HEICO's Q3 2025: Contradictions Emerge on Missile Defense Growth, FSG Margins, and Tariff Impacts

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 26, 2025

Financials Results

• Revenue: $1.16B, up 16% YOY
• EPS: $1.26 per diluted share, up 30% YOY

Guidance:

- Expect net sales growth across FSG and ETG, driven by organic demand and recent acquisitions.- FSG typically strongest in Q4; revenue builds through the year.- FSG operating margin modeled around ~24% near term; structural SG&A leverage targets 20–30 bps annual improvement; mix can swing results.- ETG operating margin expected in the 22%–24% range; Q4 often seasonally stronger.- Effective tax rate expected ~19%–20% for FY25; cash benefits from bonus depreciation and some FDII relief.- Gables Engineering expected accretive within 12 months; ETG amortization headwind ~$1M/month near term.- Strong liquidity and active M&A pipeline; capacity to pursue additional deals while delevering (net debt/EBITDA ~1.9x).- Defense and missile-defense backlogs support continued growth.

Business Commentary:

Revenue and Earnings Growth:* - HEICO Corporation reported consolidated net income of $177.3 million for the third quarter of fiscal '25,up from$136.6 millionin the third quarter of fiscal '24, reflecting a 30% increase. - The growth was driven by robust double-digit organic growth in core businesses and contributions from strategic acquisitions.

• Flight Support Group Performance:
• The Flight Support Group reported a record operating income of $198.3 million, up 29% from $153.6 million in the previous year, with operating margin improving to 24.7%.

• This improvement was primarily due to strong organic growth, particularly in the repair and overhaul sectors, and improved gross profit margins, supported by a favorable macroeconomic environment.

• Electronic Technologies Group Growth:

• The Electronic Technologies Group achieved a record net sales of $355.9 million, up 10% from $322.1 million in the previous year.

• Growth was attributed to increased demand for other electronics, defense, and space products, with defense organic net sales increasing over 6%.

• Market Share and Acquisitions:

• HEICO's strategy of acquisitions and organic growth contributed significantly to its market share gains, with the recent third largest acquisition being the purchase of Gables Engineering.
• These acquisitions, combined with a disciplined financial strategy, have supported strong market share gains and expanded product offerings.

  Sentiment Analysis:

  • Management highlighted “record-setting results,” with consolidated net income up 30% to $177.3M and net sales up 16% YOY. Cash flow from operations rose 8% to $231.2M, and liquidity improved despite $630M deployed on acquisitions. ETG reported a record backlog; FSG and ETG both set quarterly sales records. Management said they “remain very optimistic about HEICO’s future,” expect continued net sales growth across both segments, and noted Q4 is typically strongest for FSG.

  Q&A:

  • Question from Pete Lukas (CJS Securities): How is Gables Engineering performing relative to expectations, and do you have capacity for more M&A near term?
  • Response: Gables is tracking to plan in early days, and HEICO has ample capacity (LOC and capital markets) to pursue additional acquisitions.
  • Question from Pete Lukas (CJS Securities): Is the lower tax rate sustainable and tied to recent legislation?
  • Response: Expect a 19%–20% effective tax rate going forward; benefits are mostly cash via bonus depreciation and some FDII relief.
  • Question from Tony Bancroft (Gabelli Funds): Please expand on missile-defense demand and potential M&A in that space.
  • Response: Missile defense is a long-standing focus with rising orders/backlog across U.S. and allies; both segments see strong organic and M&A opportunities.
  • Question from Sheila Kahyaoglu (Jefferies): Parse FSG’s 13% organic growth by subsegment and engine vs airframe mix.
  • Response: Parts grew low-teens; repair & overhaul mid-teens (boosted gross margin); Specialty Products low double digits (defense-led). Engine is ~25% of aftermarket; majority is non-engine.
  • Question from Sheila Kahyaoglu (Jefferies): Update on PMA adoption by the DoD.
  • Response: Management remains bullish; sees significant Pentagon savings potential and ongoing opportunities for PMA in defense.
  • Question from Peter J. Arment (Baird): Where are the market share gains in FSG—Wencor synergies vs new parts?
  • Response: Gains are broad-based: Wencor synergies plus robust pipelines of new PMA and repairs, supporting outsized organic growth.
  • Question from Peter J. Arment (Baird): Can FSG margins at ~25% be sustained?
  • Response: Q3 exceeded expectations with some favorable mix; near-term model ~24% OI margin and reassess after a few quarters.
  • Question from Noah Poponak (Goldman Sachs): Does FSG have Q4 seasonality?
  • Response: Yes—Q4 is typically FSG’s strongest quarter; revenue generally builds from Q1 through year-end.
  • Question from Noah Poponak (Goldman Sachs): ETG margin outlook and seasonality?
  • Response: ETG OI margin expected at 22%–24%; Q3 mirrored Q2; Q4 often stronger, with mix driving quarterly variability.
  • Question from Noah Poponak (Goldman Sachs): Was Gables the third-largest deal and can you share size metrics?
  • Response: It’s the third-largest by purchase price; no revenue/EBITDA disclosed; acquired for its growth outlook.
  • Question from Ken Herbert (RBC Capital Markets): Pricing and inventory dynamics at airlines; any destocking risk?
  • Response: Pricing offsets cost inflation; pockets of destocking exist (more non-engine) but are balanced by shortages—net demand remains strong.
  • Question from Jonathan Siegmann (Stifel): How is Europe trending and will you invest organically or via M&A?
  • Response: Europe is performing well, aided by defense; HEICO is expanding facilities and will pursue both organic investments and acquisitions.
  • Question from Ron Epstein (BofA Securities): Any capacity constraints and how are supply chains?
  • Response: Some facility expansions and hiring are needed, but capacity is adequate; supply chains have improved though select shortages persist.
  • Question from Gavin Parsons (UBS): What’s the typical PMA price gap to OEM, and average wallet share?
  • Response: PMA discounts typically range 20%–70% vs OEM (average ~33%–40%); HEICO avoids majority share per part but sees ample runway.
  • Question from Peter John Skibitski (Alembic Global Advisors): Avionics strategy and integration approach?
  • Response: Avionics/cockpit is a long-standing focus; acquisitions run decentralized with ‘soft’ synergies and strong distribution leverage.
  • Question from Scott Stephen Mikus (Melius Research): How do you evaluate PMA projects and insourcing opportunities post-Wencor?
  • Response: Projects are IRR- and demand-driven; insourcing exists but preference is loyalty to vendors and bidding HEICO units on new parts.
  • Question from Joshua Tyler Korn (Barclays): How big is the ETG amortization headwind from Gables?
  • Response: Around $1M per month of amortization initially; management focuses on EBITA as the operational metric.
  • Question from Michael Frank Ciarmoli (Truist Securities): Are SG&A efficiencies programmatic, and any Boeing MAX OE destocking impact?
  • Response: No corporate cost program—leverage stems from efficient decentralized ops; minimal OE destocking impact and confident in MAX.
  • Question from Louis Harold Raffetto (Wolfe Research): Will you pursue software M&A, and will Gables dilute margins like Exxelia initially did?
  • Response: Open to software adjacencies; Gables acquired late in Q3, amortization will dampen OI margin some but not as much as Exxelia.
  • Question from Kristine T. Liwag (Morgan Stanley): Consider centralizing supply chain and potential PMA pricing tailwinds as contracts roll off?
  • Response: No move to centralize in next 3–5 years; may co-source selectively. PMA prices will cover cost inflation, but no profit grabs; contract roll-offs are managed.