Q2 2022 HEICO Corp Earnings Call
Welcome to the HEICO Corporation second quarter and foods your fiscal 2022 financial results call.
Ms Patricia and I will be the conference operator for today's call.
Certain statements in todays call will constitute forward looking statements, which are subject to risks uncertainties and contingencies.
Actual results may differ materially from those expressed.
Or implied by those forward looking statements as a result of factors, including the severity magnitude and duration of the pandemic heico's liquidity and the amount and timing of cash generation lower commercial air travel costs to be dependable and its aftermath.
Airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services.
Specific Asian cost and requirements, which could cause an increase to our costs to complete contracts Goldman.
Governmental and regulatory demands export policies and restrictions reductions in defense space or homeland security spending by U S and our foreign customers or competition from existing and new combat the source, which could reduce our sales our ability to introduce new product and services.
At profitable pricing levels, which could reduce our sales our single SKU.
Product development or manufacturing difficulties, which could increase our product development and manufacturing cost and the leasing goes.
Our ability to make acquisitions and achieve operating synergies from acquired businesses customer credit Suisse interest foreign currency exchange and income tax rates economic conditions, including the effect of inflation within and outside of the Asian defense space met.
Telecommunication and electronics industries, which could negatively impact our cost and revenues and defense spending budget cuts, which could reduce our defense related revenue.
Barton parts is listening to this call are encourage 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 ever.
Sort of new information future events or otherwise.
Except to the extent required by applicable law as we begin the call now I turn the call over to Lawrence Mendelsohn, Heico's, Chairman and Chief Executive Officer. Please go ahead Sir.
Okay.
Thank you very much and good morning to everyone on this call. Thank.
Thank you for joining us and we welcome you to this HEICO second quarter fiscal 'twenty two earnings announcement teleconference, I'm, Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here. This morning by Eric Mendelson, Heico's co President and President of Heico's flight support group.
Victor Mendelson Heico's co President and President of Heico's, Electronic technologies group, and Carlos Macau, Our executive Vice President and CFO .
Before reviewing our operating results in detail I would like to take a few minutes to thank all of heico's talented team members for delivering another outstanding quarter.
Your dedication to our customers and operational excellence has translated into superior results for the shareholders.
I am truly delighted by the positive trends in our aerospace business and I am optimistic that these favorable trends will continue during the remainder of fiscal 'twenty two.
I will summarize the highlights of our second quarter fiscal 'twenty to record results.
Consolidated second quarter, and first six months of fiscal 'twenty two.
Operating income represents record results for HEICO and that was driven principally by record op income within the flight support group, mainly arising from a continued rebound in demand.
For our commercial aerospace products and services.
<unk> operating income and net sales in the second quarter of fiscal 'twenty, two improved 27, and 15% respectively as compared to the second quarter of fiscal 'twenty one.
These results mainly reflect a 9% quarterly consolidated organic net sales growth.
And the favorable impact from our fiscal 'twenty, one and 'twenty two acquisitions.
Consolidated operating margin improved to 22, 8%.
In the second quarter of fiscal 'twenty, two and that was up from 27% in the second quarter of fiscal 'twenty one.
And it improved to 21.5% in the first six months of fiscal 'twenty, two and that was up from 20% in the first six months of fiscal 'twenty one.
The flight support group reported quarterly increases of 87, and 33% in operating income and net sales respectively as compared to the second quarter of fiscal two these results principally reflect.
Strong, 31% quarterly organic growth for commercial aerospace parts and services.
In addition, this marks the seventh consecutive quarter of sequential growth in net sales and operating income at the flight support group.
Our total debt to shareholders' equity was 11% as of April 32002, and that compared to 10, 3% as of October 31, 21 hour.
Our net debt, which is total debt less cash and cash equivalents of $148 6 million as of April 32002.
Impaired to shareholders' equity ratio was six 1% as of April 32002.
That compared to five 6% as of October 31, 21.
Our net debt to EBITDA ratio was two eight times and two six times as of April $30 22, and October 31 21.
We have no significant debt maturities until fiscal 'twenty, five and we plan to utilize our financial strength and flexibility to aggressively pursue high quality acquisitions of various sizes in order to accelerate growth and maximize shareholder REIT.
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I'd like to discuss our recent acquisition activity, which in March 'twenty, two we acquired all of the stock of flight microwave cooperation.
Which is a designer and manufacturer of custom high power filters and filter assemblies used in space and defense applications.
In March 22, we successfully completed the previously announced agreement to acquire 74% of the membership interest of <unk>.
Pioneer industries and.
And pioneer is a specialty distributor of spares for military aviation Marine and ground platforms to meet the remaining 26% interest continues to be one by certain members of Pioneer's management team.
We expect both of these acquisitions to be accretive to earnings within the first 12 months following closing.
At this time I would like to introduce Eric Mendelson co President of HEICO and President of Heico's flight support group and he will discuss the results of the flight support group.
Thank you.
Might support group's net sales increased 33% to $306 3 million in the second quarter of fiscal 'twenty, two up from $233 million in the second quarter of fiscal 'twenty one.
The flight support group's net sales increased 35% to $579 million in the first six months of fiscal 'twenty two up from $429 6 million in the first months in the first six months of fiscal 'twenty one.
The net sales increase in the second quarter and first six months of fiscal 'twenty to reflect strong organic growth of 23% and 26%, respectively as well as the impact from our profitable fiscal 'twenty, one and 'twenty two acquisitions.
The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued recovery in global commercial air travel as compared to the second quarter and first six months of fiscal 'twenty one.
The flight support group's operating income increased 87% to a record $66 2 million in the second quarter of fiscal 'twenty two up from $35 5 million in the second quarter of fiscal 'twenty one.
The flight support group's operating income increased 93% to a record $118 6 million in the first six months of fiscal 'twenty two up from $61 3 million in the first six months of fiscal 'twenty one.
The operating income increase in the second quarter and first six months of fiscal 'twenty. Two principally reflects an improved gross profit margin mainly from the previously mentioned higher net sales across all product lines and efficiencies realized from the higher net.
Sales volume.
By the way just as an aside and not part of the scripted remarks I have to say and congratulate the fight support team because frankly two years. After COVID-19 began and created such problems, where this industry I personally im just in all of these results and the performance of our.
I don't think anybody expected that we would be back to record numbers within our two years. After the Covid crisis happened. So I just cannot stress enough how outstanding I think these results are.
The flight support group's operating margin improved to 21, 6% in the second quarter of fiscal 'twenty two up from 15, 4% in the second quarter of fiscal 'twenty, one the flight support group's operating margin improved to 25%.
In the first six months of fiscal 'twenty, two up from 14, 3% in the first six months of fiscal 'twenty one.
The operating margin increase in the second quarter and first six months of fiscal 'twenty. Two principally reflects the previously mentioned improved gross profit margin as well as a decrease in SG&A expenses as a percentage of net sales mainly reflecting the previously mentioned efficiencies.
Now I would like to introduce Victor Mendelson co president of HEICO and President of Heico's Electronic technologies group to discuss the results of the electronic technologies group.
Thank you Eric the electronic technologies group's net sales were 237 $4 million in the second quarter of fiscal 'twenty, two as compared to $243 $1 million in the second quarter of fiscal 'twenty, one the electronic technologies group's net sales were $459 $7 million.
In the first six months of fiscal 'twenty, two as compared to $466 $6 million in the first six months of fiscal 'twenty. One the net sales decrease in both periods is mainly attributable to decreased demand for our defense products, partially offset by increased demand for our space medical and other electronics.
And telecommunications products as well as the impact from our profitable fiscal 'twenty, one 'twenty two acquisitions.
Like many other defense industry suppliers, our defense product sales declined during the first half of 'twenty two.
As to the usual question of whether lower defense sales change or the defense sales change rather was concentrated in a single product I would say that our defense sales change trends were essentially consistent and we're more or less proportionate in our various businesses and products, which isn't surprising as it seems in.
Fees with the rest of the industry.
As we've explained over the years, our defense product sales tend to be uneven, which doesn't worry us given our excellent position supplying components on a wide assortment of programs and our healthy order flow and backlog. So we remain excited about both our long term defense sales growth prospects.
And growth in the products and services, we sell in other markets.
Though we all wish him Werent the case and we wish that piece would reign over our planet. We are convinced that increasing global tensions and risks means the need for our defense products and services will continue to rise over time.
The electronic technologies group's operating income was $66 million in the second quarter of fiscal 'twenty, two as compared to $71 $3 million in the second quarter fiscal 'twenty one the electronic technologies group's operating income was $121 $6 million in the first six months of fiscal 'twenty two.
As compared to $131 4 million in the first six months of fiscal 'twenty one.
The operating income decrease in fiscal 'twenty, two second quarter and first six months principally reflects lower efficiency levels, resulting from the previously mentioned defense sales decrease and a lower gross profit margin mainly from the previously mentioned decrease in defense products net sales and increased new product research and.
<unk> expenses as a percentage of net sales in order to support important and ongoing new product development activities.
The electronic technology group's operating margin was 27, 8% in the second quarter fiscal 'twenty, two as compared to 29, 3% in the second quarter of fiscal 'twenty. One the electronic technologies groups operating margin was 26, 4% in the first six months of fiscal 'twenty two as compare.
To 28, 2% in the first six months of fiscal 'twenty, one the lower operating margin in the second quarter and first six months of fiscal 'twenty. Two principally reflects increased LNG SG&A expenses as a percentage of net sales mainly from the previously mentioned lower efficiency level as well as the previous.
We mentioned lower gross profit margin I turn the call back over to Larry Mendelson. Thank you Victor.
Consolidated net income per diluted share increased 22% to <unk> 62 in.
In the second quarter of fiscal 'twenty, two and that was up nicely from 51 in the second quarter of fiscal 'twenty. One consolidated net income per diluted share increased 21% to $1 25 in the first six months of fiscal 'twenty, two and that was also up nicely from one <unk>.
Three in the first six months of fiscal 'twenty one.
The increase in the second quarter and first six months of fiscal 'twenty two principally reflects the previously mentioned higher consolidated operating income.
Depreciation and amortization expense totaled $23 5 million in the second quarter of fiscal 'twenty. Two that was up from $22 9 million in the second quarter of fiscal 'twenty, one and totaled $46 7 million in the first six months of fiscal 'twenty, two again up from $45 9 million in.
The first six months of fiscal 'twenty one.
Significant ongoing new product development efforts are continuing at both <unk> and flight support and this is critical for the development of new products and technologies that will fuel our future growth.
R&D expense increased to $18 8 million or three 5% of net sales in the second quarter of fiscal 'twenty, two and that was up from 18 million with three 9% of net sales in the second quarter of fiscal 'twenty one.
R&D expense increased to $37 1 million or three 6% of sales in the first six months of fiscal 'twenty, two and again up from $34 2 million or not three 9% of net sales in the first six months of fiscal 'twenty one.
SG&A expense.
$88 5 million in the second quarter of fiscal 'twenty, two as compared to $83 million in the second quarter of fiscal 'twenty, one and that was an increase of $5 $5 million. The increase in consolidated SG&A expense principally reflects a three.
$4 million attributable to our fiscal 'twenty, one and 'twenty, two acquisitions and an increase of $3 1 million and selling expense to support. The previously mentioned sales growth and that was partially offset by a $1 $1 million decrease in <unk>.
G&A expenses.
Consolidated SG&A expenses were $179 8 million in the first six months of fiscal 'twenty, two and that compared to $161 2 million in the first six months of fiscal 'twenty.
Again, the increase in consolidated SG&A expense, principally reflects cost incurred to support the previously mentioned net sales growth and that resulted in increases of $6 3 million and $6 1 million in general and administrative and selling expenses respectively.
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Plus $6 3 million attributable to our 'twenty, one 'twenty two acquisitions.
Interest expense decreased to $1 million in the second quarter of fiscal 'twenty, two and that was down from $2 1 million in the second quarter of fiscal 'twenty one.
Interest expense decreased to $1 8 million in the first six months of fiscal 'twenty, two and that was down from $4 5 million in the first six months fiscal 'twenty one.
The decrease in both quarters was principally due to lower weighted average balance of borrowings outstanding under our revolving credit facility and that reflects our strong cash flow from operations, which we used to pay down borrowings.
Other income.
Both quarters.
In the first six months of 'twenty, two and 'twenty one was not significant.
Heico's effective tax rate was 23, 7% in the second quarter of fiscal 'twenty two.
And that compared to 19, 5% in the second quarter of fiscal 'twenty two.
Heico's effective tax rate was 15% in the first six months of fiscal 'twenty, two and that compared to 12% in the second quarter of fiscal 'twenty one.
The increase in the effective tax rate in the second quarter and first six months of fiscal 'twenty two.
Principally reflects an unfavorable impact from tax exempt unrealized losses and cash surrender values of life insurance policies related to the HEICO leadership compensation plan.
As compared to the tax exempt unrealized gains recognized on such policies in the second quarter and first six months of fiscal 'twenty one.
The impact of these unrealized losses accounted for an increase of about 3% in our second quarter tax rate and reflect recent overall stock market declines.
As we discussed in last quarters teleconference, HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 'twenty, two and 'twenty, one of $17 8 million and $13 5 million respectively.
<unk> from strong appreciation in HEICO stock price during the <unk> holding period.
Yes.
Net income attributable to Noncontrolling interest was $8 1 million in the second quarter of fiscal 'twenty, two as compared to $5 8 million in the second quarter of fiscal 'twenty one.
Net income attributable to Noncontrolling interest was $15 4 million for the first six months of fiscal 'twenty two.
That compared to 11 5 million in the first six months of fiscal 'twenty one.
The increase in the second quarter and first six months of fiscal 'twenty. Two principally reflects improved operating results of certain subsidiaries of the flight support group.
In which noncontrolling interests are held.
And that's inclusive of fiscal 'twenty, one and 'twenty two acquisitions.
For the full fiscal 'twenty two year, we continue to estimate a combined effective tax rate and noncontrolling interest rate of 20 between 25 and 27% of pretax income.
Uh huh.
Moving on to the balance sheet and cash flow, our financial position and forecasted cash flow remain extremely strong.
Cash flow provided for operating by operating activities was $96 8 million and $194 8 million in the second quarter and first six months of fiscal 'twenty, two respectively as compared to $102 9 million and $210 1 million in the second quarter and first six.
So fiscal 'twenty one.
During 'twenty, two we invested approximately $87 million and working capital.
And the change in working capital includes a $43 million increase to inventories and that reflects a strategic decision to increase inventory purchases within our distribution businesses and to support and.
Increase in hours consolidated backlog.
In addition, receivables increased $20 million, resulting from our net sales growth.
Accrued expenses and other current liabilities have decreased by $16 million principally due to timing.
Our working capital ratio improved to three four times as of April 30, and that was up from $3. Two at times as of October 31 21.
Our dsos.
Days sales outstanding was 45 days as of April 32002.
And that compared to 41 days as of April 30, <unk> 'twenty one.
We closely monitor all receivable collection efforts in order to limit credit risk exposure.
No one customer accounted for more than 10%.
Consolidated net sales and our top five customers represented approximately 21% and 23% of consolidated net sales in the second quarter of fiscal 'twenty to 'twenty one respectively.
Our inventory turnover rate decreased to 150 days for the period ended April 32002, and that was down from 153 days for the period ended April 32001.
Yes.
Now for the outlook.
We look ahead to the remainder of fiscal 'twenty two.
And we expect global commercial air travel to continue on the path to recovery.
Despite the potential for additional pandemic variance, we remain cautiously optimistic that.
And that the ongoing worldwide rollout of pandemic vaccines, including boosters will continue to positively influence global commercial air travel and benefit the markets we serve.
But it still remains very difficult to predict the pandemics paths and effects include.
Including factors like new variance and vaccination rates potential supply chain disruptions and inflation, which can impact our key markets. Therefore, we feel it would not be responsible to provide fiscal 'twenty two net sales and earnings guidance at this time.
However, we believe that our ongoing conservative policies strong balance sheet.
High degree of liquidity enable us to continuously invest in new research and development.
And to take advantage of periodic strategic inventory purchasing opportunities and execute on our successful acquisition program.
Which all of which collectively position HEICO for future market share gains.
In closing I would like to again, thank our incredible team members for their support and commitment to HEICO. They are the ones that make HEICO tick and grow and we're very very proud of our entire team.
The remainder of fiscal 'twenty, two and beyond looks very promising for HEICO and to me personally.
And we thank you all for making HEICO the great company that it is.
That is the extent of our prepared remarks, and I would like to open the floor to questions.
Thank you and at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. If you wish to withdraw your question. Please press the pound key we will pause for a moment to compile the Q&A roster.
Your first question is from the line of Noel up upon that from Goldman Sachs. Your line is open.
It's Gavin on for Noah Good morning.
Good morning.
Eric in SSG and pricing historically hasn't been a big lever for you, but it seems like the rest of the industry is stepping up there.
Is your strategy to increase at the same rate as the rest of the industry. So your relative discount holds or do you just kind of aimed to pass through any higher costs or how do you think about pricing.
I think the way we think about pricing is we want to maintain our margins. So our margin percentage at a minimum.
So we've got a path through our added costs and we've got to add our margin on top of that.
Having said that our list prices.
Often reflect what the what our competitors are doing.
However, when we've got long term committed customers, we've got contractual arrangements, where we sell at a discount to that list price and we don't take those increases to the extent that we would necessarily raised our list prices. So it's.
It really depends on the the arrangement, but as you can see from our results. We believe that we've been able to successfully passed along our cost increases along with maintaining a.
Recent maintaining our profit margin while at the same time, keeping our customers happy and actual.
Just add a little anecdote.
The MRO conference in.
In Dallas, a couple of weeks ago, and actually we had a major airline that everybody would be very very familiar with I can't mention the name and they brought all of their senior leadership to frankly, thank HEICO in all my years I have never had a meeting quite like this where they brought their senior.
Leadership to think I'd go one for coming up with our new products solutions, and helping them with all sorts of stuff that others wouldn't and number two not taking advantage of them and not.
Doing what other people are doing and they called out a number of other manufacturers and they said that HEICO really differentiated itself.
And what's going to be rewarded with not only increased business on products that we currently offer but increased business on a new stuff that they wanted us to develop for them. So I think as a result of.
Treating our customers right. This is going to work we will get our in summary, we will get our costs covered will maintain or grow our margins a little bit and most importantly, we will keep our customers happy because theres a huge amount of opportunity for us.
Great I appreciate all that detail, maybe just touching on the margin there and MSG youre back to pre Covid 2019 revenue, but your margins better than 100 basis points higher.
There anything abnormal in the quarter, there or is that.
A level you can continue to improve from as you grow revenue above pre COVID-19 levels.
Yes, I wouldn't say that there is anything abnormal in the quarter.
Wanted to be careful though not to predict.
These numbers I think our record operating margin percentage for the flight support group, which frankly I am amazed that in this environment with all of that we're aware of that we're able to keep our customers happy and record record margins.
So we will continue to watch that very carefully I want to be careful because obviously, we're going to be replenishing inventories we have to see what that is we're adding back some some positions growing our engineering talent, so I want to be careful to predict.
These higher margins.
But I feel good about where we're headed.
Great. Thank you this Carlos I would just add real quickly to that.
Keep in mind, we've been thinking about the SSG approaching this 20% Oi level.
The road or the path to getting there is going to be a little lumpy because as the business has returned to volume levels that we've seen in the past different parts of the SSG grow at different rates and so that's going to affect our margin during the quarter. So that's why you know for the year I would think about it along the 20% range and recognize that it's going to be.
Lumpy up and down to get there.
Helpful. Thank you.
Yes.
And your next question comes from the line of Tom <unk> from Cowen Your line is open.
Hey, good morning, guys.
Good morning.
Just to follow up on the last question.
Can you Carlos maybe can you talk about the subsegment growth within SSG and maybe that was the source of the mix benefit was it.
Led by the PMA business relative to.
Repair on specialized products anything there.
Explain how quickly margins improved.
Yes, Gautam I.
Thank the.
The PMA business. The parts business has to have all been very strong and consistently strong where we saw a little bit of a tailwind, which we expected and we talked about last quarter was a return of our specialty products group their volumes have picked up as we thought they would.
Their volumes tend to be tied to the OEM market and as you probably noticed across the board that's coming back a little bit. So that's helped us.
<unk>.
I'd say the rate of specialty products increases a little higher than it had been historically, which did have a mix impact if you would on the margin.
That's about the only okay.
Was there any sort of inventory dynamic where your prices reset faster.
Then.
The costs reflected in your inventories so there were some sort of.
Out of phase of benefit from pricing.
That might end up normalizing.
As you replenish inventory.
That's a good question.
As Eric mentioned, we have we do have a bit of a delay it's not like this is instantaneous any of our price increases it does.
Yes, it does come in phases over time as we can.
They renegotiate contracts and discuss with our with our customers the ongoing relationship that doesn't happen instantaneously.
I don't know that this quarter, we saw a huge impact from pricing.
But but nonetheless, I think it will it will continue and we will by Jay Eric said, we'll cover our cost increases we will do our best to cover our cost increases, but we're not raising prices.
Effort to boost margins and things like that we're trying to be very.
Friendly to our customers again, it's a long term strategy so.
Yep.
And one for Victor maybe Victor Atg can you talk about the bookings.
How those have trended you know maybe even since the defense budget was formerly enacted in March have you seen a pickup in.
RFP activity or anything you can speak to about that.
Okay.
So yes, yes.
It's a good question actually our book to Bill ratio in our orders are very strong.
And book to Bill accelerated for US both in the the.
The first quarter of the year, the second quarter of the year sort of entire first half.
Versus last year.
So that that remains strong.
Of course like everybody else. We've got these miscellaneous supply chain challenges, which were greater and seem to be accelerating theyre not overwhelming us Fortunately, but they are accelerating in that.
Probably.
Contribute to the book to Bill ratio even more.
Then it usually does but but as far as we're looking at it.
Book to Bill is accelerating and strong.
Thanks, guys Youre welcome. Thank you.
And your next question is from that Larry Solow from CJS Securities. Your line is open.
Great. Thank you good morning, guys and congrats on a really nice quarter in a pretty tough environment.
Commendable there.
Maybe a question for Eric.
On the.
At FSC, they're obviously pretty remarkable numbers, yet as you mentioned almost back to pre COVID-19 levels, I guess, a little bit less I guess, if we take out the acquisitions, but really strong job well what about in terms of it's got to be I know you won't give specifics on the market share gain side.
I feel like that must be that the big deciding.
<unk> been told many competitors can you maybe just.
Give a little more high level color on that on the market share gains and are they coming from any specific areas is it.
I assume most of the existing customers because you guys are pretty much cover across the commercial aviation but.
Is that where it's coming from and is it.
Mostly older legacy products, where you're sort of mixing it in with some newer stuff there.
Yes.
Gary that's a great question and I always gift.
Im very involved with all the businesses of course, but I always get prepared and the week before these conference calls to get sort of the latest information on what's going on in the ground on the ground and I can tell you that in all of our business areas in which.
Flight support operates.
In my opinion, gaining market share I have never seen in my 32 and half years at HEICO I have never seen this level of enthusiasm from our people and it is absolutely across the board.
It's in PMA parts and component repair distribution specialty manufacturing defense Sustainment. It is just completely across the board and I think that is it is.
As a result of us taking care of our people.
As times got tough, making sure that we maintained our inventory and actually grew our inventories to make sure that we could support our customers. The fact that we are not highly levered and were able to make all decisions for the long haul. The fact that our leadership teams and our sales people.
<unk> had been with the company for decades.
They know the HEICO mantra and they speak yet as well as if not better than I do.
So it is incredibly broad based it's in the aftermarket it's in the OEM and defense Sustainment.
All across our business.
<unk>.
Honestly it made me feel really really good.
Yes, that's very encouraging, especially.
These market share gains you get them they should.
Should be pretty long last thing I guess I mean, most of these things right.
Yes.
Believe that they are long lasting we've always spoken about how the trend is up and that we need to eat and look we're not going to have a large impact on any of our competitors.
Sure.
Gains are very very broad based and.
They are incremental we're doing very well.
But I see just tremendous strength and frankly everything.
All areas in which we operate.
Okay, Great and then just switching gears a quick question for Victor.
On the defense side is tough.
Perhaps I know you mentioned sort of supply chain issues, but could some of these issues may be you guys are obviously, just a component on an app.
Often a component I'm, making the product. So if there are supply chain issues from other.
Parts that are delayed maybe youre not going to deliver your part does that.
So maybe supply chain issues that competitors or in or just complementary products.
Is that also come into play with sort of the slower defense sales.
Larry I think overall that dynamic.
It does have an effect on US yes. It does slow things down I would say more pronounced is the.
Situation, where our customers are not getting product on order because they can't get it out of their factory or they don't have people people working from home and and so when a number of instances.
There are a few of our subsidiaries I should say had mentioned that to us is an issue and.
That has been actually happening for a while and I.
At some point of course that will even out.
And we should ship all of that and get those orders that we're expecting and near the customer say things like yes. It is.
Coming it's coming it's coming but we just can't take any more in the factory or in our plants or EDA space et cetera et cetera. So.
The order of a month or two or three or whatever later.
Right right, Okay, great if I could just slip one more in for Carlos just on inflation.
Obviously, you guys are having some supply chain issues and like the rest of the world and you mentioned, the 40 plus million increase in inventory to.
To help offset that a little bit, but just in terms of inflationary issues.
It seems pretty pretty well under control for you guys I think you mentioned.
Selling expense or your existing organic was up less than $3 million and I think there was as you said almost 2 million drop in G&A. So your SG&A was.
Almost from legacy was basically flat, which is pretty pretty remarkable and your thoughts on that.
Yes, I think I think during.
First of all we're structurally very entrepreneurial we have a lot of different subsidiaries and <unk>.
And managers running those facilities that have their roots.
So proprietary an entrepreneur and so they know how to adjust because when they learned how to manage that business. It was their wallet there their checkbook right and I think those trends are benefited HEICO throughout this process. There is no doubt that inflation is part of the equation and I think that our guys have done an exceptional job at managing that.
And then also to what Eric mentioned earlier, we've done a pretty good job of working with our customers to cover the increased costs as best we can so I think the whole equation at HEICO because of our structure.
Allows us to make that happen.
Right great. Okay excellent I appreciate all the color thanks, guys.
Thanks, Larry Thank you.
Thank you and our next question is from Peter Arment from Baird. Your line is open.
Yes, good morning, everyone Victor Carlos.
Hey, Eric I guess I wanted to ask a question on M&A just.
You guys recently did two deals in the quarter.
Are you talking about leaning in a little bit more maybe on the commercial market, maybe what youre seeing in the pipeline is there more activity or your willingness to do deals kind of in this recovery period or do you need to see some more time pass.
What are your kind of engage further.
Yes, we are.
Very active in the M&A area incredibly busy busier than we've ever been.
We remain disciplined.
Recognize that the market is where the market is and we've got to be competitive.
But.
Yes, I think that there are plenty of opportunities and were working them very very aggressively.
Okay I appreciate that and then just on the.
Victor you mentioned, some supply chain miscellaneous supply chain constraints, maybe Eric and Victor just both describe it are you seeing any kind of material lead times stretch out or are you going to end up just ultimately like you've kind of indicated carrying a lot more inventory throughout the year.
So this is Victor I can give you.
<unk> for the Atg companies'.
Lead times from suppliers continue to increase.
There are lead times that are out for some components as far as believe it or not over 100 weeks, that's the exception, though fortunately not the rule.
Have generally of course found workarounds around those and as you know our inventory approach has been such that we really minimize the effect of that.
But.
Would expect this to continue to be a challenge I would expect it to continue to.
Accelerate a little bit.
I would say that I think on our last conference call I estimated that we had sort of in the $10 million range that had slipped from one quarter into the next quarter end.
I would say, that's probably 50% 70% more.
In this quarter that we just finished than it was in the prior quarter.
So again, you're talking about a few percentage of sales not overwhelming.
But certainly something actually our growth would have been.
Considerably higher or somewhat higher had.
Had we not dealt with that but we'll continue to.
Let our company's address those and keep it down to sort of a low simmer as they would say rather than a roaring fire.
And Peter with regard to the fight support side I think that we were smart our people were really intelligent to make sure that we had sufficient inventory coming into this we're working very closely with our suppliers.
Frankly, there is no shortage of orders for us.
<unk> is going to be making sure that we get everything delivered on time and I think there could be hiccups down the road.
Our people.
Tell me about problems and they ultimately.
Figure out solutions to them, so I would say.
On high alert watching the.
The inventory restocking issue, but I'm hopeful that we will figure out how to manage through it.
I appreciate that and then just one last one.
Eric.
The new product Rollouts I know, you're always just kind of talk in generalities, but it sounds like customers are approaching you and theres more more opportunities coming up maybe if you could describe it.
Of the new product introductions, increasing from the past.
Kind of historical what you add to your catalog every year or are you seeing.
And just a more of an acceleration of adoption.
It would be more of a greater acceleration of adoption I think we're very content with the pace.
New product development, we've got a lot of unsold potential where people can save a lot more money if they buy the rest of our product line.
I think our preference would be to get all of that stuff sold first and then to increase the rate of new product development later.
We are we continually to grow we continually grow.
In adjacent.
You know what I call adjacent white spaces.
And so there's no change there, but we.
We've got to make sure that we get everything solved and I think our current volume and rate of new product development is really very very well optimized we've got the chain balance.
We increased new product development that you've got increased procurement manufacturing inspections sales. There is a lot of stuff that has to happen in order to support that so I.
I think where we're really well balanced right now.
I appreciate that thanks.
Thank you.
And we have the next question from the line of Christine do you walk from Morgan Stanley . Your line is open.
Good morning, guys. This is Jason on for Christine.
Warren Eric and Victor.
Eric and Victor are sort of it as we look ahead, how should we think about potential recessionary impacts across both the atg in SSG businesses.
When you say recessionary impacts you mean with the market turning down possibly in the future.
Exactly so I guess driven by say GDP decline.
Just general recessionary impact.
Yes.
Think we've picked up market share.
And we in a downturn continue to pick up market share.
So I'm not I'm not afraid of it frankly whatsoever, we don't at the moment see that kind of impact is no question. There is deflationary issues when it comes to consumer products and that's because for the last two years people have bought a lot of that stuff, especially with all the money that the government is pumped out there.
And given to consumers.
However, if you look the savings levels are still pretty elevated and the one thing that everybody wants to do today, they don't care, whether they have COVID-19 the risk of getting COVID-19 nobody cares theyre all traveling everybody's been cooped up and I think that trend is going to continue so I don't see that same.
<unk> historic at two times GDP impact on air travel occurring over the next couple of years I think we've paid a huge price in the past few years.
And I think air travel is going to be relatively strong ex obviously, Russia, Ukraine, China. I mean, there are some places that are going to see an impact, but I think with and so far as how it's going to impact HEICO we are.
So well ingrained at our customers and they view us.
Can't stress it enough that they no longer view us as this tiny little over $30 million company that we were at 30 years ago, I mean, they view us as a real.
Powerhouse and power player in the industry. So I think we're going to be the go to company frankly.
And this is victor for <unk>.
The effect of the recession would have.
It's fairly muted typically for us because we have a high proportion coming from defense and space and medical combine those markets, which tend not.
To suffer like the broader economy does in a recession, our general markets, where we serve certain high end electronics that might feel an impact.
And commercial aviation, depending on what happens with travel but.
At this point by the way, we are not seeing that and interestingly enough our orders in our non A&D markets, which I very often looked at as a precursor to overall economic activity have remained strong and remained healthy.
So at this point.
It seems to be business as usual.
Thank you guys and then maybe just one more for Victor.
Victor can you speak to some of the opportunities you're seeing in space and then sort of just maybe parse out the opportunities youre seeing in the near term and then more on a longer longer time horizon.
So our our space business as you know is really focused on what I would call the high end in space.
Not on micro Sats very much we don't chase those markets, we try to to pursue and we have been successful pursuing.
The very highly engineered high end very often radiation Tom.
Tolerant to radiation hardened solution.
So for the bigger if you will more expensive satellite.
But not entirely and that's that's a part of it so.
What we're not doing is we're not chasing after this kind of explosion in everything space and our I think our opportunities will continue to be in the higher end more highly engineered products.
And that's that's really where we're looking to expand as opposed to just sort of picking up revenue at any old margin to us.
Our view is if it's a healthy margin then it means were adding some important value to the customer and if it's if it's low margin then we're probably we'd be looking at something that's more commoditized or they feel they could get elsewhere.
Understood. Thanks, guys.
Welcome.
Our next question is from the line of Ken Herbert from RBC. Your line is open.
Yes, hi, good morning.
Good morning, Tim.
Hey.
Eric I just wanted to start with maybe a finer point on the previous question is it fair to say then that you haven't seen any change in pace of bookings or backlogs within your repair business.
Into the second half of the fiscal year as a result of any airline concerns around booking trends or maybe any slowdown in the pace of growth and then and then thinking that through is there any reason why we shouldnt continue continue to assume a sequential growth for your business into the fiscal third and fourth quarters.
Yes, I think.
The booking trends are improving.
And so I expect continued growth in the third and fourth quarters.
Think that we're grabbing market share.
And.
I anticipate that we're going to continue to do very well in all of our businesses in the third and fourth quarters.
Okay, that's great and if I could maybe Carlos typically seasonally you do you do very good from a cash standpoint into the back half of the year I know you've been investing in working capital for a number of very good reasons, how should we think about the full year free cash flow and is there any reason again youre not sort of in that.
115%, 20% conversion as it relates to net income for the full year.
Well I think for the full year can we should we should be around those historic benchmarks Youre correct first six months of this year, we have invested quite a bit in working capital to get to support the business and.
Maybe we invest a little bit more as the year goes on if the revenues continue on pace with what we think they will do but I do think our conversion will be strong this year.
Okay excellent I'll stop there and pass it back thank you.
Thanks, Ken.
We have design of Josh Sullivan from benchmark.
Your line is open.
Josh Sullivan your line is open.
Yeah.
Okay.
Good morning.
Good morning.
Just on the acceleration of adoption of new products, you mentioned and the market share gains are you seeing new customer types, either geographically or by airline business model any any entities, which historically were more hands off coming forward in this environment.
Yes.
We say we deal with every airline virtually every airline out there, they're all customers of ours, but the answer to that is yes. They are adopting a broader range of product.
Much more so than they ever have in the past so.
Yes, I think while we are not adding.
It's not so much as adding customer names.
We are broadening significantly what they're buying from us.
Okay.
And then just one on the M&A front you know in the past you've noted private equity was driving towards evaluations, obviously interest rate environment market environment have changed do you think youll see less interest in private equity and more competition from strategics going forward.
Well I, certainly hope, we're going to see that.
Competition from private equity.
As far as strategic I think HEICO has a unique value proposition and for the seller, who really wants a good home for the business a good partner wants to take care of the team members wants to treat the customers right. There is no better option then.
<unk> to partner with HEICO period bar, none we are by far the best option for that type of seller and I think the trick is frankly, finding that type of seller, who who isn't greedy.
And who wants to do the right thing because you can't get blood from a stone and frankly shame on the seller, who doesn't care about his or her people doesn't care about the customers and it is just greedy and wants to.
To take every penny they possibly can.
And.
Typically when private equity wins, it's because because of that and that trade off. So I think that we are we offer a very unique proposition also for our leadership team.
<unk> model is incredibly motivation.
And when we find good people, who know what they're doing we don't come up with all of this horse crap buzzwords from the corporate office like so many companies do and we instead, let them focus on their business. We get on the same page we get into the weeds in the detail we understand exactly how they're operating and we're here to support them.
And it works extremely well so.
Personally and very optimistic yes, I mean can corporate acquirers end up paying more money well, they're also going to have to pay higher interest rates and then they've got to deal with the intangible amortization as do we.
So I hope that they are restrained in what they do.
But.
I am very optimistic where we're very competitive I mean, nobody sells to us at a.
Ridiculously lower price than they.
Sell it or somebody else I mean, we're obviously always competitively by companies.
And we are really really busy right now.
No.
I am very optimistic that that trend will continue.
Okay, well, thank you for that.
Thanks, Josh.
We have some Greg Konrad.
From Jefferies. Your line is open.
Good morning.
Morning.
Maybe just.
Eric to start I mean, I know you touched on this a bunch, but just when you think about the recovery in kind of the data that we see around traffic retailing or narrow body versus wide body relative to your business I mean any surprises in terms of some of those areas are platforms that are may be recovering.
Faster than the broader market.
Yes.
Greg It's a matter of fact, I remember Sheila asking me I don't remember if it was on the last call or the call before that.
I think narrow body was going to recover in North America in 2022, and I don't recall, the exact words I used but.
I'd, rather see the data and let it come out and I don't want to get in front of something like that but clearly.
With American narrow body is doing extremely well.
And frankly I am shocked.
As to the pace of recovery at HEICO.
And I think we are a recovering we have recovered.
Then the industry.
And.
And there are a whole bunch of areas that haven't seen so much recovery. So I'm very optimistic, but yes, I mean, the narrow body is the strength North America is obviously the center of that strength.
Europe is recovering, but it hasnt fully recovered Asia is still struggling.
South America is in the process of recovering as sort of more like Europe .
Yes.
North Americans are just itching to fly so.
I think we're doing very well in that market.
And then maybe one for Victor in your.
Opening remarks, you talked about the defense weakness kind of being in line with peers in the industry. Overall I think it is expected to tick up in the second half of the year, whether it's in our supply chain being alleviated some of the getting the budget in place or even some tick up from just supplemental is tied to <unk>.
Crane, I mean, any commentary kind of linking the booking commentary that you had with maybe how you expect conversion in the second half of the year and would you expect to.
Defense overall to maybe improve in the second half of your fiscal year.
Yes, Greg.
Going to be very cautious on this because there just been more surprises I think this year in the last 12 months than usual.
And Ah one would generally be encouraged by healthy bookings.
But.
We have six months right the back half of the year is six months so.
I'm just not sure.
I'm not trying to be evasive, but I prefer to wait and see how it all falls out.
And then just a quick cleanup question for Carlos I mean any update there.
The tax plus noncontrolling.
Interest rate for the year.
Hey, Greg.
I'll give you my cleanup comment.
Yeah.
The tax and NCI rate should be between 25% to 27% I expect.
As Larry mentioned in his comments, we had about a 3% headwind in our tax rate for market declines in tax exempt securities, we hold and life insurance products. That's a wildcard the market keeps going down that could adversely affect our rate I'm expecting let's say anywhere from 18% to 19% in the tax rate in somewhere.
Between seven and eight CRE of pre tax income percentage of pre tax income.
As of right now.
Thank you.
Youre welcome.
Your next question is from Fitch.
From Alembic Global your line is open.
Hey, good morning, everyone and hopefully you can hear me I am traveling around mobile.
We can hear you.
Great. Just was wondering if you could drill down a little more into defense and atg sales a bit I'm. Just wondering do you do you kind of really go full speed ahead on kind of next generation.
R&D efforts.
We touched on space, but also a hypersonic.
New aircrafts efforts like <unk> that are getting a lot of money in it.
Even some of the procurement efforts like F 35 will be well funded for a while I'm just wondering how you feel HEICO was positioned in these areas.
Especially the R&D type spend areas.
Feel overall that you are well aligned with where dod's going thanks.
Good question Pete.
The answer is definitely we feel very well aligned with where the Dod is going.
You've heard us talk about this over the years that we've tried.
To construct the business in such a way that we're not just reliant on the operations tempo and we're trying to be in the higher technology.
Areas.
That offer that future growth and the higher Tech solutions and a lot of engineering and so as you saw we're spending money on the R&D side.
And product development side.
So I would I feel very good about that the timing of course is always very difficult to.
To anticipate.
But.
We're going to continue making those investments because over time to yield results.
Okay, Great I appreciate maybe just one last one for me switching to <unk> I'm, just wondering in the repair and overhaul group. It seems like there is labor tightness in the U S. It seems like that would be maybe one of your more.
Blue collar.
Focus areas I'm, just wondering if you're having any trouble sourcing labor there or youre <unk>.
You know.
And over average amount of wage pressure in that group. So just wanted to get any color you can provide there.
Yeah, I mean, we it's a good question and.
Obviously.
Our repair and overhaul is more labor intensive typically than parts.
The total percentage of sales.
We do have a job openings in that market.
But we've been able to figure out how to get it done I mean, we've treated our people extremely well they are very happy about.
The work environment about the amount of autonomy that they've gotten and doing their jobs.
They I think feel very very much appreciate it I've actually heard stories about some people, who unfortunately were offered more money by competitors.
And they go over to the competitor for the additional money and then we hear back from them very quickly, saying, Oh I've made a terrible mistake.
That they frankly, they don't operate the same way that HEICO does I'm pleased please can I come back. So I think we are in.
Pretty good shape.
We're in pretty good shape, yet, but there are openings and we're watching it we're watching it very very carefully and we take care of our people and we see that if there are areas where costs are going up we don't.
We're very proactive in making sure that our people remain hall and that we take care of and that they are proud to be at HEICO and frankly, they are the reason for our success. So.
We're in pretty good shape in that area.
Great. Thanks for the color.
Thank you thanks, Steve.
Thank you and we have speeds faster than from Julia Securities. Your line is open.
Hey, good morning, I'm on for Mike Sure Moly. This morning, thanks for taking our questions.
First I just wanted to ask what are you seeing in terms of inventory levels that airline customers has there been any significant restocking activity from customers. So far this year and are you anticipating that you might see any over the next couple of quarters.
Yes, so I've asked that question because I anticipated it would come up.
And the answer is our people don't really see restocking to date, what they do see is returned to service. So that obviously there have been some aircrafts that have been parked and those aircrafts set to get returned to service and they require parts. So we had seen that but we haven't seen what we believe.
Is there traditional quote unquote restocking.
So thats NII has asked that question 10 different ways from many many different people and thats, what seems to be coming back so.
I believe that's the case.
Alright, great. Thanks, and then.
I also just wanted to ask on your.
Specialty products business, how is that trending are you seeing sequential recovery there and are you seeing any increased interest from customers on your build to spec offerings that might translate into increased market share going forward. We are we're doing really really well in specialty products and that's the area that we said, we'd always be lagging because that's more of a.
Oems support business, where we <unk>.
Port Oems.
So.
I'll tell you a little anecdote.
Visiting one of our specialty products businesses about two weeks ago, and our partner who owns a chunk of the business and.
Sure.
His leadership team thanked me because they said two years ago, we were really.
Looking into the Abyss, where our customers were canceling orders because they were not delivering aircraft airlines didn't want new aircrafts things were absolutely terrible and they wanted to cut employment and I pleaded with them and said.
We operate a decentralized structure you can do what its your business you can run it the way you want but I am begging you. Please do not do that maintain the people because we are going to need them in order to rebound and I have to say that this leadership team of this company is never afraid to call me.
If they disagree with me on anything and they were so thankful that they followed that advice if it don't worry about the hit that we're going to take it's okay, and we need to be there we need if we don't have this team. There is no way, we're going to be able to service them and they hung on to the people and now.
Their business is surging and without those people, we wouldnt have been able to do that.
So.
I think we're our strategy and the only way that we can do that of course is we're not loaded with debt and we treat people right.
Everything is.
Long game at HEICO.
That's why I think frankly.
Frankly, the numbers are where they are and there is more to come on the upside there.
Great. Thanks, a lot for the color.
Thank you.
And we have your next question from Louis Raffetto from UBS. Your line is open.
Thank you good morning, guys. Good morning morning.
Carlos I'm going to go to your first couple of quick ones. The accrued contingent consideration is that focused in atg or SSG I think there was a.
In the quarter.
Sure there is a little bit of a benefit from the discount rate in a quarter that was split between both segments pretty evenly.
The discount rate for valuing those liabilities went up from 4% to 6% on average for us.
So that 2% did have an incremental benefit to the company, which by the way we have seen that in a while so as the rates rise as liabilities get discounted and that's why you see that in the cash flow statement.
$700 million.
That makes sense alright, perfect. Thank you.
Really there was a $9 million and we now have outflow in the.
I guess, our investing activities under other just was curious.
Yes.
The majority of that was related to a deposit on a product line acquisition that we're almost complete with.
And so for timing reasons, we made that deposit and we're still doing some investigative work.
I know, it's a small product line, we're looking to buy and that's why you see it come in and investing activities.
Yes.
Alright, perfect. Thank you and then Eric.
Eric I'm going to go back to you. So I guess I heard some of that margin some of the goodness in the quarter was a bit on mix, maybe a little bit of a mismatch on sort of pricing increases versus cost increases, but I know you said theres no. One time, so there's no reversals of any of those old bad debt expenses or inventory reserves or anything like that from a few couple of years ago.
No.
Our clean and I'm glad you mentioned that.
No.
This is something which I am really proud about HEICO and I talk about this with our people all the time, if you look at our peers out there most of our peers if not all of it took these big onetime charges were repositioned they wrote off inventory they did receivables all sorts of stuff Heiko.
Never did that and we've never done that in the history of operating this business. There are all sorts of people out there who make an economical decision in order to Goose short term earnings HEICO does not do that and if you look at our numbers.
It supports that without taking these onetime charges. So to answer your question no. It was not a reversal.
Of.
Inventory or receivables or something like that and.
And as far as pricing goes.
We've been.
As I said, we've been very careful to make sure that we pass along our cost increases and we maintain our margins.
So I don't think there I think it would be incorrect to say that theres been a mismatch in terms of pricing and cost because yes. There are some areas, where we were able to realize higher sales prices due to.
Cost going up and we had inventory at a lower cost, but I can also tell you that there are plenty of other areas, where due to contracts that we were not able to realize higher sales prices when cost went up.
So.
I wouldn't draw that conclusion that our margins were were driven because of that I mean, we're operating in a.
A very lean environment. Our people are working exceptionally hard I think our cost base coming out of Covid is lower than it was.
And so that's really the benefit that we're seeing.
Both through the margins.
Alright, that's great color appreciate Eric.
And then Larry I guess, maybe one for you and to Eric's point on uneconomical.
There's a recent deal.
For our brakes business went out at 14 times, that's something you guys.
And then looked at just not not worth 14 times.
The answer is we really don't comment on things that we look at it.
I think that.
Paying 14 times for anything I think is a pretty high price.
It's up to the buyer if he makes it work.
God bless them, let them buy it I mean, some people are paying 17 times so.
We don't do that because we are much more conservative and we'll buy something thats accretive and you know I mean, historically you know our style.
We will buy very good companies, but we're not going to reach up to the moon and the real question is in hindsight. What did these 14 17 time acquisition deals due for the accretion of the buying company.
In my opinion that sort of gets lost in the weeds, that's yesterday's news.
We can't live like that remember, where the basically the larger shareholders and we can't wait 25, or 30 years to get a payback on our investment so that's not our model.
But if somebody else wants to buy it I mean, I think they are all they happened to be very good companies.
But the question is how much do you pay for it.
And the other thing.
This is Eric that I would add is that we're very busy with.
Acquisitions, we obviously pay competitive prices, but we're very busy and in general I would say people should know if there is something for sale. We see most of everything which is for sale I mean, we're the go to buyer for.
A lot of.
A lot of.
Companies.
But we've got various priorities and we've got to do what really makes the most sense for HEICO and.
Want to be careful if someone's paying a higher price they probably see a good path.
<unk>.
To realizing very good value, but we've got to focus in.
Focus on the acquisitions, which are most meaningful to HEICO. One other thing I have learned I have been told by many experts in wall Street and M&A that roughly.
20% of acquisitions of successful, 80% of acquisitions really fail, but nobody puts out a press release to announce that we bought a pig in the poke and got stuck.
HEICO has made and that's the way I put it.
I'm not politically correct I'm, telling you what I really believe and I know that the M&A world knows that roughly 80% of acquisitions don't work. So.
Not going to buy into the greater fool theory, because I wanted to see my salary double from 1 million to $2 million in sofa my family's money in our investors' money as hard on the line and I wanted to see a payback before I die.
Wait 50 years to get my money back. So that's the way HEICO is structured and the other thing is if you look at the market acceptance of HEICO in that.
The multiple that we sell it it appears that a lot of investors appreciate what we do and I've gotten letter today, we've got incredible letters on the earnings.
I don't want to make them public, but many investors have sent us.
Thank you notes by email this morning.
Saying, how they appreciate the way we run the company.
So again, we're not going to pay 14 or 16.
There's one example, where we would pay 14 and if we were absolutely convinced that they have.
Our backlog orders that would support the future being at nine or 10 or something like that or whatever in that case, we might pay 14 on trailing but.
In general you've heard me say I wanted to get the money back within hopefully seven to 10 years and that's how we get our strong cash flow.
We're not we are not up to our neck in debt and when tough times come around we don't get calls from banks and we don't have to sell that at 8%. So that's our strategy.
Does that answer the operation at the honesty, Yeah I appreciate the honesty do you agree with it or do you disagree with me.
Oh no.
No one can disagree with what you've dealt with the family has built over the last 30 years, there and how successful that's been.
That's the right answer.
Right.
Thanks Louis.
And again as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question from Gautam Khanna from Cowen Your line is open.
Yes, thanks for taking the follow up I was just curious if you've seen any change in the pace of FAA approvals for your PMA.
Our pipeline is that does that.
Changes at all over the last couple of years.
Recently, it has not it has not changed.
Our pace of approvals.
<unk> continues and we have we have a very good relationship.
We built up a lot of confidence over over the years.
<unk>.
We're doing great there by the way I'm going to add one other bit of color.
People internally and other engineers, who have come to look at HEICO and see how we run our PMA analysis have said to us that we really overkill.
The development of parts that we go to extremes to make sure. They are correct and accurate and probably cost us more money to do that and I think that that's a very good and we believe that's a very good investment.
The FAA understands that too that the extent to which we go to developed parts of the detail and the duplication and so forth. So we get it right and.
That's something that's in our DNA and I think the.
Quality remember HEICO in general has to develop and sell quality parts, we can't sell jumped to go on Spacecrafts and electronics don't work, we have to have parts that work and aircraft engines and everything else. So quality is absolutely number one.
And we will overspend to get that quality, that's very very important to us.
That's helpful. And then just maybe Eric could you remind us how much of SSG sales.
In a normal year are derived from the Chinese market.
And then just curious if you saw any slowdown you know given.
All their lockdowns and what have you in the quarter.
Related to that region.
Yes.
Don't disclose for competitive reasons.
We are active in China, we do not have any manufacturing sites in China.
But we are in China, we sell into that market.
And I would say we're doing just fine.
Did you see any slowdown in the quarter related to the.
But the near term.
So where they can get in and buy.
I am reluctant to reply to that because I really need to study it by.
Business unit, sometimes you can have.
I wouldn't want you to form the wrong opinion, sometimes sales can be lumpy due to big inventory purchased in one quarter or another so.
I would say in looking at the China market that you could really get a sense looking from one quarter to the other.
Fair enough and then just maybe you guys have a high level view on any sort of Ukraine, Russia exposure I E sales that will be lost as a result of that.
Yes. This is Victor we did have some sales in Ukraine and Russia.
The ETE G.
So that's actually a headwind for us I mean, it's not overwhelming.
Sort of in the in the neighborhood of <unk>.
Maybe kind of 1% of sales headwind I think.
Probably on an ongoing basis as total potential.
Something like that.
And I would say within the flight support group as the numbers would be similar.
Sure.
Great. Thank you very much.
Thank you.
And there are no more questions I will turn the call back to the speakers for further remarks. Please go ahead.
Uh huh.
This is Larry Mendelson again, it's been a long call and a lot of excellent questions I hope we've been able to.
To satisfy you with the answers if not you know where to reach us give us a call at any time, we will try to be very responsive.
I. Thank you for your interest in HEICO, and we look forward to speaking with you.
When we do our third quarter earnings call, which will be sometime in <unk>.
Middle to late August so with that this is the end of the call and we wish you a very very good day.
And hopefully a strong stock market to return.
Yeah.
Thank you. This concludes today's call. Thank you all for participating you may now disconnect.
Yeah.
Okay.
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Thank you.
On the call.
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Yes.
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