf Research.

Hey, good morning, guys.

Good morning, Louis.

Maybe one for Carlos. Just the stock comp expense is pretty high in the quarter, and it was sort of called out in the press release as well. Just curious, does that level continue throughout the year, or does it step down, or does it ramp up?

That's a good question, Louis. The If you recall, you may remember last year we talked a little bit about the performance feature that were attached to our options in 25. And what winds up happening is when, you know, normally our options historically have always just been time-based, invest over five years. Now we added a performance feature last year for growth in the business, and what winds up happening is the amortization of that expense actually accelerates as a result of that. It's part of the accounting rules that drive us crazy sometimes, but nonetheless. So what'll happen is we'll probably catch a little bit more of that elevated expense the front half of this year, and then it'll taper off towards the end of the year. And in fact, as we get into the following fiscal year, it should taper down probably on par or lower than what it had been historically, because we would have amortized a lot of those 25 grants in fiscal 26. I appreciate it, Carlos.

Yeah, I know how much you love all the accounting on that. Yeah, right. Maybe one for Victor and Eric, just kind of, again, big picture here. Obviously, you guys have grown a ton over your 36 years. You're kind of in the $5 billion neighborhood. So just how do you guys think about the scale of the business, the sheer number of underlying businesses that are operating? And at some point, do you see some other potential portfolio action as making sense?

Yeah, listen, we've been able to adjust and grow with the business and morph, if you will, the organization as we've gone. There was a point in time where everything reported either to Eric or to me, this is Victor speaking, reported to one of us. And over time, we've gone to more of a bit of a working supervisor model, if you will, really extraordinary and talented people. who show an ability to handle multiple companies at one time and acquisitions as well, multi-site situations, for example. And they are leading groups. And we've been breaking this down into groups on both sides of the business. And that's going to continue. And the acquisition, you probably noticed, the acquisitions we've made have generally been into those groups or into or under reporting to another subsidiary. So we want to keep that talent doing it that way, and we think that's very scalable.

Great. Appreciate that, Victor.

Thank you very much.

And at this time, I will turn the conference back to the management team for any additional or closing remarks.

Thank you very much, everyone, for participating in our call and for those who asked questions. We are always available. That's Eric, Victor, or Carlos for any of your additional questions that you may want to ask offline. And we look forward to speaking with you again on our second quarter fiscal 26 conference call at the end of May. So thank you very much, and this concludes our call.

Thank you. And this does conclude today's call. Thank you. Thank you for your participation. You may now disconnect.