Larry Mendelson, Chairman and CEO of the HEICO Corporation (NYSE:HEI), Explains Value Creation

December 17, 2020

Larry Mendelson has been HEICO Corporation’s Chairman of the board since December 1990 and has been Chief Executive Officer since February 1990. He had been President from September 1991 through September 2009.

Mr. Mendelson has been a member of the board of governors of the Aerospace Industries Association — AIA — in Washington, D.C., of which HEICO is a member. He is the former Chairman of the board of trustees, former Chairman of the executive committee and a current member of the Society of Mount Sinai Founders of Mount Sinai Medical Center in Miami Beach, Florida.

In addition, Mr. Mendelson is a trustee emeritus of Columbia University in the city of New York, where he previously was trustee and Chairman of the trustees’ audit committee. Mr. Mendelson is a certified public accountant.

In this 3,672 word interview, Mr. Mendelson explains his company’s performance and future value creation for investors.

“We focus on high margins, products with high margins, protected markets, really arcane products, products where we have a leg up on competition, either that we have the technical know-how that is very, very difficult to duplicate by a competitor.

And we do not want to sell a complete system. We like to sell parts that go into large systems. For example, we supply aircraft parts; we supply aircraft engine parts.

And in addition to that, we supply parts that we manufacture, design, develop all over the aircraft, in the avionics, the landing gear, in the cabin, you name it, and you’ll find our individual parts, but we normally do not make the entire system.

In addition, we make lots of electronic components, uplinks, downlinks to satellite systems.

As a matter of fact, these satellites that go to Mars, Jupiter, Pluto, that land on comets, so many of their electronic components are made by HEICO’s subsidiaries.

And in addition, we do work for the defense industry. Our business is composed of two divisions, electronic technologies and flight support.

Flight support is primarily commercial aviation. And in the electronic technologies, close to half of our business is related to the defense sector.”

Larry Mendelson emphasizes the quality of earnings for HEICO:

“…More important than earnings per share is cash flow generation because it’s very possible, and many companies do have capex expenditures or other expenditures, where earnings per share is one thing, but the cash flow from the earnings per share is considerably less than the earnings per share.

So it might be 75% of reported earnings per share is really cash. In our case, over the years, the cash flow is generally 140%, sometimes as high as 180%, of reported earnings per share.

And the name of the game, business is cash flow. You cannot buy groceries in your local supermarket with earnings per share.

You can’t grow a company just with earnings per share; you need cash. So sophisticated investors look at HEICO as a cash flow generator. And that is what we’ve groomed the company to be. And that is what investors like. We call that the quality of earnings, that the earnings produce cash, not just a paper profit.”

Mr. Mendelson emphasizes that the quality of the company’s cash flow is matched by the quality of HEICO’s products:

“…We make very, very sophisticated electronics for satellites. For us, it doesn’t matter if Lockheed has the order or Boeing has the order for the satellite.

Either one will probably come to us for that particular electronic need that they specify. We will be there, and our history of successful and very high-quality products assures repeat business.

In the space business, if you supply a $5,000 or a $10,000 part, which we do, and it doesn’t function, the result is that somebody, who’s got $200 million, $300 million, $400 million of space junk floating around the Earth, doesn’t accomplish its mission.

They have to be very, very certain of high quality. And they’re not very anxious to save a few thousand dollars and go try somebody new, which they’ve never tried before, and find out that, “Oh, my goodness, that product really didn’t last. It should have lasted, but it didn’t. It doesn’t function, and now our space satellite is in trouble.” So they will go back to sources where they have long experience on extremely high quality.

And that’s what our subsidiaries do.”

Get the complete 3,672 word interview with CEO Larry Mendelson, exclusively in the Wall Street Transcript.