HEICO Corporation (HEI) Earnings

Management highlights

- **Overall Performance and Culture**: Management reported record quarterly results across all core metrics, crediting HEICO's 36-year culture of adaptability, customer trust, quality, innovation, and consistent cash generation as the driver of sustained outperformance. Business is strong across all key end markets (commercial aviation, defense, space) with near-record order levels. - **End Market Demand Trends**: - Commercial aviation: Passenger travel continues its inexorable upward trend, with airlines increasingly seeking HEICO's lower-cost PMA and DER solutions to cut costs amid higher fuel prices, driving ongoing market share gains. Limited demand softness in the Middle East due to regional conflict has been fully offset by growth in other regions. - Defense: U.S. and allied governments are increasing defense spending and replenishing depleted inventory, driving strong order and sales growth with a projected multi-year growth tailwind. Defense currently makes up just under 30% of consolidated sales, consistent with historical levels, as all verticals are growing at strong clips. - Space: The industry is growing rapidly, and HEICO's participation in both traditional and new space programs continues to expand. HEICO recently supplied mission-critical components for NASA's Artemis II deep space mission. - **Acquisition Activity**: HEICO completed four acquisitions year-to-date in FY26, including two in April 2026: 1. Flight Support Group acquired 80% of Sherwood Avionics and Accessories, an FAA/EASA Part 145 repair station for defense and commercial aviation components. 2. Electronic Technologies Group acquired 90% of Southwest Antennas, a designer/manufacturer of high-performance rugged antennas for ground defense and law enforcement applications. Both acquisitions are expected to be accretive to earnings within 12 months of closing. HEICO maintains a robust pipeline of potential acquisition targets of all sizes, focused on high-quality businesses that complement existing operations. - **Operational Dynamics**: Supply chain constraints persist for component repair, limiting growth in that segment as repair stations wait for missing parts to complete assemblies. PMA parts development runs at ~500 new introductions per year, with capacity to add more while prioritizing higher-value products.

Guidance

- ETG maintains its prior full-year FY26 GAAP operating margin guidance range of 22% to 24%, with management noting that the segment results are inherently lumpy quarter-to-quarter due to shipment mix volatility. Management indicated full-year 2026 margins are likely to land at the high end of this range based on first-half results, but declined to raise the formal guidance to retain conservatism. - FSG's long-term operating margin potential is updated to a range of 24% to 26%, a modest upward revision from prior guidance, reflecting stable margin lift from strong aftermarket and defense growth. - Management expects continued sales growth for both segments in the remainder of FY26, supported by strong underlying end market demand and contributions from recent acquisitions. - HEICO's long-term capital allocation and acquisition strategy remains unchanged: management maintains a disciplined approach, only pursuing acquisitions that meet strategic and financial criteria to deliver long-term shareholder value, while balancing organic growth and acquisitions with maintaining liquidity and financial flexibility.

Segment performance

HEICO operates two core business segments, both of which set all-time quarterly records for net sales and operating income in Q2 FY26: 1. **Flight Support Group (FSG)**: Net sales grew 21% year-over-year (YoY) to $929.4 million, with 19% organic growth plus contributions from 2026 acquisitions. Operating income increased 31% YoY to a record $243.1 million. Operating margin expanded 210 basis points (bps) YoY to 26.2%, or 28.6% before acquisition-related intangible amortization (up 160 bps YoY). Margin improvements came from SG&A operating efficiencies, improved gross profit from favorable product mix and higher volume in aftermarket replacement parts, and a 60 bps tailwind from pulled-forward defense sales. Revenue contribution: ~67% of consolidated net sales. 2. **Electronic Technologies Group (ETG)**: Net sales grew 34% YoY to a record $458.5 million (corrected from transcript typo), with 17% organic growth plus contributions from 2025 and 2026 acquisitions. Operating income increased 56% YoY to a record $121.8 million. Operating margin expanded 370 bps YoY to 26.5%, or 30.6% before acquisition-related intangible amortization (up 390 bps YoY). Margin improvements came from higher net sales volume, favorable product mix for aerospace products, and SG&A operating efficiencies. Revenue contribution: ~33% of consolidated net sales. Consolidated company-wide results: Net sales grew 25% YoY; operating income grew 41% YoY; net income grew 49% YoY to a record $233.8 million ($1.66 per diluted share); operating cash flow increased 43% YoY to $292 million; EBITDA increased 37% YoY to $408.3 million; net debt-to-EBITDA was 1.74x as of April 30, 2026.

Risks & headwinds

- The call opened with a standard disclosure that forward-looking statements are subject to risks that could cause actual results to differ materially, including: changes in commercial air travel demand or airline purchasing; product development or manufacturing delays and cost overruns; regulatory and export policy changes; reductions in defense, space, or homeland security spending; competitive pressures; cybersecurity disruptions; challenges integrating acquisitions and achieving expected synergies; customer credit risk; interest rate, foreign exchange, and tax rate volatility; and inflation across end markets. - Short-term regional conflict in the Middle East has created modest, contained demand disruption that has been offset by growth in other regions to date. - Component repair growth is currently constrained by ongoing supply chain delays for required parts. - The aerospace and defense acquisition market has become more competitive and valuation levels have risen over the past 10 years, as new market entrants have entered the space attracted by strong growth trends. - ETG results are inherently volatile quarter-to-quarter due to fluctuations in shipment mix, so strong performance in one quarter does not guarantee equivalent performance in future quarters.

Analyst Q&A

• Q: Break down FSG organic growth by product line, comment on the sustainability of strong growth, and explain if higher commercial aviation parts growth reflects market share gains amid higher fuel prices. /

  A: Organic growth was 2% for replacement parts, 21% for specialty products, and 10% for component repair. Component repair growth is lower than other lines due to ongoing supply chain delays for parts needed to complete repairs, as well as high market competition; growth would have been higher without these constraints. The addition of PMA parts to repairs via the Encore acquisition drives stronger bottom-line growth even as it modestly reduces top-line growth, by replacing high-cost OEM parts. Demand is very strong across both commercial and defense FSG, and HEICO is seeing significant market share gains as airlines clamor for lower-cost PMA solutions. The 60 bps margin tailwind from $15M-$20M in pulled-forward defense sales is the only unusual factor in the quarter, and underlying demand remains strong.

• Q: Skeptics argue HEICO faces a peak aftermarket "cliff" as older aircraft retire. What are skeptics missing? /

  A: This concern applies to parts trading businesses that hold inventory of obsolete parts for retired aircraft, not HEICO. HEICO focuses on proprietary new PMA parts and repairs, not passive parts trading. Newer generation aircraft parts are significantly more expensive and more numerous than older generation parts, and HEICO actively develops new parts for new aircraft models. For example, claims that 757 aircraft retirement is a major risk for HEICO are completely false, as 757-related sales are de minimis for the company. HEICO currently has a larger backlog of new product development than ever, and customers are actively pushing HEICO to expand output, so the future of HEICO's aftermarket business is very strong.

• Q: How do you approach acquisition strategy in the competitive defense market, and what is your differentiator? /

  A: HEICO focuses on acquiring growing component/subcomponent businesses for next-generation defense systems, prioritizing companies that have already secured strong market positioning. While valuation levels for defense acquisitions have risen, HEICO's core differentiator is that it buys businesses to own them in perpetuity, unlike private equity buyers that acquire to flip businesses for short-term gains. HEICO also often allows sellers to retain a minority stake, preserving the existing culture and leadership that built the business. This model attracts sellers who want a long-term good home for their life's work, giving HEICO consistent deal flow. HEICO also has 30 years of experience working with minority partners and over 110 completed acquisitions, giving it deep expertise to avoid overpaying for underperforming assets.

• Q: If Boeing/Airbus launch next-generation narrowbody aircraft later this decade, would HEICO bid to be included in new programs from inception? /

  A: HEICO has the capability to develop new products for next-generation aircraft programs, and would definitely pursue opportunities to bid for work on new programs. HEICO already supports new builds for legacy Boeing platforms acquired from Honeywell, and while aftermarket demand for those programs will decline over decades, there is still decades of strong demand ahead, and those businesses have already outperformed expectations. HEICO's Gables Engineering subsidiary has the capabilities to partner with airframers and subsystem suppliers on new programs, putting the company in a strong position to capture new growth opportunities.