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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, Samara, 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 one-time unusual charge to earnings, whereby the economic earnings of the upcycle are largely erased following a black swan event and investors don't realize much of the earnings never existed in the first place. Considering our terrific results, we're even more proud of them, given the added cost that many people don't appreciate, but everyone benefits from in the long run. 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 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 designs and manufactures advanced fuel containment solutions, primarily for military fixed and rotary wing aircraft. The purchase price of this acquisition was paid in cash using proceeds from our revolving credit facility, and we are very excited that Rockmart has joined the 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 EthosEnergy Group Limited. Ethos provides repair solutions for engine components and accessories for various industrial gas turbine, aeroderivative gas turbine, aerospace and defense engine platforms. I'm sure everyone on this call is keenly aware of the tremendous increase in demand for power caused by the exponential demand in AI or artificial intelligence and LLMs or large language model adoption. And this power is largely expected to be created through the use of industrial gas turbines and aeroderivative gas turbines. HEICO is obviously excited to enter this market and bring our technical capability and OEM relationships to serve this growing power demand. And we believe HEICO's acquisition of Ethos provides us with the perfect platform to sell our high-quality repair solutions to satisfy these rapidly growing needs. The purchase price of this acquisition was paid with a combination of cash using proceeds from our revolving credit facility and shares of 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% will continue to be owned by certain members of the seller's management team. We expect these acquisitions to be accretive to our earnings within the year following the acquisition.
Eric, thank you very much. Before we get into the details, I want to express my gratitude to our team members at HEICO. The results we are discussing today are a direct reflection of their talent, discipline, and commitment to execution. Their collaboration and focus on excellence is truly inspiring. The Flight Support Group's net sales increased by 15% to $820 million in the first quarter of fiscal '26, up from $713.2 million in the first quarter of fiscal '25. This increase comes from strong organic growth of 12% and the impact of our fiscal '25 acquisitions. The organic growth reflects heightened demand across all of our product lines. The Flight Support Group's operating income rose by 21% to $200.7 million in the first quarter of fiscal '26, compared to $166.1 million in the same period the previous year. This increase in operating income was largely driven by the net sales growth, efficiencies in SG&A expenses, and an improved gross profit margin, which was primarily due to higher net sales and a more favorable product mix within our repair and overhaul parts and services. The operating margin for the Flight Support Group improved to 24.5% in the first quarter of fiscal '26, up from 23.3% in the first quarter of fiscal '25. This increase in operating margin reflects a decrease in SG&A expenses as a percentage of net sales, primarily due to previously mentioned efficiencies and an improved gross margin. Acquisition-related intangible amortization expense accounted for approximately 260 basis points of our operating income in the first quarter of fiscal '26. Therefore, the FSG’s cash margin before amortization, or EBITA, was around 27.1%, which is outstanding and 110 basis points higher than the comparable margin of 26% in the first quarter of fiscal '25. We are very pleased with the sustained operational excellence and improving cash generation within the FSG businesses. Now turning to the results for the Electronic Technologies Group for the first quarter. The group's net sales increased by 12% to $370.7 million in the first quarter of fiscal '26, compared to $330.3 million in the same period last year. This increase was driven by strong organic growth of 6% and the impact of our fiscal '25 and '26 acquisitions. The organic growth is largely due to increased sales of our aerospace and defense products, although there was a decrease in space product sales. The Electronic Technologies Group's operating income was $73.2 million in the first quarter of fiscal '26, down from $76.5 million in the first quarter of fiscal '25. This decline in operating income reflects a decrease in the gross profit margin, although it was partially offset by the net sales growth. The decrease in gross profit margin resulted from a less favorable product mix in defense products and the noted drop in space product sales, even as sales of aerospace products increased. As you know, quarterly margin variability in our ETG aligns with the group's history, and shipments of lower, though not low margin products can sometimes comprise a larger share of our sales based on shipment schedules. According to our backlogs and shipping plans, we expect ETG margins to improve as the year progresses, particularly in the second half. The Electronic Technologies Group's operating margin was 19.8% in the first quarter of fiscal '26, down from 23.1% in the first quarter of fiscal '25. The lower margin is primarily due to the previously mentioned drop in gross profit. Historically, we have encountered similar unfavorable mixes, like in the first quarter of fiscal '24, but the rest of that year showed strong results, and we expect the same this year. Notably, before accounting for acquisition-related intangible amortization, our operating margin was around 24%, as these intangibles consume over 410 basis points of our margin, which is how we evaluate our businesses in relation to cash. On a pure operational basis, these margins are still strong, though we would not be content with them over a full year. The robust margins in ETG resulted in another record backlog, indicating strong demand for our products and healthy end markets. Our shipment mix tends to be uneven throughout the year, and we noted some inconsistencies this quarter, which aligns with our past experiences. We are pleased with the quarter's organic growth and are excited about the opportunities ahead in defense, commercial aerospace, and space for the remainder of fiscal '26, bolstered by our record backlog and increasing order volumes. Thank you, and I will 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 on 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.
分析師問答
Thank you. We'll take our first question from Larry Solow with CJS Securities.
Great. I have a question for Victor. It seems like the ETG is putting some pressure on the shares this morning. You mentioned Q1 '24 and it appears that the mix issue is entirely temporary. There was a notable sequential drop, but could you provide more insight into that and your backlog? It seems there's no termination on your end, and we could potentially return to that low to mid-20s range for the year. Would that be accurate?
Yes, I agree with that assessment. That's our expectation. According to the shipment schedules we have, that's what we're looking forward to. It's not uncommon for us to adjust our projections. It might be lower than average, but sometimes we experience the perfect blend of favorable shipment schedules, and sometimes we face unfortunate ones. That's why we encourage everyone to consider the entire year in the ETG, especially as the quarters progress. Our recent experiences have involved various products and subsidiaries, and we encountered a combination of challenges affecting margins, primarily related to product mix. However, what we currently have lined up for shipments and the forecasts from our subsidiaries for the year ahead look promising. Of course, we need to remain cautious, as nothing is guaranteed. But at this moment, I feel optimistic about the information we gather from our companies.
Right. And it feels like a great environment for a lot of your companies, right, in the defense side for sure.
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. Nothing is ever easy, but feeling good about it.
Yes, sure. And while I got you a pretty nice sized acquisition, the Axillon, I guess, you 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 that serves as a supplier and has established significant relationships with one of our subsidiaries, Robertson Fuel Systems. They'll be operating independently, but there's a lot of synergy possible in terms of production, streamlining operations, and developing innovative designs for our customers. This will actually report to the Robertson business to keep everything streamlined. We anticipate continued growth, and there's a considerable aftermarket replacement cycle emerging that seems to be in its early stages. We're quite satisfied with this acquisition and expect it to contribute positively to earnings in the first year of ownership. We have only owned it for about a month, so while the initial signs are positive, I won't make any definitive statements based on just one month. However, overall, I'm feeling quite optimistic about it.
Great. If I could just ask one quick question for Eric. The organic growth remains strong at 12% despite a tough comparison. Historically, we've seen some seasonal slowdown in Q1, but recently that hasn't been the case in the recovery and growth in aerospace. I'm just curious if we might be entering a more typical seasonal pattern where Q1 actually sees a slight decline from Q4, something we haven't observed in the past few years but was common before.
Larry, thank you very much for your question. I mean, you're absolutely correct. I mean, in general, if you look last year, Q1 was the lightest organic growth, likewise in 2024 as well. 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 of them, I think, is really outstanding. And if you will, we didn't stuff the channel. There's a whole bunch of inventory that could have gone out which didn't go out for various reasons. But we're very careful to make sure that we do what the customers want. I'm very happy with these numbers. I think they reflect very well on the group.
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, that's a great question. Initially, the business was primarily focused on GEO, but now we have shifted more towards LEO. Transitioning from GEO to LEO is not inexpensive; it entails lower margins and significant product design and research and development efforts. However, I think we are starting to navigate through that issue this year. We continue to offer a solid range of services for GEO, but we are primarily focusing on where the customers are, which is the LEO market. We actually have some strong businesses with impressive margins in LEO. It's important to note that the performance has been quite variable from quarter to quarter. While we are interested in space, we don't want to become overly reliant on it for that reason. You may have noticed that we have been cautious in our growth within the space sector because of this.
Got it. I appreciate the color there. And then, Eric, just briefly, can you give a little commentary there a competitor bought a PMA business. And obviously, you guys still, I think, are kind of the leader in PMAs. Is this a deal that had overlap with you? Or how should we view that?
Thanks, Peter, for your question. There’s an old saying that imitation is the highest form of flattery. When we first started in the PMA business, many thought we were crazy. Then they questioned our decisions to enter the repair business and distribution. Those who were smart enough to invest in HEICO have done very well. This trend indicates that the PMA market is very strong, with many PMA candidates available. People have asked about HEICO's competitive position, and we feel very confident about it. We’ve been operating for 36 years, focusing on our customers and creating value for them. I believe we have some of the best customer relationships in the industry, and I don't expect that to change. We continue to add value, deliver on our promises, and our customers know that when they work with HEICO, they receive a top-quality product. We have a strong presence in the market and are fully committed to it, which suggests that others are beginning to recognize the value of the PMA business.
And 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 ways 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'm glad to address that. I want to acknowledge you for being one of the first analysts to recognize the potential success of HEICO in the PMA space for both airlines and our shareholders. Those who followed your insights have benefited greatly. We are deeply committed to the PMA business and are more enthusiastic about it than ever. Currently, we have around 20,000 different parts in our extensive catalog, which gives us a significant competitive edge. When developing new parts, we can refer to our existing documentation, specifications, vendors, and manufacturing processes, making it very challenging for others to enter this space. What we truly need is broader acceptance from the airlines. For many years, we have questioned why airlines don't purchase more of our products and push us to supply even more. While we are satisfied with our progress, we believe it could be greater. Coming out of COVID, airlines have started to understand that PMA is not just about pricing; it's also about turnaround time, having alternative vendors, and ensuring parts are readily available. I have great respect for our competitors supplying parts to the industry, and I know how difficult it is to forecast demand for specific parts due to various factors. The type of maintenance performed on engines or components during previous visits impacts future needs. If previous conditions were favorable, fewer parts will be needed upon return, but if conditions were tough, demand will increase. This variability makes forecasting challenging for all vendors. HEICO is proud to offer not just top quality and cost savings but also availability, which has become increasingly important since COVID. Our PMA business sales are approximately 75% non-engine components, including airframe and interior parts, with about 25% from engines. Our engine business is performing exceptionally well, and we are developing more engine parts, as airlines are demanding them. The costs of overhauling new engines are significantly greater than those of existing engines, presenting us with substantial opportunities across the entire value chain, not just for engines but also for components. Prices for newer components are extraordinarily high, indicating a strong market for HEICO as we aid airlines in managing their costs while providing alternative supplies. For competitive reasons, I can’t disclose specific product types or manufacturers, but we prefer to focus on delivering our services to meet airlines' needs.
Yes, I appreciate all the color, Eric. Just to put a finer point on that. 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 types and 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 Class versus the common stock?
Yes, I'd be happy to answer. Most of the consideration was cash, and I believe it was over 80% in cash, if I'm not mistaken. Carlos, is that correct?
That's correct. It was a small quantity of A shares, and they wanted to feel like owners. It was their request.
They mentioned that sometimes we proceed this way because many are pleased to hold HEICO stock. The request was specifically for A shares, which is why we provided those, and that was the idea behind it. We are 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. Thank you, Sheila.
And just to elaborate on what I mentioned about Ethos, the sellers recognized that this market is experiencing substantial growth. They were looking for fair compensation to part with one of the top repair and overhaul shops specializing in industrial gas turbines and aeroderivative gas turbines. The request for HEICO A shares was aimed at rewarding them. We're very enthusiastic about this, as everyone is well-informed about the power generation sector. Ethos possesses remarkable capabilities in parts and component repairs, along with access to the market. They operate three facilities located in Connecticut, South Carolina, and Aberdeen, Scotland, which gives them excellent market access, skilled personnel, and advanced technology. Collaborating with HEICO will enhance our ability to tap into what is undeniably a rapidly growing market. The A shares served as an additional incentive; since we believe they are relinquishing a valuable asset, they sought something extra. Importantly, while acquiring companies can be straightforward, securing them at accretive prices using cash is quite challenging. We successfully executed this deal at a reasonable price, with the A shares being part of that incentive.
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 microelectronics supply chain, particularly for memory. So I was wondering if you could speak to what ETG is seeing there and if you expect to see any margin pressure there either now or in the future?
Thank you, Scott. It's a good question. We're definitely experiencing that elevated inflation rate in some of the components. We 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, it varies business by business. But overall, on a consolidated basis, more in the noise level.
Okay. Are you generally able to get all the product that you need? Like is supply chain itself a limiter? Or is it just a cost issue?
I would say it’s pretty much normal, aside from the supply chain issues we've had. There’s always something that gets delayed and holds things up somewhere in the system. But for the most part, everything is operating normally. It’s similar to airline schedules on a typical day, where there are a certain number of delays, and that’s how things are running now.
Okay. And then for Eric, do you see any opportunity for AI to help accelerate any of the maybe reverse engineering analysis for PMA and the speed at which new products can be brought to market? Or alternatively, do you think AI could help yourself 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. I was just up at one of our subsidiaries last week, and they showed me there was a certain process in our quality acceptance area where we had multiple documents and multiple forms had to be filled out, and they were able through AI to come up with a revised process, which is significantly more efficient than what we were doing before. 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.
And we'll take our next question from Ron Epstein with Bank of America.
If you consider the evolving contract structures among major defense companies, particularly the 7-year framework agreements, we have observed a few with Lockheed and even more with RTX. What impact do you anticipate this will have on your operations, particularly regarding visibility on contracts that could extend up to 7 years? How does this affect your business strategy?
Yes, Ron, good question. We think it's a net positive. We have a number of companies that supply on 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 bringing more people in and figuring a way to do that in different shifts. So overall, I think that's a net positive for us.
In the Flight Support Group Specialty Products division, we anticipate a significant positive impact due to our production of various components. Having advanced visibility into upcoming demands is extremely beneficial. Additionally, we are experiencing strong momentum in that business with record backlogs for missile defense products.
And we'll take our next question from Gavin Parsons with UBS.
You 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 a HEICO alternative. If we hypothetically flip that script, what are the implications for HEICO in a world where maybe some 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 believe so. Our business is primarily driven by the growth in fleet hours or available seat miles. Additionally, we consider factors such as the age of the aircraft. We have a fleet of over 20,000 aircraft that ages by one year each year. The original equipment manufacturers are very effective at raising prices significantly to capitalize on this. Fleet retirement has generally not played a major role, but we continue to monitor it. There is also a substantial opportunity with the new aircraft delivered in the last decade, as the cost of spare parts for these newer aircraft is considerably higher than those for the older models they replace. When comparing the same line replaceable units on older aircraft to newer ones, the newer parts are much more costly. In conclusion, I believe our value proposition significantly increases, and we are well positioned. We are already leveraging opportunities in many markets, and I expect this will persist.
And 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 CFM56s. 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. I have a question for Carlos. Looking back at space organic growth in ETG last year, it was exceptional, $13.5 million year-over-year. Could you provide us with the amount it declined this quarter? Can you preview what that decline is?
The decline in space organically was in the high single digits for the quarter compared to Q1 of '25. As Victor mentioned earlier, it's not due to order volume decreasing or a lack of backlog. It's primarily related to shipments, which is always the case with space. I wouldn't read too much into that to be honest. I think you'll see some recovery in the following quarters as we catch up on those shipments going forward.
I think that shows it has to do with that great strong comp last year. And the other question I've heard folks ask us is you have exceptional positioning with the legacy space and defense hardware providers. How is your penetration with new customers in this area? Are you guys able to maintain positions at these new people in space and defense?
Yes, 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.
And we'll take our next question from Tony Bancroft with Gabelli Funds.
Great job. My question is focused on the defense budget. You mentioned the proposed budget which could be as high as $1.5 trillion. Even if that amount doesn't materialize over the years, it's still significant in terms of direction. How do you see that affecting your business? Can you provide a general overview? Additionally, with all the announcements this year from the Department of War regarding various programs like drone dominance, how have your discussions with the Department of War shaped your perspective on these dynamics?
Thank you, Tony, for joining us and sharing your insights. Regarding our outlook, the increased defense budgets and associated orders are certainly beneficial for us. While the specifics will unfold over time, we have observed positive effects from the multiyear government purchases relevant to our business, particularly in both the Electronic Technologies and Flight Support divisions. This is reflected in our current backlogs, which is encouraging. As for the Golden Dome opportunities, while not fully defined publicly, we understand it involves many existing missile defense programs, where we participate in both business segments. There also seem to be some new tracking and reconnaissance components within that system. We've been informed that some of our offerings may relate to Golden Dome. However, there's no formal department solely dedicated to it, and the structure involves various vendors. Importantly, our defense technology partners are also engaged in numerous ways, which further supports our positive outlook for both sides of the business.
And we'll take our next question from Louis Raffetto with Wolfe Research.
Maybe one 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 does it step down? Or does it ramp up?
It's a good question, Louis. If you recall, we discussed last year the performance feature attached to our options in '25. Historically, our options have always been time-based, vesting over 5 years. Last year, we added a performance feature focused on business growth, which accelerates the amortization of that expense according to accounting rules that can be frustrating. As a result, we'll likely see a higher expense in the first half of this year, which should decrease towards the end of the year. Furthermore, as we move into the next fiscal year, it should be on par or lower than historical levels since a significant portion of those '25 grants will have been amortized by fiscal '26.
I appreciate it, Carlos. Yes. I know how much you love all the accounting on that.
Yes, right. Yes. Listen, we've been able to adjust and grow with the business and morph, if you will, the organization as we've gone. There was a point in time where everything reported either to Eric or to me, this is Victor speaking, reported to one of us. And over time, we've gone to more of a bit of a working supervisor model, if you will, really extraordinary and talented people who show an ability to handle multiple companies at one time and acquisitions as well, multisite situations, for example, and they are leading groups, and we've been breaking this down into groups of both sides of the business, and that's going to continue. And the acquisition, you probably noticed the acquisitions we've made have generally been into those groups or into or under reporting to another subsidiary. So we want to keep that talent doing it that way. And we think that's very scalable.
And at this time, I will turn the conference back to the management team for any additional or closing remarks.
Thank you very much, everyone, for participating in our call and for those who asked questions. We are always available, it's Eric, Victor or Carlos for any of your additional questions that you may want to ask offline. And we look forward to speaking with you again on our second quarter fiscal '26 conference call at the end of May. So thank you very much, and this concludes our call.
Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.