Welcome to the HEICO Corporation Second Quarter and Full Year Fiscal 2022 Financial Results Call. My name is Patricia, and I will be the conference operator for today's call. 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 or implied by those forward-looking statements as a result of factors, including the severity, magnitude and duration of the pandemic, HEICO's liquidity and the amount and timing of cash generation; lower commercial air travel caused by the pandemic and its 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 fees or homeland security spending by U.S. and our 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 the lease 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 effect of inflation within and outside the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our cost; and revenue and defense spending 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 the applicable law. As we begin the call, now I turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you very much and good morning to everyone on this call. Thank you for joining us and we welcome you to this HEICO second quarter fiscal 2022 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 would like to take a few minutes to thank all of HEICO's talented team members for delivering another outstanding quarter. Your dedication to our customers and operational excellence has translated into superior results for the shareholders. I am truly delighted by the positive trends in our aerospace business, and I am optimistic that these favorable trends will continue during the remainder of fiscal 2022. I will summarize the highlights of our second quarter fiscal 2022 record results. Consolidated second quarter and first six months of fiscal 2022 operating income represents record results for HEICO and that was driven principally by record operating income within the Flight Support Group, mainly arising from a continued rebound in demand for our commercial aerospace products and services. Consolidated operating income and net sales in the second quarter of fiscal 2022 improved 27% and 15% respectively as compared to the second quarter of fiscal 2021. These results mainly reflect a 9% quarterly consolidated organic net sales growth and the favorable impact from our fiscal 2021 and 2022 acquisitions. Consolidated operating margin improved to 22.8% in the second quarter of fiscal 2022. And that was up from 20.7% in the second quarter of fiscal 2021. And it improved to 21.5% in the first six months of fiscal 2022. And that was up from 20% in the first six months of fiscal 2021. The Flight Support Group reported quarterly increases of 87% and 33% in operating income and net sales respectively, as compared to the second quarter of fiscal 2021. These results principally reflect strong 31% quarterly organic growth for commercial aerospace parts and services. In addition, this marks the seventh consecutive quarter of sequential growth in net sales and operating income at the Flight Support Group. Our total debt to shareholders' equity was 11% as of April 30, 2022. And that compared to 10.3% as of October 31, 2021. Our net debt, which is total debt, less cash and cash equivalent of $148.6 million as of April 30, 2022, compared to shareholders' equity ratio was 6.1% as of April 30, 2022. And that compared to 5.6% as of October 31, 2021. Our net debt to EBITDA ratio was 0.28x and 0.26x as of April 30, 2022 and October 31, 2021. We have no significant debt maturities until fiscal 2025. And we plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions of various sizes in order to accelerate growth and maximize shareholder return. I'd like to discuss our recent acquisition activity, which in March 2022, we acquired all of the stock of Flight Microwave Corporation, which is a designer and manufacturer of custom high power filters and filter assemblies used in space and defense applications. In March 2022, we successfully completed the previously announced agreement to acquire 74% of the membership interest of Pioneer Industries. Pioneer is a specialty distributor of spares for military, aviation, marine and ground platforms. The remaining 26% interest continues to be owned by certain members of Pioneer's management team. We expect both of these acquisitions to be accretive to earnings within the first 12 months following 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 results of the Flight Support Group.

Thank you. The Flight Support Group's net sales increased 33% to $306.3 million in the second quarter of fiscal 2022, up from $230.3 million in the second quarter of fiscal 2021. The Flight Support Group's net sales increased 35% to $579 million in the first six months of fiscal 2022, up from $429.6 million in the first six months of fiscal 2021. The net sales increases in the second quarter and first six months of fiscal 2022 reflect strong organic growth of 23% and 26% respectively, as well as the impact from our profitable fiscal 2021 and 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 second quarter and first six months of fiscal 2021. The Flight Support Group's operating income increased 87% to a record $66.2 million in the second quarter of fiscal 2022, up from $35.5 million in the second quarter of fiscal 2021. The Flight Support Group's operating income increased 93% to a record $118.6 million in the first six months of fiscal 2022, up from $61.3 million in the first six months of fiscal 2021. The operating income increase in the second quarter and for the six months of fiscal 2022 principally reflects an improved gross profit margin mainly from the previously mentioned higher net sales across all product lines and efficiencies realized from the higher net sales volume. As an aside and not part of the scripted remarks, I want to congratulate the Flight Support team because, frankly, two years after COVID began and created such problems for this industry, I am in awe of these results and the performance of our team. I don’t think anybody expected that we would be back to record numbers within two years after the COVID crisis happened. So I cannot stress enough how outstanding I think these results are. The Flight Support Group's operating margin improved to 21.6% in the second quarter of fiscal 2022, up from 15.4% in the second quarter of fiscal 2021. The Flight Support Group's operating margin improved to 20.5% in the first six months of fiscal 2022, up from 14.3% in the first six months of fiscal 2021. The operating margin increases in the second quarter and for the six months of fiscal 2022 principally reflect the previously mentioned improved gross profit margin, as well as a decrease in 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 Group to discuss the results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales were $237.4 million in the second quarter of fiscal 2022 as compared to $243.1 million in the second quarter of fiscal 2021. The Electronic Technologies Group's net sales were $459.7 million in the first six months of fiscal 2022 as compared to $466.6 million in the first six months of fiscal 2021. The net sales decreases in both periods are mainly attributable to decreased demand for our defense products, partially offset by increased demand for our space, medical, other electronics and telecommunications products, as well as the impact from our profitable fiscal 2021 and 2022 acquisitions. Like many other defense industry suppliers, our defense product sales declined during the first half of 2022. As to whether the defense sales change was concentrated in a single product, I would say that our defense sales change trends were essentially consistent and proportionate across our various businesses and products, which aligns with the rest of the industry. As we've explained over the years, our defense product sales tend to be uneven, which doesn't worry us given our excellent position supplying components on a wide assortment of programs and our healthy order flow and backlog. We remain excited about both our long-term defense sales growth prospects and growth in the products and services we sell in other markets. Though we all wish it weren't the case, increasing global tensions and risks mean the need for our defense products and services will continue to rise over time. The Electronic Technologies Group's operating income was $66 million in the second quarter of fiscal 2022, as compared to $71.3 million in the second quarter of fiscal 2021. The Electronic Technologies Group's operating income was $121.6 million in the first six months of fiscal 2022 as compared to $131.4 million in the first six months of fiscal 2021. The operating income decrease in the second quarter and first six months principally reflects lower efficiency levels resulting from the previously mentioned defense sales decrease and a lower gross profit margin mainly from the decrease in defense product net sales and increased new product research and development expenses as a percentage of net sales in order to support important and ongoing new product development activities. The Electronic Technologies Group's operating margin was 27.8% in the second quarter of fiscal 2022 as compared to 29.3% in the second quarter of fiscal 2021. The Electronic Technologies Group's operating margin was 26.4% in the first six months of fiscal 2022 as compared to 28.2% in the first six months of fiscal 2021. The lower operating margins principally reflect increased SG&A expenses as a percentage of net sales, mainly from the previously mentioned lower efficiency level, as well as the previously mentioned lower gross profit margin. I'll turn the call back over to Larry Mendelson.

Thank you, Victor. Consolidated net income per diluted share increased 22% to $0.62 in the second quarter of fiscal 2022 and that was up nicely from $0.51 in the second quarter of fiscal 2021. Consolidated net income per diluted share increased 21% to $1.25 in the first six months of fiscal 2022 and that was also up nicely from $1.03 in the first six months of fiscal 2021. The increase in the second quarter and first six months of fiscal 2022 principally reflects the previously mentioned higher consolidated operating income. Depreciation and amortization expense totaled $23.5 million in the second quarter of fiscal 2022, up from $22.9 million in the second quarter of fiscal 2021, and totaled $46.7 million in the first six months of fiscal 2022, up from $45.9 million in the first six months of fiscal 2021. Significant ongoing new product development efforts are continuing at both ETG and Flight Support and this is critical for the development of new products and technologies that will fuel our future growth. R&D expense increased to $18.8 million or 3.5% of net sales in the second quarter of fiscal 2022, up from $18 million or 3.9% of net sales in the second quarter of fiscal 2021. R&D expense increased to $37.1 million or 3.6% of sales in the first six months of fiscal 2022, up from $34.2 million or 3.9% of net sales in the first six months of fiscal 2021. SG&A expenses were $88.5 million in the second quarter of fiscal 2022 as compared to $83 million in the second quarter of fiscal 2021, an increase of $5.5 million. The increase in consolidated SG&A expense principally reflects $3.4 million attributable to our fiscal 2021 and 2022 acquisitions and an increase of $3.1 million in selling expense to support the previously mentioned sales growth, partially offset by a $1.1 million decrease in G&A expenses. Consolidated SG&A expenses were $179.8 million in the first six months of fiscal 2022 compared to $161.2 million in the first six months of fiscal 2021. Again, the increase in consolidated SG&A expense principally reflects costs incurred to support the previously mentioned net sales growth, which resulted in increases of $6.3 million and $6.1 million in general administrative and selling expenses respectively, plus $6.3 million attributable to our 2021 and 2022 acquisitions. Interest expense decreased to $1 million in the second quarter of fiscal 2022, down from $2.1 million in the second quarter of fiscal 2021. Interest expense decreased to $1.8 million in the first six months of fiscal 2022, down from $4.5 million in the first six months of fiscal 2021. The decreases were principally due to a lower weighted average balance of borrowings outstanding under our revolving credit facility, reflecting our strong cash flow from operations, which we used to pay down borrowings. Other income in both periods in 2022 and 2021 was not significant. HEICO's effective tax rate was 23.7% in the second quarter of fiscal 2022, compared to 19.5% in the second quarter of fiscal 2021. HEICO's effective tax rate was 15% in the first six months of fiscal 2022 compared to 12% in the first six months of fiscal 2021. The increase in the effective tax rate principally reflects an unfavorable impact from tax-exempt unrealized losses in cash surrender values of life insurance policies related to the HEICO leadership compensation plan as compared to the tax-exempt unrealized gains recognized on such policies in the second quarter and first six months of fiscal 2021. The impact of these unrealized losses accounted for an increase of about 3% in our second quarter tax rate and reflected recent overall stock market declines. As we discussed in last quarter's teleconference, HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 2022 and 2021 of $17.8 million and $13.5 million, respectively, resulting from strong appreciation in HEICO stock price during the option holding period. Net income attributable to noncontrolling interest was $8.1 million in the second quarter of fiscal 2022, as compared to $5.8 million in the second quarter of fiscal 2021. Net income attributable to noncontrolling interest was $15.4 million in the first six months of fiscal 2022, compared to $11.5 million in the first six months of fiscal 2021. The increases principally reflect improved operating results of certain subsidiaries of the Flight Support Group in which noncontrolling interests are held, inclusive of fiscal 2021 and 2022 acquisitions. For the full fiscal 2022 year, we continue to estimate a combined effective tax and noncontrolling interest rate of between 25% and 27% of pre-tax income. Moving on to the balance sheet and cash flow, our financial position and forecasted cash flow remain extremely strong. Cash flow provided by operating activities was $96.8 million and $194.8 million in the second quarter and first six months of fiscal 2022, respectively, as compared to $102.9 million and $210.1 million in the second quarter and first six months of fiscal 2021. During 2022, we invested approximately $87 million in working capital. The change in working capital includes a $43 million increase to inventories, reflecting a strategic decision to increase inventory purchases within our distribution businesses and to support an increase in our consolidated backlog. In addition, receivables increased $20 million resulting from our net sales growth. Accrued expenses and other current liabilities have decreased by $16 million principally due to timing. Our working capital ratio improved to 3.4 times as of April 30, up from 3.2 times as of October 31, 2021. Our DSOs, day sales outstanding, were 45 days as of April 30, 2022, compared to 41 days as of April 30, 2021. We closely monitor all receivable collection efforts in order to limit credit risk exposure. No one customer accounted for more than 10% of consolidated net sales and our top five customers represented approximately 21% and 23% of consolidated net sales in the second quarter of fiscal 2022 and 2021, respectively. Our inventory turnover rate was 150 days for the period ended April 30, 2022, down from 153 days for the period ended April 30, 2021. Now for the outlook, we look ahead to the remainder of fiscal 2022, and we expect global commercial air travel to continue on a path to recovery. Despite the potential for additional pandemic variance, we remain cautiously optimistic that the ongoing worldwide rollout of pandemic vaccines, including boosters, will continue to positively influence global commercial air travel and benefit the markets we serve. It still remains very difficult to predict the pandemic's path and effect, including factors like new variants and vaccination rates, potential supply chain disruptions, and inflation, which can impact our key markets. Therefore, we feel it would not be responsible to provide fiscal 2022 net sales and earnings guidance at this time. However, we believe that our ongoing conservative policies, strong balance sheet, and high degree of liquidity enable us to continuously invest in new research and development and to take advantage of periodic strategic inventory purchasing opportunities and execute on our successful acquisition program, all of which collectively position HEICO for future market share gains. In closing, I would like to again thank our incredible team members for their support and commitment to HEICO. They are the ones that make HEICO tick and grow. We are very, very proud of our entire team. The remainder of fiscal 2022 and beyond looks very promising for HEICO to me personally, and we thank you all for making HEICO the great company that it is. That is the extent of our prepared remarks, and I would like to open the floor to questions.

Thank you. Your first question is from the line of Noah Poponak from Goldman Sachs. Your line is open.

Hey, it's Gavin on for Noah. Good morning. Eric, in FSG pricing historically hasn't been a big lever for you, but it seems like the rest of the industry is stepping up there. Is your strategy to increase at the same rate as the rest of the industry so your relative discount holds, or do you aim to pass through any higher costs? How do you think about pricing?

Yes, I think the way we think about pricing is we want to maintain our margin percentage at a minimum. We have to pass through our added costs and then add our margin on top of that. Having said that, our list prices often reflect what our competitors are doing. However, when we have long-term committed customers, we have contractual arrangements where we sell at a discount to that list price, and we don't immediately take increases just because list prices rise. It really depends on the arrangement, but as you can see from our results, we believe we've been able to successfully pass along our cost increases while maintaining reasonable profit margins and keeping our customers happy. As an anecdote, at the MRO Conference in Dallas a couple of weeks ago, a major airline brought all of their senior leadership to thank HEICO. In all of my years, I've never had a meeting quite like this where they brought their senior leadership to thank HEICO: one, for coming up with new product solutions and helping them with things that others wouldn't, and two, for not taking advantage of them as others have. They called out other manufacturers and said that HEICO really differentiated itself and would be rewarded with not only increased business on products we currently offer, but increased business on new items they wanted us to develop. So as a result of treating our customers right, we will get our costs covered, maintain or grow our margins a little, and most importantly keep our customers happy because there's a huge amount of opportunity for us.

Great. I appreciate all that detail. Maybe just touching on the margin at FSG: you're back to pre-COVID 2Q 2019 revenue, but your margins are better by more than 100 basis points. Is there anything abnormal in the quarter there, or is that a level you can continue to improve from as you grow revenue above pre-COVID levels?

I wouldn't say there's anything abnormal in the quarter. I want to be careful not to over-predict. These numbers represent a record operating margin percentage for the Flight Support Group, which is astounding given the environment. We'll continue to watch that very carefully. We will be replenishing inventories; we're adding back some positions and growing our engineering talent, so I want to be cautious predicting sustained higher margins. But I feel good about where we're headed.

Great. Thank you.

This is Carlos. I would just add quickly: we've been thinking about the FSG approaching this 20% operating income level. The path to getting there will be a little lumpy because as the businesses return to volume levels, different parts of FSG grow at different rates and that will affect our margin during the quarter. So for the year, think about it around the 20% range and recognize it will be lumpy up and down to get there.

Helpful. Thank you.

And your next question comes from the line of Gautam Khanna from Cowen. Your line is open.

Hey, good morning, guys. Just to follow up on the last question, Carlos, can you talk about the subsegment growth within FSG and maybe that was the source of the mixed benefit? Was it led by the PMA business relative to repair and specialty products? Anything there that might explain how quickly margins improved?

Yes, Gautam. I think the PMA parts business has been very strong and consistently strong. We saw a tailwind we expected: the return of our Specialty Products Group. Their volumes have picked up as we thought they would. Their volumes tend to be tied to the OEM market, which is coming back a bit. So that's helped us. I'd say the rate of parts increases was a little higher than historically, which did have a mix impact on the margin. That's about the only thing.

Okay. Was there any sort of inventory dynamic where your prices reset faster than the costs reflected in your inventory, so there was an out-of-phase benefit from pricing that might normalize as you replenish inventory?

That's a good question. We do have a bit of a delay in implementing price increases; it's not instantaneous. Price increases come in phases over time as we renegotiate contracts and discuss ongoing relationships with customers. That doesn't happen instantaneously. So I don't know that this quarter showed a huge impact from pricing, but I think it will continue. We'll do our best to cover cost increases, but we're not raising prices simply to boost margins; we're trying to be friendly to our customers as a long-term strategy.

Yes. And one for Victor: ETG, can you talk about bookings, how those have trended, maybe even since the defense budget was enacted in March? Have you seen a pickup in RFP activity or anything you can speak to about order flow?

It's a good question. Our book-to-bill ratio and orders are very strong and book-to-bill accelerated for us both in the first and second quarters of the year compared to last year, so that remains strong. Of course, like everybody else, we've got miscellaneous supply chain challenges which are greater and seem to be accelerating. They're not overwhelming us, fortunately, but they are accelerating and probably contribute to the book-to-bill ratio even more than usual. But as far as we're looking at it, book-to-bill is accelerating and strong.

Thanks, guys.

Thank you.

And your next question is from the line of Larry Solow from CJS Securities. Your line is open.

Great. Thank you. Good morning, guys and congrats on a really nice quarter in a pretty tough environment—very commendable. Maybe a question for Eric on FSG: obviously pretty remarkable numbers, as you mentioned almost back to pre-COVID levels. I guess a little less if we take out the acquisitions, but really strong. What about market share gains? This must be a big factor versus competitors. Can you give high-level color on market share gains and whether they're coming from specific areas? Is it mostly existing customers or new customers, and are these legacy products or newer ones?

Larry, that's a great question. I'm very involved with all the businesses and, from the ground, I can tell you that in all of our Flight Support business areas we are, in my opinion, gaining market share. In my 32.5 years at HEICO, I've never seen this level of enthusiasm from our people. It is absolutely across the board: PMA parts, component repair, distribution, specialty manufacturing, defense sustainment. I believe it's the result of us taking care of our people as times got tough, maintaining and growing our inventories to support customers, the fact that we are not highly levered, and our leadership teams and salespeople who have been with the company for decades. It's incredibly broad-based across aftermarket, OEM, and defense sustainment. That gives me tremendous confidence.

That's very encouraging, especially since these market share gains should be long lasting, right?

Yes, I believe they are long lasting. Our gains are broad-based and incremental. We're doing very well. I see tremendous strength across all areas in which we operate.

Okay, great. Then switching gears, a quick question for Victor: on the defense side, could some of the slowness be caused by supply chain constraints at other parts of the system—i.e., your customers can't get other components so they delay integrating your part? Could complementary product supply chain issues be affecting your defense sales?

Larry, that dynamic does have an effect and can slow things down. More pronounced is when our customers can't get products out of their factories or have labor issues; they've told us that's an issue. In a number of instances, our subsidiaries have mentioned that we expected shipments to come and they get delayed by a month or two or three. At some point that will even out and we'll ship those orders that we expect.

Right, right. Okay, great. And if I could ask one more for Carlos on inflation and SG&A: it seems pretty well under control for you guys—organic SG&A was up modestly and G&A decreased. Any thoughts on managing inflationary issues?

During this period, we're structurally entrepreneurial with many subsidiaries run by managers who started as entrepreneurs. They know how to adjust because they learned to manage when it was their wallet. Those tenants have benefited HEICO. Our teams have done an exceptional job managing costs, and we've worked with customers to cover increased costs as best we can. HEICO's structure allows us to make that happen.

Right, great. Excellent. I appreciate the color. Thanks, guys.

Thanks, Larry.

Thank you.

Thank you. And your next question is from the line of Peter Arment from Baird. Your line is open.

Yes, good morning everyone. Larry, Victor, Eric, Carlos, hi. Eric, I wanted to ask about M&A. You guys did two deals in the quarter. Are you leaning into commercial market deals more? What's the pipeline look like? Is there more activity or willingness to do deals in this recovery period or do you need to see more time pass?

We're very active in the M&A area—busier than we've ever been. We remain disciplined, recognize market prices, and are competitive. There are plenty of opportunities and we're working them aggressively.

I appreciate that. On supply chain constraints, can Eric and Victor describe whether lead times have materially stretched out or whether you'll continue carrying more inventory throughout the year?

For ETG companies, lead times from suppliers continue to increase. In some cases some components have lead times over 100 weeks, though that's an exception, not the rule. We've generally found workarounds and our inventory approach has minimized the effect. I would expect this to continue to be a challenge and perhaps accelerate a bit. On the last call, I estimated about $10 million slipped from one quarter to the next, and I'd say that's 50% to 70% more in the quarter we just finished than the prior quarter. It's a few percent of sales—something to watch. Our growth would have been somewhat higher without these issues, but our companies are working to keep this at a manageable level.

Peter, on the Flight Support side, we were smart to make sure we had sufficient inventory coming into this. We're working closely with suppliers. There's no shortage of orders for us; the challenge is getting everything delivered on time. There could be hiccups, and our people tell me about problems, but they ultimately figure out solutions. We're on high alert watching inventory restocking but I'm hopeful we'll manage through it.

I appreciate that. One last one: on new product rollouts, it sounds like customers are approaching you more. Is the pace of new product introductions increasing from historical levels and is adoption accelerating?

It's more of an acceleration of adoption. We're content with our pace of new product development; we have unsold potential where people can save more by buying other products in our line. Our preference is to sell that first and then increase the rate of new product development. We continue to grow in adjacent white spaces. We're well balanced now—if we increase new product development, we'd have to increase procurement, manufacturing, inspection, and sales. So our current volume and rate of new product development are optimized.

Appreciate that. Thanks.

Thank you.

And we have the next question from the line of Kristine Liwag from Morgan Stanley. Your line is open.

Good morning, guys. This is Jason on for Kristine. Eric and Victor, as we look ahead, how should we think about potential recessionary impacts across both ETG and FSG businesses?

If you mean a general macro downturn, I think we continue to pick up market share and in a downturn we'd continue to pick up market share. I'm not afraid of it. We don't see the same consumer-driven deflationary impact in our markets because people want to travel. Savings levels remain elevated and demand for travel is strong—people are cooped up and they want to fly. I don't see a historic two-times GDP impact on air travel over the next couple of years. There are geopolitical factors like Russia/Ukraine and China that could have impacts regionally, but HEICO is well ingrained with our customers and seen as a real powerhouse, so I think we'll be a go-to company in a downturn.

For ETG, the effect of a recession is typically muted because a high proportion of our sales come from defense, space and medical, which tend not to suffer like broader consumer markets. Some general markets we serve could feel an impact, but we are not currently seeing that. Our orders in non-A&D markets, which can be a precursor to overall economic activity, have remained strong and healthy.

Thank you, guys. And one more for Victor: can you speak to the opportunities you see in space, and parse out near-term vs longer-term opportunities?

Our space business is focused on high-end space—radiation tolerant or hardened solutions for larger, more expensive satellites, not micro-satellites. We're not chasing volume commoditized micro-sat markets. Our opportunities will continue in higher-end, highly engineered products where margins are healthy, because those reflect important value to the customer. We aim to expand in those areas rather than chase low-margin revenue.

Understood. Thanks, guys.

You're welcome.

Our next question is from the line of Ken Herbert from RBC. Your line is open.

Yes, hi—good morning. Eric, I wanted to ask a finer point on bookings and backlog within your repair business into the second half of the fiscal year. Have you seen any change in pace due to airline concerns around booking trends? Is there any reason we shouldn't continue to assume sequential growth into the fiscal third and fourth quarters?

Booking trends are improving and I expect continued growth in the third and fourth quarters. We're grabbing market share and I anticipate continued strong performance across our businesses in the third and fourth quarters.

Okay, that's great. And Carlos, typically seasonally you have very strong cash generation in the back half of the year. Given your working capital investments so far, how should we think about full-year free cash flow? Is there any reason you won't be in that historic 115%–120% conversion of net income for the full year?

For the full year, Ken, I think we'll be around those historic benchmarks. The first six months we invested in working capital to support the business, and we may invest a bit more if revenues continue on pace. But I do think our conversion will be strong this year.

Okay, excellent. I'll stop there. Thank you.

Thanks, Ken.

We have the line of Josh Sullivan from Benchmark. Your line is open.

Sorry—that was on mute. Good morning. On the acceleration of adoption of new products and market share gains, are you seeing new customer types either geographically or by airline business model—any entities that historically were more hands off coming forward in this environment?

We deal with virtually every airline; they're all customers of ours. The answer is yes: they are adopting a broader range of products much more than before. It's not so much adding new customer names, but we're broadening significantly what existing customers buy from us.

One on M&A: private equity used to drive up target valuations. Given changes in the interest rate and market environment, do you think you'll see less interest from private equity and more competition from strategics going forward?

I certainly hope we'll see less competition from private equity. HEICO has a unique value proposition for sellers—we're often the best home for a business or management team that cares about their people and customers. We offer motivation and autonomy for leadership teams and allow them to run their businesses. We are competitive on price but disciplined; we focus on acquisitions that make strategic sense for HEICO. I'm optimistic the trend will continue in our favor.

Okay, thank you.

Thanks.

We have Greg Konrad from Jefferies. Your line is open.

Good morning. Eric, I know we've touched on this, but when you think about the recovery and regional traffic, narrow body versus wide body, any surprises in areas or platforms recovering faster than the broader market?

Yes. North America narrow body is doing extremely well; the pace of recovery at HEICO has been surprising and quicker than the industry. There are areas that haven't seen as much recovery, so I'm optimistic but cautious. Europe is recovering but not fully; Asia is still struggling; South America is more like Europe. North Americans are particularly eager to fly, and that strength is reflected in our results.

A question for Victor: you mentioned defense weakness in line with peers. Given expectations for defense to tick up in the second half—supply chain improvement, budget enactment, potential supplemental funding—any view on conversion in the second half? Would you expect defense to improve in the back half?

Greg, I'll be cautious. There have been more surprises recently than usual. Healthy bookings are encouraging, but we have six months in the back half of the year, and I'm not comfortable making a strong prediction. I prefer to wait and see how it unfolds.

Quick clean-up for Carlos: any update to the combined tax and noncontrolling interest rate for the year?

The combined tax and NCI rate should be between 25% and 27%. As Larry mentioned, we had about a 3% headwind on our tax rate due to unrealized losses in tax-exempt securities held in life insurance policies; it's a wild card and could adversely affect our rate if markets decline. Right now, I'm expecting about 18% to 19% for the tax rate and 7% to 8% for noncontrolling interest as a percentage of pre-tax income.

Thank you.

Your next question is from Peter Skibitski from Olympic Global. Your line is open.

Hey, good morning, everyone. Hopefully you can hear me—I'm traveling and on my mobile.

We can hear you well.

Great. I was wondering if you could drill down into defense and ETG sales a bit. With DoD focusing on next-generation R&D—space, hypersonics, new aircraft efforts—how is HEICO positioned in these areas, especially R&D-type spend? Do you feel aligned with where DoD is heading?

Pete, good question. We feel very well aligned with where the DoD is going. Over the years we've constructed the business to not rely only on ops tempo; we're in higher technology areas that offer future growth and require engineering. We're investing in R&D and product development; timing is difficult to anticipate but we're committed to these investments because they yield results over time.

Great. Maybe one more: in the repair and overhaul group, there's labor tightness in the U.S. Is that an issue for you? Any trouble sourcing labor or wage pressure?

Repair and overhaul is more labor intensive than parts, and we do have job openings, but we've been able to manage. We've treated our people extremely well; they're happy with the work environment and autonomy. Sometimes people are offered more money elsewhere and come back saying it wasn't the right fit, so we’re in pretty good shape. We watch openings carefully and take care of our people, and if costs go up, we're proactive in making sure our people remain whole. They're the reason for our success.

Great. Thanks for the color.

Thank you. Thanks, Pete.

We have a question from Pete Esterline from Truist Securities. Your line is open.

Hey, good morning. I'm on for Michael Ciarmoli this morning. Thanks for taking our questions. First, what are you seeing in terms of inventory levels at airline customers—any significant restocking activity so far this year and do you anticipate any over the next couple of quarters?

I've asked this question across our teams and the answer is we haven't really seen restocking to date. What they are doing is returning aircraft to service—parked aircraft need parts to be returned to service—so we've seen that. But we haven't seen what we would call traditional restocking yet.

Great, thanks. Also, how is the specialty products business trending? Are you seeing sequential recovery, and any increased interest in build-to-spec offerings that could translate to market share gains?

We're doing really well in specialty products. This area tends to lag since it's OEM-tied, but I visited one specialty products business recently and their leadership thanked me: two years ago customers canceled orders, they considered cutting employment, and I urged them to maintain people so we could rebound. They maintained the team and now their business is surging. That approach—treating people right and avoiding heavy debt—allowed us to support the rebound.

Great, thanks a lot for the color.

Thank you.

And we have your next question from Louis Raffetto from UBS. Your line is open.

Thank you. Good morning, guys. Carlos, the accrued contingent consideration—was that focused in ETG or FSG? I think there was a benefit related to discount rates.

Sure. There was a benefit from the discount rate in the quarter split between both segments pretty evenly. The discount rate for those liabilities went up from around 4% to about 6% on average for us, and that 2% increase provided an incremental benefit which you see as $1.7 million to $1.8 million in the cash flow statement. We haven't seen that in a while; as rates rise those liabilities get discounted.

That makes sense. Thank you. Also, there was roughly a $9 million to $10 million outflow in investing activities under 'other'—what was that?

The majority of that was related to a deposit on a product-line acquisition we're close to completing. For timing reasons we made the deposit while finishing investigative work. It's a small product-line acquisition.

All right. Thank you. Eric, I want to go back to margins: some of the goodness in the quarter—was any of it from reversals of old reserves, such as bad debt or inventory reserves from prior years?

No, it's all clean. I'm proud HEICO never took big one-time charges like many peers did—writing off inventory or receivables. We didn't do that and we don't do that to goose short-term earnings. So there was no reversal of inventory or receivables. On pricing, while we realized some higher sales prices due to cost increases, there are other areas where contractual arrangements prevented immediate price increases. We operate in a lean environment, our teams are working hard, and our cost base coming out of COVID is lower, so that's a primary benefit flowing through margins.

Appreciate that. Larry, one quick question: I recall a recent brakes business sold at about 14x. Is that something you looked at and deemed not worth 14x?

We don't comment on every opportunity we look at. Paying 14x for anything is a high price—it's up to the buyer to decide. Some pay even 17x. We don't do that; we're more conservative and only buy things accretive to our model. Historically our style is to buy good companies but not reach to the moon. In hindsight, the real question is what did those high-multiple deals do for the buyer's accretion? We can't live like that—HEICO is run for the long haul and we want payback in a reasonable timeframe. We're the larger shareholders and have to be prudent. If someone wants to pay 14x and it works for them, god bless them. But we won't overpay. We want returns in a reasonable time horizon—seven to ten years ideally—and we avoid excessive debt so we can act through cycles.

I'd add that we're very busy on acquisitions and generally see most opportunities. We pay competitive prices but are selective. M&A success rates are a reality—experts say roughly 20% are successful—so we stick to our discipline. For sellers who want a good home for their business and people, HEICO is an excellent option because we support leadership and operate in the weeds with them instead of imposing corporate buzzwords. We're optimistic and competitive but disciplined.

Yes, we appreciate the honesty.

That's the right answer.

No one can disagree with what you've built over the last 30 years and how successful it's been.

Thank you.

We have a follow-up from Gautam Khanna from Cowen. Your line is open.

Thanks for taking the follow-up. Have you seen any change in the pace of FAA approvals for your PMA parts pipeline over the last couple of years?

No, it has not changed. Our pace of approvals continues and we have a very good relationship with the FAA. Over the years we've built confidence; we often overdo development work for PMA parts to ensure correctness and accuracy, which may cost more but is a good investment. The FAA understands the extent of our efforts and that helps us get it right. Quality is number one for HEICO; we will overspend to ensure quality because parts go on aircraft and spacecraft and must perform reliably.

That's helpful. Eric, could you remind us how much of FSG sales in a normal year are derived from the China market, and did you see any slowdown in the quarter related to lockdowns there?

We don't disclose detailed geographic exposure for competitive reasons. We are active in China and do not have manufacturing sites there, but we sell into that market and are doing fine. Regarding any slowdown in the quarter, I would be reluctant to draw conclusions from one quarter because sales can be lumpy due to inventory purchases in a given quarter. So I wouldn't assert a clear trend from quarter-to-quarter for the China market.

Fair enough. Do you have any high-level view on Ukraine-Russia exposure—sales that will be lost as a result of that conflict?

We did have some sales in Ukraine and Russia in ETG, so that's a headwind. It's not overwhelming—on the order of roughly 1% of sales as an ongoing potential impact.

Within the Flight Support Group, the numbers would be similar.

Great. Thank you very much, guys.

Thank you.

There are no further questions. I will turn the call back to the speakers for further remarks. Please go ahead.

This is Larry Mendelson again. It's been a long call and a lot of excellent questions. I hope we've been able to satisfy you with the answers; if not, please reach out to us and we'll try to be responsive. We thank you for your interest in HEICO and look forward to speaking with you at our third quarter earnings call, which will be sometime in mid-to-late August. With that, this is the end of the call. We wish you a good day and hopefully a strong stock market to return.

Thank you. This concludes today's call. Thank you all for participating. You may now disconnect.