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Investing.com -- S&P Global Ratings has revised its outlook for The Heico Cos. LLC to negative from stable due to high leverage. The credit rating agency has maintained its ’BBB-’ issuer credit rating on the company, as announced on June 2, 2025.
The negative outlook is a response to the heightened risk that Heico may not be able to reduce and maintain its S&P Global Ratings-adjusted leverage below 2.5x over the next 12 to 24 months. This follows weak operating performance in Heico’s Metal Processing Group (MPG) and Industrial Technologies Group (ITG) segments, leading to an adjusted leverage of 2.5x as of December 31, 2024.
The agency anticipates this high leverage to persist through 2025, partly due to the negative impacts of inflation and tariff uncertainty, particularly affecting MPG’s exposure to steel processing in Canada. The cyclical nature of Heico’s businesses contributes to the volatility of its revenue and EBITDA, increasing the risk that credit metrics may remain weak or weaken further.
MPG, which accounted for about 34% of Heico’s 2024 revenue, has been under pressure since 2023. This segment faces challenges from lower scrap prices and affiliate demand, infrastructure spending delays, and reduced demand from customers in its heavy equipment, transportation, and automotive end markets. Inflationary pressures and uncertainty around Section 232 tariffs, especially on steel imported from Canada, pose additional risks for MPG in 2025.
However, growth is forecasted in Heico’s other three segments. The company has realigned its thermal solutions business from the Applied Solutions Group (ASG) segment to ITG, which is expected to boost revenue due to increased demand in aerospace and defense end markets. The ASG segment is also expected to see increased demand for its aftermarket parts and services.
Growth is also expected in the Construction Solutions Group (CSG) segment, with positive liquefied natural gas (LNG) projects, specifically with the Bo-Mac Contractors business, and two larger commercial electrical projects. Delayed large multifamily housing construction jobs are expected to resume in the second half of 2025 as interest rates decrease.
Despite these challenges, Heico has been focusing on cost reduction, especially within the MPG segment, since 2024. The company has reduced headcount, managed discretionary spending, consolidated facilities, and improved inventory management. Efforts have also been made to contain costs within ITG, with facility consolidation, overhead reduction, and enhancement of aftermarket parts and services.
Historically, Heico has quickly deleveraged when its leverage rises above 2x and has maintained its S&P Global Ratings-adjusted debt to EBITDA at 1x-2x. However, leverage remained high at 2.5x for both 2023 and 2024, driven by ongoing stress within MPG and ITG.
Heico’s free operating cash flow (FOCF) is exposed to working capital fluctuations from MPG, but it is countercyclical. The company is expected to continue prioritizing reducing inventory and improving its working capital throughout the year. Capital expenditure is expected to be reduced to about $70 million-$75 million in 2025, down from $99 million in 2024, to mitigate further declines in FOCF.
The rating on Heico could be lowered if its S&P Global Ratings-adjusted leverage remained above 2.5x on a sustained basis, if there were unforeseen operational challenges, or if weak cash flow coincided with weak earnings. The outlook could be revised to stable if its S&P Global Ratings-adjusted leverage were sustained well below 2.5x and if it sustained positive FOCF.
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