HEICO Corp Q3 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Peter Lukas - CJS Securities - Analyst : It's Pete Lucas for Larry. Congrats on another great quarter. Just wondering in the ETG segment, if you could give us a little more color on how the Gables acquisition is performing relative to your expectations? Backing into it, it seems to be in line with your historical EBITDA multiples. And then in terms of your current leverage, how does that set you up? I know you mentioned the pipeline for M&A, but are you comfortable if something were to come up in the short term? Victor Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Electronic Technologies Group Thank you. Those are good questions. This is Victor. So we've closed on the acquisition about a month ago. So it's early days. But so far, as we say, so good. It's doing almost exactly as we expected. But I will caution I don't make a trend out of one month. But so far, we're very, very happy with it and how it's doing and pleased with the acquisition. And in terms of the cost of the acquisition, we can easily handle many more acquisitions, of course, depending on size, both on our existing line of credit and I think what we would very, very easily raise beyond that if we needed to. But we continue to have excellent capacity for acquisitions.

Question: Peter Lukas - CJS Securities - Analyst : Very helpful. I'll jump back in the queue.

Question: Tony Bancroft - Gabelli International Gold Fund Ltd - Analyst : Congratulations, gentlemen. Very nice quarter. Just -- you were talking about missile defense a little bit. Would you maybe expound on that and maybe also talk about potential M&A in that space? It just seems like there's just so much going on with missile defense, obviously, with Golden Dome and just all the [kinetic] war going on right now. Maybe you could talk a little bit more about that? Victor Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Electronic Technologies Group Yes. So Tony, this is Victor. Missile defense has been a part of our business actually for many years, just about since we -- shortly after we started the ETG. And we are seeing opportunities. In fact, we are seeing some orders. I wouldn't call it yet major needle movers for things related to Golden Dome, which as you know, incorporates some existing technologies and products into something that, I'll say, layers on top. So we continue to see orders from what we've been doing and getting orders on new products in addition to where we make products that are used for foreign missile defense as well, basically US products that are then sold on to -- from the US primes on to foreign countries, obviously, US allies. So it remains a great opportunity for us. It's something we've been doing for a long time. And I will emphasize, we've been doing it in what you would -- people tend to consider legacy defense as well as new tech defense. And I think that's very, very important. We've always been very careful about serving all the markets and not just playing to larger customers. Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group And also, Tony, just to add, within the FSG, we also have a very big position in missile defense and are a leading manufacturer of rocket nozzles and other missile defense applications. And the market is very strong. We do look at additional acquisitions. We have a lot of organic growth capability in that area. And so I think both are going to continue to be very exciting for us.

Question: Sheila Kahyaoglu - Jefferies LLC - Analyst : Great quarter. Maybe if I could ask, just going back to FSG, if we could just parse out the 13% organic growth by subsegment and by market. And I know there's been a lot of talk about engine versus airframe. Any context there? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 26, 2025 / 1:00PM, HEI.N - Q3 2025 HEICO Corp Earnings Call Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group So Carlos, do you want to do the --

Question: Sheila Kahyaoglu - Jefferies LLC - Analyst : Got it. And then maybe just given news out this morning with the Pentagon thinking that taking equity stakes in defense contractors, any update on your end on PMA into the DoD? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. That continues to be an area where we think the Pentagon can save a lot of money. And the Pentagon is looking at a lot of things. They're trying to implement a lot of things right now, but we're very bullish on that. So we think that, that will be continued opportunity for us. There's no reason why they shouldn't get those savings the same way as the commercial aftermarket and business aftermarket does. So we're -- we think that there's very good potential. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 26, 2025 / 1:00PM, HEI.N - Q3 2025 HEICO Corp Earnings Call

Question: Peter Arment - Robert W. Baird & Co Inc - Analyst : Eric, Carlos, nice quarter. Eric, talking about FSG, you talked about some market share, and I know Carlos just went through what the drivers were on MRO and some of the repairs and parts. But where are you seeing the opportunities in market share? Is this still benefiting from the Wencor synergies or how should we think about that? Or is it just new parts that you're developing and introducing? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. I think it's across the board. Yes, there are synergies with Wencor to answer that part of your question. But we have very, very strong organic growth opportunities across the entire business. So specifically, if you look at PMA and repair, I just did the strategic annual sales meeting reviews I participated in and saw, by subsidiary, the focus that they've got on developing new products, whether it's PMA or repair and it is -- it frankly blew me away. We are -- have got such technical capability, such customer support and demand that I'm really excited about the opportunities here. So I really see it very broad-based. And I think if you look at our numbers, the organic growth of 13%, with the fact that our aftermarket business is only roughly 25% engine. I think we -- I was surprised after seeing where other companies report it. Our 75% of our business is non-engine and we turned in 13% organic growth. I mean, frankly, I don't know how our guys did this. It's phenomenal. And so I think that really speaks to the competitive advantage that we have where we don't run a single big integrated enterprise, we run dedicated targeted businesses that are really -- excuse me for using the expression, but are killers in what they do. And they are really good, really knowledgeable. They know all the details and the organic growth pipeline is just tremendous. And I think when you see 75% of our business being airframe, and we're up 13% organic growth. I think that speaks to the depth and the breadth of our product line and capabilities.

Question: Noah Poponak - Goldman Sachs Group Inc - Analyst : Maybe just staying more, Carlos, does FSG have seasonality in the fourth quarter up or down sequentially?

Question: Noah Poponak - Goldman Sachs Group Inc - Analyst : Okay. So we can marry that with how the incrementals have played out and that will make the year of '24 and then your point previously has been you can expand a little bit from there next year with over the normal incremental?

Question: Noah Poponak - Goldman Sachs Group Inc - Analyst : Yes, that makes sense. Maybe you could similarly speak to your -- how you're thinking about ETG, which I know you've explained why that's a little bit more volatile quarter-to-quarter. It was off in the first quarter, down in the second and third; usually has some stronger seasonality in the fourth quarter. Do you expect that? And what's (technical difficulty) thinking of the rig --

Question: Noah Poponak - Goldman Sachs Group Inc - Analyst : Okay. You guys say Gables was your third largest ever acquisition? And if so, is that an enterprise value? Or is that a revenue or EBITDA? And can you give us any sense for the revenue and EBITDA? Victor Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Electronic Technologies Group Sure. So that was on enterprise -- purchase price, purchase consideration. And I don't know that we're breaking out other numbers, Carlos, I'm going to --

Question: Ken Herbert - RBC Capital Markets Inc - Analyst : Maybe, Eric, just start, as you look at the -- I think this third quarter, you were up against some of your more challenging comps in terms of FSG organic growth. Can you comment specifically within FSG, on the commercial side with your airline customers, has anything changed in the third quarter in the pricing dynamic or specifically your outlook for airline inventory levels as you move into the fiscal '26? Are you getting as good a pricing as you've gotten in prior quarters? And is there any risk on the inventory side at airlines that you'd call out in the next few quarters? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 26, 2025 / 1:00PM, HEI.N - Q3 2025 HEICO Corp Earnings Call Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Got it. So to take the first part of your question, with the 13% organic growth, you're right. I mean it's great numbers, especially considering that it was on top of 15% organic growth a year ago and 19% organic growth before -- in 2023. So I'm very happy with the sustained organic growth. We are getting pricing but again, it is commensurate with our cost increases. So our philosophy always has been, and our customers understand, nobody wants a price increase. But we must pass along our price increases -- our cost increases in order to be a viable, sustainable business. And so we have been able to do that. As far as -- I think you're probably also -- you're asking about inventory levels and what's going on at the customers. And it's really a mixed message. There are, as you know, when we all went through the pandemic, there were some significant shortages that occurred afterwards. And there was a certain amount of overordering in particular areas. And we are seeing some destocking in some areas yet we continue to see huge shortages in others. So therefore, the way I look at it on the HEICO portfolio is they net each other out. And we -- overall, we are not seeing destocking. But that is -- again, there are pockets of destocking, and pockets of customers just clamoring and can't get enough because the supply chain is just too thin for what they need. So I would characterize it that way.

Question: Ken Herbert - RBC Capital Markets Inc - Analyst : Nice results across the board.

Question: Ronald Epstein - Bank of America - Analyst : Maybe just a quick question on capacity. With all the growth you're seeing across both your commercial businesses and your defense businesses, is there any way where you're just squeezed on capacity? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes, there are a number of areas. There are a number of facilities that we've got to expand. It is still hard to hire people in certain geographies, although that is getting easier. I think AI and what's going on in the economy is helping in that area. But overall, I would say we're well -- we're very well positioned. We've made the investments to be able to handle future growth. And I think the other unique thing in HEICO is we haven't squeezed the fruit in terms of operating at our various facilities in excess of their ability so we've got plenty of capacity to be able to continue to grow and expand. So I think we're good in that area. We're always very mindful of that.

Question: Ronald Epstein - Bank of America - Analyst : Got you. And then how are your supply chains doing, right? I mean, the suppliers to you, maybe on raw materials and other things? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. They're -- in general, they're -- things are much improved. There are still some -- there are a number of areas of continued shortage and where we've got parts on backlog, and we're dying to get parts in our sales could be considerably higher if we had those parts. So that still remains a challenge, but there's no question that the amount has gone down significantly. One of the other things that we watch is we do a tremendous amount of incoming inspection at HEICO. And we don't just go dock the stock. We, instead, inspect the parts and we've got a very robust inspection process. And I can tell you that 1.5 years ago, two years ago, the backlog in incoming inspection was quite large. And our folks have done a great job in working that down. And I think that speaks to the capacity issues, adding people, adding facilities to be able to get all this stuff through. So we're -- we've made very good progress in that area.

Question: Ronald Epstein - Bank of America - Analyst : Got it. And have you -- I mean, Carlos, if you guys had to keep a little more inventory around just to smooth any gaps?

Question: Gavin Parsons - UBS AG - Analyst : What would you say is the average price gap now between one of your PMA parts and the OEM part? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes. That's really a hard number to estimate. I think that if you were to look across the entire business, it of course, depends on how long somebody has been buying a product because if a customer has been buying a product for a very long time and has it on contract, then we give them some form of price protection. Our -- I don't -- I can't tell you what our average is. I can take a guess, but I can tell you that I would say the range is from a 20% discount on the low end and on parts where customers have been buying them for a long time. And we've been able to control our cost, it could be as high as the 70% discount. So if you want to, say, probably on average, we're probably from one-third to 40% below the OEM price, I would say, something like that. But I don't have a number across the board. The other thing is, of course, in our Repair business, we have a lot of proprietary repairs, which save our customers considerable dollars. And there, the savings can be easily north of 50%.

Question: Pete Skibitski - Alembic Global Advisors - Analyst : I just want to circle -- I just want to circle back to the Gables deal just because it seems like you guys have made a number of avionics acquisitions at this point. And so I just wonder if you could speak to the strategy if they're just one-off deals? Or is there a deeper strategy there in terms of maybe moving up the value chain in the commercial OE world or just maybe these deals are mostly aftermarket? I'm not sure. But I was wondering if you could speak to the strategy after a number of avionics deals. Victor Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Electronic Technologies Group Sure. So the answer is we've been active in avionics and cockpit electronics actually since 1999, I think, when we made our first two acquisitions in this space. One was in our Repair and Overhaul when we started with an acquisition called Air Radio and Instrument. And at the same time, Rating and Power business with emergency backup power supplies and some other things and panels that are used in cockpit. So it's always been an attractive sector for us. We've expanded in that over the years; in 2001, with another acquisition and then beyond that with a series of others, mostly in Repair and Overhaul. But also adding other things like emergency locator transmitters, which are related, and panels and displays over the years. So it's an attractive area where we've been able to expand somewhat opportunistically. We're not just -- I wouldn't say we're looking to rise in the food chain. That is not our objective. We're really looking to go where there are excellent opportunities and excellent, both OEM opportunities as well as aftermarket. Aftermarket is a big part, of course, of the strategy. And in the case of Gables Engineering, it is, as we talked about in the press release, a storied company founded in 1946, which had a wealth of suitors. I mean many, many, many people wanted to buy this company, would have loved to have acquired it. But ultimately, we had established a relationship over a fair number of years, also being a local company here in South Florida, located near a number of our other facilities, including our offices where we're sitting right now. And so the opportunity presented itself. They were ready to do something. But most importantly, they wanted a good home for the business. They wouldn't sell it to just anyone. They did select us out of many other opportunities. And it wasn't just based on economics. It was really based on what they thought we would do with the business, how we could grow it and that we would be a great steward. So the answer to your question is it's a combination of things, which is very typical of our acquisitions. That is very often the case. We may target something but we may not be able to make acquisitions in it either affordably or sensibly. And that's how we've grown the business. We don't just stop there and say, okay, we can't get what we want on a path, on a product road map; we're going to look beyond that. We're going to take adjacencies and move. And I think that's been a big part of our success is our willingness and ability to bob and weave over the years. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 26, 2025 / 1:00PM, HEI.N - Q3 2025 HEICO Corp Earnings Call So we're very happy to have that acquisition, again, being a very unique company in the industry. In fact, I'll just add that their terms are like Kleenex is the generic term or Xerox. People refer to panels and cockpits as Gables' panels. I mean that is a term in the industry. So it's a really special business.

Question: Kristine Liwag - Morgan Stanley - Analyst : Eric, Victor, and Carlos, can you talk about the supply chain and it sounds like (technical difficulty) disruptive -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 26, 2025 / 1:00PM, HEI.N - Q3 2025 HEICO Corp Earnings Call Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Kristine, I think, unfortunately, your connection. Can you repeat that? You may have to call back in if the connection is not good. I'm sorry, we can't hear you. If you call back in, we'll get to your question very quickly.

Question: Gautam Khanna - Cowen and Company LLC - Analyst : I was curious on the -- Carlos, you made that comment about FSG profit rates exceeding even your expectations. And mix is a part of it. But I'm curious, has the profitability of the various product lines themselves just increased aftermarket parts, repair, et cetera, have you seen an increase in profitability just in the baseline PMA business or the Repair business?

Question: Gautam Khanna - Cowen and Company LLC - Analyst : That makes sense. I'm curious on the -- Wencor integration or maybe said differently, cross-selling opportunity, how far along you are there? And the basis of my original question was on the PMA, just aftermarket parts side, given the OEM equivalent products seem to be getting a lot of pricing each year, I would think we would start to see the base level of the PMA aftermarket sales, just the profitability, continuing to rise just because you get a discount off of the OEM list price, which keeps going up at a rate well above inflation. Are you seeing -- maybe if you could speak to both of those? Or are you seeing the base PMA aftermarket business profit rates increase perhaps because of that lift as are linked to OEM prices? And secondly, where are you on that Wencor cross-sell opportunity? How far along are you in that journey? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group So let me start on the Wencor cross-sell opportunity, we've made good progress. And I'm glad you used the term cross-sell opportunity and not consolidation because we do operate these businesses separately. But there is an opportunity where a customer comes to us and they want a bigger product line of a particular area and we're able to deliver it. And the Wencor combination has been incredibly successful. The DNA of Wencor matches HEICO beautifully and we're able to really satisfy our customers. And you can see for after two years of -- two years of this, how well we are doing and how happy our customers are. So that's a given. As far as the margins, we've always said that we're going we need to pass along our cost increases. And we've done that. We have not used increasing prices as a profit grab. We're continuing to make sure that we deliver value to our customers in all areas that we provide, whether it's independent or whether it's OEM aligned. So I think that's why we're capturing so much market share. And frankly, our -- I think the margins are getting better because our people just work exceptionally hard and they really go the extra mile. And they figure out how to get the customers, what the customer needs, while we make sure we take care of our suppliers, as I mentioned in the prior question about Wencor and their suppliers and how we're loyal to them. And I think it's just doing good business. And there's just a general efficiency increase. And as we put more volume across the platform, we're able to drive higher operating margins.

Question: Joshua Korn - Barclays Services Corp - Analyst : This is Josh Korn on for David. Lots already been asked. I just wanted to ask how much of a headwind will intangible amortization be from Gables on margins for ETG?

Question: Joshua Korn - Barclays Services Corp - Analyst : Okay. I'll just stick to one. Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group And by the way, just to add, as you know, and I just want to make sure we reiterate, the intangible amortization is really, as far as we're concerned, an accounting made up number. And it really doesn't impact the performance of the company. The performance of the company is outstanding. And really, the way that we look at these acquisitions is EBITA. And it's a little frustrating because a lot of people in the industry look at acquisitions via EBITDA. And to us, depreciation is a real expense. This is something that we -- if you're going to be in business long term, you've got to make capital expenses, which typically equal or similar in the same range as depreciation. But it's really the EBITA number that's important. And especially when you look at EBITDA, Gables is really outstanding, just simply outstanding company.

Question: Michael Ciarmoli - Truist Securities - Analyst : I'll try and be quick here. Just Carlos, on the FSG margins, I think you called out SG&A efficiency as well. Are there any other actions you guys are taking to strip out costs or consolidate? Maybe it dovetails in with the Wencor ongoing synergies?

Question: Michael Ciarmoli - Truist Securities - Analyst : Got it. And then, Eric, just real quick on the destocking. On your Specialty Products, are you seeing anything specifically related to Boeing to the MAX? We've heard that specifically on the destocking and potentially it could be a drag into next year. But anything on -- from that customer or that program? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Talking from an OE basis or an aftermarket basis?

Question: Kristine Liwag - Morgan Stanley - Analyst : Guys, sorry about earlier. Can you hear me now? Victor Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Electronic Technologies Group Perfectly.

Question: Kristine Liwag - Morgan Stanley - Analyst : Yes. That makes sense. And if I could follow on, Eric, you mentioned earlier for PMA, you have some products that are maybe 50% or 70% discount to the OEM and some of this are due to your long-standing price guarantees with customers. But I guess broadly speaking, I mean, because the REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 26, 2025 / 1:00PM, HEI.N - Q3 2025 HEICO Corp Earnings Call OEMs have raised prices so much in the last five years, those are probably parts you could potentially increase pricing, but your customer is still getting a significant savings. How should we think about potential margin opportunity there? And are you seeing some of those contracts roll off in the near term to give you a little bit of tailwind on margin? Eric Mendelson - HEICO Corp - Co-President and Director; President, Chief Executive Officer of HEICO Flight Support Group Yes, that's a great question. And we do see contracts rolling off over time. When the percentage savings is that high, it's typically after somebody has been purchasing the part from us for a long time, which would, in many cases, imply that they are more mature products. So look, if we wanted to be -- if we wanted to maximize short-term margin, yes, we could absolutely increase prices substantially. But these are products that are at the longer end of the tail of their lifetimes, our customers have been very loyal to us. And yes, around the fringes, we do have to obviously increase our price to cover our increased costs and some of those costs have been substantial and we will do that without a question of a doubt. But in terms of really resetting and doing a profit grab, that's really not the HEICO way. And so I would not model that kind of activity. Thank you. Well, we thank everyone for participating. I think that is the end of the questions. Samira, do we have anybody else with questions?