Q3 2021 HEICO Corp Earnings Call
[music].
Certain statements in today's call will constitute forward looking statements, which are subject to risks uncertainties and contingencies.
This outflow so <unk>.
They differ materially from those expressed in or implied by those forward looking statements as a result, all factors, including the severity.
Neutrals and duration of the COVID-19 pandemic.
Hi, this liquidity and the amount and timing.
High cash generation low rate commercial air travel caused by the COVID-19 pandemic and its aftermath.
Airline fleet changes or airline purchasing decisions, which.
Good costs lowered demand for our goods and services.
Product specific patient cost and.
Our requirements.
When should cause an increase to our costs to complete contracts.
Governmental and regulatory demands.
Export policies and restrictions.
That's shown in defense space or homeland security.
Security spending by U S and or foreign.
All customers or competition from existing and new competitors, which.
Could they do a state.
Which could reduce our sales or ability to introduce new products and services at profitable pricing levels.
Which could reduce our sales or sales growth.
Product development are magnified.
Oren difficulties, which could increase our product development and manufacturing costs and daily sales.
Our ability to make acquisitions and achieve operating synergies from acquired businesses.
Customer credit risk.
Interest foreign currencies exchange and income tax rates.
Economic conditions, including the effects of inflation.
And outside of the aviation defense space medical and telecommunications and electronic industries.
Mitch did negatively impact our costs and revenues and defense spending or budget cuts.
Which could reduce our defense related revenue.
Bart is listening to this call are encouraged to review all of Heico's filings with the Securities and Exchange Commission.
Including but not limited limited to filing on Form 10-K.
Form 10-Q and form 8-K.
We undertake no obligation to public publicly update or revise any forward looking statements.
Whether as a result of new information feed.
Events or otherwise except to the extent required by applicable law.
As we begin the call now I'll turn the call over to Lawrence Mendelsohn.
I guess, chairman and Chief Executive Officer.
Thank you very much.
Good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO third quarter fiscal 'twenty, one earnings announcement teleconference, I'm, Larry Mendelson, Chairman and CEO.
How can 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 CEO.
CEO role.
Before beginning my review of the operating results I'd like to take a moment and recognize all of heico's talented team members for their extraordinarily high performance during the challenging times brought on by COVID-19.
The dedication to Iqos.
<unk> customers and the safety of their fellow team members continues to be exceptional in our opinion.
On behalf of our board of Directors and management I want to thank each and every member of Heico's worldwide team for these efforts and the outstanding results that we are reporting.
Okay.
I will now summarize the highlights of our third quarter and first nine months of fiscal 'twenty one.
We were very pleased to report consolidated operating income and net sales in the third quarter of fiscal 'twenty, one improved 40.
To 11% and 22%, respectively as compared to the third quarter of fiscal 'twenty, which was the quarter in which our operating results were most negatively affected by the pandemic.
Our performance principally reflects quarterly consolidated.
<unk> net sales growth of 17% as well as the favorable impact from our fiscal 2020 one acquisition.
The flight support group reported quarterly increases of 250%.
And 33%.
<unk> operating income and net sales.
<unk> as compared to the third quarter of fiscal 'twenty. These.
These substantial increases principally reflect increased demand for the majority of our commercial aerospace products and services.
Resulting from some recovery in global commercial air travel as compared to the prior year.
In addition, this marks the fourth consecutive quarter of sequential growth in net sales and operating income as the flight support group.
We are very pleased with this trend and we do expect to see it continue.
The electronic technologies group reported quarterly increases of 14, and 11% in net sales and operating income respectively.
As compared to the third.
Quarter of fiscal 'twenty.
These increases principally reflect the impact from our profitable fiscal 2020, one acquisitions as well as strong organic net sales for the majority of our products.
Our total debt to shareholders' equity.
Improved to 17, 4% as of July 31, 21.
That compared to 36, 8% as of October 31 'twenty.
Our net debt.
As total debt less cash and cash equivalents of.
$117.1 million as of July 31, compared to shareholders' equity ratio improved to a very low five 3% as of July 31, 21, and that was down from 16, 6% as.
Tober 31, 'twenty, obviously, we are not a heavily leverage company.
And we have a lot of debt capacity and the ability for acquisition and growth.
Our net debt to EBITDA ratio improve 2.25%.
As of July $31.21.
<unk> from 0.71 times as of October 31 'twenty.
During fiscal 'twenty, one we successfully completed four acquisitions and have no significant debt maturities until fiscal 'twenty four.
Four we plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions of various sizes to accelerate growth and maximize shareholder returns.
Cash flow provided by operating activities was very strong increasing 30.
33% to 124 billion in the third quarter of fiscal 'twenty, one and that was up from $93.1 million in the third quarter of fiscal 'twenty.
Cash flow provided by operating activities remained strong increasing 12% to three.
$334.1 million in the first nine months of fiscal 'twenty, one and that was up from $299 million in the first nine months of fiscal 'twenty.
In July 21, we paid a regular semiannual cash dividend of <unk> <unk> per share.
And this represented our 86 consecutive semiannual cash dividend.
And it was 12, 5% higher than the <unk> <unk> per share cash dividend, we paid in January 'twenty one.
In June 21, we acquired.
Wired 80, 181% of the assets of <unk>.
And the FAA certified part 145 repair station with extensive proprietary FAA designated engineering representative repairs.
The remaining 19.
Sure, 9% interest continues to be owned by certain members of <unk> management team as well as certain members of the management team of an existing HEICO flight support subsidiary <unk> as part of HEICO flight support and we expect the acquisition to be accretive to earnings.
<unk> from the first 12 months following closing.
Earlier this month, we acquired 89% of RIN Ridge engineering, and the <unk> company.
Ridge is a leading a leader in performing tight tolerance machining and brazing.
Within large sized parts in mission critical defense and aerospace applications Becton provides machining fabrication and welding services for aerospace defense and other industrial applications.
The remaining 11% interest continues to be owned by certain.
Members of ridges, and Victor and management team.
These companies are now part of Heico's flight support group and we expect these acquisitions to be accretive to our earnings per share within the first 12 months following closing.
At this time I would like to introduce Eric Mendelson co.
<unk> of HEICO and President of Heico's flight support group and he will discuss the results of the flight support group.
Thank you very much.
To start out by first thanking all of Heico's team members for their incredible dedication and.
And in particular.
Their sacrifice in 2020.
<unk>.
Our shareholders and.
The community at large expect phenomenal results from HEICO and they just automatically think that we're able to pump out these incredible results quarter after quarter, but the truth is that.
All of the businesses that we're in are very competitive businesses and our people have to work incredibly hard and last year. They went through tremendous sacrifices tremendous personal sacrifices and.
In order to help HEICO and looking at the results that we see now today I.
I believe as a result of that hard work and dedication. So I just personally. Thank all of the HEICO team members for everything that they've done to make our company what it is today.
Moving onto the <unk>.
Prepared remarks.
The flight support group's net sales increased 33% to 237.
$7.1 million in the third quarter of fiscal 'twenty, one up from 178.2 million in the third quarter of fiscal 'twenty. The net sales increase in the third quarter of fiscal 'twenty. One is principally from organic growth of 32%. The organic growth is mainly attributable to increased.
Demand for commercial aerospace products across all of our product lines.
The flight support group's net sales were $666.7 million in the first nine months of fiscal 'twenty, one as compared to $731.2 million in the first nine months of fiscal 'twenty.
Net sales decrease.
Kris and the first nine months of fiscal 'twenty, one is principally organic and reflects lower demand for the majority of our commercial aerospace products and services, resulting from a decline in global commercial air travel attributable to the pandemic.
The flight support group's operating income increased.
Increased 250% to $42.1 million in the third quarter of fiscal 'twenty, one up from $12 million in the third quarter of fiscal 'twenty.
The operating income increase in the third quarter of fiscal 'twenty, one principally reflects the previously mentioned net sales growth.
And an improved gross profit margin, mainly due to increased demand for our commercial aviation products. Additionally, we had a decrease in bad debt expense due to certain commercial aviation customers filing for bankruptcy protection in the third quarter of fiscal 'twenty last year as a result.
The Pandemics financial impact the flight support groups operating income was 100 point $103.4 million in the first nine months of fiscal 'twenty, one as compared to $121.6 million in the first nine months of fiscal 'twenty. The operating income decrease in the.
First nine months of fiscal 'twenty, one principally reflects the previously mentioned lower net sales as well as higher performance based compensation expense and the impact from lost fixed cost efficiencies stemming from the pandemic, partially offset by a decrease in bad debt.
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Yes.
The flight support group's operating margin improved to 17, 7% in the third quarter of fiscal 'twenty, one up from six 7% in the third quarter of fiscal 'twenty. The operating margin increase in the third quarter of fiscal.
Fiscal 'twenty one principally reflects the previously mentioned increase in net sales improved gross profit margin and lower bad debt expense.
The flight support group's operating margin was 15, 5% in the first nine months of fiscal 'twenty, one as compared to 16, 6% in the first nine.
Months of fiscal 'twenty.
The operating margin decrease in the first nine months of fiscal 'twenty, one principally reflects an increase in SG&A expenses as a percentage of net sales mainly from the previously mentioned higher performance based compensation expense.
Cost fixed cost efficiencies.
Partly offset by the previously mentioned lower bad debt expense.
Now I'd like to introduce Victor Mendelson co president of HEICO, and President of Heico's Electronic technologies group to discuss the results of the electronic technologies group.
Thank you.
And first let me say.
<unk>.
All of heico's, remarkably talented and dedicated team members.
Who delivered yet again on behalf of each other on behalf of our customers and on behalf of our fellow shareholders. This quarter as you did throughout 2020 and throughout this year in.
And frankly before.
And as you do in both good times and in challenging times, we are truly grateful for what you do and how you do it and thank you to all of our team members.
The electronic technologies group's net sales increased 14% to 230.
$9.5 million in the third quarter of fiscal 'twenty, one up from $210.9 million in the third quarter of fiscal 'twenty.
The net sales increase in the third quarter of fiscal 'twenty, one principally resulted from our fiscal 2020, one acquisitions as well as organic growth of 5% the oral.
Growth principally reflects increased demand from our other electronic defense medical and commercial aerospace products, partially offset by decreased commercial space net sales as we've historically noted commercial space revenue recognitions tends to be uneven through.
Through the quarters due to factors like.
606, accounting and periodic shifting our production resources between commercial and defense space work.
Which occurred this quarter and saw total space activity overall.
In line with our expectations importantly, aerospace orders remain healthy.
The electronic technologies group's net sales increased 11% to a record $706.2 million in the first nine months of fiscal 'twenty, one up from 600.
$38.3 million in the first nine months of fiscal 'twenty.
A net sales increase in the first nine months of fiscal.
'twenty, one principally reflects our fiscal 2020, one acquisitions as well as organic growth of 2% the organic growth principally reflects decreased demand for our other electronic and defense products, partially offset by lower commercial aerospace and commercial space product sales.
The electronic technologies group's operating income increased 11% to $69 million in the third quarter fiscal 'twenty, one up from $61.9 million in the third quarter of fiscal 'twenty.
The operating income increase in the third quarter fiscal 'twenty, one principally reflects the previously mentioned net sales.
Partially offset by a slightly lower gross profit margin mainly from the commercial space.
Products net sales decrease the electronic technologies group's operating income increased 8% to a record $204 million.
In the first nine months of physical.
Sales grew 21 up from $184.9 million in the first nine months of fiscal 'twenty. The operating income increase in the first nine months of fiscal 'twenty. One principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin mainly from a less favorable product mix.
For defense products, and the lower commercial space products net sales, which in turn was partially offset by an increase in net sales of other electronic products.
The electronic technologies groups operating margin was 28, 8% in the third quarter fiscal 'twenty, one as compared to $29.
Fiscal 2% in the third quarter of fiscal 'twenty. The electronic technologies group's operating margin was 28, 4% in the first nine months of fiscal 'twenty, one as compared to 29% in the first nine months of fiscal 'twenty. The current year's third quarter and nine months margins are within the anticipated range I frequently.
We discussed on these calls and remain excellent overall margins of which we and our team members are very crowd.
The operating margin change in the third quarter and nine months of fiscal 'twenty. One principally reflects the previously mentioned gross profit margin effects from the Prairie Artic commercial space sales shift.
I turn the call back over to Larry Mendelson.
Thank you Victor and Eric.
Moving on to earnings per share.
Consolidated net income per diluted share increased 40% to 56 cents in the third quarter of fiscal 'twenty, one and that.
<unk> 40 in the third quarter of fiscal 'twenty the increase in the third quarter of fiscal 'twenty. One principally reflects previously mentioned higher operating income at both operating segments.
Consolidated net income per diluted share was $1.58 in the first nine months of fiscal 'twenty one.
It was up and that compares to $1.83 in the first nine months of fiscal 'twenty. The decrease in the first nine months of fiscal 'twenty, one principally reflects higher income tax expense and lower operating income of flight support partially offset by higher operating income of the electronic.
One allergies group.
Depreciation and amortization expense totaled $22.9 million in the third quarter of fiscal 'twenty, one and that was up slightly from $21.9 million in the third quarter of fiscal 'twenty and totaled $68.8 million in the first nine months.
Technical 'twenty, one and that was up from $65.2 million in the first nine months of fiscal 'twenty.
The increase in the third quarter and first nine months of fiscal 'twenty, one principally reflects the incremental impact from our fiscal 2020 one acquisition.
Research and development expense increased to $18 million or three 8% of net sales in the third quarter of fiscal 'twenty, one and that was up from $15.1 million or three 9% of net sales in the third quarter of fiscal 'twenty.
R&D expense increased to 52.
$2 million or three 8% of net sales in the first nine months of fiscal 'twenty one.
And that was up from 49 million or three 6% of net sales in the first nine months of fiscal 'twenty.
As usual significant ongoing new product development efforts are.
Pointing at both <unk> and flight support.
Our consolidated SG&A expenses with $83.9 million in the third quarter fiscal 'twenty, one and that compared to $75 million in the third quarter of fiscal 'twenty.
Continue the increase in consolidated SG&A expense in the third quarter of fiscal 'twenty, one principally reflects higher performance base.
Compensation expense higher other SG&A expense and the impact from our fiscal 2020 one acquisitions.
Partially offset by lower bad debt expense.
Consolidated SG&A expenses were $245 million 1 million in the first nine months of fiscal 'twenty, one and that compared to $232.8 million in the first nine months of fiscal 'twenty.
<unk>.
The increase in consolidated SG&A expenses in the first nine months of fiscal 'twenty, one principally reflects higher performance based compensation expense and the impact from our fiscal 2020, one acquisitions and partially offset by reductions in bad.
That expense and other SG&A expense.
The company's lower bad debt expense in the first nine months and third quarter of fiscal 'twenty one <unk>.
It reflects higher bad debt expense in the first nine months and third quarter of fiscal 'twenty.
And that was due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during the third quarter of fiscal 'twenty as a result of the pandemic financial impact.
<unk> SG&A expense as a percentage of net.
Net sales decreased to 17, 8% in the third quarter fiscal 'twenty, one and that was down from 19, 4% in the third quarter of fiscal 'twenty.
The decrease in consolidated SG&A expense as a percentage of net sales in the third quarter of fiscal 'twenty.
One principally reflects lower bad debt expense as well as efficiencies gained from the previously mentioned net sales growth, partially offset by higher performance based compensation.
Consolidated SG&A expense as a percentage of net sales.
Was 18, 1% in the first nine months of fiscal 'twenty, one and that compared to 17, 1% in the first nine months of fiscal 'twenty.
The increase in consolidated SG&A expense as a percentage of net sales in the first nine months of fiscal 'twenty one.
Principally.
It reflects higher performance based compensation expense.
<unk> offset by lower bad debt expense.
Interest expense decreased to $1.7 million in the third quarter of fiscal 'twenty, one and that was down from $2.
$6 million in the third quarter of fiscal 'twenty. The decrease was principally due to lower weighted average balance on borrowings outstanding under our revolving credit facility.
And interest expense decreased to $6.2 million in the first nine months of fiscal 'twenty, one down from $10 six.
<unk> in the first nine months of fiscal 'twenty.
That decrease was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.
Other income in the first nine months and third quarter was not significant.
Our effective tax rate was 15, 7% in the third quarter of fiscal 'twenty one.
That was up from 13, 4% in the third quarter of fiscal 'twenty.
The increase principally reflects a larger deep duction related to foreign derived.
And tangible income principally resulting from final tax regulations that were issued in the third quarter of fiscal 'twenty.
Sure.
Our effective tax rate in the first nine months of fiscal 'twenty, one was 13, 3% and that compared to three.
5% in the first nine months of fiscal 'twenty.
As previously discussed in a prior quarterly teleconference, HEICO recognized a larger discrete tax benefit from stock option exercises in the first quarter of fiscal 'twenty compared.
<unk> to fiscal 'twenty one.
And that accounted for the majority of the increase in the year to date effective tax rate.
In addition, our effective tax rate in the first nine months of fiscal 'twenty, one reflects the favorable impact of higher tax exempt.
<unk> gains in the cash surrender value of life insurance policies related to the HEICO Corporation leadership compensation plan.
Yeah.
Net income attributable to Noncontrolling interest was six.
<unk> $8 million in the third quarter fiscal 'twenty, one and that compared to $3.2 million in the third quarter of fiscal 'twenty net.
Net income attributable to Noncontrolling interest was $18.2 million for the first nine months of fiscal 'twenty, one and that compared to $16 six.
Six points in the first nine months of fiscal 'twenty.
The increase in net income attributable to Noncontrolling interest in both the third quarter fiscal 'twenty, one and the first nine months of fiscal 'twenty, one principally reflects higher allocation of net income to noncontrolling interest.
<unk> as a result of certain fiscal 'twenty acquisitions.
And an increase in the operating results of certain subsidiaries of flight support and Atg in which noncontrolling interests are held.
For the full fiscal 'twenty, one year, we now estimate.
They made a combined effective tax rate and noncontrolling interest rate.
<unk> 22, and 23% of pretax income.
Our day sales.
<unk> outstanding of receivables improved.
<unk> 41 days as of July 2031, 21, and that was down from 43 days as of July 31 'twenty.
Of course, we monitor all receivable collection efforts in order to limit credit exposure.
No one customer accounted for more than.
<unk>, 2% of net sales and our top five customers represented approximately 22% and 25% of consolidated net sales in the third quarter of fiscal 'twenty, one 'twenty respectively.
Our inventory turnover rate improved.
<unk> hundred 50 days for the period, ending July $31, 21, and that compared to 154 days for the period ending July 31 'twenty.
Now for the outlook.
Looking ahead to the remainder of fiscal 'twenty, one and to fiscal 'twenty two.
We remain cautiously optimistic that the ongoing worldwide rollout of COVID-19, vaccines will positively influence commercial air travel and will benefit the markets we serve.
But as we have all learned it is difficult to predict the pandemics path and effects.
Including factors like vaccination rates, new variance, which can impact our key markets.
Therefore, we feel it would not be responsible to provide fiscal 'twenty, one net sales and earnings guidance at this time.
Nor for 'twenty two.
However, our ongoing conservative policies.
<unk> strong balance sheet high degree of liquidity enable us to invest in new R&D.
Execute on our successful acquisition program and position HEICO for market share gains as the industry recovers.
Covers.
Without their unwavering passion to exceed customer expectation, our outstanding quarterly results would not be possible. Thank you for.
I'm, making HEICO, such an excellent and unique company I also want to thank our loyal shareholder base.
That recognizes that the future.
Believes as we do that the future is very bright and continue to hold our shares and support our efforts.
Thank you and now I'd like to open the floor for questions.
At this time I would like to remind everyone in order to ask a question you May Press Star then the number one on your telephone keypad.
Again, its star one on your telephone keypad.
Well, possibly get some momentum.
The Q&A roster.
Your first question comes from the line of Larry Solow from CJS Securities. Your line is open. Please ask your question.
Great. Good morning, guys and thanks for taking the questions first question Larry and.
Perhaps for you just on a more macro temperature checks.
Sounds like you know, obviously, we realize it very fluid situation with Covid and all but.
Just what are you guys seeing you know obviously, we saw a nice large improvement in commercial travel in the first six months a year and now we're sort of stabilizing down about 20%.
Hum.
I have just driven any changes in customer behavior order trends and.
More importantly, the path to full recovery seems like it's totaled up in the air but do you still kind of think you can get back to 19 level sort of at some time, maybe perhaps towards the end of calendar 'twenty two it's particularly in <unk>.
In our commercial aviation.
So Larry.
That's a very difficult question to ask it's like asking a fortune teller, what's in my future. So.
So difficult because things like the new Delta version of Covid pop up all of a sudden we were honest.
St.
Restaurants are pulling back.
People are saying well you know hesitating and so forth my personal opinion is that we will continue to grow.
Through the remainder of 'twenty I'm talking about flight support.
Of course, it will grow through the remainder.
<unk> 21, and certainly into 'twenty two.
Again, we're cautious because.
What is going to happen with the other shoe drop.
Assuming assuming that we don't have another shoe dropping in another.
Version of Covid or some other unusual event.
Yes.
Or are the afghanis attacking Mr Biden or something but yes.
Yes.
Things are kind of normal.
I see continued.
<unk> strength and growth in our markets, but to go out on a limb and predicted Intel.
Sure haul, we're definitely going to do it that's just not been our style, we don't hate the stock we try our best but.
A very positive outlook.
I can't.
Based upon what I see.
You are very positive, but could something else happened, yes, I'd like.
To add to that if you don't mind.
Hi, Larry good morning.
Eric I'm not so great great question, and something we spend a lot of time talking about Ah I spent a lot of the last two weeks with our aftermarket leadership in sales and marketing folks.
Understanding what they're seeing and what their plans are and I can tell you that they're all very optimistic and I believe that we are not I believe we are continuing to take market share we're doing very well in all of our businesses in the aftermarket I feel that.
Since.
We were able to hang on to a greater percentage of our people than our competitors that we are very well positioned for the recovery.
Specifically to answer your question across the board no we have not seen a drop in business as a result of the delta variance thus far.
Okay.
The Americas in general has been strong Europe never saw really the recovery in Asia ex China Hasnt seen the recovery. So I think that we've got a lot of wind to our backs and I think a lot of.
Increased demand.
To help drive the continued to drive the sales higher having said that if you look at what's going on with the Delta variant in the United States I think it's inevitable that there'll be a little bit of a pullback here I think people are.
Continuing to travel for personal travel as well as for business meetings, I think where travel.
Travel is being clipped us into larger conventions larger group meetings, so I don't.
We haven't seen it.
It would be logical for it.
To temper back a little bit of course, there is normally a little bit of a fall pullback anyway, but again since we haven't seen the rebound in Europe, nor Asia ex China, I think that we've got a lot of very good potential there.
So I remain very optimistic as far.
When do we get back to the 19 levels.
I certainly hope that by the end of 'twenty two we are back at.
At the 19.
19 levels. However that is not to say that 'twenty two will equal 19, because it's going to take a while to get.
At those levels. So I think consensus in the industry is that 2023 should.
Overall for full year equaled 19, and remember our 2023 starts November one 2022 or so.
I'm pretty optimistic on how we're doing.
So.
We feel good notwithstanding the recent news flow.
Alright.
Great that color and then maybe just switching gears real fast quick question for Victor.
I know you guys don't give specifics on particular acquisitions, but it does look like the ridge engineering.
Get back between group I guess thats two separate purchases kind of combine it looks like it's a little bit larger than some of your smaller ones to date.
That's sort of part of the question in part D. It looks like there you don't have manufacturing expertise. So perhaps there is some.
Cross selling opportunities using their technology or their expertise.
Expertise capabilities.
Other businesses as well as a true.
Well yeah.
Larry This is Victor So of course, you know that as you know as part of the flight support group being.
Our mechanical manufacturing business of metals.
Based manufacturing business.
And there is some opportunity.
For cross selling with some of the things that the ETE G does.
I don't think it's going to be a tremendous needle mover, but but there is some opportunity there and we will explore those as we get a little further down the road in a.
A little more time passes.
Got it okay, great. Thank you guys appreciate it you're welcome thanks Larry.
Your next question comes from the lineup Josh Sullivan. Your line is open. Please ask your question.
Hey, good morning, good morning, Josh.
HEICO has always been.
Thought of as a leader in the PMA market, but curious of your thoughts on the <unk> market.
It <unk> part of any larger opportunity in the E. R or just what are some of the dynamics youre seeing in that market.
Yes, Josh it's a great question I think something that a lot of people often overlook.
But yes.
Yes Heiko.
We believe is the largest independent.
Repair and overhaul group focusing on the components market in the world and when we say independent non OEM non airline non government affiliated and a key part of that strategy is.
Using the <unk> repairs and when we combine that with the opportunity to use certain PMA parts I think it results in an unbeatable combination.
I can tell you that the pride.
We operate a very decentralized business, where we've got businesses that focus on specific product.
<unk> and camp chronic is particularly good in a number of the products that it does and it does have <unk> I think we've got the ability to develop more <unk>.
And I think we're going to do very well because we offer it as a full suite not just walking.
Going in and offering a single <unk> offering lots of different <unk>. So, yes, I think thats fair.
And an important part of the strategy.
Long with the PMA.
Okay.
And then just thinking about the bad debt expense exposure at this point.
Last year, obviously was a very tough time for the airlines, but as the government support tapers off going forward.
What do you think about your airline partners financial position just kind of broadly speaking I mean do you think the bad debt expenses are behind us or do you think that.
We should just be cognizant going forward.
I think the distresses behind Us frankly.
I feel good about where they are and I can tell you looking at some of the order patterns in some of the stuff that they're ordering from us that they had never bought from us before.
Leads me to believe that.
<unk> is going to continue to take.
Sure as they've got to focus on cost.
As he goes treated them very well through these crises, but I really think the airline distress is behind us.
Okay. Thank you.
Gil.
Your next question comes from the line of feature Armen from Baird.
Market's open please ask your question.
Yes, good morning, Larry and Victor Carlos.
Hey.
Eric maybe just to start with you on and can you maybe just give us a little more color on kind of what you just mentioned on order rates and FSD regarding kind of your kind of where early on calling the end of the kind of destocking and we saw.
You know I guess surprisingly, 16% sequential growth last quarter, but just 3%. This quarter, maybe you could talk maybe a little bit about the cadence of what you're seeing.
Sure I, you know I mentioned in the call.
In the second quarter call three months ago that the 16% really surprised us and we were frankly shocked.
Sorry, it's so strong.
I cautioned everybody at that time that I didn't see that continuing.
And sure enough that didn't continue at that 16% rate, but look I'm.
Very happy that we held the ground.
When you go up 16% off and you can cut back trimmed back.
I was happy that we were able to post 3% above what was off the charts numbers.
<unk>.
In hindsight.
Would it have looked good to have.
10% growth in the 10% growth, yes, but that's not how we manage it.
I can.
To see the airlines with whom we deal are very optimistic and I have never spoken to our sales force before and seen them. So positive and optimistic now part of that is due to us gaining market share in.
In the PMA and the <unk> as well as the distribution area.
So heiko is doing.
Very well because we were financially strong through the crisis, we held on to a much larger percentage of our workforce than our competitors. So I think we're starting to.
Reap those benefits.
Very hard to figure out quarter over quarter increases.
Again the other.
The focus and the other point I want to make is that our businesses are focused on profitability and if you see the profitability and the margin it far outpace the sales increase.
We evaluate businesses.
On cash flow and profitability sales is sort of irrelevant as a matter of fact, if you have a lot of sales and not profitability. That's not a good thing at HEICO. So because we don't want to tie up capital in that we'd rather.
Invest capital in something that's going to produce income so I'm.
Overjoy.
Frankly with the earnings that we've been able to put out.
While delivering very good savings to the customers.
And I think that.
In North America.
There's got to be some sort of impact on <unk>.
<unk> schedules, but.
I think it's going to be at the margins and again, Europe and Asia ex China Hasnt experienced the return so I think we've got far more upside in those areas than we do in some.
Little potential risk in the United States I got to say are the major operators in the United States.
All without exception very optimistic and they want to make sure that theyre going to get product and everybody is nervous about supply chain shortages. I mean, there were articles in the journal today about China, and not being able to not that we get our parts from China, but not being able to.
<unk>.
Get enough labor for their factories.
<unk> as well as.
Covid in Vietnam, and all sorts of supply chain challenges. So I think we're going to be pretty aggressive and leave those parts on order. So we're.
We're feeling good yes.
So just just to follow up on that so we're not really seeing kind of a restocking yet on the shelves yet for.
Sure.
Just.
In terms of the transition from out of the end of the Destocking.
You're sort of.
You're in a more normalized rate kind of matching overall flight activity, we haven't seen kind of a restocking apart yeah I would say that is correct, but I think in hindsight some of the second quarter.
Sure.
They have been a little bit of a restocking for certain customers no theres not wholesale restocking going on but in in the Americas. The North America I think the airlines want to make sure that they've got enough parts on the shelf so.
<unk>.
You know maybe there has been a little bit there was a little bit of that in the second quarter, but.
Not to the full extent that we would anticipate.
Okay understood and just a follow up quick one I'm Carlos just the cash generation continues to be really impressive maybe you could just talk a little bit about expectations around the working capital.
From here is there a potential for a little bit of a headwind as demand starts to pick up as we kind of go into next year building any inventory or anything Peter.
Peter Thanks for the question I was feeling I was feeling lonely over here in the corner.
Working capital.
Capital management, and our subsidiaries is fantastic and I expect that to continue.
<unk>.
We went through.
What I'll call challenging times over the last year dealing with Covid and the focus by our subsidiaries on cost management without.
Penalizing the Labor force just looking for efficiencies in doing.
Most lean things.
Things they could has been extraordinary and I think that will continue so I don't expect.
I don't expect big changes in the pattern, you're seeing now as sales pick up we will have a an investment in receivables that will happen I think our inventories at the right levels right now so.
The only change I could see as an investment in receivables, but I do.
You can take catalyst and news flow for this year.
I appreciate all the color thanks Peter.
Peter.
Your next question comes from the line of Michael Sure Molly from truly Securities. Your line is open piece ask your question.
Hey, good morning, guys. Thanks for taking the questions here.
I don't know, Eric or Carlos maybe just to put a finer point on this.
This quarter I guess, there is normally a little bit slower in general coming off the the heavy foreign season, we've seen this pick up in the Delta here and I guess, you're not going to give guidance, but if I look at that.
<unk> sequential growth.
Growth Street, Scott you guys are 13% into the fourth quarter I mean, given what we're seeing.
Softer as you already telegraphed last quarter Eric.
That 16 wasn't sustainable but is that is that too heavy or do you guys have orders and kind of confirmation that youll see a step up in sequential growth.
Into this current quarter, we're in now.
Michael This is Carlos.
The answer the first part of that maybe Eric will have a follow up.
Because of the uncertainties, we're seeing in the marketplace.
Is that the order patterns as the Delta virus variants kicked off so that's why we didn't give guidance. So I don't want to comment on 13%, 20% 5%.
We really don't know I can tell you that I think in general the sales will continue to trend up we've said.
Consistently for quite some time that we think it's more of a linear.
Chairman upward that's why we were surprised in Q2 with the growth in SSG.
We will continue this pace back up to 2019 levels towards the end of 'twenty two on a trailing 12 at the end of the year and I think that's what people should expect anything above that will be gravy and will make us all happy, but we're not we're not expecting.
Pattern, lumpiness and the patterns quarter by quarter more of a just a linear progression up yes, I think thats great.
Very accurate response Carlos.
The only thing that I would add.
And also.
What you are.
Bringing.
Back there as well as some of the prior questions.
Is that.
It's very difficult to predict when the restocking is going to occur.
We don't believe that we've seen much restocking to date, because our ALG orders had been fairly strong.
So.
If people are needing parts right away they don't have them on the shelf.
So that leads me to believe that there is a lot of pent up demand yet to come and I keep on mentioning from Europe and Asia ex China.
So, but it's Mike it's really hard to predict.
So when when it's going to hit.
As you know, we get roughly 70% of our orders in the month of ship. So I really don't have we don't have visibility to be able to see that we know that we are winning market share. We know we're developing products, we know that our people.
Our more pumped up than ever and so I think that we're going to do exceptionally well and people will continue to provide I am sure you're you've been buying everyone's itching to fly.
And when that occurs.
Hard to.
<unk> is very hard to predict.
<unk>.
Got it.
Yes.
Yeah got it that's fair what about are you getting any indications Eric.
Eric either from your people or from Airlines I mean, we've been talking about maybe windisch restocking happen, but presumably the bulk of your demand right now coming from narrow bodies.
<unk> I mean should we expect assuming vaccination.
Continue to happen here and knock on wood, maybe international travel starts to really recover.
Is there an expectation from you guys that maybe we get a little bit of a bow wave of activity to support some of the wide bodies out there in the fleet that presumably are still.
Very much underutilized in terms of.
Daily utilization flight activity as that starts to pick up.
Yes, I think that will start.
But frankly, the wide body is really going to be more trends oceanic traffic.
And my guess is that recovery is shifted more to the right.
And probably in getting prepared for next summer My senses next summer is going to be very strong.
It's interesting when I look at our Asian facility.
The vaccination rate.
Somewhere between 90, and 100% or people are vaccinated at least with one with one shot and we've been very careful in how we're operating but where we're doing quite well out there.
Which leads me to believe that there is going to be a big surge in travel people are going to want to go to Europe to Asia.
They're going to want to come here.
Think wide body.
The spring is wide body demand for parts is going to <unk>.
Dart.
Start taking off and it will be delayed just like the narrow body was but.
It's going to be there so.
Is I still feel good about it.
Got it Okay, maybe just one last one for Carlos.
The SSG operating margins.
Very strong sequential growth I think 3% revenue growth, 18% operating growth great leverage there really high sequential.
Incremental margins I mean can that.
Can that sort of margin expansion continue should we be thinking about costs starting to be layered back in that topline continues to ramp or how.
How should we calibrate ourselves for margin expansion and cadence going forward.
The best way Michael for you to look at that is is trend the operating margin up with the revenue growth I mean, we ultimately expect the flight support group get back 20% GAAP operating margins.
And I think if you can trend that upwards with your model on revenue growth youre going to Youre going.
I think too much in line with at least our expectations at this point.
As we rebounded and as I've mentioned in prior calls you know the.
The incremental margins can be a little higher than our decrements, because you have things like product flying off the shelf as opposed to manufacturing right. So you can get you can get a bigger.
To be part of the incremental dollar than on the downside and so we saw that this quarter, but I wouldn't I wouldn't assume a massive leap in our Oi margin I would trend it with.
With sales growth and get get get your model back to around 20% and then at that point I think what will happen is we'll react similar to.
Have we have in the past you'll have just incremental bump ups in the margin as time passes through efficiencies and growth in sales.
Perfect. Thanks.
Thanks, guys I'll jump back in the queue.
Your next question comes from the line up Sheila <unk> your.
Your line is.
Banking please ask your question.
Good morning, guys. Thank you for that time.
I'll start with Navy T G I.
Sir I don't want you to feel left out so well.
What's kind of going on in Atg organic growth was pretty good up by brand it an easy comp.
You've seen a lot of suppliers really decelerate in their defense.
Okay. So maybe if you could talk about what youre seeing in defense and space because they believe it accounts for 60% of the sales.
What's going on and should we expect any air pockets.
Hi, Sheila this is victor.
I would say that overall.
And then the businesses as.
As we pointed out in the numbers it was pretty.
Pretty much firing on just about all cylinders this quarter.
That's the outlook I think is pretty healthy.
Not every business is as strong as is the other businesses I think we've said over time we.
We expect defense to flatten out at the very least with the budgets I mean, the budget is not resolved as you know.
And.
So we would expect that to be the case going forward.
I would expect space to be strong.
We think our.
Other markets right now should continue overall to be strong of course, that's predicated on what happens in the overall economy and with the viruses, but right now what we see is general strength and recovery as well in our commercial aviation markets.
And.
And when I refer to space I prefer.
Generally the commercial space, but also our defense space.
And I think we'll just have to see where defense plays out over time, we tend not to just look quarter to quarter as you know.
In defense I think we've constructed the business pretty well too.
To avoid the operations tempo or though we're.
Not free from that.
And we've always tried to stay more focused on the.
Higher technology rooms that are.
<unk>.
Not so much involved with.
The engagements that are countries involved in that.
And Bob Moore.
More involved with intelligence surveillance reconnaissance.
To a certain extent standoff warfare and things like that.
And that generally tends not to be as volatile.
We'll have to see how that plays out but that's been the strategy.
Okay.
Certainly fall color and then Larry for you your favorite topic I think you guys raised your dividend.
And you also did three acquisitions within SSG over the last two months. So kind of what are you seeing in the market whether its for M&A or using your balance sheet and just given recent deals with Mega and.
And then how do you guys approach.
What is the rationale estimate for synergies as a percentage of sales like how do you guys see that just your overall thoughts on the market.
But I think overall, we are looking at quite a large number of transactions we're doing due diligence.
Parker on them.
Some of these big transactions, specifically, you mentioned that trends Diamond Parker.
With regard to <unk>.
<unk>.
I think that both of them are paying very high prices for that we.
And so that we model.
Dozens of public companies to see what they might look like combined with HEICO.
<unk>.
They are.
We think they are paying a very high price, but they also feel that they can get great synergies and I would say that.
Look they're both very good companies and I assume that they know what they're doing so that's probably richer than our blood could stand but.
I wish them, good luck and success in those acquisitions.
We are looking at a large number of companies we certainly.
We have the balance sheet and the capacity.
To do large transactions and where.
Our nature is to be more conservative and of course, then trans time, which which you know.
And our model is a little bit different than trans time, but I think we are seeing a lot of operators.
Opportunity.
And we're working on it so.
Problem is a lot of private equity and other money is very cheap.
People are pushing up I think there is a basic inflation in the.
The M&A world.
People are paying very high.
High prices and we are a little bit conservative on that and also because our model is a decentralized model. We don't go in and clean house with an acquisition and throw people out of jobs and all that kind of stuff.
So again, we have to be.
A little bit careful in how we do things, but I think there are enough transactions at potential transactions out there that will enable us to.
Close on our fair share of what's available so.
Im cautiously optimistic I think it's with.
It will be sort of business as usual it is harder because we are competing.
With a lot of people with a lot of cash in our pocket and it's burning a hole in their pocket.
We probably.
Won't be as aggressive as those people, but that is just our style and it's worked for 30.
One years so.
We will.
We will continue pretty much the way we are.
Awesome well, thank you for the color.
Okay.
Your next question comes from the lineup Gautam Khanna from Cowen. Your line is open. Please ask your question.
Hi, good morning.
Guys. Good morning morning.
Hey, I had a couple of questions.
<unk> G I was curious about.
Sequential trend within the quarter. So it was like the exit rate in July.
In July where they substantially different than that of the preceding two month.
Was there any sort of fits and starts you saw through the quarter anything you could.
Talk about just within the quarter and what the trend was.
No not I've got them. If there are no I wouldn't say that we saw any real particular trends within the quarter.
Just sort of <unk>.
Gradual.
<unk> upward shift.
But no nothing nothing that really stands out.
Okay, and then within the segment of SSG, we have the three major sub segments.
Any major differences between the three.
<unk> specialized products repairs.
The aftermarket parts and services.
Gordon This is Carlos how are you.
Great. Thank you.
The repair group was quite strong in Q3.
By the way we expected.
But it performed quite nicely it.
Had it really really done a good job parts and repair was way up and again, we expected that.
I don't want to.
Harp on this too much but the laggard if you would the lowest growing part of the segment was specialty products and again we.
We kind of anticipate.
Anticipating that the OEM cycle is a little softer than the aftermarket. So we anticipate that but it's growing nicely and we're happy with its performance and Youll see the breakout if you look at our we will file our quarter on.
Thursday, so you'll be able to see the trend in the sales by by those two areas.
Okay.
This is Eric that S. Why as Carlos just pointed out with the specialty.
Specialty products sort of growing the least out of the group or the smallest percentage.
That's why we've got a lot of confidence that when that.
That recovers that we're.
We're going to have a nice rebound there because we haven't seen that yet.
We've seen some but not not to the full extent.
That makes sense.
Victor I was just curious within the Atg group.
It's not all defense Aero Defense and then there is other.
Industrial markets medical whatever I was curious.
Anything you could speak about the.
The non defense the non aero businesses within EDG, and how how they trended in the quarter and what visibility looks like.
And in the upcoming quarters. Thank you sure Gautam This is victor.
Those businesses have been very strong and actually gaining momentum throughout the year.
And.
We've seen strong demand.
And.
They are not without supply chain challenges in fact book, but we have never been in one of the.
The just in time inventory companies.
In our own policies. So we haven't really had to contain much with with those challenges.
Dissipate that as the year wears on we might see some here and there.
But we've been able to navigate those very successfully.
And.
I think thats, a sign frankly that we might encounter a little more of those in the noise level.
That demand is just very very strong there and it doesn't seem to be subsiding.
And that's across the board in the various <unk>.
Markets.
<unk> serve it's not just limited to.
Two one individual market, let's say so right now we're very pleased with how those businesses are proceeding.
And.
We've seen a nice recovery as well.
In some of the medical product and markets that.
That we serve.
That had been affected of course by the pandemic.
An improvement in demand there.
Obviously as procedures were put on hold.
In the middle early part of 2020.
Those are those recoveries have been good for us as well so.
Those those.
We serve.
Those feel pretty good for us too.
Okay. Thank you Victor and then Larry for you I'll ask last one for me.
Just wanted to ask about.
Your comments on the.
Parker people paying high prices and all of that I am curious.
Is there any larger.
Those actions.
The actions you guys are looking at or is the pipeline today kind of sales with more of a typical HEICO acquisition profile midsize small sized tuck ins or.
Is there an opportunity here to kind of how the cycle is still early.
Go bigger is that something.
<unk> you guys are keen to do or anything you can say about that would be helpful.
So the answer is yes, we are looking as I mentioned earlier.
<unk>.
In this call.
We are looking at larger companies.
Sometimes we can't.
The numbers work at least.
Our decentralized operation.
Where we don't go in and cut and do those types of things.
So, but we are looking at larger companies and standard companies of all size companies.
And we run models consistently our M&A people.
People.
In addition to investment banking people who call us.
Every virtually every day.
To look at this possibility and this possibility so we certainly have.
The financial ability to do large transactions.
In the multibillion.
Dollar size.
And.
Our balance sheet is pristine that you know that and we are trying our very best to the idea that we have is not to grow because of size topline biggest sales company, but to be the most profitable.
Company that generates the most cash so to US an acquisition is really all about cash yes earnings per share and so forth, but for example on these calls what we haven't focused on.
Is and I'm sure that many many people on the call analyst and investors.
<unk> focus on cash I know that because when we have.
One on one conferences conversations that's what they talk about so in my opinion running HEICO managing Heiko, it's all about what the EBIT a looks like and what is the.
Cash flow looking like and that's the critical factor. So when we make an acquisition. It's all about cash flow return on our investment not to become the biggest company in aerospace or electronics or anything else. So that's what we really focus on them and we find if you really do.
We find that.
On medium sized acquisitions at the right price and the right company, we can generate as much or more cash than we can generate on very large companies.
This is a map, but be assured that Carlos Eric Victor me.
Our M&A.
Hey, guys. We're looking at this virtually 24 seven.
So again, it's all different sizes, but the bottom line to US is number one cash flow to earnings per share.
Cause if we have cash flow, we'll have earnings per share, but if we have earnings per share.
We might be heavily leveraged and we won't have cash flow that's a possibility as you know.
We've put that all into the model and we try to figure out what is the best.
Total overall result for HEICO for an acquisition, but yes, we're looking at all sizes.
Okay. Thank you guys.
Your next question comes from the line of Norwalk pulp went up from Goldman Sachs. Your line is open. Please ask your question.
Hi, good morning, everybody good morning.
So in the aerospace aftermarket.
I'm hearing.
Hearing you say.
No major sequential change month by month through the quarter.
I'm hearing you say that airlines are generally still sort of you know.
Concerned about not being ready for a recovery.
Opposed to it being incrementally worried about Covid and I'm hearing you say.
Do you expect <unk> revenue up sequentially and that's with with a month under your belt and then also appear that usually transitions a little bit the business from leisure.
And so I guess I guess, there's a little maybe less of a question and more of us making sure I have the summary, correct because we've heard some other companies say that.
The exit rate of the June quarter was worse than the entry rate and suggest that airlines have gone on a little bit of a pause in aftermarket purchasing activity because they are worried about delta variant.
Just wanted to confirm that I have it correct that you are not really seeing it that way that you've seen domestic.
Domestic leisure strong international business week.
<unk> and Delta just kind of keeps it there for the time being.
And youre not seeing really incremental weakness that you are concerned with in your aerospace aftermarket business.
Hi, Eric.
A lot of information in there.
But basically I would agree with what you said.
With just one little caveat on the international side I don't think its only business I think it's a lot of.
Leisure travel as well that international Hasnt picked up from my comment was more overall that I think international has got good potential to go up number one and number two.
Europe, Hasnt recovered and Asia ex China has not recovered.
I would say, yes, but that was all true pre delta variant.
So I guess, what I'm, saying is it sounds like your summary is that the Delta variant of COVID-19 has not really significantly change the trend line in your aerospace.
The aftermarket business for now.
For now that is correct.
That is correct.
As to comment on what I thought would come down the road and since Europe, Hasnt recovered Asia ex China hasn't recovered of course.
The OEM cycle is building and.
And we've got significant market share gain.
I answered the way that I did.
Yes.
No look I think it's possible that HEICO does a bit better than other companies because of these various.
Points that we just spoke about.
And.
But obviously, it's very difficult to anticipate.
Specifically, what the fourth quarter is going to be yes, we do have youre right. We've got three and a half weeks under our belt, but I don't have full numbers for August yet, we never know what the subsidiaries.
These are going to do until they post those numbers. So I won't know until basically September 1st what the month looks like.
And it's very difficult to predict because we've seen our guys tend to be fairly conservative.
So the trend tends to be right before.
End of the month, they're always way low and they end up coming in higher.
Until I see that.
No.
I don't know what it is I mean, I would caution against being too aggressive for the fourth quarter, because I mentioned Delta variant is obviously not good news for.
For the United States, nor for the rest of the world, but from what we've seen thus far it's not crippling at all so okay. Okay.
Okay.
That's very helpful.
Sure.
Recognize pack.
Packed a lot into that question there, but the overall overarching summary, I think I understand.
For the unit.
Does does have more exposure to what's happening with the parked fleet and aircraft coming back into service I know you have a I think a significant sized structures.
Component repair group.
Business and maybe there is maybe there's other exposures there, but in addition to usually traffic and parked are linked but to the extent that.
Aircraft are coming back into the service at a faster clip than traffic.
Or those are just different.
Does that meaningful for HEICO.
Yeah.
The look I think overall the aftermarket not only for HEICO, but for the industry is obviously you got to look at the 2000 and something thousand aircraft out there and by definition most of those.
The ones that were part where basically in need of maintenance they.
Part of the ones that didn't need maintenance. So yes as demand gets added back they've got to put money into the fleet. So I think that is.
One of the.
One of the situations that we've seen however, we do.
They didn't ultimately anticipate a restocking and ultimately of course, the rest of the world returning to normal so.
My sense is it.
Going to be pretty those attributes are going to be.
Present.
Over the next year as well.
Okay.
Just last question the.
The share gain that you've referred to.
Way to quantify that I mean, how much revenue have you added to the.
The PMA business over the last 18 months from share gain or I know, it's not just in P. M area, but any way to even directionally size, what you've accomplished there.
And then it's hard to.
Two.
For me to present, what those numbers are because they're occurring in many different areas.
And it's difficult to see in the numbers I mean, yes, we know what we're doing in terms of.
New products.
But also you got to combine that with the recovery in other markets you got it.
Look at how additional share gain is going to impact us going forward. So it becomes very difficult to.
To identify.
To call out part of the problem. This is Carlos.
As part of the problem might be is because we track this share gains by customer and we certainly don't want to talk about customers on this call, but we're very aware of our market share with each airline globally that we serve and we are seeing that they are buying more and they're buying things that are theyre, putting in orders for things that they had not bought into.
So we believe that that trend that we're seeing as a result of gaining market share from from our customer base.
Okay fair enough. Thanks, very much you bet.
Thank you.
Your next question comes from the line of police Razzano from UBS. Your line is open please ask.
Ask your question.
Hey, good morning, everybody.
Morning.
So Eric I wanted to circle back with you on the Ridge Becton deal as you talk about flight support getting back to 19 levels by the end of 'twenty. Two can you how much impact does that deal sort of have on that and sort of sticking with that and I know the deal didn't close tool.
Early for Q.
I'm guessing we're not going to know what you spent on that until the 10-K or any any guidance you can give us on those two things just as we think about cash balances and things like that going into the end of the year.
Louis This is Carlos so.
We did it we did disclose the purchase price because.
Does the acquisition relative to our balance sheet was not material, we have a big balance sheet. So I wouldn't I wouldn't look at the.
And being a drain on cash or we paid with cash on hand.
In our.
At the beginning of this month so.
If you look at our cash balance whatever we had.
We usually operate with.
Probably half of what we got on the balance sheet. So some of that went towards the acquisition.
Okay, great. Thank you.
And then Eric any impact I guess on the topline you can just help us because again it does seem like it's a bigger.
Sitting around with an efficacy than you've done in the warrants.
It's a nice sized company I mean, they've got about 200 people they are in the manufacturing business.
And.
They're really a very outstanding company, we're really honored to be the home that they.
<unk> for this business.
And we think that there are a lot of people who would have coveted buying the company.
And they saw the culture that HEICO has got and really our long term commitment and the fact that we don't sell companies in that we just build and grow.
So they are going to be embarking on additional growth in terms of <unk>.
Buildings more equipment.
We're very excited about that we've spoken with.
Major customers and they're extremely well valued and really the furthest ahead.
And that space According to.
Our customers.
And so we're really very very optimistic that it's going to provide.
Another great Avenue for growth.
Good business with really great people.
So we're very optimistic and.
Head.
It's again, a nice adjacent white space for us.
Never did machine.
Machining of embracing like this frankly I've never seen this.
Elsewhere.
What they had been able to pioneer and develop I mean, it started out as a very small company and due to the grid.
Emanation of the.
The founders and leaders of the business and all the people they have been able to do stuff that other people viewed as really impossible and frankly.
Fairly I've seen quite a bit of machining in my 31 years of HEICO and I've never seen anything.
Determine rich.
The machining and the brazing that they do is really very very close tolerance.
Very difficult to do.
I don't think anybody else in the world can really do these kinds of products. So I think.
Very.
<unk> like opportunity for us and.
One of the reasons I'm very optimistic about our specialty products business that we're going to see kantar.
Continued demand as the cycle builds over on the commercial side and then what.
These products and some of the other stuff we're doing on the military side while.
Why.
Very good optimistic on it.
Okay. That's great. Thank you.
Carlos just another one for you I guess, the corporate cost looks like another quarter of pretty high is this sort of a new sustainable level or anything else.
Like one time in nature and there just to be mindful of as we think forward.
I think we had.
The only thing.
<unk> really in the corporate cost center, that's up is.
It's performance based comp expense.
And I think going into the first quarter was like Q2, we add a little bit more Q3 was more on a run rate. So I think what Youll see Lewis is if you look for anywhere from.
One.
8% to 2% of revenues, that's about what our corporate cost center.
Amount to for any given year. So that's what I'd focus on if you're modeling.
But the only theres no unusual stuff. It really is just related to hopefully having bonuses. This year remember, we didnt have any last year so the comparable.
As to the prior year.
Our low principally related to the performance based comp being absent in 2020.
Okay, that's great and just a quick one Larry you talked a lot about the M&A and obviously you guys had been extremely successful in doing that over the last 30 years and I guess, maybe the question is how is that landscape.
GAAP changed at all given all this new competition that Youre seeing.
And what people are.
Kind of willing to pay and then sort of combine that with your conservative nature.
Well.
As I indicated earlier.
People are paying much higher prices because.
There is an inflation in our <unk> and our economy and you see that just read the newspaper and they tell you that prices of goods and services is going up number one in the M&A World is seeing the same thing low interest rates.
Just a plethora of money in the definition.
Inflation is more money chasing the same amount of goods. So obviously, we're getting an inflation in acquisition. So the question is.
Can we invest heico's money wisely to get the type of return.
Initially it makes sense.
And.
That becomes more difficult when you are competing with somebody who is willing to pay 14 times EBITDA.
Take you 2025 years to repay your investment.
So we look at things as a return as you would.
<unk> is an <unk> investor, which you are.
Return on investment and we like to get our money back within say 10 years and our.
Model is that.
And we pay fair prices will pay eight times 10 times EBIT.
Good.
And what we want to see the cash flow.
Coming back so that if we mentally say we pay.
Whatever we pay for it by the time, we're into the fourth or fifth year of owning a company.
We have received.
Just enough cash back too.
To make that company costing us in our portfolio.
<unk> four or five times EBIT.
So it becomes a no brainer.
And that has been our strategy, but if we have to pay prices that take US 20 years to do that.
<unk> all of a sudden we wind up going to the banks and getting heavily indebted.
Which we don't again, our strategy is to be relatively low leverage and we can't do that if it takes us 20 or 25 years to recoup our investment so we do that stuff.
That's our model.
Our model.
<unk> been able to grow.
Without being heavily indebted for the past 31 years and we've grown at a compound rate of I don't know, 19% with stock has grown 24% or whatever it is.
And that's the model we want to stick.
And then we.
We had a board meeting the other day, we discussed it and basically the board has an agreement with that.
So.
Not to say there arent opportunities for us to acquire companies that are strong cash flow generators.
And we will give.
To us and our shareholders a return on their investment so.
But there are a lot of companies going into 2014, and 16 times EBITDA and you make all kinds of assumption I mean, you can justify any acquisition you cannot justify it 20 times EBITDA price if you assume that.
<unk> are going to be God knows what.
We're a little more conservative and we don't do that.
I can't tell you is that the smartest thing I don't know.
<unk> that we've done 80, some acquisitions that we've never had one blow up on us.
So that's our strategy and I think we're sticking to that.
I believe there will be enough. It's harder we have to look at more companies to get one good acquisition than we've looked at in the past, but we will do that and we will continue to do it and I am convinced that we will.
<unk> successful going forward.
We have a very very experienced M&A group.
Eric Victor Carlos other people at work on it myself included.
I am confident that we will continue to.
Exceed expectations in M&A.
But believe me it is really tough tough because people are paying price.
That's great I really appreciate all the color Larry.
There are no further question at this time you may continue.
I do want to thank.
The.
The people that have tuned into this conference and shown interest in HEICO.
We appreciate your interest and your support over the years.
As you all know Carlos Eric Victor and myself, we are available.
If you call us email us we'll discuss if you have.
Questions that we can answer without running into.
Problems SEC problems disclosure problems will be very happy to discuss things anything that we can discuss openly we'll be happy to our doors and telephones are open to you and we welcome any call that.
I want to make.
We will talk to you.
I guess the fourth quarter, we don't report until the middle towards the end of December probably the middle of December. So we look forward to speaking with you at that time and in the meantime, let.
If you have any questions, but again, thank you very much and this ends our formal cool.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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