Earnings Call
Heico Corp (HEI)
Earnings Call Transcript - HEI Q2 2023
Operator, Operator
Welcome to the HEICO Corporation Second Quarter Fiscal 2023 Financial Results Call. My name is Tamara, 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 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 will now turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.
Laurans Mendelson, Chairman and CEO
Thank you very much, and good morning to everyone on this call. We thank you for joining us, and we welcome you to the HEICO Second 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 talented team members for delivering another strong quarter. As I have said many times before, HEICO's strength comes from its people, our team members. Their commitment to our customers and the consistent delivery of high-quality products and services is what drives our excellent financial results for shareholders. I continue to be very optimistic about the future for HEICO and our over 9,000 team members. I'd like to summarize the highlights of the second quarter fiscal '23 results. They are record results. Consolidated second quarter fiscal '23 net sales represent record results for HEICO, driven principally by record net sales within the Flight Support Group. This arose mainly from the continued rebound in demand for commercial aerospace products and services and the contributions from our fiscal '23 and '22 acquisitions. Consolidated operating income and net sales in the second quarter of fiscal '23 each improved by 28% as compared to the second quarter of fiscal '22. These results mainly reflect 10% quarterly consolidated organic net sales growth as well as the impact from some acquisitions. Consolidated net income increased 24% to $105.1 million or $0.76 per diluted share in the second quarter of fiscal '23, and that was up from $85 million or $0.62 per diluted share in the second quarter of fiscal '22. Our total debt to shareholders' equity was 26.4% as of April 30, '23, and this compared to 11% as of October 31, '22. Our net debt, which is total debt less cash and cash equivalents of $627.5 million as of April 30, '23 compared to shareholders' equity ratios was 21.9% as of April 30, '23, and this compared to 5.7% as of October 31, '22. Our net debt-to-EBITDA ratio was 0.4x, less than 1x, as of April 30, '23, and that compared to 0.25x as of October 31, '22. Both times were less than 1x EBITDA. The increase in our debt ratio in the first 6 months of fiscal '23 principally reflects the impact from financing the purchase of Exxelia in January '23. Cash flow provided by operating activities was $77.8 million in the second quarter of fiscal '23, and that compared to $96.8 million in the second quarter of fiscal '22. The cash flow provided by operating activities in the second quarter of fiscal '23 reflects an increase in working capital principally driven by an increase in inventory to support our increased consolidated backlog. We continue to forecast strong cash flow from operations for fiscal '23. As a personal comment, I always consider increases in inventories an indication of future growth in sales, so the increase in the inventory does not concern me. I will now discuss our recent acquisition activity. In March '23, we entered into an exclusive license and acquired certain key assets for the aircraft emergency locator transmitter, or ELT product line from Honeywell International, and this will fit nicely with the business operations of a subsidiary of the ETG Group. ELTs provide critical emergency transition signals in the event of aircraft impact on land or water to enable first responders to aircraft. We expect this license and asset acquisition to be accretive to our earnings in the year following closing. Earlier this month, we announced that we entered into an agreement to acquire Wencor Group for $1.9 billion in cash and $150 million in HEICO Class A common stock, all to be paid at closing for a total of $2.050 billion in the aggregate. Upon closing, which is expected to occur by the end of calendar '23, Wencor would be HEICO's largest-ever acquisition in purchase price as well as in revenue and income acquired. Wencor will become part of HEICO's Flight Support Group. Wencor is a large commercial and military aircraft aftermarket company, offering factory new FAA-approved aircraft replacement parts and value-added distribution of high-use commercial and military aftermarket parts and aircraft and engine accessory component repair and overhaul services. Wencor is based in Peachtree, Georgia, and provides its parts and services internationally, employing approximately 1,000 team members in 19 facilities around the United States. HEICO recently entered into the financing arrangements to secure adequate funding for the Wencor acquisition. This acquisition is subject to government approval and customary closing conditions. The highly synergistic acquisition is expected to be accretive to HEICO's earnings within the following year after closing. This acquisition materially expands HEICO's aftermarket product offerings and will enable the combined company to offer even greater savings and greater capabilities to customers while expanding our new products and services development capacity. Wencor is an ideal and perfect highly complementary fit with HEICO. 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 second quarter results of the Flight Support Group.
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Thank you. The Flight Support Group's net sales increased 28% to a record $392.2 million in the second quarter of fiscal '23, up from $306.3 million in the second quarter of fiscal '22. The net sales increase in the second quarter of fiscal '23 reflects robust 20% 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 second quarter of fiscal '22. The Flight Support Group's operating income increased 51% to a record $99.9 million in the second quarter of fiscal '23, up from $66.2 million in the second quarter of fiscal '22. The operating income increase in the second quarter of fiscal '23 principally reflects the previously mentioned net sales growth and improved gross profit margin and the impact of the amendment and termination of a contingent consideration agreement, partially offset by an increase in performance-based compensation expense. The improved gross margin in the second quarter of fiscal '23 principally reflects higher net sales within our Aftermarket Replacement Parts and Specialty Products product lines. The Flight Support Group's operating margin improved to 25.5% in the second quarter of fiscal '23, up from 21.6% in the second quarter of fiscal '22. The operating margin increase in the second quarter of fiscal '23 principally reflects the previously mentioned improved gross profit margin and decreased SG&A expense as a percentage of net sales, mainly reflecting the previously mentioned amendment and termination of a contingent consideration agreement, partially offset by higher performance-based compensation expense. Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the second quarter results of the Electronic Technologies Group.
Victor Mendelson, Co-President and President of HEICO's Electronic Technologies Group
Thank you, Eric. The Electronic Technologies Group reported a net sales increase of 27%, reaching a record $301.8 million in the second quarter of fiscal '23, compared to $237.4 million in the same quarter of fiscal '22. This increase is mainly due to our acquisitions in fiscal '23 and '22, along with higher net sales from our other electronics, aerospace, and space products, despite a decline in defense product sales. The group's operating income rose 3% to $68 million in the second quarter of fiscal '23, up from $66 million in the prior year quarter. This rise in operating income is largely attributed to the previously mentioned high sales volume, which was partially offset by a lower gross profit margin and reduced efficiency levels, mainly due to the impact of our January '23 acquisition. The reduced gross profit margin this quarter primarily stems from lower defense product sales, although this was partially balanced by increases in net sales from our other electronics and aerospace products. The Electronic Technologies Group's operating margin was 22.5% in the second quarter of fiscal '23, compared to 27.8% in the same quarter of fiscal '22. Noting that the group's noncash amortization is about 5 percentage points, this performance translates to what we deem the actual operating margin metrics for assessing a business, around 27.5%, which we view as a strong performance at the operating level and aligns with my earlier expectations for our margin range. The lower, yet still strong operating margin reflects the previously mentioned diminished gross profit margin along with increased SG&A expenses as a share of net sales, primarily due to the aforementioned reduced efficiencies. Our defense sales were lower than the previous year, as anticipated and as discussed in our last earnings call, contributing to this overall reduced operating margin despite the solid sales growth of our other electronics and aerospace products. Delving a bit deeper into these sales, our Commercial Aviation sales and backlog have been particularly robust, and I expect this trend to continue for a while. Sales of our other high-end electronic components have remained strong, though I anticipate some overall softening in these markets as the year progresses. Exxelia, our largest acquisition in the Electronic Technologies Group, has performed as we expected, and we are very pleased with this acquisition. However, as we've often stated, Exxelia's operating margins are below the typical average ETG segment margin. Consistent with our earlier comments, we expect Exxelia to reduce the overall consolidated average ETG operating margin by about 2 percentage points moving forward. Regarding the supply chain, we are continuing to make progress in reducing sales delays attributed to supply issues, with our subsidiaries now estimating that these delays have fallen below $30 million, even dipping into the mid- to low $20 million range for Exxelia. Most of our businesses report that overall supply conditions are either stable or improved compared to earlier, and they anticipate continued, albeit inconsistent, improvement throughout the year. We remain very confident in the outlook for our Electronic Technologies Group, both in the long and short term, as our ETG companies are an exceptional and vital set of businesses, expertly managed by skilled leaders and supported by talented team members. Furthermore, given the ETG's record backlog, the expected delivery timelines for that backlog, and projected orders, we anticipate an increase in our Defense Product net sales within the next year, although we can never be sure of the exact timing and sales levels. I'll now turn the call back to Larry Mendelson.
Laurans Mendelson, Chairman and CEO
Thank you, Victor. As we look ahead to the remainder of fiscal '23, we continue to anticipate net sales growth in both the FSG and ETG groups, 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 may lead to higher material and labor costs. During fiscal '23, 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. We believe that our ongoing conservative policies, a strong balance sheet and a high degree of liquidity enables us to continuously invest in new research and development and to take advantage of periodic strategic inventory purchasing opportunities, as well as executing on our successful acquisition program. All these collectively position HEICO for continued growth and market share gains. In closing, I would again like to thank our incredible team members for their continued support and commitment to HEICO. Their persistent drive and determination to win in the marketplace has resulted in another quarter of outstanding results, and we thank you for all that you do to make HEICO a great company. I would now like to open the floor for questions.
Operator, Operator
And we'll take our first question from Rob Spingarn with Melius Research.
Robert Spingarn, Analyst
First, congratulations on the Wencor deal. I have a couple of questions on that. So Eric, if it's okay, if I could just start with you. I wanted to ask if you could perhaps offer some color on the differences between the 2 companies' PMA, distribution and component repair businesses, and how those complement one another?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Great. Rob. I would be happy to. We're very, very excited about the Wencor deal because of the complementary nature of the transaction. If you look at their various businesses, their product lines really complement HEICO's very well. HEICO started out over in the PMA area focused on engine parts, Wencor has focused on non-engine parts. HEICO also does non-engine parts, but there actually is very little similarity in the product that we do. And as a matter of fact, the HEICO component repair stations purchased all of the Wencor PMAs because HEICO doesn't offer those PMAs. So we're very excited about the complementary nature there. With regard to component repair, Wencor overhauls a lot of components and is in a lot of market niches where HEICO is not in, so we think that that's going to broaden us. And then likewise, in distribution, we focus in different areas. Wencor is, for example, has a very large position over in the bearings area whereas HEICO basically isn't involved in the bearings business. So we think that overall, this is going to permit HEICO to become a more efficient and stronger competitor by giving more products to our customers at lower prices, so we're very excited about it.
Robert Spingarn, Analyst
And so Eric, based on what you just said, it seems that this isn't simply about adding the two together. There appears to be a significant cross-selling opportunity where Wencor's customers can purchase more HEICO parts and vice versa.
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Absolutely. We feel very, very strongly about that. There's a whole product line that HEICO doesn't offer that we're going to now be able to offer to the airlines, and frankly, give them more choice, greater opportunity, greater savings, and it's really going to work out very well. Also, Wencor's got a whole set of manufacturers that makes products for them, and frankly, a lot of those manufacturers, I think can also make products for HEICO as well and vice versa. So we think it's really going to create a tremendous amount of efficiencies. And sort of lastly, HEICO has focused over the years more on, I would say, the airline market. Yes, we serve independent repair stations and brokers and smaller customers. But Wencor really has a world-class e-commerce system, e-commerce platform, which I think is going to be a really great value to our customers. So I mean, I know that our component repair stations like buying parts from Wencor, so I think that as we bring the best that both companies have to offer, I think it's really going to be good for our customers.
Robert Spingarn, Analyst
Okay. And just to close the loop on this, Eric. I think normally, HEICO or FSG does about 300 to 500 new PMAs annually, get added to the catalog. I'm not sure what that equivalent number would be for Wencor. But should we assume that the pace of product development in addition to the catalog won't change for either company? Or is there a different answer there?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
I believe it will definitely not decrease and is likely to increase as we expand our product offerings for customers. There will be more development opportunities, so we see it as a positive addition. Currently, labor is quite scarce, but we have a strong workforce, and Wencor also has an excellent team. Our companies share a very similar ethos. We both consider ourselves smaller in relation to the large players in the industry, and we focus heavily on product quality, response time, service, and pricing. This collaboration is a great fit, and it's something we've desired for a long time. I'm pleased that we were able to accomplish it.
Laurans Mendelson, Chairman and CEO
Rob, this is Larry. As a comment to summarize, we really believe that this combination is a great win for our customers because with expanded capacity, we believe that we'll be able to offer customers better pricing, lower pricing, more products and more efficiency. So we look at it not so much as a win for HEICO and Wencor, which I think it will be, but really a big win for the customers and the industry. As you know, HEICO exists because its pricing is below the OEM, and that's the reason that they buy our products; we're 30%, 40% below. And this will give us the capacity to give even more value.
Robert Spingarn, Analyst
Larry, Eric, thank you very much. Victor, Carlos, I had a couple for you, but I'll step aside.
Operator, Operator
We'll take our next question from Peter Arment with Baird.
Peter Arment, Analyst
Larry, Eric, Victor, Carlos. Victor, maybe I can just start with you. ETG margins are now kind of fully reflecting the inclusion of Exxelia. How should we think about the progression from margins to go back towards kind of the 27%. You mentioned the 200 basis points or the 2% kind of impact, but how are you thinking about that progression back?
Victor Mendelson, Co-President and President of HEICO's Electronic Technologies Group
Yes, Peter, this is Victor. It's a good question. Right now, I'm keeping our assumptions close to where we are. I think you know we're generally quite conservative in this regard. I believe that as some of our defense products gain traction later this year and early next year, which tend to have higher margins, it should improve our margins. However, I feel more comfortable saying that we will maintain our current position. But I've mentioned before that I think being within approximately 10% of our current state is a healthy range. Of course, acquisitions could significantly change that, depending on the specifics.
Peter Arment, Analyst
Yes, that's helpful. Eric, I have another question about margins. The March performance at FSG continues to be impressive, but you mentioned the elimination of contingent agreements. Can you clarify how significant that was? You noted it was partially offset by stock compensation. How should we view FSG margins going forward? I know we’re excluding Wencor, but you've shown really strong performance post-COVID. Any clarification would be appreciated.
Carlos Macau, Executive Vice President and CFO
Peter, this is Carlos. I'll address that. The earnout from the 2021 acquisition consisted of two parts that were contingent on performance levels. We believe that the company who has those earnouts with the previous owners would likely achieve them. We evaluated the probability of that happening as favorable. The seller wanted to receive their earnout sooner, so we renegotiated the structure and arranged to pay them $9 million this quarter instead of splitting it over the next few years, with the first payment originally due at the end of next year and the second at the end of 2026. Essentially, they opted to take the earnout sooner and forfeit potential additional earnings later on. Specifically, the first tranche was $9 million and the second was $18 million, meaning they took $9 million instead of potentially $27 million. We believe this decision is beneficial for our shareholders and a fair deal for the previous owners of the company we acquired, and that's how this arrangement was finalized.
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
The suggestion to proceed came from our partners, not from HEICO. They approached us with the idea, and we agreed to move forward. The company has been performing exceptionally well, and we are very pleased with our partners. As Carlos mentioned, it's a mutually beneficial situation. Regarding the margins, HEICO has performed well post-COVID. We have demonstrated to our customers that, starting as a small company, it's crucial to keep them satisfied; otherwise, we risk going out of business. Our strategy of maintaining inventory allowed us to meet customer needs, especially when others ran out. We have actively engaged with our customers, expanded our product lines, and as a result, we are doing exceptionally well. We've also streamlined our operations due to market changes resulting from COVID, becoming much more efficient. While the $9 million may not be a recurring figure, even without it, our operating margin exceeded 23%, which is quite impressive. Throughout this period, we've focused on customer satisfaction, providing parts and expanding our product range at competitive prices. I must commend our team; the corporate office mainly facilitates acquisitions, but our field team is responsible for executing our strategy effectively. The positive results reflect their hard work.
Peter Arment, Analyst
Appreciate all the color, and congrats on Wencor.
Operator, Operator
Our next question comes from Larry Solow with CJS Securities.
Lawrence Solow, Analyst
Great. Congratulations on a really strong quarter. Eric, can you provide a bit more detail about the Commercial Aviation segment? You grew 20% this quarter, following close to 25% organic growth in Q2 last year at 23%. It seems like we've recovered well from COVID in the narrow-body market. Can you discuss the differences between narrow-body and wide-body recovery? What do you see moving forward? Have you noticed any changes in order patterns or in airlines holding more or less inventory? Any insights on that would be appreciated.
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Larry, thanks. I’d be happy to answer that. The organic sales growth has been truly remarkable. In Flight Support, we just achieved our eighth consecutive quarter of over 20% organic growth. It’s one thing to have four quarters of recovery, but the numbers have consistently exceeded my expectations every single quarter, indicating significant strength in the market. Airlines are preparing for the summer season, fully aware that it’s going to be challenging this year. Everyone wants to fly, whether for leisure or business, and they are very focused on ensuring that they meet the demand. As a result, they are making sure they have the necessary inventory. I continue to meet with our sales leaders quarterly to understand our status, and they consistently report ongoing strength. Asia is the final region to recover, and widebodies are the last fleet type to bounce back. However, we are noticing increased interest in our offerings, allowing us to add more principles and develop additional parts and repairs. Overall, this reflects positively on the market. While there will eventually be a slowdown, it won't last indefinitely, and I remain optimistic that when it does occur, we will continue to move forward just as we have in the past. Timing these events is quite challenging, which is why we are so dedicated to the market.
Lawrence Solow, Analyst
Got it. I have a follow-up on the margin question, and Carlos can provide insight. Your margins excluding the one-time benefit, for the segment year-to-date or in the first two quarters, are close to 23%. Carlos, how should we view this moving forward? It seems like you're operating at a high level. Is this the peak, or should we expect to pull back a bit in the next couple of quarters? I'd like your thoughts on that.
Carlos Macau, Executive Vice President and CFO
I want to clarify that I'm not providing guidance, so please be cautious about my comments. However, I believe we are currently in a favorable business environment where the segment is performing exceptionally well. We are experiencing high growth and a strong product mix, and we hope this trend continues. If I had to estimate, I would say our segment margin might align somewhere between 2022 and 2023 as a run rate. Nonetheless, I don’t want to make any firm promises at this time because we still need to adjust after the disruptions caused by COVID.
Operator, Operator
We'll take our next question from Pete Skibitski with Alembic Global.
Peter Skibitski, Analyst
I guess maybe for Victor, ETG. Victor, just within Defense, obviously, there's been some supply chain issues. But kind of beyond supply chain, are you seeing areas where your Defense sales are strong, some areas where it's weak? Is it just kind of a timing mismatch right now in terms of what the Pentagon is prioritizing for purchases?
Victor Mendelson, Co-President and President of HEICO's Electronic Technologies Group
Yes, this is Victor. The answer is yes, and it's not uncommon for us to see a range of results across different businesses. This variation may be a bit more noticeable now between some of our higher and lower margin products and businesses than it has been in the past. In some instances, we have backlog, but delivery isn't due yet. We're also expecting large orders, some of which have faced delays. Others are intended for foreign military use, potentially to U.S. customers, or may go through the Department of Defense, like FMS or similar arrangements. This gives us a sense of optimism as we look further ahead. Still, as you noted, the situation is somewhat mixed, which isn't particularly unusual for us.
Peter Skibitski, Analyst
You don't feel like you've lost any market share? Or the competition has gotten particularly intense amongst suppliers?
Victor Mendelson, Co-President and President of HEICO's Electronic Technologies Group
Yes, definitely not. We feel strongly we haven't ceded market share on any products or programs. It's more, in a sense, what they're buying at the particular moment. But we feel pretty good about the backlog and the orders and the order estimates going forward. But again, I'm not anticipating it as a next quarter change or even necessarily the quarter after that. I think it goes a little further and deeper into time based on when I look at our backlogs, our delivery schedules and some of the orders that we're anticipating.
Peter Skibitski, Analyst
Okay. So am I right, when you guys talk about Exxelia being 2 points of headwind, I think from a core perspective and some modest increase in amortization. So it still seems maybe you're down a couple of points year-over-year in underlying core margin at ETG, and so is that basically all mix essentially? So you really need defense mix to recover in ETG to get back to kind of the core level of margin that you did in the past year or 2? Is that the right way to think about it?
Victor Mendelson, Co-President and President of HEICO's Electronic Technologies Group
That's a good way to think about it. I think that's right. Or mix on some of the other higher-margin products that we have.
Operator, Operator
We'll take our next question from Kristine Liwag with Morgan Stanley.
Kristine Liwag, Analyst
With the recent acquisition, once you complete this, I think Laurans, you mentioned that you expect net debt to EBITDA to be below 3x. But this leverage is still higher than where you've historically operated. How do you think about the debt load for the business going forward? I mean, when you look at the other main aftermarket player, I mean, they could leverage up as much as 7x net debt to EBITDA. So one, is this kind of the 3x as the new normal? Or do you anticipate to go where you've historically operated at below 1x? Or does this give you appetite for even further leverage, maybe not as much as 7x but maybe higher than 3x?
Laurans Mendelson, Chairman and CEO
So to answer that question, first of all, I want to emphasize that according to our projections, when we closed this transaction, Wencor, our debt-to-EBITDA will be under 3x. I think the number is 2.8x or 2.7x, Carlos?
Carlos Macau, Executive Vice President and CFO
Yes. Net-net.
Laurans Mendelson, Chairman and CEO
Net debt-to-EBITDA will be under 3x. We insisted on giving HEICO A shares in the transaction to maintain leverage under 3x. HEICO has not been a highly leveraged company; we have never gone above 2x. Our projections indicate that within a year, we expect to be slightly below 2x again. At this moment, we are not considering becoming a highly leveraged company at 6x or 7x. Our strategy is to take on leverage under 3x and reduce it to below 2x within about a year, aligning with our historical conservative approach to leverage. While we do not provide specific guidance, we aim for 15% to 20% growth in our bottom line annually, a target we have consistently met for the past 30 years. Based on our current understanding, we believe this acquisition will allow us to continue to grow within that range in '24, assuming market conditions remain favorable. We anticipate our leverage will be below 2x by the end of '24. Therefore, we plan to continue making smaller acquisitions as long as our leverage remains stable. I hope that answers your question.
Kristine Liwag, Analyst
Yes, it does.
Operator, Operator
Our next question from Pete Osterland with Truist Securities.
Peter Osterland, Analyst
I'm on for Mike Ciarmoli this morning. First, I just wanted to ask one on the Wencor acquisition. Given that historically you've operated acquired companies on more of a stand-alone basis, how are you thinking about the integration of Wencor into HEICO? Are there any preparations you're making that you can talk about that are perhaps different than for some of the acquisitions you've made in the past?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Yes. It's a great question, and something we've been thinking about quite a bit. Wencor is a very, very well-run company, and they've got tremendous asset in their people. So frankly, our plan at the moment is just to acquire it and believe it as a separate stand-alone company for the near term. Let's see what benefits could exist between the 2 companies over time, we'll share best practices and we'll figure out how to serve our customers even better. So I think there's obvious areas where we can help each other continue to grow and improve, but the plan is to believe it is a separate stand-alone company for the moment.
Peter Osterland, Analyst
All right. That's helpful. And then just kind of a follow-up on some of those synergies that you might expect from the Wencor acquisition. Do you expect that as a combined company, it might give you an opportunity to speed up the development of new PMA parts? Or do you anticipate there might be any benefits related to scale in terms of working to get PMA parts approved?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Yes, that's also a great question. In terms of scale and getting PMA parts approved, we've got a great track record with the FAA to be able to get parts approved so I feel pretty confident that we'll be able to continue to add to that. Wencor has, as I mentioned earlier, a product line that HEICO doesn't offer so I think that this is going to add to the portfolio. And yes, it will speed up the development because right now, for example, HEICO wants to develop the type of part that we haven't done in the past, whereas Wencor has done that type of part in the past then we would be able, yes, to develop it more quickly. So I think that that's going to be a benefit. Also, when we go to customers, very often, customers ask for a broader product line. And by adding the 2 product lines together, we're going to be able to cover a lot more of the waterfront. And so we're very excited about all the benefits that that's going to bring.
Operator, Operator
We'll take our next question from Sheila Kahyaoglu with Jefferies.
Sheila Kahyaoglu, Analyst
Congratulations, Larry. I have a question for you. You mentioned inventory and supply chain multiple times in your prepared remarks, and you've typically excelled at cash conversion. Could you elaborate on that? Eric, you also mentioned inventory and ensuring supply is ready for customers. Is this a new approach? Is it related to a specific business? If you could provide more details on that, I would appreciate it.
Laurans Mendelson, Chairman and CEO
No, I think two things were happening. Number one, our backlog is larger, and to fill that backlog to supply the customers on time, we have to have inventory. So that went up. Number two, because of supply chain issues, our subsidiaries want to make sure they have inventory on the shelf to meet the customers' demand. So those 2 things increased the inventory. And that was the main increase, I think, in inventory.
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Additionally, we expect further growth in our businesses, particularly on the distribution side. We're bringing on more principles and expanding into additional territories, which means we need to increase our inventory. As many are aware, lead times in the industry have significantly lengthened, with products that previously had lead times of 4 to 8 weeks now taking anywhere from 26 to 52 weeks. It's important for us to ensure we can serve our customers and have the necessary parts readily available. In fact, the leader of our distribution business informed me this morning that a major industry player, one of our biggest customers, has experienced a 98% on-time delivery rate despite the 52-week lead times for the products we distribute. Our ability to achieve this high rate of on-time delivery, while others are far behind, is due to our strategy of maintaining inventory. We are committed to supporting our customers. We have never faced cash constraints, and we want to ensure that we invest wisely in the right inventory—since having the wrong inventory would be counterproductive. By holding the right inventory, we satisfy our principles and can effectively meet our customers' needs. This is the main reason why our inventory levels have risen, and we believe it's the right approach.
Operator, Operator
Okay. That's helpful. And then, Victor, maybe for you with Exxelia. I mean, obviously, we all understand that it's lower margin, but is it lower margins now? Is there something structural in the business? Or is it just a factor of its footprint?
Victor Mendelson, Co-President and President of HEICO's Electronic Technologies Group
Look, it's a good margin business in absolute terms. It's just not as high margin as the rest of the business. Their margins have been increasing over the last several years. I think that I would expect that to continue, but I don't anticipate it's going to get to the same margin as the rest of the ETG in the near term at least or in the next couple of years, absent some acquisition or acquisitions which would change that story. So we're very happy with the margins. They're very good, but just not as high as the rest. And that went into our acquisition decision.
Laurans Mendelson, Chairman and CEO
In previous conferences, we mentioned that the ETG Group intended to acquire a strong company with a lower margin than when ETG was at 28% or 33%. We always indicated that purchasing a company with a margin close to 20% would lower our average margin. However, the cash and profit generation potential and the scale of the Exxelia acquisition justified our decision to accept a lower operating margin because it is an excellent company with great management and significant growth potential. These factors outweighed our preference for a higher margin. We believe that as we implement efficiencies, the margin can improve.
Operator, Operator
Our next question comes from Josh Sullivan with The Benchmark Company.
Joshua Sullivan, Analyst
I'm going to comment on doing PMA parts you haven't maybe done in the past using possibly some of Wencor's expertise, what is your appetite to expand the PMA waterfront? Where might you go with PMA you haven't gone in the past?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Yes, it's a great question and it's something that we thought quite a bit about. We think that there's a whole set of parts that we just haven't been able to tap as efficiently. And if you look at HEICO's sort of developed a certain skill, engineering skill set to go after the types of parts that HEICO does and Wencor has done the same for the parts that they have done. And by being able to focus in each of those areas, I think there's going to be a lot more that we can do together. A lot of these parts made up, so you can have a complex part next to it. That's a complex part, but the 2, there's a certain interaction between them. And so this is really going to help us develop a much fuller product set because we're going to be able. But basically, we'll be able to expand into areas that we haven't done in the past.
Joshua Sullivan, Analyst
And then just on the growth of PMA in general, there's some thought PMAs have benefited from some of the struggling OEM supply chain issues. How should we think about that dynamic? If and when OEM supply chains recover, do you still think PMA growth will be strong in the years?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
I certainly hope so. We believe there has been a lasting shift in the industry. Both HEICO and Wencor have been educating customers about PMA for approximately 50 years, and it takes time for these ideas to resonate. Necessity has driven innovation, and we have been presenting products that are technically sound, if not superior. The OEM companies supplying the market do offer high-quality products. Matching the OEMs in terms of product quality presents a significant technical challenge, and ensuring our products are available requires substantial effort. I believe we are well-positioned to continue increasing our sales. We compete with the OEMs, which are exceptional companies, and they are formidable competitors because of their extensive product offerings and superior quality. We see this as an opportunity to combine multiple products and compete with the OEMs more effectively. Additionally, it's worth noting that some OEMs are now purchasing our PMA products to ensure they have parts available for repairs, illustrating a shift in how HEICO and Wencor products are perceived in the market.
Operator, Operator
Our next question comes from Tony Bancroft with Gabelli Funds.
George Bancroft, Analyst
Great job on the quarter. Could you provide some insight into the PMA market? Who else is involved aside from Wencor? They seem to be one of the larger players, albeit small compared to you. Is that where you plan to concentrate your efforts in the future? Also, could you elaborate on that?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Yes, Tony, this is Eric. I'm happy to address that. There are many competitors supplying PMA parts, and while I won't name them, our customers are aware of who they are and engage with them, which I believe will continue. For future acquisitions, I wouldn't say our focus is on the PMA area. Instead, we see numerous adjacent areas where HEICO currently doesn't operate. Even though we've had success, we remain a small company with plenty of opportunities ahead. We plan to grow by concentrating on areas that enhance our offerings and expanding our product range to become a more efficient and competitive player in the market.
Operator, Operator
Our next question comes from Colin Ducharme with Sterling Capital.
Colin Ducharme, Analyst
Quick housekeeping for Victor and Carlos on ETG. Did you provide the organic sales number for that segment for the quarter? I may have missed it. Also, I’d like to follow up on the Wencor deal with Eric and/or Larry. I want to explore this from both a strategic and financial perspective. Strategically, you mentioned the integration of both PMA franchises. Can you elaborate on how the distribution and PMA aspects might be combined? It seems that Wencor has been focusing on signing exclusive distribution agreements lately. Can you leverage your larger PMA catalog in conjunction with these agreements? That appears to create a logical strategic synergy. From a financial viewpoint, you previously mentioned maintaining the same cultural integration without making any significant changes. We believe HEICO's cultural strengths are its real asset. Looking at Wencor, it's a business that has historically managed a significant debt burden of 6x, 7x, or even 8x EBITDA, which has limited reinvestment opportunities. With the transition, they should benefit from a more robust financial model. Could you discuss the differences in their DNA regarding opportunities and the capacity for reinvestment? I would love to hear your thoughts on this.
Laurans Mendelson, Chairman and CEO
Yes. Let me make one comment. Wencor was owned by private equity, and their model is heavy leverage. HEICO, when it closes, will own Wencor and our model is low leverage. So that leverage situation will totally disappear.
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Yes, Colin, those are excellent questions, and I appreciate you bringing them up. Both HEICO and Wencor operate in the distribution market, and we provide unique advantages to our distribution partners. We pay close attention to details and started as small companies focused on maximizing benefits for customers, ensuring they are aware of product availability to increase sales. Another area of similarity is that both HEICO and Wencor can assist distribution partners in developing additional parts not currently in their catalogs. This is an exciting area for us, as HEICO has existing distribution partners and the capability to develop specific PMAs, which we are recognized for in the airline industry. There is a significant potential for Wencor to introduce new parts to HEICO's distribution partners and vice versa. This collaboration will enhance competition in the distribution aftermarket, leading to greater cost savings for airlines. In terms of financials and cultural aspects, both businesses share a strong focus on details and quality. Our teams prioritize customer needs, responding quickly and effectively. The people within our companies are our most valuable asset. Wencor, as a private equity-owned entity, faced certain constraints, but HEICO's lower leverage will empower Wencor's team to sell more products and manage inventory more flexibly. This is beneficial for our customers, as increased sales typically result in higher earnings for them. We face competition from several large companies that excel in their field, making it tough to compete. Wencor has been somewhat limited in recent years, but now, with this change, we can fully unleash their potential, which I believe will greatly benefit our customers.
Carlos Macau, Executive Vice President and CFO
I got to follow that. All right, so you asked about the ETG. For the quarter, it was down 3% organically, most of that driven by Defense. The other slips within the ETG organically were all up. They were either flat compared to the prior quarter or were all up, so that's the quarter. And I think for the year, it's similar. It was some around, year-to-date, around 2% down for the segment on organic growth.
Operator, Operator
We'll take our next question from Noah Poponak with Goldman Sachs.
Noah Poponak, Analyst
Can you frame your market share now in PMA and then where Wencor sits in that respect? And it sounds like you do not foresee any issue in terms of closing with that combined size in PMA. Is that because the combined PMA there would still be small as a percentage of total PMA? Or because it would still be small as a percentage of total aerospace broad aftermarket?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Yes. We don't know the specific shares because that information is not available. But our competitors, as we've always mentioned, are the original equipment manufacturers. When you look at the OEM aftermarket sales, we are indeed very small compared to them. This will enable us to compete more effectively with the OEMs. Therefore, we still regard our market share as quite minimal. However, we believe that the potential for growth in our product offerings is significant, which is why we are very optimistic about the future and see substantial opportunities ahead.
Noah Poponak, Analyst
Were you able to, in the diligence process, look into whether or not market share and just PMA would be a factor?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
No. I mean, look, we study everything, but as I've always said, I've been asked on these calls for 20 years about what factors in the marketplace affect us the most, and it's always been the OEMs. They have the home field advantage, they're selling the original product, and they have point of sale capability. When they sell the asset, they can secure long-term maintenance and offer a full product set. That's always been our competition. If you had to pin me down for our market share against aftermarket parts, I'd say it's around 2%. That's very small, and I see a lot of opportunity for growth. Honestly, at 2%, we're never going to match the sales of some of these very large companies. However, I believe we can continue to expand our product line, offering more products at competitive prices to our customers and saving them a lot of money. The airlines are saving significantly thanks to our products, and if they're able to do that at 2%, I think they can save even more as we move forward.
Laurans Mendelson, Chairman and CEO
No. This is Larry. As you know, the original equipment manufacturer generally has a monopoly on replacement parts, offering the only available options. If they need to replace parts, they must go to the original equipment manufacturer. HEICO holds a small share because of its PMA, which has been successful due to its cost advantage for the airlines. We provide significantly greater value to the airlines, which is where our competitive edge lies. While you are aware of the market landscape, we remain quite small in comparison to the overall market. Essentially, we focus on competing with ourselves. Our goal is to grow the bottom line by 15% to 20%, but that represents a minor portion of the broader market.
Noah Poponak, Analyst
Okay. I appreciate all that. I just had 2 more. One, was the accelerated earnout or the contingent consideration, was that in the FSG segment EBIT and EBIT margin in the quarter?
Carlos Macau, Executive Vice President and CFO
It was, Noah. The $9 million was a liability on our balance sheet up through the middle of Q2, and then we reversed it when we renegotiated the transaction. It went through EBIT in the segment. So there was about 2.3% worth of benefit to the OEM margin related to this matter.
Noah Poponak, Analyst
So Carlos, I guess that's a pretty sporty margin if I adjust that.
Carlos Macau, Executive Vice President and CFO
Yes.
Noah Poponak, Analyst
Should I work from there going forward? Or does that have some other favorable timing that doesn't repeat in the near term? Or how should I think about the next steps there?
Carlos Macau, Executive Vice President and CFO
I'm generally cautious when discussing margins because it's hard to predict. However, I consistently communicate that we are in an exceptional period where the business is experiencing significant growth. As Eric pointed out, we've enjoyed eight consecutive quarters of 20% or higher growth. In such an environment, we can gain substantial leverage on fixed costs and benefit from a favorable product mix. I am cautiously optimistic that our margins will remain high and I feel more positive about them today than I did yesterday. If I were to model it, I'd anticipate a norm of 22% to 23% for the segment, but I can’t provide precise numbers until the business stabilizes. The industry has slowed, and once we assess the market landscape, it will be easier to provide answers. Right now, all of our businesses in the Flight Support Group are performing exceptionally well, and we'll see how things settle once the industry growth tempers.
Operator, Operator
We'll take our next question from Louis Raffetto with Wolfe Research.
Louis Raffetto, Analyst
Eric, you've provided some really good thoughts on the FSG business in Wencor. I guess as we think about product development, you kind of mentioned you guys did some parts, Wencor did other parts, but you guys could maybe leverage each other. I guess how do you think about HEICO wanting to do a part that maybe Wencor would have done in the past? How do you manage that going forward?
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
In general, I would say that previously, if Wencor already had a part, HEICO wouldn't develop it. They operate quite distinctly in two separate areas. We believe this arrangement allows each business to excel in its strengths. Additionally, both companies utilize various engineering and technical tools that can enhance each other's processes. Overall, we anticipate that this collaboration will provide customers with a wider range of products and help us explore new markets that we haven't previously targeted. I'm hesitant to provide specifics because we don't want to reveal our plans, but we believe there are many opportunities to develop products where there are currently no alternatives, and we plan to pursue those opportunities.
Louis Raffetto, Analyst
Right. I guess, Victor, one for you. In the press release and on the call, you kind of mentioned these lower efficiencies or lower level of efficiencies due to Exxelia. I guess I'm just trying to understand exactly what that means. Is that just sort of the drop-through of the dilution? Or was there some other level of lower efficiencies as a result of the deal? Did something else happen?
Victor Mendelson, Co-President and President of HEICO's Electronic Technologies Group
Yes, I think it's just the drop-through of the dilution.
Louis Raffetto, Analyst
Okay. Just wanted to make sure that was it. And then just one last one for Carlos. The 2.7x to 2.8x leverage multiple you kind of mentioned and Larry mentioned, to be clear, that's not pro forma, that's just kind of adding the $1.9 billion? I guess, technically, if you kind of give yourself credit for that EBITDA, I think it should be lower, probably under 2.5x. Is that correct?
Carlos Macau, Executive Vice President and CFO
We'll see. I think the net leverage in our model is around $2.8 million. We'll determine how much is outstanding on our line. It will depend on how much debt we pay down between now and closing, but that is our best forecast at this moment.
Operator, Operator
We'll take our next question from Gautam Khanna with TD Cowen.
Gautam Khanna, Analyst
I wanted to ask a couple of questions. First, on the Wencor multiple, you guys are paying for it. Maybe just a little bit of background on the sale process? Like it seems like a fairly low multiple, all things considering. Was it an auction? If you could just describe some of the background to how this acquisition came about?
Laurans Mendelson, Chairman and CEO
First of all, it's a good question. We have known about Wencor for many years and were aware of it. In the past, we attempted to acquire it at much lower prices. There was an auction where we competed with some well-financed private equity groups. We don't believe we paid a low price; in fact, I feel that we paid a high price, much higher than we had really wanted to pay. The auction drove the price up, and we ultimately paid what we consider to be a market price.
Eric Mendelson, Co-President and President of HEICO's Flight Support Group
Yes. We always strive to do right by HEICO shareholders, so we aim to pay the most reasonable price possible. The situation was very competitive with a lot of interest in the company, and we believe that the price we paid was fair for the business. This is a large asset, significantly bigger than anything we've acquired in terms of earnings, personnel, or revenue. Overall, we think it's a very fair price for the business, and we're truly excited about the future. There are great opportunities for our customers, so we believe this will work out well.
Gautam Khanna, Analyst
Could you provide your expectations for earnings accretion in 2024 and possibly in 2025, considering that while it appears accretive on paper, there are amortization and other deal-related expenses to consider?
Carlos Macau, Executive Vice President and CFO
Well, I'll tell you what, I'd be happy to answer that question for you when we close. At the moment, we've signed a deal but we haven't closed it. So I rather not get into forecasting that stuff until we've actually closed on the deal.
Operator, Operator
Thank you for your participation. You may now disconnect.