Earnings Call Transcript - HEI Q3 2025

Operator, Operator

Welcome to the HEICO Corporation Third Quarter 2025 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 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; 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 cost 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 statements 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 A. Mendelson, Co-CEO

Thank you, Samara, and good morning to everyone on this call. Thank you for joining us, and we welcome you to HEICO's Third Quarter Fiscal '25 Earnings Announcement Teleconference. I'm Eric Mendelson, HEICO's Co-CEO. I am joined here this morning by Victor Mendelson, HEICO's Co-CEO; and Carlos Macau, our Executive Vice President and CFO. Before highlighting our third quarter of fiscal '25 record-setting results, I start this call by thanking all of HEICO's team members for their dedication and focus on delivering another outstanding quarter. We continue to experience high growth rates across the majority of our subsidiaries and are humbled by the hard work and commitment of our team members that they bring every day to deliver these excellent quarterly results. Our customers require seamless execution and demand excellence in everything we do. Our people are the only reason we continue to win in the marketplace and generate significant shareholder value. All of our shareholders should thank our team members for everything they do for HEICO and our shareholders. Our record third quarter results reflect robust double-digit organic growth in our core businesses, further enhanced by the momentum from our disciplined acquisition strategy. On behalf of the Board and our executive management team, thank you for another record-breaking quarter. As we look ahead, we see significant opportunities supported by a favorable pro-business environment that encourages innovation, investment and expansion. Our laser focus on growth within the commercial aviation, defense and space markets, combined with the exceptional talent of our team members gives me confidence that HEICO is well positioned to sustain strong momentum and capture additional market share gains across our diverse markets. We remain very optimistic about HEICO's future. In summarizing our third quarter of fiscal '25 record results, we note that consolidated net income increased 30% to a record $177.3 million or $1.26 per diluted share in the third quarter of fiscal '25 and up from $136.6 million or $0.97 per diluted share in the third quarter of fiscal '24. This is quite an achievement of which we are very, very proud. Consolidated operating income and net sales for the third quarter of fiscal '25 represent record results for HEICO, increasing 22% and 16%, respectively, compared to the third quarter of '24. The Flight Support Group set an all-time quarterly operating income and net sales records in the third quarter of fiscal '25, improving 29% and 18%, respectively, over the third quarter of fiscal '24. The increases principally reflect strong 13% organic growth from increased demand across all of its product lines and the impact from our profitable fiscal '25 and '24 acquisitions. The Electronic Technologies Group set an all-time quarterly net sales record in the third quarter of fiscal '25, improving 10% over the third quarter of fiscal '24. This increase principally reflects improved demand for the majority of its products including double-digit organic net sales growth of other electronics and space products. Cash flow provided by operating activities increased 8% to $231.2 million in the third quarter of fiscal '25, up from $214 million in the third quarter of fiscal '24. For the third quarter of fiscal '25, cash flow provided by operating activities represents 130% of net income. For over 36 years, a core tenet of HEICO's unique business model has been to fund our organic growth with cash generated by operations and not incur debt to grow organically. This doesn't happen by accident. Our operations are painstakingly designed and managed to generate excess cash that we use to make accretive acquisitions, thereby compounding our growth. I'm proud to report that cash generation remains exceptionally strong at HEICO. Consolidated EBITDA increased 21% to $316.4 million in the third quarter of fiscal '25, up from $261.4 million in the third quarter of fiscal '24. Our net debt-to-EBITDA ratio was 1.9x as of July 31, 2025, down from 2.06x as of October 31, 2024. I would like to highlight that our liquidity improved significantly even after deploying $630 million on acquisitions during the past 9 months. We are very pleased with HEICO's strong cash generation which drives our ability to delever quickly to support future acquisition opportunities. In July '25, we paid our consecutive semiannual cash dividend since 1979, at the rate of $0.12 per share, representing a 9% increase over the prior dividend paid in January of 2025. We continue to be very busy with acquisitions and completed our fifth acquisition of fiscal '25 in the third quarter. In July, our Electronic Technologies Group acquired 100% of the stock of Gables Engineering. Gables designs and manufactures advanced solutions for aerospace platforms, including cockpit displays and other avionics components such as navigation, audio, surveillance and communication panels for a wide range of aircraft. Gables is the third largest acquisition in HEICO's history and we expect Gables to be accretive to earnings within the year following the acquisition. Finally, we take a moment to remember Frank Schwitter. A member of our Board of Directors who passed away recently. Frank was a dear friend and CPA, who served as a Board member since 2006. He was a valued member of the HEICO family with his expertise in financial accounting and reporting having been developed over many decades serving as a partner in the national office of Arthur Andersen. We share our thoughts and prayers with his family and thank them for the many years of service and friendship he provided to our Board. He will be greatly missed. I now turn the call over to Victor Mendelson, HEICO's co-CEO, to discuss the third quarter results of our flight support and Electronic Technologies Groups in greater detail.

Victor H. Mendelson, Co-CEO

Thank you, Eric. As I discuss the operating results of our two segments, I join you in recognizing the extraordinary contributions of HEICO's team members. Your talent, determination and innovative spirit have turned challenging objectives into real success. On behalf of our shareholders, thank you for the energy and collaboration that not only drive our performance but also make these accomplishments especially rewarding. The Flight Support Group's net sales increased 18% to a record $802.7 million in the third quarter of fiscal '25, up from $681.6 million in the third quarter of fiscal '24. The net sales increase in the third quarter of fiscal '25 reflects strong organic growth of 13% and the impact from our profitable fiscal '25 and '24 acquisitions. The organic net sales growth reflects increased demand across all of our product lines. The Wencor and legacy HEICO operations continue to exceed our expectations. And obviously, this was an excellent combination, which was completed around two years ago. Our customers continue to find great value in our larger aftermarket product offerings for the aerospace parts and component repair and overall needs, which has also translated into excellent growth, opportunities and success for HEICO. The Flight Support Group's defense business continues to present an excellent opportunity, especially as the current U.S. presidential administration prioritizes defense and cost efficiency. HEICO is well positioned to support these efforts by providing lower-cost alternative aircraft replacement parts, helping the government taxpayers save money while expanding our market reach. Our missile defense manufacturing business is experiencing significant growth driven by increased demand in both the U.S. and our allies. With the substantial backlog of defense missile defense orders and ongoing shortages, we anticipate meaningful expansion from this pipeline, reinforcing our commitment to delivering cost-effective solutions with industry-best quality. The Flight Support Group's operating income increased 29% to a record $198.3 million in the third quarter of fiscal '25, up from $153.6 million in the third quarter of fiscal '24. The operating income increase principally reflects the previously mentioned net sales growth and improved gross profit margin and SG&A expense efficiencies realized from the net sales growth. The improved gross profit margin principally reflects higher net sales within our repair and overhaul parts and services and specialty product lines. The Flight Support Group's operating margin improved to 24.7% in the third quarter of fiscal '25, up from 22.5% in the third quarter of fiscal '24. The operating margin increase principally reflects the previously mentioned improved gross profit margin and an impact from a decrease in SG&A expenses as a percentage of net sales, mainly reflecting the previously mentioned SG&A expense efficiencies. Given that acquisition-related intangible amortization expense consumed approximately 200 basis points of our operating margin in the third quarter of fiscal '25, the FSG's cash margin before amortization, or EBITA, was approximately 27.3%, which has been consistently excellent and is 210 basis points higher than the comparable FSG cash margin of 25.2% in the third quarter of fiscal '24. And we know that we run the operations internally and evaluate our businesses based on EBITA, which to us is a real cash number, not one that just takes into account a made-up amortization number required by accounting regulations. I'm very happy with the continued expansion of our cash margin, and we believe our efficient and decentralized operating structure has permitted us to expand these margins as we simultaneously delight our customers with cost savings and lightning-quick turnaround. For the Electronic Technologies Group, our net sales increased 10% to a record $355.9 million in the third quarter of fiscal '25, up from $322.1 million in the third quarter of fiscal '24. The net sales increase reflects strong organic growth of 7% and the impact from our fiscal '25 and '24 acquisitions. The organic net sales growth is mainly attributable to increased demand for our other electronics, defense and space products. The ETG's defense organic net sales increased by over 6% during the third quarter of fiscal '25 and are anticipated to continue steady growth during the remainder of the fiscal year, as we again have significant order volume and a record backlog. The ETG's other electronics organic net sales increased 16% during the quarter, continuing the trend from the previous quarter, an increase in organic growth after following multiple quarters of lower demand, due in part to inventory destocking and our customers for high-end industrial and electronic components. We're optimistic for continued growth going forward. The Electronic Technologies Group's operating income increased 7% to $81 million in the third quarter of fiscal '25, up from $75.8 million in the third quarter of fiscal '24, the operating income increase principally reflects the previously mentioned net sales growth, partially offset by an increase in performance-based compensation expenses. The Electronic Technology Group's operating margin was 22.8% in the third quarter of fiscal '25 as compared to 23.5% in the third quarter of fiscal '24. The operating margin was sequentially consistent with the second quarter of fiscal '25 as both periods had a similar net sales mix and growth. Lower operating margin compared to the third quarter of fiscal '24 principally reflects an increase in SG&A expenses as a percentage of net sales, mainly driven by higher performance-based compensation expense. Very importantly, as we talked about with the Flight Support Group, before acquisition-related intangibles amortization expense, our operating margin was 26.6% as intangibles consumed around 380 basis points of our operating margin. Again, this is how we judge our businesses as that most closely correlates to cash. On a true operating basis, these are excellent margins, and we are very, very pleased with them. I turn the call back over to Eric Mendelson.

Eric A. Mendelson, Co-CEO

Thank you, Victor. As we look ahead, we remain confident in achieving net sales growth across both the FSG and ETG segments, driven by continued organic demand for most of our products. Additionally, we aim to accelerate growth through our recently completed acquisitions while capitalizing on new acquisition opportunities. Our disciplined financial strategy continues to focus on maximizing long-term shareholder value through a balanced approach of strategic acquisitions and strong organic growth initiatives aimed at gaining market share while maintaining a strong financial position in preserving flexibility. Acquisition activity remains very strong across both operating segments with a solid pipeline of opportunities under review. Our focus is on identifying businesses that complement HEICO's existing operations and strengthen our strategic position. True to our disciplined philosophy, we pursue only those transactions that are prudent, accretive and capable of delivering lasting value to our shareholders. Thank you very much for attending this call. Those were the prepared remarks. And now I'd like to ask Samara to please open up the floor for questions.

Operator, Operator

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

Unidentified Analyst, Analyst

It's Pete Lukas 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 kind of 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 H. Mendelson, Co-CEO

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 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.

Unidentified Analyst, Analyst

Very helpful. And just last one for me. It seems you saw a benefit from the tax rate this quarter due to R&D tax credits. Is that lower rate sustainable? And is that driven by the big beautiful bill? And do you see any other benefits from that build that we should think about?

Carlos L. Macau, CFO

Yes, this is Carlos. The only advantage we experienced in the quarter was related to cash. As you may know, the full depreciation of qualifying equipment is retroactively applied back to January 25. This helped reduce some of our third-quarter tax payments when the legislation was enacted. However, moving forward, it's mostly a cash advantage for us. We should also see a slight benefit from some changes in the foreign FDII regulations that were released. Overall, our tax rate for the quarter was around 18.9%. Looking ahead, if we consider a rate of 19% to 20%, that would likely be a reasonable effective annual rate for HEICO for the year.

Operator, Operator

And our next question comes from Tony Bancroft with Gabelli Funds.

George Anthony Bancroft, 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 with all the kinetic war going on right now. Maybe you could talk a little bit more about that.

Victor H. Mendelson, Co-CEO

Yes, this is Victor. Missile defense has been part of our business for many years, nearly since we started the ETG. We are seeing opportunities and some orders, though I wouldn't consider them significant yet, especially related to Golden Dome, which integrates some existing technologies and products. We continue to receive orders for both our ongoing projects and new products, including offerings for foreign missile defense, specifically U.S. products sold to foreign countries that are allies of the U.S. This sector remains a strong opportunity for us, and we've been active in both legacy defense and new tech defense, which is very important. We've always focused on serving all markets and not just catering to larger customers.

Eric A. Mendelson, Co-CEO

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 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.

Operator, Operator

We'll take our next question from Sheila Kahyaoglu with Jefferies.

Sheila Karin Kahyaoglu, Analyst

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?

Carlos L. Macau, CFO

Yes, we had an interesting quarter. The Parts business grew in the low teens, which is similar to last quarter. We experienced notable growth in the repair and overhaul and Specialty Products group. Repair and overhaul increased in the mid-teens, driven by a favorable mix that slightly improved our gross margin. That's encouraging to see. As a reminder, the repair business primarily involves component repair since we don’t handle hangers or aircraft repairs, but rather focus on components, which allows us to channel many of our PMA parts. This was a pleasant surprise this quarter. Regarding Specialty Products, the growth was in the low double digits, mainly due to our defense business. I also anticipate an improvement in our commercial aerospace OEM work within specialty products now that some airframers are achieving better operational cadence. Eric, do you want to add anything?

Eric A. Mendelson, Co-CEO

Yes. Sheila, to add to your question about engine versus non-engine, we are predominantly non-engine. It's difficult to calculate precisely because the businesses don't capture the information in the same manner. However, I would estimate that the engine segment of our aftermarket business is around 25%, which is about a quarter. Historically, HEICO had a higher percentage of engine, but due to several acquisitions in recent years, the most significant being Wencor, most of those purchases have been non-engine. This is why our engine percentage in the aftermarket is likely around 1.75.

Sheila Karin Kahyaoglu, 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 A. Mendelson, Co-CEO

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 there's very good potential.

Operator, Operator

We'll take our question from Peter Arment with Baird.

Peter J. Arment, Analyst

Carlos, next quarter. Eric, talking about FSG. You talked about some market share, and I know Carlos just went through kind of 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 kind of the Wencor synergies? Or how should we think about that? Or is it just new parts that you're developing and introducing?

Eric A. Mendelson, Co-CEO

Yes, I believe the growth opportunities are broad across the board. There are indeed synergies with Wencor, but we also have very strong organic growth potential throughout the entire business. In particular, focusing on PMA and repair, I recently participated in the strategic annual sales meeting reviews and was impressed by the dedication of each subsidiary in developing new products, whether related to PMA or repair. Our technical capabilities and customer support are outstanding, which makes me really excited about the prospects. The organic growth of 13% is significant, especially considering that only about 25% of our aftermarket business is engine-related. I was surprised to find that 75% of our business is non-engine, yet we achieved 13% organic growth. It's phenomenal, and it highlights our competitive advantage; we operate dedicated businesses that excel at what they do. They are knowledgeable and detail-oriented, creating a tremendous organic growth pipeline. With 75% of our business being airframe, the 13% organic growth reflects the depth and breadth of our product line and capabilities.

Michael Frank Ciarmoli, Analyst

Got it. And then, Eric, just real quick on the destocking. On your specialty products, are you observing anything specifically related to Boeing and the MAX? We've heard that the destocking could potentially impact next year. But do you have any updates from that customer or that program?

Eric A. Mendelson, Co-CEO

Yes. We've seen a little bit of it in certain areas. We've seen a little bit of it, but we're very confident that Boeing is going to be extraordinarily successful with the MAX. And we feel very well positioned there. And I think anybody who's buying into that program is going to do very well, the whole industry, all of the OEMs, yes.

Operator, Operator

And we'll take our next question from Jonathan Siegmann with Stifel.

Jonathan Siegmann, Analyst

Eric, Victor and Carlos. Could you maybe comment a little bit on how Europe is trending. The company has got a larger exposure there with the acquisitions? Just are you seeing any impact from the headlines of stronger defense spending there? And how is the business faring?

Victor H. Mendelson, Co-CEO

Sure. John, this is Victor. So Europe is doing quite well for us. It's been a success story. As you know, we expanded in Europe through what was then, I guess, what still is our second largest acquisition, Exxelia, which has done very well, and in part because of defense. That has really shined for them and for us. And then other defense sales, including in the Flight Support Group on missile defense, which Eric mentioned a little bit earlier, as well as sales from our other businesses, by the way, that we've owned in Europe for much longer and some U.S. based. So right now, that's good for us. Look, we are also mindful of nationalism issues and things like that. So we understand where the limits might be in U.S.-based business selling into Europe as we get a little further out to the future, hence, our appetite for acquisitions on the continent.

Eric A. Mendelson, Co-CEO

I can share that in the flight support area, we are performing exceptionally well with our customers in Europe, including aspects such as PMA, repair, and distribution. Notably, our distribution operations have extensive networks across Europe, with many personnel dedicated to distribution efforts. Our market share appears to be robust, making Europe a crucial market for us, and we are seeing strong performance in this region.

Operator, Operator

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

Ronald Jay Epstein, 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 just kind of squeezed on capacity?

Eric A. Mendelson, Co-CEO

Yes, there are several areas where we need to expand our facilities. Hiring remains challenging in some locations, though it is becoming easier. I believe that AI and the current economic situation are aiding in this. Overall, I would say we are in a strong position. We have made the necessary investments to support future growth. Additionally, a unique aspect of HEICO is that we have not pushed our facilities beyond their capabilities, which means we have ample capacity to continue growing and expanding. So, I believe we are in a good place regarding capacity, and we remain very aware of it.

Carlos L. Macau, CFO

I could use a few more hands in my accountants. But other than that, I think you're right.

Ronald Jay Epstein, 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 A. Mendelson, Co-CEO

Yes, overall, things have improved significantly. However, there are still several areas experiencing shortages and we have parts on backlog. Our sales could be much higher if we had those parts available, which continues to be a challenge. Nonetheless, the backlog has decreased notably. At HEICO, we conduct extensive incoming inspections; we don't just accept stock but thoroughly inspect the parts with a strong inspection process. A year and a half to two years ago, the backlog in incoming inspection was quite substantial, but our team has effectively reduced it. This improvement reflects our capacity issues as we are adding personnel and facilities to manage the workflow. We've made significant progress in this area.

Carlos L. Macau, CFO

Ron, this is Carlos. I would like to add that I truly believe in this approach. Although it presents some administrative challenges due to the lack of centralized purchasing, our numerous supply chains allow our team to adapt and negotiate effectively to secure products, especially during shortages. This flexibility helps us fulfill our customers' needs. While this method may be more expensive and less efficient than centralized processing, from a customer standpoint, we rarely run out of supplies because our team can locally negotiate for raw materials. This capability gives us a competitive edge.

Ronald Jay Epstein, Analyst

Got it. And have you, Carlos, considered keeping a bit more inventory to help smooth out any gaps?

Carlos L. Macau, CFO

So we've always given our subsidiary sort of the green light to make sure they have what they need for their customers. I mean, candidly, a few years ago, post-COVID, it got a little out of hand in my judgment. I think we invested a little too much in inventory. What you've seen, and you saw it in our cash flow statement probably was our investment in inventory has come down. The ETG candidly has done an excellent job this year on managing inventory. They had very little use of working capital the first 9 months of the year as it relates to investment in inventory. FSG's investment in inventory has been commensurate with our organic growth. So I think the situation on the inventory side for us this year is pretty positive.

Operator, Operator

And we'll take our next question from Gavin Parsons with UBS.

Gavin Eric Parsons, Analyst

What would you say is the average price gap now between one of your PMA parts on the OEM part?

Eric A. Mendelson, Co-CEO

Yes, estimating that number is quite challenging. It largely depends on how long a customer has been purchasing a product. If a customer has a longstanding contract, we typically offer some form of price protection. While I can’t provide an exact average, I believe discounts range from around 20% for newer customers to potentially 70% for those who have been with us for a long time and where we've managed our costs effectively. On average, I would suggest we are likely about 33% to 40% below the OEM price. However, I don't have a specific figure for every scenario. Additionally, in our repair business, we offer many proprietary repairs that can lead to significant savings, often exceeding 50%.

Gavin Eric Parsons, Analyst

That's really helpful. And maybe this is a range question, too, but anything that you could share on what your average market share is or customer wallet share is across the portfolio?

Eric A. Mendelson, Co-CEO

We're careful over on the PMA side. We never want to take a majority market share in any particular part that we go after. It would be hard to come up with that number, depending on what the denominator is. But I do believe that there is still plenty of, if you will, unsold potential. So I'm very confident of our continued growth and market penetration. Thanks, Gavin.

Operator, Operator

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

Peter John Skibitski, Analyst

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 kind of 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 H. Mendelson, Co-CEO

We've been involved in avionics and cockpit electronics since 1999, starting with our first two acquisitions: one in repair and overhaul called Air Radio and Instrument, and another in emergency backup power supplies and related cockpit panels. This sector has always attracted us, and we've expanded through various acquisitions over the years, focusing mainly on repair and overhaul, while also adding emergency locator transmitters and other related items. Our aim is to pursue strong opportunities rather than simply trying to climb the industry ladder. The aftermarket plays a significant role in our strategy as well. Gables Engineering, founded in 1946, drew interest from many potential buyers, but we built a relationship over several years as a local company in South Florida with several facilities nearby. When they decided to sell, they were looking for a good home for their business, and chose us based on our potential to grow the company and our commitment as stewards. Our acquisition strategy typically combines various factors, as we often target areas but may adjust our approach based on what is feasible and sensible. We're adaptable and have successfully integrated adjacencies into our growth strategy. We're excited about the Gables acquisition because it's a unique company in the industry, with the name Gables panels being widely recognized, illustrating its significance in the market.

Peter John Skibitski, Analyst

That's great. Yes, very helpful. And just, Victor, and all these deals that you've done in the avionics world, you continue to run them separately. You're not kind of integrating them into one big avionics company. Is that right?

Victor H. Mendelson, Co-CEO

Yes, we are not merging them into a single large avionics company. However, the businesses do collaborate. HEICO has been particularly successful over the years in achieving what I refer to as soft synergies, where they work together on new programs, technical cooperation, production, and quality. They often use other HEICO companies as suppliers, which is becoming more common. A significant advantage has been our distribution capabilities, supported by an exceptional team that has developed this aspect over time. Our distribution business is unique and has played a crucial role in our success in the cockpit, avionics, and electronics sectors.

Eric A. Mendelson, Co-CEO

Yes. I would agree, Pete, that the distribution has been very key to making a number of these acquisitions more accretive and significantly more successful because we do have a unique position with our customers we're able to increase our market share and do exceptionally well and I think provide a very, very strong outlet. So that's been a big key. To your question as to whether there's a broader strategy? HEICO started out life as a JT8D engine parts manufacturer, and then we got into other engines and components and as time has gotten on into structures and avionics. And we're looking to continue to build out our capabilities, yet leave them very entrepreneurial. So everybody is very much focused on their unique technology. And our thought is if we're very good at the details that there'll be a very good solution. But we do have, as you pointed out, in Avionics, we did acquire Gables. We acquired some wonderful Honeywell product lines and display units and aircraft information management systems. I mean we do have a very, very strong avionics business within HEICO.

Operator, Operator

And we'll take our next question from Scott Mikus with Melius Research.

Scott Stephen Mikus, Analyst

Eric, Victor, Carlos, nice results. Eric, I have a quick question on the organic investment opportunities, particularly in the PMA business. When you're evaluating what parts to pursue, how do you form that business case? Are you looking for a payback over a year or two? Or does the part eventually you have to be able to generate, say, $3 million plus in revenue with accretive margins to make it worthwhile? Just how do you think about evaluating that process?

Eric A. Mendelson, Co-CEO

We consider many factors when evaluating opportunities. We assess how similar a new project is to previous ones, the demand from customers, the expected payback, the required investment, and the timeline for vendor delivery. All of these elements contribute to an internal rate of return analysis, which we carefully evaluate as it is crucial for our decision-making. The process is indeed complex, but our goal is to develop as many parts as possible, and we aim to be present in all areas, so we typically do not rule out any possibilities.

Michael Frank Ciarmoli, Analyst

Got it. And then thinking of the margins at FSG, they're very good again. Is there still more margin expansion opportunity from outsourcing more work that Wencor had previously used build-to-print shops for?

Eric A. Mendelson, Co-CEO

The answer is yes. I believe there is further opportunity for the Wencor companies to grow alongside other hydro companies. While we can source products already made by existing vendors, it’s not our preferred approach. We prefer to remain loyal to our vendors and allow our other family companies the chance to bid on new products in the future. This is more in line with our focus. Regarding the margin, FSG had an operating margin of 24.7% in the third quarter, which exceeded my expectations. What impresses us even more is that our EBITA margin was 27.3%, surpassing what we initially thought was possible. We achieved this while still providing excellent value to our customers and not taking advantage of them. If you had asked me ten years ago about reaching this figure, I would have said it wasn't feasible in the near future. However, we just keep making progress and working hard every day, and the results are undeniable. I believe there are more outsourcing opportunities available, and we will see how that develops.

Operator, Operator

And we'll take our next question from Kristine Liwag with Morgan Stanley.

Kristine T. Liwag, Analyst

One Eric, Victor and Carlos, can you talk about the supply chain and it sounds like the technical difficulty?

Eric A. Mendelson, Co-CEO

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.

Operator, Operator

And in the meantime, we'll take the next question from Gautam Khanna with TD Cowen.

Gautam J. Khanna, Analyst

I was curious, Carlos, you mentioned that FSG profit rates are exceeding your expectations. While the mix plays a role, I'm interested to know if the profitability of the different product lines, such as aftermarket parts and repairs, has also improved. Have you noticed an increase in profitability in the baseline PMA business or the repair business?

Carlos L. Macau, CFO

I would say yes. I highlighted repair because it had a positive impact on the quarter, and it was due to mix. Honestly, with the repair business, we operate on a week-to-week basis, making it difficult to predict our repairs for the next quarter. We receive requests for proposals to do jobs, and what we’ve noticed is that the PMA friendly repairs significantly contribute to profitability. We had a good quarter with many PMA friendly repairs. Our team is continually developing new DER repairs, and if this trend continues, it will positively impact our margins. However, not every quarter is like this one, and the repair side can be unpredictable. I was pleased with our performance there. Additionally, don't forget about our specialty products, particularly our defense business, which has three years' worth of firm backlog. The team is working hard, and we are expanding this business, which is beneficial for us. So, these two factors, along with the strong parts business we've seen throughout the year, are driving our margin.

Eric A. Mendelson, Co-CEO

And Gautam, I should also add that while Carlos is absolutely right, our independent proprietary repair business does have very strong margins. I should also mention that we are doing exceptionally well on OEM aligned, OEM licensed repairs as well. These continue to provide great value to our customers and to our OEM partners. So HEICO remains neutral regarding which product we sell. We want to be available to all customers, as some seek alternative products and we are the largest provider in that area, ready to deliver. However, there are also customers who prefer an OEM product, and we are fully aligned to develop that OEM product, whether through our repair business or our PMA business as OEM licensed products. Our distribution is entirely focused on OEMs. We are really strong across the board, responding to whatever our customers want, rather than pushing one specific option. It's about meeting their needs and requests.

Victor H. Mendelson, Co-CEO

Yes, this is Victor. I want to point out that the acquisition is of a growing company and business. They have introduced many new initiatives and programs that are significant. We anticipate it becoming a strong growth story for us in the coming years. This acquisition is a key motivator for us. While we sometimes acquire companies at favorable prices, we chose this one primarily for its growth potential rather than its current state.

Carlos L. Macau, CFO

So Louis, this is Carlos. We acquired that company in the last week of July, which was the final week of our quarter, so there was no impact on Q3. We are currently studying the business and working on integration and other necessary tasks. We will provide more updates on this topic in Q4. As mentioned earlier, it is a very unique business with strong demand and significant positions on several OEM platforms. I don't anticipate it will negatively affect our margins. However, I expect that in the initial years, there will be substantial amortization, which may slightly reduce the operating income margin for this business, though it shouldn't be as significant as the impact we saw from the Exxelia deal back in January of '23.

Operator, Operator

And we'll take our next question from Kristine Liwag with Morgan Stanley.

Kristine T. Liwag, Analyst

Guys, sorry about earlier. Can you hear me now?

Victor H. Mendelson, Co-CEO

Perfectly.

Kristine T. Liwag, Analyst

Okay. Great. So Eric, Victor, Carlos, I want to address a question about the supply chain. Earlier, you mentioned that your strategy of being flexible and not relying on a centralized supply chain has helped you obtain the necessary parts during this period of disruption. However, it appears that demand for aerospace and defense remains strong and is progressing positively, with the supply chain starting to stabilize. Considering that you are now a much larger company compared to pre-COVID, would you think about adopting a more centralized supply chain? If you pursue this route, what potential savings could you achieve? Carlos, you indicated that your current method likely incurs higher costs, but as things stabilize and you move in that direction, how much margin could you possibly gain?

Carlos L. Macau, CFO

I want to share my perspective on that. I don't think, culturally, over the next 3 to 5 years, that is the direction we’re heading. As the company grows and matures, those considerations may come into play, but right now, I don't see it as necessary. Over the next 3 to 5 years, I don't think that strategy will be effective. However, we might eventually shift to collaborative purchasing in areas where we have similar end markets or product lines, and we already do some of that, but it isn't organized as centralized purchasing. So, Kristine, that's our current situation. To be honest, I haven't conducted a detailed analysis to provide a specific figure. Certainly, if we consolidated our general and administrative spending, it would be cheaper. However, I believe the risk of losing customer revenue and disrupting our satisfied customer base likely outweighs any potential benefits for HEICO at this stage in our growth.

Kristine T. Liwag, Analyst

Yes. That makes sense. And if I could follow on. Eric, you mentioned earlier for PMA, you have some products that are maybe a 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 OEMs have raised prices so much in the last 5 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 A. Mendelson, Co-CEO

That's a great question. We do see contracts ending over time. When the percentage savings is high, it usually means the customer has been buying the part from us for a long time, which often indicates that these are more mature products. If we wanted to maximize short-term margins, we could definitely raise prices significantly. However, these products are approaching the end of their lifecycle. Our customers have been very loyal to us. While we do need to increase our prices to cover our rising costs, which have been considerable, we are committed to doing that. However, resetting prices for a profit boost is not how we operate. Therefore, I would not suggest modeling that kind of approach. Thank you. We appreciate everyone's participation. That concludes our questions. Samara, do we have anyone else with questions?

Operator, Operator

There are no additional questions.

Eric A. Mendelson, Co-CEO

Okay. Well, thank you, everyone, for participating. We will have the fourth quarter results call in late December, and we look forward to your continued interest, and we thank you for your continued interest in HEICO. If anyone has any additional questions, of course, as always, feel free to reach out to Carlos, Victor or me, Eric. And we'd be happy to fill you in, but we wish you a pleasant end of the summer, and thank you for your support of HEICO over the years. And that concludes today's call.

Operator, Operator

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