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.