管理層發言
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; 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 costs and revenues.
Parties listening to this call are encouraged to review all of HEICO's filings with the U.S. 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 more and 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 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, as 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 are honored that our subsidiaries were selected as trusted suppliers on a historic program as they are on many other key and historic programs. I guess you could say we are over the moon on this one. I'm getting some groans from that pun here in the room. I dedicate that one, by the way, to Rob 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 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, 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. 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, and this is really important, before acquisition-related intangibles amortization expense, our operating margin was 30.6% — yes, 30.6% — as intangibles amortization consumed around 410 basis points of our operating margin and is 390 basis points higher than the comparable ETG cash margin of 26.7% in the second quarter of fiscal '25. As we discussed last quarter, the ETG's operating margin is extremely sensitive to shipping mix, and we continue to expect volatility in our operating margin consistent with history.
On a true operating basis, these are excellent margins, and we are very pleased with this quarter's profitability while simultaneously satisfying our customers with industry-leading quality and turnaround time at very competitive prices. We continue to expect overall GAAP operating margins between 22% 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. And 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. And that's supported by a healthy pipeline of potential opportunities we are currently evaluating. Our long-term acquisition strategy remains unchanged. You're all familiar with it, and we continue to focus on identifying high-quality businesses that complement our existing operations, strengthen our market positions and support our long-term growth objectives.
As always, we will remain disciplined in our approach, and 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.
分析師問答
At this time, if you would like to ask a question, please press star then one on your telephone keypad. We'll take our first question from Lawrence 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 parts 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 ETG. 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. But actually, I think they're really trying to estimate what they think is reasonable going forward. And frankly, they're more than sandbaggers; they're really super talented and they have very aggressive goals, and they always seem to outperform. And that's what really happened in this quarter. Breaking down 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 you may say, well, why is component repair so much lower than the others? One is it's an extremely competitive business, as everybody knows.
But number two, it's dependent on getting parts from suppliers in order to complete these components. 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. There's no question that it's getting better, but we've got massive backlogs in all of our FAA-approved repair stations. A lot of them are waiting on parts. So 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 — 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 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 can tell you, I was at the MRO show roughly a month ago, and I'm on the phone with customers all the time. They are clamoring for more parts. We 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 the Middle East, that has impacted some sales to the Middle East. But you can see that we've well overcome that impact elsewhere. 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. 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. We disclosed about a 60 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 had that impact. But the demand is just very, very strong across both our commercial and defense business.
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 MRO 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?
Peter, it's a great question. All of the areas remain very strong. I mean there has been a little bit of a slowdown in certain pockets. 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. One of the other things that's important to note is that whenever there's angst or concern in 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 that materially impacts our results, but there's a tremendous knock-on effect around the world where people realize that they have to cut costs. 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. It's just a matter of them doing what they have to do in order to buy these parts.
Got it. Appreciate the color. And Victor, 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 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 space — I would say actually both defense and commercial — orders are strong. The demand outlook is positive for that. But you'll recall that historically, it's somewhat volatile for us and I would expect that to continue to be the case — somewhat volatile but trending up. 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 get overly 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 that we have and the record orders and record backlogs.
We'll take our next question from Kenneth Herbert with RBC Capital Markets.
Gentlemen, great results. Maybe just first on the ETG segment. Are these margins reflecting just purely timing or 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.
A couple of things. I look at the first half of the year as the better lens. Ninety-day slices of time, while important, are not always entirely reflective of where the business is going. So with the first quarter being weaker than it should have been and the second quarter being very strong, I look at that average. I think we continue to get the same growth rates in the ETG over time, and maybe we'll do better. The order book certainly continues to amaze me. I would say there's potential to do better on the margin, but I would just encourage people to not get too excited yet. Our businesses are conservative; our people are conservative.
I would just say we were blessed with the quarter where all the verticals or industry places had double-digit organic growth. And when that happens, we're going to post nice margins. That doesn't always happen. It's a lumpy business. For the six-month period, the margins in the segment were 23.5%, and I think that's pretty good. 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. It's better to err on the side of 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 segments.
Ken, that's a great question. I don't have the booking information in front of me at the moment, but I can tell you it's been very strong across all areas — aerospace as well as defense. Conversations about additional business have also been very strong. If a lot of those conversations turn into orders, which we're hopeful they will, I think you'll see continued significant growth on our defense side. We have a unique suite of products, we deliver on time, our costs are reasonable, we have outstanding quality, and I think we're in a very good position to continue to fill government needs as well as those of allies. We're very optimistic on that.
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 I would say 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 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, 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? How does that rank in the growth vectors for the company that you're excited about?
On 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. That business will continue to grow for us as the overall market grows. The historical programs still have an important role, but the defense tech ones will continue to grow.
In addition to missile defense in the new tech area, we're also very active in the drone and unmanned missile business. Those areas remain very strong. The exquisite legacy programs remain very important to HEICO and are major drivers of the company's success. As new defense tech gains business, HEICO is positioned to serve that market as well.
I'll slip another one in for you. There is a proposal to report earnings twice a year instead of quarterly. Given the lumpiness in results and the 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 need to consider. Our audit committee will discuss it. There are advantages and disadvantages to each approach. We need a little more definition on where things are going and what shareholders would like to see. We haven't made up our mind.
From an operational perspective, reporting quarterly creates cadence and focus — it gets people four times a year to hurry up and get things done and make sure they close out the quarter strong. While semiannual reporting might be convenient for corporations, I think quarterly cadence is beneficial from an operating perspective. That's my two cents.
The countervailing view is that quarterly reporting can cause a lot of short-termism and an overfocus on 90-day periods. We'll continue to review the pros and cons.
We'll take our next question from John Godyn with Citi.
Eric, I wanted to ask a bigger picture question about this idea of peak aftermarket. Skeptics are focused on whether aftermarket-heavy players like yourselves have been over-earning in recent years, implying some sort of revenue or margin cliff. At the same time, Eric, you said you've never been more optimistic about the future and that customers are clamoring for parts. There's a big delta there. Could you reflect on what skeptics are missing given your long experience?
John, I appreciate the question. Skeptics should be more focused on people engaged in pure parts trading — those with big inventories of obsolete product not in production; they could be hurt if retirements accelerate. That concern is misplaced when applied to a company like HEICO. Newer generations of equipment that we support are significantly more expensive and there is a lot more of it. For HEICO, the notion that a single legacy platform like the 757 is central to our success is incorrect; it's de minimis. We have new product development capabilities and significant backlogs. Customers are literally begging us for more parts. With the price of new-generation equipment, I think we're going to do extraordinarily well. People in the parts trading business have a different dynamic than HEICO. Yes, we have a small but successful parts trading business, but our focus is on developing proprietary parts, proprietary repairs, outstanding distribution, and specialty manufacturing. That's our business.
We'll take our next question from Sheila Kahyaoglu with 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?
Sheila, what Victor ate for breakfast was money.
I had a high-protein breakfast: egg whites with toast and some avocado. More seriously, we've been alluding over the quarters to the very strong order rates, the backlog, the shipping rate and the fact that some quarters are stronger and weaker than others. We have a very strong order book that continues to grow. It comes down to a combination of two things: what we design and produce for our customers and the market need, which seems to be growing in all the markets we serve. I'm excited about defense; we see a tail on this. Framework agreements are still being worked on, but we have seen increases in orders for many programs, both historical and new. We get inquiries about how to multiply production and what it would cost; it feels like a good moment.
Great. Eric, one for you to follow up on John's question. I know there are misconceptions about the aftermarket. Any color you can give on whether that's 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 three-quarters non-engine and roughly one-quarter engine. We've seen tremendous demand across the board. Middle East volumes are a bit lower, but overall that's not very impactful. As flying is reallocated, other carriers in North America, Europe and Asia absorb it. So it's strength across the board for us.
We'll take our next question from Mariana Perez Mora with Bank of America.
Good morning, everyone. I'm going to switch gears a little bit to the industrial aeroderivative engines. You've owned that business for a full quarter now. Could you discuss what were the surprises both to the upside and the downside getting into that vertical?
We're very excited about that. The aeroderivative market is incredibly strong and the industrial gas turbine market is very strong. Those are the two areas Ethos, now part of Encore, satisfies. We think that's going to be a very strong market for us. We've been studying that business for a while and working on the transaction roughly a year ago. Ethos has tremendous capability in Connecticut, South Carolina and in Aberdeen, Scotland. I visited that facility this quarter — great people, great technology and focus. We are very well positioned as demand for power generation increases, and Ethos will be in a great position as part of HEICO.
Perfect. And on defense, you just did the Southwest Antennas acquisition and mentioned your strategy of acquiring robust, growing businesses. How strong is that pipeline? How competitive are prices to acquire those targets, especially in a market where demand and recapitalization are strong? What role do you want to play and what areas are you looking at? How competitive could you be?
We're looking at components or subcomponents used in next-level systems. That's been our strategy since we started doing defense and we've been successful at it. Pricing for assets has increased over time as more people see the attractiveness of the space. We continue to pay reasonable and fair prices and we look for businesses that are growing and have strong market placement. We are particularly attractive to sellers who want a long-term owner and a good home for their business — someone who will allow them to continue to own part of the business sometimes. We buy to own forever; private equity tends to flip assets. People who have built businesses for decades and want a partner to continue the legacy are typically attracted to us. We have a long pipeline of such companies.
Adding to Victor's point, as of the end of last year, we had 31 minority partners in our businesses. We've developed a corporate culture and structure to work with partners, share and cooperate — that doesn't happen overnight. We've been doing this for nearly 30 years. The aerospace and defense industry is littered with private equity and corporate deals where people overpaid and underperformed. HEICO has been careful to avoid those pitfalls. When we find a business that wants a long-term owner, there's no better home than HEICO. I would also add that the industry has attracted many new entrants in recent years and some have overpaid. There will be a shakeout over time and our experience helps us avoid mistakes.
One more follow-up. You mentioned framework agreements and multiyear procurements. You generally don't approach businesses on cash neutrality alone; you care about operating profit and free cash flow. What is your appetite to acquire businesses that are less profitable than your core at least in the near term?
As a rule of thumb, we don't like to acquire businesses with less than a 20% operating margin or EBITDA margin. There have been exceptions where we bought a money-losing business and knew margins would improve quickly, or where something was strategically important and would reach those margins. But buying something we believe will remain sub-20% operating margin for the foreseeable future is unlikely for us.
We also have a very strong balance sheet and can make investments, but we anchor and justify investments with concrete long-term agreements. If we can secure those, we're willing to spend capital, hire people and expand facilities globally. The U.S. government would be well served by multiyear framework deals because aerospace and defense has historically run in boom-bust cycles, which is not good for hiring or capital allocation. Multiyear procurements would be extremely helpful to the industry and beneficial to voters and people who depend on reliable defense supply.
We'll take our next question from Matt Martello on for Scott Mikus with Melius Research.
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 were to launch next-gen narrow-bodies later this decade or in the early 2030s, would your operating units bid for work packages so they're specced into the program from inception?
First, I have to compliment you on your knowledge — it's exceptional and you're absolutely correct in everything you said. Yes, across HEICO we have very good capability to develop additional products. Our Gables engineering subsidiary has the ability and would be a phenomenal partner to develop additional products for both airframers and avionics subsystem suppliers. We're in a great position to support both. With regard to aftermarket demand for the products you mentioned, yes, over time those markets will decline, but we've been very happy with the performance of those businesses. There's a massive amount of business to be had over the next many decades on those programs. I also have to call out the team at Sunshine Avionics and HEICO Parts and Repair for doing a marvelous job on integration and execution on those programs.
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. Could you quantify how much you think that was, not just from a margin standpoint but from a sales standpoint?
Gautam, it's about roughly between $15 million and $20 million.
Got you. Since fuel prices have gone up since the beginning of the war, have you seen new customers approach HEICO about PMA parts? Have you seen a change in customer behavior to take advantage of the lower-cost offering you provide?
The simple one-word answer is yes across many markets. I had a call with the head of a customer we've been talking to for years about a new product that would be powerful for us. We have a lot of kinetic energy built up at HEICO: customer goodwill, design capability, and customers want it. We are not a threat to OEM competitors; we supplement what they do. Some customers want premium offerings and others want cost-efficient options. HEICO can support both. On the commercial side we're very strong, and on the defense side we're entrepreneurial, cost-conscious, high-quality and able to scale. We're in a very good place.
Are you seeing customers asking you to reverse engineer parts or giving you new product development ideas at a quicker pace than prior to the conflict?
Yes, 100%. They're coming to us with ideas and requests more frequently because they recognize that if they want high quality, short lead times and better prices, HEICO is the answer.
And last one: since the quarter, demand has also been very good; there has not been a deceleration, correct?
Correct. With the exception of a modest slowdown in the Middle East, demand remains strong overall.
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 how much the 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 a single lever; it felt like a unique situation where all verticals and end markets were pushing at similar paces. We were honestly busting at the seams. When that happens, we're going to get some margin expansion, and some of that is due to mix. Also, we get leverage on fixed cost base and our G&A spend was down as a percent of revenue. That will continue as we grow and add more volume; our relatively flat structure allows for margin expansion without adding many new layers of management. There's nothing particularly unique 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 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?
Good question. With the incredible growth we're seeing in our aftermarket business and the surge in some military business in FSG, I think we've got a bit more stable margin lift. If I were to give you a range, I'm thinking 24% to 26% for FSG — those two end points — and depending on any given 90-day period, if one vertical outperforms the other, we'll migrate to the high or low end of that range. My thinking on that has come up a little bit from prior quarters.
I appreciate that. Eric, you mentioned the accelerated deliveries. Just to be clear, was that flowing through specialty products or through the parts business? You called out 20% organic growth. So just curious.
It would be a little bit in both; but the pull-forward was all defense-related.
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 taking that number higher?
I'd say we're in the roughly 500 parts area annually, and we've got the ability to do more. The question is whether we scale more broadly versus picking higher-value products. Sometimes we develop PMA parts in conjunction with principals so sometimes they hold the PMA and sometimes we do. Also, DER repairs frequently perform the same effective function as PMA parts and we achieve 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.