管理層發言
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.
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 incurred 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 Anderson. 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.
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 and 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 account for 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, 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.
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.
分析師問答
And we'll take our first question from Larry Solow with CJS Securities.
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?
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.
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?
Yes, this is Carlos. The only benefit we observed this quarter was related to cash. As you may know, the full depreciation of qualifying equipment is retroactive to January 25. This helped reduce some of our tax payments for the third quarter when the bill was enacted. However, looking ahead, it's primarily a cash benefit for us. We might see a slight advantage from some of the changes to the foreign FDII regulations that were introduced. Overall, our rate was approximately 18.9% for the quarter. Moving forward, considering a rate between 19% and 20% would likely be a reasonable effective annual rate for HEICO for the year.
And our next question comes from Tony Bancroft with Gabelli Funds.
Congratulations gentlemen, very nice quarter. Just you were talking about sort of 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.
Yes, this is Victor. Missile defense has been part of our business for many years, almost since we started the ETG. We are currently seeing opportunities and even receiving some orders. While I wouldn't consider these orders to be major game changers related to Golden Dome, which integrates some existing technologies and products, we are still seeing demand. We continue to get orders for new products and for U.S. products that are sold to foreign countries, particularly U.S. allies. This remains a significant opportunity for us, and we have been active in both legacy defense and new tech defense markets. It's important to note that we have always been careful to cater to all markets rather than just focusing on larger customers.
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.
We'll take our next question from Sheila Kahyaoglu with Jefferies.
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?
So Carlos, do you want to do the...
Yes, sure. We had a very interesting quarter. The Parts business grew in the low teens this quarter, similar to what we saw last quarter, with notable growth in the repair and overhaul and Specialty Products group. Repair and overhaul was up in the mid-teens, driven by a favorable mix during the quarter that slightly elevated our gross margin. It's encouraging to see this. As you know, the repair business primarily involves component repair rather than hangers or airplanes, and this work helps us effectively channel a lot of our PMA parts. That was a pleasant surprise this quarter. Additionally, in Specialty Products, growth was in the low double digits, mainly driven by our defense business. However, I want to highlight that with improvements in airframers' cadence, I expect our commercial aerospace OEM work within specialty products to become a bit more steady moving forward. Eric, would you like to...
Yes. To add to your question about engine versus non-engine, as you know, we are primarily non-engine. It's challenging to quantify this because our different business segments do not track the information in the same manner. However, I would estimate that the engine segment of our aftermarket business makes up about 25%, roughly a quarter. Historically, HEICO had a higher percentage of engine, but we have made several acquisitions in recent years, the largest being Wencor, and most of those acquisitions have been focused on non-engine segments. This is why our engine percentage is likely around 1.75 in the aftermarket.
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?
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.
We'll take our question from Peter Arment with Baird.
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?
Yes, I believe the opportunities are widespread. There are indeed synergies with Wencor, but we also have significant organic growth prospects throughout the entire business. Specifically, when examining PMA and repair, I recently reviewed our strategic annual sales meetings and was impressed by the focus on developing new products. Our technical capabilities, customer support, and demand are exceptional, which makes me very optimistic about our opportunities. The organic growth of 13% is notable, especially considering that our aftermarket business is only about 25% engine-related. I was surprised to see that 75% of our business is non-engine, and yet we achieved 13% organic growth. It's truly remarkable. This reflects our competitive advantage, as we do not operate as a single large integrated enterprise; instead, we manage specialized businesses that excel in their areas. They are highly knowledgeable, and the organic growth pipeline is robust. With 75% of our business in airframe and still achieving 13% organic growth, it highlights the depth and diversity of our product line and capabilities.
Yes, that's very helpful. Carlos, regarding margins, it was a strong quarter for incremental margins. How should we view this moving forward? Is it primarily driven by mix this quarter, or do you believe margins like this can be maintained?
The team continues to impress me with their performance. I have to be honest with you; the margin we achieved this quarter was beyond what I anticipated. Is it sustainable? I sincerely hope so. I believe some of the margin growth was driven by mix, but it wasn't solely responsible. Our gross margin increased a couple of points, largely due to mix. I would love to see this trend continue, but mix fluctuates. If I were to make a projection for the segment, I now expect us to be in the low 24% range; previously, I had estimated between 23% and 24%. This year, the team has truly outperformed and surpassed my expectations. There will be more updates on this front. However, I wouldn't forecast a model or expect 25% margins just yet. I think it's prudent to wait a few quarters to see how this develops. If you're doing some modeling, assuming around 24% would be a reasonable estimate for our operating income margins.
Take our next question from Noah Poponak with Goldman Sachs.
Maybe just staying with Carlos, does FSG have seasonality in the fourth quarter, up or down sequentially?
Typically, if you look back over time, Noah, the fourth quarter is typically our strongest quarter in the FSG. So yes, seasonality, I wouldn't call it seasonality, but what we do tend to see in the revenue side is our low point is typically Q1 and then it slowly builds throughout the year. So that's kind of been our trajectory.
Okay. So we can marry that with kind of how the incrementals have played out and that will make the year of '24 and then your point, previously, is then you can expand a little bit from there next year with or without normal incremental.
Yes, as we've mentioned before, we anticipate a typical improvement of 20 to 30 basis points, provided there aren't significant fluctuations in the FSG mix. Much of this improvement comes from leveraging our SG&A expenditures. These are the metrics we rely on and aim to reach. There are instances, like this quarter, where the mix is beyond our control. When we experience favorable mix quarters, particularly with growth in repair and overhaul, it becomes difficult to forecast for any specific quarter. Therefore, I wouldn't base future projections solely on the nearly 25% operating margin. I suggested to other analysts that we should evaluate how the next couple of quarters unfold before making any predictions. You could estimate around 24%, and then we’ll see how we progress from there.
Yes, that makes sense. Could you share your thoughts on ETG, which you have mentioned tends to be more volatile from quarter to quarter? It was down in the first quarter and also the second and third quarters, but typically sees stronger seasonality in the fourth quarter. Do you anticipate that trend continuing? What is your current outlook for the range?
Yes. So look, I was pleased with the ETG's performance this quarter. I think I've mentioned to you and other folks I've spoken to that the third quarter, to me, always felt like a repeat of Q2. It looked that way in our forecast. And the margin sequentially was the same. I expect that segment on any given Sunday is going to run between 22% and 24% operating margin, and we sort of split it right down the middle of the gold post this quarter. So from my perspective, this is kind of the area you can count on. The numbers will move up and down from there, and it will be dependent on mix. I think volume-wise, similar to the FSG as we continue to grow that base of business, we will see some operating leverage in the expenses. But no, I think from a profitability standpoint on a go-forward perspective, not much has changed, in my view, I think that 22% to 24% range still holds true.
Okay. You guys say Gables was your third largest ever acquisition? And if so, is that an enterprise value? Or is that a revenue or EBITDA? And can you give us any sense for the revenue and EBITDA?
Sure. That was regarding enterprise value, purchase price, and purchase consideration. I'm not sure we're providing other numbers, Carlos.
No, we're not. You'll find the cumulative acquisitions for the year in the 10-K report. Gables on its own doesn't cross any significant threshold, so we won't disclose their specific numbers. However, it was a substantial acquisition for us this quarter, and you can see the cash flow indicating what we paid for it. It's not a big secret. But with our growth, some of these acquisitions, while large relative to our historical figures, aren't material to the overall picture, so we don't provide many details in that area.
Yes, this is Victor. I want to point out that the acquisition is a growing company and a thriving business. They have many new initiatives and programs that are quite important. We anticipate this will be a positive growth story for us as it develops over the next few years. It is a significant motivator for our company. Our focus was not just on acquiring it at a good price; it’s a great business, but we are more interested in its growth potential than its current status.
We'll take our next question from Ken Herbert with RBC Capital.
Eric, could you start by discussing the third quarter? It seems that you faced some tough comparisons regarding FSG organic growth. Can you specifically address the commercial aspect with your airline customers? Has there been any change in pricing dynamics or your forecasts for airline inventory levels as you approach fiscal '26? Are you experiencing comparable pricing to previous quarters? Additionally, do you foresee any risks concerning inventory levels at airlines in the upcoming quarters?
Got it. Regarding the first part of your question, we achieved 13% organic growth, which is impressive, especially considering we had 15% organic growth last year and 19% the year before in 2023. I’m very pleased with this ongoing organic growth. We are implementing price increases that align with our rising costs. Our approach has always been to ensure that while no one wants a price increase, it's necessary to maintain a viable and sustainable business. We have managed to pass these costs along. In terms of inventory levels with our customers, the situation is mixed. Following the pandemic, we experienced significant shortages and some overordering in certain areas. We are currently seeing destocking in some sectors, while there are still considerable shortages in others. Overall, in the HEICO portfolio, these trends tend to balance each other out. We are not observing widespread destocking, although there are specific pockets of customers struggling to meet their needs due to a constrained supply chain. That’s how I would describe the situation.
That's helpful, Eric. And on the destocking comment, is there any more granularity you could provide on that either with reference to your engine versus non-engine exposure or any other parts of the aftermarket, maybe specifically where you're seeing more inventory pressure from your customers or destocking?
I believe that the destocking effect is likely less significant in the engine sector, with a somewhat greater impact on the non-engine side. However, overall, we don't observe a widespread destocking trend across our operations. Demand remains extremely strong, and at times it can be challenging to distinguish where market growth is occurring versus our own performance. Our team is dedicated to organic growth and increasing market share, which they achieve not only in PMA and repair but also in distribution. I genuinely feel that HEICO has gained market share in distribution and is performing exceptionally well in selling our principal products. This success often obscures what might be happening elsewhere in the market because our team excels at onboarding new principals and maintaining a small company mindset to achieve high market share without missing opportunities. At HEICO, we ensure that nothing falls through the cracks. Our distribution teams are highly focused on capturing every potential sale, which may contribute to the lack of observed destocking, as they are actively pursuing every opportunity, a practice that is somewhat unusual in the industry.
And we'll take our next question from Jonathan Siegmann with Stifel.
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?
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 is selling into Europe as we get a little further out to the future, hence, our appetite for acquisitions on the continent.
In the flight support area, we are performing extremely well with our customers in Europe, including PMA, repair, and distribution. Our distribution businesses have a significant presence in Europe, with many people focused on distribution efforts. Our market share is strong, and Europe remains a critical and important market for us, performing very well.
Great to hear. In this favorable environment, are there new opportunities for organic investments, or should we expect acquisitions to be the primary use of cash?
I think it's both. We have been expanding in Europe, both our footprint. We just completed. I still consider the U.K. part of Europe, although it's not EU. And we just completed a new facility in the U.K. and one of our businesses. We're starting in another outside of Paris and another business as well as some capital improvements, facility improvements and additions in other places in Europe. So I would expect it to be both organic and acquired.
And Jonathan, as I mentioned in the beginning of my prepared remarks, our cash flow remains very strong. So I think one of the unique things is that we're able to grow in all geographies and also in Europe, and still generate cash from that region that we're able to use in acquisitions. So we're able to grow organically. We don't have to tie up all sorts of capital in order to grow organically, and we can actually take additional cash that comes out of the businesses and use it for acquisitions. And that's really what creates this whole compounding effect at HEICO.
And we'll take our next question from Ron Epstein with Bank of America.
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?
Yes, there are a number of areas. There are a number of facilities that we've got to expand. It is still hard to hire people in certain geographies, although that is getting easier. I think AI and what's going on in the economy is helping in that area. But overall, I would say we're very well positioned. We've made the investments to be able to handle future growth. And I think the other unique thing in HEICO is we haven't squeezed the fruit in terms of operating at our various facilities in excess of their ability. So we've got plenty of capacity to be able to continue to grow and expand. So I think we're good in that area. We're always very mindful of that.
I could use a few more deaths from my accountants. But other than that, I think you're right.
Got you. And then how are your supply chains doing, right? I mean, the suppliers to you maybe on raw materials and other things?
Yes, in general, things are much improved. There are still several areas of continued shortages and parts on backlog that we are eager to receive. Our sales could be significantly higher if we had those parts, so that continues to be a challenge. However, the overall amount of backlog has decreased significantly. Additionally, we conduct a substantial amount of incoming inspection at HEICO. Rather than simply receiving shipments, we inspect the parts, and our inspection process is very robust. I can say that 1.5 to 2 years ago, the backlog in incoming inspection was quite large, but our team has done an excellent job reducing that. This reflects our efforts to address capacity issues by adding personnel and facilities to process everything more efficiently. We have made significant progress in that area.
Ron, this is Carlos. I wanted to add that I truly believe in this approach. Although managing it can be administratively challenging without centralized purchasing, having around 100 supply chains allows our teams to adapt and negotiate effectively to secure products during shortages. This flexibility helps us meet our customers' needs, even if it results in a more costly and less efficient process compared to centralized systems. However, as Eric mentioned, we generally don't run out of supplies because our teams can negotiate locally for raw materials, which gives us a competitive edge.
Got it. Carlos, do you think it would be beneficial for you to keep a little extra inventory on hand to help manage any gaps?
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 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.
And we'll take our next question from Gavin Parsons with UBS.
What would you say is the average price gap now between one of your PMA parts on the OEM part?
Yes, that's a challenging number to estimate. It really depends on how long a customer has been purchasing a product, as we offer some form of price protection for long-term customers with contracts. While I can't provide an exact average, I estimate that discounts can range from 20% for newer customers to as much as 70% for long-term customers where we've managed to control costs. On average, I would suggest we're likely between one-third to 40% below the OEM price, though I don't have a definitive figure. Additionally, in our repair business, we offer many proprietary repairs that can save customers significant amounts, often exceeding 50%.
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?
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.
I'll take our next question from Pete Skibitski with Alembic Global.
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.
We've been involved in avionics and cockpit electronics since 1999, starting with our first two acquisitions in this area, which included Air Radio and Instrument for repair and overhaul, as well as a business that provides emergency backup power supplies and panels used in cockpits. This sector has always been appealing to us, and we've gradually expanded through additional acquisitions over the years, particularly in repair and overhaul, as well as incorporating related products like emergency locator transmitters and cockpit displays. Our strategy focuses on pursuing excellent opportunities, including both original equipment manufacturer (OEM) and aftermarket scenarios, with a significant emphasis on the aftermarket. Regarding Gables Engineering, which we discussed in the press release, it has a long history, being founded in 1946, and attracted many potential buyers. However, we built a relationship with them over several years as a local company in South Florida, close to our own facilities.
When they were ready to sell, they sought a suitable home for their business and ultimately chose us. Their decision wasn't solely based on financial considerations; they believed in our potential to nurture and grow the business responsibly. In summary, our acquisition approach is diverse, often targeting areas that may not be easily accessible, and we're open to exploring adjacent markets to drive growth. This adaptability has been crucial to our success. We are pleased with this acquisition; Gables is a distinguished company in the industry, so much so that their panels are often referred to generically as "Gables panels," highlighting their significance in the market.
That's great. Yes, very helpful. And just, Victor, in 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?
Yes. We are not combining 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. They work together to approach customers for new programs, cooperate technically, and collaborate on production, quality, and other areas. It is quite common, and increasingly so, for them to use other HEICO companies as suppliers. A significant advantage has been, and continues to be, our distribution. We have an outstanding distribution business led by remarkable individuals who have developed it over time. It's truly impressive and unique, and I’m not sure if Eric would like to add anything on that. Over the years, we have significantly invested in distribution within that business, and I believe it has played a major role in our success in the cockpit, avionics, and electronic sectors.
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. We bought Millennium avionics. I mean we do have a very, very strong avionics business within HEICO.
And we'll take our next question from Scott Mikus with Melius Research.
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?
We consider many factors when evaluating opportunities. We assess how similar an opportunity is to our previous ventures, customer demand, expected payback, investment needed, and the time it takes to acquire it from the vendor. All of these elements contribute to an IRR analysis, which we find essential. The overall process is quite complex, but we aim to develop as many parts as possible and strive to be present in all areas, avoiding exclusions. So the answer is yes. I believe there is more opportunity for the Wencor companies to continue growing alongside the other hydro companies. Regarding sourcing products that are already made by existing vendors, we have the capability to do that, and we have in the past, but it's not our preference. We prefer to remain loyal to our vendors and allow our other family companies the chance to bid on new products moving forward. That’s where our focus lies.
In terms of margin, in the third quarter, FSG achieved a 24.7% operating margin, which exceeds any expectations I had. Even more impressive is our EBITA margin at 27.3%, surpassing what we ever anticipated. This has been accomplished while still providing significant value to our customers without exploiting them. If you had asked me ten years ago, when we were about 10% lower in that area, if we could reach this level, I would have said it wasn’t likely in the foreseeable future. However, we've just kept working hard, and the results speak for themselves. I do believe there are further in-sourcing opportunities, and we'll see how that develops.
And we'll take our next question from Kristine Liwag with Morgan Stanley.
One Eric, Victor and Carlos, can you talk about the supply chain and it sounds like there was a technical difficulty?
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.
And in the meantime, we'll take the next question from Gautam Khanna TD Cowen.
I was curious, Carlos, you mentioned that FSG profit rates have exceeded your expectations. While mix plays a role, I want to know if the profitability of the different product lines, such as aftermarket parts and repair, has increased. Have you observed a rise in profitability within the baseline PMA business or the repair sector?
I would say yes. I highlighted repair because it positively impacted the quarter, and that was due to the mix. In the repair business, we essentially respond to opportunities each week, making it hard to predict what we'll repair in the next quarter. We've seen that PMA-friendly repairs are beneficial for profitability. We had a strong quarter with many PMA-friendly repairs. Our team continues to develop new DER repairs daily. If that continues, it will positively affect our margins. However, not every quarter is like this one; the repair side can be inconsistent. Nevertheless, I was pleased with it. Also, let's not forget about our specialty products. In the defense business, we have accumulated about three years' worth of firm backlog, and our team is working hard on expanding that business, which is beneficial for us. Thus, these two factors, along with the strong parts business we've experienced all year, are what are driving this margin.
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 add that we are doing exceptionally well on OEM aligned, OEM licensed repairs as well. Those continue to be of great value to our customers as well as to our OEM partners. So HEICO is really agnostic when it comes to what product we want to sell. We want to be out there. There are some customers who want an alternative product, and we're obviously the largest in that space and will deliver it to them. But there are other customers who want an OEM product, and we are absolutely there and aligned to develop that OEM product, whether it's through our repair business or our PMA business as OEM licensed product. Our distribution is all OEMs. So we're really very strong across the board, and it's whatever our customers want, and it's not so much us pushing one thing or the other. It's responding to their needs and requests.
I'm interested in the progress of the Wencor integration and the potential for cross-selling. Specifically, how advanced are you in that area? My initial question was regarding the PMA, focusing on the aftermarket parts side. As the OEM equivalent products appear to be increasing in price annually, I would expect to see a rise in the base level of PMA aftermarket sales, leading to improved profitability due to discounts on the OEM list prices, which are outpacing inflation. Are you observing an increase in profit rates for the base PMA aftermarket business tied to the rising OEM prices? Additionally, how far along are you in pursuing the Wencor cross-selling opportunity?
Let me start with the Wencor cross-sell opportunity. We've made solid progress, and I appreciate your use of the term cross-sell rather than consolidation because we run these businesses independently. There is an opportunity when a customer approaches us needing a larger product line in a specific area, and we can deliver that. The Wencor integration has been extremely successful, and its culture complements HEICO perfectly, allowing us to meet our customers' needs effectively. After two years, the results are evident, and our customer satisfaction is high. Regarding margins, we have always stated that we need to pass on our cost increases, and we have done so without taking advantage of pricing for profit. We ensure we provide value to our customers in all areas, whether independent or OEM aligned, which explains our significant market share growth. Additionally, I believe our margins are improving because our team works exceptionally hard and goes the extra mile to meet customer requirements while maintaining good relationships with our suppliers, as I previously discussed regarding Wencor and their partners. It's simply good business practice. We also see a general increase in efficiency, and as we increase volume across the platform, we can achieve higher operating margins.
And we'll take our next question from Kristine Liwag with Morgan Stanley.
One Eric, Victor and Carlos, can you talk about the supply chain and it sounds like the supply chain is stabilizing?
Kristine, I apologize. Your line dropped. Could you repeat the question? If you could call back in that would be great.
And in the meantime, we'll take the next question from Gautam Khanna TD Cowen.
I was curious, Carlos, you mentioned that FSG profit rates are exceeding your expectations. While mix plays a role, I want to know if profitability has increased across the various product lines, such as aftermarket parts and repair. Have you observed an increase in profitability in the baseline PMA business or the repair business?
I would say that yes, I highlighted repair because it had a positive impact on the quarter, and it was due to mix. Honestly, with the repair business, you kind of eat what you kill every week. So it's very difficult to predict what we're going to repair next quarter, for example. You receive RFPs to do jobs, and what we've seen in the repair business is that the PMA friendly side of those repairs is helpful to profitability. We had a nice quarter with a lot of PMA friendly repairs that we completed.
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 note that we are performing exceptionally well in OEM aligned and OEM licensed repairs as well. These continue to provide great value to our customers as well as to HEICO and our OEM partners. HEICO is really flexible regarding the products we choose to sell. We want to be actively engaged in the market.
That makes sense. I'm curious on the Wencor integration or maybe said differently, cross-selling opportunity, how far along you are there?
So let me start on the Wencor cross-sell opportunity. We've made good progress. And I'm glad you used the term cross-sell opportunity and not consolidation because we do operate these businesses separately. But there is an opportunity where a customer comes to us and they want a bigger product line of a particular area.
And we'll take our next question from Kristine Liwag with Morgan Stanley.
Thank you for your time. Challenges have been significant. Have you seen any adjustments or changes in your terms around it?
Yes, we appreciate the continued interest, and thank you for your participation. If anyone has any further questions, feel free to reach out to Carlos, Victor, or me. Thank you all for your support of HEICO.
Thank you. And this does conclude today's call. Thank you for your participation. You may now disconnect.