Welcome to the HEICO Corporation Fourth Quarter 2024 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 the severity, magnitude and duration of public health threats, such as the COVID-19 pandemic; HEICO's 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 to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by US 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; 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 Laurans Mendelson, HEICO's Chairman and Chief Executive Officer. And Mr. Mendelson, please go ahead.

I'm sorry. Thank you, and good morning to everyone on this call. We thank you for joining us, and we welcome you to this HEICO fourth quarter fiscal '24 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. I am joined here this morning by Eric Mendelson. Eric is HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO. Now, before discussing our record operating results, I want to sincerely thank HEICO's talented team members for their exceptional contribution to our success. Your dedication to exceeding customer expectations and achieving operational excellence has driven outstanding results and reinforces my confidence in HEICO's future. Over the past several years, we have achieved extraordinary growth in commercial aviation, emerging stronger than ever from a very challenging period in the aerospace industry. Our team members' resilience and adaptability during this time of rapid recovery and expansion have been remarkable. Equally commendable is the agility shown by our recent acquisitions, which have seamlessly integrated into our operations and enhanced our collective success. I'm also encouraged by our progress in expanding our presence in key markets such as defense and space. These sectors are critical to long-term strategy, and our team members' commitment to delivering innovative, reliable and best-cost solutions has strengthened HEICO's reputation as a trusted partner. This focus is for us for continued growth and success across diverse markets. I'll now summarize the highlights of our fourth quarter fiscal '24 record results. Consolidated operating income and net sales in the fourth quarter of fiscal '24 represent record results for HEICO and improved by 15% and 8%, respectively, as compared to the fourth quarter of fiscal '23. Consolidated net income increased 35% to a record $139.7 million, or $0.99 per diluted share in the fourth quarter of fiscal '24, and that was up from $103.4 million, or $0.74 per diluted share in the fourth quarter of fiscal '23. The Flight Support Group set all-time quarterly net sales and operating income records in the fourth quarter of fiscal '24, improving 15% and 35%, respectively, over the fourth quarter of fiscal '23. The increases principally reflect strong 12% organic growth, mainly attributable to increased demand for Flight Support Group's commercial aviation products and services, as well as the impact from our profitable fiscal '23 and '24 acquisitions. Consolidated EBITDA increased 13% to $264 million in the fourth quarter of fiscal '24, and that was up from $234.2 million in the fourth quarter of fiscal '23. Our net debt to EBITDA ratio was 2.06 times as of October 31, '24, and that was down from 3.04 times as of October 31, '23. Our excellent operating results have allowed us to early achieve the forecast we made a year ago, that our net debt to EBITDA ratio would return to a historical level of about 2 times within roughly one year to 18 months following the Wencor acquisition, and that excluded the impact of any additional acquisitions. Our acquisition pipeline is extremely robust with opportunities in both Flight Support and ETG, and we intend to follow our time-tested strategy of opportunistic acquisitions that continue to expand the cash-generating ability of HEICO. Cash flow provided by our operating activities increased 39% to $205.6 million in the fourth quarter of fiscal '24, and that was up from $148.4 million in the fourth quarter of fiscal '23. Yesterday, HEICO's Board of Directors declared an $0.11 per share cash dividend payable in January 2025, and this represents our 93rd consecutive dividend, and this reflects their continued confidence in the strong cash flow generation of HEICO. Now, let me talk about acquisition activity. Over the past few months, our ETG Group made several strategic acquisitions, one, acquiring 70% of SVM Private Limited in November '24, they acquired 87.9% of Mid Continent Controls in October '24, and they acquired 92.5% of Marway Power Solutions in September 2024. In addition, in August '24, our Flight Support Group acquired the Aerial Delivery and Descent Devices division of Capewell Aerial Systems. All of these acquisitions were funded by using cash provided by operating activities, except for Capewell, which was principally funded using proceeds from our revolving credit facility. We expect each of these acquisitions to be accretive to our earnings within the following year of acquisition. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the fourth quarter results of the Flight Support Group. Eric?

Thank you very much. The Flight Support Group's net sales increased 15% to a record $691.8 million in the fourth quarter of fiscal '24, up from $601.7 million in the fourth quarter of fiscal '23. The net sales increase reflects the impact from our fiscal '23 and '24 acquisitions and very strong 12% organic growth. The organic net sales growth mainly reflects increased demand across all of our product lines. The Wencor operations continue to exceed our expectations, and we are convinced this was an excellent acquisition for HEICO. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs, which has translated into excellent growth opportunities and success for both our legacy businesses and Wencor. We continue to operate Wencor as a standalone business operation. I have defined our strategy as cooperation, capabilities and consistency without consolidation. The sales, earnings and margins proved this was the perfect strategy. As I have mentioned before, we continue to make good progress working together in serving our customers in a combined seamless fashion. Some examples of how we are working together include: one, utilization of all HEICO and Wencor PMAs and DERs at all repair stations; two, commercial and defense aftermarket sales cooperation; three, Wencor's e-commerce platform lists all HEICO non-competitive PMAs; four, Wencor is utilizing HEICO's manufacturing base to quote many new products; five, engineering and regulatory cooperation; six, sharing our best-in-class vendors; and seven, various back office synergies such as insurance, payroll, retirement benefits and export compliance that will help offset additional regulatory compliance costs, such as SOX and our FAA ODA. In addition, the FSG's defense sales continue to grow and offer an excellent opportunity. Many people have asked us what the U.S. presidential administration change will mean for HEICO. In short, we are very excited about it. Whether it's the chance to sell more of our much lower cost alternative aircraft replacement parts to save the government and taxpayers significant money or other opportunities, the possibilities are many. HEICO has always been about finding cost savings or best-cost solutions for our customers, whether they're defense or commercial customers, and not about getting the highest price out of them. Another example of the opportunity set is the components we make for missile defense systems, which is a strong and growing business for us. Missile defenses are increasingly important to the United States and our allies, with sales of these products growing dramatically amidst what is effectively a shortage of defense missiles and a very large backlog stretching over years. We expect meaningful growth from this existing backlog alone. Moving on to operating income. The Flight Support Group's operating income increased 35% to $154.5 million in the fourth quarter of fiscal '24, up from $114.6 million in the fourth quarter of fiscal '23. The operating income increase principally reflects the previously mentioned net sales growth, a decrease in acquisition costs, and an improved gross margin. The improved gross profit margin principally reflects higher net sales within our aftermarket parts and repair and overhaul parts and services product lines. The Flight Support Group's operating margin improved to 22.3% in the fourth quarter of fiscal '24, up from 19% in the fourth quarter of fiscal '23. Given that acquisition-related intangible amortization expense consumed approximately 270 basis points of our operating margin in the fourth quarter of fiscal '24, the FSG's cash margin before amortization, or what we call EBITDA, and the way we measure our businesses internally, was approximately 25.0%, which has been consistently excellent during 2024, and is 300 basis points higher than the comparable FSG cash margin of 22% in the fourth quarter of fiscal '23. I am extremely pleased with these results. The increased operating margin principally reflects the previously mentioned lower acquisition costs and improved gross profit margin as well as a higher level of SG&A efficiencies resulting from the previously mentioned net sales growth. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the fourth quarter results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales were $336.2 million in the fourth quarter of fiscal '24, as compared to $342.5 million in the fourth quarter of fiscal '23. The net sales decrease in the fourth quarter principally reflects lower defense and other electronics net sales, partially offset by increased space products net sales and the impact from our fiscal '24 acquisitions. This is in line with our expectations, as we've commented on earnings calls over the past few quarters, and is consistent with inventory destocking of some customers, particularly those in the non-aerospace and defense markets. Our defense sales growth was nicely healthy in the fiscal '24 year, though this growth varied highly by quarter, which, as you know, has historically been the case, and we anticipate the ETG's quarterly defense sales volatility will continue, but the overall trend remains positive. As expected, other electronic net sales were lower during the fourth quarter of fiscal '24 compared to the fourth quarter of fiscal ’23 due to customer restocking. The low single-digit organic net sales decline was a much lower decline than in prior quarters and I believe recent better order flow and backlog indicate the de-stocking trends are improving. I continue to expect a return to growth in these and other electronic end markets and businesses during the first half of fiscal ‘25. The ETG's fourth quarter record backlog and strong overall orders support our optimism and as the non-A&D markets improve, we continue to anticipate growth into our next fiscal year. The Electronic Technologies Group's operating income was $81.8 million in the fourth quarter fiscal ‘24, as compared to $86.4 million in the fourth quarter of fiscal ‘23. The operating income change principally reflects a less favorable gross profit margin, mainly from the previously mentioned decreased defense and other electronics net sales, partially offset by the previously mentioned increased space products net sales. The Electronic Technologies Group’s operating margin was 24.3% in the fourth quarter of fiscal '24 as compared to 25.2% in the fourth quarter of fiscal '23. Importantly, before acquisition-related intangibles amortization expense, our operating margin was above 28% as intangibles amortization consumes around 400 basis points of our margin. That's how we judge our businesses as that most closely correlates to cash. So, on what we think of as a true operating basis, these are excellent margins, and we are very pleased with it. The operating margin change principally reflects the previously mentioned less favorable gross profit margin and the lower level of SG&A efficiencies. I turn the call back over to Larry Mendelson. Thank you.

Victor, thank you. Now as for the outlook, as we look ahead to fiscal '25, we do anticipate net sales growth in both Flight Support and Electronic Technologies, driven primarily by organic growth, supported by strong demand for the majority of our products. In addition, we plan to drive growth through our recently completed acquisitions while positioning ourselves to capitalize on potential opportunities from future acquisitions and to provide new cost savings and best-cost opportunities to our government in the new administration's efficiency efforts. Our priorities include continued strong new products and services development, further expanding market penetration, and maintaining our financial strength and flexibility, all with a strong emphasis on delivering long-term value to our shareholders. In closing, I would like to reiterate my heartfelt appreciation to our exceptional team members for their steadfast support and commitment to HEICO. Our strategy of cultivating a diverse portfolio of outstanding businesses continues to yield positive results for our shareholders. With strong key markets, fiscal '25 is poised to be another successful year. We thank you for your continued confidence in HEICO. And as I've shared before, I remain highly positive about HEICO's future. Thank you, all. And now, I will turn the call over to the operator for questions.

And we'll take our first question from Larry Solow with CJS Securities.

Great. Good morning. Congratulations on another good quarter, good year. I guess the first question, maybe a couple for Eric, you gave us a lot of good detail on the Wencor acquisition. Sounds like things are really going well there. Just curious, you mentioned some of — obviously this is one of the bigger acquisitions that could get ever done and you spoke about a lot of things there. Curious, as we look out going forward, are there still opportunities to gain even more revenue synergies or other things? Now you've had this under the hood for a little more than a year, under your umbrella, excuse me, things that maybe you didn't think were available or sort of positive surprises that you could work on going forward on that side of the business?

Good morning, Larry, and thanks for your question. First of all, as you pointed out, we're very happy with the Wencor acquisition. It has been immensely successful and exceeded all of our wildest expectations. Number one, starting with the people, they are outstanding. They really fit the HEICO culture. The companies are very similar, and the businesses are working extremely well together. We're in a unique situation that all of our aftermarket businesses are running, of course, at record numbers, performing exceptionally well. They are so busy just trying to accomplish what they've each got in their backlog in terms of getting the parts out the door and developing all this new stuff that we've just left them alone right now. I do think that there is an additional opportunity in further cooperation and going to the customers with a bigger basket. But as of now, you can see with these kinds of results, 12% organic growth, 13% in the aftermarket. Following a tremendous deal like that, that beats what anybody thought was possible. So we're very, very happy with that. But we do think that there are additional opportunities. Our teams are working very closely together in the parts and repair side to harvest those opportunities. We've already been very successful by putting all of the HEICO and the Wencor PMAs as well as the HEICO and Wencor DER repairs together. So our repair stations can focus on particular units and really drive costs down and service levels up to the customer. And we've been very successful in that, and we anticipate continued success in that area. So yes, I think, internally, Wencor is going to be the gift that keeps on giving, not only because of Wencor, but because of the HEICO legacy businesses and really being the perfect fit there and just going so well.

Got it. And, Eric, you mentioned that you touched on it briefly just on your opportunities maybe increasing on the military side of the business under the new administration, whether it be through DOGE or whatever, it just does seem like there are a lot of opportunities solely on the military side, right, on the government side. Just any more color there? Is that something we should look forward to near term? Is that more of a mid to longer-term opportunity? I know you've always been kind of focused, obviously, getting more into the military aircraft side, I guess, right? Where I think there's not much on the PMA side there. So, any more color there would be great.

That's a great question, and we are extremely excited about this opportunity. This is real simple low-hanging fruit. DOGE is something I think everybody in the country realizes that we've got to spend our dollars more wisely and HEICO offers various solutions without getting into the specifics because we have our competitors on the call and I welcome them to it but of course we can't lay out a roadmap for them of what we're going to do. But needless to say, I think there is a tremendous amount of low-hanging fruit. HEICO was working on all of this before the election. And so we were very hopeful that there would be a number of breakthroughs. We are still hopeful of that. DOGE just pours more fuel on the fire. When you look at the budget deficit and the amount of money that has to be cut, there are tremendous cost savings opportunities. And we think that it's not only cost, but there's also, and without, I have to be very careful because of course I don't want to provide a roadmap to our competitors, but there are a number of areas whereby, in particular, in the development of new products where HEICO can offer increased quality, and by the way that's not just the tagline, that's proven through various rig tests, increased quality, better development timelines, and lower cost. So I think DOGE is going to be outstanding for us. Now, having said that, you asked is this going to be short, medium, or long term, I think it's going to be more medium-term. In the short term the government has its money committed, so that's going to be what it is. But I do feel that this is just additional clarity and legs for HEICO as we move forward. I expect the opportunities to be very, very substantial because it's just not only about price.

Got it, great, I appreciate all that color. Maybe just lastly a question for Carlos, just margins. I know you don't guide specifically, but just sort of a high-level outlook for the coming year. FSG was — looking back, was pretty consistent in fiscal '24. And ETG, I know, is a little bit more mix dependent. So just any thoughts as we look into fiscal '25? Thanks.

I think, as we look at the Flight Support Group, it's performing as expected. We're posting between 23% and 24% operating margins pretty consistently. I think our build on that will be slight improvements as we continue to grow the base of the business. We'll get SG&A leverage on some of our fixed costs, which should be additive to the margin. Very similar to what we did a decade prior to COVID. It'll be small steps. It's not going to be ratcheted moves. And look, in the ETG, I've been saying for a while that when the mix settles out, I would expect that segment on a GAAP basis to come around the 24% margin range. This quarter I was very pleased to see them exceed that. So, as I look into '25, I would expect the business to continue to be lumpy as it always has been. We'll have quarters that are higher and lower. But my baseline is around that 24% range.

Got it. Great. Thanks, Carlos. Appreciate it.

Thanks, Larry.

And we'll take our next question from Robert Spingarn with Melius Research.

Good morning. This is Scott Mikus on for Rob Spingarn.

Good morning. Hi, Scott.

Eric, you brought up DOGE and saving money across the federal government. So I'm just wondering, can you quantify right now what percentage of FSG sales are directed to the DoD? And then for programs other than the commercial derivatives like the P-8, have you already started the process of aggregating a list of potential parts that could be sold to the DoD?

Yes. I don't have the exact percentage for the DoD in front of me, but defense represents roughly a quarter of FSG sales, so that gives you an idea. The opportunity extends beyond the areas you mentioned; we have compiled a list and understand what the potential opportunities are. I won't outline them on the call, but it's quite substantial, and the government should be saving these dollars.

Okay. And then also going back to Wencor, they used a lot of build-to-print shops in the past to manufacture parts. You talked about insourcing some of that manufacturing. Can you talk about where you are in that journey and is there more cost savings to gain from insourcing even more of that work?

Absolutely. We've got very broad manufacturing capabilities at HEICO and we are focusing on Wencor's robust new product development in terms of manufacturing that stuff within various HEICO businesses. There is an opportunity to resource some of the existing business. As long as our vendors treat us right and are fair with us, we're very loyal to them. So they have nothing to worry about. And frankly, the new pipeline is so robust that it will really keep our shops very busy. We think the opportunity is very strong in that area.

Okay. Thanks for taking the questions, and happy holidays.

Thank you, and happy holidays to you too, Scott.

Our next question comes from Ken Herbert with RBC Capital Markets.

Yeah, hi, good morning. Thanks for taking the question. Maybe Eric…

Good morning.

Just to start, as you look at FSG organic growth within fiscal '25, I know you're probably not going to get too specific, but is there any reason we shouldn't see double-digit organic growth again across FSG in fiscal '25?

No, I don't think there's any reason you shouldn't see it. We're very optimistic on our three disaggregated revenue buckets of parts, repair and specialty products; they're all very strong. I think a double-digit expectation is reasonable. Of course, we're only 45 days into the year, so we always want to be a little circumspect. Between Thanksgiving and the New Year, volumes can be skewed depending on shipments from our vendors and how customers manage their inventory. We don't like to lean too much on November and December to prognosticate the rest of the year. Our internal numbers are for double-digit organic growth within the Flight Support and again, very strong in all three of our segments.

Okay. that's very helpful.

Just keep in mind, while we don't really have seasonality to our business, one thing Eric pointed out is important. Our first quarter typically with the holidays tends to be a little lighter than the second, third and fourth quarter. So just keep that in mind when you're thinking about what he just said.

And historically, November and December are lower months. January is always the month that drives the first quarter. We're not yet in January, so it's hard to say, but our internal numbers are very optimistic and our business heads are extremely optimistic.

Okay. That's very helpful. And just one more, if I could. There's obviously been a lot of commentary recently around greater confidence in execution in terms of new aircraft deliveries and new engine deliveries out of the OEMs. What's your view on if things do start to perform better there, how quickly can fleets really start to turn around to become younger? How quickly do you think spending on some of the legacy assets would actually start to slow as that tide does ideally get better in 2025 and '26 in terms of execution on the airframe and the engine OEM side, if that makes sense?

I have tremendous respect for the airframe and engine OEMs. They build incredible products, but they're dependent on their supply chains, which were severely disrupted through COVID when many suppliers slashed orders. The suppliers still face challenges. I visit our businesses and see significant supply chain issues. I am not convinced supplier supply will turn around substantially in the near term. I expect the aftermarket to remain very strong. Airlines have been bitten by deferrals and don't want to be in a situation where they lack legacy assets to complete routes and schedules, so they'll continue to spend prudently. Also, if OEM deliveries increase and available seat miles increase, the market can absorb additional seats and keep older aircraft in service. Based on the order trends we see, the aftermarket remains very strong and I don't see change at this moment.

Great. Thanks, Eric.

Thank you.

Next question comes from Gautam Khanna with TD Cowen.

Yeah, thanks. Good morning, guys.

Good morning.

I was wondering, DoD and PMA parts, what historically has been the disconnect there on their ability or willingness to entertain buying those? Is it do they require OEM parts or is it just culture? I'm curious what actually has prevented that change.

They don't have a process. As Carlos says, they don't have a box to check. What the airlines had to have, and this is what we worked on 35 years ago, was a certification process. When I first went into the airlines and showed them what we could do and said we could develop all these additional parts, they said to me, that's a great idea, but we can't buy PMA parts. I said, you're already buying our combustion chambers where the fuel and air is mixed and burned, and we've supplied those parts to you for 20 years with a flawless service record; why can't you buy these additional parts? This is the process we're going to use with the FAA, and this is the box you have to check, and that's been immensely successful. The government must change. The United States cannot continue to run at these budget deficits. There is no reason if a part is good enough for commercial aircraft it shouldn't be used by the DoD. That is a relic of the past, and I think the government recognizes this is low-hanging fruit. HEICO is well positioned to help. We still think current providers will continue to do well. HEICO already provides products to the DoD and not everything lends itself to our solutions, but what we can provide is significant.

That makes sense. And just to follow up on that, is the opportunity biggest on the commercial derivatives like Tanker and P-8 where you may have comparable products on the commercial aircraft that they're built on? Or is there a big opportunity beyond that?

I think there is a very large opportunity in both. On the commercial derivatives, it's a no-brainer. They already use some of the parts, so it's not that they're fundamentally opposed; they need the process and approvals in place. Outside of the commercial derivatives, there are significant savings opportunities as well. This will not be a fiscal 2025 impact primarily; it's more medium term, but it's a nice add-on to what we're currently doing.

Great. Thanks. Happy holidays, guys.

Same to you.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Good morning, guys, and thank you for the time. Eric, if I could start with you, please. If we could just talk about the organic growth within FSG up 12% and then just the different parts of the business, aftermarket parts is up 13%, slightly down from 17% last quarter. How do you think about the parts business trending into '25? Can it still grow double digits? And what did you see with MROs versus airlines, the demand there?

Good morning, Sheila, and thank you for your questions. We are very optimistic on continued growth in all segments. In breaking down our organic growth, the parts side had the highest organic growth in 2024. The area with the lowest organic growth was specialty products. We think that in 2025, based on backlogs we already have in specialty products, organic growth will accelerate in that area, and parts will remain strong and grow double digits. Component repair is probably in between those but still strong. I expect double-digit growth in parts, component repair, and specialty products.

Okay. And then maybe if we could talk about Wencor a minute. Any way to quantify the revenue synergies? How you think about their 6,000 SKUs relative to your 15,000 or so? How many have penetrated into your customer base? And then a PMA question unrelated to the defense side of the business: do you see PMA becoming easier under the new administration for commercial parts as well?

Specifically with regard to Wencor, if you take a look at our organic growth within parts and component repair, you'll see there's approximately $62 million of organic growth in the fourth quarter in just parts and repair. That's all organic and remember we owned Wencor for pretty much the entire fourth quarter. For HEICO and Wencor to grow $62 million organically, no acquisitions, that's huge and far beyond what I thought was possible. We have incredible teams and leaders. HEICO's competitive advantage is how we've structured businesses as individual units with their own heads and combined with a central sales force. There's a tremendous amount of unsold potential. It's a matter of getting in front of customers and having them switch from legacy solutions to HEICO solutions. For specialty products, our backlogs are tremendous; the challenge is executing and getting product from vendors because the market is tight. I'm bullish across the board. Regarding PMAs on the commercial side, the FAA has been outstanding to work with over the last 35 years. I expect continuing ability to get PMAs. We've received more PMAs than ever and I expect that to continue.

Thank you.

And our next question comes from Scott Deuschle with Deutsche Bank.

Hey, good morning.

Hey, Scott. Good morning.

Eric, can you give us any sense of what the growth acceleration at specialty products could look like next year? It sounds like you got a lot of tailwinds there between the OE ramp and the missile defense growth. There was a period in 2022 and 2023 where specialty products was growing over 50% regularly. Could something like that repeat itself?

Internal numbers are strong for specialty products. The key is getting products out of suppliers. From what we're seeing and based on budgets, at least 10% organic growth seems very reasonable. A 10% organic growth rate is strong and meaningful in this market with constrained material and labor, so I'm very optimistic.

Okay, great. And then just one follow-up: I think some airlines have built up some inventory of spare aftermarket parts. Have you seen evidence of customer inventory build for your parts or are airlines generally hand-to-mouth for HEICO parts?

For HEICO parts, they're pretty hand-to-mouth. They don't typically overstock our parts because they rely on our delivery program and ability to supply parts in the month of order. I'm not aware of material oversupplies at the airlines; demand remains strong.

Right. Okay. Thank you. Happy holidays.

Thanks. Happy holidays to you too.

Our next question comes from Noah Poponak with Goldman Sachs.

Hey, good morning, everyone. Happy holidays.

Good morning, Noah. Happy holidays to you too.

I wanted to ask about the FSG margin. The full year is probably higher than what you were projecting at the beginning, and in the fourth quarter it's down sequentially. Is the non-cash piece higher? Can you give 4Q versus 3Q numbers or is there anything else abnormal whether cost or mix in the fourth quarter margin? And where do you think those margins can go next year?

You're digging deep. We're down about 20 basis points Q3 to Q4; I consider that a little noise. There is a little more amortization in Q4 this year than last year, which probably contributed to that blip. There's not a lot of noise in either quarter for unusual items. My expectation on the FSG is margins in the 22% to 23% range, and that's what we've done. We're basically at 22.5% for the year. I expect incremental gains due to leverage on costs as revenue grows. The FSG has grown revenue without increasing SG&A proportionally; SG&A has declined as a percent of revenue consistently all year. I expect that trend to continue, and that's where we'll eke out incremental margin gains. Absent big mix shifts, that's my expectation next year.

Carlos, that makes sense. You referenced that range over time but you expect margin improvement due to volume growth. Historically you've had fairly consistent incremental margin as revenue grows. Is that the expectation going forward?

Absolutely. Historically, pre-COVID, margins grew 20 to 30 basis points a year based on volume growth. As we grow, the cost base isn't growing as fast as revenues. I expect that to continue and absent big mix swings, that should be the cadence going forward.

Okay. And then about the other industries outside defense, space, aero within ETG — that was down in the quarter for the fifth consecutive quarter. Can you talk about what's behind that and what it would take to stabilize and grow again?

It's not a one-year event to wash out the overordering which likely occurred over 2 to 2.5 years. My sense is the reversal will start in the first half of our year. We see signs of that in a number of businesses where order rates have started to turn up, and in others it's bouncing along the bottom. Sometimes we get occasional positive surprises where the month ends better than expected. Historically, when this happens, somewhere around half a year later you start to see rising sales sequentially. I would expect that to play out similarly barring unforeseen events.

That's helpful. One last quick one: corporate in the quarter is fairly high compared to where it had been running. Anything abnormal there or how should we think about the run rate moving forward?

We typically run about 1.4% to 1.5% of sales in corporate expenses. Over the last four years we've had inflationary pressure on insurance and benefits and related items. We had a little noise with FX as the dollar weakened. Nothing extraordinary. Going forward, the trend should continue around 1.4% to 1.5% of sales. As the company grows, we don't have lavish expenditures, but we do need people to manage the business, so that's the approximate area we'll run in.

Got it. Great, thank you.

You're welcome.

We'll take our next question from Michael Ciarmoli with Truist Securities.

Hey, good morning, guys. Thanks for taking the questions and happy holidays here.

Good morning.

Eric, we've talked a lot about FSG and the trajectory, but looking at the sequential growth, one of the lowest sequential growth rates we've seen in several quarters. Was there anything unusual in this quarter versus last quarter? It sounds like all business lines are running at record levels. Any notable changes or customer behavioral changes that might have impacted sequential FSG revenue?

A couple of things. We don't focus on sequential growth rates because they can move around and exaggerate trends. The number we always look at is annual growth versus the prior year. Our FSG organic growth was approximately 12% in Q1, 12% in Q2, 15% in Q3, and 12% in Q4. That's phenomenal and far above industry norm. So I'm super happy with it. It's risky to read too much into quarter-to-quarter moves; the year-over-year comparisons are more important.

Got it. No, that's helpful. And then one other housekeeping for Victor: did you give the ETG organic growth rate for the quarter at the consolidated level?

ETG was down low single-digits, approximately 4% down for the quarter organically. In total for the quarter, consolidated growth was up about 3% including acquired growth, but the organic side was down roughly 4%.

Got it. Perfect. Thanks, guys. I'll check back.

Thank you.

We'll take our next question from Pete Skibitski with Alembic Global.

Hey, good morning, guys.

Good morning, Pete.

A couple quick ones for Carlos. Carlos, D&A is a pretty big add-back for you guys in cash flow. Do you have an expectation for D&A for '25? And post-COVID, post-Wencor, the use of working capital, especially in inventory, has been larger. Is that a short-term thing or should we expect greater inventory build going forward?

I expect D&A to be very similar next year to this year. Depending on how many acquisitions we do, it could fluctuate, but as a percentage, roughly the same as this year. Regarding working capital, we came into this year with commitments on products purchased multiple years ago because of supply chain challenges. We took delivery on much of that toward the end of last year and beginning of this year. That skewed our annual inventory a bit higher than normal. I expect that to moderate in '25 because many firm commitments from COVID-era lead times were fulfilled. As we grow organically, we'll need more inventory, but the slope of that spend may be lower than in the prior few years. Our receivable management is excellent with very little consumption in receivables despite growth. We are highly focused on working capital and expect to return to more normalized working capital consumption historically versus the last two to three years.

Great. Thanks for the color.

Our next question comes from David Strauss with Barclays.

Thanks. Good morning.

Good morning, David.

I wanted to follow up on the FSG margin. Eric, you gave some relative growth parameters across parts, repair and specialty products. How do those relative growth rates influence the margin for FSG in '25?

I think it will help. The FSG margin story has been one of the least reported yet most important things to our company. From roughly 2015 to 2019, our operating margin was in the 18% to 19% area. Now it's up in the 22% to 23% area. We've gone up about 500 basis points over that period despite lower-margin acquisitions and the COVID turmoil. HEICO businesses are adept at wringing efficiencies out of operations year by year. We don't have company-wide programs that drive margin; these gains come from each business improving operations, increasing volume, and reducing costs. I expect operating margins to continue heading north while still providing cost savings and benefits to customers, not via price but via cost and volume.

Terrific. And on ETG, would you expect ETG to grow revenue organically next year? If so, is that low single-digit or mid-single-digit?

We expect and budgeted for organic growth in ETG next year in the lower single-digits range. With acquisitions, we hope for more. We have strong acquisitions in the pipeline. I am hopeful we'll do better than budget, but we are being conservative. ETG will remain lumpy by quarter and by end market, as it has historically.

Terrific. Thanks very much and happy holidays.

Thank you.

We'll take our next question from Ron Epstein with Bank of America.

Hey, good morning guys.

Good morning, Ron.

What's your expectation for maybe the change in the M&A environment with the new administration?

We've been very active in acquisitions; we bought five businesses this fiscal year. Our teams are busier than ever looking at a variety of deals in both segments of all sizes. For HEICO, it's been a strong market. I would anticipate less regulatory scrutiny and a more pro-business evaluation environment, but HEICO is already a preferred buyer because we don't present the same complications others might. So the regulatory environment should improve and remain very good for HEICO.

We've always been a value-preferred supplier and have not pushed monopoly-type pricing. As a consequence, we've not had issues with regulatory approvals historically. People generally expect the regulatory environment to be more favorable to business and to companies like ours.

Got it. And what's your appetite for doing another big one? Would you be interested in assets Boeing might be shopping?

Our appetite for acquisitions of all sizes, including larger ones, remains the same. We do larger deals when they make sense. We won't do them just to add revenue; it's about the bottom line. The appetite is the same for smaller bolt-ons as well.

Wencor, our largest acquisition to date, has been an absolute home run. We've proven we can execute, assimilate businesses, and continue to generate cash to reduce leverage and do more deals. I feel 100% confident in our ability to continue to do larger acquisitions.

Got it. Great. Thanks, guys. Happy holidays.

Thank you. You too. Thank you.

And the next question comes from Louis Raffetto with Wolfe Research.

Hey, good morning, guys. Eric, just to make sure I'm level set here. So, 13% organic growth in aftermarket repair parts. Do you have MRO and specialty products for the quarter? I know MRO had been a little lighter but seemed to accelerate in the fourth quarter?

MRO is about 11% in the fourth quarter and specialty products was 11% in the fourth quarter.

Okay, perfect. And Carlos, it looks like there was another small impairment and a contingency adjustment in the quarter. Can you share color? It seems like those negatively weighed; were they in either or both segments or corporate?

We had a small impairment to a trade name in the fourth quarter of about $1.5 million, normal course of business. The roughly $1 million increase in contingent earn-out liability was split pretty evenly between the two segments; it's related to accreting that liability to terminal value. It's the normal noise we see quarterly for discounted liabilities accreting to payout value. Nothing unusual.

Makes sense. Thanks very much.

Thank you.

At this time, I will turn the conference back to Laurans Mendelson for any additional or closing remarks.

I would like to thank everybody on this call for their interest in HEICO. We look forward to our next earnings call, which will be for the first quarter of '25. Personally, I'm very optimistic about the outlook for HEICO. We see opportunity in acquisition and internal growth. I feel that the company is doing extremely well, and it will continue to do so. Let us know if you have any other questions that we haven't answered during this call. Otherwise, we stand ready to speak to you at the end of the first quarter '25. Thank you very much.

And this concludes today's call. Thank you for your participation. You may now disconnect.