Q3 2022 HEICO Corp Earnings Call
Welcome to the HEICO Corporation third quarter and full year fiscal 2022 whereas financial results call. My name is Connie and I will be the operator assisting you today.
Certain statements on today's call will constitute forward looking statements, which are subject to risks uncertainties and contingencies heico's actual these actual results may differ materially from those expressed.
In or implied by those forward looking statements as a result of factors, including but not limited to the severity magnitude and duration of the COVID-19, pandemic heico's liquidity liquidity and amount of timing of cash generation.
Lower commercial air travel caused by the pandemic and its aftermath airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services.
Product specifications cost and requirements, which could cause an increase to our costs to complete contracts.
Ever met and regulatory demands export policies and.
Restrictions reductions in defense space or homeland security spending by U S <unk> foreign customers or competition from existing and new competitors, which could reduce ourselves our ability to introduce new products and services at profitable pricing levels, which could reduce ourself.
Yes.
Sales and sales growth product development or manufacturing difficulties, which could increase our product development and manufacturing costs and daily cells, our ability to make.
Acquisitions.
Parties listening to this call are encouraged to review all of the Heico's filings with the Securities and Exchange Commission, including but not limited to filings from the 10-K.
Form 10-Q , and forms 8-K, we undertake no obligation to publicity under update or revise any forward looking statements whether it was a real as a result of new information future events or otherwise, except they extended requirements by applicable law.
And now I'll turn the call over to Lawrence Mendelsohn, Heico's, Chairman and Chief Executive Officer. Please go ahead Connie. Thank you and good morning to everyone on the call. We thank you all for joining us and welcome you to the HEICO third quarter fiscal 'twenty two earnings announcements.
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 VP and CFO .
Today, My comments will address our consolidated Q3 results acquisitions and accomplishments followed by a presentation of this segment results from Eric and Victor Heico's co presidents.
Now before reviewing the quarterly results I would like to take a moment to thank all of heico's talented team members for their contributions to another remarkable quarter.
Their commitment to producing the highest quality products for customers resulted in excellent quarterly financial results for all HEICO shareholders.
And I remain very optimistic in the future for our company.
Summarizing the highlights of.
Third quarter.
I will tell you that consolidated third quarter fiscal 22, net sales and operating income.
Represent record results for HEICO.
Driven principally by record operating results within the flight support group, mainly arising from continued strong rebound in demand for our commercial aerospace products and services.
In addition, this marks the eighth consecutive quarter of sequential growth.
And operating income for the flight support group.
Consolidated operating income and net sales in the third quarter of fiscal 'twenty, two improved 28% and 21% respectively.
As compared to the third quarter of fiscal 'twenty one.
These results, mainly reflect 13% quarterly consolidated organic net sales growth as well as the favorable impact from our fiscal 'twenty, two and 21 acquisitions.
Consolidated operating margin improved to 22, 6% in the third quarter of fiscal 2002 and that was up from 21, 4%.
In the third quarter of fiscal 'twenty one.
Net income attributable to Noncontrolling interest was $10 $5 million in the third quarter of fiscal 'twenty, two as compared to $6 8 million in the third quarter of fiscal 'twenty, one and of course the increase principally reflects.
Improved operating results of certain subsidiaries in which noncontrolling interests are held.
We continue to estimate the annual allocation of earnings to Noncontrolling interest partners to approximate 7% to 8%.
Percentage of pre tax income.
Heico's effective tax rate was 27% in the third quarter of fiscal 'twenty, two and that compared to 15, 7% in the third quarter of fiscal 'twenty one.
I wanted to comment on this tax rate because it's a major issue and.
Later in this call Carlos Macau will explain the complexities.
Between actual tax that we pay in cash.
And the tax provision required for GAAP, but suffice it to say from an operating point of view in.
In my mind and management mine, our tax rate is really 21%.
For the analysts out there who are on the phone.
If you apply the 21% which is our what we estimate to be our annual.
Tax rate.
You will find that the earnings per share for the quarter would be 65 to 66.
In my opinion, and Carlos as two and he'll go into detail.
The additional 7% difference between 'twenty, one and 'twenty seven.
Most likely never has to be paid and Carlos will explain why that is and I just wanted to pointed out very very clearly.
The increase in our tax rate.
Reflected a five 3% unfavorable impact from tax exempt unrealized losses in the cash surrender value of life insurance policies related to the HEICO leadership compensation plan and that was recognized in the third.
Third quarter of fiscal 'twenty two.
And that.
Compared to the tax exempt unrealized gains.
Recognize in the third quarter fiscal 'twenty one.
Plus a two 6% unfavorable impact from a larger income tax credit recognized in the third quarter of fiscal 'twenty, one due to higher qualifying R&D expenses as compared to the third quarter of fiscal 'twenty two and.
That's a big mouthful, it's very complicated.
But the simplistic answer is as we look at it again is.
The real tax in my opinion and management is 21%.
For the quarter.
We now expect a full year effective tax rate to be between 20, and 21% of pre tax earnings.
The increase in our estimated annual effective tax rate from prior year estimates of 18% to 20% is directly attributable to overall stock market declines, causing unfavorable investment results within HEICO leadership compensation plan.
During the third quarter of fiscal 'twenty two.
Consolidated net income increased 7% to $82 $5 million or <unk> 60 per diluted share in the third quarter of fiscal 'twenty, two and that was up from $76 9 million or <unk> 56.
<unk> per diluted share in the third quarter of fiscal 'twenty one.
Liquidity and cash generation was very strong cash flow provided by operating activities increased 20% to $149 $2 million in the third quarter of fiscal 2002.
And that was up from $124 million in the third quarter of fiscal 'twenty one.
This despite our continued investments in working capital to support strong orders and our increased consolidated backlog.
We now expect capital expenditures for the full fiscal 'twenty two to approximate $35 million and this is down from prior estimate of $40 million.
<unk> total debt to shareholders' equity ratio improved to nine 9% as of July 31 22.
And that was down from 10, 3% as of October 31, 'twenty one.
Our net debt, which is total debt less cash and cash equivalent of $112 $2 million as of July $31 22, compared to shareholders equity ratio improved to four 5% as of July 31, 22 and that compares.
To five 6% as of October 31, 21, our balance sheet is very very strong.
Net debt to EBITDA ratio improve 2.2 times as of July 31, 22 down from two six as of October 31, 'twenty. One we have no significant debt maturities until fiscal 'twenty five and we plan to you.
Utilize our financial strength and flexibility to continue aggressively pursuing high quality acquisitions of various sizes to accelerate growth and to maximize shareholder returns.
In July 22, we paid a regular semiannual cash dividend of <unk> <unk> per share, which represented our 88 consecutive semiannual cash dividend.
Okay.
In July 22, our flight support group acquired accurate metal machining.
A leading manufacturer of high reliability components.
And assemblies in the aerospace defense and semiconductor equipment subsystem supplier markets.
Accurate employees approximately 250 people at its Cleveland, Ohio production facility.
In July 22, we announced the agreement for our <unk> group to purchase <unk> International which represents heico's largest ever acquisition <unk>.
<unk> is headquartered in Paris, France, and as a global leader in the design manufacture and sales of <unk>.
High reliability complex passive electronic components.
In rotary joints assemblies.
Mostly aerospace and defense products <unk> is expected to generate approximately 190 million euros in revenue during calendar year 2002.
It has 11 advanced locations worldwide to support its over 3000 customers.
The <unk> transaction is expected to be completed in the first quarter of fiscal 2003.
In August 22, a subsidiary of the Atg Group acquired charter engineering located in Pinellas Park, Florida.
And charter designs and manufactures RF and microwave coaxial switches for the aerospace defense commercial and automated test equipment and instrumentation markets.
In August 22.
We announced the Atg group acquired sensor systems.
And Thats based in Chatsworth, California.
And it's one of the world's largest leading designers and manufacturers of airborne antennas for commercial and military applications.
Sensors antennas are found on nearly all large commercial transport aircraft built in the last 50 years, along with numerous business and military aircraft.
We expect all of these acquisitions to be accretive to our earnings within the year following their respective close date.
At this time I would like to introduce Eric Mendelson co President of HEICO and President of Heico's flight support group to discuss third quarter results of the flight support group.
Thank you.
The flight support group's net sales increased 39% to a record $333 million in the third quarter of fiscal 'twenty two.
$237 1 million in the third quarter of fiscal 'twenty one.
Net sales increase in the third quarter of fiscal 'twenty to reflect strong organic growth of 25% as well as the impact from our profitable fiscal 'twenty, two and 21 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 third quarter of fiscal 'twenty one.
<unk>.
Sure.
Yes.
The flight support group's operating income in <unk>.
<unk>, 68% to a record $78 million in the third quarter of fiscal 2002.
Up from $42 1 million in the third quarter of fiscal 'twenty one the.
The operating income increase in the third quarter of fiscal 'twenty two.
Typically reflects an improved gross profit margin mainly from increased net sales across all product lines and efficiencies realized from the higher net sales volume.
The flight support group's operating margin improved to 21, 4% in the third quarter of fiscal 2002 up from 17, 7% in the third.
Third quarter of fiscal 'twenty one.
The operating margin increase in the third quarter of fiscal 'twenty, two principally reflects a decrease in SG&A expenses as a percentage of net sales mainly reflecting the previously mentioned deficiencies as well as the previously mentioned improved gross profit margin.
Now I would like to introduce Victor Mendelson co president of HEICO and President of Heico's Electronic technologies group to discuss the third quarter results of the electronic technologies group.
Eric the electronic technologies group's net sales increased 2% to $244 2 million in the third quarter of fiscal 'twenty two up from $239 5 million in the third quarter of fiscal 'twenty one.
Net sales increase principally reflects the impact from our profitable 'twenty, one and 'twenty two acquisitions as well as 1% organic growth the organic growth mainly reflects increased demand for our other electronics space and medical products, partially offset by decreased defense products.
<unk>.
Which seems to be common among defense companies this year with U S government outlays lagging.
The increase in non defense revenues underscores these other product lines strength in the quarter.
The electronic technologies group's backlog remains healthy with a roughly 16% increase since August October 31, 21, and it remains elevated reflecting strong orders. However, we've experienced increasing delays in receiving components and raw materials from some suppliers adversely impacting.
Some defense products planned production and shipment during fiscal 'twenty, two and during the quarter.
We estimate somewhere around $25 million of our revenues moved out of fiscal third quarter into future periods, mostly estimated to be in the fiscal fourth quarter.
Due to supplier or even supplier issues or even customer ordering delays.
Notably.
Our book to Bill ratio increased in the quarter and year to date.
The electronic technologies groups operating income was $68 million in the third quarter of fiscal 'twenty, two compared to $69 million in the third quarter fiscal 'twenty one the slight operating income decrease principally reflects the lower gross profit margin mainly from the previously mentioned.
<unk> decrease.
Defense product sales.
The electronic technologies group's operating margin was 27, 9% in the third quarter of fiscal 'twenty, two compared to 28, 8% in the third quarter fiscal 'twenty one.
<unk> operating margin principally reflects the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of sales.
Turn the call back over to Larry Mendelson.
Thank you Victor and Eric.
As we look ahead to the remainder of fiscal 'twenty, two we expect global commercial air travel to continue on a path to recovery despite the potential for additional pandemic variance.
We remain cautiously optimistic that the ongoing worldwide pandemic vaccines and boosters rollout will continue to positively influence global commercial air travel and benefit the markets we serve.
While signs of stability in global commercial air travel continue to surface. It still remains very difficult to predict the pandemics passed in effect.
Including factors like new variance vaccination rates potential supply chain disruptions and inflation, which may 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.
In closing I'd like to again, thank our incredible global team members for their continued support and commitment to HEICO and its shareholders together, we continue to win in the marketplace exceed our customer's expectation and build a larger and more successful company for the <unk>.
Future. Your contributions are what makes HEICO and excellent company.
I'd now like to open the floor for.
More questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Prompt on the phone line will indicate when your line is open.
State your name and company before posing your question again press Star one to ask a question and we will pause for just a moment to allow everyone a chance to signal.
And we will take our first question.
Your line is open.
Hi, good morning, Thanks for taking the questions.
Maybe just first question Larry could you just kick off just and I realize you haven't closed this acquisition, yet, but just on the <unk> acquisition.
Obviously your largest silver.
<unk>.
Exciting maybe you can give us a little more color on that it looks like complementary markets and I'll pick up the year entering Europe . So maybe that's a nice advantage for you maybe on the defense side and are there any maybe question one there and then maybe possibly the room for improvement on the operating side. It sounds like maybe margins are not quite where you guys are or.
Is it just sort of a mix issue there that kind of keeps that down thanks.
So I'm going to let Victor furnish most of the color all I can tell you is.
Victor and I and the team have been looking at <unk>.
For I can't remember four years by I don't remember, we always like this company we got to know the management, we got to know about the company.
We feel that this will be a great adjunct or addition to the <unk> group.
I think their margins are good they're not.
30% margins that we like to see in atg, but we have good margins.
Think we have an outstanding management team, there and I think the opportunities for expansion through acquisition.
Realistic. So I think this will be a great addition to the HEICO group.
And I'll, let Victor if I get into some of the more details that he could explain.
Larry those are good questions.
How are you.
Great those are good.
<unk>.
Thank you.
Until we're completely done with the regulatory processes.
We'll hold off on kind of predicting.
Anything there other than to say that the same management will continue running the company the people, where there will be there and there'll be implementing the plan that they've laid out in their own internal growth plan, which certainly impressed us.
And.
We remain very excited about the company.
Okay fair enough and I think while you got the mic there how about just a couple of just questions for you.
The quarter, obviously looked pretty good if you take out that sort of $25 million.
Push forward and.
In sales and then maybe.
Maybe just give us a little more color on whats driving this growth.
With defense I think you said mentioned being still down a little bit and that's half the half of your I guess close to half of your revenue there in your segments. So.
Is it just a mix of space medical General industrial what's driving that put you a pretty good growth ex defense.
Visibility on defence, specifically do you see that improving as we go over the next few quarters.
Yes so.
And the order that you raised there is those are also good questions.
We had very nice growth.
Across the board.
<unk>.
Most of the or all of the other markets. Some stood out certainly in percentage terms for us space medical other electronics markets were particularly.
Particularly strong in the quarter and sales aerospace.
Aerospace was very nice in telecom other things that we serve and even some of the smaller markets. So.
Some of the other really small markets for us like marine.
So very strong so kind of across across the board in the other markets on defense.
As I mentioned in the introductory remarks.
We're all seeing that Dod outlays have been lagging this year.
Nobody seems to really know why there's a lot of it right. There are a lot of different theories on this and so on.
Yes.
Hi.
My tendency is to be conservative and not believe that it's coming in the next 60 or 90 days that it turns these things tend to take a little bit longer thats why as the year is the year is worn out and we've been careful.
In our remarks.
No.
I don't know of any orders or small amounts maybe here and there nothing outside the ordinary that's been cancelled in defense for us.
There are always by the way in businesses like ours of course, there are always cancellations and pull ins and things like that the normal noise level, but referring to outside of the normal noise. All I don't see anything unusual there and whats happening is as I mentioned, our book to Bill has been growing.
And our backlog has been growing so it confirms that there.
They are not lost orders and they ship at some point.
<unk>.
Like I said in the call some of those are going to be in the fourth quarter and civil beyond.
Okay, Great just shifting gears real quest.
A quick shot at.
Just on your revenue trends, obviously, it had been really strong.
I assume we obviously have to slow down.
We're back to where it looks like to pre COVID-19 levels.
But can you just give us a little more color on airline inventory levels.
I imagine there is still below normal and.
How do we.
Do you sort of see that coming about.
Sure.
Just in terms of passenger travel it doesn't obviously, it's pretty much back to where we were I guess ex sort of business travel I guess, that's still a lagging factor, but so just trying to see how are you.
Do you envision growth over the next few quarters from a high level.
Yes, all great questions Larry.
I spend a lot of time thinking about this and talking to our folks about it.
No question our results have been outstanding I think that we've captured market share I know we've captured market share.
We've got parts that other people don't have I think HEICO is.
Increasing credibility in the industry, we're viewed as a major.
Industry participant and supplier.
We're not the small PMA company that we used to be many many years ago. So I think that credibility is is very important and we view it very much in a different light.
Having said that North America is has returned basically back to the pre COVID-19 levels are it's pretty close with Europe, a little bit behind of course Asia is still lagging substantially and Latin America is lagging somewhat sort of in between Europe and Asia.
In terms of the return to service.
With regard to your question about inventory, we don't believe that airlines are.
Stocking a lot of inventory I think a lot of what we have supplied is going directly onto aircraft. However, when you look the industry in general and I talked to our people about supply chain and what's going on there is tremendous.
Extension in the turn time.
<unk> turn times or lead times.
For materials part services, all sorts of things. So as a result, I think it's logical to assume that airlines are buying ahead of their needs. I don't think they are they're ordering ahead of their needs, they're not necessarily building inventories, but they haven't had.
A very large demand in this return to service as they've put aircraft back into service they needed a lot of maintenance. So there has been a big increase there. So when you factor all of this together.
I think HEICO is going to continue to do very well.
Got to be careful obviously, 25% organic growth is outstanding and we've done this now for quite some time, we're back basically to our pre COVID-19 levels. So.
Wouldn't anticipate this kind of growth to continue we don't know right. We're trying to figure it out nobody tells you a monitoring more than I need because I'm worried I can't get it next year. So.
Having done this for a long time.
Im cautious that.
There could be some of that going on now of course, that's going to be mitigated by the recovery in Asia and South America.
Somewhat so I think we're in a great place, we're going to continue to do very well, but I just sort of cautious about getting.
Extrapolating this too far forward.
Nobody knows.
Understood Great I appreciate all the color really helpful. Thanks, Thanks, a lot guys.
Okay.
And we'll take our next question from Sheila <unk>.
Hello from Jefferies.
Okay.
Yes.
Hi, This is Allen on for Sheila. Thanks for the question on your sensor systems acquisition, you paid in part with HEICO shares.
Maybe you decided to use equity here, how does that change the recurrent.
For that.
So.
The reason for that is that one of the sellers of sensor systems.
Only sell.
Because he wanted HEICO shares.
It really was as simple as that.
Happy to give cash.
Have known this seller for we have worked on that acquisition for over seven years.
He is the seller.
Really love HEICO was approached by many other companies, we believe who offered more money.
But he only wanted to sell to HEICO and the only one at HEICO shares.
That was the only way we could make the deal.
And we were happy to do so.
Great and you've been pretty active with four acquisitions announced in the past month or so is there anything that changed in that M&A market that allowed you to be more active or like drove that activity.
No I don't think so.
I think we have often said that we make acquisitions when they become available to us.
Perhaps.
<unk>.
In some cases it might be that the.
The market for acquisition loans by private equity was getting a little tougher.
Private equity when they did their arithmetic.
Doubt that they couldn't match.
Match, the terms that HEICO has on its credit line. So.
They were in one or two cases, they couldnt really compete with us and we were able to win the day. So I think that is.
As might have been part of it but I can tell you. Some of these acquisitions as I said sensor we worked on for seven years and it just time had come and this is Victor I would say it really is a question of timing in these deals that we've closed and when they came available and when we are able to reach <unk>.
<unk>.
In most of the acquisitions were working on now or we've announced.
They were talking exclusively with us and it's just when the timing became good.
Awesome and maybe just one more on atg.
You have any visibility to when that $25 million of delayed revenue will be recovered is there something that you.
You need to see in the market or how do we think about.
How much confidence you have in recovering any of that in fiscal Q4.
Yes look I think that.
Our expectation our company's expectations is that the bulk of that will be in the fourth quarter and then some of it will be let's say first second quarter I mean, we do.
Don't see it being out that far but.
What has happened is that.
The.
There is a shift that's going on so we have something that shifts from the second to the third and then those things that moved into the third quarter shipped but then it was more.
It grew more in the in the in the third quarter exceeded the amount that was if you will delayed.
Increase so as I said on the call that last quarter's call I think I said that we thought.
In the first quarter it was about $10 million worth of delayed shipments and then in the second quarter. We estimated that grew by 50% to 70% rate kind of in the $16 million to $17 million range, 15% to 17 range.
And now we are estimating in the 25 ish range.
So it's that growth in particular.
That we seek so I do expect a lot of the third quarter delayed shipments to ship in the fourth but I expect some push outs than in the fourth going into the first quarter.
And I would hope at some point those moderate when my expectation would be which is first the moderate flatten out and then start moving down.
But it's possible.
Moves down straight.
Thanks for that color that's it for me.
Thank you thanks Avishai failing.
And we will take our next question from Peter <unk> from Baird.
Yes, good morning, Larry Victor Eric Carlos.
Good morning.
Eric.
Eric can you.
You may be talk a little bit about.
Maybe the size of your parts catalog.
Or the.
The runway that you still see in developing parts because obviously your organic growth continues to be incredibly impressive.
Got it yeah good morning, Peter.
So our parts catalog and in terms of TMA I think youre, referring to is about we've got about 13000 approvals.
So it is really quite broad and it covers.
Many engines as well as all of the different chapters.
Chapters, so we're in fuel hydraulic pneumatic electromechanical avionics wheels and brakes.
Structures really interiors all over the aircraft. So I think it's really a very diversified product line.
And it's not focused on any one area, nor any one competitor and we like that approach very much. We think that that really makes a lot of sense. So then your combined.
You asked about concerning the parts catalog along with our line replaceable unit, our component overhaul capability and it really is quite large and then of course, you add into distribution and it gets even larger so we pretty much everything.
And the airplane for.
Variety of customers.
And Eric do you still have the ability to kind of add more to that I mean, now that you've got such a large size.
In terms of 13000, plus parts do you still kind of see the ability to add a few hundred parts of the year as you've done in the past.
Absolutely, we're keeping our new product development spending levels, consistent with where they've been in the past.
And we continue to develop three to 500, new PMA per year, a similar number of repairs. So we're continuing to.
Increase the.
Yes.
The product range that we've got in addition, we've got a number of.
I'd say extremely complex critical.
Products, which we offer which we don't publicly speak about for competitive reasons, sometimes our competitors know about them other times they don't.
But we've been really very our team is phenomenal.
Finding all sorts of opportunities and figuring out how to engineer and how to do this stuff and as far as I'm concerned we've got the best sales force on the planet and they are really able to get.
Customer excitement and customers to work with us and our customers Trust us because this stuff we're doing is very complicated.
And they've got to have a.
A high degree of faith in HEICO and Thats why we.
It takes this seriously our quality organization and the engineering content that we put in to make sure that we're really.
Extremely robust very very thorough and frankly, what we do goes beyond what's required in any of the regulations, but it's something that we've done for 32 years, because it's the right thing to do for our customers and to protect HEICO. So we spend a lot of money, making sure everything.
Perfect.
And frankly, that's why we've got the quality reputation that we've got.
Adam permit Eric Alright product, yes, yes.
Yes, no. Thank you for that color and just how.
How do we think about it.
Wide body activity starts to recover.
Going forward, we should see a pickup there we're already starting to see some pickup in widebody traffic how much of an impact will that have on kind.
Overall efficacy.
Yes, it will be very helpful I say.
<unk>.
A little bit of South America wide body, that's the upside from here.
Most of our business.
I mentioned before is narrow body of course cargo has done very well in a lot of that cargo market is basically wide body aircraft.
So we've done we've done very well in that space as well, but I do think theres going to be additional additional demand. Obviously is the wide bodies further returned to service.
Okay, and just one quick one carload expectations for the tax rate for the fourth quarter can you give us a little color there. Thanks.
Yes, I think I think you should plan on somewhere around 4% for the year could be 20% to 21%.
<unk>.
I gave you that number thats, assuming that we don't have a catastrophe in the stock market as Larry mentioned earlier, we have broad losses in the overall stock market between now and our fiscal year end that could amplify a rate a little bit again in Q4, but.
A lot of the business of predicting that so that's where we stand right now.
I appreciate all the color thanks, guys.
Thank you.
And well take our next question from Ken Ken Herbert RBC capital markets.
Yes, hi, good morning.
Good morning, guys, Hey, Yeah, Hey, good morning, Victor maybe if I could first start off with a question on <unk>. The last couple of years, you've had a nice sequential improvement in margins from the fiscal third to the fourth quarter can you talk about maybe how we should think about margins in this segment. This year considering there is clearly.
Some recovery of part of what's been delayed with the normal seasonality seasonal benefit you get in the segment.
Thanks, Ken.
Thank you this is victor.
Good question.
I am not looking for any.
Increase in margins.
That happens that would be great but.
My own planning at least is to be more conservative on that and not assume an increase in margins.
In the in the fourth quarter.
At this point and then we're now in our budgeting process for 2003, and we'll start thinking about those.
Of course.
The 23 margins will be moderated from historical levels.
Somewhat because of the <unk> acquisition.
Which we've.
Said.
We've talked about their margins being within our in our target range, but.
Not at the top more towards the bottom of our target range.
So we'll start to think about those later.
Just just on that point.
For the base business, depending upon where this year ends up it's hard to say, but I think of your margins have been running sort of that 29 ish to maybe 29% to 30% range is there any reason in 'twenty three excluding accelerated you don't get back to those levels.
I don't know yet because I really have to see the individual budgets by.
By the way keep in mind that that's of course, the GAAP margin after amortization. So the business is on their own.
We're running about three four points higher than that five I'm, sorry, so about five points higher.
Then that so if you're running at 29%. That's 34, if you are running at 28%.
That's 33.
Average bad I don't know yeah. So.
Again as I've said on these calls in the past and it's sort of hard to go to somebody say you bump you came in at 32% instead of 33% or 30% instead of 32 or 33. So.
That's part of the.
The challenge Ken This is Carlos just to follow up real quick on what Victor said Theres. So many businesses in the Atg and is a very mix sensitive segment.
<unk>.
With the little bit of a drag that we've had this year on defense that has brought the margin down a little bit, but we've been running the last couple of quarters, 28% I think as a management team, we're very happy with that.
And as Victor said, I think going into the fourth quarter would be we'd be very happy if that maintained at that level.
Perfect that's helpful and if I could.
Just one for Eric.
It's been a few calls now that you've called out sort of incremental opportunities as supply chains continue to stretch for new material into the aftermarket I'm just curious as you get these opportunities as they come up how much opportunity is there for you to really sort of scale the PMA offerings in a particular year.
More timeframe or maybe how long does it take to go from.
Identifying an opportunity to perhaps having a product in the marketplace me how quickly can you take advantage of this share opportunity considering the broader supply chain disruptions in the aerospace side.
Yeah. Good question, Ken I like to say that to develop if youre speaking about a PMA part.
Typical cycle time from when we induct it until we have it available is approximately a year.
That can be a short as a couple of months.
For something Thats, very hot and not that complex.
Two a couple of years for something that's on the other end of the spectrum something Thats Super complex.
So.
I would say what we're taking advantage of now is increased penetration of our existing product line. So these are parts that we've had available for sale. There is no. Good reason why frankly.
More people are buying it just it takes a while to get all this done and as a result of having them I think we're able to pick up market share.
So I think it.
Really as a result of that also we were.
Since we don't have a lot of leverage and we make sure that we're very well financed within the company. Unlike others, we didn't squeeze our inventory.
So there is nearly as much as others and as a result, when demand came back we've been able to satisfy it.
As opposed to others, who have really been.
Frankly drained down their inventories so I think that leaving us in good place right now I would say the market share capture isn't as much from finding and immediate opportunity and developing it as it is stuff that we.
We've already had in process for some time.
Yes.
Great Alright, well, thank you very much.
Thank you.
And we'll take our next question from Robert Spingarn from Elias Research.
Hey, there.
Good morning, Rob.
Can you guys.
Good morning, everybody I want to follow up on a few things that have already been asked so.
Larry I was going to start with you on M&A you talked about the concentration of deals just a random timing there but.
I thought your private equity comment was interesting are we seeing a different pipeline now than we've seen in the past and as the size of the transactions getting larger.
I don't think so I think it's pretty much business as usual.
I mean in the past.
The very large transactions.
Normally went to private equity in.
Other industry buyers at multiples that we just don't trade. So if they were trading and you know some of the ones I'm talking about $17 15 times, EBITDA and things like that.
We have looked at these companies in the past, but we.
Unable to do that.
I think now we're seeing a little bit lower so far a little bit lower pricing because of interest rates.
And I think that would normally be expected.
Private equity I think has to be a little more careful we've been told by many bankers there.
Net.
Private equity has to put in more equity and pay higher interest rates. Some of the banks. We have been told really out of the ball game for certain borrowers and private equity. So I think this puts a little bit of pressure on the pricing and lets us participate, but I would say overall.
<unk>.
It's kind of business as usual and I can tell you that we have many many deals that are in the pipeline that we're looking at which is normal for us but the question is will we be able to close a deal we will the pricing be right for us we will our due diligence show.
This is really a great company as opposed to some hockey stick presentation that a seller puts out and then when we start to dig in and turn over the rocks, we say wait a minute. So I think the answer is.
Sort of business as usual may be a little bit better.
Okay, Eric a couple for you.
I just wanted to go back to this discussion.
Hubbard from Covid, because clearly you said wide body, we're not there yet.
And there are certain regional.
Areas, where were not fully recovered and so notwithstanding the fact that you had record sales in the quarter, which I think were $6 million higher than the prior record quarter, Michael Port all of it.
Would seem to me that.
Sure.
Okay.
Sure.
New products, new customers is there a way to calibrate what a recovery quarter would look like if you got that wide body and you've got everybody that you're missing in your sales in other words is the $330 million number closer to 400 million fully recovered.
Yes, because we've got obviously some acquisitions in there.
And the right.
So it is a higher number I'm not sure what the.
What the number would be maybe.
I think we're pretty close.
Right now.
Just thinking for a moment in my head I mean, maybe it's more like $370 million quarter at 300.
That would be record a record.
That kind of thing.
Maybe $3 60.
Would be record directory.
And.
Without fresh.
Right.
With the long lead times for Sperry, we're hearing the airline with disguise.
And given that many of these sole.
Paul source are you seeing folks come in at a higher rate and asking HEICO to develop parts because they just can't get them from the OEM.
Yes, we are seeing.
Definitely tremendous interest in our product line, a lot of trust and confidence in our.
Process and our ability to develop things, where we had our global sales meeting for the parts and repair businesses and I can tell you in my 30, nearly 33 years of doing this I've never seen.
Such enthusiasm across all of the businesses across all of the regions all of the people.
And frankly.
Just have to add the team that we've got there.
<unk> been doing this.
Some of them have been there nearly 30 years, others 20, others 10, but this is a team that's worked very very well together for decades.
There is a lot of trust a lot of confidence it's extremely well led.
I really think we're seeing.
If you will a tremendous internal synergy being able to respond to our customers.
Our customers request, we don't have it's not.
We've got a whole bunch of new people doing this for the first time, it's quite the opposite it's people, who really understand the capability understand how to get things done at the customers how to develop the parts how to get it so it had to get it board.
And it's really I would say, a very very well oiled machine as well as in our distribution business as well I mean, it's exactly the same thing and I think these companies are very much hitting their stride.
As I said parts repair and distribution I should also add we that our global sales meeting for the distribution business and again in <unk>.
Louisiana like I've never seen before as a result of market credibility.
With both our customers as well as our principles.
As well as really understanding maturity just the team that's been together a long time can rely on each other and so I think market share is a big part of what we are seeing my comments with regard to.
Return to service.
It's hard to figure out exactly where you are in that.
In that cycle.
But I felt it was something that just has to be caught out because obviously, 25% organic growth can't be done forever.
This actually brings up another question on the PMA side.
There are a few new entrants some folks trying to get in here, but can you just talk about how you've got this well oiled machine.
Does that concern you at all or are you just happy when PMA is growing overall.
Do you expect this market to have a different growth trajectory post COVID-19.
My comments honestly are focused on hydro PMA.
We have to be very very careful HEICO uses a process.
That we're very proud of that we've developed and we really fine tuned over the last 30 years.
And I think that is a unique HEICO process. So I'm very reluctant to extend that in general the PMA I mean, what we see in terms of interest in our product I think is very much focused on our product specifically ask our people.
Out any of our competitors in any of the spaces and we don't believe that competitors frankly are in the same.
Area in terms of.
Technical credibility product breadth.
So I my sense is it's much more of a HEICO phenomenon.
Okay, and then just quickly thank you Victor.
Victor.
All of them.
Of the deals could you update us on your end market distribution. Once these things are fully in.
Yes.
So they should be roughly comparable to what we have now defense may grow a little bit.
But it's pretty much within the noise level of where we are with the acquisitions, we've added I guess.
Yes.
Sensor systems that increases our commercial.
Nicely.
But.
Overall, it's probably not a major major shift and then theres. Some other acquisitions, we're working on as well that.
I would probably keep us close to around where we are now.
Okay. Thanks, so much everyone.
Thank you thanks, Rob.
And again it is star one to ask a question and if you find that your question has been answered you may remove yourself from the queue by pressing star two and we will take our next question from Robert Stallard.
Medical research.
Okay. Thanks, so much good morning.
Good morning, good morning.
Just a couple of follow up questions from me on.
On the <unk> deal you mentioned, it's our biggest deal to date under the margin is lower than the overall Atg group.
How would you compare this business compared to the other things that you see in this division and does this mark any sort of change in your approach to the sort of deals you'd be willing to do in the future.
Rob This is Victor it's very consistent actually with the strategy and atg.
The overwhelming majority of <unk> revenue is derived from component sub components and down at that level, which as you know is world we'd love.
And that's part of what interested us in it in the first place or a big part of what interested you us in the first place.
So I don't I don't really see it as a departure shift it is larger for us and that just happens to be because it was a larger opportunity that they have done a great job I will say one thing that is a little different and accelerated than our typical acquisition is.
The management team has done an excellent job, creating a unified platform a unified company there.
And so.
As opposed to just the strict individualistic model that we have typically followed so this.
This marks kind of.
Our if you will participation in something that's more integrated and we're excited about that because I think it broadens our aperture a little bit.
Okay, and then have you Victor just to follow up on your comment from earlier on how these delays seem to have gone from 10% to 15% to $25 million.
Over the last three quarters.
You seem to be suggesting that we're going to go the other way in the fourth quarter is that accurate or do you expect this trend to continue.
I apologize if I left you with the impression I think were going the other way in the fourth quarter I'm, not sure which way it will go in the fourth quarter.
My comment to answer one of the other questions earlier was intended to convey that I don't think its going to suddenly reverse and that.
Going to see this.
Disappear I think that what's more likely to happen. This is just my opinion is it at some point it flattens out and then starts to reverse but I would expect that in the fourth quarter, we will see some revenue.
That we had expected to ship we had scheduled originally to ship in the fourth quarter move out into the first in future quarters.
While we shipped in the fourth quarter things that moved from the third in let's say second quarters.
That makes sense. Thanks, so much Victor.
Pleasure.
And we will take our next question from peak Kubicki.
Hey, good morning, everyone.
Just wanted to start just wanted to start by talking about SG&A. It looks like you guys are getting some really nice efficiencies here year to date and particularly in the last couple of quarters. So I was just wondering kind of what.
Opportunities going forward are there, we're continuing efficiencies and to what extent that could possibly accrue to the FSD segment.
So no. This is sorry, Pete this is Carlos.
And the <unk> in particular, we benefited by leverage on those fixed costs. So you are correct our spend relative to revenue growth is that stable. Therefore, the percentage has come down and we.
We pride ourselves on running efficient operations not overspending on.
On G&A type activities I do believe that selling costs as revenues go up we'll continue to mirror that revenue growth, but overhead things like that we will continue to catch efficiencies on.
Same in Atg Atg is.
And a slight increase.
Expenditures in the SG&A area relative to revenues.
A lot of that was due to the fact that we're not getting this year. The growth that we typically are accustomed to and I think that too will cure itself. As you just talked about as we get into probably some more better times out of the future.
Particularly the defense area that I think will start catching those efficiencies again on the SG&A spend so.
Long way of saying that I believe overall for the company.
Our fixed costs in the G&A area are stable and well and that we will see selling costs increased proportionally with our sales volume increases.
Okay. That's helpful. Thank you for that and then just last one for me when you guys talk about mix a lot in SSG and you're talking about specialty products and specialty products I think it was up about 50% in the first half of the year I don't know what it did in the third quarter, but maybe you could talk about demand there.
Going forward over the next kind of six.
Six to 12 months in terms of what Youre seeing.
Yes, great question.
Demand was very strong we did very well in the third quarter on specialty products.
It is important to note that.
Whereas the aftermarket parts repair distribution has been on the rebound really.
Since.
Yes.
We've had extremely high organic growth rates I'm, just looking for my numbers here.
If you just bear with me.
32, starting in the third quarter of last year organic growth of 32% and 28%, 30%, 23% 25%.
Very very high the specialty products.
Covered later, so therefore, we are seeing great.
Greater growth right now out of the specialty products only because if you will the comps on our parts and repair and distribution are becoming more difficult because we saw that recover the recovery sooner of course, when COVID-19 hit the aftermarket was the one that took the biggest immediate hit because airlines.
Really didn't need the parts.
Specialty products continue to ship according to their orders and so they are bottom came later.
So we do anticipate additional recovery in specialty products, we think we're doing very well in that section as well.
Thanks, so much guys.
Thank you.
And we'll take our next question from Noah <unk> from Goldman Sachs.
Hi, good morning, everyone.
Morning.
<unk>.
I just wanted to go back to the <unk> margin.
I know earlier you discussed.
Some of the drivers of how it can move around and what you expect moving forward.
And the EBIT versus ebay, but I just want to make sure I fully understand whats.
Transpired over the last year or two years, it's been six to eight quarters, or so where it's down year over year.
And so if you just had to hone in on the one or two main drivers of that.
What would that be.
No. This is Victor I would say.
Main driver would be the biggest driver probably the defense mix.
In a sense, it's mix right in the mix of products that.
We've been selling.
So if I look at it on a longer view of where it's at.
Mid to high twenties.
If I'm just looking at what's happened over the last two years that sort of off of a tough compare from a mix perspective, and then the mix has just changed a little bit the last few years.
Yes, that's correct I.
I think in which which items into the mix like what's what's a better mix versus at worst mix in the segment.
Well I've got to be careful because I don't want to get.
Competitors, a roadmap into the margins on particular products.
I'd like to answer your question, but without breaking out what we don't disclose Carlos I don't I think no.
The one thing one thing I would say maybe give you a clue as we have talked about over the last year or so that are other electronics more industrial type products that are.
Not as specialized as let's say space or defense have grown very nicely over the past year and a half and that has tilted the mix a little bit towards those products, which have a little bit lower margin profile and so I think that's one reason why you have seen that.
I think as as.
Atg settles and excellence, we get some of the.
Really the defense outlays eviction mentioned earlier seems to be one of the things that.
<unk> is driving.
The shift in mix for us at least this year because as Victor mentioned, we do have the orders, it's outlays and it's kind of the mark in the supply chain has come and everything up and I think that that delay in order has has sort of hurt the mix a little bit for the atg, which when that happens we.
We do have we do have a little bit of softening in the rate, but I will tell you. This.
As a management team of Ctg's kicking out 20% operating margins outstanding on the desk doing on Iris Jake because that as Victor mentioned with the IV amortization back Thats, an ATM machine. That's a cash business, that's very strong and if we can continue that from my seat I want to be very happy.
Okay.
Is that I mean is that the.
Is that where the segments going over time with the acquired revenue or I mean in the past you have kind of consistently pegged where you expect it to land within our range over the medium term.
They're an updated version of that.
Well, we havent, we are intentionally not giving guidance no I do think that what I have said in the past, though is it if the segment falls between 26% and 30, we're happy and I've said that during this time because we have had this mix impact on the business. So I think we'd probably stick with that view for now we see.
It will be falling right in the middle of that range at least.
Discount this fiscal year so.
Think about it expect it that's fine we'll give we'll give some thoughts in December after we get our budgets done as to what may be the segment when I look like at that time, I believe but for now.
If you stick with that range will be fine.
Okay.
And then Carlos just.
On working capital and it's pretty specifically on the inventory line.
You've built that.
As you've attempted to kind of smartly be ahead of what's happening with supply chain and all of these different.
Pieces of volatility.
What are you going to how are we going to handle that going forward do you need to keep doing that or can you reverse that is that a is that a.
Cash inflow next year, how does that change.
Change going forward.
So I think in the short term, we're going to continue to tell our subsidiaries to invest in inventory, we probably spent during the quarter.
$18 million to $20 million more in inventory use of working capital in the quarter, just the three month period and I think that.
I would expect that maybe to continue into year end, we will see how things shape out what we don't want NOLA.
Is to get in a situation, where our customers somehow or.
HEICO product because we did plan appropriately.
Nobody's in addition, or can see the future I mean, we do our best right. We are experiencing some supply chain challenges, but I think for the most part because we did go long on inventory its benefited our customers and our sales will continue to do that probably sometime in 2003 when this.
Mess clears itself up in the supply chain, we'll get back to a normal run rate and to your point that may be a source of cash midway into 'twenty, three or something like that.
Okay.
Okay. Thank you.
Thank you.
And we'll take our next question from Michael CR Molly.
Hey, good morning, guys. Thanks for taking the questions maybe Carlos maybe I just missed this but to stay on.
<unk> line of questioning with any key GM margin.
As inflation.
Been any any headwind to the margins there for some of your defense exposed products that might be under.
Kind of fixed price contracts that haven't necessarily reset yes. It is that is that a component of any of the.
The margin pressure that you've sort of commented on mix there.
Hi, This is Victor Mike.
I would say it's in it's in the noise level I mean.
As we've said in the past Theres, a lag effect, which I think is what you're keying on between inflation setting in and then new contract pricing.
Taking effect.
So.
We don't have a huge part of our revenue.
They're long term contracts, but we do have some and we do have that lag effect now that can be offset in turn by adjustments we make.
On other contracts, where we are not limited.
So that's why I say overall I don't think inflation has been a big factor in our in our margins.
There, but it's not the big driver and I think Michael is a practical matter. We are subsidiaries of tried to preserve their margins with pricing, we have certainly not gone overboard with pricing.
Some other companies have so thats why we havent discussed during the year, our margins being impacted for pricing because I think our guys have done a good job targeted price increases to cover our margins and maintain them.
Got it got it.
Carlos I know youre, not going to give us guidance here, but looking at SSG, specifically I mean, you've sort of average maybe maybe 8%.
Sequential revenue growth over the past several quarters. Realizing there is some acquisition growth in there, but you're kind of still think we're looking forward sort of a mid single digit sequential revenue growth rate and then <unk>.
Obviously youre running extremely high here.
Record levels for for segment operating margins and in flight support.
Im not necessarily asking if we can see further expansion, but is this kind of 'twenty, one ish percent range kind of stable and good for the near term.
What would have been really consistent on is that this segment I believe runs at a 20% operating margin fully loaded all in GAAP margin.
As Eric mentioned, a few minutes ago.
Margin in the SSG has been elevated the last few quarters, because we have seen the mix settle into a normal run rate we've seen different parts of the business comes song in different quarters and that mix has amplified the oi margin a little bit and I think as we settle into our normal.
Mix as we get beyond Q4, and probably in the first 23 I do believe that this segment will settle in.
We expect 20% it could it be better sure, but I wouldn't.
I wouldn't do long term projections.
Higher than that and you can you can assume that we'll constantly.
Eke out little increases to that margin like we have historically.
But don't look at two quarters and get over your skis and assume that.
But that that might continue we hope it does but I think it's more in that 20% range. So we've been talking about.
Got it okay perfect makes sense thanks, guys.
Debt.
Yes.
And we will take our next question from Guam Hana.
Web.
Hi. This is gautam can you hear me guys.
Yes.
Right.
Hello, Hey, good morning.
I was wondering if.
Oh.
I was wondering if you could.
Discuss supply chain at FSC has that been an issue and if so where are the pinch points.
Yes, the supply chain has been an issue.
It's very difficult to get certain raw materials.
Certain services are very difficult to come by people who are really.
Suppliers are running pretty close to capacity right now.
<unk> been able to manage it I think frankly, because our people work really hard and forecasted some of this stuff combined with the fact that we've been able to.
Hold larger inventories to make sure that we can satisfy the demand of our customers. So.
Yes.
That still is a huge challenge for us, even though I don't call it out.
It is a huge challenge, it's very very significant but.
But we've just been able to figure out how to how to get it done and not.
<unk>.
Not ready to hinder the business.
Yes.
Okay.
Can you talk a little bit about where geographically you are seeing strength in the aftermarket on the commercial aftermarket is it.
I mean are we starting to see China come back and I'm, just curious how that pattern has kind of changed over the last six months.
In terms of areas of strength.
If you look at where the flights are so North America is doing very well.
Pretty close back to where it was maybe at 90% level.
Following next by Europe Asia is significantly behind China is way behind.
South America is sort of in between Europe and Asia.
So if you look at it with regard to flight so I think thats, probably the best way the.
The best way to look at it.
Yeah.
Okay.
And then just stepping back and asking about <unk> again.
It looks like a very different type of profile and I was curious how it fits in.
I say that because the rebate the number of employees.
Pretty high over 2000.
So Carlos just earlier point on margins that might be a little lower I'm, just curious sort of how does it fit in then.
Post that deal which is fairly large.
How bandwidth constrained do you think you are to integrate other acquisitions if at all.
Give us some background on that deal.
Jonathan This is victor so kind of taking it in reverse order.
Constrained constrained about the question about constraints on management because of excel. It actually is the opposite for us because it has a very strong management team Central management team. So we pick up.
A lot of operations in a number of excellent product lines in one without having to devote the individual resources typically we would buy whatever number of companies that would be let's say eight or 10 companies in order to achieve the same results. So that's.
I think it actually is easier for us given the quality of the management team and its I'd say team. It's not just one person that we're who we're relying on its a number of people Fortunately.
And with respect to the product what attracts us to it is is really that product line I mean these are.
Critical to our mission critical components, many used in high reliability applications certainly in harsh environment applications their business in the capacitor segments and resistors for example in those products.
They are not serving the bulk commodity market, they're serving the high end market.
So that's a very very nice fit with us.
And then some of their other products that they make that are slightly higher level of integrations.
<unk>.
We are also these mission critical components that are used generally in more stable applications right, we're not going after the consumer and the broad industrial markets. Although they do have some exposure in those as well.
So overall, that's what attracts and again the margins are very good I mean, if I.
We're not going into exactly what they are but most people would look at that and say Wow. This is well beyond the margin of a typical manufacturing company for sure. So all put together and it's a great. We think it's a great cash generator. We also like the fact by the way that it expands our international presence.
In a very important markets to be served locally by people in those those countries in those regions as opposed to just trying to serve them from the United States.
That's important to us and the geographic manufacturing.
Footprint that we get out of that we like that as well I think it offers us some opportunities as we go forward.
To be more nimble in.
In production when there are disruptions.
Whether those are from future pandemics or supply chain issues or whatever one other thing this is Larry.
They have approximately 3000 customers.
That's a great market reach and the customers. They have are amongst the top industrial companies in the world. So this customer list the ability to possibly market with other product lines that we have.
The fact that I remind you that the average <unk>.
<unk> company has an operating margin of 7% to 11%.
This is basically significantly higher than that so.
In other words, one of the problems that we're getting dinged on is that.
<unk> group is running in the Thirty's and operating margin. So if we pick a company that's in the twenties.
It reduces the margin but still.
It's a great return on our investment and very strong cash flow. So we think it'll be a very strong acquisition.
And just this is victor it as an aside you.
You saw in the announcement that they have production in some lower cost countries like Morocco, Vietnam and generally those are higher head count lower wage.
Operations when you when you're producing those so so generally that influences.
The number of people and the last thing we mentioned it earlier, but I remind you.
We think there is possibility of expansion acquisition.
Acquisition expansion within that group of companies so overall.
This is not something that we just found and we acted upon.
Just 123, we have been looking at this company for a number of years.
I appreciate the thorough answer and I was curious also just in terms of non U S. M&A.
Is that are you seeing more such opportunities with cutbacks.
Whatever else.
Got.
It sounds like we may be one of <unk>.
More.
There are there are other opportunities we are seeing outside of the U S.
Wouldn't expect an avalanche of them, but I think where we're seeing a few more.
And but I think our primary.
Acquisition.
Supply if you will will come still in the U S. Let me remind you too that some of our acquisitions result.
From existing company operations, introducing us to customers or suppliers.
They use and as we have more foreign operations.
Those foreign operations will in due course introduce us to companies that they deal with outside of the U S. But I agree with what Victor says the majority of our acquisitions I would expect to be within the U S. But I think we're going to see some more foreign <unk>.
Acquisitions too.
Some of these companies these foreign acquisitions.
Really.
Straws narrowly.
Competent people with extremely high technical capability.
I mean, some of the companies that we acquire in France for example.
France has a as of <unk>.
Serious industrial base.
Very highly educated workforce.
So the companies that we own in France.
Pay high salaries.
And they generate strong profits.
And we have been able to expand those companies multiple times and they have been worked out as very good acquisitions.
Thanks, very much guys.
Thanks, Sean.
And we will take our next question from Colin Ducharme from Sterling capital.
Hi, good morning, Thanks for taking the question, maybe I'll start off with Victor one clarification and maybe one more insightful question a clarification just on your book to Bill that sounded like you've gotten a healthy uptick there I don't know if you're able to quantify that.
Any more for us, but if not just maybe provide some color on what the drivers for that improvement or whether by market product or geography.
And then question on the <unk> deal, it's getting a lot of airtime today.
Pretty exciting your commentary it sounds very much like a platform for further kind of building going forward and I just wanted to try to.
I guess clarify that that's indeed, how you and the team are also thinking about it you talked about open opening aperture.
Is this kind of a land.
<unk>.
Much like Hollywood serves as Youre kind of central nervous system domestically and increasingly overseas is this kind of going to be a central nervous system for the European continent does it open the funnel for incremental deals that may make more sense with this platform in your fold that perhaps made less sense prior to the deal. Thank you.
You're welcome so.
Call it.
It definitely serves as a platform and a base in Europe for excel to expand and I would expect that they will.
We continue to make acquisitions, they have actually a history of making acquisitions successfully and including them. If you will integrating into their system.
And I would expect that to continue I don't think their plan is to do at a breakneck pace I think they'll do it at a.
At.
A reasonable pace, but.
In terms of our other companies in Europe , I don't think our plan is to have them change their reporting lines.
And start to reporting to start reporting to accelerate now that doesn't mean that the businesses can't and won't collaborate.
In.
And a lot of places and I think theres a lot of opportunity actually for that.
That kind of thing to happen by the way one other thing that we think is.
Gives us a good opportunity.
To expand <unk> into the states.
<unk> is the majority of its sales are non U S.
And it does have content in the U S. It does sell in the U S. And we think we can increase the U S is a huge market of course, and we think that we can help them.
In the U S. So I think that'll be another good opportunity for us.
In terms of your question about Collyn.
What where we're seeing our bookings.
Increase our order flow increase.
I would say.
Generally is following the pattern with our revenue to a certain degree.
And so the biggest increases are coming in non defense.
Round, so although we have within defense, we have some pretty nice increases and some of the individual businesses there as well.
Yes.
Okay. Thanks, and then maybe a couple of follow ups for the rest of the team.
Eric you talked a little bit about inventory positioning of certain aero customers.
<unk> and I'm wondering just stepping back we've seen in certain industrial segments.
A change in ethos, if you will on inventory.
Willingness to carry inventory.
In certain industrial segments, and I'm wondering if pre versus post COVID-19, that's inherent in your aero customers, meaning they want to run a leaner operation post COVID-19 versus pre or are things relatively consistent and then a final follow up for Larry you talked a lot about consistency of deal flow not a lot.
Had changed there from a pipeline standpoint, one thing that has changed markedly as the cost of capital and that changes the math for a certain segment of buyers and so I just wanted to drill down on that point, if you could offer a little bit of color if thats changing at all types of buyers or the timing of getting deals done.
Thanks for your time.
So to answer your last question about the timing cost of money and so forth.
We have been told as I said before by many investment bankers not just one that in terms of private equity the banks have tightened up considerably.
No.
<unk> equity is paying more for their borrowings.
We think because of our great liquidity and our ability to judge a draw on our credit line without going to banks for approval for every acquisition that it gives us a little bit of a benefit over.
Some of the other private equity I think some private equity is being stressed a little bit according to what the banks tell us so.
I think the.
Increased interest rate.
Probably in the long run is slightly beneficial to us now I.
I don't expect that to be a major major change.
But.
Every little bit helps so.
I think thats good of course.
We are also a preferred.
Buyer.
Cause we can write a check and none of our deals are subject to financing.
Of course, as you know a seller one of the key two key things in the seller's mind that is price and certainty to close and with US. The seller has certainty to close because none of our deals are subject to financing so I think well.
In all this gives us a slight advantage in the marketplace over what things were before when interest was very very low.
The banks were just throwing money at private equity.
So.
Does that answer your question.
Okay. That's helpful and just to check up on the inventory.
Positioning.
Yes.
Yes. This is Eric <unk> with regard to the inventory.
<unk> seen much of a change thus far inventory strategy from our airline customers.
It's something that we're going to watch very carefully I think they are since lead times.
Are getting pushed out there also.
Taking that into account into their order rate. So I think thats an issue, but we don't really I don't think theres going to be a really a pre COVID-19 post COVID-19 change regarding airline inventory strategy or at least we don't see it at the moment.
Thank you.
Thank you.
It appears there are no further questions at this time, Mr. Mendelson I'd like to turn the conference back to you for any additional or closing remarks.
Well, thank you very much and again, thank you to all the participants on the call.
Hope we responded to your question adequately.
You have other questions of course, we are available.
Just and otherwise we will look forward to speaking to you after our fourth quarter and full year.
Later on in this year, so have a very good holiday weekend, which is coming up and we look forward to speaking to you soon again. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
Yes.
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Yeah.
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