Welcome to the HEICO Corporation First Quarter Fiscal 2023 Financial Results Call. My name is Samara, and I'll be today’s operator. Certain statements in today’s call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to, the severity, magnitude and duration of public health threats such as the COVID-19 pandemic or health emergencies; HEICO's liquidity and the amount of and timing of cash generation, lower commercial air travel caused by health emergencies and their aftermath, airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services, product specification costs and requirements, which could cause an increase to our cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space or Homeland Security spending by U.S. and/or foreign customers, or competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales, our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange and income tax rates, economic conditions including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries, which could negatively impact our cost and revenues, and defense spending or budget cuts, which could reduce our defense-related revenue. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except to the extent required by applicable law. I now turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.

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

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

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

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

Thank you. We will take our first question from Scott Deuschle with Credit Suisse. Please go ahead.

Hey, good morning.

Good morning.

Good morning, Scott.

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

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

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

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

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

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

Okay. Thank you, everyone.

You’re welcome.

Thanks.

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

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

Good morning.

Good morning.

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

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

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

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

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

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

Appreciate that. Thanks, guys.

Thanks, Peter.

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

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

Good morning.

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

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

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

Not particularly. As a matter of fact, we’ve had a little bit more intangible amortization. So that would have, as a result of the acquisition, decreased the margins. So no, I don’t think it’s really a mix thing. I think we’re just very efficient. We’ve got a great team. The thing that’s interesting is I think that these margins are a result of, frankly, what we did a decade and two decades ago. They’re not as a result of what we’ve done in the last year or two. When you treat your customers right, you treat your people right, you get into a virtuous cycle, and I think that’s very much where we are.

Got you. And then just one quick follow-up for Carlos, just on the – a little bit of a higher tax rate this quarter. I know a little bit less stock option credit for you guys. Has your full year outlook at all changed?

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

Got you. Appreciate all the color. Thanks guys.

Thanks, Larry.

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

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

Hi. This is Eric. Good morning. Yes, we’re doing quite nicely in the Chinese market. I mean, we’re – we tend to be – I tend to not like to get into a lot of detail on specific customers or markets for competitive reasons. But I can tell you that we’re doing very well. We’ve got a very good presence there, and I think we are well positioned to pick up market share and to continue to grow that market as it recovers.

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

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

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

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

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

Yes, around $700 million.

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

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

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

Great. Thanks, Eric, and thanks everyone.

Thank you.

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

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

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

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

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

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

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

Okay, great. Thank you.

Thanks, Sheila.

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

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

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

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

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

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

Perfect. Thanks, Carlos. Appreciate the color.

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

Hey, thank you. Good morning, guys.

Good morning.

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

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

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

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

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

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

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

And this concludes today's call. Thank you for your participation. You may now disconnect.