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Welcome to the HEICO Corporation Third Quarter Fiscal 2023 Financial Results Call. My name is Samia, and I'll be today's operator. 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 as a result of factors including, but not limited to, the severity of magnitude and such as the COVID-19 pandemic or health emergencies; HEICO's liquidity and the amount 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; supplemental 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, 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; 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 Lawrence Mendelson, HEICO's Chairman and Chief Executive Officer.

Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO third quarter fiscal '23 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 dedicated and talented team members who are responsible for another strong quarter of excellent results. They continue to produce the highest quality products and services for our customers, while maintaining our unique entrepreneurial corporate culture that has delivered excellent returns to shareholders. I'd like to extend a warm welcome to the approximate 1,000 HEICO-Wencor Group team members who recently joined the HEICO family. We look forward to our collective journey of exceeding customer expectations and winning in the marketplace. I, personally, have never been more optimistic about the future for HEICO. I'd like to now summarize the highlights of our third quarter fiscal record results. Consolidated third quarter fiscal '23 net sales represent record results for HEICO, driven principally by record net sales within Flight Support Group, mainly arising from continued strong demand for our commercial aerospace products and services and the contributions from our fiscal '23 and '22 acquisitions. Consolidated operating income and net sales in the third quarter of fiscal '23 improved by 16% and 27%, respectively, as compared to the third quarter of fiscal '22. These results mainly reflect a 12% quarterly consolidated organic net sales growth and the impact from acquisitions. I'd like to note an important item. HEICO incurred acquisition costs from the Wencor acquisition during the third quarter of fiscal '23. And this decreased our net income by approximately $3.5 million or $0.03 per diluted share. The way management looks at our operations, we were able to report $0.74 a share earnings in the third quarter, after deducting this unusual $0.03 per share. So management considers our earnings in the third quarter as actually $0.77. Recognizing this, our operating margins, especially before Wencor related non-recurring deal expenses, that's what I was talking about, $3.5 million or $0.03, remained strong and are consistent with the expectations we previously communicated in investor calls and events. These margins are very healthy margins even though our product mix this year has meant lower overall margins than in prior years. Consolidated net income attributable to HEICO increased 24% and to $102 million or $0.74 per diluted share, of course, again, after deducting $0.03 of those special Wencor expenses in the third quarter of fiscal '23, and that was up from $82.5 million or $0.60 per diluted share in the third quarter of fiscal '22. In connection with the Wencor acquisition, our net debt-to-EBITDA ratio was 0.75x as of July 31, '23, and that compared to 0.25x as of October 31, '22. Our net debt-to-EBITDA ratio increased in the first nine months of fiscal '23, and due to our successful offering of $600 million of 5.5% senior unsecured notes due August 1, '28 and $600 million of 5.35% senior unsecured notes due August 1, '33. We used the net proceeds from the sale of these notes to repay the outstanding borrowings under our revolving credit facility and to fund a portion of the Wencor acquisition purchase price. Cash flow provided by operating activities was very strong at $145.9 million in the third quarter of fiscal '23, and that compared to $149.2 million in the third quarter of fiscal '22. Cash flow provided by operating activities in the third quarter of fiscal '23, reflects an increase in working capital, principally driven by an increase in inventories to support increased consolidated backlog. We continue to forecast strong cash flow from operations for fiscal '23. In June, we were honored to announce that I will receive the prestigious 44th Annual Howard Hughes Memorial Award from the Aero Club of Southern California on Wednesday, September 6. The Howard Hughes Memorial Award honors exceptional leaders who have advanced field of aviation or aerospace technology. Upon receipt of the award, I will join 43 aviation and aerospace pioneers, including last year's honoree, Harrison Ford, as well as prior honorees, general Chuck Yeager, Bob Hoover, Neil Neil, general Jimmy Doolittle, Elon Musk, Jim Love, Maryland, Houston and captain Sully Sullenberger and many others. I'm profoundly honored to receive such a prestigious award from such a prestigious organization, though I believe it really belongs to all of HEICO's team members because it results from all of their remarkable work and success over several decades. The Aero Club of Southern California is recognized as one of the leading aviation and aerospace organizations in the world. And the idea that they would bestow this award upon me leaves me deeply humbled and very grateful. Last week, we announced that our 3D PLUS and Exxelia subsidiaries supplied mission-critical electronic components on India's Chandrayaan-3 spacecraft, which successfully executed a soft landing on the Moon's South Pole. We offer our congratulations to the Indian Space Research Organization, and we are honored to be a trusted supplier on this remarkable and historic mission. The level of sophisticated engineering, quality and precision demonstrated by our subsidiaries on this project was outstanding and commendable. I'd like to now discuss our recent acquisition activity. Earlier this month, we completed the acquisition of Wencor for $1.9 billion in cash and approximately 1.1 million shares of HEICO Class A common stock with an assigned value of $150 million in the merger agreement or a total of $2.05 billion in the aggregate. The transaction was HEICO's largest ever in terms of purchase price as well as revenue and income acquired. We believe Wencor is a perfect and highly complementary fit with HEICO. And we expect the combination will be transformative, providing a unique and growing portfolio of proprietary cost saving solutions for our airline and OEM customers. We continue to anticipate this highly synergistic acquisition to be accretive to our earnings within the year following closing. In addition, HEICO anticipates that it will continue to achieve its often articulated growth objective in the years subsequent to the closing. Immediately following the closing, we forecast pro forma net debt-to-EBITDA leverage ratio will be approximately 3:1, and will return to historically low levels within roughly one year to 18 months after acquisition, excluding the impact of future acquisition or possible capital deployment activities. At this time, I would like to now introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the third quarter results of the Flight Support Group. Eric?

Thank you very much. First of all, I would like to welcome our new 1,000 Wencor team members into the new HEICO and Wencor family. This combination has been something that we've dreamed of doing for literally the past 20 years. And we could not be more excited and more overjoyed that this finally has come to fruition. Over the last number of weeks, I've been visiting Wencor facilities around the United States and have a very busy schedule plan for the next couple of months as I go out and meet all of the Wencor team members. I've been particularly impressed with the quality and the outstanding character and ability and DNA of the Wencor team members. You can never know what is going to happen down the road. And you never know exactly what it's like to work with people who have been in the same space, but you haven't gotten to know very well over many years. And I can tell you that our hopes and dreams have been completely fulfilled. As I've gotten to know the Wencor team members and their DNA, it is remarkably similar to HEICO's style and DNA. And it is something that I think is going to yield tremendous results for many, many years to come. So again, welcome to all of our new team members from Wencor. Going into the results. The Flight Support Group's net sales increased 23% to a record $405 million in the third quarter of fiscal '23, up from $330.3 million in the third quarter of fiscal '22. The net sales increase in the third quarter of fiscal '23 reflects robust 19% organic growth as well as the impact from our profitable fiscal '22 acquisition. The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued global commercial air travel growth as compared to the third quarter of fiscal '22. The Flight Support Group has now achieved 12 consecutive quarters of growth in net sales, and these numbers don't yet include the positive impact we expect from the Wencor acquisition, which will further transform our business as the world's leading independent aftermarket supplier. The Flight Support Group's operating income increased 26% to $89.2 million in the third quarter of fiscal '23, up from $70.8 million in the third quarter of fiscal '22. The operating income increase in the third quarter of fiscal '23 principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by an increase in the previously mentioned acquisition costs related to the Wencor acquisition. The improved gross profit margin in the third quarter of fiscal '23 principally reflects higher net sales and a favorable product mix across all of our product lines. The Flight Support Group's operating margin improved to 22.0% in the third quarter of fiscal '23, up from 21.4% in the third quarter of fiscal '22. The operating margin increase in the third quarter of fiscal '23 principally reflects the previously mentioned improved gross profit margin, partially offset by the previously mentioned acquisition costs, which reduced our operating margin by approximately 81 basis points. Our second quarter of fiscal '23 margin of 25.5% included a onetime benefit of 2.3%, yielding a 23.2% net operating margin on a continuing basis. Our third quarter of fiscal '23 margin was 22.8% before the unique costs related to the Wencor acquisition. We're very proud of these excellent operating margins, which have increased approximately 300 basis points from our then record 2019, and increased 400 basis points from our then record 2018. Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the third quarter results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales increased 33% to a record $325.9 million in the third quarter of fiscal '23, up from $244.2 million in the third quarter of fiscal '22. The net sales increase principally reflects the impact from our fiscal '23 and '22 acquisitions as well as increased commercial aviation and other electronics products net sales, partially offset by lower year-over-year defense products net sales. We were pleased to see 10% sequential growth over the second quarter of fiscal '23 in defense product net sales, and we're equally pleased that quarterly organic commercial aerospace and other electronic products, net sales growth contributed 2% overall organic net sales growth in the third quarter of fiscal '23. The Electronic Technologies Group's operating income increased 9% to $74.2 million in the third quarter of fiscal '23, up from $68 million in the third quarter of fiscal '22. The increase in operating income principally reflects the previously mentioned higher net sales volume, partially offset by a lower gross profit margin and higher costs from our January '23 acquisition. The lower gross profit margin in the third quarter of fiscal '23 principally reflects decreased defense products net sales, partially offset by increased commercial aviation and other electronics products net sales. In line with our expectations, the Electronic Technologies Group's operating income was 22.8% in the third quarter of fiscal '23 as compared to 27.9% in the third quarter of fiscal '22. This margin is after roughly 500 basis points of amortization. So, the EBITA margin from what our businesses sell was really close to around 28%, which I and we consider to be excellent and is consistent with the margin range that I've talked about on other earnings calls and in other venues that we should expect for this business before taking account into future acquisitions. The lower operating margin principally reflects the previously mentioned lower gross profit margin and increased SG&A expenses as a percentage of net sales. I turn the call back over to Larry Mendelson.

Thank you, Victor. As for the outlook of HEICO in our opinion, as we look ahead to the remainder of fiscal '23, we continue to anticipate net sales growth in both the FSG and ETG, divisions, principally driven by demand for the majority of our products. Additionally, continued inflationary pressures may lead to higher material and labor costs. In addition, we've begun sharing the best practices and getting to know the Wencor businesses, which share a very similar entrepreneurial culture and customer focus as HEICO's businesses. We do believe the Wencor acquisition provides HEICO with additional scale to continue broadening our aerospace products and services, while maintaining our special culture of treating customers with respect and integrity. Our operating margins especially before non-recurring acquisition expenses remain very healthy and reflect our strong business operations. We believe our ongoing conservative policies and strong cash flows enable us to continuously invest in new research and development and take advantage of strategic acquisition opportunities, which collectively position HEICO for future market gains. In closing, I would like to again thank our incredible team members for their continued support and commitment to HEICO. I humbly welcome all of the Wencor team members to our family and look forward to winning new business together as one team. Thanks to all the HEICO team members for everything you do today to make HEICO an excellent company. I would now like to open the floor for questions. Thank you.

[Operator Instructions] And we'll start with our first question from Peter Arment with Baird. Please go ahead.

Larry, Eric, Victor and Carlos, congratulations on the Wencor deal. Really great stuff. Eric, I just wanted to start there. Just when you closed the Exxelia deal, there was -- that obviously put some pressure on the reported operating margins of the ETG Group. And I just -- maybe if you could just level set us how we're thinking about the impact will be because of, one, of course, probably a little bit of a lower margin profile. How you think about what that kind of the impact will be? And then, what are some of the opportunities to think about just from a synergy perspective?

Let me just kind of clarify one thing. The margins on Wencor and the margins on Exxelia are really different. And so Eric and Victor can speak to that. The margins on Wencor are pretty much in line with the margins of our Flight Support Group. But the margins on Exxelia are lower. But Eric and Victor can speak more detail to that.

Yes. So we're -- this is Eric. We're obviously very excited about the Wencor acquisition for some of the reasons that I mentioned earlier on the call. We think that it's a tremendous broadening of our product line. It's sort of amazing that you could have two companies sort of focused in different spaces. And now with the opportunity to bring them together, we're able to offer significantly more to our customers. And I can tell you that major customers have been extremely supportive of this business combination and have really been looking forward to the benefits that it's going to bring. And I think that's one of the reasons why we were able to secure antitrust approval so quickly, and because, frankly, our customers are really pushing us and very excited about this. So with regard to the margins, I would say that the Wencor EBITA margins are very similar to the flight support margins. Carlos can get into some of the specifics, but are basically within the same area. Obviously, there's going to be some intangible amortization as a result of those -- as a result of the acquisition. But as far as the EBITA earnings of the business, it's going to be, in general, in the same area as the HEICO businesses. And we do anticipate tremendous synergies going forward. Right now, we're all in a learning phase. We want to be very careful and make sure that we harness all of the benefits that this combination brings. Unlike many companies, we don't sort of set out with an operating margin target. We just simply want each of the businesses to perform to the best of its ability and to generate the margins that are correct for its long-term success. So if look at the Flight Support group, I'm really happy that our margins, people back in 2018 thought we were sort of at top margins, and now we're up 400 basis points from there. In 2019, they thought we were at top margins we're up 300 basis points. We did not set a target a specific target of a number where we want it to be. Instead, we just make the decisions that make sense, breach operating businesses and the margins end up where they are. So, I'm very encouraged that as a result of adding the Wencor product line that we're going to continue on this journey to improve margins. But in general, there -- the EBITA margins are in the same

Yes. Yes, very helpful. Maybe Carlos could just clarify maybe on the purchase accounting adjustments.

So we closed on one core August 4. So it's not in our third quarter numbers, although we did have acquisition expenses incurred through the end of 7/31 in there. We paid a little over $2 billion for Wencor. I would expect the expenses related to the deal will be south of 1% of the purchase price. We don't have all of those bills in yet, if you would, but there will be some deal costs that flow in Q4 that are not capitalized and will be expensed. So more to come on that as we get those bills. The purchase accounting side of it, I don't expect huge inventory write-ups like we normally have with some deals. Given the nature of their products, they have a lot of -- they have repair, they have parts and they have distribution. And so some of those businesses, particularly in the parts and distribution, they don't lend themselves to inventory write-ups that we experienced in other businesses. So we'll see how that plays out. And there'll be more to come on that, Peter, in the fourth quarter.

Okay. That's helpful. And just, Victor, just to clarify, could you just quantify, if you can, the impact of the supply chain on ETG in the third quarter?

Yes, Peter, this is Victor. Good question. It's now running below or it ran below rather $20 million, probably a few million dollars below $20 million, somewhere in that range. And so definitely moving in the right direction, big improvement there, and from talking with our companies and surveying them, the vast majority feel, it's moving in the right direction or at least stabilized. So we're pretty happy with that.

We'll take our next question from Pete Skibitski with Alembic Global. Please go ahead.

Maybe I want to start with Eric. Eric, just kind of broadly, we're kind of at the end of the summer travel season here for the most part, right? I was just wondering, as you look at the potential for kind of the reality maybe of economic weakness in Europe and China, we'll see how long that lasts or not. But you talked to so many of the airlines. I was wondering if you could give us your perspective on -- do you think these guys are going to get more cautious on their aftermarket spend kind of in the forward 12 months in this environment? And maybe you can give us a sense of with Wencor, is the opportunity for share gain maybe more than enough to offset any potential greater cost and by the airlines and their spend?

Yes. So Pete, let me start out by saying the market is incredibly strong. And we -- at the moment, we don't see any slowdown in sight. We -- having said that, we also understand that all recoveries are -- tend to end with a little bit of an overshoot and then things trend down just a little bit and then they resume their upward climb. I think one of the interesting things that may be going on now is that there's a lot of older equipment out there that really needs a lot of maintenance. And there has been a shortage of parts. The airlines still don't have as much as many parts as they need. And so we really see a lot of support in the market. So I don't see a slowdown in the cards right now. As far as China and Asia goes, those were the last to recover. So I don't think that we've even seen the full recovery there yet. So I think things are very strong in general. I mean, we're in this for the long haul. And whenever a little slowdown comes, to your point, I think that there's going to be a lot of synergy opportunities between HEICO and Wencor and being able to broaden our product lines. And I think we will continue to gain share and we'll move through that period. very well. So, I'm not concerned about it at all.

Okay. That's very helpful. I appreciate that. Just last one for me is just I know you guys are not aggressive with pricing. But just should we expect the continued approach at FSG just to be -- make sure you kind of -- you claw back inflation, so you get some modest net pricing power post inflation. Is that kind of the general way to think about things going forward?

Yes, I think that's fair. I mean, our business is always want to gain market share. We always believe in an expansionary opportunity. We don't work out of scarcity and we think that tomorrow always has greater opportunity than today. Having said that, we've got to make sure that we recapture our costs, and we maintain and grow our margins a bit. So I think due to the efficiency that we've got in the businesses, the operating leverage, I would anticipate that we're going to continue to move in a positive direction while continuing to generate huge value for our customers. I mean, we save our customers a lot of money. We treat them very, very well. They know that. And I think that's why, frankly, they were so supportive of the Wencor combination these two companies coming together is something which is really going to be very helpful to our customers.

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

Great. And I echo my congrats on a good quarter and obviously, the largest acquisition in your history. Just sticking with the Wencor theme for a couple of questions. Eric, I know you don't give specific -- but it feels like on synergies and accretion immediately were targets, but it feels like this acquisition, more than many, it's larger, obviously, but it just feels like one plus one equals three in many places more than your usual acquisition. Just kind of trying to want to talk through some of the complementary things and where you see some of the combination really benefiting HEICO the most.

Thanks. I agree with you. I think that this one is a uniquely synergistic acquisition. It's something that we had to do, makes us a stronger competitor, much more efficient, brings more products to our customers. The other thing, Larry, that it does is as we share best practices, and we've already started doing this. Each company sort of focused in different areas. And I think there's a tremendous amount that we can learn by sharing those best practices and going to what I call the highest common denominator. If we are so fortunate as to have operating efficiencies, that would really be great news, one, because our costs would go down. But two, the combined HEICO and Wencor have over 100 unfilled job openings. And we've learned that our best and most productive team members typically come from inside, from inside of the businesses, they understand the culture. And we think that there's going to be great opportunities for the HEICO and the Wencor team members to take on expanded roles going forward. So, I think when you put all of that together, hopefully, the need -- we won't have to go out and hire as many people from the outside. And instead, we can promote from within. I think we're really in a very unique opportunity here. I want to be careful and not get too far over our skis before having the opportunity to get into the details because it's all detail driven. We don't come out with a model and say, okay, we expect you from the corporate office to cut cost by x and raise price by y, and do that. Some companies do that. It's extremely effective for them. What we have found in our very competitive businesses is the best thing is just to make the right long-term operating decisions. And if you do that, you plant the seeds and you reap the benefits for years to come. And so you've been around HEICO for a long time. And I don't think any of us back in 2018, 2019 thought that we would be increasing our operating margins by 300 basis points from '19, 400 basis points from '18 just through our standard operating procedure. So, I think that we've got that opportunity. Wencor is extraordinarily well run. They've got a DNA so similar to HEICO. They're very focused on the customer, very focused on efficiency getting it done, jumping through hoops for the customers. So there couldn't be a better marriage. So I couldn't be more optimistic. Everything that we had hoped for in the acquisition is proving true. So, we're -- I think we're well on our way.

Great. I appreciate all that color. And then maybe switching gears real fast. Victor, just you guys mentioned, obviously, defense has been a little bit of a laggard year-to-date more on the delivery side than on the bookings. Could you maybe speak to some of your other markets as well as defense bookings on a go-forward basis, kind of where we stand there? And just on the margin -- segment margin. I know obviously, Exxelia is impacted margins somewhat. But as defense comes back, could we expect maybe a little bit of a rebound off of kind of these 22%, 23% numbers that we've seen in the last two quarters?

So, yes, a couple of things, I mean the defense businesses that we're seeing orders increase in those particular businesses tend to be our higher-margin businesses. So what I would expect that this kind of 28% EBITA margin, probably at some point over the next six months starts to tick higher, though I want to see that and we're doing budgets now and we're going through our budget cycle. So I want to really see that for sure. But that's kind of how it feels now. Commercial Aviation, I would expect to remain strong. A variety of space businesses for us, I think will remain strong from what I see orders being healthy. I think the other electronics, the other high-end electronics, as I said, I think, in the last two calls, those, I would expect to be softer and they're more tied to, let's say, the general economy and their own different cycles than the other businesses. And I think that will take a little bit of time to cycle through more than six months.

We'll take our next question from Michael Ciarmoli with Truist Securities. Please go ahead.

Congrats on the -- getting the deal done. Good results, as always. Maybe Eric or Carlos, you referenced kind of the historical FSG margins here a couple of times and how you've exceeded kind of those, if we were to say, they'd be assumed prior peaks, I guess you're not going to give specifics, but with Wencor, with the potential synergies? And I guess as you look forward, do you think you've got room to push these FSG margins even higher once you kind of fully extract all those synergies with Wencor and maybe penetrate even further on both revenue and cost synergies?

Good morning, Michael, and thank you for your comments. This is Eric. First of all, the short answer is yes. I want to be careful as to not get out and set expectations very high because we are in right now the process of HEICO understanding how the Wencor businesses operate, Wencor understanding how the HEICO businesses operate. So it's very, very important. We did not set out -- when we increased margins over the last five years by 400 basis points, we didn't do that by, if you will, setting a goal and then going towards that goal. Instead, what we did was made sure that we had really capable, hungry, talented, hard-working, honest people running each of their businesses and doing the best that they could possibly do. And that's exactly how Wencor operates. That's how HEICO continues to operate. So I personally am hopeful that we continue to increase these margins as time goes on. But I want to be careful as to not get ahead of ourselves and start predicting what those numbers are going to be. I'd rather -- and it's not a matter of under promising and over delivering. It's a matter of truly not knowing. We just make the right decisions and we do the right things. And that lays the foundation for a terrific groundswell of opportunity. So, I think it's important to go ahead and do that and continue doing that. But yes, I think the margins are going to increase. Now we do have, of course, the amortization that's coming from the Wencor acquisition, and Carlos can get into that. It's really important that everybody model that. But of course, that's a non-cash charge. It has nothing to do with the operating income of the business. I mean that's non-sensical charge, which actually we get a tax benefit from. So -- but yes, I think our margins are going to continue to do well. Carlos, I don't know if you want to get into some of the specifics there.

Yes. I would just say, Michael, as I've said over the past several quarters, the FSG continues to grow at a fast pace. All verticals within the Flight Support Group are growing at a fast pace. And we still haven't settled into what I'll call our footprint where the mix sort of normalizes. So until that happens, we're going to have movement in the margin, plus and minus. This quarter, it was 22%. I think I've been pretty clear that I think that on a long-term basis, we might settle in around that point and then grow gradually from there. I don't know if we're at that point yet because I do think there's some more growth to come that may be -- that may have the verticals growing at different rates that messes with mix a little bit. But I do think if you look at the last decade, the FSG, the one thing that's been pretty consistent is the ECA margin gains is just about every year. And it's not large gains. It's just steps, right? Leveraging our fixed costs, it's new products and things like that. I expect that pattern to continue once we settle into our, what I'll call it, normal footprint or mix for the segment.

Okay. Perfect. And just one more on housekeeping just to kind of maybe level set us for modeling. I mean looking at the fiscal fourth quarter, two months contribution from Wencor. I mean, was this sort of -- if you can maybe give us a sense, has it been sort of just under $200 million quarterly revenue run rate? Or what can we expect from the Wencor contribution in this fourth quarter?

I think that's a good question. What I I'll give you this guidance. We expected when we put -- when we did the deal that Wencor would do, pro forma sales around $724 million in '23, and we still expect that. So I mean, I guess you could divide that number by four and come up with a quarterly run rate. But that's what we continue to expect. And the truth is they've done a little better since we've acquired them. But I think for modeling purposes, if you take what we already published, the $724 million divided by four that will give you a quarterly run rate for now. And once we get through Q4, and we have our sea legs under us on the acquisition, we'll give some better thoughts at that point.

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

Maybe, Eric, if I could start with you with another question on Wencor. Can you talk a little bit about how that business has grown organically over the last couple of years coming out of the pandemic? And how should we think about with the Wencor business, the sort of the organic growth profile of that business over the next few years, maybe either relative to FSG at large or relative to some of the specific product lines within your business?

Ken, I'd be happy to answer that. I would say that one quarter's growth rate has been very similar to HEICO's very comparable. They've done a great job in growing the PMA business, the repair, the distribution, the defense. So it's been very, very similar to HEICO. So -- and their operating philosophies, so similar to HEICO. That's why I think that there's going to be immediate opportunities to start working together. As a matter of fact, one of our businesses just send me an e-mail on Friday, he placed a $400,000 order with Wencor on a bunch of stuff. They didn't even know Wencor supplied before we started introducing some of the various folks. So I think there's going to be a lot of opportunity there. And -- but the growth rates, I would say, are really quite similar. Wencor has been extraordinarily aggressive in its markets. And it's sort of interesting that HEICO, Wencor sort of didn't bump up against each other very much. There's been relatively little overlap, and it's been in different areas. So, I think it is sustainable.

That's great. And as you look at the Encore business and you look out over the next few years and obviously, the distribution, the repair and the PMA lines within Wencor. Are there any particular parts of the business that you're maybe more bullish about? Or where you see some really unique opportunity to take share? How should we think about the various pieces of Wencor and the outlook over the next couple of years?

Yes. I think they're very well positioned in each of the businesses. PMA is very strong and in areas complementary to HEICO in a lot of products that HEICO is not in. So, I think that by having a bigger supply basket that we can offer to our customers, we're going to generate a lot of value. Likewise, on the repair side, Wencor operates in a very decentralized autonomous entrepreneurial fashion, and they have focused in areas where HEICO wasn't by and large. So, I think that that's going to be very strong. Distribution has been phenomenal. They've captured a lot of lines, and they have a great relationship with their distribution partners and they've got a very robust pipeline. So, I think that's going to be good. And then in the defense market, they're relatively new to that, and they found some defense areas where we haven't been planning. So it's really adding to the product line. So I don't mean to not answer the question, but I would say I'm very optimistic on all four of Wencor's. And then really, HEICO's vertical, which I'm very also optimistic on, is our specialty products because Wencor doesn't manufacture things themselves, and they buy a lot of stuff. And the HEICO Specialty Products group manufactured, I mean that's our specialty to manufacture these basically, source-approved products. And I think that we're going to be able to make a lot of stuff for Wencor. Not necessarily that they're going to resource existing suppliers. They're very loyal to their existing suppliers. But I think on a go-forward basis, in the time when capacity is very tight, they're already asking our businesses to make product for them. So, I think our Specialty Products business is also going to be a beneficiary. But that's going to be over like a five-year period because it takes a while to get all of that manufacturing product digested. But I think it's going to be all across the Flight Support Group's five sort of operating verticals.

I'll take our next question from Sheila Kahyaoglu with Jefferies. Please go ahead.

So, I wanted to go back to the same line of questioning you've had over the last few questions. Maybe on Wencor, just maybe touch upon the opportunity, Eric, you've been talking about a lot of the revenue synergies and what portion of their business is distribution for their own PMA parts versus third parties? And the same thing for HEICO, and how that kind of results in the delta revenue per employee, which is almost double HEICOs?

Yes. So as you're aware, Sheila, so we disaggregate revenue into three areas: parts; repair; and specialty products. So, Wencor's business is going to be included in the parts and the repair section of the flight support numbers. So -- and my guess is that it's probably going to be roughly 1/3 repair, roughly 2/3 parts. And the parts includes both distribution -- maybe a little bit more on the parts side. The parts include distribution as well as PMA. So they're all growing very well that there's tremendous synergy opportunity between these businesses. So I think they're going to continue to do extraordinarily well. And as you know, there's a big interplay between those various areas because the repair businesses, obviously, require parts in order to repair their products and those come in, in the form of distributed product as well as PMA product. So I think it's going to be very strong there. That already gives you an idea, roughly, let's just say 70 -- one quarter is roughly, 70% parts, 30% repair in that general area.

Okay. And Eric, another one for you, sorry, I'm just keeping it to you for today. There's this thesis out there that aftermarket is softening and decelerating for whatever reason. How do you guys model the trajectory of FSG in the long being of steer? Is it just that of warranty aircraft? Or is it individual sales? Can you give us your thoughts on how you think the overall aftermarket business is going to grow from here?

Well, for us, the aftermarket business is extremely strong. Back in last December, I thought that even though we weren't seeing any softening, that a softening would be inevitable and would come, and I was wrong. Things remain extremely strong. And I think that is a result of us capturing share, more people wanting to do more things with us. And I think, frankly, the future for us is very good. We don't see a softening as of now. And our backlog is tremendous. Some of our backlogs in some of the businesses are 2x the historical rate. So things are really strong. You've got an older fleet, which requires a lot of very expensive parts. And a lot of these, you can't MEL a lot of these components, and you've got to get them fixed. And I think things are continuing to remain strong. Yes, the day will come when we come off the top of it and the whole industry comes off the top a little bit and does a little bit of a dip. But I think, frankly, the industry is very, very well positioned and is going to go from strength to strength here.

And the next question will come from Josh Sullivan with the Benchmark Company. Please go ahead.

Just the comments around using strong cash flow to invest in R&D. As you integrate Wencor and explore new value parts or PMA opportunities, should we expect a development cycle from the time you increase kind of that investment in PMA development to the time of FA approvals, any R&D cycle to think about as you integrate here?

I don't think so. I think that the cycles are pretty short at both HEICO and Wencor. I think actually, that's probably one of the things that we may be able to help win quarter shorten some of the cycles. But I would say, in general, the cycles are very similar. I don't think there's going to be a major change in new product development spending. We're just going to continue doing the things that we've always done. And I think it's going to be very consistent. But by sort of putting together these baskets of products, it's just becoming a tremendous value to our customers. This is something that they really need -- they've expressed a lot of frustration when they can't get a part or they can't get a component. There have been a lot of shortages, both HEICO and Wencor, notwithstanding our big backlogs I think, have done a really good job with on-time delivery relative to the industry. And that's why I think our customers want to reward us with more business.

Got it. Got it. And then just the comments around -- you called out the majority of products driving growth. But curious within FSG, what types of products were in that minority which didn't drive growth or any common themes there?

Yes. There have been a couple of businesses, I would say, more in the specialty products area, where basically commercial OEM products, you're familiar with the -- sort of the vagaries of the commercial build market. Certain things are hot, certain things are not. So I would say there's been a little bit of a slowdown in some of that. I would say that's probably the area that has been if you will the slowest. But the backlogs are very strong. And I can tell you over on the defense side of our Specialty Products business, backlogs are enormous, and we're very optimistic for future sales. So I think we're very, very well positioned. I mean frankly, if we had the capacity right now, we could -- our specialty products in a number of businesses, could ship significantly more than they are. I mean we are just so busy. And yet we continue to add space and add real estate, add machines, add people. But just keeping up with the demand is really difficult. And these tend to be a little bit longer cycle. But I think both Wencor and the HEICO businesses, if they could, they would really load significantly more business into our specialty products, but we just don't have the capacity at the moment.

[Operator Instructions] We'll take our next question from Jack Ayers with TD Cohen. Please go ahead.

This is Jack on for Gautam today. Eric, just going back to Wencor here. I think you talked about the margin profile, EBITA roughly similar to FSG? And I know, Larry, you kind of mentioned about net leverage at 3x and sort of quickly deleveraging kind of historical levels over time. I kind of just wanted to dig on that a little bit more because it seems pretty robust. And if we're kind of looking at this correctly, I mean it does seem like quite an inflection in cash and EBITDA. So I just kind of wanted to dig on sort of the cash profile of Wencor, maybe working capital dynamics, things like that. Just any color.

Yes. I think there Wencor's cash profile is very similar to HEICO's. They -- as far as receivables and inventory, they have a very similar policy in terms of cash generation, I think it's going to be very, very similar to HEICO. Of course, we are going to have the -- as I mentioned in an earlier question, we will have the intangible amortization to contend with, but that's a non-cash charge. I mean that doesn't impact our cash. And as I mentioned, we even get a tax benefit for a chunk of it. So it helps cash. But it's, I would say, very, very similar. We've been very fortunate to acquire almost like our brother from another mother. I mean it's -- the businesses are just very, very similar.

And our next question comes from Louis Raffetto with Wolfe Research. Please go ahead.

Maybe just a follow-up on Jack's question there. When you guys talked about the historical leverage within 12 to 18 months, I guess, what are we looking at? Like are we looking at the 2019 to 2022 where you were sort of 0 to 0.5 turn levered? Are you talking sort of further back where you're one to two turns levered? Just trying to get a sense.

Louis, this is Carlos. When we talk about historical levels, we're talking something below two. That's how we think about it.

Okay. Great. And then maybe, Carlos, just the corporate expense seemed to step up in the quarter. Was there anything else related to the deal or anything else just to be mindful of?

No, there was a lot -- there was some intersegment activity, which was maybe on an apples-to-apples basis might have been $1 million higher. That's not unusual timing. There were some step-ups in some costs, in particular, IT and professional services, travel, things like that. There were some increases there. But I would say that proportionally, with the growth in the business, it didn't necessarily grow an outward pace. You know what I mean, it was pretty much consistent with the growth in the business.

Okay. That's great. And then, I mean, I guess, Larry, maybe one for you, just additional M&A from here. Obviously, you've done your two largest deals back to back now. I guess, how do we think about you absorbing Wencor and sort of moving on with your historical strategy from here?

Well, I think we might have to take a little bit of a rest. We want to get, as we mentioned, get that debt down below three, and into the area of 2x EBITDA. However, I think there might be some bolt-on acquisitions. We're looking at a number of transactions we don't drop our M&A strategy just because of the two large acquisitions. And we are looking at them. And I think we will find ways to finance them at the same time, keeping the desire to get below 2x EBITDA. So, I think we can walk and chew gum at the same time. I think we can do it and we'll work that out. We'll work the financial arrangements out. As we are now were rated as a credit investment credit rating on our bonds. We want to keep that. We're very proud of that. In addition, it saves us interest cost. And so we will, again, push to get it down below 2x and or 2x. Prior to this Wencor, we have never been even at 2x EBITDA. So, I'll remind you of that. And we don't like leverage, strong leverage, so we're going to work towards that. But we -- I think we still will be able to make acquisitions and do both.

Great. Victor, just a quick one for you. I think, obviously, the defense growth was nice sequentially up 10%. I think you said it was still down maybe year-over-year. Do you have that number? I know last quarter, you said it was down 14%, but just curious this quarter.

Louis, this is Carlos. I actually have that number handy. Organically, defense was down in the high single digits, which that coming off the last, gosh, four, five, six quarters, that's heading in the right direction. That's why it was important to us when we saw that sequential growth in defense to highlight that because we've been waiting for that. That's something we've known was going to come, we just didn't know exactly when. So, that's -- one quarter doesn't make a trend, but we're optimistic, not only given that swing, but also some of the forecasts from our subs tend to support, the fact that we may be seeing a turn here in our defense electronics business.

There are no additional questions at this time.

Okay. This is Larry Mendelson, and we have no more questions. If any of you do have questions, you know that Eric, Victor, Carlos and I are available, give us a call, we'll try to help you out. And we thank you for participating in this call, and we look forward to speaking to you in the fourth quarter earnings call, which will be sometime towards the middle or end of December. So, thank you all and this is the end of the call.