Heico Corp. Aktie

Welcome to the HEICO Corporation Second Quarter 2026 Financial Results Call. My name is Samara, and I will be your operator for today's call.

Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements.

Factors that could cause such differences include, among others, the severity magnitude and duration of public health threats, our liquidity and the amount and timing of cash generation; lower commercial air travel, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase in our cost to complete contracts, governmental and regulatory demands, export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales.

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 HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, 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, HEICO'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 HEICO's Second Quarter Fiscal '26 Earnings Announcement Teleconference. As you've heard, I'm Victor Mendelson, HEICO's Co-Chairman and Co-Chief Executive Officer. And I'm joined here this morning by my fellow Co-Chairman and Co-Chief Executive Officer; Eric Mendelson, as well as our Executive Vice President and CFO, Carlos Macau.

Before we get into our record results, let's take a moment to thank the people who produced yet another set of records for HEICO, and that's our team members. It's your resolute dedication, your diligent efforts and your focus on exceeding customer expectations that produced these results. We know you are what makes HEICO unique, and we're also grateful to call you our colleagues and our friends. We are excited about the opportunities ahead and our company's future with you.

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 HEICO team members, customers, vendors and their family members, with Memorial Day just behind us, we honor and remember those who made the ultimate sacrifice in service to our country and to our allies.

We remain deeply grateful for their courage, for their dedication and commitment to protecting the freedoms we all enjoy. HEICO is very proud to support the United States and its allies defense needs. 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 HEICO 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 multiyear 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 HEICO, the most common word is trust. They trust that our company will deliver real and sustainable growth that will deliver innovation that will deliver quality that will deliver real cash. That's very important. Real cash. And we will do all of this, honestly, among other things. They call it the HEICO culture, and we like that.

So our most recent quarterly and year-to-date results are just another manifestation of the HEICO culture. And summarizing those results, today, we emphasize that consolidated net income, operating income and net sales in the second quarter of fiscal '26, are, again, record results for HEICO, increasing by 49%, 41% and 25%, respectively, compared to the second quarter of fiscal '25. The Electronic Technologies Group set all-time quarterly operating income and net sales records in the second quarter of fiscal '20 and improving 56% and 34%, respectively, over the second quarter of 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 of fiscal '26 up from $156.8 million or $1.12 per diluted share in the second quarter of 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 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 '20 up from $297.7 million in the third quarter of fiscal '25.

Meanwhile, our net debt-to-EBITDA ratio was 1.74x as of April 30, '26 and as compared to 1.6x as of October 31, 25. This increase results from our successful completion of 4 acquisitions so far in fiscal '26. In April, we announced that 3 of our subsidiaries, 3Ds, Xellia 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 our honor 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 Stallard. Our recent acquisition activity also remained risk. 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 the 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. And we expect both of these acquisitions to be accretive to our earnings within the year following the acquisition.

In addition, we have an excellent potential acquisition pipeline consisting of great potential transactions, both large and small. And I'll now turn the call over to Eric Mendelson, fellow Co-Chair and Co-CEO to go into some more details about the business. Eric?

Thank you very much, Victor. Before reviewing the numbers, I would first like to recognize and thank HEICO's outstanding team members around the world for delivering another exceptional quarter. What HEICO's 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 '20 up from $767.1 million in the second quarter of fiscal '25. The net sales increase in the second quarter of fiscal '20 reflects strong organic growth of 19% as well as the impact from 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% 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 customers' 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 EBITA was approximately 28.6%, which has been consistently excellent and is 160 basis points higher than the comparable FSG cash margin of 27.0% in the second quarter of fiscal '25. While we remain grateful for these margins, we are particularly proud that we did so while simultaneously delivering significant cost savings, outstanding service and incredibly fast turnaround times to our customers.

Victor eloquently spoke of trust in his opening comments. And these results once again show both our customers and shareholders that we can satisfy their objectives, not at the expense of one another, but simultaneously and continue to build upon the trust placed in HEICO and our culture. 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% and to a record $45.5 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% and 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 reflects the previously mentioned net sales growth and 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% and 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% and 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% and 24% for all of fiscal '26 and 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 and closing remarks.

Eric, thank you very much. We expect the HEICO culture will continue propelling us forward. And for the remainder of fiscal '26, we anticipate increased sales in both the Flight Support and Electronic Technologies Group that 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. [ Eric ] 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 approach, and we'll 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.

[Operator Instructions]. And we'll take our first question from Larry Solow with CJS Securities.

Eric, I think you described it really well by just one word, wow, really, really impressive quarterly results, I'm sure your dad is smiling up above.

I guess first question, just on -- Eric, for you, just on FSG. Can you just kind of give us the really impressive growth on the organic side. Can you just run down the mix between the commercial and the defense side, I mean, on the park side and what drove that growth? And nice step-up from last quarter other than the pull forward? Do you think -- does this feel sustainable? Is there anything unusual in there or...

Yes. So Larry, thank you very much. We are really proud about the performance that we had in the second quarter across the entire business, both in the FSG as well as the -- and I've commented many times in the past that I think we've got some of the greatest group of sandbaggers that I've ever had the pleasure of knowing. I joke around and call them Sam baggers.

But actually, I think they're really trying to estimate what they think is reasonable going forward. And frankly, they -- more than sand baggers, 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 organic growth by product line. When you look at parts, it's around 2% specialty products is 21%, and component repair is about 10%.

And 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 and 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 FA-approved repair stations. And frankly, a lot of them are waiting on part. So I think that component repair organic growth. 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, we have been seeing a lot more DER and PMA friendly repairs with the acquisition of Encore. So the one dynamic that brings to us is as we can populate these repairs with more PMA product, we have less top line but more bottom line growth. In other words, a more profitable repair without having to charge customers for the high-priced OEM parts. So keep that in mind also.

Yes. No, no, absolutely. And I think the defense specialty side, that's great numbers, and I think directionally 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. And what we feel like there's a little bit of a slowdown just on the 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?

Yes. 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.

We -- I have never seen both our internal operations folks, our 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. 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 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. And we disclosed about 60% -- 60 points -- basis point improvement in our margin as a result of that because we've got the fixed costs associated with running the business. We just moved the sales forward. So as a result, we have that kind of impact. But the demand is just very, very strong across both our commercial and defense business.

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

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 MSC 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?

Yes. 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 -- the Middle East as a percentage of our total sales is relatively small. But 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 realities they got to get more serious and cut costs. And that always helps us in the long term. We end -- there ends up being more interest in our products.

We get approved in more spaces and that inures to greater future revenue and earnings. So to answer your question, nothing significant in the Middle East, but tremendous knock-on effect around the world where people realize that they got to cut cost. And there's no reason why they shouldn't buy more of a product line. 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 doing what they got to do in order to buy these parts.

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

Yes. 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'll recall that historically, it's somewhat volatile for us. And I would expect to continue that to be the case, so somewhat volatile by continuing up in, if you will, to the right and a positive place for us.

And that, by the way, in a sense, maybe a little bit of a metaphor in 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 overjoydematic 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.

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

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

Well, a couple of things. I think -- I'm looking at as the first half of the year. right? And 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 get the same growth rates in the ETG over time, and maybe we'll do better. I mean the order book certainly, I would say, is continues to amaze me.

And I would say we'll continue to look for that GAAP margin, which, as you heard, is 400-some-odd basis points higher and 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 the quarter where all the verticals or industry place 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 6-month period, the margins in the segment were 23.5%. And I think that that's pretty damn good. And my sense is that if we continue to catch this high growth, we'll probably be towards the high end of the overall range we've given you. But we don't want to overpromise something. And I think it's better to way 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 book-to-bill for the company in the quarter or maybe just trends you're seeing in bookings because it clearly sounds like acceleration in defense is what we're seeing across both the segments.

Yes. 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 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 -- 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 those of the needs of allies, and we're very optimistic on that.

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 1% 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 imply to you is that the rest of the business is keeping pace, too. They are -- all the verticals are growing at a really nice clip. So it's not just defense that's pushing the card up the hill, if you would. It's all the verticals really firing on all cylinders.

We'll take our next question from Jonathan Siegmann with Stifel.

Great results. On the comments on missile defense interceptors, just would you've in the past mentioned rate positions on some of the exquisite programs like standard missile and PAC-3. You also mentioned having some supply arrangements with some of the new emerging players. Is that specifically in missile defense, is your product competitive? Any kind of how does that rank in the growth vectors for the company that you're excited about?

Yes. The -- 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. I wouldn't -- 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 we'll continue a growing business for us as it will be of the overall market. I don't think the historical programs are going away anytime soon. I think they still have a very important role, but the defense tech ones will continue to grow.

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 -- the Unmanned missile business. So I think that continues to remain very strong. I mean don't get me wrong that the exquisite legacy programs continue to be of tremendous importance to us and 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.

And then I'll just slip another fun one for you. Just there is a proposal to go to just reporting earnings twice a year instead of 4x. Given the lumpiness in the results. 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.

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. There's -- there are advantages and disadvantages to east. So I think we'll have to really understand those better. But I wouldn't -- I don't think we made up our mind.

Yes. And this is Eric. I can say that from an operational perspective, reporting quarterly, I think it's a good thing because it gets people 4 times a year to hurry up and get things done and to make sure they close out the quarter strong. And if they only have 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 semiannually. 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 my 2 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-term short-termism and 90-day slots of time and an overfocus on that. So we're going to have to discuss that and review the advantages and disadvantages.

We'll take our next question from John Godyn with Citi.

Eric, I wanted to just maybe ask like a bigger picture question about this idea of peak aftermarket. That's, I would say, skeptics are focused on basically whether 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 mis-call you, but never been more optimistic about S future, I heard you say customers are clamoring for parts. So there's obviously just a big delta there. I was hoping you could just take a second to reflect on it. what are the skeptics missing because you've been doing this a long time, and as you mentioned, set a lot of records along the way.

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 a buy to a company like HEICO. Because the newer generation of equipment that we are coming out with is significantly more expensive than the order generation that it is replacing, number one. And number two, there's a lot more of it. So I heard people say, oh, 757 is -- and the engines on it is very important to HEICO. Excuse me for saying this, but that is BS. That is just absolute nonsense. There is 0 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 HEICO, I think the reason why I am more optimistic about the future is because I see all of these products, and I see how expensive they are. And that's why I think we're going to do very well. We have a new product development generation ability. And that new product development area, it has got more product than they can possibly handle in speaking with our operating folks last week and going over the backlogs in those areas. I mean we've got more parts than we've ever had, and we have customers literally begging us to do significantly more. And with the price of the new generation equipment, I think we're going to do extraordinarily well. So that's why I'm very optimistic. People who are in the parts trading business. I think they've got a different dynamic that is not HEICO's dynamic.

Yes, we have small parts trading an extremely successful parts trading business within HEICO, 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.

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

I have three questions. 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. Like how do you think about what really accelerated versus Q1 and how that demand continues in your various end markets within ETG into the second half.

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 toast and some avocado. But -- and what did ETG for breakfast, maybe it's money. But in all seriousness, and I thank you, by the way, for your generous comments. In all seriousness, we -- 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 just -- we have a very strong order book. It continues to grow. And that's a reflection in all the markets, interestingly enough, I guess, at the end of the day, it comes down to a combination of two things.

One, what we get what we design and sell to our customer, 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 ForEx, how can you 10x your production and 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 like a lot of misconceptions about what's going on in the aftermarket. Any color you could give us whether that's geography or when the aftermarket, and it's still hot when the aftermarket was really strong people thought about engine versus airframe? Like how are you seeing demand changes as capacity utilization comes down?

Yes. We're seeing tremendous demand across the business. Our PMA business is roughly 3/4 nonengine, roughly 1 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 that -- 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.

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

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

Maria, I'm sorry, the phone had cut out, you're saying with regard to which?

Can you hear me better?

Yes.

Perfect. So on aeroderivative engine, the industrial ones. You have teed business for an entire quarter, what were the surprises both to the upside or the downside as you get deeper into that end market?

Yes. We are very excited about that. I mean as you've seen, the aeroderivative market is incredibly strong. The industrial gas turbine market is very strong. Those are the two areas that Ethos, which is now part of Encore satisfies. And we think that that's going to be a very, very strong market for us. We've been working on this for a while, studying that business and negotiating on the transaction roughly a year ago.

So we're just divided that it's part of the HEICO stable. I think they've got 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 in and HEICO 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 Montana 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 sourced for resiliency what is the role you want to play there? Where -- what areas are you looking at? And how competitive you could be in a market that I could imagine is relatively expensive today?

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, a few people 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 the business for maybe decades, and in a sense, their name is on the door. They love the business. They want an owner is 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 10-K, we have third -- 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 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, 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 what doesn't. And I can tell you that the aerospace and defense industry is littered with private equity and other corporate deals where people overpaid and they are significantly underperforming. And HEICO has been very careful to not go into those pitfalls. And as Victor said, when we find a business that is looking for a long-term owner, there is no better home than HEICO.

And I think with regard to pit falls, 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 1 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 it's hard to mimic if it's not like coming from within. If I may, one more follow-up. On this new agreement, you mentioned the framework agreements before. There is a lot of like talk around like cash neutrality, but you generally don't approach businesses that way. You actually care about like operating profit and free cash flow generation. What is your appetite to acquire businesses that are less profitable than your core, at least for the near term?

Look, as a rule of thumb, we don't like to acquire businesses with less than a 20% operating or we call it EBITDA margin. There have been exceptions to that, which we've made where we felt that the margin would improve where 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 it's really a matter.

I think the U.S. government would be well served with regard to these multiyear framework deals to make sure that the industry has got the money, can really rely on that because if you look historically, within aerospace and defense, it 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 multiyear 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 really impacts.

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

This is Matt Martello on for Scott Mikus. One more question for Eric. So you acquired the 777 AMS and 737 NG via product line day product lines a little over a year ago from Honeywell. So you now support Boeing's new builds on the 777 classic and 737 NG derivatives like the PA E7 in addition to servicing the aftermarket. If Boeing and Airbus were to launch next-gen narrow-bodies later this decade or in early 2030s, would your operating units bid for work packages, so they're specked into the program from inception?

First of all, I have to complement you with your knowledge of the business because it's exceptional, and you know it. And you're absolutely correct in everything that you said. And yes, we definitely would -- I can't comment specifically on whether those particular products, we would bid in terms of work packages. But I can tell you, across HEICO. We do have very good capability to be able to develop additional products. And for example, in our Gables engineering subsidiary, and they've got the ability and our -- I think, would be a phenomenal partner to develop additional products for both the airframers as well as for the avionics subsystem suppliers.

We are in a great position to be able to support both and that's what 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 AMS and the VA 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. More over at HEICO parts and repair, who made all of this happen.

And we'll take our next question from Gautam Khanna with TD Cowen.

Thank you. Good morning, and great margins. Just a follow-up on your earlier comment about a bit of a pull forward on sales. Did you -- could you quantify how much you think that was not just from a margin standpoint, from a sales standpoint.

Yes. Gautam, it's Eric. It's about roughly between $15 million and $20 million.

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

The simple one-word answer to that is yes. when we have in many different markets. I mean you 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 HEICO. We've got a lot of customer goodwill. We've got the ability to design these parts and repairs. The customers want it.

We are not a threat to our OEM competitors we're also in the OEM business. This just supplements what they do. there's always a demand. Some people want to stay in whatever the Ritz-Carlton and the Four Seasons and other people have a budget whatever, for a Marriott and the Hilton. And we, at HEICO can support both. So I think in the -- on the commercial side, we're very strong on the defense side, incredibly entrepreneurial and high-performing cost conscious, high-quality and we've got tremendous ability in that area and tremendous ability to scale. So I think we're just in a very good place.

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

Same answer. Yes. Yes, that 100%. They are -- because they realize if you continue doing what you've done in the past, you'll get the same thing. And 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, HEICO's 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 -- okay.

With the exception, I mean I have mentioned about, of course, the Middle East, that's a little bit lower, but in general, your statement is correct.

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

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

Yes, 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 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 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 on 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 or 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 nothing -- there's not one area that I would call out as being more impactful than the other, it was just a solid push across the entire platform.

We'll take our next question from Louis Raffetto with Wolfe Research

So maybe, Carlos, you talked about the GAAP margin for 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. I do think that what we're seeing now -- two things with the incredible growth that we're seeing in our aftermarket business and the surge, if you would, in some of the military business in the FSG, I do think that we've got a little bit more of a stable margin lift. If I was impressed to give you a range, my thinking right now is probably 24% to 26% is that those two end posts that I think will float between. And depending on any given 90-day period, if we have one vertical outperforming the other, we'll migrate to the high or low end of that range. But I think that's kind of where we're at. And yes, it's my thinking on that has come up a little bit from prior quarters.

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, was that -- does that flow through the specialty products? Or is that through the parts, 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 was just curious, the incremental kind of $15 million to $20 million of pull forward was that flowing through your specialty products? Or is that flowing through the parts business?

Yes, that would be probably be a little bit in both the way we end up accounting for it. But it was all defense. It was all of the defense market.

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

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

I'd say we're in the 500 area, and we've got the ability to do more. We've got to scale the whole thing. 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 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, sometimes we do so in conjunction with our principles.

So sometimes they hold the PMA, sometimes we hold the PMA. And the other thing which is really important is the DER repairs. Because the DER repairs basically can frequently or very frequently perform the same function, the same effective function as the PMA part, and we achieved the sales through that channel.

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.

Welcome to the HEICO 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. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements.

Factors that could cause such differences include, among others, the severity, magnitude and duration of public health threats, our liquidity and the amount and timing of cash generation, lower commercial air travel, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase in our cost to complete contracts; governmental and regulatory demands, export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; 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 HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement 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, HEICO's Co-Chief Executive Officer.

Thank you, Samira, and good morning to everyone on this call. Thank you for joining us, and we welcome you to this HEICO First Quarter Fiscal '26 Earnings Announcement Teleconference. I'm Eric Mendelson, HEICO's Co-Chairman and Co-CEO. I am joined here this morning by Victor Mendelson, HEICO's other Co-Chairman and Co-CEO; and Carlos Macau, 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 HEICO's 2025 fourth quarter results. So we thought our listeners would appreciate a little insight into HEICO before we discuss HEICO's 2026 first quarter results.

Obviously, HEICO's 2026 first quarter results reflect continued growth, and we are very proud of them, especially considering that only 36 years ago, HEICO had only $25 million in revenue, $2 million in earnings and 200 team members. Our dad, Victor and I would often question ourselves, how is our 36-year 23% compound annual growth rate in share price possible, especially when we were rarely leveraged at more than 2x 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 the same. 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 is 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 2 of the many things that HEICO has done routinely over decades and why we've never had a onetime 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. HEICO 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 HEICO's secret sauce as you listen 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. HEICO'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 HEICO'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 HEICO 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 noncontrolling interests was $21.8 million or $0.15 per diluted share as compared to $26.5 million or $0.19 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 benefit from 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 HEICO 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 HEICO. 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 1.79x as a result as of January 31, '26, as compared to 1.6x as of October 31, '25.

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 HEICO's long-term value. In January '26, we paid our regular semiannual cash dividend of $0.12 per share. This represented our 95th consecutive semiannual 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 Axillon Aerospace's fuel containment business, which was renamed Rockmart Fuel Containment. Rockmart designed to manufacture 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 Rockmart has joined HEICO family, and we are very excited about their future contribution to HEICO'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, aeroderivative gas turbines, 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 in 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 HEICO 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% book continuing 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, HEICO'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 HEICO 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. .

The 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 EBITA, 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 of 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 product -- 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 of fiscal '25 as compared to 23.1% in the first quarter of fiscal '25 -- excuse me, 19.8% in the first quarter of fiscal '26 as compared to 23.1% in the first quarter of 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 margin. 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 HEICO's core strengths is identifying high-quality businesses that complement and reinforce our strategic positioning. We believe HEICO is the preferred buyer for sellers seeking a great home for their businesses.

Consistent with our long-standing acquisition philosophy, we will only pursue opportunities that meet our strict financial and strategic criteria are accretive 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.

[Operator Instructions]

And we'll take our first question from Larry Solow with CJS Securities.

I guess first question for Victor. Just I think maybe the ETG is putting a little pressure on the shares this morning. It sounds like and I know you referenced Q1 '24, 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 remediation and we could balance right back to the low to mid-20s range for the year. Is that fair to say? .

Yes, 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 we get at times, we get the perfect storm of good shipment schedules. And sometimes, we got the perfect storm of unfortunate shipment schedules. But -- and that's why we really guide people to look at the full year on the ETG particularly as it moves on throughout the quarters. And the experience we had on this -- it was in 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 on the -- as the year is pretty exciting. Of course, we'll have to see. There are no guarantees I always say in life. But right now, I'm feeling good about what our companies are telling us, feeling very good about what our companies are telling us.

Right. It feels like a great environment for a lot of your companies, right, the defense...

Yes. 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 the mix of what's been growing is a nice mix overall. So feeling good about it and nothing is ever easy, but feeling good about it.

Yes, sure. And while I got you Victor, a pretty nice size acquisition, I guess, renamed Rockmart Fuel. I think it's your third largest ever in HEICO history. So any more color on this? Is this your usual sort of type multiple and accretion we should expect over time?

It's a very nice business. It is a -- it's a supplier and has done a lot of business with one of our other subsidiaries, Robertson Fuel Systems. They will be operating steadily, but there's a lot that they can do to do for each other in terms of production, moving 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 streamlined and easy.

I think it's -- and 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 a replacement cycle that appears to be growing. We appear to be in the early innings of that. So we're pretty happy with it. As we said, and we expect it to be accretive to earnings in the first year of ownership. We've only owned it for about a month. So so far, it's so good. And I won't declare victory or anything else based on 1 month right now feeling pretty good about it.

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

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 organic growth, likewise in 2024 as well. I'm particularly proud of these results given the high comps that we had in the prior years. We had very high comps basically for the last 4 years and to post 12% organic growth on top end, I think, is really outstanding.

And if you will, we don't stuff the channel. There is 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.

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

Nice results as usual. 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 HEICO, given all the demand for LEO market?

Yes. It's a very good question. Originally, the business was more heavily geo and over time, I would say now we're more heavily LEO and that -- in the businesses that were geo originally. Shifting to LEO isn't cheap, right? Margins are less. There's a lot of different that goes into that. And -- but that -- I think we're getting through, if you will, the sort of the other side of that over the course of this year. And 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. So -- 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 probably noticed that we've. We've been careful how we've grown in space for that reason.

Got it. I appreciate the color there. And then, Eric, just briefly give a little commentary that a competitor bought a PMA business. And obviously, you guys still think are kind of the leader in PMAs. Is this a deal that had overlap with you? Or how should view of that?

Thanks, Peter, for your question. Well, you know how the old saying goes, imitation is the highest form of flattery. And for years, 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 in distribution and all the things we did. And those people who were smart enough to invest in HEICO 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 HEICO's competitive positioning. And we feel very strongly about HEICO's competitive positioning, where 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 HEICO, 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.

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

Yes, Eric, maybe just wanted to follow up on your just comments there. I think there's a belief that PMA represents one of the real secular growing markets coming out of the 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 HEICO either in markets you typically haven't been in? Or maybe with customer sets or any other way you look at the market to help us better frame how PMA is actually really doing broadly and for you, obviously, here as we continue to see the recovery?

Yes, 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 HEICO was doing in the PMA space was 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.

We are very committed and have never been more excited about the PMA business than we are today. We are -- 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, I mean, 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.

And we've spoken about this for many years, why don't the airlines buy even more, 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 at COVID, they recognize what we've said all along that PMA isn't only about price, it's about a turn time 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 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 engineer the component.

If times were good and they had funny 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 HEICO provides not only top quality and outstanding value and cost savings, but we also provide availability. And this is something that has become front and center since COVID. So we're happy about that. When you look at the U.S. specifically, the products that we're doing, our sales in the PMA business are roughly 3/4 nonengine, 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 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 HEICO is going to do extraordinarily well in our PMA and repair business as we help airlines reduce their costs and keep them somewhat manageable and provide an alternate source of supply. I can't get into obvious specific product types or manufacturer types for competitive reasons. We'd rather just go do our thing and satisfy the airlines.

Yes. I appreciate all the color, Eric. Just to put a finer point on that. Yes.

I might just add to what Eric just said, just to maybe put a few leafs on the tree, if you would. Our organic growth in our aftermarket business, which is 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 and get 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?

Yes. We are seeing shifts in customer option adoptions the airlines recognize they need this. 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 HEICO tremendously.

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

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 Eric, how do we think about those distributions happening? Because I think you were mentioning it and why was it A stock versus the common stock?

Yes, 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 -- it was a small quantity of A shares, and they wanted to feel like owners. It was their request.

They -- yes. And look, sometimes we do this because people are very happy to own the HEICO stock. The request was for 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 be in. 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?

Look, we continue to expect 22% to 24% GAAP 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. 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. .

And by the way, Sheila, just to expand on what I said about Ethos. The sellers recognize that this market 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 aeroderivatives gas turbines, they really wanted to be compensated. And they the request for HEICO A shares was in order to help reward them.

We're very excited. Everybody is very knowledgeable about what's going on in the power generation space. And Ethos has incredible capabilities in developing and executing on partial repairs, component repairs and the access to that market. They've got 3 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 HEICO, I think that it's going to provide HEICO with the ability to access what is, 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 something additional. And we were able -- the other thing which is important, it's very easy to buy companies, but to buy companies at prices where it's accretive in 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 entitlement.

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

Victor, there's some elevated inflation right now in certain parts of the microelectronic 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 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 items that are in the backlog.

It is what I would consider a headwind, but more in the noise level and not particularly notable. And by the way, varies business by business. But overall, on a consolidated basis, more in the noise level.

Okay. Are you generally able to get all the products that you need like a supply chain itself? Or is it just a cost this year?

I would say it's essentially normal 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 -- but for the most part, everything is 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. We're alternatively do you think AI could help yourself for your airline customers better query parts catalogs and identify new maybe previously unexplored PMA opportunities. Just trying to better understand how HEICO can use AI to sustain or even accelerate growth .

Yes. That question has a lot of insight. And I think the answer is definitely with regard to both developing new parts, streamlining processes. It 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.

So we're already using it in the operations at HEICO. 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 look at the HEICO performance rate, our quality rate, our quality rating, how happy everybody is with us. I think that it will be a continued tailwind for HEICO.

I mean there's no reason why customers aren't buying more of our product line. And I think AI will accelerate our growth.

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

Just as a follow-on here. If you looked at some of the evolving contract structures that are going on with some of the big defense primes there, in particular, the 7-year framework agreements. So far, we've seen a handful of Lockheed, a bigger handful of 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 7 years? And how does that impact your business and how are you thinking about it? .

Yes. 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 on capacity, we've got really good capacity availability. It's usually a question of hiring people and bring more people in and figuring we do that in different ships. 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 -- 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 products?

Got it. Got it. Got it. And then we've talked about some supply chain stuff. I mean have you had any impact from critical minerals or magnets or whatever else? And how you've been managing that in the places where you do?

Yes, it's 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 some of the 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 how is 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?

Yes. 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 has 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 as Victor said by differentiating ourselves and providing the best home for the seller that has tremendous value. 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 HEICO has 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, et cetera.

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 the -- some of the prices of switching topics for a moment of some of what I believe are the defense tech businesses, I think they're extremely exaggerated. And 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, it's just not what HEICO is about and not what we plan on doing.

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

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 and how fast they are moving inventory as the pace picked up as airlines perhaps for the summer travel season?

Yes. The -- I would say the inventory levels are very consistent to what we've seen in the past. There are certain parts that can be 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 supporting the demands of the aftermarket. And -- but I really sort of see it very much as business as usual and not much of a change for HEICO 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 1 year into the current administration. Have 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 PH and KC-46?

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 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 look at the President's defense budget and something has got to be a bill payer for these tremendous increases. And this is very logical. And 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 in that regard.

I'll take our next question is from John Godyn with Citi.

Here. Eric, I wanted to follow up on the energy business and Ethos and what you did there. You offered a number of data points in breadcrumbs. We see different companies across A&D, attacking this in different ways. I just wanted to talk about the picture, but the types of questions in 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 they'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. 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. If you look -- 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 aeroderivative. 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.

As far as the aeroderivative connection. I mean that makes a lot of sense. Everybody is very familiar with about HEICO does and really what we can bring to some of the aeroderivative parts should customers want that as well on the industrial gas turbine parts.

Both on the IGT and the aeroderivative, Ethos has very strong OEM relationships. And they have -- 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 to try to form them with different companies.

And if not, we think 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, veins, all sorts of very 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 HEICO. If HEICO were to try to enter the industrial gas turbine or the aeroderivative market on its own, it would be extremely difficult.

We didn't 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 HEICO over -- in the fullness of time, that as symbolically, we might even have an IGT 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. It really -- I would say it's in early innings right now. The company has got great capability, great people, 3 locations and I hope what you're saying is correct, and I'm sure that our team members at Ethos and at Wencor are listening to this call. And they are inspired by your question and outlook for it.

And we'll take our next question from Matthew Akers with BNP Paribas.

Most of mine have been asked already, but I wanted to just touch on the balance sheet and just how you feel what point times leverage obviously has come down quite a bit since Wencor, 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 how kind of how you're thinking about the balance sheet here?

I'm happy to take that question. Our leverage right now is under 2x. So I'm very comfortable at this leverage point. And 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.

And so we'll still use that type of a structure. Right now, our permanent debt or the bonds that we have are running less than 1 turn of EBITDA. So I think our capital structure is quite flexible, and we're not capital constrained. So from a balance sheet perspective, we could go higher on leverage.

I think if we did that, it would be very opportunistic and there have to be a pathway to generate significant cash to bring us back down in the 2x, 2.5x leverage ratio, I mean, I would think that, that's something that's doable for us.

I don't think HEICO is going to be a 7x levered 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 2s over a reasonable period of time, we would certainly consider that and execute on if it was good for our shareholders.

I think that's really helpful. Yes. No. And then I guess just one on ETG. I guess was the government shutdown at all related to any of the mix 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 we'll pick up the benefit of that later on in the year. But I wouldn't call it a material impact.

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

We have Max Miller on for Gavin.

It's pretty clear that a lot of the tightness in the aftermarket and some of the OEM pricing, you're seeing actually increases the value proposition of HEICO alternatives. If we hypothetically flip that script, what are the implications for HEICO in a world where maybe the new aircraft come online, some of the older platforms come out of the fleet and aftermarket or at least the fleet age begins to normalize a little bit. Does that change the math for PMA utilization and where you see HEICO thriving?

We don't think so. I mean our business is always impacted by first and foremost, the growth in fleet hours or available seat miles. And then it is 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 1 year per year. And the do a really good job of making sure that they escalate prices very aggressively to make up for any of that to take advantage of that.

And then when you look at the fleet retirement that typically hasn't been a big part of -- 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 the same line LRU on an older aircraft versus a newer aircraft, the newer ones are significantly more expensive. So all of this is to say, I think -- 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.

We'll take our next question from Michael Ciarmoli with Truist.

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 generating a materially more amount of parts thinking that they've got life after or additional life besides kind of in the traditional aircraft market?

Yes. I think definitely. When you look at the aeroderivative market, there is tremendous life in repurposing those engines. There are many companies doing that, whether it's on some of the old CF6s or the CFM56 is, but the use of the HEICO parts in those repairs and overhauls is, I expect going to be substantial. So I think that there is a very good tailwind for us there.

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

Congratulations on the quarter. Just one for Carlos. Just looking back at space organic growth in the Q 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. Can you -- in this Q, can you preview what that decline is?

The decline was -- 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 a result of order volume kicking down or backlog not being. It's really just a function of shipments always is it 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 that has to do with that great strong comp last year. And the other question I 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, John. It's a good question. The answer to that is yes. We picked up a number of 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.

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

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

Well, first, Tony, thank you very much for joining us and for your comments and very much appreciate them. In terms of the outlook for us, the impact on first question, you're aware 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 multiyear buys that the government is doing on programs we're on, 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, 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 -- 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. There's no Golden Dome department. You don't get a letter head that says Golden Dome is sufficiently golden done. 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 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.

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

Maybe 1 for Carlos. Just the stock comp expense was pretty high in the quarter. I know it was sort of called out in the press release as well. Just curious, does that level continue throughout the year? Or is it -- does it step down? Or does it ramp up?

It'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 and what winds up happening is when -- normally, our options historically have just been time-based, invest over 5 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 will happen is we'll probably catch a little bit more of that elevated expense in the front half of this year and then it will 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. Yes. I know how much you love all the accounting on that. 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 at some point, do you see some other potential portfolio action as making sense?

Yes. Listen, we've been able to adjust and grow with the business. And more, 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 multisite situations, for example, and they are leading groups, and we've been breaking this down into groups 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.

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 ask questions, -- we are always available. It's Eric Victor 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 for your participation. You may now disconnect.

Welcome to the HEICO Corporation Fourth Quarter 2025 Financial Results Call. My name is Samara, and I will be your operator for today's call.

Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements.

Factors that could cause such differences include the severity, magnitude and duration of public health threats, such as the COVID-19 pandemic; HEICO's 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 to our cost to complete contracts; governmental and regulatory demands, export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales; 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 HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements 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, HEICO's Co-Chairman and 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 HEICO's fourth quarter fiscal '25 earnings announcement teleconference. As you heard, I'm Victor Mendelson, HEICO's Co-Chairman and Co-CEO. I am joined here this morning by Eric Mendelson, HEICO's other Co-Chairman and Co-CEO; and Carlos Macau, our Executive Vice President and CFO.

As we start this call, Eric and I would like to take a moment to remember our father, Larry Mendelson, whom you all know was long HEICO's Chairman and CEO. As sons, we were beyond blessed to have a unique and loving father who instilled in us from our earliest days values and life methods based on fairness, on excellence, on quality. And as our father used to say, just doing the right thing.

Of course, these values and life methods apply in business too. And as a businessman, he knew how much these matter, along with a fixation on real earnings, that is to say cash flow. Many of you on this call will remember his unrelenting emphasis on cash flow, not artificial GAAP metrics, although he always lived by those GAAP metrics and enforced them. He knew what really mattered.

Eric and I were also blessed to have been partners with our father from well before the 3 of us became HEICO's largest shareholders. and mounted our effort to take over management. And by the way, in a few weeks, we'll mark the 36th anniversary of our taking over here. Working with him to build HEICO day in and day out was a pleasure and an honor that you get to experience. And I can say that through his example, not only were Eric and I imbued with these values, these life methods and his business approach, but more important, all of HEICO, all of HEICO became so imputed.

That was his succession plan, and was nearly always -- as was nearly always the case with our father, it worked perfectly. Our father is profoundly proud of HEICO. He was also one of the greatest optimists we ever knew. And in his closing days, even after nearly 36 remarkable HEICO years, he was more optimistic than ever about this company's prospects. I can tell you that we and the HEICO team share that optimism. And I can also say how grateful we are for all that we learned from him.

Thank you for indulging us for a few moments there.

Before turning to our fourth quarter fiscal '25 record-setting results, which you know capped another exceptional year for HEICO, we recognize our team members' extraordinary efforts. Our team members' dedication to our customers, our endeavors across the organization were the reason for our very strong results this quarter and this year, leaving us quite optimistic about HEICO's future. We and HEICO's Board thank you for all you have done in 2025 and before. And we look forward to an even more prosperous 2026.

So taking a moment to summarize our record results during the fourth quarter of fiscal '25, we note, first, that consolidated net income increased 35% to a record $188.3 million or $1.33 per diluted share in the fourth quarter of fiscal '25, up from $139.7 million or $0.99 per diluted share in the fourth quarter of fiscal '24. Consolidated operating income and net sales in the fourth quarter of fiscal '25 represent record results for HEICO, which improved by 28% and 19%, respectively, as compared to the fourth quarter of fiscal '24.

The Flight Support Group set all-time quarterly net sales and operating income record in the fourth quarter of fiscal '25, improving 21% and 30%, respectively, over the fourth quarter of fiscal '24. The increases principally reflect strong 16%, strong would be an understatement, but 16% organic growth, stemming from increased demand across all of the group's product lines as well as the impact from our profitable fiscal '25 and '24 acquisitions.

The Electronic Technologies Group also set all-time quarterly net sales and operating income records in the fourth quarter of fiscal '25, improving 14% and 10%, respectively, over the fourth quarter of fiscal '24. These increases principally reflect strong organic growth for most of the group's products and the impact from our profitable fiscal '25 and '24 acquisitions.

Consolidated EBITDA increased 26% to $331.4 million in the fourth quarter of fiscal '25, up from $264 million in the fourth quarter of fiscal '24. And our net debt-to-EBITDA ratio improved to 1.6 as of October 31, '25, down from 2.06 on October 31, '24.

Cash flow provided by operating activities increased 44% to $295.3 million in the fourth quarter of fiscal '25, up from $205.6 million in the fourth quarter of fiscal '24. Yesterday, HEICO's Board of Directors declared a semiannual $0.12 per share cash dividend on both classes of HEICO stock, payable in January 2026, representing our 95th consecutive dividend and reflecting the Board's ongoing confidence in our company's strong cash flow generation.

We completed 5 acquisitions in fiscal '25, 3 in the Electronic Technologies Group and 2 in the Flight Support Group, further enhancing our sales, our earnings and our cash flow. Each of our Flight Support and Electronic Technologies groups recently entered into agreements to acquire 2 separate and unrelated businesses, 1 of which, Ethos, was just announced earlier this week. As of now, we anticipate both should close in the first quarter of calendar '26, though they are, of course, subject to customary closing conditions, including, among others, antitrust clearance and the sellers complying with typical representations and covenants. So we can't be certain of actual timing or actual closing. We expect these acquisitions would be accretive to HEICO's earnings within the year of each transaction's closing.

I now turn the call over to Eric Henderson to discuss our Flight Support and Electronic Technologies groups' fourth quarter results in greater detail. Eric?

Thank you, Victor. Before we turn to the results, I want to pause and recognize the remarkable performance of HEICO's team members. What we are reporting today is the product of extraordinary talent, relentless execution and a culture developed over decades that consistently turns ambitious objectives into real outcomes. Time and again they have demonstrated the ability to rise to the challenges, adapt and deliver at the highest level. Their commitment, collaboration, determination and creative approach are the foundation of these results and make them especially rewarding.

We are all sure that our dad is looking down on us today as we report these outstanding results and we close our 36th year with HEICO. As Victor said so eloquently a few moments ago, we are both so grateful for all that we learned from our dad and from all the time that we had with him.

Now moving on to the results. The Flight Support Group's net sales increased 21% to a record $834.4 million in the fourth quarter of fiscal '25, up from $691.8 million in the fourth quarter of fiscal '24. The net sales increase reflects strong organic growth of 16% and the impact from our fiscal '24 and '25 acquisitions. The net sales growth reflects increased demand across all of our product lines.

HEICO's operations continue to exceed our expectations, underscoring our highly successful combination with Wencor. Customers increasingly recognize the value of our expanded aftermarket parts and repair and overhaul offerings, which has driven strong growth opportunities and continued success across the company.

The Flight Support Group's defense business remains a compelling opportunity, particularly as both the U.S. administration and our foreign allies emphasize defense readiness and cost efficiency. HEICO is extremely well positioned to support these priorities by delivering high-quality, lower-cost alternative aircraft parts that help reduce costs for the government and taxpayers while expanding our addressable markets.

Our missile defense manufacturing business is also experiencing very significant growth, fueled by rising demand from the United States and our allies. We have substantial orders and backlog to support the continued expansion of this business, and we are committed to providing cost-effective solutions in industry-leading quality to our U.S. military and our foreign allies.

The Flight Support Group's operating income increased 30% to a record $201 million in the fourth quarter of fiscal '25, up from $154.5 million in the fourth quarter of fiscal '24. The operating income increase reflects the previously mentioned net sales growth and improved profit margin and SG&A expense efficiencies realized from the net sales growth. The improved profit margin principally reflects net sales growth within our repair and overhaul, parts and services product line and a more favorable product mix within our specialty products product line.

The Flight Support Group's operating margin improved to 24.1% in the fourth quarter of fiscal '25, up from 22.3% in the fourth quarter of fiscal '24. The increased operating margin principally reflects the previously mentioned improved gross profit margin. Since acquisition-related intangible amortization expense consumed approximately 250 basis points of our operating margin in the fourth quarter of fiscal '25, the Flight Support Group's cash margin, which is before amortization, or what we also call EBITA, was approximately 26.6%, which has been consistently excellent and is 160 basis points higher than the comparable Flight Support Group cash margin of 25.0% in the fourth quarter of '24.

As I have previously discussed, we are laser-focused on cash generation at each of our businesses. I am very happy with the continued expansion of our cash margins and believe the decentralized operating structure has permitted us to expand these margins while simultaneously delivering high-quality products and services to our customers at substantial cost savings with lightning-quick turnaround times.

Now I will discuss the fourth quarter results of the Electronic Technologies Group. The Electronic Technologies Group's net sales increased 14% to a record $384.8 million in the fourth quarter of fiscal '25, up from $336.2 million in the fourth quarter of fiscal '24. The net sales increase reflects strong organic growth of 7% and the impact from our fiscal '25 and '24 acquisitions. The organic net sales growth is mainly attributable to increased demand for our other electronics, defense, aerospace and space products.

The Electronic Technologies Group's operating income increased 10% to a record $89.6 million in the fourth quarter of fiscal '25, up from $81.8 million in the fourth quarter of fiscal '24. The operating income increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by higher SG&A expenses, mainly reflecting increased share-based compensation expense. The improved gross profit margin principally reflects a more favorable mix of our medical and other electronics products.

The Electronic Technologies Group's operating margin was 23.3% in the fourth quarter of fiscal '25, as compared to 24.3% in the fourth quarter of fiscal '24. The operating margin change principally reflects an increase in SG&A expenses as a percentage of net sales, primarily from the previously mentioned higher share-based compensation expense, partially offset by the previously mentioned improved gross profit margin. Importantly, before acquisition-related intangibles amortization expense, our operating margin was a very healthy 27.3% as intangibles amortization consumed around 400 basis points of our operating margin. This is how we judge our business as that most closely correlates to cash. On a true operating basis, these are excellent margins and we are very pleased with them.

And now I turn the call back to Victor Mendelson to discuss our outlook.

Thank you, Eric. Looking ahead to fiscal '26, we anticipate net sales growth across both the Flight Support Group and the Electronic Technologies Group, driven by organic growth from increased demand for the majority of our products as well as growth through our recent acquisitions. We'll continue to pursue selective acquisition opportunities to complement this growth. And our disciplined financial management remains dedicated to creating long-term shareholder value through a balanced combination of organic growth and strategic acquisitions while maintaining financial resilience and flexibility.

Acquisition activity, of course, continues to be robust across both operating segments, supported by a healthy pipeline of potential acquisition opportunities currently under evaluation. And as such, we remain focused on identifying high-quality businesses that complement HEICO's existing operations and, of course, further strengthen our strategic positioning. Consistent with our longstanding acquisition philosophy, we will only pursue acquisitions and opportunities that meet our strict financial and strategic criteria, that are accretive and have the potential to generate durable long-term value for HEICO and for our shareholders.

So thank you very much for attending our call. Those are our prepared remarks, and we ask Samara, the operator, to please open the line for questions.

[Operator Instructions] And we'll take our first question from Larry Solow with CJS Securities.

Great. I appreciate the comments on Larry, and I'm sure he's smiling down on the really strong free cash flow this quarter. So congrats on that.

First question, Eric, I guess, for you. Just on the growth in -- as we look out at FSG, I think we used to do U.S. sort of a high single, low double-digit grower and growth in mid-teens plus on the core business for about 5-plus years. Maybe the first couple were COVID recovery. But just trying to -- as we look out, it feels like all the positives continue to align in your direction. But could you just help us just kind of bucket what these drivers? Clearly, the market is growing nicely, but I don't know if growth has accelerated above historical levels where we are today. But is it just your expanded parts offering? Is it market share? Is it just more acceptance of your parts? Just trying to -- if you could just bucket those multiple positives that's been driving your business.

Sure, Larry, I'd be happy to do that. And thank you very much for your kind comments. Yes, we're sure dad would be very, very happy with these results. I'm sure he is. So you're right, the organic growth has been tremendous. And frankly, it's even surprised us and me. I've always been optimistic and I've always thought that we would continue to outgrow the market, but we continue to do so in a much more meaningful way. So you're right.

Why is that? I think it's a number of things. Number one, of course, we want to be grateful for the rising tide environment in the industry. So that's been terrific and that's been very strong for us.

But I think the other thing that's been really good is the value proposition that HEICO offers our customers. The thing that perhaps I'm most proud about is that we've had 16% organic growth in this quarter and another 5% acquired on top of that, for a total of 21% sales growth. but operating income increased 30%. And at the same time, our customers are incredibly happy in getting huge value from us.

So we've been able to drive operating income, if you will, primarily off of the organic sales growth, and our customers are still very happy. So I think that speaks to a tremendous sales opportunity that we have really in all of our businesses, whether it's in the PMA parts, repair, distribution, specialty manufacturing, defense, the same. And I'm talking over on the Flight Support Group side, and then, of course, on the ETG, more growth opportunity there.

But I really think it's the value proposition that we offer combined with our decentralized and very entrepreneurial structure. I get e-mails after we announced the earnings from a number of different people within HEICO, and basically thanking me for the incredible results. And I turn around and say, "No. Yes, we've been very good on capital allocation, but they are the ones who really deliver these results." We're just reporting the results that they deliver. And it's as a result of being very intimate with their product line, understanding their customers, the whole competitive dynamic. So I think that as there are more aircraft out there and there's increased demand in both commercial aircraft as well as defense products and missile interceptors, I think that we are just incredibly well positioned.

So look, the organic growth has surprised me. That's one of the reasons why we don't give guidance, because we don't know where it's going to be. We just know at HEICO that we've got 11,000 people come to work every day, put their heads down and work as hard as they possibly can, and frankly, the results are the results, so -- but I do think that the value proposition is tremendous.

And I guess, lastly, one of the other things that I think we've seen over the last number of years is that other manufacturers are increasing their prices substantially. And I think that just further supports the HEICO value proposition. So we're -- I think we're just in a great [ position ] right now.

No, no, I appreciate all that color, yes. No, that was great. Victor, how about a question for you, just I think you obviously had a little sluggishness last year, but a good year this year. It feels like most of your end markets, or if not all of them, now are kind of pointing up to the right, obviously, led by defense, I know the National Defense Authorization Act was just passed recently. It feels like that was positive. So any just general thoughts on state of the union on your outlook?

Yes. We're projecting growth next year in ETG. As I always do, I guide people to look for, on an organic basis, mid, low single digits organic growth. If we do better, that's great. We'll see where everything shakes out a year from now and over quarters, but we feel very good about our businesses. We did our budget reviews, our subsidiary annual reviews, and as a rule of thumb, our companies are feeling good. Not every company is going to march ahead next year in the way we'd like to see. But overall, we're very [indiscernible].

We'll go our next question from Ron Epstein with Bank of America.

And again, my condolences about your father. On the quarter itself, a couple of quick things. How are things looking for M&A as we go into 2026?

Very strong. I mean we're working on a lot of opportunities. I would say, each quarter, we seem to feel like it can't get any busier. Our pipeline is busier and busier. But that's exactly what happened at -- in this past quarter, and actually in recent weeks since the quarter ended. So we've got a lot we're working on, a lot that we're looking at.

Of course, as you know, Ron, it doesn't happen until it closes. And there's just a lot of work, a lot of diligence. We're extraordinarily discerning in what we'll buy. But there, we're fortunate in that we are known as a great home for sellers, particularly entrepreneur, founder-managers and others who are really going to take care of the businesses, not only honor the legacy but keep the entrepreneurial environment. So there's a lot of opportunity for us. We'll see what we're able to mine out. But we're cautiously optimistic.

And Ron, I would also just add to that. So we started really our acquisition program in earnest about 27 years ago. And we really acquired, I don't know, 110 companies. And we really have a track record. It's not just 1, 2, 3, 5, 10-year track record. It's a very, very long track record and DNA, which is embedded in the company.

So when we talk to sellers, I think we're viewed in a very, very different light. And as a result, we've got just a tremendous -- we got a lot of bandwidth and we also have a lot of different sellers who really view us as the buyer of choice. So I think we're in a really good position there.

Got it. And how comfortable are you guys leveraging up to do a deal given the balance sheet is so strong?

Ron, this is Carlos. So I would say, similar to history, we're not afraid of leverage. For the right transaction for the right deal for our shareholders, we would take on additional leverage. I don't think that our company, the culture and the way we do business would suggest we'd like to have permanent leverage in the 5 or 6 range. But if we had to spike up 4, 5, 6x to do a deal, and I felt comfortable that within 12 to 18, 24 months, we could get that leverage back down to a manageable number, we would certainly do that if it was good for our shareholders.

I think as a sort of status quo, we like leverage to be somewhere around 2x. That's a comfortable spot for us. Right now, we're -- our permanent debt, if you would, or our bonds are sitting at about 1 turn of EBITDA. That's very comfortable. I think we could probably carry 2 turns of debt in permanent sort of financing posture and be very comfortable at HEICO with the cash generation that we have.

Got it. Got it. And then maybe just one last one for me. How is it working -- you guys had mentioned last year about doing PMA parts for defense. And how is that going? Is there any progress on that front?

Ron, this is Eric. So yes, there has been progress on that front. But as we always said, it was really going to be more of a medium-term project. As you know, it takes a little bit of time for the government to do all the stuff that they've got to do. But we think that there is a very, very big opportunity there for us, and we're quite excited about it.

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

Eric, Victor, Carlos, nice results. Eric, you talked a lot about -- a little bit about defense and missile defense. And it's about -- if I remember correctly, defense and space is roughly about 1/4 of the FSG segment. Do you see that mix changing much just given all the growth you're highlighting?

I think actually, it's going to probably remain pretty consistent because we have so much growth over on the commercial side that they're doing a great job keeping up with the huge growth over on defense. So I think it's probably going to be somewhat consistent going forward. But I do think that there are massive opportunities for us over on the defense side. And as these -- as our customers become more familiar with our broad capabilities -- and by the way, not only our long-time large defense customers who we continue to support and have a great relationship with, but also the defense tech community, we're doing a lot of work for those guys as well and delivering huge value. We've got design capability, manufacturing capability across a very wide array of products. We're able to solve all sorts of complex problems for them. And so I think that that's just going to continue to be big opportunity for us, along with the launch business.

We've grown -- we don't -- we're very careful at HEICO, we don't talk about specific programs, specific customers, because, frankly, we don't want to give a road map to our competitors on what we're doing. And we say, just look at our results. But I can tell you that there have been very well-known companies coming into HEICO, into our specialty products group, into our other manufacturing businesses, asking to help solve some of this country's major, major problems. And we've -- really I'm super proud of our team. So I think there's a big opportunity there.

I appreciate the color. Maybe Eric and Victor, you could both comment on maybe Golden Dome. Just how you see HEICO's business kind of positioned. Obviously, there's been a lot in the classified circles and behind the scenes, not much public. How do you view the opportunity set for HEICO?

Yes, this is Victor. It's a good question. Obviously, we're excited by it. Golden Dome consists of a number of existing programs, and from what we understand, because it's not, I think intentionally, so it's not entirely publicly defined or maybe not entirely that we can discuss on a public call. But you have the existing programs on which we have great presence, and have had for years, some of which Eric is alluding to in his comments, but the same in both, by the way, both ETG and FSG within the business. And then there's a lot of reconnaissance, surveillance, tracking that's being added to it, and networking it together. And a number of our businesses have been told that some of the things they're working on, some of the development contracts they've been getting are related to that, without being able to go into the specifics on each one of those programs, of course. And subsidiaries, we'll take our customers at their word, there is no order that comes in at the top that says Golden Dome Department, right? So we will have to judge as we go down the road how much it will be.

But it's definitely additive and we're definitely excited about it. And we, of course, think it's the right thing to do for the country given the success, for example, of Iron Dome. And a number of our companies have components on a number of the Iron Dome constituent parts.

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

Very nice results. Maybe, Eric, just -- yes, just to start, you've grown FSG margins pretty substantially, about 300 basis points from '21 to -- or '22 to '25. I can appreciate part of that's been mixed with Wencor. You've also seen some opportunities on pricing in other areas. How do we think about FSG margins into fiscal '26 and beyond? And is there any reason we don't see a continued pace of improvement?

Ken, so thank you for your question. And yes, I would -- while we don't give guidance, you're right, we've grown margins substantially. And at the same time, the thing that I'm really proud about is we've kept our customers very happy at that -- while doing that simultaneously.

I do think there's continued margin opportunity. for us, continued margin expansion as we have basically greater absorption of our, what I'll call, our fixed costs, whether it's in cost of sales or SG&A. I do think that we've got additional leverage there. We've made a number of significant investments over the last number of years to broaden our manufacturing and design and distribution capabilities. And so I think we'll continue to see improved margins there.

It's hard for me to guess what that is because the truth is I really don't know. As I mentioned, I think, before, we've got this great decentralized organization and they all submit budgets, which tend to be on the, let's just say, very conservative side. So it's very hard for me to predict going forward what it's going to be. But I just know that at the end of the day, they end up outperforming.

So I think Carlos may have some additional thoughts on that.

[indiscernible]?

I am.

Ken. So here's the deal. I continue to believe that the FSG is going to play between 23.5% and 24.5% GAAP operating margins. And the reason that I have kind of a wide sort of vector there is because we have noticed and talked about some mix impacts on the margin, particularly in specialty products and repair and overhaul. So historically, the FSG margin story has always been about volume. So until that mix sort of settles down a little bit, it's kind of hard to tighten that up. But I think you could expect between those ranges. And hopefully, it will be towards the high end of that, and there'll be reasons that are quarter-specific if we're not. But I think that's the range you should expect. .

That's helpful, Carlos. And if I could, Eric, just one other question. It seems like each time this year, we have a debate around better deliveries out of Boeing and Airbus and the implications of what that could mean for aftermarket spending. Can you just comment on what you're seeing in airlines today as they think about 2026 around aircraft retirements, obviously, fuel prices are low, continued use of legacy or older assets? Just what's your view on aftermarket fundamental into 2026?

Yes, it's a great question. And we've got the utmost respect to Boeing and Airbus. And we think that -- as well, of course, Embraer. And we think that they're going to get a lot of the supply chain issues worked out. These are phenomenal companies that put out the best products, unbelievable products, and the world really needs them, and they will get all those -- their situation worked out.

So then the question is what happens to the rest of the aftermarket there on the order aircraft. And we think that the order aircraft will continue to be in very good demand. You can see what the retirement rates have been. And again, you've got this older fleet that is a very large fleet, which is continuing to age 1 year per year and consume a massive amount of parts. So we think that we're in very good position.

Again, we're long-term investors, if you will, citizens, residents in the stock. And so if there's a dip, things move up and down a little bit, it doesn't change our view on it. So we're -- for us, we don't really look at the, if you will, the quarter-to-quarter and sort of the micro moves. We're looking out saying the airlines recognize that there's massive need coming down the road, they need more suppliers. We're there to fill that opportunity on both the independent side as well as the OEM align side, it's whatever our customers want. And so I think we're in a good position, but it should remain quite strong, to answer your question.

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

Maybe if I could start, and I want to give you guys condolences on Larry, because I think we're also lucky to have known him and he's impacted all of our lives in some ways. So maybe going back to the performance for '25 [indiscernible] the quarter as well, Eric, I wanted to ask you, I know everybody's harped on FSG growth and just because it's accelerated in the quarter. If you could give us any detail on maybe the parts of the business that you think will outperform as we head into fiscal '26. And also you've announced some pretty new transactions like EthosEnergy recently and another transaction. So can you talk about how those fit into the broader, both Wencor and the broader FSG?

Sure. I would be happy to. And Sheila, thank you also for the very nice comments about dad, and he always respected you and your fellow analysts and really enjoyed his time very much with you all. And so thank you for that.

As far as for the subsectors within Flight Support that are going to outperform, I mean, I'm sorry to sound like a broken record, but I think it's really across the board. It's in everything that we're doing. We're seeing strength across the board. So I wouldn't say that there's one area in particular. We are very excited -- you bring up Ethos, and we're very excited about that because they're strong in the IGT market. And of course, you've got all these industrial gas turbines, of which some are aeroderivatives, supporting the AI power demand. And there's, as you know, there's a massive amount of power that has to be created. And these IGTs are, industrial gas turbines, are expected to play a major role there.

So we think that we're in very, very good position to help Ethos continue to support their program. And we think that there is just a tremendous amount of opportunity. We like the people very much. They have 3 different facilities. It's a very decentralized organization, very entrepreneurial. I think there's going to be a big increase in demand on the various components that they overhaul. And we think that it's just a great addition to Wencor. Wencor has been, as HEICO has been, Wencor has been very successful in their markets. And we allocate out the acquisitions according to bandwidth and who got time and capacity to be able to take on these acquisitions. We're really happy that Wencor has got the talent and the technical ability to help drive that business forward. And we think that we'd get very good performance out of it.

Can you maybe also talk about the Axillon Fuel Containment business? Does that work with [ Robertson ]? How do you think about how that will fit into the framework? And can we think about annual revenues in the $125 million range for that one?

Well, so this is Victor. The business is separate from Robertson. It's a supplier to Robertson, so Robertson has been a customer. I think working together, they can bring additional benefits to our customers and to the marketplace and make things, in fact, even more competitive for our customers. There's opportunity there. In terms -- we didn't break out the revenue from the business, so I'm being careful, of course, on that. And of course, when it closed, of course, if it closes, right, no deal is ever certain, but that timing issues and approvals and things like that that we've got to go through will also influence the amount of revenue that we recognize in fiscal '26.

Got it. Sure. Sorry, Victor, I forgot Robertson was in ETG.

We'll take our next question from John Godyn with Citigroup.

I wanted to -- I completely appreciate that we've gone away from annual guidance a long time ago in HEICO. But at the same time, every few years, you guys reiterate that 15% to 20% net income growth kind of multiyear target. And we've had a couple of years of amazing net income growth. And I'd just kind of offer the observation that consensus expectations are for a very sharp deceleration over the next few years. And I just wanted to kind of revisit this idea, take the temperature. How do you feel about 15% to 20% as sort of the multiyear growth number from here a target? And is there anything that you're seeing that suggests a sharp deceleration in growth rates is likely?

So John, first of all, thank you very much for your question. This is Eric. I'd be happy to answer that. As you know, the 15% to 20% has always been an aspirational number. The company is designed in a decentralized way, but rolling up into groups. So we can harness the individual and entrepreneurial efforts of our people in the businesses and combine them with technology, market access, capital that the larger groups bring.

So I can tell you that all of the subsidiaries have organic growth targets that are consistent with the numbers that you mentioned. And we believe that on the acquisition side, we are in a very good position and continue to be the buyer of choice.

The important -- obviously, the important metric for us is EBITA, which is really operating income plus intangibles amortization due to purchase accounting, because that's really a made-up number, if you will. But I think in terms of growing our EBITA, nothing has changed going forward. Obviously, as we get there, it may become more difficult. But of course, as we've gotten bigger, we hit the numbers and it's become easier.

So all I can tell you is we remain very focused and I think we're in a good position going forward. As far as giving guidance, for us to give guidance, as I've mentioned, is very difficult because our subsidiaries tend to give very conservative guidance to us and then we have to add a number on top of that, and who knows what that number is going to be. But I can tell you, Victor and I spend a lot of time out in the field with our businesses. We're aware of all the technology they're developing. Carlos is out there as well. And I think the future is going to be very good for us, and we're going to continue to outgrow the market. So nothing has changed with our focus on outgrowing the market.

So despite a few great years above that range, it sounds like you don't see it likely that we're below that range for a number of years going forward. It sounds like the algorithm is still intact as far as you can tell.

Well, as I mentioned, look, those numbers are aspirational numbers. I think 15% is a great aspirational number. And we're working very hard to make that happen. Again, we don't provide guidance, so I want to be very careful what I say. But we are -- everything here at HEICO is structured to continue this growth.

John, this is Carlos. Let me refer you to history here. We've done for 35 years, compounded our bottom line at 18%. So we've proven that we can do it. Every year, we sit down, we do our budgets, we look at the performance, the atmospherics in the markets, and we shoot for 15% to 20% bottom line growth, and we're capable of doing that. As Eric mentioned, as we grow larger, it becomes more challenging. But as we look out over the next 3 to 5 years, I don't see anything impeding those aspirational goals. That's what we target as a group, as a Board and as a company to grow. So I think that's all intact.

And also, I would just add to what Carlos said, when you look at our leverage, roughly 1.5x, I mean we've got tremendous ability to make acquisitions. I mean when you generate, what was the number, $934 million, from operations, I mean the cash is really very, very strong. And we're able then to take that cash and go buy other entrepreneurial businesses where people want to be part of HEICO. So there's no change to our program.

And we'll take our next question from Noah Poponak with Goldman Sachs.

Can you hear me okay?

We can.

Great. Yes. Those were nice comments about your father. It was great to be able to work with him.

Just staying on these FSG margins a bit. Carlos, you talked about mix I guess when we look at the incremental being better in '25 than '24, are you able to parse out the pieces of that? How much of it was that mix? And can you tell us what those mix items are and what you expect them to do next year? And how much of it was any change in pricing philosophy?

So the price part of that, we'd probably get, Noah, 2 or 3 points' worth of price in our numbers every year. Now we're basically covering our labor inflation. I mean raw materials for us is a lower piece of the overall build material. So the concerns we have around here really are labor inflation, and we seem to be getting enough price out of our customers to cover that. and still provide them with great value and make them feel like the value proposition is huge with HEICO to do business with us.

The components of the mix -- so I would say this. We've noticed a nice increase in the gross margin with our repair and overhaul business. And most of that has been attributed to heavier PMA and DER repairs that we've been doing this year. I would say the mix shift there has been a little bit more favorable towards the PMA and DER. We've also expanded our avionics repairs quite a bit this year. So those components there have had a positive lift in the gross margin, and repair and overhaul, which has translated into the overall segment margin.

I'd also say that within specialty products, the core of that business, if you spun the clock back 5 or 6 years or so ago, it was really a commercial OE play, pre-COVID, let's say. It was all about seats and thermal blankets and insulation and things like that. What we've noticed post-COVID is a real uptick, and Eric has talked about it earlier, in the defense business we have there, whether it's missile hardware, whether it's drone hardware and things like that, structural pieces that we're making. And that shift towards more of a heavier defense play within specialty products rather than the commercial OE has had a little bit of an improvement on the margins.

So I think those 2 things have helped. And then, of course, our parts business has been off the charts. It's been growing at a tremendous pace, outgrowing the other verticals. And as that business continues to outperform, it absorbs a lot of the fixed cost that Eric has talked about earlier. It does have a little bit of a, I guess, an efficiency play within our SG&A and our fixed cost spend.

So those are really the key contributors to the FSG. Most of that is very durable, Noah. I mentioned earlier on the margins, I kind of said 23.5%, 24.5%, it's kind of a wide spread on my expectation. But it is because mix can play heavy or light in any one particular quarter. So I'll be able to narrow that down as we get further into next year and the year after and then see how the mix footprint plays out. But, Noah, it's all been positive. I think it's very durable margin improvements. And as we continue to grow, I think we can eke out small improvements just on our leverage and our fixed costs, 20, 30 bps a year, something like that. So all positive, Noah. I don't see anything that's like onetime or not durable.

Okay. That's really helpful color. Yes, I mean, I think, obviously, you want to have some conservatism in what you're saying about the forward, but your -- the operating margin is still pretty far below the gross margin. So just all else equal, if you're growing volumes, you would have your normal incrementals and be able to just expand margins over time. Obviously, it's not always all else equal, but -- okay.

You got it.

Can you size how much revenue you generate from missile and missile defense?

Well, we don't size it. If you look in our public filings, you'll see that within the FSG, we do break out specialty products in our defense business. So you can see how that business has grown. But we, for competitive reasons, don't size it.

Okay. And then how do you expect capital deployed towards acquisitions in '26 to compare it to '25 size-wise?

I mean, Eric and Victor like to buy every shiny object they can get their hands on. So I expect that we'll continue [ at that pace ]. But look, we have -- we're not capital constrained, Noah, and we have a tremendous opportunity set in front of us. We're able to be very selective at this point in time on what we deploy capital on, which is a good thing, and that the basket of opportunities is as big as it's ever been. So I think we probably should have a repeat of what we did last year into '26, would be my hope and my expectation. But again, you never know.

And remember, we are guided by -- we want to grow 15% to 20% bottom line. It is a controlled growth strategy. So that guides us, but we do not walk away from extraordinarily good opportunities for our shareholders. So in the event that we outgrow that metric, it's because we had great opportunities in the acquisition front that we just couldn't pass on, right? And so that will also guide our thinking on how we deploy the capital.

And Noah, just also to add a little bit of color why we're so optimistic on the acquisition front. I mean, if you look, we're leveraged at 1.5x. So we've got -- we're under -- 1.6x. So we're underleveraged. We've got plenty of firepower. Our businesses generate a lot of cash. Just putting that cash to work is a big task. We've done 110 -- our commercial, we've done 110 acquisitions. We are experienced. We know what's important. We know how to motivate people. We've got dozens of entrepreneurs for sellers to speak with, explain why HEICO is the best home they could possibly imagine. And frankly, we've got an incredible acquisitions team, which is out there pounding the pavement, working really hard, making sure that we're in every process and we -- we're constantly talking to people.

And we're talking to them years in advance of when they want to possibly sell their company. Somebody may be interested in a liquidity event 10 years from now. That's no problem, because there are so many points of contact at HEICO where we can start working with them and connecting them to the HEICO system and help their businesses, help our businesses. And when they're ready, they're ready.

So I think we're in great -- really great positioning there. And if you look, so many of the businesses that we buy were not available to sell for other people to other people. They didn't -- they were not interested in selling. They were only interested in selling to HEICO. And actually, Gables Engineering is a perfect example of that, where this business was sought after by so many people in the industry and they only spoke to HEICO. And of course, they got a very full price, so -- but they only spoke to HEICO and they wanted to make sure that they were able to continue their growth, and HEICO is able to do that.

I appreciate all the detail.

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

Obviously, pass along my condolences to Mr. Mendelson. He really was the best of the best and he's going to be sorely missed here at Gabelli.

With the Ethos acquisition, like you discussed, is sort of in one way is sort of going outside your scope of traditional M&A, but another way, obviously, there's a lot of adjacencies. With the backdrop of the amount of strong growth looking into -- going forward, is there maybe a sort of a new world order or a new outlook on where you would go across aerospace in a sense or maybe other areas of high growth? Maybe you could talk about -- there's so many opportunities out there, and as a sense, whether you're seeing strength there. Maybe you could talk about anything that could be outside your typical adjacencies.

Sure. Tony, so first of all, thank you very much for your nice comments about dad, and he always enjoyed his time with you and Mario and held you in the highest regard, both of you.

And as far as Ethos, we really like the IGT area. We've been in the IGT area through a number of our businesses for a number of years -- or for decades. And we like growing, as we say, into adjacent white spaces where we understand the technology, whether it's the engineering or the operations of the turbine, whether it's the manufacturing or the repair technology, distribution we think that there's a lot of point of commonality. It's not -- some of them are aeroderivatives so they're very, very similar to the aero side. But other ones are pure industrial gas turbines, very, very large machines.

And we think that we understand that space quite well. There's going to be a lot of tailwind for a long period of time. We think we can add a lot of value. Our initial approach there is to go into that market with a very much OEM aligned strategy, and try to continue to develop and grow that. But we think it's just another very good business for us to enter.

And Tony, this is Victor. Adding to that, that's really been our history. If you look back over time, when we started out and we took over HEICO, it essentially had 1 product, right, the combustion chamber and the JT8D engine, a PM part, that was it for the most part, and did some machining and milling. And over the years, we've stepped very carefully, but I think very intentionally and successfully into, as Eric would say, these white space adjacencies, and it's worked out very nicely.

So our product offering today is vastly expanded. It doesn't look anything like it used to. But it's happened over time, the saying about boiling the frog is, in a sense, applicable here, that we just do this carefully, slowly, a lot of singles and doubles, no bet the company situations, but we just keep at it.

And so I would expect we'll continue doing that. We don't have any other specifics or data that we can share at this point on exactly where we're going, but you can rest assured that they will be sensible and they will be somehow connected to what we're already doing.

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

Condolences again to your family and company for your fallen Chairman. We look forward to you keeping the legacy alive by preserving the culture.

Thank you. And Jon, we've known you a long time. He always admired you back when you were at Fidelity, and we appreciate your confidence and your comments.

So I wanted to ask, Eric, you've constantly characterized PMA for military as this medium-term opportunity. But there's been lots of executive orders and directives and we had, in particular, a pretty spirited opening statement at AUSA by the Secretary of Army, specifically about parts. So just could you give us a sense of what's really changing? Is the opportunity for you being pulled forward? And then maybe talk about the difference between qualifying a PMA part for military aircraft relative to commercial? Is it longer or more complicated?

So look, the U.S. operates a lot of -- U.S. military operates a lot of commercial derivative aircraft, and these a lot of these parts and repairs have been approved by the FAA. And there's no reason the government shouldn't be taking advantage of them. So we think that, sort of big picture, that's where the opportunity exists.

As you know, the gap between what comes out, as they say in the -- with the senior people in the "building" versus what ends up getting done sometimes can take a fair amount of time. And I think this administration is very focused on getting that done. We have to get that done. And so that's why we're very bullish on the opportunity.

I hate to provide super detail into what we're working on because we do have competitors in everything we do. I don't like giving them a road map. But we do think that there is very good -- there continues to be very, very good opportunity. And now it's up to the government to really execute on that. And I think that as they execute, the opportunity will be very rewarding for HEICO.

Good luck with the new year.

We'll take our next question from Scott Deuschle with Deutsche Bank.

Carlos, just to clarify your response to Noah's question, are the specialty products gross margins generally higher or lower than the gross margins in the other submarkets at FSG?

It's a good question. We don't get into vertical margin profile. I would say that, obviously, our -- we said over the years, obviously, our PMA business is our highest-margin business. But the other verticals within the FSG all float around the average margin of the segment. So that's about the best I could do for you.

Okay. And then, Eric, if we were to think about the largest and most established customers for FSGs, PMA and repair solutions from like United, Delta or Lufthansa, are those customers generally running flat out in terms of buying essentially everything from FSG that they can? Or is there still a lot of white space with those existing big customers for FSG to be doing even more for them?

Yes. I mean without commenting on who the largest customers are, they're buying a lot of our product, but there still remains tremendous potential at each of them. And you may ask, well, why is that? Why is it, if they're such big customers and they're buying most of your product or a lot of your product, why don't they buy all of your product? And I agree with you that's very frustrating and something that we talk about all the time. Sometimes they have an arrangement, a contract with somebody else. Other times, it's the time, the inertia that it takes to get these parts approved within the organizations.

But I can tell you that we continue to have very big opportunities in many areas, and we are [ comparing ] those opportunities quarter-by-quarter. I continue to learn of great wins with major airlines and products, whether they're parts or repair services that they had not done with us in the past. So that's why I remain very bullish.

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

Eric, Victor, condolences.

Thank you very much.

I wanted to ask, so you operated decentralized operating structure with many disparate operating units when it comes to pursuing new business opportunities whether it be for Golden Dome or other programs, do you ever find situations where your operating units are competing against each other for the same work package? Do you force them to collaborate or do you let them pursue those business opportunities independently just to give the overall organization as many shots on goal as you can get? Just your thoughts on that.

Sure. It's extremely rare that we find our businesses in competitive situations. It's far more common that they actually have cooperative situations, they can help each other out or sometimes they'll go to a customer together, occasionally, with a package or something like that. We don't, as a rule of thumb, police our businesses. We don't tell them what they can sell or they should sell. We encourage them to work together. And they're very practical and they do, I think they find a way to rationalize things where they should.

They're always, tell you the truth, always most focused on finding the most cost-effective solutions for our customers, because that's what we're known for and the best solution for the customer. So I have seen it in the rare case where there is something that's dual offering, that they're just happy to let the customer make the decision. And what we don't do is curtail dual offerings. We're very careful to not do that.

Right. And we also -- I can tell you, in some of our businesses whereby we have multiple locations, customers may want to deal with the location or the business that's physically closest to them because it's more convenient and they may get competing offers from different HEICO businesses, and we're fine with them deciding where they want to send the business. I mean we want to make the customer happy. And likewise, if the customer wants an independent solution with PMA or DER, we do that. If they want an OEM solution, we do that too.

So we're really agnostic. We want to make sure that we're serving the customer in whatever way they want to be served. And we think that it works out quite well to have multiple businesses in the space constantly striving for lower cost, better turnaround, better quality. And that's what makes HEICO such a strong competitor out there.

Okay. I'll stick with 1 question, but I wanted to wish you and your families happy holidays. And Victor, a happy belated birthday as well. Your birthday was on the 11th.

Thank you, Scott. I appreciate it, and we wish you happy holidays as well. I'm going to have to find your birthday.

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

I guess maybe sort of along those similar lines, how integrated are the HEICO and Wencor part and repair catalogs? And how long can that be a growth tailwind from cross-selling?

Well, they are -- we offer a lot of different products across the businesses. There is some overlap. And whatever the customer wants. If they want to buy it from one business or the other, that's fine. If they want to work new development projects with one business or the other, that's fine. As I've said, there's -- I always use the analogy, there are many different types of food out there. And some people may want Italian food or American food or French food, whatever. And at HEICO, we really don't care, as long as we're selling them the product.

So I think that there are a lot of additional opportunities to work together, but we've already really taken advantage of those and we've really helped the various businesses forward. And I think you can see in the results, it's really worked out quite well.

Great. Also love a diverse diet.

We'll take our next question from Alexandra Mandery with Truist Securities.

This is Alexandra Mandery on for Michael Ciarmoli with Truist Securities. In terms of your PMA portfolio, what is the exposure like in terms of new engines, including the [indiscernible] [ GTF, GNX], and do you see that as an opportunity including first-time shop visits on the PMA front?

Yes. So we normally don't get into details about specific product types or competitors. But in general, I can tell you that when an engine is new, it tends to be under warranty, and that's not a big opportunity for us over on the PMA side. It may be more so over on the repair side. And it's as those platforms age and customers want alternatives, that's when it sort of comes into focus with us.

So I would just sort of leave it at that. And -- but I can tell you that our technology that we use to be able to engineer parts is consistent across all engines, all components. And we're very confident about our ability to technically develop the current generation, the next generation, as far as we're concerned, all within our wheelhouse.

Great. That makes sense. Can you provide any additional color on general trends in ETG given the portfolio being well suited for space and defense tech, including next-gen systems and where you see bookings going?

Yes. So this is Victor. And I think that the trends that we talked about a little bit earlier in the call and the optimism for our various markets is intact, and for some of the reasons that you mentioned. Not -- by the way, not all of every market is good and not all of every market offers opportunity. So in space, there's a lot of opportunity, but there's a lot of profitless opportunity there. And I think we've been pretty good at avoiding those situations and really going where we can add particular value to our customers and get recognized -- or be recognized for that in terms of profitability and market position and so on.

And the same applies in defense. There's opportunity, which we take advantage of, in the more established segments of the market as well as some of the newcomers in the defense tech sector. So we sell to both and are proud to do so. And we also believe that the market will continue to evolve such that there will be very important places for both, that one won't necessarily just replace the other. So it's important for us in a sense to be everywhere. And I think our business is, not I think, I know, our businesses have been particularly successful at doing that for a long time.

One other note on defense. As we look at the government's focus on cost and we look at the government's focus on speed, and particularly somebody earlier in the call mentioned the comments from the Army Secretary. HEICO has always been based on speed. We're not a cost plus fixed fee company. overwhelmingly. We have very little, tiny amount of revenue on the cost plus fixed fee column. It's all on our dime. We develop it. It may be developed to specification, it may be developed to something else, but we develop it on our dime and sell it. And it's based on doing it and doing it quickly and responding very quickly to our customers. So we are used to doing that and we are extremely well situated for the environment should it evolve to more of that.

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

My condolences. Larry was a fantastic, kind of a legend in the industry, always very generous of his time.

I just had a couple of quick ones. One, I remember asking Larry, probably like 7 years ago on an earnings call, how he viewed the Class A stock and just what the -- if there's ever going to be a desire to remove it and just get the common. What are your opinions on that?

At the moment, I believe status quo. We've talked about the issues over time with dad. And of course, the idea of collapsing them requires an exchange value. And were we to do that at 1 to 1, then we'd have perhaps upset common holders. And if we did that at current market prices, we'd have upset Class A holders. And as you know, the 2 classes are identical in all respects, except for voting. So identical the dividends, the economic benefits, the share of earnings, everything. So they really belong ultimately at the same price. There have been times over the years where they've converged. We do believe at some point they will converge and that the Class A is really sort of a screaming value. And in fact, you may notice that when we recently bought shares or directors, purchase shares every year equal to a certain portion of their retainer. And when they bought the shares, they all bought, I think, all bought Class A common shares. So that really is a screaming value. And I think over time, a rational market will recognize that and push them together.

Got you. Okay. And I wanted to ask also just in terms of demand by region, other companies in the sector have said like China may have bought spare parts, pulled forward some purchases. Have you seen any sort of trends that would suggest anything to that -- of prebuying or -- of the PMA parts?

No. We see strength in all of our areas. So I would not say that we've seen that. It can be lumpy a little bit because people may buy parts a couple of times a year for each part number, and therefore, it can be a little lumpy. But no, I wouldn't say that we've seen any region particularly stronger than the others.

Okay. And then just my last one. In terms of pipeline of new PMA parts that are going to be introduced, typically, you guys have given a range, could be as many as 500 in a given year. What does the pipeline look like for '26 in terms of what you're introducing to the market?

Yes. I would say it's consistent with what we've done historically. Really, no change there. We're very happy with the with the number of parts that we've come out with. We've been at a similar number for a number of years. It went up when we bought Wencor. But I think you can see from the numbers that I think our decision has been quite good in that regard. And so I wouldn't see any substantive change.

And we'll take our next question from Cashen Keeler with BNP.

This is Cashen on behalf of Matt today. I guess just going off that last question, just wanted to ask on PMA. How supportive has the FAA been regarding parts approvals there? It seems like everything related to FA approvals, whether it be interiors or new aircraft, has just taken longer, so has that had any impact on your pipeline of new parts?

No. We've got a great relationship with the FAA, and we interface with them in many different ways. And I would say it's really business as usual for us. We -- no change there. All is progressing very well for us.

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

Victor, maybe I missed this, but could you give the end market growth within ETG for the quarter? I don't know how -- defense versus electronics.

We did not break that out publicly.

Okay. I'll take a look in the 10-K. Maybe, Carlos, for you. CapEx, you guys aren't one to really spend, but you spent a little bit more in the fourth quarter. Anything you could sort of point to what that extra spending went to?

I think it was sort of business as usual, Lou. We had around yearend, you wind up getting projects accelerated sometimes because you get yearend deals as the calendar year closes out. So we still spend around, I think, 1.5%, maybe 1.6% of our revenues on CapEx. That's about where we've been historically on the CapEx expense side. And I think as we look into '26, it should be in a similar range, 1.5%, 1.6% revenues or something like that.

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

Thank you very much, Samara. We appreciate your coverage of the call for us. We wish everybody on the call a wonderful holiday season. and we thank you for listening today, and we look forward to talking with you on the next call or, if not, sooner. Thank you very much.

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

Welcome to the HEICO Corporation Third Quarter 2025 Financial Results Call. My name is Samara, and I will be your operator for today's call. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements. Factors that could cause such differences include the severity, magnitude and duration of public health threats, such as the COVID-19 pandemic HEICO's 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 to our cost to complete contracts, governmental and regulatory demands, export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales.

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. 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 cost and revenues. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements, 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, HEICO's Co-Chief Executive Officer.

Thank you, Samira, and good morning to everyone on this call. Thank you for joining us, and we welcome you to HEICO's Third Quarter Fiscal '25 Earnings Announcement Teleconference. I'm Eric Mendelson, HEICO's co-CEO. I am joined here this morning by Victor Mendelson, HEICO's Co-CEO; and Carlos Macau, our Executive Vice President and CFO. Before highlighting our third quarter of fiscal '25 record-setting results, I start this call by thanking all of HEICO's team members for their dedication and focus on delivering another outstanding quarter. We continue to experience high growth rates across the majority of our subsidiaries and are humbled by the hard work and commitment of our team members that they bring every day to deliver these excellent quarterly results. Our customers require seamless execution and demand excellence in everything we do. Our people are the only reason we continue to win in the marketplace and generate significant shareholder value. All of our shareholders should thank our team members for everything they do for HEICO and our shareholders.

Our record third quarter results reflect robust double-digit organic growth in our core businesses, further enhanced by the momentum from our disciplined acquisition strategy. On behalf of the Board and our executive management team, thank you for another record-breaking quarter. As we look ahead, we see significant opportunities supported by a favorable pro-business environment that encourages innovation, investment and expansion. Our laser focus on growth within the commercial aviation, defense and space markets, combined with the exceptional talent of our team members gives me confidence that HEICO is well positioned to sustain strong momentum and capture additional market share gains across our diverse markets.

We remain very optimistic about HEICO's future. In summarizing our third quarter of fiscal '25 record results, we note that consolidated net income increased 30% and to a record $177.3 million or $1.26 per diluted share in the third quarter of fiscal '25 and up from $136.6 million or $0.97 per diluted share in the third quarter of fiscal '24. This is quite an achievement of which we are very, very proud. Consolidated operating income and net sales for the third quarter of fiscal '25 represent record results for HEICO, increasing 22% and 16%, respectively, compared to the third quarter of '24.

The Flight Support Group set an all-time quarterly operating income and net sales records in the third quarter of fiscal '25, improving 29% and 18%, respectively, over the third quarter of fiscal '24. The increases principally reflect strong 13% organic growth from increased demand across all of its product lines and the impact from our profitable fiscal '25 and '24 acquisitions. The Electronic Technologies Group set an all-time quarterly net sales record in the third quarter of fiscal '25 improving 10% over the third quarter of fiscal '24. This increase principally reflects improved demand for the majority of its products including double-digit organic net sales growth of other electronics and space products.

Cash flow provided by operating activities increased 8% and to $231.2 million in the third quarter of fiscal '25, up from $214 million in the third quarter of fiscal '24. For the third quarter of fiscal '25, cash flow provided by operating activities represents 130% of net income. For over 36 years, a core tenet of HEICO's unique business model has been to fund our organic growth with cash generated by operations and not incurred debt to grow organically. This doesn't happen by accident. Our operations are painstakingly designed and managed to generate excess cash that we use to make accretive acquisitions, thereby compounding our growth.

I'm proud to report that cash generation remains exceptionally strong at HEICO. Consolidated EBITDA increased 21% to $316.4 million in the third quarter of fiscal '25, up from $261.4 million in the third quarter of fiscal '24. Our net debt-to-EBITDA ratio was 1.9x as of July 31, 2025, down from 2.06x as of October 31, 2024. I would like to highlight that our liquidity improved significantly even after deploying $630 million on acquisitions during the past 9 months. We are very pleased with HEICO's strong cash generation which drives our ability to delever quickly to support future acquisition opportunities.

In July 25, we paid our 94th consecutive semiannual cash dividend since 1979, at the rate of $0.12 per share, representing a 9% increase over the prior dividend paid in January of 2025. We continue to be very busy with acquisitions and completed our fifth acquisition of fiscal '25 in the third quarter. In July, our Electronic Technologies Group acquired 100% of the stock of Gables engineering. Gables designs and manufactures advanced solutions for aerospace platforms, including cockpit displays and other avionics components such as navigation, audio, surveillance and communication panels for a wide range of aircraft.

Gables is the third largest acquisition in HEICO's history and we expect Gables to be accretive to earnings within the year following the acquisition. Finally, we take a moment to remember Frank Schwitter. A member of our Board of Directors who passed away recently. Frank was a dear friend and CPA, who served as a Board member since 2006. He was a valued member of the HEICO family with his expertise in financial accounting and reporting having been developed over many decades serving as a partner in the national office of Arthur Anderson. We share our thoughts and prayers with his family and thank them for the many years of service and friendship he provided to our Board. He will be greatly missed.

I now turn the call over to Victor Mendelson, HEICO's co-CEO, to discuss the third quarter results of our flight support in Electronic Technologies Groups in greater detail.

Thank you, Eric. As I discuss the operating results of our 2 segments, I join you in recognizing the extraordinary contributions of HEICO's team members. Through talent, determination and innovative spirit have turned challenging objectives into real success. On behalf of our shareholders, thank you for the energy and collaboration that not only drive our performance but also make these accomplishments especially rewarding. The Flight Support Group's net sales increased 18% to a record $802.7 million in the third quarter of fiscal '25 up from $681.6 million in the third quarter of fiscal '24. The net sales increase in the third quarter of fiscal '25 reflects strong organic growth of 13% and the impact from our profitable fiscal '25 and '24 acquisitions. The organic net sales growth reflects increased demand across all of our product lines. The Wencor and legacy HEICO operations continue to exceed our expectations. And obviously, this was an excellent combination, which was completed around 2 years ago. Our customers continue to find great value in our larger aftermarket product offerings for the aerospace parts and component repair and overall needs, which has also translated into excellent growth and opportunities and success for HEICO.

The Flight Support Group's defense business continues to present an excellent opportunity, especially as the current U.S. presidential administration prioritize defense and cost efficiency. HEICO is well positioned to support these efforts by providing lower cost alternative aircraft replacement parts, helping the government tax payers save money while expanding our market reach. Our missile defense manufacturing business is experiencing significant growth driven by increased demand in both the U.S. and our allies. With the substantial backlog of defense missile defense orders and ongoing shortages, we anticipate meaningful expansion from this pipeline, reinforcing our commitment to delivering cost-effective solutions with industry best quality.

The Flight Support Group's operating income increased 29% to a record $198.3 million in the third quarter of fiscal '25, up from $153.6 million in the third quarter of fiscal '24. The operating income increase principally reflects the previously mentioned net sales growth and improved gross profit margin and SG&A expense efficiencies realized from the net sales growth. The improved gross profit margin principally reflects higher net sales within our repair and overhaul parts and services and specialty product lines. The Flight Support Group's operating margin improved to 24.7% in the third quarter of fiscal '25, up from 22.5% in the third quarter of fiscal '24.

The operating margin increase principally reflects the previously mentioned improved gross profit margin and an impact from a decrease in SG&A expenses as a percentage of net sales, mainly reflecting the previously mentioned SG&A expense efficiencies. Given that acquisition-related intangible amortization expense consumed approximately 200 basis points of our operating margin in the third quarter of fiscal '25, the FSG's cash margin before amortization, or EBITA, was approximately 27.3%, which has been consistently excellent and is 210 basis points higher than the comparable FSG cash margin of 25.2% in the third quarter of fiscal '24.

And we know that we run the operations internally and evaluate our businesses based on EBITA, which to us is a real cash number, not one that just takes account for a made up amortization number required by accounting regulations. I'm very happy with the continued expansion of our cash margin, and we believe our efficient and decentralized operating structure has permitted us to expand these margins as we simultaneously delight our customers with cost savings and lightning quick turnaround. For the Electronic Technologies Group, our net sales increased 10% to a record $355.9 million in the third quarter of fiscal '25 up from $322.1 million in the third quarter of fiscal '24.

The net sales increase reflects strong organic growth of 7% and the impact from our fiscal '25 and 24 acquisitions. The organic net sales growth is mainly attributable to increase demand for our other electronics, defense and space products. The ETG's defense organic net sales increased by over during the third quarter of fiscal '25 and are anticipated to continue steady growth during the remainder of the fiscal year, as we, again, have significant order volume and a record backlog. The ETG's other Electronics organic net sales increased 16% during the quarter, continuing the trend from the previous quarter, increase in organic growth after following multiple quarters of lower demand, due in part to inventory destocking and our customers for high-end industrial and electronic components.

We're optimistic for continued growth going forward. The Electronic Technologies Group's operating income increased 7% to $81 million in the third quarter of fiscal '25, up from $75.8 million in the third quarter of fiscal '24, the operating income increase principally reflects the previously mentioned net sales growth, partially offset by an increase in performance-based compensation expenses. The Electronic Technology Group's operating margin was 22.8% in the third quarter of fiscal '25 as compared to 23.5% in the third quarter of fiscal '24. The operating margin was sequentially consistent with the second quarter of fiscal '25 as both [indiscernible] had a similar net sales mix and growth. Lower operating margin compared to the third quarter of fiscal '24 principally reflects an increase in SG&A expenses as a percentage of net sales, mainly driven by higher performance-based compensation expense. Very importantly, as we talked about with the Flight Support Group, before acquisition-related intangibles amortization expense, our operating margin was 26.6% and as intangibles consumed around 380 basis points of our operating margin.

Again, this is how we judge our businesses as that most closely correlates to cash. On a true operating basis, these are excellent margins, and we are very, very pleased with them. I turn the call back over to Eric Mendelson.

Thank you, Victor. As we look ahead, we remain confident in achieving net sales growth across both the FSG and ETG segments, driven by continued organic demand for most of our products. Additionally, we aim to accelerate growth through our recently completed acquisitions while capitalizing on new acquisition opportunities. Our disciplined financial strategy continues to focus on maximizing long-term shareholder value through a balanced approach of strategic acquisitions and strong organic growth initiatives aimed at gaining market share while maintaining a strong financial position in preserving flexibility. Acquisition activity remains very strong across both operating segments with a solid pipeline of opportunities under review.

Our focus is on identifying businesses that complement HEICO's existing operations and strengthen our strategic position. True to our disciplined philosophy, we pursue only those transactions that are prudent, accretive and capable of delivering lasting value to our shareholders. Thank you very much for attending this call. Those were the prepared remarks. And now I'd like to ask Samira to please open up the floor for questions.

[Operator Instructions] And we'll take our first question from Larry Solow with CJS Securities.

It's Pete Lucas. It's Pete Lucas for Larry. Congrats on another great quarter. Just wondering in the ETG segment, if you could give us a little more color on how the Gables acquisition is performing relative to your expectations backing into it, it seems to be kind of in line with your historical EBITDA multiples. And then in terms of your current leverage, how does that set you up? I know you mentioned the pipeline for M&A, but are you comfortable if something were to come up in the short term?

Thank you. Those are good questions. This is Victor. So we've closed on the acquisition about a month ago. So it's early days. But so far, as we say, so good, it's doing almost exactly as we expected. But I will caution I don't make a trend out of 1 month. But so far, we're very, very happy with and how it's doing and pleased with the acquisition. And in terms of the cost of the acquisition, we can easily handle many more acquisitions, of course, depending on size both on our existing line of credit and I think what we would very, very easily raise beyond that if we needed to. But we continue to have excellent capacity for acquisitions.

Very helpful. And just last 1 for me. It seems you saw a benefit from the tax rate this quarter due to R&D tax credits. Is that lower rate sustainable? And is that driven by the big beautiful bill? And do you see any other benefits from that build that we should think about?

Yes, this is Carlos. The only benefit we saw in the quarter really related to cash. As you may know, the full depreciation of equipment that we buy that qualifies, they retro that back to January 25. So it helped alleviate some of our third quarter tax payments when the bill was passed. But I think going forward, for us, it's mostly a cash benefit. We should see a little benefit from some of the changes to foreign, the FDII regulations that came out. I think overall, our rate it was a little -- it was around 18.9% for the quarter. And I think that going forward, if we're thinking about a 19% to 20% rate, that's probably a good effective annual rate for HEICO for the year.

Very helpful. I'll jump back in the queue.

And our next question comes from Tony Bancroft with Gabelli Funds.

Congratulations gentlemen, very nice quarter. Just you were talking about sort of about missile defense a little bit. Would you maybe expound on that and maybe also talk about potential M&A in that space. It just seems like there's just so much going on with missile defense, obviously, with Golden Dome and just all the [indiscernible] work going on right now. Maybe you could talk a little bit more about that.

Yes. So Tony, this is Victor. Missile Defense has been a part of our business actually for many years, just about since we shortly after we started the ETG. And we are seeing opportunities. In fact, we are seeing some orders. I wouldn't call it yet major needle movers for things related to Golden Dome, which as you know, incorporates some existing technologies and products into something that sort of, I'll say, layers on top. So we continue to see orders from what we've been doing and getting orders on new products in addition to where we make products that are used for foreign missile defense as well, [indiscernible] products that are then sold on to -- from the U.S. prime on to foreign countries, obviously, U.S. allies. So it remains a great opportunity for us. It's something we've been doing for a long time.

And I will emphasize, we've been doing it in what you would people tend to consider legacy defense as well as new tech defense. And I think that's very, very important. We've always been very careful about serving all the markets and not just playing to larger customers.

And also, Tony, just to add within the FSG, we also have a very big position in missile defense and are a leading manufacturer of rocket nozzles and other missile defense applications. And the market is very strong. We do look at additional acquisitions. We have a lot of organic growth capability in that area. And so I think both are going to continue to be very exciting for us.

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

Maybe if I could ask just going back to if we could just parse out the 13% organic growth by subsegment and by market. And I know there's been a lot of talk about engine versus air [indiscernible] Any context there?

So Carlos, do you want to do the...

Yes, sure. So Sheila, we had a very interesting quarter. The Parts business as usual, grew in the low -- it was in the low teens this quarter. It's pretty much similar to what we saw last quarter, where we saw some really nice -- some growth was in the repair and overhaul and Specialty Products group. Repair and overhaul was up in the mid-teens, and that was -- that was driven by a really nice mix during the quarter, which elevated our gross margin a little bit. And we're -- it's nice to see that. And as you recall, the repair business it's pretty much a parts play. It's a component repair. As you know, we don't have hangers and we don't repair airplanes, but we do components and a lot of that work is a channel for us to really filter a lot of our PMA parts through. So that was a nice surprise during the quarter. And as Eric just mentioned, with Specialty Products, that growth was in the low double digits, and that's been driven principally by our defense business within the Specialty Products Group.

Although I would point out that now that we've seen some of the airframers getting a little bit better of a cadence I do expect our commercial aerospace OEM work within specialty products to pick up a little bit or be a little more steady than it had been in the past. So Eric, do you want to...

Yes. And then also, Sheila, to add, you asked about engine versus non-engine, as you know, we are a majority non-engine. And our -- it's hard to calculate because the businesses don't capture the information necessarily the same way. But I would say that the -- our engine portion of our aftermarket business is probably around 25%, roughly a quarter. that gives you a -- HEICO historically had been had a higher percentage of engine but we've made a number of acquisitions over the last number of years, the largest of which was encore, and the majority of those acquisitions has been non-engine that's why our percentage of engine is probably roughly in the 1.75 area of the aftermarket.

Got it. And then maybe just given news out this morning with the [indiscernible] thinking that taking equity stakes in defense contractors, any update on your end on PMA into the DoD.

Yes. That continues to be an area where we think the Pentagon can save a lot of money. And the Pentagon is looking at a lot of things. They're trying to implement a lot of things right now, but we're very bullish on that. So we think that, that will be continued opportunity for us. There's no reason why they shouldn't get those savings the same way as the commercial aftermarket and business aftermarket does. So we're -- we think that there's very good potential.

We'll take our question from Peter Arment with Baird.

Eric, Carlos nice quarter. Eric, talking about FSG. You talked about some market share, and I know Carlos just went through kind of what the drivers were on MRO and some of the repairs and parts. But where are you seeing the opportunities in market share? Is this still benefiting from kind of the Wencor synergies? Or how should we think about that? Or is it just new parts that you're developing and introducing?

Yes. I think it's across the board. Yes, there are synergies with one core to answer that part of your question. But we have very, very strong organic growth opportunities across the entire business. So specifically, if you look at PMA and repair, I just did the strategic annual sales meeting reviews participated in and saw by subsidiary, the focus that they've got on developing new products, whether it's PMA or repair and it is, frankly, blew me away. We are -- have got such technical capability, such customer support and demand that I'm really excited about the opportunities here. So I really see it very broad-based. And I think if you look at our numbers, the organic growth of 13%, with the fact that our aftermarket business is only roughly 25% engine.

I think we I was surprised after seeing where other companies report it, our 75% of our business is non-engine and we turned in 13% organic growth. I mean, frankly, I don't know how our guys did this. it's phenomenal. And so I think that really speaks to the competitive advantage that we have, where we don't run a single big integrated enterprise -- we run dedicated targeted businesses that are really -- excuse me, using the expression, but our killers in what they do. And they are really good, really knowledgeable. They know all the details and the organic growth pipeline is just tremendous.

And I think when you see 75% of our business being airframe, and we're up 13% organic growth. I think that speaks to the depth and the breadth of our product line and capabilities.

Yes. That's super helpful color there. Carlos, just on margins. FSG, I think was a really strong quarter for incremental margins. How do we think about this going forward? Is it just more mix driven than you -- for this quarter? Or do you think that margins like this can be sustained?

So these guys keep making lies at to me. They're so good at what they do. I had to be [ candid ] with you. The margin that we posted this quarter exceeded my expectations. Is it a sustainable look, I hope so. I still think that mix drove some of the growth in that margin, but it wasn't the super majority of the margin. I mean our gross margin was up a couple of points -- and a lot of that was driven by some of the mix. And I'd love to see that continue, but mix is what it is, right?

So I think if I had to project the segment, I do expect now that we're somewhere in the 24s. I had previously thought 23% to 24% was our range. But this year, the guys have just they've outperformed, and they've exceeded my expectations. So some more to come on that. I mean I wouldn't project out a model or forecast at 25% margins just yet. I think you should let us bank some a few quarters under our belt to see how this plays out. But if you are modeling, if you assume around 24, you're probably in a good ZIP code, 24% OI margins.

Take our next question from Noah Poponak with Goldman Sachs.

Maybe just staying more Carlos, does FSG have seasonality in the fourth quarter up or down sequentially?

Typically, if you look back over time, though, the fourth quarter is typically our strongest quarter in the FSG so yes, seasonality, I wouldn't call it seasonality, but what we do tend to see in the revenue side is our low point is typically Q1 and then it slowly builds throughout the year. So that's kind of been our trajectory.

Okay. So we can marry that with kind of how the incrementals have played out and that will make the year of '24 and then your point previously has been you can expand a little bit from there next year with over the normal incremental.

Yes. I mean I would think, as we've said in the past, Noah, we do expect absent big mix swings within the FSG, we do expect the normal cadence of 20, 30 bps improvement. A lot of that is just leverage on our SG&A spend. Those are the kind of things that we sort of count on and look to achieve things like this quarter where you can't control mix. And when we have good mix quarters in particular, like Eric pointed out, with the growth in repair and overhaul, that that's hard to predict in any one given quarter. So I wouldn't take almost 25% operating margin and sort of parlay that into the next future quarters. I mentioned to the other analysts -- let's see how the next couple of quarters play out before we start getting into that ZIP code. You could probably count at 24% and let's see where we're going from there.

Yes, that makes sense. Maybe you could similarly speak to your -- how you're thinking about ETG, which I know you've explained why that's a little bit more volatile quarter-to-quarter. It was off in the first quarter, down in the second and third usually has some stronger seasonality in the fourth quarter. Do you expect that? And what's [indiscernible] thinking of the rig...

Yes. So look, I was pleased with the ETG's performance this quarter. I think I've mentioned to you and other folks I've spoken to that the third quarter, to me, always felt like a repeat of Q2. It looked that way in our forecast. And the margin sequentially was the same. I expect that segment on any given Sunday is going to run between 22% and 24% operating margin, and we sort of split it right down the middle of the gold post this quarter. So from my perspective, this is kind of the area you can count on. The numbers will move up and down from there, and it will be dependent on mix. I think volume-wise, similar to the FSG as we continue to grow that base of business, we will see some operating leverage in the expenses. But no, I think from a profitability standpoint on a go-forward perspective, not much has changed, in my view, I think that 22% to 24% range still holds true.

Okay. You guys say Gables was your third largest ever acquisition? And if so, is that an enterprise value? Or is that a revenue or EBITDA? And can you give us any sense for the revenue.

Sure. So that was on enterprise Purchase price purchase consideration. And I don't know that we're breaking out other numbers, Carlos, I'm going to...

No, we're not. So look, you'll see it -- we're going to -- in the 10-K, you'll see the cumulative acquisitions for the year. Gables on its own doesn't really cross any materiality threshold, so we won't be breaking out their specific numbers. But you'll be able to tell -- I mean, look, it was a big acquisition we had in the quarter. You'll be able to see in our cash flow is what we paid for it. It's no big secret. But as far as the numbers go, we've gotten so big now that some of these acquisitions, even though they are large from our historical standpoint to our numbers aren't significant or material to the overall picture. So don't give a lot of details in that regard.

Yes, this is Victor. I will note that, that acquisition is a growing company. It's a growing business. There's a lot of new stuff, new programs, new things that they've gotten on which are quite significant to it. So we expect that to be a nice growth story internally as it unfolds over the next few years. It's a major motivator for us. It wasn't just -- sometimes we in position a good price. This is -- it's a great business, but I think we bought it more for the growth than just where it is right now.

We'll take our next question from Ken Herbert with RBC Capital

Maybe, Eric, just start. As you look at the -- I think this third quarter, you were up against some of your more challenging comps in terms of FSG organic growth -- can you comment specifically within FSG, on the commercial side with your airline customers, has anything changed in the third quarter in the pricing dynamic or specifically your outlook for airline inventory levels as you move into the fiscal '26. Are you getting as good a pricing as you've gotten in prior quarters? And is there any risk on the inventory side at airlines that you'd call out in the next few quarters?

Got it. So to take the first part of your question, with the 13% organic growth, you're right. I mean it's great numbers, especially considering that it was on top of 15% organic growth a year ago and 19% organic growth before -- in 2023. So I'm very happy with the sustained organic growth. We are getting pricing but again, it is commensurate with our cost increases. So our philosophy always has been and our customers understand nobody wants a price increase. But we must pass along our price increases -- our cost increases in order to be a viable, sustainable business. And so we have been able to do that.

As far as -- I think you're probably also -- you're asking about inventory levels and what's going on at the customers. And it's really a mixed message. There are, as you know, when we all went through the pandemic, there were some significant shortages that occurred afterwards. And there was a certain amount of overordering in particular areas. And we are seeing some destocking in some areas yet we continue to see huge shortages in others. So therefore, the way I sort of look at it on the HEICO portfolio is they net each other out.

And we -- overall, we are not seeing destocking. But that is -- again, there are pockets of destocking in pockets of customers just clamoring and can't get enough because the supply chain is just too thin for what they need. So I would sort of characterize it that way.

That's helpful, Eric. And on the destocking comment, is there any more granularity you could provide on that either with reference to your engine versus non-engine exposure or any other parts of the aftermarket, maybe specifically where you're seeing more inventory pressure from your customers are destocking.

Yes. I would say I think in the areas of destocking are probably less on the engine side, there are some and are probably slightly greater on the non-engine side. But then as I said, again, for us, it sort of all nets itself out, and we don't see a destocking phenomenon on our parts on average across the board. We continue to see extremely strong demand, a tremendous demand. And frankly, sometimes it's a little hard for me to understand and to parse out where the market is growing versus where our market is going. Our people are very focused on growing organically and gaining market share, and they do that in, of course, the PMA and repair but they also do that in the distribution. And I really believe that HEICO has increased market share over in the distribution side and frankly, is so good through our distribution businesses in selling our principles product that it can hide what can be going on in the marketplace because our folks are so good at bringing on additional principles and making sure that we operate with a small company mindset where we get very high market share, and we don't drop the ball.

We don't -- at HEICO, there's never an excuse that, "Oh, that fell between the cracks" that just doesn't happen. And our distribution businesses are very focused at picking up all of the sales that they possibly can. So I think that also could be a reason why we don't see destocking because -- our folks are just out there picking up every single thing they can, and I think that's somewhat uncharacteristic of the industry.

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

Eric, Victor and Carlos. Could you maybe comment a little bit on how Europe is trending. The company has got a larger exposure there with the acquisitions? Just are you seeing any impact from the headlines of stronger defense spending there? And how is the business faring?

Sure. John, this is Victor. So Europe is doing quite well for us. It's been a success story. As you know, we expanded in Europe through what was then, I guess, what still is our second largest acquisition, Exela, which has done very well, and in part because of defense. That has really shined for them and for us. And then other defense sales, including in the Flight Support Group on missile defense, which Eric mentioned a little bit earlier, as well as sales from our other businesses, by the way, that we've owned in Europe for much longer and some U.S. based.

So right now, that's good for us. Look, we are also mindful of nationalism issues and things like that. So we understand where the limits might be in U.S.-based business is selling into Europe as we get a little further out to the future, hence, our appetite for acquisitions on the continent.

And also I can tell you as far as the flight support area, we're doing extremely well with our customers over in Europe, whether it's PMA, repair or distribution, and in particular, our distribution businesses have very large European network. We've got many, many people on the ground over in Europe focused on distribution to hundreds of people. And so we -- I think our market share is very good, and that remains a critical and important market for us, and it's doing very well.

Great to hear. And with -- in this favorable environment, are there new opportunities to organically invest -- or should we expect just acquisitions being the primary use of cash?

I think it's both. We have been expanding in Europe, both our footprint. We just completed. I still consider the U.K. part of Europe, although it's not EU. And we just completed a new facility in the U.K. and 1 of our businesses. We're starting in another outside of Paris and another business. as well as some capital improvements, facility improvements and additions in other places in Europe. So I would expect it to be both organic and acquired.

And Jonathan, as I mentioned in the beginning of my prepared remarks, our cash flow remains very strong. So I think one of the unique things is that we're able to grow in all geographies and also in Europe, and still generate cash from that region that we're able to use in acquisitions. So we're able to grow organically. We don't have to tie up all sorts of capital in order to grow organically, and we can actually take additional cash that comes out of the businesses and use it for acquisitions. And that's really what creates this whole compounding effect at HEICO.

Fantastic.

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

Maybe just a quick question on capacity. With all the growth you're seeing across both your commercial businesses and your defense businesses, is there any way where you just kind of squeezed on capacity?

Yes, there are a number of areas. There are a number of facilities that we've got to expand -- it is still hard to hire people in certain geographies, although that is getting easier. I think AI and what's going on in the economy is helping in that area. But overall, I would say we're well -- we're very well positioned. We've made the investments to be able to handle future growth. And I think the other unique thing in HEICO is we haven't squeeze the fruit in terms of operating at our various facilities in excess of their ability -- so we've got plenty of capacity to be able to continue to grow and expand. So I think we're good in that area. We're always very mindful of that.

I could use a few more deaths from my accountants. But other than that, I think you're right.

Got you. And then how are your supply chain is doing, right? I mean, the suppliers to you maybe on raw materials and other things?

Yes. The -- in general, there -- things are much improved. There are still some -- there are a number of areas of continued shortage and where we've got parts on backlog, and we're dying to get parts in our sales could be considerably higher if we had those parts. So that still remains a challenge, but there's no question that the amount has gone down significantly. One of the other things that we is we do a tremendous amount of incoming inspection at HEICO. And we don't just go dock the stock we instead inspect the parts, and we've got a very robust inspection process. And I can tell you that 1.5 years ago, 2 years ago, the backlog in incoming inspection was quite large. And our folks have done a great job in working that down. And I think that speaks to the capacity issues, adding people, adding facilities to be able to get all this stuff through. So we're -- we've made very good progress in that area.

Ron, I would say... Carlos.

I was just going to add to that. I do think I'm a big believer in this while administratively, it's a little challenging. We don't have centralized purchasing. The ability for our -- we probably have 100 supply chains. And the ability for our guys to bob and weave and negotiate and beg and whatever they need to do to get product in times where we've experienced shortages, I think it allows us to be a lot more flexible and meet our customers' needs. It's probably a more expensive process at the end of the day. I mean, I think it's less efficient than centralized processing.

But the truth of the matter is, from a customer perspective, as to Eric's point, we don't tend to run out of things because our guys are able to negotiate locally for raw materials and supplies. And I think that does give us a competitive advantage.

Got it. Got it. And have you -- I mean, Carlos, if you guys had to keep a little more inventory around just kind of smooth any gaps?

So we've always given our subsidiary sort of the green light to make sure they have what they need for their customers. I mean, candidly, a few years ago, post-COVID, it got a little lot of hand in my judgment. I think we invested a little too much in inventory. What you've seen, and you saw it in our cash flow statement probably was our investment inventory has come down the ETG candidly has done an excellent job this year on managing inventory. They had very little use of working capital the first 9 months of the year as it relates to investment in inventory. FSG's investment in inventory has been commensurate with our organic growth. So I think the situation on the inventory side for us this year is pretty positive.

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

What would you say is the average price gap now between one of your PMA parts on the OEM part?

Yes. That's really a hard number to estimate. I think that if you were to look across the entire business, it's it, of course, depends on how long somebody has been buying a product because if a customer has been buying a product for a very long time and has it on contract, then we give them some form of price protection. Our -- I don't -- I can't tell you what our average is. I can take a guess, but I can tell you that I would say the range is from a 20% discount on the low end and on parts where customers have been buying them for a long time, and we've been able to control our cost, it could be as high as the 70% discount. So if you want to say probably on average, we're probably from 1/3 to 40% below the OEM price, I would say, something like that.

But I don't have a number across the board. The other thing is, of course, in our repair business, we have a lot of proprietary repairs which save our customers considerable dollars. And there, the savings can be easily north of 50%.

That's really helpful. And maybe this is a range question, too, but anything that you could share on what your average market share is or customer wallet share is across the portfolio?

We're careful over on the PMA side. We never want to take a majority market share in any particular part that we go after. I it would be hard to come up with that number, depending on what the denominator is. But I do believe that there is still plenty of, if you will, unsold potential -- so I'm very confident of our continued growth and market penetration. Thanks, Gavin.

I'll take our next question from Pete Skibitski with Alembic Global.

I just want to circle -- I just want to circle back to the Gables deal just because it seems like you guys have made a number of avionics acquisitions at this point. And so I just wonder if you could speak to the strategy if they're just kind of one-off deals? Or is there a deeper strategy there in terms of maybe moving up the value chain in the commercial OE world or just maybe these deals are mostly aftermarket. I'm not sure, but I was wondering if you could speak to the strategy after a number of avionics deals.

Sure. Sure. So the answer is we've been active in avionics and cockpit electronics actually since 19, I think, when we made our first 2 acquisitions in this space One was in our repair and overhaul when we started with an acquisition called Air Radio and instrument. And at the same time, Rating and Power business with emergency backup power supplies and some other things and panels that are used in cockpit. So it's always been an attractive sector for us. We've expanded in that over the years. In 2001 with another acquisition and then beyond that with a series of others, mostly in repair and overhaul, but also adding other things like emergency locator transmitters which are related and panels and displays over the years.

So it's an attractive area where we've been able to expand somewhat opportunistically. We're not just -- I wouldn't say we're looking to rise in the food chain. That is not our objective. We're really looking to go where there are excellent opportunities and excellent both OEM opportunities as well as aftermarket. Aftermarket is a big part, of course, of the strategy. And in the case of Gables engineering, it is, as we talked about in the press release, a storied company founded in 1946, which had a wealth of suitors. I mean many, many, many people wanted to buy this company would have loved to have acquired it.

But ultimately, we had established a relationship over a fair number of years also being a local company here in South Florida, located near a number of our other facilities, including our offices where we're sitting right now. And so the opportunity presented itself, they were ready to do something. But most importantly, they wanted a good home for the business they wouldn't sell it to just anyone. They did select us out of many other opportunities, and it wasn't just based on economics. It was really based on what they thought we would do with the business, how we could grow it and that we would be a great steward.

So the answer to your question is it's a combination of things, which is very typical of our acquisitions that is very often the case. We may target something but we may not be able to make acquisitions in it either affordably or sensibly -- and that's how we've grown the business. We don't just stop there and say, okay, we can't get what we want on a path on a product road map we're going to look beyond that. We're going to take adjacencies and move. And I think that's been a big part of our success is our willingness and ability to bob and weave over the years. So we're very happy to have that acquisition, again, being a very unique company in the industry.

In fact, I'll just add that their terms are like Kleenex is sort of the generic term or Xerox people refer to panels and cockpits as Gable's panels. I mean that is a term in the industry. So it's a really special business.

That's great. Yes, very helpful. And just, Victor, and all these deals that you've done in the avionics world, you continue to run them separately. You're not kind of integrating them into 1 big avionics company. Is that right?

Yes. We're not integrating them into one large avionics company. However, the businesses do cooperate. And I think that's where HEICO has been particularly successful over the decades. Is being able to get what I call recall soft synergies where they cooperate going to customers for new programs -- they cooperate technically, they cooperate on production, quality and others. They will use other HEICO companies as suppliers which is very common and increasingly common. And of course, a major, major benefit has been and continues to be distribution.

We have an amazing distribution business led by some really remarkable people who have built that business over time, really absolutely stunning and a unique distribution business, which I don't know if Eric has to comment on. But over the years, we have put a lot of distribution with that business. And I think that's been a big part of our success. -- in the cockpit and avionics and electronic space.

Yes. I would agree, Pete, that -- the distribution has been very key to making a number of these acquisitions more accretive and significantly more successful because we do have a unique position with our customers able to increase our market share and do exceptionally well and I think provide a very, very strong outlet. So that's been a big key. To your question as to whether there's a broader strategy. HEICO started out life as a JT8D engine parts manufacturer, and then we got into other engines and components and as time has gotten on into structures and avionics. And we're looking to continue to build out our capabilities, yet leave them very entrepreneurial.

So everybody is very much focused on their unique technology. And our thought is if we're very good at the details that there'll be a very good solution. But we do have, as you pointed out, in Avionics, we did acquire Gables, we acquired wonderful Honeywell product lines and display units and aircraft information management systems. We bought Millennium, avionics. I mean we do have a very, very strong avionics business within HEICO. And that's been built over a long period of time,

In we have a lot of experience in.

Yes. No, that's great. I appreciate it.

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

Eric, Victor, Carlos, nice results. Eric. I have a quick question on the organic investment opportunities, particularly in the PMA business. When you're evaluating what parts to pursue how do you form that business case? Are you looking for a payback over a year or 2? Or does the part eventually you have to be able to generate, say, $3 million plus in revenue with accretive margins to make it worthwhile? Just how do you think about evaluating that process?

I mean we look at a lot of things. We look at how similar it is to something that we've done before, how much the customer wants it, what the payback looks like, what the investment is, how quickly we can get it from the vendor I mean there's all of that stuff put together. And then basically, that goes into an IRR analysis, and we've got -- we evaluate that because, obviously, that's important. And sort of pull it all together. So I would say it's sort of a complex process. But we want to continue to develop as many parts as we possibly can. We plan on being everywhere. So we tend not to exclude things.

Okay. And then thinking of the margins at FSG, they're very good again. Is there still more margin expansion opportunity from in-sourcing more work that Wencor had previously used build-to-print shops for.

The answer is yes. I think that there is additional opportunity for the 1 core companies to continue to grow with the other hydro companies. As far as resourcing product that's already made by an existing vendor, we do have the capability to do that, and we have done that, but that's probably not our preference. Our preference would be to be loyal to our vendors and give our other family companies, the opportunity to bid on new product going forward. And so I think that's more of the that's more of the focus. As far as the margin, of course, in the third quarter, FSG was 24.7% operating margin, which, frankly, is beyond any number I thought it could be. The thing which I think we're even more impressed with is that our EBITA margin was 27.3% which is really more than we ever thought that could be. And that's done while we continue to deliver great value to our customers, and we don't take advantage of them.

So I you would have asked me 10 years ago when we were roughly 10% below this number in that area. If we could ever get to this number, I would have told you not in the foreseeable future, not something that I'm really thinking about. But we just put one foot in front of the other and work hard every day, and the numbers don't mind and they are what they are. So I think that there is additional in-sourcing opportunity, and we'll just sort of have to see how that plays out.

And we'll take our next question from Kristine Liwag with Morgan Stanley.

One Eric, Victor and Carlos, can you talk about the supply chain and it sounds like the big disruptive.

Kristine, I think, unfortunately, your connection, can you repeat that? You may have to call back in if the connection is not good. I'm sorry, we can't hear you. If you call back in, we'll get to your question very quickly.

And in the meantime, we'll take the next question from Gautam Khanna TD Cowen.

Excellent. I was curious on the -- Carlos, you made that comment about FSG profit rates kind of exceeding even your expectations. And mix is a part of it. But I'm curious, has the profitability of the various product lines themselves just increased aftermarket parts, repair, et cetera. Have you seen an increase in profitability just in the baseline PMA business or the repair business.

I would say that Yes. Look, I would say I highlighted repair because it has -- it did have a positive impact on the quarter, and it was due to mix. And honestly, with the repair business, you kind of eat what you kill every week. And so it's very difficult to predict what we're going to repair next quarter, by example. I mean you get RFPs to do jobs. And what we have seen in the repair business is the 1 thing that is helpful to profitability is the PMA friendly side of those repairs. So we've -- we had a nice quarter where there's a lot of PMA friendly repairs that we did. Our guys to Eric's point, continue to develop new DER repairs every day. And so I think as that if that continues, it does have a very positive impact on our margins. Now not every quarter feels like this one.

You with me on the repair side. It does -- it is kind of hit or miss. But no, I was very happy with that. And then also, don't forget, we mentioned specialty products. The defense business we have there, we've banked gosh, 3 years' worth of firm backlog there, and those guys are working super hard and we're expanding that business, and that is good business for us. And so I think those 2 factors coupled with the very strong parts business that we've seen all year is really what's driven this margin.

And Gautam, I should also add that while Carlos is absolutely right on the -- our independent proprietary repair business does have very strong margins. I should also add that we are doing exceptionally well on OEM aligned, OEM licensed repairs as well. And those continue to be of great value to our customers as well as the HEICO as well as to our OEM partners. So HEICO is really agnostic when it comes to what product we want to sell. I mean we want to be out there. There are some customers who want an alternative product. And we're obviously the largest in that space and we'll deliver it to them. But there are other customers who want an OEM product, and we are absolutely there and aligned to develop that OEM product, whether it's through our repair business, even our PMA business as OEM licensed product.

Our distribution is all OEMs, all OEM. So we're really very strong across the board, and it's whatever our customers want, and it's not so much us pushing one thing or the other. It's responding to their needs and requests.

That makes sense. I'm curious on the when core integration or maybe said differently, cross-selling opportunity, how far along you are there? And the basis of my original question was on the PMA, just aftermarket parts side, given the OEM equivalent products seem to be getting a lot of pricing each year, I would think we would start to see the base level of the PMA aftermarket sales, just the profitability continuing to rise just because you get a discount off of the OEM list price, which keeps going up at a rate well above inflation. Are you seeing -- maybe if you could speak to both of those?

Or are you seeing the base PMA aftermarket business, profit rates increase perhaps because of that lift as are linked to OEM prices? And secondly, where are you on that on core cross-sell opportunity? How far along are you in that journey?

So let me start on the Wencor cross-sell opportunity. We've made good progress. And I'm glad you used the term cross-sell opportunity and not consolidation because we do operate these businesses separately. But there is an opportunity where a customer comes to us and they want a bigger product line of a particular area. And we're able to deliver it. And the Wencor combination has been incredibly successful. The DNA of Wencor matches HEICO beautifully, and we're able to really satisfy our customers. And you can see for after 2 years of 2 years of this, how well we are doing and how happy our customers are. So that's a given. As far as the margins, we've always said that we're going we need to pass along our cost increases. And we've done that. We have not used increasing prices as a profit grab. We're continuing to make sure that we deliver value to our customers in all areas that we provide, whether it's independent or whether it's OEM aligned.

So I think that's why we're capturing so much market share. And frankly, I think the margins are getting better because our people just work exceptionally hard and they really go the extra mile and they figure out how to get the customers what the customer needs, while we make sure we take care of our suppliers. As I mentioned in the prior question about Wencor and their suppliers and how we're loyal to them. And I think it's just doing good business. And there's just a general efficiency increase. And as we put more volume across the platform, we're able to drive higher operating margins.

You mind if i interject? One thing that's helpful -- this is Carlos. One thing that's helpful in understanding some of what Eric just said, is that a lot of our large PMA relationships are done on long-term contracts. And we continue to commit to our customers anywhere from 3 to 5 years in these contracts. And more often than not, we will lock in pricing with either CPI inflator or flat pricing. And there's a lot of reasons strategically to do that. It's additive to our business. They have more parts every year, but it does guarantee pricing for them. And that's part of the reason why when you start thinking about pricing our PMA business, many times we are locked in.

Now we are able to go back in inflationary times as we've shown over the last 5 years to get a little price to cover our costs even when we have these type of arrangements. But to your earlier question about the OEM prices rising at much faster rates even if those prices go up, maybe our standard price list mirrors that growth, but our true net revenue or net sale is based off contractual relationships, which more often than not in the PMA space is going to have a fixed price component.

So it's not really impacted by that type of movement in the market.

Right. Appreciate it.

I'll take our next question from David Straus with Barclays

This is Josh Korn on for David. Lot's already been asked. I just wanted to ask how much of a headwind will intangible amortization be from Gables on the margins for ETG?

I mean, look, we're probably -- we're looking somewhere around $1 million a month in amortization right now. So you can do the math there and figure out what it is on the OI margin.

Okay. I'll just stick to one.

And by the way, just to add, as you know, and I just want to make sure we reiterate the intangible amortization is really as far as we're concerned and accounting made up number. And it really doesn't impact the performance of the company. The performance of the company is outstanding. And really, the way that we look at these acquisitions is EBITA. And it's sort of a little frustrating because a lot of people in the industry look at acquisitions via EBITDA. And to us, depreciation is a real expense. This is something that we -- if you're going to be in business long term, you've got to make capital expenses, which typically equal or similar in the same range as depreciation. But it's really the EBITA number that's important.

And especially when you look at EBITDA, Gables is really outstanding, just simply outstanding company.

We'll take our next question from Michael Ciarmoli with Truist Securities.

I'll try and be quick here. Just Carlos, on the FSG margins, I think you called out SG&A efficiency as well. Are there any other actions you guys are taking to strip out costs or consolidate maybe it dovetails in with kind of the Wencor ongoing synergies?

No, we're not -- Michael, as you know, we run all these decentralized operations. So there's no real corporate program. I think what you wind up having with HEICO is you have a lot of very efficiently run subsidiaries that when you add revenue growth on top of that, they don't often need to expand their SG&A footprint. You know what I mean, they can handle the additional volumes or maybe it requires a few more salespeople. But the truth of the matter is there's not a big spend on overhead and SG&A type activities that aren't directly related to a sale that we typically incur.

So that leverage that we're getting. It's been the story at HEICO ever since I've gotten here. We seem to always -- the revenues outpace our SG&A spend, and we get a little leverage off it. I expect that will continue.

Got it. And then, Eric, just real quick on the destocking. On your specialty products, are you seeing anything specifically related to Boeing to the MAX. We've heard that specifically on the destocking and potentially it could be a drag into next year. But anything on -- from that customer or that program?

Talking from an OE basis or an aftermarket basis?

Sorry, on an OE new production basis?

On an OE basis. No. I mean we've seen a little bit of it in certain areas. We've seen a little bit of it, but we're very confident that Boeing is going to be extraordinarily successful with the MAX. And we feel very well positioned there. And I think anybody who's buying into that program is going to do very well. the whole industry, all of the OEMs yes.

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

Maybe just on M&A. As we think about future deals, are you focused on remaining sort of a designer, manufacturer and providing repair services? Or are you open to some of these more software-oriented product offerings?

Yes. We're open to that for sure. And in fact, some of our businesses have software products and sales and offerings. It's not a huge part of what we do, but we would be eager to grow in that. And I suspect we will over time. Again, as I was talking about earlier, in avionics, when we started, we get a foothold and we try to grow affordably and sensibly so I would imagine over time that will happen.

Great. Appreciate it. And then maybe just one more on Gables. I guess when you guys did [indiscernible] you were pretty, I think, open about that it would be dilutive to margins, whether that was operating margins or EBITDA margins, is there just no impact from Gables just given how the size of it or it's relatively within the overall segment view?

So Louis, this is Carlos. I mean the last week of July, the last week of our quarter, so there wasn't any impact, obviously, we're still studying the business and we're still integrating and doing the things we need to do. So there'll be more on that topic in Q4. I think it was mentioned earlier, it's a very unique business with incredible demand and really nice positions on a lot of OEM platforms. So more to come on that. I don't think it will be dilutive to the margins. I do think that in the early years, we will have some heavy amortization, so that will dampen the OI margin a little bit on the business, but I don't think it should be as pronounced as the [indiscernible] deal was when we did that back in January of '23.

We'll take the next question from Kristine Liwag with Morgan Stanley

Guys, sorry about earlier. Can you hear me now?

Perfectly.

Okay. Great. So Eric, Victor, Carlos, I just want to touch on a supply chain question. You guys mentioned earlier that, look, the approach that you have for bobbing and weaving and not having a centralized supply chain has been very helpful in getting you the parts that you need in this period of supply chain disruption. But I guess, at this point, we're seeing demand for aerospace and defense continue to be strong, things to be moving in the right direction and the supply chain stabilizing? And look, before, compared to pre-COVID, you're a much bigger company now. So at some point, would you consider going through a more centralized supply chain? And if you go in that direction, how much could you potentially save I think, Carlos, you mentioned that your current approach does probably cost you more money, but as things stabilize and you move in that direction, how much in margin could you potentially capture?

I'll give you my 2 cents on that. I don't think culturally at this point that in the next 3 to 5 years, I don't see that as being a direction we had. Look, as the company matures and we get larger, maybe maybe those things will come into play. Right now, I don't think it's necessary. And like I said, over the next 3 to 5 years, I don't think that strategy would work. Now there could be -- we could migrate to pockets of purchasing where we have businesses in similar end markets or similar product areas where they might co-source together on certain products. And by the way, we do some of that now but it isn't housed in what I would call centralized purchasing and like that.

So I think, Kristine, I think that's where we're at right now, to be honest with you, I haven't done a study to give you a precise number. Obviously, if you consolidated everything from a pure G&A spend, I think it would be cheaper. But I do think that the potential for lost customer revenue and for disrupting our happy customer base, it's probably not worth it for HEICO at this point in our life cycle.

Yes. That makes sense. And if I could follow on. Eric, you mentioned earlier for PMA, you have some products that are maybe 50% or 70% discount to the OEM and some of this are due to your long-standing price guarantees with customers. But I guess broadly speaking, I mean, because the OEMs have raised prices so much in the last 5 years, those are probably parts you could potentially increase pricing, but your customer is still getting a significant savings. How should we think about potential margin opportunity there? And are you seeing some of those contracts roll off in the near term to give you a little bit of tailwind on margin?

Yes, that's a great question. And we do see contracts rolling off over time. When the percentage savings is that high, it's typically after somebody has been purchasing the part from us for a long time, which would, in many cases, imply that they are more mature products. So look, if we wanted to be -- if we wanted to maximize short-term margin, yes, we could absolutely increase prices substantially. But these are products that are at the longer end of the tail of their lifetimes, our customers have been very loyal to us.

And yes, around the fringes, we do have to obviously increase our price to cover our increased costs and some of those costs have been substantial and we will do that without a question of a doubt. But in terms of really resetting and doing a profit grab, that's really not the HEICO way. And so I would not model that kind of activity.

Thank you. Well, we thank everyone for participating. I think that is the end of the questions. Samara, do we have anybody else with questions?

There are no additional questions.

Okay. Well, thank you, everyone, for participating. We will have the fourth quarter results call in late December, and we look forward to your continued interest, and we thank you for your continued interest in HEICO. If anyone has any additional questions, of course, as always, feel free to reach out to Carlos Victor or me, Eric. And we'd be happy to fill you in, but we wish you a pleasant end of the summer, and thank you for your support of HEICO over the years. And that concludes today's call.

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