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Welcome to the HEICO Corporation First Quarter Fiscal 2023 Financial Results Call. My name is Samara and I'll be today’s operator. Certain statements in today’s 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 as a result of factors including, but not limited to, the severity, magnitude and duration of public health threats such as the COVID-19 pandemic or health emergencies; HEICO's liquidity and the amount of and timing of cash generation, lower commercial air travel caused by health emergencies and their aftermath, 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, our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange and income tax rates, 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, and defense spending or budget cuts, which could reduce our defense-related revenue. 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 Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.

Thank you, Samara, and thank you all on this call. Good morning to everyone and we thank you again for joining us. Welcome you to this HEICO first quarter fiscal 2023 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation; and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO. Before reviewing our operating results in detail, I'd like to take a moment to thank all of HEICO's talented team members for delivering another very strong quarter. The growth and profitability of our operating companies continues to exceed my expectations. It's the people at our companies that make us exceptional and produce these outstanding results. Again thank you for another record-breaking quarter, and I continue to be optimistic that our growth will continue throughout fiscal 2023 and beyond. Summarizing the highlights of our first quarter fiscal 2023 record results. Consolidated first quarter fiscal 2023 net sales represent record results for HEICO, driven principally by record net sales within the Flight Support Group, mainly arising from continued rebound in the demand for our commercial aerospace products and services. Consolidated operating income and net sales in the first quarter of fiscal 2023 improved 31% and 27%, respectively, as compared to the first quarter of fiscal 2022. These results mainly reflect 14% quarterly consolidated organic net sales growth and the impact from our fiscal 2022 and 2023 acquisitions. Consolidated operating margin improved to 20.8% and in the first quarter of fiscal 2023 and that was up from 20.2% in the first quarter of fiscal 2022. Consolidated net income increased 7% to $93 million or $0.67 per diluted share in the first quarter of fiscal 2023, and that was up from $86.9 million, or $0.63 per diluted share, in the first quarter of fiscal 2022. It should be noted that net income attributable to HEICO in the first quarter of fiscal 2023 and 2022, were both favorably impacted by a discrete net income tax benefit from stock option exercises. The benefit in the first quarter of fiscal 2023, net of control – non-controlling interest was $6.1 million, or $0.04 per diluted share, down from $17.5 million, or $0.13 per diluted share, in the first quarter of fiscal 2022. This information should be considered when analyzing the results, the comparative results between fiscal 2022 and 2023. In addition, the company incurred $5.1 million of acquisition costs related to the closing the Exxelia International acquisition in January 2023. And that decreased net income attributable to HEICO in the first quarter of fiscal 2023 by approximately $4.3 million or $0.03 per diluted share. In my opinion, that should also be considered when analyzing the results of our first quarter. The comparatively lower tax benefit from stock option exercises and the onetime Exxelia acquisition costs reduced our diluted earnings by approximately $0.11. Our net debt, which is total debt less cash and cash equivalents of $640.2 million as of January 31, 2023 compared to shareholders' equity, was 23.3% as of January 31, 2023 and that compared to – sorry, 5.7% as of October 31, 2022. Obviously, the increase was the debt that we incurred to acquire Exxelia. Our net debt-to-EBITDA ratio was 1.02 times as of January 31, 2023, and that compared to 0.25 times as of October 2022, still a very, very low debt-to-EBITDA ratio. The increase in our net debt ratios in the first quarter of fiscal 2023 principally reflect the impact again from the purchase of Exxelia in January 2023 and that was HEICO's largest ever acquisition in terms of purchase price. Cash flow provided by operating activities remained strong, totaling $76.7 million in the first quarter of fiscal 2023 and that compared to $78 million in the first quarter of fiscal 2022. The cash flow provided by operating activities in the first quarter of fiscal 2023, reflects an increase in working capital, principally driven by an increase in inventories to support our increased consolidated backlog we continue to forecast strong cash flow from operations for fiscal 2023. In January 2023, we increased our regular semiannual cash dividend by 11% to $0.10 per share. This represented our 89th consecutive semiannual cash dividend, which we have paid since 1979. Let me now discuss our recent acquisition activity. As mentioned previously, in January 2023, we acquired Exxelia International, our largest ever in terms of purchase price and revenue. We are excited about the European defense and aerospace opportunities, which Exxelia brings to HEICO, and we look forward to supporting their continued growth plans. This acquisition is expected to be accretive to HEICO's earnings per share within the first year of the transaction closing. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the first quarter results of the Flight Support Group. Eric?

Thank you. The Flight Support Group's net sales increased 36% to a record $371.3 million in the first quarter of fiscal 2023, up from $272.7 million in the first quarter of fiscal 2022. The net sales increase in the first quarter of fiscal 2023 reflects strong 25% organic growth as well as the impact from our profitable fiscal 2022 acquisitions. The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services resulting from continued recovery in global commercial air travel as compared to the first quarter of fiscal 2022. The Flight Support Group's operating income increased 60% to a record $83.6 million in the first quarter of fiscal 2023, up from $52.4 million in the first quarter of fiscal 2022. The operating income increase in the first quarter of fiscal 2023, principally reflects the previously mentioned net sales growth, improved gross profit margin and efficiencies realized from the higher net sales volume. The improved gross profit margin in the first quarter of fiscal 2023 principally reflects higher net sales within our aftermarket replacement parts and specialty products product lines and the impact of lower inventory obsolescence expenses primarily due to increased demand. The Fly Support Group's operating margin improved to 22.5% in the first quarter of fiscal 2023 up from 19.2% in the first quarter of fiscal 2022. The operating margin increase in the first quarter of fiscal 2023 principally reflects the previously mentioned improved gross profit margin and decreased SG&A expenses as a percentage of net sales, mainly reflecting the previously mentioned efficiencies. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies to discuss the first quarter results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales increased 15% to $255.1 million in the first quarter of fiscal 2023, up from $222.3 million in the first quarter of fiscal 2022. The net sales increase is mainly attributable to the impact from our fiscal 2022 and 2023 acquisitions. The Electronic Technologies Group's organic net sales in the first quarter of fiscal 2023 were consistent with the prior year and principally reflected increased other electronics, commercial aviation and medical products net sales offset by decreased defense products net sales. The Electronic Technologies Group's operating income increased 2% to $56.5 million in the first quarter of fiscal 2023, up from $55.6 million in the first quarter of fiscal 2022. The increase in operating income principally reflects the previously mentioned higher net sales volume, partially offset by higher acquisition costs and fees related to the Exxelia acquisition and a lower gross profit margin. The lower gross profit margin in the first quarter of fiscal 2023 principally reflects decreased net sales of defense products, partially offset by increased net sales of our other electronics and commercial aviation products. The Electronic Technologies Group's operating margin was 22.2% in the first quarter of fiscal 2023 as compared to 25% in the first quarter of fiscal 2022. The lower operating margin principally reflects the Exxelia acquisition costs, along with the lower gross profit margin and increased SG&A expenses as a percentage of net sales partially offset by lower performance-based compensation expense. Although as we anticipated, our defense net sales have been lower, the ETG's backlog remains at record levels, even factoring out Exxelia. Each ETG subsidiary is a unique business with unique drivers, but they are supplying mission-critical, high-reliability or harsh environment products which are required for their customers' products to operate. This remains a very positive dynamic and materially explains our strong backlog and our confidence going forward. While I don't have a crystal ball, as I previously mentioned, we expect our commercial aviation demand to remain strong this year and beyond, and the defense sales should strengthen in the later part of this year or even early next year, as higher defense budgets and defense spending kicks in. We also expect that our high-end other non-aerospace and defense markets, which have been very strong and continue to report record sales will become softer ahead due to what at least I believe, will be a reversion to normal ordering patterns by manufacturers as general supply chain conditions ameliorate. Hopefully, this coincides with the defense upturn though we can't be certain on the timing of each. Consistent with what we've often said and our experience over literally decades we believe the ETG should be a mid- to low single-digit organic sales grower over time with meaningful variations on that growth rate during individual quarters. This has been the ETG pattern since the business was formed in 1996. When asked on these calls what I believe our operating margins will be. You've heard me remark that I felt our cash margin which is the operating margin before acquisition accounting, which is the true economic margin business realizes would stay within the ranges we are now seeing obviously before considering the impact from future and unknown acquisitions. Keeping in mind that our noncash amortization expense is around 500 basis points. And that we had meaningful transaction expenses in the quarter from the Exxelia acquisition, which trimmed our operating margin by another couple of hundred basis points. Our companies continue to report excellent margins in the expected range. I'm often asked what impact Exxelia, which is a strong margin business, but has lower margins than our overall average should have an overall ETG margins, I would say it will probably be around 200, will probably trim around 200 basis points of consolidated margins going forward. before, of course, taking into effect any future and unknown acquisitions, still great margins overall. As we anticipated in our last conference call and other settings, our business has made material progress reducing supply chain delays, which we expect to continue, though unevenly throughout the year. By the way, in the first quarter, we roughly estimate that somewhere around a little shy of $30 million of shipments were delayed mostly into our second quarter versus over $40 million of delays during fiscal 2022's fourth quarter. Overall, we remain very excited about the ETG's prospects over time and are thrilled to have the irreplaceable set of businesses we operate in this group with strong margins and reasonable growth prospects. I'll turn the call back over to Larry Mendelson.

Thank you, Victor. And as for the outlook, we look ahead to the remainder of fiscal 2023 and continue to anticipate net sales growth in both Flight Support and ETG, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures and lingering supply chain disruptions stemming from the COVID-19 pandemic, mainly to higher material and labor costs. During fiscal 2023, we plan to continue our commitments to developing new products and services, further market penetration and an aggressive acquisition strategy while maintaining our financial strength and flexibility. In closing, I would like to again thank our incredible team members for their continued support and commitment to HEICO. The remainder of fiscal 2023 looks promising, and I believe our unique culture of ownership and entrepreneurial spirit will continue to provide for outstanding operating results for our shareholders. Thank you all for what you do to make HEICO a great company. And with that, I would like to open the floor and the line for questions.

Thank you. [Operator Instructions] And we’ll take our first question from Scott Deuschle with Credit Suisse. Please go ahead.

Hey, good morning.

Good morning.

Good morning, Scott.

Eric, have you been able to work with your airline customers to reopen any of your aftermarket LTAs to get some price increases through early? Or have the airlines generally not been willing to do that?

Hi Scott, yes, we’ve been able to get price increases. Our LTAs do permit us to adjust price, although typically, it’s capped at various levels, depending on the level of business that the customers have with us. But yes, we’ve been successful in getting priced from our LTA customers as well as our non-LTA customers.

Okay. Great. And then Victor, on the Defense OE side, I think some of your peers are exposed to four to five-year LTAs with basically little to no inflation protection at all, and that’s causing them to underearn relative to what their businesses are capable of. So I guess I was curious if that’s been a constraint on profitability for you at all as well? And just any detail you can offer on exposure to LTAs on the defense side of the business.

Yes. Generally speaking, we don’t have a four and five-year pricing locked in on those LTAs. But there definitely is a lag effect on pricing – price adjustments, right? We generally don’t have orders of less than a year. So usually, that takes some time to filter through. We’ve been pretty successful offsetting it over time. Almost all our companies feel that we will offset the inflationary effects. But there can be a delay in, let’s say, six months or a year, we do have some longer-term pricing locked in, in some instances.

Okay. And then last question for me, Carlos, maybe you can just say what the ETG backlog was in the quarter and maybe how that’s trended relative to the last year or whatever it compares most useful. Thank you.

Sure. The – if you look at the backlog compared between Q1 2023 and Q1 2022, it is up, it’s about $856 million roughly for the end of Q1 2023 which, by the way is pretty consistent with Q4’s backlog, which was elevated, but it is substantially larger than it was in Q1 2022, which is around $660 million.

Okay. Thank you, everyone.

You’re welcome.

Thanks.

Our next question comes from Peter Arnett with Baird. Please go ahead.

Hey, good morning, Larry. Thank you, Carlos, Eric…

Good morning.

Good morning.

Hey, another strong quarter for margins in the second quarter where we’ve seen margins above 22%, and you’ve given a lot of reasons to the efficiencies. But I guess maybe just kind of talking on Scott’s question on just your ability to pass on some price. How are you thinking about just this level of margins going forward? Any color there would be helpful.

Yes. Obviously, we’re going to continue to treat our customers well, as I’ve said for the last year or so, we’ve got to make sure that we maintain our margins in this inflationary environment, both materials and labor are increasing in cost. And we need to make sure that we pass along that cost plus we’re able to get a reasonable margin on top of it. So I think the numbers can fluctuate quarter-to-quarter depending on mix. But I think we’re in a pretty good area and where – we like where we are. We have not received a lot of price in these margins. We’ve received some. And I think there’s an opportunity to get some more. But of course, as we replace inventories, inventory costs will be going up. So I’m reluctant to predict or to forecast the change in margins. I think that this is really a reasonable level. And we run the business very much as in the viewpoint of what’s right for our customers and what’s right for the business and the margin just sort of falls out of the end. So I don’t have a way to tell what it’s going to be, but I do feel that these are reasonable numbers going forward.

Yes. I appreciate that. And Eric, have you seen any pickup in kind of the wide-body mix yet? And obviously, we’ve seen wide-body traffic starting to materially pick up globally.

Yes, we’ve seen some pickup in wide-body, yes. And everybody anticipates continued strengthening in those markets.

Okay. And just one last one, Carlos, on the net leverage kind of jumping up following facility deal. Any thoughts on just deleveraging or where your comfort level is if more M&A is going to be achieved this year. Thanks.

Well, we have a pretty full pipeline on M&A, and we’re going to do all the deals that make sense for our shareholders. So if we find transactions that make sense for the company and the shareholders, we’ll find a way to do it. We’ve never really been concerned about a leverage number too much. I think Larry said in the past that we would take on substantial leverage for the fit – hike we just haven’t found that animal yet. I mean right now at 1 times levered, I feel like we’re under levered and I’d love nothing more than to find more opportunities to get that leverage number up. However, I do think our culture and our pattern of operations suggests that if we do borrow, we make a hell of an effort to delever quickly. And so as we move forward, outside of use of cash for, let’s say, acquisitions, CapEx and things like that, we will be looking to reduce our credit exposure so that we can reload on other deals as they come in front of us.

Appreciate that. Thanks, guys.

Thanks Peter.

Our next question comes from Larry Solow with CJS Securities. Please go ahead.

Great. Thanks, and good morning, everybody. Congrats on our really good quarter especially…

Good morning.

Great quarter, especially with these adjustments. I guess, Eric, a couple of questions for you first. So the FSG organic revenue growth, 23% this quarter. And I think if you look back last year, I think in Q1, it was somewhere – I think it was close to 30%. So obviously, last year was a little bit of easier comp, this year was not. How do you – you see ordering patterns and stuff? It feels like are they still building back inventory? Or is this all new sales for you? Just trying to get a little grasp on really an amazing quarter. And pretty considerable outperformance compared to where we were on the top line.

Good morning, Larry.

Good morning.

Yes, we’re very pleased with the numbers. Actually, our first quarter 2022 organic growth, I think, was 30%. So now we’ve done 25% on top of 30%, which is really quite outstanding. And it’s, frankly, far more than we had internally predicted. Our businesses continue to do very well. And I’ve spoken with our salespeople over the last couple of weeks to understand our sales leadership to understand what’s going on. And they anticipate basically continued strength in the business. I’m reluctant to anticipate growth beyond the level where we are. I mean, we grew 7% from the fourth quarter, just the quarter-on-quarter number top line. I think that we’re running at a really solid rate. And I want to see a few more quarters to really understand where we are. None of our customers and our salespeople do not believe that the airlines are overstocking. But as I’ve cautioned everybody over the last number of quarters, every downturn, of course, is followed by a recovery and every recovery is followed by a slight overshoot. And I specifically asked this question to our sales leaders, are we in – do we have any indication that we’re in the overshoot area? And the answer is no. Nobody thinks that we’re in the overshoot area. So I’m cautiously optimistic. The numbers are incredible. They’re phenomenal. I think we’re capturing market share, and this is unique to HEICO. We’ve – we speak to our customers, and we see what’s going on with other suppliers. And we think that, frankly, the performance at HEICO is really with regard to the aftermarket is industry-leading, and we’re outperforming others. And that’s as a result of being able to hold inventory, treating our customers, right, not jamming them with price increases, making sure that they get value. So I feel very good about where we are.

And I know we’ve asked questions on the margins the last several quarters, they’ve been kind of running a little bit above that sort of 2021 historical range. Has the mix changed at all over the last few years that could maybe help that margin or not particularly?

Not particularly. Not particularly. As a matter of fact, we’ve had a little bit more intangible amortization. So that would have as a result of the acquisition. So that would have decreased the margins. So no, I don’t think it’s really a mix thing. I think we’re just very efficient. We’ve got a great team. The thing that’s interesting is I think that these margins are a result of, frankly, what we did a decade and two decades ago. They’re not as a result of what we’ve done in the last year or two. When you treat your customers, right, you treat your people, right? You get into a virtuous cycle, and I think that’s very much where we are. And I think we’re reaping the benefits of the long-term the culture that we put into place over 20 years ago, 30 years ago, and that’s what’s driving these numbers. We have the parts when other people did. We continue to develop a lot of new PMAs and other products through the downturn. We continue to take inventory. We did all of the right things, and that’s why these numbers are coming out and frankly, even surprising us.

Got you. And then just one quick follow-up for Carlos, just on the – a little bit of a higher tax rate this quarter. I know a little bit less stock option credit for you guys. Has your full year outlook at all changed? I don’t know if you commented – I was going to do on the call for a couple of minutes. Has your full year outlook changed at all from the tax rate?

No, it really hasn’t. The fourth quarter tax rate was substantially larger this quarter than Q1 of 2022, which the reason Larry mentioned is the lower benefit from tax stock option, the tax benefits that we experienced. If you look at the rate, it’s 100% of the increase is due to that. I think for the year, we should fall out between 20% and 21%, kind of where we fell last year. I think that’s where we’ll wind up this year.

Got you. Appreciate all the color. Thanks guys.

Thanks, Larry.

Our next question comes from Pete Osterland with Truist Securities. Please go ahead.

Good morning. Thank you for taking our questions today. First, I just wanted to ask, within the Flight Support Group, what are you seeing for product demand in the Chinese market? Has there been any choppiness as a result of their emergence from the pandemic lockdowns? And are you seeing any potential that sales into that market could be a strong tailwind for FSG sales over the rest of the fiscal year?

Hi. This is Eric. Good morning. Yes, we’re doing quite nicely in the Chinese market. I mean, we’re – we tend to be – I tend to not like to get into a lot of detail on specific customers or markets for competitive reasons. But I can tell you that we’re doing very well. We’ve got a very good presence there, and I think we are well positioned to pick up market share and to continue to grow that market as it recovers. Frankly, our sales there have really been outstanding over the last year in excess of what we had predicted and frankly, where we were in 2019. And I think we’ll continue to benefit as that market recovers.

Thanks. That’s helpful. And then I had one for Carlos. Could you provide an estimate for what you expect interest expense to be for the year? Is the first quarter level a good run rate to use? Or just any help you could get there?

Well, I think our interest right now is running close to 6% on our debt. It’s variable. We just borrowed $0.5 billion for Exxelia. So I haven’t really given a forecast on that. But if you take our outstandings, it’s going to be somewhere at $10 million. If you’re thinking about a run rate, it could be around $10 million a quarter, something like that.

Appreciate the help. Thanks.

We’ll take our next question from Kristine Liwag with Morgan Stanley. Please go ahead.

Hey guys. Following up on some of the questions on leverage. Laurans, you said that you’ve got a busy pipeline for acquisitions. So how should we think about how you finance this? I mean the business is under levered and also you guys use the Class A stock to finance acquisitions before, how do we think about the balance of financing for those incremental portions? And you guys have historically run a very underlevered book. But what would be the peak leverage you’re willing to consider if the deals are available and accretive?

Do you want to answer? Basically, we will continue right now to use our credit line, which we’re underdrawn on that credit line. We have – we can go to $1.5 billion, and we have facility to go to $1.850 billion. And we’re right now what Carlos $650 million or something like that.

Yes, around $700 million.

$700 million. So we have plenty of room on that. In the event that we were to consider something larger, we have spoken to our banks and the banks are fully supportive of going much further if we would like to. At the moment, we have no request into them to do that. But we’ve always spoken with them and said, in the event that we need additional funds, we can do that. As for issuing HEICO Class A stock and an acquisition. We normally don’t do that because we find that because of our strong cash flow, we’d rather pay cash and reduce the debt balance quickly. As Carlos said earlier, we would increase the leverage amounts as long as we could bring them down to a much more manageable amount, which I consider in the area of 2x to 3x EBITDA – at 2x to 3x. We’ve never been at 2x EBITDA. We’ve always been below. And we will continue to be a low-levered company. We never intend to go as some companies go to 5x, 6x, 7x. We do not do that. Does that answer your question?

Yes, that’s great. Very helpful. Thank you. And if I could ask another question. During COVID, airlines were a lot more cost conscious and PMAs were a priority for them. Now that we’ve seen air traffic continue to be strong and sustained, we are seeing that globally. Can you talk about where PMA is in terms of your airline customers’ priorities? And if you could provide some information regarding how your market share evolved maybe for your top 10 customers and the use of PMA that would be most appreciated.

Yes, I’d be happy to do that. A couple of things. Of course, actually, they’re interesting during the pandemic, actually, customers were so – see problems that I don’t know that they were approving many alternative parts at that moment. However, we were very confident that we would ultimately get those parts approved. So we continue to develop, continue to manufacture them through the pandemic. So when the pandemic got to the end, we started getting a lot of parts approved. We hear from our customers that, that is not a PMA item; it’s really a HEICO specific item. HEICO developed these parts, HEICO developed these repairs. And I think that our growth is really unique for the industry. So I’d be very careful. And I would not describe it as a broad interest in PMA. I think this is specifically a broad interest in HEICO. As we’ve gotten larger, we’re a $20 billion market cap company. We’ve got deep technology and strong financial ability and our customers see that. And I think we’ve been rewarded with a unique opportunity right now. So – but as far as HEICO goes, we continue to develop a lot of parts and repairs. We’ve got a lot in progress. Our distribution businesses are doing very well in taking market share from others. So I anticipate continued growth, certainly over the numbers that we did last year. Again, our first quarter numbers were, frankly, so out of the park that I’m reluctant to predict increases off of those for the next couple of quarters, and we like to mature at this level. First, I’m not saying that we won’t, but – and frankly, when we did our fourth quarter call two months ago, I had no belief that we would be hitting these numbers that we’re hitting now. So, I prefer to be a little bit conservative going forward, but I do anticipate continued growth off of last year.

Great. Thanks, Eric, and thanks everyone.

Thank you.

Next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.

Thank you, good morning everyone. Thanks for the time. Eric, just on your last point, FSG sales are 8% above 2019 levels. I’m guessing that has minimal gross price in there. So to your market share point, where do you think you’re gaining share? Is it just additional products, additional customers on the same product? Are you coming out with more products because customers are demanding it? Is it regional growth? Can you talk a little bit about that? And I appreciate the earlier color.

Yes, it’s – good morning, Sheila and thanks for your question. I would say it is a strength across the board. We are getting significant sales of parts to customers who had not purchased those customers – not purchased those parts before. So, I anticipate continued increase there. Normally, when a customer switches to us, they buy all of their demand from us. So yes, part of it is we’re seeing their own recovery and the volumes are increasing. But also a large part of it is we’re doing very well and coming out with new products and getting those products sold. And then, of course, the flow-through between PMA and distribution has been very strong, and we’ve been helping our distribution principles of pain PMAs and we sell those parts as well. And that’s worked out very well. So it’s really broad-based strength. We still have – as far as geographies, we still have recovery opportunity, I would say, primarily in Asia as a result of the – those markets are still lagging, as you know, from your weekly report. So, I think that there’s continued opportunity there. But yes, we are – we’re past our 2019 numbers and really very, very happy about that.

Great. I have one for Victor and one for Carlos. So Victor, in terms of Exxelia, we’re calculating about from one month of contribution, 50 basis points of dilution and then margins are still down 40 bps year-over-year outside of Exxelia. So can you kind of talk about what the mix impact specifically is? Is it just more of the specialty products that are nondefense? And how long you think that will continue?

Sure, Sheila. I think I assume those numbers include the dilution from the transaction expenses. So those are nonrecurring expenses, and that was – that probably accounted for a very good portion of that in the quarter. But the mix Exxelia is majority aerospace and defense. And then they have a variety of other markets. Some of it is energy. Some of it is clean energy. Some of it is transportation, trains, for example, and other electrification initiatives. So it’s a pretty broad product base. And just across the board, their margins are generally lower than our margins. I wouldn’t be surprised that over time those move up. I don’t want to make a prediction as to that. I think it’s a little too early to do that, but they certainly are margin-focused and their margins have been on an upward trend over the last, I don’t know, four, five years. So we like that as well.

Great. And then, Carlos, last one for you. Inventory was the use of cash in the quarter, about $52 million, following $89 million in fiscal 2022, which is pretty unusual for you guys. So how do we kind of think about that unwinding?

That’s a good question, Sheila. We knew that we would have a spend this quarter. The spend this quarter was rather concentrated rate of that $52 million, roughly $30 million that was related to distribution buys that relate to certain contracts that either renewed or renew. And so we have – we do have some bulking up in that area. – if you pull the $30 million out, it’s $20 million worth of inventory spend, yes, that probably felt about right just for supporting our backlog. I don’t anticipate huge investment in inventory like we had last year. In fact, with interest rates going up, I’ve encouraged the subs to be smart on that. But I’ve also told them that if they have customer demand, we don’t want them to be in a situation where they don’t have product to support the customers. So it’s a delicate balance. But I don’t believe that you’ll see us have the same level of investment for the full year this year as we did last year.

Okay, great. Thank you.

Thanks, Sheila.

Our next question comes from Ken Herbert with RBC Capital Markets. Please go ahead.

Yes, hi, good morning. Maybe a first question for Victor or Carlos. It sounds like, Victor, the commentary on sort of the pace of recovery of supply chain in your defense markets, in particular, maybe a little slower than expected do you still see sort of full year ETG organic growth up low to mid-single this year? And how does that recovery look in terms of the top line for the segment over the next few quarters?

Yes, I would – this is Victor. I would think that’s probably right, low to mid single digits organic growth. I think it’s a little early to tell with certainty. I mean again, when the defense budget – defense recovery moves in for us is really a little bit up in the air. Not that it’s been bad by the way. I mean, our businesses are doing well in absolute terms. But I would expect that and later this year, possibly into next year, we would see it. I mean, I just – on timing, I just don’t know. Supply chain by the way for us, from our vendors like I think a lot of other people, still not easy. But as I mentioned in my comments definitely improving. And our companies kind of across the board are saying either it’s improving or at least not deteriorating. So that’s a good sign.

Okay. And even when I do the add backs for the ETG margins, it still seems like it’s obviously a little bit lower than it’s been. Was there anything structurally different in the segment or maybe higher costs associated with maybe some investments in prebuys [ph]? Or how should we think about sort of the core ETG margins, obviously excluding the amortization and of course the Exxelia impact?

Sure, and that’s what I was alluding to in my remarks is that over time people have said to me, look, on these calls in particular, where do you think the margins are going to be. And I would say, listen, I don’t know exactly. But I then give you kind of think of where we are – where we were, which is kind of the origin of the cash margin, right? Low 30s, 32%, 31%, 33%, bouncing around in that range. And I’ve always said, listen, I think within 10% of that is probably reasonable, and that’s where we’re finding ourselves more or less before transaction expenses, et cetera. So I do think that’s reasonable and that is mix sensitive. I mean, that is definitely mix sensitive. In defense, we have some higher margin products of which we’re selling less right now. And that tends to shift over time. But it’s definitely mix sensitive.

Ken, this is Carlos. Just to be clear because we didn’t include this in the $5.1 million. If you add in to the ETG margin, if you add in the $5.1 million and then throw another $1 million in there for amortization costs related to the deal that’s new. You get back to a margin that’s very similar to what we had last year to what Victor was trying – was pointing out.

Perfect. Thanks, Carlos. Appreciate the color.

You’re welcome.

The next question comes from Gautam Khanna with Cowen. Please go ahead.

Hey, thank you. Good morning, guys.

Good morning.

I just first follow-up on Carlos’ last point of clarification. So in terms of onetime items at ETG in the quarter, was it the 5.1 million plus 1 [ph] million of amortization or was it were there other things related to the Exxelia transaction that flowed through there?

So the one time stuff was $5.1 million, and what I was pointing out was that we took on some additional amortization for the month of January. It was close to $1 million. And that relates to new amortization. It has things in there such as inventory write-ups, purchase accounting amortization. So there’s an element of that is kind of short term. The inventory write-up only lasts for a quarter and a half or something like that or a couple quarters. So there’s an element of that additional $1 million, which it’s not really a one-time cost. We’re going to have the amortization going forward. But what the point I was trying to make was that if you kind of factor all that stuff in, the ETG is running around a 25% operating margin, which is what we posted last year at this time. That was the point of that statement.

Yes. Okay. No, that helps. Thank you. I was also curious, on supply chain, we often hear about ETG having some challenges in the supply chain. Is flight support also seen supply chain challenges? And if so, kind of what is the past dues there if any?

Yes, we – hi, Gautam. This is Eric. Yes, we definitely have seen supply chain challenges within FSG. Frankly, our sales and earnings would be even higher. If we got all these parts in which we’re not able to get at the moment. Look, I think we’re doing better than most, and that’s as a result of our decentralized structure. We don’t do Soviet Central planning at HEICO. We let the businesses figure out what they need. They stay very close to their customers. That’s how everything is designed. And as a result, I think we were ahead of the curve and you saw our inventories go up a year ago, and now you’ve seen the results of having that inventory on the shelf. And now our inventories are up again and we’re going to be in position to be able to support our customers is this level of sales hopefully continues to go up. But yes, we are definitely seeing the same supply chain challenges around materials and in particular labor at our suppliers. There were aerospace products are made in relatively small quantities for the aftermarket. And you'd be surprised how many manufacturers around the world and very high quality, good manufacturers had people retire and they sort of, if you will loss the recipe on how to do certain processes; and I'm talking major companies. So they've struggled getting people trained to be able to replicate those processes. And often, they make parts that have not been acceptable. So, but I think things are definitely getting better in that regard.

Okay. No, that's really helpful. And then just Victor, if you don't mind, maybe also just elaborating on how the supply chain has improved and where maybe incrementally things got worse, if any? Just curious where you're seeing the bottlenecks still.

I mean – thank you. This is, it's still on the component side. And our businesses by so many different components, subcomponents plus raw materials, things like metals and silicones and so on. Those have been easier for us, but it's generally on the electronic component side, I mean, an area that remains difficult, I think for everybody in the industry. Certain items, things like FPGAs, there are some other parts and components. I'm aware of where some vendors are slipping. I'd rather not call them out publicly on this and where they keep falling short rather consistently where we have effectively sole-source situations and it's hard to dual source and things of that nature. But it is – our company is – about close to half of our companies report to us that it's improving more than half at least static or improving, and it's the minority who see it small minority going the other way. So that's what I say. I think we'll continue to make progress. It will be uneven on it one quarter forward, maybe next one a little bit backward, but generally in the right direction. I think that's probably because people in the manufacturing chain generally, companies in the manufacturers generally have gone out and put more on the shelves. And I think there's going to be a reversion to the mean. And that will happen over some period of time, whether it's a year or six or nine months or I don't exactly know.

Thank you, guys. Appreciate it.

Thank you.

The next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.

Hi. Good morning.

Good morning, Josh.

On your PMA HEICO customers, given that the value of the parts offer, and you talked about how customers switch over to the entire HEICO portfolio when they realize the value. But is this impacting airline long-term aircraft fleet planning decisions at all? Are you seeing any data that suggests because HEICO's PMA's legacy aircraft can be kept profitable for longer, maybe delaying any retirement decisions?

We have heard at various places that, that is a consideration. I don't know if that's also partly designed to get us to manufacture more products for our customers. But yes, we can have a considerable impact on the cost of operation of older equipment. And when our customers commit to us long-term and we give them pricing protection, we can get into an area where our parts can be as much as 70% below the OEM after many years, and we still drive very nice margins and the airlines save a lot of money. So I do think it's a factor, but I think the larger factor is the overall cost of the aircraft, what they want to do in terms of reliability, fleet simplification, all of that stuff. But there's no question that we are a major cost driver for them, especially as the aircraft get old.

Got it. Thank you for the time.

Thank you.

[Operator Instructions] We'll take the next question from Louis Raffetto with Wolfe Research. Please go ahead.

Good morning, guys.

Good morning.

Good morning.

Eric, I guess you called out the 23% organic growth for commercial aero. So I guess defense is up even more. Can you just sort of differentiate your defense end market versus that in ETG?

So the defense market that we've got, let's see, the, yes. The defense market was up a greater percentage. We do have a lot of components on – in the missile defense area, and we're particularly strong there. Look, it can bounce around year-over-year. I'm very pleased with the numbers. We've made a big push into defense, and we're doing very nicely. I would say the big difference, Louis, is that the Flight Support defense stuff in general doesn't have the same supply constraints with regard to certain electronics that ETG has. ETG is get more susceptible to the chip issues. And over on the flight support side, we don't have a lot of that. So that's really the main driver there.

That's great color. It's glad to hear. I know Defense has been an area that's probably say underwhelmed, but it's been a big opportunity. So it's good to hear that you're making some headway there.

Yes. It is a huge opportunity, and we have a big focus in that area.

Great. Carlos, just back to the backlog in ETG. I think you said $856 million, so that's up $150 million or so from last quarter. Is that the bulk of that from Exxelia or just trying to gauge the $856 million from the $660 million and again, a little over $700 million through the year.

Yes. So if you're looking at Q4 backlog, yes, a lot of – the majority of – not all of it, but the majority of it is Exxelia adding on that we picked up in January.

And then just one more on the, there was a small change in the accrued contingency in the quarter. Just which segment that impacted? Was that sort of another headwind within ETG? Or was that an FSG?

That was a combination of discount rates and FX, which broadly affected both segments.

All right. That’s perfect. Thank you very much.

Thanks Buddy.

And our next question comes from Ron Epstein with Bank of America. Please go ahead.

Hey, good morning guys. Just a couple of questions for you. One thing we've been hearing is that some of the suppliers when you go down into the lower tiers of the supply chain or suffering from working capital needs and other balance sheets are kind of maybe upside down because of making investments before the pandemic and then things are not playing out that aggravated by the 737 situation. Has that created any opportunities for you all from an M&A perspective to maybe pick up some interesting, albeit smaller companies that would be available today that might not have been before?

Yes. Ron, this is Eric. Yes, I would say that there has been some opportunity in that area. But normally that's sort of not the area, the folks who are having those issues, in general, are not the companies that we're working with. So I don't anticipate it at this point, being a huge opportunity for us. I mean, frankly, the large companies have to make sure paid as they have been getting paid earlier from the government that they take care of their supply base. And I think those companies are more in that general realm. So it's not as applicable to us to the kind of revenues.

Got it. And then if we think about the PMA – maybe just following up on question said earlier, the global fleet kind of debt went two years older when sort of everything was in a coma because of the pandemic. So you've got a fleet that's two years older. You've got aircraft that are that much closer to a de-check. They might not be on long-term maintenance contracts anymore. They might be out of warranty. Are you seeing a pickup in demand for your products for like a third de-check on some of these aircraft?

Yes. I think I don't have specific information on that. But yes, I do believe that we are selling parts for checks that had not been anticipated. I don't think it's a large part of our sales. But yes, I am aware that we are benefiting from that.

Got it. Okay, thank you very much.

Thanks, Ron.

[Operator Instructions] And it appears there are no additional questions at this time. I'll turn the call back to the speakers for any additional or closing remarks.

Thank you. Again, this is Larry Mendelson, and I want to thank everybody on this call for your interest in HEICO. If you do have questions, we are available, Eric, Victor, myself, Carlos, so you can give us a call or e-mail. And we look forward to speaking to you at the Q2 earnings call, which will be in about three months from now. So have a good day, you all, and we'll speak to you soon.