Earnings Call
Heico Corp (HEI)
Earnings Call Transcript - HEI Q1 2026
Operator, Operator
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.
Eric Mendelson, Co-CEO
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 two 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 a result as of January 31, '26, as compared to 1.6x as of October 31, '25. The increase in our leverage ratio is a direct result of the successful completion of an acquisition during the first quarter. Acquisition activity in both operating segments remains very strong with a very healthy pipeline of opportunities. We continue to target complementary businesses that align strategically and financially, focusing on disciplined accretive transactions that enhance HEICO's long-term value. In January '26, we paid our regular semiannual cash dividend of $0.12 per share. This represented our 95th consecutive semiannual cash dividend since 1979. Now I'd like to take a moment to discuss our recent acquisition activity. In January, our Electronic Technologies Group acquired 100% of Axillon Aerospace's Fuel Containment Business, which was renamed Rockmart Fuel Containment. Rockmart 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.
Victor Mendelson, Co-CEO
Thank you very much, Eric. I want to express my gratitude to our team members at HEICO before we delve into the details. The results we are discussing today reflect their talent, discipline, and commitment to execution. Their collaboration and focus on excellence in everything we do is truly inspiring. In the first quarter of fiscal '26, the Flight Support Group's net sales rose 15% to $820 million, compared to $713.2 million in the same quarter of fiscal '25. This growth is attributed to strong organic growth of 12% and the impact of our acquisitions from fiscal '25. The demand across all our product lines contributed to the organic net sales growth. The Flight Support Group's operating income increased 21% to $200.7 million in the first quarter of fiscal '26, up from $166.1 million in the same quarter of fiscal '25. This increase in operating income was mainly driven by the growth in net sales, efficiencies in SG&A expenses from that growth, and an improved gross profit margin. The improved gross margin was largely a result of the higher net sales and a better product mix in our repair and overhaul parts and services segments. The operating margin for the Flight Support Group improved to 24.5% in the first quarter, compared to 23.3% in the same quarter of fiscal '25. The rise in operating margin reflects a decrease in SG&A expenses as a percentage of net sales, primarily due to the efficiencies mentioned earlier and an improved gross margin. Acquisition-related intangible amortization expense accounted for about 260 basis points of our operating income in the first quarter. Therefore, the Flight Support Group's cash margin before amortization, or EBITA, was around 27.1%, which is excellent and consistently high, being 110 basis points above the comparable cash margin of 26% in the first quarter of '25. We are very pleased with the ongoing operational excellence and improved cash generation displayed by the businesses in the Flight Support Group. Turning to the first quarter results of the Electronic Technologies Group, net sales rose 12% to $370.7 million in the first quarter of fiscal '26, compared to $330.3 million in the same quarter of fiscal '25. This increase was driven by a strong 6% organic growth and the impact from our acquisitions in fiscal '25 and '26. The organic net sales growth primarily came from increased sales of aerospace and defense electronics products, though it was partially offset by a drop 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 decrease in operating income mainly reflects a reduction in gross profit margin, somewhat offset by the previously mentioned net sales growth. The decline in gross margin was due to a less favorable product mix of defense products and lower sales of space products, but this was somewhat balanced by increased sales in aerospace products. As you know, quarterly margin variability in our Electronic Technologies Group aligns with historical trends, with periods where lower margin products make up a larger share of sales. We anticipate that ETG margins will improve as the year advances, especially in the second half. The Electronic Technologies Group's operating margin was 19.8% in the first quarter of fiscal '26, compared to 23.1% in the first quarter of fiscal '25. This decline in operating margin is largely due to the previously mentioned lower gross profit. We have seen similar unfavorable mixes in the past, including in the first quarter of fiscal '24, followed by a stronger rest of the year, and we expect a similar trend this year. Notably, our operating margin before acquisition-related intangibles amortization was approximately 24%, as these amortizations take over 410 basis points out of our margin, which is how we evaluate our businesses and aligns closely with cash. Even on a true operating basis, these remain strong margins, though we would seek improvement on a full-year basis. The strong margins in the Electronic Technologies Group resulted in a record backlog, showing robust demand for our products and healthy end markets. Our shipments and mix can vary throughout the year. We saw some of this variability in our shipment mix this quarter, which is consistent with patterns we've discussed in previous calls. We are satisfied with the quarter's organic growth and are particularly enthusiastic about the opportunities in defense, commercial aerospace, and space for the rest of fiscal '26. This optimism is supported by our record backlog and growing order volumes. Thank you, and I will hand the call back to Eric.
Eric Mendelson, Co-CEO
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.
Operator, Operator
Thank you. We'll take our first question from Larry Solow with CJS Securities.
Lawrence Solow, Analyst
Great. I have a question for Victor. It seems that the ETG is putting some pressure on the shares this morning. You mentioned Q1 '24, and it appears that the mix issue is completely temporary. There was a significant sequential drop, but could you provide more detail on that, your backlog, and the mix? It doesn't seem like you have any terminations, and we could potentially bounce back to that low to mid-20s range for the year. Is that accurate?
Victor Mendelson, Co-CEO
Yes, I think that's absolutely right. That's our expectation based on the shipment schedules and what we have. It's not unusual for us to experience fluctuations. It may be lower than average, but sometimes we encounter favorable shipment schedules, and other times we face unfortunate ones. That's why we encourage everyone to consider the entire year for the ETG, particularly as the quarters progress. Our recent experience spanned various products and subsidiaries, and it represented a perfect storm of challenges regarding margins, primarily due to mix issues. However, what we have planned for shipments and what our subsidiaries are showing as the year progresses is quite promising. Of course, we'll have to wait and see; there are no guarantees in life. But at the moment, I feel optimistic about the information our companies are providing.
Lawrence Solow, Analyst
Right. And it feels like a great environment for a lot of your companies, right, in the defense side for sure.
Victor Mendelson, Co-CEO
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.
Lawrence Solow, Analyst
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?
Victor Mendelson, Co-CEO
It's a very nice business that acts as a supplier and has had significant dealings with one of our other subsidiaries, Robertson Fuel Systems. They will operate separately, but there's a lot of potential for collaboration in production, new designs, and innovation for our customers. This will be reported under the Robertson business to ensure a streamlined process. We anticipate continued growth, especially with a growing aftermarket replacement cycle that seems to be in its early stages. We're pleased with its performance so far. We expect it to contribute positively to earnings in the first year of ownership, though we have only owned it for about a month. Overall, I'm feeling optimistic about it.
Lawrence Solow, Analyst
Great. If I could just ask a quick question for Eric. The organic growth remains strong at 12% despite a challenging comparison. I'm curious, historically in Q1, there has typically been some seasonal slowdown. However, we haven't observed that in the past couple of years with the recovery and growth in the aerospace sector. Do you have any thoughts on whether we might be returning to a more typical seasonal pattern where Q1 sees a decline compared to Q4, which we had not experienced in recent years, but was something we used to see?
Eric Mendelson, Co-CEO
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 four 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.
Operator, Operator
And we'll take our next question from Peter Arment with Baird.
Peter Arment, Analyst
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?
Victor Mendelson, Co-CEO
Yes. It's a great question. Originally, our business was primarily focused on GEO, but now we've shifted more towards LEO. Transitioning from GEO to LEO isn't inexpensive; the margins are lower and require significant changes in product design and research and development. However, I believe we are moving past those challenges this year. We still have a solid offering for GEO, but we are targeting where the demand is, which is in the LEO market. Our LEO operations also have strong margins, and we've seen substantial improvements there. However, it’s been a volatile business, with performance fluctuating greatly from one quarter to the next. While we value space, we are being cautious about expanding our presence in that area due to these inconsistencies.
Peter Arment, Analyst
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?
Eric Mendelson, Co-CEO
Thanks, Peter, for your question. The old saying goes that imitation is the highest form of flattery. For years, when we ventured into the PMA business, many thought we were crazy. They also doubted our decisions to enter the repair and distribution sectors. Those who were wise enough to invest in HEICO have seen significant success. We believe this indicates that the PMA market is very robust, with many potential PMA candidates available. People have inquired about what this means for HEICO's competitive positioning, and we are very confident about it. After 36 years of running this company, we have consistently prioritized our customers and focused on delivering value. I would guess we have the best customer relationships in the industry, and I don't foresee that changing. We provide value, keep our promises, and ensure that when clients work with HEICO, they receive a top-quality product. Our presence in that market remains strong, and we are fully committed to it. This situation highlights that others are acknowledging the value in the PMA business.
Operator, Operator
And we'll take our next question from Ken Herbert with RBC Capital Markets.
Kenneth Herbert, Analyst
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.
Eric Mendelson, Co-CEO
I appreciate the question, Ken. I want to acknowledge your early insights regarding HEICO's potential in the PMA space, which has proven beneficial for both airlines and our stakeholders. We are more committed and excited about our PMA business than ever before. With approximately 20,000 different parts in our catalog, we hold a significant competitive edge. This allows us to reference existing drawings, specifications, and manufacturing processes when developing new parts, which is crucial since true innovation is rare in our field. Our focus is on achieving greater acceptance within the airline industry. We've often questioned why airlines don't purchase more from us. Despite being satisfied with our current transactions, we believe there is room for growth. Post-COVID, airlines have begun to understand that PMA is about more than just cost; it involves prompt turnaround times and having readily available parts. I greatly respect our competitors, but forecasting demand for specific parts can be challenging due to various factors, including the condition and history of components. If airlines were financially robust previously, they might have installed new parts, leading to less immediate demand when components are returned. Conversely, if they were more conservative financially, demand for parts will increase. HEICO not only offers quality and value, but we also ensure availability, which is increasingly important in a post-pandemic world. Our PMA sales are predominantly in non-engine parts, including components, airframes, and interiors, with around 25% in engines, where our business is thriving. The airline industry is eager for more engine parts, especially considering the high costs associated with overhauling new engines compared to older models. This presents significant opportunities for us across the value chain, not just in engines but also in components, which are becoming prohibitively expensive. In conclusion, HEICO is well-positioned to excel in the PMA and repair sectors by offering airlines cost-reduction solutions and reliable alternative supply options. While I can't disclose specific product types or manufacturers for confidentiality reasons, our focus remains on meeting the needs of airlines effectively.
Kenneth Herbert, Analyst
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?
Eric Mendelson, Co-CEO
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.
Operator, Operator
And we'll take our next question from Sheila Kahyaoglu with Jefferies.
Sheila Kahyaoglu, Analyst
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?
Eric Mendelson, Co-CEO
Yes, I'd be happy to answer. Most of the consideration was in cash, and I believe it was over 80%, if I'm not mistaken. Carlos, is that correct?
Carlos Macau, CFO
That's correct. It was a small quantity of A shares, and they wanted to feel like owners. It was their request.
Eric Mendelson, Co-CEO
They acknowledged that sometimes they issue A shares because shareholders are eager to own HEICO stock. The request was specifically for A shares, which is why they granted them, and they are very excited about the acquisition.
Sheila Kahyaoglu, Analyst
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?
Victor Mendelson, Co-CEO
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.
Eric Mendelson, Co-CEO
To expand on my previous comments about Ethos, the sellers recognized the tremendous potential of this growing market. They were seeking adequate compensation for selling one of the leading repair and overhaul shops focused on industrial gas turbines and aeroderivative gas turbines. The request for HEICO A shares was intended as a reward for them. We are very excited, as everyone involved is well-informed about the power generation sector. Ethos has exceptional capabilities in parts repairs and has access to this market through their three facilities in Connecticut, South Carolina, and Aberdeen, Scotland. They have strong market access, talented personnel, and advanced technology. By joining forces with HEICO, we believe this will enhance HEICO's access to a rapidly expanding market. The A shares acted as an incentive; since they were parting with what we consider an amazing asset, they sought something extra. Importantly, while acquiring companies can be straightforward, securing them at prices that are accretive through cash can be very challenging. We managed to finalize this deal at a reasonable price, with the A shares contributing to that agreement.
Operator, Operator
And we'll take our next question from Scott Deuschle with Deutsche Bank.
Scott Deuschle, Analyst
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?
Victor Mendelson, Co-CEO
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.
Scott Deuschle, Analyst
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?
Victor Mendelson, Co-CEO
I would say that things are mostly normal, aside from the supply chain issues we've experienced. There's always some item that's causing delays in the system. However, everything is generally operating smoothly. It's similar to an airline schedule on a regular day, where there are some delays, and that's how things are functioning right now.
Scott Deuschle, Analyst
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.
Eric Mendelson, Co-CEO
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.
Operator, Operator
And we'll take our next question from Ron Epstein with Bank of America.
Ronald Epstein, Analyst
If you look at the evolving contract structures with major defense contractors, particularly the 7-year framework agreements, we have observed a few with Lockheed and a larger number with RTX. What impact do you anticipate this might have on your company, if any, considering it may provide you with visibility on contracts extending up to 7 years? How does this influence your business operations, and what are your thoughts on it?
Victor Mendelson, Co-CEO
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.
Eric Mendelson, Co-CEO
In the Flight Support Group Specialty Products division, we believe it will have a very positive impact because we produce many different components, and having advanced visibility into upcoming demands will be extremely beneficial. This has also provided a strong advantage for that business, which is experiencing record backlogs for missile defense products.
Operator, Operator
Got it. Got it. Got it. And then we've talked about some supply chain stuff. I mean, have you had any impact from critical minerals or magnets or whatever else and how you've been managing that in places where you do?
Victor Mendelson, Co-CEO
Yes, it's very, very minimal. It has not been a significant issue for us. And so far, we do not expect that it will become one. And in fact, there could be opportunities for us as a result of that when some of the new supply comes online in the U.S. vis-a-vis acquisitions and things of that nature, but that's further down the road.
Ronald Epstein, Analyst
Got it. Got it. And then maybe one more, if I can, to both of you guys. What are you seeing broadly in the acquisition market around valuation and so on and so forth? I mean as you both know, no doubt, the sector has gotten pretty hot. And how is that impacting how you're looking at valuations and how you can do M&A going forward where it is accretive in the framework of time that you guys like?
Victor Mendelson, Co-CEO
Yes. So Ron, it's definitely pushed multiples up over a long period of time. It isn't anything new, maybe a little bit more than historically. For us, certainly, that's why we're working so hard to make sure that we do as well as we've done in the past. And one of the important factors with us, I think, is the seller. And is the seller someone who's looking for something unique, particularly a good home for the business, someone who's going to retain the legacy and the operations in a similar capacity as operated in the past. And that gives us a really big advantage we've discovered historically. It doesn't mean we're going to buy everything we want, but it means there's a very nice pipeline. We have to count on a little more future growth, I think, and believe in the growth stories a little more than we used to. And so we're spending more time doing that to ensure that we think we're going to get the growth out of the businesses that's estimated.
Eric Mendelson, Co-CEO
Our acquisition teams are working harder than ever, and their pipelines are full. I expect to see more acquisition activity this year, which I believe will please our shareholders. A crucial point is that, as Victor mentioned, by setting ourselves apart and offering the best environment for sellers, we create significant value. It's simple to pay high prices for acquisitions, but making them financially viable is another matter. HEICO has strict cash flow requirements, and we evaluate each deal individually to ensure it can support its own debt service and working capital needs. That's how we've achieved consistent growth. Growth doesn't come from overpaying; it comes from acquiring reasonable assets that can sustain themselves. When evaluating defense tech companies, I find their prices to be quite inflated. We focus on businesses that produce cash now and in the future, and paying high multiples for assets that do not generate cash is not aligned with HEICO’s approach or our future plans.
Operator, Operator
And we'll take our next question from Scott Mikus with Melius Research.
Scott Mikus, Analyst
I was curious, do you have a sense of how inventory levels are at your airline customers? Because you mentioned that you didn't want to stuff inventory into the channel. And then I was also curious, within your distribution businesses, have there been any noticeable changes over the past several quarters in how fast they are moving inventory as the pace picked up as airlines prep for the summer travel season?
Eric Mendelson, Co-CEO
Yes. I would say the inventory levels are very consistent with what we've seen in the past. Some areas may be overstocked while others are understocked, but overall, there hasn't been a significant change. Regarding our distribution businesses, they are doing exceptionally well and are quite busy managing the demands of the aftermarket. I see it as business as usual with not much change for HEICO.
Scott Mikus, Analyst
Okay. And then thinking back a year ago, a lot of us were asking about DOGE and how that could benefit your business. We're now one year into the current administration. So have you started to see the Pentagon get the ball rolling on acquiring more alternative parts to both reduce maintenance costs and improve readiness rates for military aircraft. Are they at least doing it on the derivatives like the P-8s and KC-46s?
Eric Mendelson, Co-CEO
We've seen some movement there, yes. We always said that this would be a medium-term project. It's very hard to get things fully moving at the speed that we would like. But we are seeing good progress there, and we do anticipate further progress to come. So we feel very good. You look at the President's defense budget and something's got to be a bill payer for these tremendous increases. And this is very logical. And I think what the Secretary of War is doing makes a lot of sense, and they just can't keep on paying these high prices. So I'm still very optimistic in that regard.
Operator, Operator
And we'll take our next question from John Godyn with Citi.
John Godyn, Analyst
Eric, I wanted to follow up on the energy business and Ethos and what you're doing there. You offered a number of data points and breadcrumbs. We see different companies across A&D attacking this in different ways. I just wanted to talk about it big picture, but the types of questions on my mind are, did you kind of go down this path based on reverse inquiries from customers? What types of components do you expect to supply? Is it based on your existing SKUs? Or do you think that you're going to develop new SKUs? There are so many questions here. I can't go through all of them, but I just wanted to give you a chance to kind of talk through this a bit more.
Eric Mendelson, Co-CEO
Thank you. I think this is an important area that hasn't received much attention. We believed this market had potential, and we have been developing Ethos for about a year. We observed the industrial gas turbine sector and, to a lesser extent, the aeroderivative market, and identified strong opportunities. We actively engaged with the seller to create a viable deal and established a solid relationship with the operational teams, becoming their preferred buyer. The link to aeroderivatives is logical since everyone is familiar with HEICO and what we can offer in terms of aeroderivative components as well as for industrial gas turbines. Ethos has extensive OEM relationships, with approvals to support those products, and they've maintained this for a long time. We intend to continue supporting these channels without offering alternatives where OEM relationships exist. In cases where there are no OEM partnerships, we will seek to establish them and believe there are significant opportunities for market penetration given the high demand. The current activities of power companies highlight this need. Ethos provides a diverse range of products, including blades and various static and rotating parts. We believe their technology aligns well with ours, and we are thrilled about this acquisition, seeing it as a pathway for HEICO’s success. If HEICO were to enter the industrial gas turbine or aeroderivative market independently, it would face substantial challenges, as we had limited relationships with these customers. Ethos has been a reliable supplier for decades and originated from the Wood Group Aero accessories and components group. This background gives us a strong foundation to build upon as we move forward.
John Godyn, Analyst
And this is such a big market. I'm just curious, do you see this as something that could grow significantly for HEICO over time to the point where it might warrant the creation of a third segment, like an IGT segment? Could it be that substantial?
Eric Mendelson, Co-CEO
That would be very aspirational. I don't want to make any promises, but we do have high expectations for the business. It is still in the early stages right now. The company has strong capabilities, great people, and three locations. I hope your perspective is accurate, and I believe our team members at Ethos and Wencor are listening to this call and are inspired by your question and outlook.
Operator, Operator
And we'll take our next question from Matthew Akers with BNP Paribas.
Matthew Akers, Analyst
Most of my questions have already been addressed, but I wanted to discuss the balance sheet and your perspective on the current 1.8x leverage, which has significantly decreased since then. Historically, it seems you have operated at a lower level. Are you comfortable with the current leverage? Would you prefer it to be lower? It appears there are several potential M&A deals in the pipeline, so how are you considering the balance sheet at this point?
Carlos Macau, CFO
I'm happy to take that question. Our leverage right now is under 2x. So I'm very comfortable at this leverage point. And I expect that what we've done in the past will continue in the future. We'll continue to use a line of credit as a primary vehicle for funding acquisitions, which then affords us the opportunity to quickly pay that down and reload for the next deals. And so we'll still use that type of a structure. Right now, our permanent debt or the bonds that we have are running less than one turn of EBITDA. So I think our capital structure is quite flexible, and we're not capital constrained. So from a balance sheet perspective, we could go higher on leverage. I think if we did that, it would be very opportunistic and there would have to be a pathway to generate significant cash to bring us back down in the 2x, 2.5x leverage ratio. I mean I would think that, that's something that's doable for us. I don't think HEICO is going to be a 7x levered business. That's not in the cards for us. But I'm not going to rule out for an incredibly good acquisition. If we went to that level and had a pathway to get back down into the 2s over a reasonable period of time, we would certainly consider that and execute on if it was good for our shareholders.
Matthew Akers, Analyst
That's helpful. Yes. And then I guess just one on ETG. I guess was the government shutdown at all related to any of the mix impact that you guys discussed in the quarter? Or is that not the driver?
Victor Mendelson, Co-CEO
That wasn't the driver. It did have some impact a little bit, stuff shifting out. And so we'll pick up the benefit of that later on in the year, but I wouldn't call it a material impact.
Operator, Operator
We'll take our next question from Gavin Parsons with UBS.
Max Miller, Analyst
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?
Eric Mendelson, Co-CEO
We don't believe that's the case. Our business is primarily influenced by the growth in fleet hours or available seat miles. Additionally, the age of the aircraft plays a significant role. We have a fleet of over 20,000 aircraft that age annually, and the original equipment manufacturers do an excellent job of raising prices sharply to capitalize on this situation. While fleet retirement has not been a major factor historically, we are actively monitoring it. There's also a substantial opportunity with the new aircraft delivered over the past decade; the cost of spare parts for these newer models is significantly higher than those for the aircraft they replace. When comparing the same parts on older versus newer aircraft, the newer models are much more expensive. Overall, I agree with your assessment that our value proposition is significantly enhanced, and I believe we are well-positioned. We are already seizing opportunities in many markets, and I expect this trend to continue.
Operator, Operator
And we'll take our next question from Michael Ciarmoli with Truist.
Michael Ciarmoli, Analyst
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?
Eric Mendelson, Co-CEO
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.
Operator, Operator
And we'll take our next question from Jonathan Siegmann with Stifel.
Jonathan Siegmann, Analyst
Congratulations on the quarter. I have a question for Carlos. Looking back at the organic growth in ETG from last year, it was exceptional at $13.5 million year-over-year. Can you tell us how much it decreased this quarter? Can you provide a preview of that decline?
Carlos Macau, CFO
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 a decrease in order volume or a lack of backlog; it's mainly about shipments, which is always the case with space. I wouldn't worry too much about that. I expect we will see some recovery in the following quarters as we manage those shipments moving forward.
Jonathan Siegmann, Analyst
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?
Victor Mendelson, Co-CEO
Yes, thank you, John. It's a good question. The answer to that is yes. We picked up a number of new space and defense tech customers along the way. And so far, we're holding on to them. The way we generally look at it is that we are going to supply the customer base. They need our parts, our products regardless of who they are. And for the most part, that seems to be holding true. Thanks for the question.
Operator, Operator
And we'll take our next question from Tony Bancroft with Gabelli Funds.
George Bancroft, Analyst
Great job. My question is about the defense budget. You saw 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 a significant figure. How do you think that will affect your business? Can you provide a general overview on this? Additionally, there have been various announcements from the Department of War regarding programs like drone dominance and arsenal freedom. What insights have you gained from your discussions with the Department of War, and what is your overall perspective on these developments?
Victor Mendelson, Co-CEO
Thank you, Tony, for joining us and for your comments, which we greatly appreciate. Regarding the outlook and the impact of increased defense budgets, as you asked, it's certainly beneficial for us. The details will matter in the long run, but based on what we see and have heard, particularly concerning the multiyear contracts the government is placing on programs we are involved in, there is a positive impact for both our Electronic Technologies and Flight Support divisions. We are likely witnessing some of this in our current backlogs, which is encouraging. As for the Golden Dome opportunities, while it's not fully defined publicly, it appears to involve many existing missile defense programs, and we are engaged in various aspects of these programs. There are indications that we are supplying components for the Golden Dome initiative, although there isn't a formal Golden Dome department. The list of primary vendors highlights our position within the supply chain. Additionally, we observe that companies in defense technology are participating in multiple ways, which we are also noticing. Overall, both aspects present positive prospects for us, and we feel optimistic about them across both divisions.
Operator, Operator
And we'll take our next question from Louis Raffetto with Wolfe Research.
Louis Raffetto, Analyst
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?
Carlos Macau, CFO
It's a good question, Louis. If you remember last year, we discussed the performance feature added to our options in '25. Historically, our options have been time-based, vesting over five years. Last year, we introduced a performance feature linked to business growth. This change accelerates the amortization of the related expense due to accounting rules. As a result, we will likely see a higher expense in the first half of this year, which should decrease towards the end of the year. By the following fiscal year, the expense should align with or be lower than historical levels, as we will have amortized much of the '25 grants in fiscal '26.
Louis Raffetto, Analyst
I appreciate it, Carlos. Yes. I know how much you love all the accounting on that.
Victor Mendelson, Co-CEO
Yes, right.
Jonathan Siegmann, Analyst
Maybe one for Victor and Eric, just kind of, again, big picture here. Obviously, you guys have grown a ton over your 36 years. You're kind of in the $5 billion neighborhood. So just how do you guys think about the scale of the business, the sheer number of underlying businesses that are operating? And at some point, do you see some other potential portfolio action as making sense?
Victor Mendelson, Co-CEO
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.
Operator, Operator
And at this time, I will turn the conference back to the management team for any additional or closing remarks.
Eric Mendelson, Co-CEO
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.
Operator, Operator
Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.