Prepared remarks
Welcome to the HEICO Corporation Second Quarter Fiscal 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; 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, which could adversely affect our business; our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals, and to 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. 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. 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 '26, 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 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 in the second quarter of fiscal '26 up from $204.7 million in the second quarter of fiscal '25. That strong cash generation remains a hallmark of our strategy, and it does permit us to invest in our people and our growth while increasing shareholder value. Consolidated EBITDA increased 37% to $408.3 million in the second quarter of fiscal '26 up from $297.7 million in the second quarter of fiscal '25. Meanwhile, our net debt-to-EBITDA ratio was 1.74x as of April 30, 2026 compared to 1.6x as of October 31, 2025. This increase results from our successful completion of four acquisitions so far in fiscal '26. In April, we announced that three 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 active. In April, we completed two more acquisitions. The Flight Support Group acquired 80% of the stock of Sherwood Avionics and Accessories, which is an FAA and EASA Part 145 repair station specializing in the maintenance, repair and overhaul of complex, mission-critical mechanical and electromechanical components for defense and select commercial aviation platforms. The purchase price was paid with a combination of mostly cash using proceeds from our revolving credit facility and some shares of HEICO Class A common stock. The Electronic Technologies Group acquired 90% of the stock of Southwest Antennas Inc., which is a well-known and very well-regarded designer and manufacturer of high-performance rugged and mission-critical antennas, primarily for ground-based defense and law enforcement applications. The purchase price was paid in cash, using proceeds from our revolving credit facility. We expect both of these acquisitions to be accretive to our earnings within the year following the acquisition. In addition, we have an excellent potential acquisition pipeline consisting of great potential transactions, both large and small. I'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 continues to accomplish is remarkable. And on behalf of our leadership, the Board of Directors and shareholders, we sincerely thank all of our team members for their continued commitment to our company, our customers and to one another. The Flight Support Group's net sales increased 21% to a record $929.4 million in the second quarter of fiscal '26 up from $767.1 million in the second quarter of fiscal '25. The net sales increase in the second quarter of fiscal '26 reflects strong organic growth of 19% as well as the impact from fiscal '26 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 $185.0 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 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. 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. The Electronic Technologies Group net sales increased 34% to a record $455.5 million in the second quarter of fiscal '26, up from $342.2 million in the second quarter of fiscal '25. The net sales increase reflects strong organic growth of 17% and the impact from our fiscal '26 and '25 acquisitions. The double-digit net sales growth is mainly attributable to increased demand for our other electronics, defense, aerospace and space products. The Electronic Technologies Group operating income increased 56% to a record $121.8 million in the second quarter of fiscal '26, up from $77.9 million in the second quarter of fiscal '25. The operating income increase 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% 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, before acquisition-related intangibles amortization expense, our operating margin was 30.6%; 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 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. For the remainder of fiscal '26, we anticipate increased sales in both the Flight Support and Electronic Technologies Groups 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 pointed out that acquisition activity remains robust, as we've talked about a little bit already in this call across both operating segments. That's supported by a healthy pipeline of potential opportunities we are currently evaluating. Our long-term acquisition strategy remains unchanged. You're all familiar with it, and we continue to focus on identifying high-quality businesses that complement our existing operations, strengthen our market positions and support our long-term growth objectives. As always, we will remain disciplined in our approach, and 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.
Questions and answers
(Operator Instructions were provided.) 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 kind of give us the breakdown of the really impressive organic growth? Can you run down the mix between the commercial and the defense side, I mean, on the parts side and what drove that growth? It was a nice step-up from last quarter other than the pull forward. Do you think this feels sustainable? Is there anything unusual in there?
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 Electronic Technologies Group. I've commented many times in the past that I think we've got some of the greatest group of sandbaggers that I've ever had the pleasure of knowing. I joke around and call them sandbaggers. They're really trying to estimate what they think is reasonable going forward. Frankly, they're super talented and they have very aggressive goals, and they always seem to outperform. That's what really happened in this quarter. Breaking down organic growth by product line: parts is around 2%, specialty products is 21%, and component repair is about 10%. You may ask, 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 from suppliers in order to complete these components. If we're missing a single part, we can't build an assembly. As a result, there are still significant supply chain issues. There's no question that it's getting better, but we've got massive backlogs in all of our FAA-approved repair stations, and frankly, a lot of them are waiting on parts. I think that 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, absolutely. The defense specialty side—those are great numbers and 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 was really strong. Some feel like there is a little bit of a slowdown on the demand side from travel. Have you seen any slowdown in travel? Are you guys 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 was at the MRO show roughly a month ago, and I'm on the phone with customers all the time. They are literally clamoring for more parts. I have never seen our internal operations folks, our salespeople as well as customers literally pushing us to do significantly more. With regard to the war in the Middle East, that has impacted some sales to the Middle East, but you can see that we've well overcome them elsewhere. That's because of our market share gains and the tremendous enthusiasm for what we're providing—certainly on the commercial aerospace side, but also on the defense side, where we've been extraordinarily strong. We did have a situation where a customer asked us to pull forward some sales that we had originally planned for the second half of this year, and so that did boost the second quarter a little bit. We disclosed about a 60-basis-point improvement in our margin as a result of that because we've got fixed costs associated with running the business and we just moved the sales forward. So that kind of impact occurred. But the demand is 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, sticking with you—maybe if you could level-set us a little bit. Historically, more of your revenue from MRO comes out of North America, but Middle East exposure—have you seen any behavior changes or can you give any color on how you're seeing regional demand globally?
Peter, it's a great question. All of the areas remain very strong. 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 across the board. One of the other important things to note is that whenever there's angst or concern with regard to commercial aviation, airlines have to get more serious and cut costs, and that always helps us in the long term. There ends up being more interest in our products. We get approved in more spaces and that inures to greater future revenue and earnings. So to answer your question, nothing significant in the Middle East, but a tremendous knock-on effect around the world where people realize they have to cut costs. We have the quality, the turn time and the price. It's a matter of customers doing what they need to do to buy these parts.
Got it. Appreciate the color. Victor, maybe quickly on the space end market, which historically has been a little more volatile but demand signals continue to be really robust—could you describe what you're seeing from demand and the capacity to support that?
Yes. Thank you. Your question was specifically on space, right? So both defense and commercial space—orders are strong. The demand outlook is favorable. Historically, it is somewhat volatile for us, and I would expect that to continue—somewhat volatile but continuing upward overall. That is, by the way, somewhat of a metaphor for 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 and we don't become over-enthusiastic 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. We feel really good about that given the backlogs we have and the order flow 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 first on the ETG segment—are these margins reflecting purely timing or better mix in the quarter? Is there anything else structurally we should think about? Carlos, it sounded like you were thinking the margins for the segment could be a little bit better moving forward relative to prior commentary.
A couple of things. I look at the first half of the year as a whole. Ninety-day slices are important but don't always reflect where the business is going. The first quarter was weaker than it should have been, the second quarter very strong; I look at that average. I think we continue to get the same growth rates in ETG over time and maybe we'll do better. The order book continues to amaze me. There's potential to do better on margin, but I would encourage people not to get too excited yet. Our businesses are conservative. Carlos, do you want to add?
I would just say we were blessed this quarter where all the verticals had double-digit organic growth. When that happens, we're going to post nice margins. That doesn't always happen and it's a lumpy business. For the 6-month period, the margins in the segment were 23.5% and I think that's very good. If we continue to capture this high growth, we'll probably be toward the high end of the overall range we've given you. But we don't want to overpromise—better to err on conservatism.
Thanks, Carlos. One more: you obviously have defense exposure in each operating segment. It sounds like there was some pull forward or accelerated shipments in FSG, maybe ETG as well. Can you talk about defense bookings across the segments—what was book-to-bill or trends you're seeing in bookings? It sounds like acceleration in defense is what we're seeing across both segments.
Ken, that's a great question. I don't have booking information in front of me at the moment, but I can tell you it's been very strong across aerospace and defense end markets. Conversations about additional business have also been very strong, and if many of those conversations turn into orders, which we're hopeful they will, you'll see continued significant growth on the defense side. We have a unique suite of products, deliver on time, with reasonable costs and outstanding quality. We're in a very good position to continue to fill government needs as well as those of allies, and we're very optimistic.
It's interesting, Ken—from a macro standpoint, we continue to be about a tick under 30% defense of our sales on a consolidated basis, and that's been pretty consistent. Maybe 1% higher this quarter compared to Q2 of '25. So our defense business is growing at a nice clip, but the rest of the business is keeping pace, too. All the verticals are growing at a really nice clip. So it's not just defense that's pushing the card up the hill—it's all verticals firing on all cylinders.
We'll take our next question from Jonathan Siegmann with Stifel.
Great results. On the comments on missile defense interceptors—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 there? How does that rank in the growth vectors for the company that you're excited about?
On the defense tech programs, a number of our subsidiaries are supplying into the defense tech firms across a variety of programs. I don't think it's limited to missile defense; it's broader. It certainly includes some missile defense given the other things we supply. That business will continue to grow for us as will the overall market. Historical programs remain important, but defense tech ones will continue to grow.
To add to Victor's comment, in addition to missile defense in the new tech area, we are also very active in the drone and unmanned missile business. That continues to remain very strong. The legacy exquisite programs continue to be major drivers and are crucial for national defense. As the new defense tech space gains business, HEICO is positioned to serve that market as well.
One more fun one: there is a proposal to go to reporting earnings twice a year instead of four times a year. Given the lumpiness in the results and consternation after last quarter, any thoughts on whether reporting only twice a year would be appropriate for the company?
I think this is something we have to study. It's definitely a possibility and something our audit committee will discuss. We need more definition on where things are going and what shareholders would like to see. There are advantages and disadvantages; we'll review them and have to understand them better. We haven't made up our mind.
From an operational perspective, reporting quarterly helps create cadence and urgency—people hurry to get things done and close out the quarter strong. If companies only had two opportunities to do that, I don't think, in general, for industry it would be helpful. While semiannual reporting could be convenient for corporations, the cadence of monthly shipments and quarterly reporting is generally good for operations. That's my two cents. Our operating people may not be excited to hear that, but that's what I believe.
The countervailing view is that quarterly reporting can cause short-termism and an overfocus on 90-day periods. We'll discuss the advantages and disadvantages.
We'll take our next question from John Godyn with Citi.
Eric, a bigger-picture question about the idea of peak aftermarket. Skeptics say aftermarket-heavy players may have been over-earning in recent years, implying some revenue or margin cliff. At the same time, Eric, you said you've never been more optimistic and customers are clamoring for parts. What's the disconnect? What are skeptics missing given your long experience and historical record?
John, I appreciate the question. Skeptics should focus more on people in the pure parts trading business—those with big inventories of legacy product not in production may be hurt if there's increased retirement of those parts. That concern is misplaced for a company like HEICO. The newer generation of equipment that we are addressing is more expensive than the older generation and there is more of it. People sometimes say the 757 engines are very important to HEICO—that's not accurate; that's de minimis for us. HEICO focuses on new product development, proprietary parts, proprietary repairs, distribution, and specialty manufacturing. We have more parts and more backlog than we've ever had, and customers are literally begging us to do more. With the price of new-generation equipment, I think we're going to do extraordinarily well. The business of parts traders is different from HEICO's business. We do have a small but successful parts trading business intentionally, but our focus is on developing proprietary parts, repairs and distribution.
And we'll take our next question from Sheila Kahyaoglu with Jefferies.
I have three questions. First to Victor: what did you have for breakfast? Second, what did ETG have for breakfast all quarter long—what really accelerated versus Q1 and how does that demand continue into the second half across ETG end markets?
Sheila—I’ll chime in—what Victor ate for breakfast was money.
I had a high-protein breakfast—egg whites with toast and some avocado. On ETG, joking aside, we've been alluding over the quarters to a very strong order rate, backlog, shipping rate, and the fact that some quarters are stronger than others. We have a very strong order book that continues to grow, reflecting increasing demand in the markets we serve. I'm excited about defense; we see a multiyear tail. Framework agreements are still being worked on, but we've seen increases in orders for many of those programs, the historical programs as well as new programs and R&D. Customers are asking how we can increase production—6x, 10x—and give them quotations. It feels like a good moment.
Eric, one follow-up related to John's question on aftermarket misconceptions—any color on geography or engine versus airframe? How are you seeing demand changes as capacity utilization comes down?
We're seeing tremendous demand across the business. Our PMA business is roughly 75% non-engine and roughly 25% engine. We've seen strong demand across the board. Middle East is a little lower, but the impact is not huge and other regions like North America and Europe have absorbed flying demand. It's strength across the board for us.
And we'll take our next question from Mariana Perez Mora with Bank of America.
Good morning. I'll switch gears to industrial aeroderivative engines. You've owned that business for a full quarter now. Could you discuss surprises—both upside and downside—getting into that vertical?
Mariana, the aeroderivative market is incredibly strong. The industrial gas turbine market is very strong. Those are the areas that Ethos, now part of Encore, satisfies. We think that's going to be a very strong market for us. We've been studying and negotiating that transaction for a while. Ethos has tremendous capability in Connecticut, South Carolina and in Scotland. I visited that facility this quarter—great people and great technology. As AI and other demand drivers increase the need for power generation, Ethos should be in a very good position and HEICO is excited to have it in our stable.
Perfect. On defense, you mentioned the Southwest Antennas acquisition and a strategy of acquiring robust businesses. How strong is that pipeline and how competitive are prices to acquire those targets, especially with high demand and governments seeking new entrants for resiliency? What's the role you want to play—what areas are you looking at and how competitive can you be?
We're looking at components or subcomponents used in next-level systems—that's been our strategy. Pricing for assets has increased over time as more people are attracted to the space; that's been happening for about a decade. We continue to pay reasonable and fair prices and look for businesses that are growing and have excellent market placement. Importantly, we are the best buyer for a seller who wants a good home and to remain involved long term. People who want an owner or partner and want to continue the business in the same place are generally attracted to us. That uniqueness helps keep our pipeline filled with the kinds of companies we want.
To add, as of the end of last year we had 31 minority partners in our businesses. Developing a culture and structure to work with partners takes time—we've been doing this nearly 30 years. Private equity often flips businesses; HEICO buys to own forever. That differentiator is powerful. Regarding pricing, aerospace and defense attracted many entrants post-COVID, and many overpaid and now underperform. HEICO has been careful to avoid those pitfalls and seeks long-term fits—a real home for businesses and their founders.
One more follow-up: you generally prefer businesses with solid profitability. What's your appetite to acquire businesses that are less profitable than your core, at least near term?
As a rule, we don't like to acquire businesses with less than a 20% operating or EBITDA margin. There have been exceptions where we bought a money-losing business and knew margins would improve quickly through consolidation or other actions. Those are exceptions. We are unlikely to buy businesses that we expect to remain sub-20% operating margin for the foreseeable future unless there's a very compelling strategic rationale.
We have a strong balance sheet and can make investments, but to justify those investments we anchor them to concrete long-term agreements. If we can secure those, we will spend capital, hire people and expand facilities. Multiyear framework deals from the government would help stabilize capital allocation and hiring and would be extremely helpful to both the government and industry.
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. You acquired the 777 AMS and 737 NG 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 PAE 7 in addition to servicing the aftermarket. If Boeing and Airbus launch next-gen narrowbodies later this decade or early 2030s, would your operating units bid for work packages so they're specced into the program from inception?
First, I compliment you on your knowledge—it's exceptional. Yes, we would definitely consider bidding on work packages. I can't comment specifically on particular products, but across HEICO we have capability to develop additional products. For example, our Gables engineering subsidiary has strong capabilities and would be a good partner to develop products for airframers and avionics subsystem suppliers. Regarding the aftermarket products you mentioned, over time demand will decline, but we've been very happy with the performance of those businesses and see a massive amount of business to be had over the next many decades. I also want to acknowledge Sunshine Avionics and our teams who have done excellent integration and execution on those programs.
And we'll take our next question from Gautam Khanna with TD Cowen.
Thank you. Good morning and great margins. Follow-up on the earlier comment about a bit of a pull forward on sales—could you quantify how much that was not just from a margin standpoint but from sales standpoint?
Gautam, it's Eric. The pull forward was roughly between $15 million and $20 million.
Got you. Since fuel prices have gone up since the beginning of the year, have you seen new customers approach HEICO about PMA parts? Have you seen a change in customer behavior to take advantage of your lower-cost offering?
Yes. We have seen that across many markets. Customers are more receptive—I've had calls with heads of customers we've been talking to for years about new business that could be powerful for us. HEICO has kinetic energy: customer goodwill, design capability, and the ability to scale. Customers want high quality, short lead times and better prices. HEICO can support both OEM-level and lower-cost options, and many customers are choosing those cost-effective options now.
Are customers asking you to reverse-engineer parts or giving new product development ideas at a quicker pace than before the conflict?
Yes—100%. They're more willing to try new approaches because they realize if they keep doing the same thing they won't get different results. HEICO provides high-quality, competitive-priced solutions with great lead times.
Last one: it's fair to assume demand since the quarter has been very good—no deceleration?
Correct. With the exception of some softness in the Middle East, demand continues to be strong overall.
And we'll take our next question from David Straus with Wells Fargo.
This is Josh Korn on for David. We talked about margins earlier—any way you could quantify how much mix impact was in each segment versus the other levers?
I would say both segments experienced favorable mix during the quarter, coupled with high volume growth. There wasn't one lever that was unique; all verticals and end markets were pushing at similar paces. It felt like a quarter where we were busting at the seams, and when that happens, you get margin expansion. Some of that is due to mix, and a lot of it is incremental margin leverage on our fixed-cost base because our fixed costs are relatively low. G&A spend was down as a percent of revenue and as we continue to grow and add more volume, our relatively flat structure allows some margin expansion. There's nothing singular to call out; it was a solid push across the entire platform.
We'll take our next question from Louis Raffetto with Wolfe Research.
Carlos, you talked about 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 margin potential there?
Good question. With the incredible growth in our aftermarket business and the surge in some military business in FSG, I think there's a bit more stable margin lift. If I were to provide a range, I'm thinking FSG could be in the 24% to 26% operating margin range, floating between those endpoints depending on which vertical is outperforming in any given 90-day period. That thinking has come up a little bit from prior quarters.
Appreciate that. Eric, you called out accelerated deliveries—does that flow through specialty products or through parts? You called out 20% organic growth.
It would be in both; it's all defense-related sales that were pulled forward. The accounting and flow include both specialty products and parts.
We'll take our next question from Gavin Parsons with UBS.
How many PMA parts are you introducing annually now, and what would be the considerations to take that number higher?
We're in the roughly 500 parts range annually, and we have the ability to do more. The consideration is whether to increase quantity or focus on higher-value products. Sometimes we develop PMAs in conjunction with principals, so sometimes they hold the PMA, sometimes we do. DER repairs frequently perform the same effective function as PMA parts and drive sales through that channel as well.
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. 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.
This concludes today's call. Thank you for your participation. You may now disconnect.