Earnings Call Transcript - HEI Q4 2025

Operator, Operator

Welcome to the HEICO Corporation Fourth 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, among others, the severity, magnitude, and duration of public health threats such as the COVID-19 pandemic, our liquidity and the amount and timing of cash generation; lower commercial air travel, airline fleet changes or airline purchasing decisions, which could cause lower demand for goods and services, product specification costs and requirements, which could cause an increase in our cost to complete contracts; governmental and regulatory demands, export policies and restrictions; reductions in defense, space, or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales. Our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; cybersecurity events or other disruptions of our information technology systems could adversely affect our business and our ability to make acquisitions, including obtaining any applicable domestic and/or foreign governmental approvals and achieve operating synergies from acquired businesses. Customer credit risk, interest, foreign currency exchange and income tax rates; and economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries, which could negatively impact our costs and revenues. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. I now turn the call over to Victor Mendelson, HEICO's Co-Chairman and Co-Chief Executive Officer.

Victor Mendelson, Co-CEO

Thank you, Samara, and good morning everyone on this call. We appreciate your participation in HEICO's Fourth Quarter Fiscal '25 Earnings Announcement Teleconference. I'm Victor Mendelson, HEICO's Co-Chairman and Co-CEO, and I'm here with Eric Mendelson, our other Co-Chairman and Co-CEO, and Carlos Macau, our Executive Vice President and CFO. Before we begin, Eric and I want to take a moment to remember our father, Larry Mendelson, who was HEICO's Chairman and CEO for many years. We feel incredibly fortunate to have had such a caring father who taught us values and principles centered around fairness, excellence, and quality. He often said to just do the right thing, a philosophy that extends into our business practices. He was deeply committed to real earnings—focusing on cash flow rather than artificial GAAP metrics, although he respected those guidelines as well. Many of you may recall his strong focus on cash flow. Eric and I also had the privilege of working alongside our father long before we became HEICO's largest shareholders and took on management roles. In a few weeks, we will celebrate the 36th anniversary of our leadership here. Building HEICO with him was a rewarding experience that few get to have. He instilled his values and business philosophy not just in us, but in all of HEICO. This succession strategy worked flawlessly, as it often did with him. He took great pride in HEICO and was one of the most optimistic people we knew. Even near the end of his remarkable 36 years with HEICO, he remained hopeful about the company’s future. We, along with the HEICO team, share that optimism and are grateful for everything he taught us. Thank you for letting us take a few moments to reflect on him. Now, let's move on to our record-setting fourth quarter fiscal '25 results, which capped off another outstanding year for HEICO. We want to acknowledge the extraordinary efforts of our team members, whose dedication to our customers contributed significantly to our strong results this quarter and year, giving us great optimism about HEICO's future. We, along with HEICO's Board, appreciate all your contributions in 2025 and look forward to an even more successful 2026. So taking a moment to summarize our record results during the fourth quarter of fiscal '25, we note, first, that consolidated net income increased 35% to a record $188.3 million or $1.33 per diluted share in the fourth quarter of fiscal '25, up from $139.7 million or $0.99 per diluted share in the fourth quarter of fiscal '24. Consolidated operating income and net sales in the fourth quarter of fiscal '25 represent record results for HEICO, which improved by 28% and 19%, respectively, as compared to the fourth quarter of fiscal '24. The Flight Support Group set all-time quarterly net sales and operating income records in the fourth quarter of fiscal '25, improving 21% and 30%, respectively, over the fourth quarter of fiscal '24. The increases principally reflect strong organic growth stemming from increased demand across all of the group's product lines as well as the impact from our profitable fiscal '25 and '24 acquisitions. The Electronic Technologies Group also set all-time quarterly net sales and operating income records in the fourth quarter of fiscal '25, improving 14% and 10%, respectively, over the fourth quarter of fiscal '24. These increases principally reflect strong organic growth for most of the group's products and the impact from our profitable fiscal '25 and '24 acquisitions. Consolidated EBITDA increased 26% to $331.4 million in the fourth quarter of fiscal '25, up from $264 million in the fourth quarter of fiscal '24. And our net debt-to-EBITDA ratio improved to 1.60 as of October 31, '25, down from 2.06 on October 31, '24. Cash flow provided by operating activities increased 44% to $295.3 million in the fourth quarter of fiscal '25, up from $205.6 million in the fourth quarter of fiscal '24. Yesterday, HEICO's Board of Directors declared a semiannual $0.12 per share cash dividend on both classes of HEICO's stock payable in January 2026, representing our 95th consecutive dividend and reflecting the Board's ongoing confidence in our company's strong cash flow generation. We completed five acquisitions in fiscal '25, three in the Electronic Technologies Group and two in the Flight Support Group, further enhancing our sales, our earnings, and our cash flow. Each of our Flight Support and Electronic Technologies groups recently entered into agreements to acquire two separate and unrelated businesses, one of which Ethos was just announced earlier this week. As of now, we anticipate both should close in the first quarter of calendar '26. Though they are, of course, subject to customary closing conditions, including, among others, antitrust clearance and the sellers complying with typical representations and covenants. So we can't be certain of actual timing or actual closing. We expect these acquisitions would be accretive to HEICO's earnings within the year of each transaction's closing.

Eric Mendelson, Co-CEO

Thank you, Victor. Before we turn to the results, I want to pause and recognize the remarkable performance of HEICO's team members. What we are reporting today is the product of extraordinary talent, relentless execution and a culture developed over decades that consistently turns ambitious objectives into real outcomes. Time and again, they have demonstrated the ability to rise to the challenges, adapt and deliver at the highest level. Their commitment, collaboration, determination, and creative approach are the foundation of these results and make them especially rewarding. We are all sure that our dad is looking down on us today as we report these outstanding results and we closed our 36th year with HEICO. As Victor said so eloquently a few moments ago, we are both so grateful for all that we learned from our dad and from all the time that we had with him. Now moving on to the results. The Flight Support Group's net sales increased 21% to a record $834.4 million in the fourth quarter of fiscal '25, up from $691.8 million in the fourth quarter of fiscal '24. The net sales increase reflects strong organic growth of 16% and the impact from our fiscal '24 and '25 acquisitions. The net sales growth reflects increased demand across all of our product lines. HEICO's operations continued to exceed our expectations, underscoring our highly successful combination with Wencor. Customers increasingly recognize the value of our expanded aftermarket parts and repair and overhaul offerings, which has driven strong growth opportunities and continued success across the company. The Flight Support Group's defense business remains a compelling opportunity, particularly as both the U.S. administration and our foreign allies emphasize defense readiness and cost efficiency. HEICO is extremely well positioned to support these priorities by delivering high-quality, lower-cost alternative aircraft parts that help reduce costs for the government and taxpayers while expanding our addressable markets. Our missile defense manufacturing business is also experiencing very significant growth, fueled by rising demand from the United States and our allies, we have substantial orders and backlog to support the continued expansion of this business, and we are committed to providing cost-effective solutions and industry-leading quality to our U.S. military and our foreign allies. The Flight Support Group's operating income increased 30% to a record $201 million in the fourth quarter of fiscal '25, up from $154.5 million in the fourth quarter of fiscal '24. The operating income increase reflects the previously mentioned net sales growth and improved profit margin and SG&A expense efficiencies realized from the net sales growth. The improved profit margin principally reflects net sales growth within our repair and overhaul parts and services product line and a more favorable product mix within our specialty products product line. The Flight Support Group's operating margin improved to 24.1% in the fourth quarter of fiscal '25, up from 22.3% in the fourth quarter of fiscal '24. The increased operating margin principally reflects the previously mentioned improved gross profit margin. Since acquisition-related intangible amortization expense consumed approximately 250 basis points of our operating margin in the fourth quarter of fiscal '25, the Flight Support Group's cash margin, which is before amortization or what we also call EBITA, was approximately 26.6%, which has been consistently excellent and is 160 basis points higher than the comparable Flight Support Group cash margin of 25.0% in the fourth quarter of '24. As I have previously discussed, we are laser-focused on cash generation at each of our businesses. I am very happy with the continued expansion of our cash margins and believe the decentralized operating structure has permitted us to expand these margins while simultaneously delivering high-quality products and services to our customers at substantial cost savings with lightning quick turnaround times. Now I will discuss the fourth quarter results of the Electronic Technologies Group. The Electronic Technologies Group's net sales increased 14% to a record $384.8 million in the fourth quarter of fiscal '25, up from $336.2 million in the fourth 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, aerospace and space products. The Electronic Technologies Group's operating income increased 10% to a record $89.6 million in the fourth quarter of fiscal '25, up from $81.8 million in the fourth quarter of fiscal '24. The operating income increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by higher SG&A expenses, mainly reflecting increased share-based compensation expense. The improved gross profit margin principally reflects a more favorable mix of our medical and other electronics products. The Electronic Technologies Group's operating margin was 23.3% in the fourth quarter of fiscal '25 as compared to 24.3% in the fourth quarter of fiscal '24. The operating margin change principally reflects an increase in SG&A expenses as a percentage of net sales, primarily from the previously mentioned higher share-based compensation expense, partially offset by the previously mentioned improved gross profit margin. Importantly, before acquisition-related intangible amortization expense, our operating margin was a very healthy 27.3% as intangibles amortization consumed around 400 basis points of our operating margin. This is how we judge our business as that most closely correlates to cash. On a true operating basis, these are excellent margins, and we are very pleased with them.

Victor Mendelson, Co-CEO

Thank you, Eric. Looking ahead to fiscal '26, we anticipate net sales growth across both the Flight Support Group and the Electronic Technologies Group, driven by organic growth from increased demand for the majority of our products as well as growth through our recent acquisitions. We'll continue to pursue selective acquisition opportunities that complement this growth and our disciplined financial management remains dedicated to creating long-term shareholder value through a balanced combination of organic growth and strategic acquisitions while maintaining financial resilience and flexibility. Acquisition activity, of course, continues to be robust across both operating segments, supported by a healthy pipeline of potential acquisition opportunities currently under evaluation. And as such, we remain focused on identifying high-quality businesses that complement HEICO's existing operations and, of course, further strengthen our strategic positioning. Consistent with our long-standing acquisition philosophy, we will only pursue acquisitions and opportunities that meet our strict financial and strategic criteria that are accretive and have the potential to generate durable long-term value for HEICO and for our shareholders.

Operator, Operator

Those are our prepared remarks, and we ask Samara, the operator, to please open the line for questions.

Lawrence Solow, Analyst

Great. I appreciate the comments on Larry, and I'm sure he's smiling down on the really strong free cash flow this quarter. So congrats on that. First question, Eric, I guess to you, just on the growth and as we look at it at FSG, I think we used to view you as sort of a high single, low double-digit grower and grew in mid-teens plus on the core business for five-plus years. Maybe the first couple were COVID recovery, but just trying to, as we look at it, it feels like all the positives continue to align in your direction. Can you just help us just kind of bucket these drivers? Clearly, the market's growing nicely, but I don't know if growth has accelerated above historical levels where we are today. But is it just your expanded parts offering? Is it a market share? Is it just more acceptance of your parts? Just trying to, if you could just bucket those multiple positives, I think, driving your business.

Eric Mendelson, Co-CEO

Sure. Larry, I'd be happy to do that. And thank you very much for your kind comments. Yes, for sure, dad would be very, very happy with these results. I'm sure he is. So you're right. The organic growth has been tremendous, and frankly, it's even surprised us and me. I've always been optimistic, and I've always thought that we would continue to outgrow the market, but we continue to do so in a much more meaningful way. So you're right. Why is that? I think it's a number of things. Number one, of course, we want to be grateful for the rising tide environment in the industry. So that's been terrific, and that's been very strong for us. But I think the other thing that's been really good is the value proposition that HEICO offers our customers. The thing that perhaps I'm most proud about is that we've had 16% organic growth in this quarter and another 5% acquired on top of that for a total of 21% sales growth, but operating income increased 30%. And at the same time, our customers are incredibly happy in getting huge value from us. So we've been able to drive operating income, if you will, primarily off of the organic sales growth, and our customers are still very happy. So I think that speaks to a tremendous sales opportunity that we have really in all of our businesses, whether it's in the PMA parts, repair, distribution, specialty manufacturing, defense sustainment. I'm talking over on the flight support group side, and then, of course, on the ETG support group side, more growth opportunity there. But I really think it's the value proposition that we offer combined with our decentralized and very entrepreneurial structure. I get emails after we announced the earnings from a number of different people within HEICO, basically thanking me for the incredible results. I turn around and say, 'No, yes, we've been very good on capital allocation, but they're the ones who really deliver these results. We're just reporting the results that they deliver.' And it's as a result of being very intimate with their product line, understanding their customers, the whole competitive dynamic. So I think that as there are more aircraft out there and there's increased demand in both commercial aircraft as well as defense products and missile interceptors, I think that we are just incredibly well-positioned. So look, the organic growth has surprised me. That's one of the reasons why we don't give guidance because we don't know where it's going to be. We just know at HEICO that we've got 11,000 people coming to work every day, putting their heads down, and working as hard as they possibly can, and frankly, the result of the results. But I do think that the value proposition is tremendous. And I guess lastly, one of the other things that I think we've seen over the last number of years is that other manufacturers are increasing their prices substantially. And I think that just further supports the HEICO value proposition. So I think we're just in a great place right now.

Lawrence Solow, Analyst

No, I appreciate all that color. No, that was great. Victor, how about a question for you. Just I think you obviously had a little sluggishness last year, but a good year this year. It feels like most of your end markets or if not all of them now are kind of pointing up and to the right, obviously, led by defense. I know the National Defense Authorization Act that was just passed recently, it feels like that was positive. So any just general thoughts on state of the union on your outlook?

Victor Mendelson, Co-CEO

Yes. We're projecting growth next year in ETG. As I always do, I guide people to look for on an organic basis, mid- to low single digits organic growth. If we do better, that's great. We'll see where everything shakes out a year from now and over the quarters, but we feel very good about our businesses. We did our budget reviews, our subsidiary annual reviews. And as a rule of thumb, our companies are feeling good. Not every company is going to march ahead next year in the way we'd like to see. But overall, very close.

Ronald Epstein, Analyst

And again, my condolences about your father. On the quarter itself, let's just a couple of quick things. How are things looking for M&A as we go into 2026?

Victor Mendelson, Co-CEO

Very strong. I mean, we're working on a lot of opportunities. I would say each quarter, we seem to feel like it can't get any busier. Our pipeline is busier and busier, but that's exactly what happened in this past quarter and actually in recent weeks since the quarter ended. So we've got a lot we're working on, a lot that we're looking at. Of course, as you know, Ron, it doesn't happen until it closes. And there's a lot of work, a lot of diligence. We're extraordinarily discerning in what we'll buy. But we're fortunate in that we are known as a great home for sellers, particularly entrepreneur founder managers and others who are really going to take care of the businesses, not only honor the legacy but keep the entrepreneurial environment. So there's a lot of opportunity for us. We'll see what we're able to mine out, but we're cautiously optimistic.......

Eric Mendelson, Co-CEO

And Ron, I would also just add to that. So we started really our acquisition program in earnest about 27 years ago. And we really acquired, I don't know, 110 companies, and we really have a track record. It's not just 1-, 2-, 3-, 5-, 10-year track record. It's a very, very long track record in DNA, which is embedded in the company. So when we talk to sellers, I think we're viewed in a very, very different light. And as a result, we've got just a tremendous lot of bandwidth, and we also have a lot of different sellers who really view us as the buyer of choice. So I think we're in a really good position there.

Carlos Macau, CFO

Ron, this is Carlos. I would say that, similar to our past approach, we are not averse to using leverage. For the right transaction that benefits our shareholders, we would consider taking on additional leverage. However, our company culture does not support maintaining a permanent leverage level in the range of 5 or 6. If we needed to increase leverage to 4, 5, or 6 times for a deal, and I believed we could reduce it back to a manageable level within 12 to 24 months, we would definitely pursue that if it serves our shareholders' interests. As a general guideline, we prefer our leverage to be around 2 times, which feels comfortable for us. Currently, our permanent debt or bonds are approximately at 1 times EBITDA, which is quite manageable. We could likely sustain a 2 times debt level comfortably, given our strong cash generation at HEICO.

Ronald Epstein, Analyst

Got it. And then maybe just one last question from me. How is the work going on the PMA parts for defense that you mentioned last year? Is there any progress on that front?

Eric Mendelson, Co-CEO

Ron, this is Eric. So yes, there has been progress on that front. But as we always said, it was really going to be more of a medium-term project. As you know, it takes a little bit of time for the government to do all the stuff that they have to do. But we think that there is a very, very big opportunity there for us, and we're quite excited about it.

Peter Arment, Analyst

Eric Victor, Carlos, nice results. Eric, you talked a little bit about defense and missile defense. And if I remember correctly, defense and space is roughly about a quarter of the FSG segment. Do you see that mix changing much, just given all the growth you're highlighting?

Eric Mendelson, Co-CEO

I believe it will likely remain consistent due to significant growth on the commercial side, which is effectively keeping pace with the substantial growth in defense. There are considerable opportunities in defense as our customers become more acquainted with our extensive capabilities. This includes not just our long-standing large defense clients, with whom we maintain strong relationships, but also companies within the defense tech sector. We are actively collaborating with them and delivering substantial value. Our design and manufacturing capabilities span a wide range of products, allowing us to address various complex challenges. I anticipate this will continue to represent a significant opportunity for us, alongside our launch business. At HEICO, we are cautious and do not discuss specific programs or customers, as we aim to protect our strategies from competitors. We encourage stakeholders to look at our results instead. I can share that many well-known companies have engaged with our Specialty Products group and other manufacturing divisions to help tackle some of the country’s major challenges. I am very proud of our team, and I see a substantial opportunity ahead.

Victor Mendelson, Co-CEO

This is Victor. It's a good question, and we are certainly excited about it. Golden Dome includes several existing programs, though it's not entirely defined or something we can discuss in detail on this call. We have a significant presence in these programs, which Eric mentioned in his comments, and this applies to both ETG and FSG within the business as well. There is also a lot of reconnaissance, surveillance, and tracking being integrated, and many of our businesses have been informed that some of their development contracts relate to this initiative. While I can't provide specifics on each program or its subsidiaries, we trust our customers' insights. There isn't a formal order labeled Golden Dome, so we will need to evaluate its impact as we proceed. It is certainly an additive opportunity, and we are excited about it. We believe it's the right approach for the country, especially considering the success of Iron Dome, with several of our companies contributing to its components.

Kenneth Herbert, Analyst

Very nice results. Maybe, Eric, just to start, you've grown FSG margins pretty substantially, about 300 basis points from '21 to '24 or '22 to '25. I can appreciate part of that has been mixed with Wencor. You've also seen some opportunities on pricing in other areas. How do we think about FSG margins into fiscal '26 and beyond? And is there any reason we don't see continued pace of improvement?

Eric Mendelson, Co-CEO

Thank you for your question. While we don't provide specific guidance, you are correct that we have significantly improved our margins. I am particularly proud that we have managed to keep our customers satisfied during this process. I believe there are still opportunities for margin expansion as we better absorb our fixed costs, whether in cost of sales or SG&A. We have made considerable investments in recent years to enhance our manufacturing, design, and distribution capabilities, which should lead to continued margin improvement. It’s difficult for me to predict the exact figures because our decentralized organization submits conservative budgets. However, they tend to outperform those projections. Carlos might have some additional insights on this.

Carlos Macau, CFO

You're hiking the football, Tommy? Ken. So here's the deal. I continue to believe that the FSG is going to play between 23.5% and 24.5% GAAP operating margins. And the reason that I have kind of a wide sort of vector there is because we have noticed and talked about some mix impacts on the margin, particularly in Specialty Products and repair and overhaul. So historically, the FSG margin story has always been about volume. So until that mix sort of settles down a little bit, it's kind of hard to tighten that up. But I think you could expect between those ranges. And hopefully, we'll be towards the high end of that, and there will be reasons that are quarter specific if we're not, but I think that's the range you should expect.

Kenneth Herbert, Analyst

That's helpful, Carlos. And if I could, Eric, just one other question. It seems like each time this year, we have a debate around better deliveries out of Boeing and Airbus and the implications of what that could mean for aftermarket spending. Can you just comment on what you're seeing at airlines today as they think about 2026 around aircraft retirements, obviously, fuel prices are low, continued use of legacy or older assets. Just what's your view on aftermarket fundamentals into 2026?

Eric Mendelson, Co-CEO

Yes, that's a great question. We have a lot of respect for Boeing and Airbus, as well as Embraer. We believe they will resolve many of the supply chain issues they are experiencing. These are excellent companies that produce outstanding products, which the world truly needs. They will manage to address their situations. The question then becomes what will happen to the aftermarket for older aircraft. We believe there will continue to be strong demand for these older aircraft. The retirement rates highlight this, and the aging fleet remains significant, increasingly consuming parts. We feel confident in our position. We are long-term investors in this stock, so short-term fluctuations do not alter our perspective. We are not focused on quarter-to-quarter changes; instead, we see that airlines acknowledge the substantial need for additional suppliers in the future. We are prepared to take on that opportunity, both on the independent side and with OEM partnerships, depending on our customers' needs. Overall, we believe we are in a strong position, and the market should remain robust.

Sheila Kahyaoglu, Analyst

I want to start by expressing my condolences for Larry. We were fortunate to have known him, and he has influenced all our lives in some way. Regarding the performance for 2025, it has been outstanding this quarter. Eric, I wanted to ask you about the FSG growth, particularly since it has accelerated this quarter. Can you provide any insights into the parts of the business you believe will excel as we move into fiscal 2026? Additionally, you've announced some exciting transactions such as EthosEnergy and others. Could you explain how these fit into both Wencor and the overall FSG?

Eric Mendelson, Co-CEO

Sure. I would be happy to. And Sheila, thank you also for the very nice comment about that, and he always respected you and your fellow analysts and really enjoyed this time very much with you all. And so thank you for that. As far as for the subsectors within Flight Support that are going to outperform, I mean, I'm sorry to sound like a broken record, but I think it's really across the board. It's in everything that we're doing. We're seeing strength across the board. So I wouldn't say that there's one area in particular. We are very excited. You bring up Ethos, and we're very excited about that because they're strong in the IGT market. And of course, you've got all these industrial gas turbines, of which some are air derivatives, supporting the AI power demand. And as you know, there's a massive amount of power that has to be created. And these IGTs, industrial gas turbines, are expected to play a major role there. So we think that we're in very, very good position to help Ethos continue to support their program. And we think that there's just a tremendous amount of opportunity. We like the people very much. They have three different facilities. It's a very decentralized organization, very entrepreneurial. I think there is going to be a big increase in demand on the various components that they overhaul. And we think that it's just a great addition to Wencor. Wencor has been, as HEICO has been, Wencor has been very successful in their markets. And we allocate the acquisitions according to bandwidth and who's got time and capacity to be able to take on these acquisitions. But we're really happy that Wencor has got the talent and the technical ability to help drive that business forward. And we think that there'll be very good performance out of it.

Victor Mendelson, Co-CEO

This is Victor. The business operates independently from Robertson, serving as a supplier to them. Robertson has been a customer, and by collaborating, they can provide more advantages to our customers and enhance competitiveness in the marketplace. There is potential for growth here. We haven't detailed the revenue from the business, so I have to be cautious about that. Additionally, once the deal closes, which is not guaranteed, timing and necessary approvals will impact the revenue we report in fiscal '26.

John Godyn, Analyst

I completely understand that HEICO moved away from providing annual guidance a while back. However, every few years, you restate your multi-year target of 15% to 20% net income growth. We've experienced a couple of years with excellent net income growth, but I'm noticing that consensus expectations indicate a significant slowdown in growth over the next few years. I wanted to revisit this topic and gauge your thoughts. How do you view the 15% to 20% target for multi-year growth moving forward? Do you see any factors that suggest a sharp slowdown in growth rates is likely?

Eric Mendelson, Co-CEO

So John, first of all, thank you very much for your question. This is Eric. I'd be happy to answer that. As you know, the 15%, 20% has always been an aspirational number. The company is designed in a decentralized way but rolling up into groups. So we can harness the individual and entrepreneurial efforts of our people in the businesses and combine them with technology, market access, capital that the larger groups bring. So I can tell you that all of the subsidiaries have organic growth targets that are consistent with the numbers that you mentioned. And we believe that on the acquisition side, we are in a very good position and continue to be the buyer of choice. Obviously, the important metric for us is EBITDA, which is really operating income plus intangible amortization due to purchase accounting because that's really a made-up number, if you will. But I think in terms of growing our EBITDA, nothing has changed going forward. Obviously, as you get bigger, it may become more difficult. But of course, as we've gotten bigger, we've hit the numbers, and it's become easier. So all I can tell you is we remain very focused. And I think we're in a good position going forward. As far as giving guidance, for us to give guidance, as I've mentioned, it's very difficult because our subsidiaries tend to give very conservative guidance to us. And then we have to add a number on top of that, and who knows what that number is going to be. But I can tell you, Victor and I spend a lot of time out in the field with our businesses. We're aware of all the technology they're developing. Carlos is out there as well. And I think the future is going to be very good. It's going to be very good for us. And we're going to continue to outgrow the market. So nothing has changed with our focus on outgrowing the market, so.

Carlos Macau, CFO

Hey, John, this is Carlos. Let me refer you to history here. We've done for 35 years, compounded our bottom line at 18%. So we've proven that we can do it. Every year, we sit down, we do our budgets, we look at the performance, the atmospherics in the markets, and we shoot for 15%, 20% bottom line growth. And we're capable of doing that. As Eric mentioned, as we grow larger, it becomes more challenging. But as we look out over the next three to five years, I don't see anything impeding those aspirational goals. That's what we target as a group, as a board, and as a company to grow. So I think that's all intact.

Eric Mendelson, Co-CEO

And also, I would just add to what Carlos said. When you look at our leverage out roughly 1.5x, I mean, we've got tremendous ability to make acquisitions. I mean, when we generate, what was the number, $934 million from operations. I mean, the cash is really very, very strong. And we're able then to take that cash and go buy other entrepreneurial businesses where people want to be part of HEICO. So there's no change to our program.

Noah Poponak, Analyst

Can you hear me okay?

Eric Mendelson, Co-CEO

We can.

Noah Poponak, Analyst

Those were nice comments about your father. It was great to be able to work with him. Just staying on these FSG margins a bit, Carlos, you talked about mix. I guess when we look at the incremental being better in 2025 than 2024, are you able to parse out the pieces of that? How much of it was that mix? And can you tell us what those mix items are and what you expect them to do next year? And how much of it was any change in pricing philosophy?

Carlos Macau, CFO

So the price part of that, we probably get one or two or three points worth of price in our numbers every year. We're basically covering our labor inflation. I mean, raw materials for us is a lower piece of the overall bill of materials. So the concerns we have around here really are labor inflation, and we seem to be getting enough price out of our customers to cover that and still provide them with great value and make them feel like the value proposition is huge with HEICO to do business with us. The components of the mix, so I would say this. We've noticed a nice increase in the gross margin with our repair and overhaul business. And most of that has been attributed to heavier PMA and DER repairs that we've been doing this year. I would say the mix shift there has been a little bit more favorable towards the PMA and DER. We've also expanded our avionics repairs quite a bit this year. So those components there have had a positive lift in the gross margin and the repair and overhaul, which has translated into the overall segment margin. I'd also say that within specialty products, the core of that business, if you spun the clock back five or six years or so ago, it was really a commercial OE play. Pre-COVID, let's say, it was all about seats and thermal blankets and insulation and things like that. What we've noticed post-COVID is a real uptick, and Eric's talked about it earlier, in the defense business we have there, whether it's missile hardware, whether it's drone hardware, and things like that, structural pieces that we're making. That shift towards more of a heavier defense play within specialty products rather than the commercial OE has had a little bit of an improvement on the margin. So I think those two things have helped. And then, of course, our parts business has been off the charts. It's been growing at a tremendous pace, outgrowing the other verticals. And as that business continues to outperform, it absorbs a lot of the fixed costs that Eric's talked about earlier. It does have a little bit of a, I guess, an efficiency play within our SG&A and our fixed cost spend. So those are really the key contributors to the FSG. Most of that is very durable, Noah. I mentioned earlier on the margins, I kind of said 23.5, 24.5. It's kind of a wide spread on my expectation, but it is because the mix can play heavy or light in any one particular quarter, so I'll be able to narrow that down as we get further into next year and the year after and then see how the mixed footprint plays out, but no, it's all been positive. I think it's very durable margin improvements, and as we continue to grow, I think we can eke out small improvements just on our leverage and our fixed costs, 20, 30 basis points a year, something like that, so all positive. I don't see anything that's like one-time or not durable.

Noah Poponak, Analyst

Okay. That's really helpful color. Yes. I mean, I think obviously you want to have some conservatism in what you're saying about the forward, but the operating margin is still pretty far below the gross margin. So just all else equal, if you're growing volumes, you would have your normal incrementals and be able to just expand margins over time. Obviously, it's not always all else equal, but okay.

Carlos Macau, CFO

Well, we don't size it. We don't size it. If you look in our public filings, you'll see that within the FSG, we do break out specialty products in our defense business. You can see how that business has grown, but we, for competitive reasons, don't size it. I mean, Eric and Victor like to buy every shiny object they can get their hands on. So I expect that we'll continue at a higher pace.

Noah Poponak, Analyst

I don't believe that.

Carlos Macau, CFO

But look, we're not capital constrained, Noah, and we have a tremendous opportunity set in front of us. We're able to be very selective at this point in time on what we deploy capital on, which is a good thing. And the basket of opportunities is as big as it's ever been. So I think we probably should have a repeat of what we did last year into 2026 would be my hope and my expectation. But again, you never know. And remember, we are guided by, we want to grow 15%, 20% bottom line. It is a controlled growth strategy. So that guides us, but we do not walk away from extraordinarily good opportunities for our shareholders. So in the event that we outgrow that metric, it's because we had great opportunities in the acquisition front that we just couldn't pass on, right? And so that will also guide our thinking on how we deploy the capital.

Eric Mendelson, Co-CEO

Noah, I want to share why we're so positive about our acquisition strategy. Currently, we're operating at a leverage ratio of 1.5x, which means we're under-leveraged and have ample resources at our disposal. Our businesses generate significant cash, and effectively utilizing that cash is a key focus for us. We've successfully completed 110 acquisitions in our commercial sector, demonstrating our experience and understanding of what matters. We know how to inspire sellers, and we have numerous entrepreneurs eager to discuss why HEICO is the ideal choice for their companies. Additionally, our exceptional acquisitions team is actively engaged and consistently networking to ensure we're involved in every relevant opportunity. We're even building relationships years ahead of any potential sales; some may consider a liquidity event ten years down the line. This long-term approach allows us to connect with many contacts within HEICO, fostering collaboration that benefits both their organizations and ours. When sellers are prepared to make a move, we will be ready. Many of the companies we acquire may not have been available to others; they were solely interested in partnering with HEICO. A perfect example is Gables Engineering, a highly sought-after business in the industry that only negotiated with HEICO. They ultimately received a strong offer while ensuring that HEICO could support their continued growth.

George Bancroft, Analyst

And obviously, pass along my condolences to Mr. Mendelson. He really was the best of the best, and he's going to be sorely missed here at Gabelli. With the Ethos acquisition, like you've discussed, it's sort of, in one way, it's sort of going outside your scope of traditional M&A, but another way, obviously, there's a lot of adjacencies. With the backdrop of not a strong growth looking into going forward, is there maybe sort of a new world order or a new outlook on where you would go across aerospace in the sense or maybe other areas of high growth? Maybe you could talk about there's so many opportunities out there, and as a defense budget, you're seeing strength there. Maybe you could talk about anything that could be outside your typical adjacencies.

Eric Mendelson, Co-CEO

Thank you for your kind words about my dad. He always valued his time spent with you and Mario and regarded both of you very highly. Regarding Ethos, we have a strong interest in the IGT area, where we've operated through various businesses for decades. We prefer to expand into adjacent markets where we have a solid understanding of the technology, whether that be in turbine engineering, operations, manufacturing, or repair. We believe there is a significant overlap in our expertise. Some products are similar to aero derivatives, while others are large industrial gas turbines, which we are quite familiar with. We anticipate positive momentum in this sector for an extended period, and we believe we can contribute considerable value. Our initial strategy will focus on aligning closely with OEMs to develop and grow within that market, as we see it as a highly promising business opportunity.

Victor Mendelson, Co-CEO

And Tony, this is Victor. Adding to that, that's really been our history. If you look back over time, when we started out when we took over HEICO, it essentially had one product, right, the combustion chamber and the JT8D engine, the PMA part. That was it for the most part, and it did some machining and milling. And over the years, we've stepped very carefully, but I think very intentionally and successfully into, as Eric would say, these white space adjacencies, and it's worked out very nicely. So our product offering today is vastly expanded. It doesn't look anything like it used to, but it's happened over time. The saying about boiling the frog is in a sense applicable here that we just do this carefully, slowly, a lot of singles and doubles, no bet the company situations, but we just keep at it. And so I would expect we'll continue doing that. We don't have any other specifics or data that we can share at this point on exactly where we're going, but you can rest assured that they will be sensible and they will be somehow connected to what we're already doing.

Jonathan Siegmann, Analyst

Condolences again to your family and company for your father and Chairman. We look forward to you keeping the legacy alive by preserving the culture.

Eric Mendelson, Co-CEO

The U.S. military uses many commercial derivative aircraft, and a significant number of the parts and repairs have received FAA approval. There is no reason for the government not to take advantage of this. We believe that the main opportunity lies here. It's important to note that there can be a considerable delay between what the senior leaders intend and what is actually accomplished. This administration is dedicated to closing that gap, and we must make it happen. This is why we remain optimistic about the prospects. While I prefer not to disclose too many specifics due to competition, we believe there are still excellent opportunities available. Now it is up to the government to follow through, and as they do, it should be quite beneficial for HEICO.

Scott Deuschle, Analyst

Carlos, just to clarify your response to Noah's question, are the Specialty Products gross margins generally higher or lower than the gross margins in the other submarkets of FSG?

Carlos Macau, CFO

It's a good question. We don't discuss vertical margin profiles. I would say that our PMA business is our highest margin business. The other verticals within the FSG are around the average margin of the segment. So that's about the best I could do for you.

Eric Mendelson, Co-CEO

Yes, we have significant customers who are purchasing a large amount of our product, and there's still a lot of potential with each of them. You might wonder why they don't buy all of our products if they are such major customers. It's a source of frustration for us, and we discuss it frequently. Sometimes they have contracts with other suppliers, and at times it can be difficult to navigate the approval process within their organizations. However, I'm optimistic because we continue to identify major opportunities and are making progress with them each quarter. We've also achieved notable wins with major airlines and in areas where they hadn't previously worked with us, which keeps me very positive about our future.

Scott Mikus, Analyst

Eric, Victor, condolences. I wanted to ask, so you operate a decentralized operating structure with many disparate operating units. When it comes to pursuing new business opportunities, whether it be for Golden Dome or other programs, do you ever find situations where your operating units are competing against each other for the same work package? Do you force them to collaborate, or do you let them pursue those business opportunities independently just to give the overall organization as many shots on goal as you can get? Just your thoughts on that.

Victor Mendelson, Co-CEO

It's quite uncommon for our businesses to face direct competition with each other. More often, they actually collaborate, helping one another, and occasionally presenting joint packages to customers. Generally, we don't impose restrictions on what they can or should sell; rather, we encourage teamwork, which they naturally engage in. They tend to find ways to rationalize their offerings effectively. Their primary focus is always on providing the most cost-effective solutions for our customers, as this is our reputation. In rare instances where there are dual offerings, they allow the customer to decide, and we purposely avoid limiting these dual offerings. Additionally, in some of our businesses with multiple locations, customers might prefer the closest option for convenience, and they often receive competitive offers from different HEICO businesses, which is perfectly acceptable to us. Our aim is to ensure customer satisfaction, whether that means providing independent solutions with PMA or DER or offering OEM solutions. We’re entirely neutral, focused on serving the customer in whatever way they prefer. This competitive dynamic among our multiple businesses drives lower costs, faster turnaround times, and better quality, which strengthens HEICO's position in the market.

Scott Mikus, Analyst

Okay. I'll stick with one question, but I wanted to wish you and your families happy holidays. And Victor, a happy belated birthday as well, it was on the 11th.

Operator, Operator

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

Gavin Parsons, Analyst

I guess maybe sort of along those similar lines, how integrated are the HEICO and Wencor part and repair catalogs? And how long can that be a growth tailwind from cross-selling?

Eric Mendelson, Co-CEO

We offer a wide range of products across our businesses. There is some overlap, and we cater to whatever the customer prefers. If they choose to purchase from one business or the other, that's perfectly fine. If they want to explore new development projects with either, that works too. I often liken this to the variety of cuisines available; some may prefer Italian, American, or French food, and at HEICO, our priority is selling them the product, regardless of their choice. I believe there are many more opportunities for collaboration, and we have already made significant progress in maximizing those, effectively advancing the various businesses, as evidenced by our positive results.

Alexandra Eleni Mandery, Analyst

This is Alexandra Mandery on for Michael Ciarmoli with Truist Securities. In terms of your PMA portfolio, what is the exposure like in terms of new entrants, including the LEAP, GTF, GEnx? And do you see that as an opportunity, including first-time shop visits on the PMA front?

Eric Mendelson, Co-CEO

Yes. So we normally don't get into details about specific product types or competitors. But in general, I can tell you that when an engine is new, it tends to be under warranty. And that's not a big opportunity for us over on the PMA side. It may be more so over on the repair side. And it's as those platforms age and customers want alternatives, that's when it sort of comes into focus with us. So I would just sort of leave it at that. But I can tell you that our technology that we use to be able to engineer parts is consistent across all engines, all components. And we're very confident about our ability to technically develop the current generation and next generation. It's as far as we're concerned, all within our wheelhouse.

Victor Mendelson, Co-CEO

Yes. So this is Victor. I think that the trends that we talked about a little bit earlier in the call and the optimism for our various markets is intact and for some of the reasons that you mentioned. By the way, not all of every market is good, and not all of every market offers opportunities. So in space, there's a lot of opportunity, but there's a lot of profitless opportunity there. And I think we've been pretty good at avoiding those situations and really going where we can add particular value to our customers and get recognized or be recognized for that in terms of profitability and market position and so on. And the same applies in defense. There's opportunity, which we take advantage of in the more established segments of the market, as well as some of the newcomers in the defense tech sector. So we sell to both and are proud to do so. And we also believe that the market will continue to evolve such that there will be very important places for both, that one won't necessarily just replace the other. So it's important for us, in a sense, to be everywhere. And I know our businesses have been particularly successful at doing that for a long time. One other note on defense. As we look at the government's focus on cost and we look at the government's focus on speed, and particularly somebody earlier in the call mentioned the comments from the army secretary. HEICO has always been based on speed. We're not a cost-plus-fixed-fee company. Overwhelmingly, we have very little, a tiny amount of revenue in the cost-plus-fixed-fee column. It's all on our dime. We develop it. It may be developed to specification. It may be developed to something else, but we develop it on our dime and sell it. And it's based on doing it and doing it quickly and responding very quickly to our customers. So we are used to doing that, and we are extremely well-situated for the environment should it evolve to more of that.

Cashen Keeler, Analyst

This is Cash on behalf of Matt today. I guess just going off that last question, I just wanted to ask on PMA. How supportive has the FAA been regarding parts approvals there? It seems like everything related to FAA approvals, whether it be interiors or new aircraft has just taken longer. So has that had any impact on your pipeline of new parts?

Eric Mendelson, Co-CEO

No, we have a strong relationship with the FAA and communicate with them in various ways. It’s really business as usual for us, with no changes. Everything is progressing very well for us.

Louis Raffetto, Analyst

Victor, maybe for you, maybe I missed this, but could you give the end market growth within ETG for the quarter? I don't know how defense versus electronics?

Carlos Macau, CFO

No, we did not break that out publicly, Louis. No. I think it was sort of business as usual where we had around year-end, you wind up getting projects accelerated sometimes because you get year-end deals as the calendar year closes out. So we still spend around, I think, 1.5%, maybe 1.6% of our revenues on CapEx. That's about where we've been historically on the CapEx spend side, and I think as we look into 2026, it should be in a similar range, 1.5, 1.6x revenues or something like that.

Victor Mendelson, Co-CEO

Thank you very much, Samara. We appreciate your coverage of the call for us. We wish everybody on the call a wonderful holiday season, and we thank you for listening today, and we look forward to talking with you on the next call or if not sooner. Thank you very much.

Operator, Operator

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