Heico Corporation

Welcome to the HICO 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. 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, 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 Victor Mendelson, HICO's co-chairman and co-chief executive officer.

Thank 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 HICO's second quarter fiscal 26 earnings announcement teleconference. As you've heard, I'm Victor Mendelson, HICO'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, Let's take a moment to thank the people who produced yet another set of records for Heiko, and that's our team members. 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 Heiko 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. We 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 HICO 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. HICO is very proud to support the United States and its allies' defense needs. So getting to our results. Our record second quarter fiscal 26 results probably speak for themselves, and we'll delve into the details shortly. 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 Heiko cost-effectively provides. And I should add that that list of what we provide keeps on growing. Fuel prices eventually settle back, spurring even more growth. And 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 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. The 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 Heiko, 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 hyco-culture, and we like that. So our most recent quarterly and year-to-date results are just another manifestation of the hyco-culture. And summarizing those results, today we emphasize that consolidated net income, operating income, and net sales in the second quarter of fiscal 26th are again record results for Heiko, 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 fiscal 25. These 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. Very 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. Consolidated EBITDA increased 37% to $408.3 million in the second quarter of 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 30, 26, as compared to 1.6 times as of October 31, 25. This increase results from our successful completion of four acquisitions so far in fiscal 26. In April, We announced that three of our subsidiaries, 3D Plus, Accelia, 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. I 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 Stollard. 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 our 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. The 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. I now turn the call over to Eric Mendelsohn, my fellow co-chair and co-CEO, to go into some more details about business.

Eric. Thank you very much, Victor. Before reviewing the numbers, I would first like to recognize and thank Heiko's outstanding team members around the world for delivering another exceptional quarter. What Heiko 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. Flight Support Group's operating income increased 31 percent 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. During 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. Given 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 EBIT-A, 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 Heiko and our culture. I 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. The 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 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. The 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. On 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 percent and 24 percent 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 Mendelson, Co-Chairman and Co-CEO, Victor Mendelson, Co-Chairman and Co-CEO, Eric, thank you very much.

We expect the HICO 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. 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. As 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. Thank 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 star 1 to ask a question. And we'll take our first question from Larry Solo with CJS Securities.

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 from above. 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, you know, on the part side, and, you know, what drove that growth? And a nice step up from last quarter, other than the pull forward, you know, do you think, you know, does this feel sustainable? Is there anything unusual in there?

Yes. So, Larry, thank you very much. We are really proud about the progress 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, Frank, you know, I, I've commented many times in the past that I think, uh, we, we've got some of the greatest group of sandbaggers that I've ever, uh, uh, had the pleasure of knowing. Um, I, I, I joke around and call them sandbaggers, but actually, um, I think they're really trying to estimate what they think is reasonable going forward. And frankly, 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? One 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 FA-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.

One 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 LENCOR. So the one dynamic that brings to us is as we can populate these repairs with more PMA product, we have less top-line repairs. 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.

Yeah, 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 growth. And 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 even stronger in this period?

Yeah, 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. I have never seen both our internal operations folks or salespeople as well as customers literally pushing us to do significantly more. And yes, with regard to the war in Iran that has impacted some sales 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, you know, certainly on the commercial aerospace side, but frankly also on the defense side, where we've been extraordinarily strong in that area. We 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 percent, 60 points basis point improvement in our margin as a result of that because, you know, 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.

Great, Doug. I appreciate that call. Thank you.

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

Yeah, 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 more of your revenue from FSC comes out of North America, but Middle East exposure, maybe if you've seen any behavior changes or maybe just give us any color just on globally how you're seeing regional demand. Thanks.

Yeah, 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 is 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. 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. You 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.

Got it. Appreciate the color. Yeah. Appreciate that. And Victor, and just maybe quickly on kind of the space and market, which historically has kind of been a little more volatile, but the demand signals continue to be really robust there. Maybe 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.

Yeah, 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, if you will, to the right and a positive place for us. And by the way, in a sense, maybe a little bit of a metaphor in the ETG generally. 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. 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.

Got it. Thanks, Victor. Thanks, guys. Thank you.

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

Yeah. 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 mixed benefit in the quarter, or is there anything else you would call out as maybe structurally we should think about it? 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.

Well, you know, a couple of things. I think I'm looking at it as the first half of the year. That's the way I look at it. 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 the first quarter being weaker than it should have been, the second quarter being very strong, and I look at that average, and I think we continue to target the same growth rates in the ETG over time, and maybe we'll do better. I mean, the order book certainly, I would say, continues to amaze me. And I would say we'll continue to look for that 22% to 24% gap margin, which, as you heard, is 400 and some odd basis points higher than 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. And like Eric said, it's not sandbagging, but our businesses are conservative. And to talk to our folks, they're pretty conservative. Carlos, I don't know if you have something to add to that.

I would just say we were blessed with a quarter where all the verticals or industry plays had double-digit organic growth. And when that happens, 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 six-month period, the margins in the segment were 23.5%. And I think that, 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.

Thanks, 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 or maybe just trends you're seeing in bookings? Because it clearly sounds like acceleration and defense is what we're seeing across both the segments.

Yeah, Ken, 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 in all of the areas, aerospace as well as defense, you know, in terms of the end markets. It's been incredibly strong, and I can tell you that conversations about additional business has also been very strong. 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 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 the needs of our allies, and we're very optimistic on that.

You know, it's interesting, Ken, 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 Q2 of 25. So I would say our defense business is growing at a nice clip. But what I'm trying to apply to you is that the rest of the business is keeping pace, too. All the verticals are growing at a really nice clip. So it's not just defense that's pushing the cart up the hill, if you would. It's all the verticals really firing on all cylinders.

Thanks, Carlos. You had great results, everybody. Thank you.

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

Hey, good morning, John. Thank you. Hi, 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? How does that rank in the growth vectors for the company that you're excited about? Thank you.

Yeah. On the defense tech program, so it's a number of our subsidiaries are supplying into the defense tech firms. They'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. It certainly does include some missile defense in that sector, and it would make sense given 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 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.

I 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 that continues to remain very strong. I mean, don't get me wrong that the, uh, you know, the exquisite, um, legacy programs continue to be of tremendous importance to us and are our 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.

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

You 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 are advantages and disadvantages to each, so I think we'll have to really understand those better. But I don't think we made up our minds.

And this is Eric. I can say that from an operational perspective, reporting quarterly I think is a good thing because it gets people four 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 two 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.

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

Good luck with the rest of the year.

Thank you. Thank you.

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

Hey, 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, you know, never been more optimistic about FSG's future. I heard you say, you know, 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.

Yeah, 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. 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. And I can understand them being concerned. I think it is That concern is massively misplaced when applied to a company like Heiko 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 Heiko. 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. And for... Heiko, 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 is new product development area 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 Heiko's dynamic. Yes, we have a small parts trading and extremely successful parts trading business within Heiko, but it's very small relative to our flight support group. And that's intentional. We want to focus on developing proprietary parts proprietary repairs, doing outstanding distribution, specialty manufacturing, that's our business.

That was fantastic. I don't think I can follow up on that, so I'll just leave it there. Thanks. Thank you very much.

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

Great. Good morning, guys, and thank you. I have three 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? 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?

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

I had high-protein breakfast, egg whites with whole wheat toast and some avocado. 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, 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 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 of two things, one, what we design and sell to our customer, 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. I know these framework agreements are still being worked on, 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 moment.

Great. And Eric, one for you to follow up on John's question, if possible. I know 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. Like, How are you seeing demand changes as capacity utilization comes down?

Yeah, we're seeing tremendous demand across the business. Our PMA business is roughly three-quarters non-engine, roughly one-quarter engine, 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 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.

Thank you.

Thanks, Sheila.

And we'll take our next question from Mariana Perez-Mora with Bank of America. Good morning, everyone.

Good morning. How are you?

Doing great. So I'm going to switch gears a little bit to the industrial aero derivative engines. You have owned that business for a full quarter now. Could you please discuss what were the surprises, both to the upside and the negative surprises getting into that vertical?

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

Oh, can you hear me better?

Yes.

Oh, perfect. So on our 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?

Yeah, we are very excited about that. I mean, as you've seen, the aero derivative 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 Heiko stable. I think they've got, you know, tremendous capability in Connecticut, in South Carolina, and then also in Everdeen, 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, and Heiko, in a great position to be able to pick up that business. So I'm very happy with it.

Perfect. 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 like 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? What areas are you looking at and how competitive you could be in a market that I could imagine is relatively expensive today?

Yes. 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 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. And 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 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. Those people are generally attracted to us. And I think there are enough of them who want to transact with us that it works.

And Mariana, adding on to what Victor just so well said, If you look in our 10K, as of the end of last year, we had 31 partners, 31 minority partners in our businesses. 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 we've 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 in business. 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. And that's why, 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 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 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 Heiko has been very careful to not go into those pitfalls. And as Victor said, when we find a business that is looking for a long-term owner, There is no better home than Heiko. 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 one day there's going to be quite a shakeout with regard to those businesses.

I do agree that that is your secret sauce when you go to acquire, and that's a culture that is hard to mimic if it's not coming from within. If I may, one more follow-up. On these new agreements, and you mentioned the framework agreements before, there is a lot of talk around cash neutrality. but you generally don't approach businesses that way. You actually care about 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?

As a rule of thumb, we don't like to acquire businesses with less than a 20% operating, or as we call it, EBITDA 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.

And 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 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, uh, you know, it's, it's really a matter. I think the U S government, uh, would be well served, you know, with regard to these, uh, multi-year framework, uh, deals, you know, to make sure that the industry has, has got the money can really rely on that. Because if you look historically, within aerospace and defense, 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.

Thank you so much for the caller.

Thank you. Thank you.

We'll take our next question from Scott Mikus with Melias Research.

Good morning. This is Matt Maritello. I'm for Scott Mikus. Good morning. One more question for Eric. So you acquired the 777 Ames and 737 NG via product lines, BIA product lines, a little over a year ago from Honeywell. So you now support Boeing's new builds on the 777 Classic and 737NG derivatives like the PA-E7, 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?

First 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 Heiko, 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 a phenomenal partner to develop additional products for both the air framers as well as for the avionics subsystem suppliers. We are in a great position to be able to support both. And that's what we currently do. 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. But 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 I do also have to just to call out, frankly, to 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, 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 Louis Morel over at Heichel Parts and Repair who made all of this happen.

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

We'll take our next question from Gotham Khanna with TD Cowan.

Hey, thank you. Good morning and great margins.

Thank you. Thank you.

Just to follow up on your earlier comment about a bit of a pull forward on sales, could you quantify how much you think that was, not just from a margin standpoint, from a sales standpoint?

Yeah. Hi, Gautam. It's Eric. It's about, you know, roughly between 15 and 20 million.

Gotcha. 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 Heiko about PMA parts? Or I'm just curious if you've seen a change in customer behavior since to take advantage of the lower cost offering that you guys have? Is that discernible?

The simple one-word answer to that is yes. We have. 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 very powerful for us. Look, it's just continued. I think we've got a lot of kinetic energy built up at Heiko. 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. Some people want to stay in whatever, the Ritz-Carlton in the Four Seasons, and other people have a budget, whatever, for a Marriott in the Hilton. And we at Heiko can support both. So I think on the commercial side, we're very strong. On the defense side, incredibly entrepreneurial business. 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.

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

Same answer, yes. Yes, 100%. They are because they realize 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 the same thing over and over again, expecting different results. And they know that if they want to get high-quality, short-term times at better prices, high goes the answer.

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

Excellent. Thank you, guys.

Thank you, Gotham. Thanks, Gotham.

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

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

Yeah, 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, you know, a lever or it felt like for the quarter is a little unique, but all verticals, all end 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 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 our G&A spend was down as a percent of revenue. So 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. We don't have to hire seven different more layers of vice presidents to manage the business. Our guys managed to juggle many balls at one time and get things done. So that's the story. I know what you're searching for. 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.

Okay, great.

Thank you. I'll stick to one. Thanks.

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

Hey, good morning, guys. Hey, Louis.

So maybe Carlos, you talked about the gap 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?

I knew somebody was going to ask. It's a good question and one that we've pondered quite a bit here. You know, 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 and 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 percent is that those two end posts that I think will 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, my thinking on that has come up a little bit from prior quarters.

All right. I appreciate that. And maybe, Eric, I know obviously you've sort of given us the color on the accelerated – deliveries. Just to be clear, 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.

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

Sure. 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 was that flowing through the parts business?

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

Okay, great. Thank you. But it was all defense. It was all the defense market. Okay.

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

Thank you. Morning. Morning. Hi, Gavin.

How many PMA parts are you introducing annually now, and what would be the considerations to taking that number higher?

You know, I'd say we're in the 500 area and we've got the ability to do more. You know, we've got to scale the whole thing. 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.

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

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

Thank 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.

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