Heico Corporation

Welcome to the HICO Corporation second quarter and full-year fiscal 2022 financial results call. My name is Patricia and I will be the conference operator for today's call. Certain statements in today's call will constitute forward-looking statements which are subject to risk, uncertainties, and contingencies. HICO's 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, high cost liquidity and the amount and 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 specification costs and requirements, which could cause an increase to our cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and or foreign customers or competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development or manufacturing difficulties which could increase our product development and manufacturing costs and delay sales, our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange and income tax rates, economic conditions including the effect of inflation within and outside the aviation, defense, space, medical, telecommunication, and electronics industries, which could negatively impact our cost and revenue, and the PEN spending budget cuts, which could reduce our defense-related revenue. Parties listening to this call are encouraged to review all of HICO's filings with the Security and Exchange Commission, including but not limited to filings on Form 10-K and Form 10Q and Form 8K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by the applicable law. As we begin the call, now I turn the call over to Lawrence Mendelson, High Coast Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you very much, and good morning to everyone on this call. Thank you for joining us, and we welcome you to this HICO second quarter fiscal 22 earnings announcement teleconference. I'm Larry Mendelsohn, Chairman and CEO of HICO Corporation, and I'm joined here this morning by Eric Mendelsohn, HICO's Co-President and President of HICO's Flight Support Group, Victor Mendelsohn, HICO's Co-President and President of HICO'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 HICO'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 22. I will summarize the highlights of our second quarter fiscal 22 record results. Consolidated second quarter and first six months of fiscal 22 Operating income represents record results for HICO, and that was driven principally by record operating income within the flight support group, mainly arising from a continued rebound in demand for our commercial aerospace products and services. Consolidated operating income and net sales in the second quarter of fiscal 22 improved 27% and 15% respectively as compared to the second quarter of fiscal 21. These results mainly reflect a 9% quarterly consolidated organic net sales growth and the favorable impact from our fiscal 21 and 22 acquisitions. Consolidated operating margin. improved to 22.8% in the second quarter of fiscal 22, and that was up from 20.7% in the second quarter of fiscal 21. And it improved to 21.5% in the first six months of fiscal 22, and that was up from 20% in the first six months of fiscal 21. The Flight Support Group reported quarterly increases of 87 and 33 percent in operating income and net sales, respectively, as compared to the second quarter of fiscal 2022. These results principally reflect strong 31 percent 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 30, 22, and that compared to 10.3% as of October 31, 21. Our net debt, which is total debt less cash and cash equivalent, of $148.6 million as of April 30, 2022, compared to shareholders' equity ratio was 6.1% as of April 30, 2022, and that compared to 5.6% as of October 31, 2021. Our net debt to EBITDA ratio was 0.1%. 2.8 times and 0.26 times as of April 30, 2022, and October 31, 2021. We have no significant debt maturities until fiscal 25, 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 returns. I'd like to discuss our recent acquisition activity, which in March 22, we acquired all of the stock of Flight Microwave Corporation, 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 percent of the membership interests of Pioneer Industries, and Pioneer is a specialty distributor of spares for military, aviation, marine, and ground platforms. The remaining 26 percent interest continues to be owned 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 HICO and president of HICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Thank you. The flight support group's net sales increased 33% to $306.3 million in the second quarter of fiscal 22, up from $230.3 million in the second quarter of fiscal 21. The flight support group's net sales increased 35% to $579 million in the first six months of fiscal 22, up from $429.6 million in the first months in the first six months of fiscal 21. The net sales increase in the second quarter in the first six months of fiscal 22 reflects strong organic growth of 23% and 26%, respectively, as well as the impact from our profitable fiscal 21 and 22 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 21. The flight support group's operating income increased 87% to a record $66.2 million in the second quarter of fiscal 22, up from $35.5 million in the second quarter of fiscal 21. The flight support group's operating income increased 93% to a record $118.6 million in the first six months of fiscal 22, up from $61.3 million in the first six months of fiscal 21. The operating income increase in the second quarter and first six months of fiscal 22 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 flight support team because, frankly, two years after COVID began and created such problems for this industry, I personally am just in awe of these results and the performance of our team. I don't think anybody expected that we would be back to record numbers within or two years after the COVID crisis happened. So I just cannot stress enough how outstanding I think these results are. The Vice Support Group's operating margin improved to 21.6% in the second quarter of fiscal 22. up from 15.4% in the second quarter of fiscal 21. The flight support group's operating margin improved to 20.5% in the first six months of fiscal 22, up from 14.3% in the first six months of fiscal 21. The operating margin increase in the second quarter and first six months of fiscal 22 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 Heiko and president of Heiko's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.

Victor Mendelson Thank you, Eric. The Electronic Technologies Group's net sales were $237.4 million in the second quarter of fiscal 22, as compared to $243.1 million in the second quarter of fiscal 21. The Electronic Technologies Group's net sales were $459.7 million in the first six months of fiscal 22, as compared to $466.6 million in the first six months of fiscal 21. 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, other electronics and telecommunications products, as well as the impact from our profitable fiscal 21 and 22 acquisitions. Like many other defense industry suppliers, our defense product sales declined during the first half of 22. 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 were more or less proportionate in our various businesses and products, which isn't surprising as it seems in phase 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 it weren't the case and we wish that peace 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 22 as compared to $71.3 million in the second quarter of fiscal 21. The Electronic Technologies Group's operating income was $121.6 million in the first six months of fiscal 22 as compared to $131.4 million in the first six months of fiscal 21. The operating income decrease in fiscal 22 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 product net sales and increased new product research and development 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 of fiscal 22 as compared to 29.3% in the second quarter of fiscal 21. The electronic technology group's operating margin was 26.4% in the first six months of fiscal 22 as compared to 28.2% in the first six months of fiscal 21. The lower operating margin in the second quarter and first six months of fiscal 22 principally reflects increased SG&A expenses as a percentage of net sales, mainly from the previously mentioned lower efficiency level, as well as the previously 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 percent to 62 cents in the second quarter of fiscal 22, and that was up nicely from 51 cents in the second quarter of fiscal 21. Consolidated net income per diluted share increased 21 percent to $1.25 in the first six months of fiscal 22. and that was also up nicely from $1.03 in the first six months of fiscal 21. The increase in the second quarter and the first six months of fiscal 22 principally reflects the previously mentioned higher consolidated operating income. Depreciation and amortization expense totaled $23.5 million in the second quarter of fiscal 22. That was up from $22.9 million in the second quarter of fiscal 21 and totaled $46.7 million in the first six months of fiscal 22, again up from $45.9 million in the first six months of fiscal 21. Significant ongoing new product development efforts are continuing at both ETG 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 3.5% of net sales, in the second quarter of fiscal 22, and that was up from $18 million, or 3.9% of net sales, in the second quarter of fiscal 21. R&D expense increased to $37.1 million, or 3.6% of sales, in the first six months of fiscal 22, and again, up from $34.2 million were 3.9 percent of net sales in the first six months of fiscal 21. SG&A expense were $88.5 million in the second quarter of fiscal 22, as compared to $83 million in the second quarter of fiscal 21, and that was an increase of $5.5 million. The increase in consolidated SG&A expense principally reflects a $3.4 million attributable to our fiscal 21 and 22 acquisitions and an increase of $3.1 million in selling expense to support the previously mentioned sales growth, and that was partially offset by a $1.1 million decrease in G&A expenses. Consolidated SG&A expenses were $179.8 million in the first six months of fiscal 22, and that compared to $161.2 million in the first six months of fiscal 21. Again, the increase in consolidated SG&A expense principally reflects costs incurred to support the previously mentioned net sales growth, and that resulted in increases of $6.3 million and $6.1 million in general administrative and selling expenses, respectively, plus $6.3 million attributable to our 21 and 22 acquisitions. Interest expense decreased to $1 million in the second quarter of fiscal 22, and that was down from $2.1 million in the second quarter of fiscal 21. Interest expense decreased to $1.8 million in the first six months of fiscal 22, and that was down from $4.5 million in the first six months fiscal 21. 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 use to pay down borrowings. Other income in both quarters in the first six months of 22 and 21 was not significant. HICO's effective tax rate was 23.7% in the second quarter of fiscal 22, and that compared to 19.5% in the second quarter of fiscal 22. HICO's effective tax rate was 15% in the first six months of fiscal 22, and that compared to 12% in the second quarter of fiscal 21. The increase in the effective tax rate in the second quarter and its first six months of fiscal 22 principally reflects an unfavorable impact from tax exempt unrealized losses in cash surrender values of life insurance policies related to the HICO 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 21. 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 quarter's teleconference, HICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal 22 and 21 of $17.8 million and $13.5 million, respectively, resulting from strong appreciation in HICO stock price during the optionee's holding period. Net income. attributable to non-controlling interest was 8.1 million in the second quarter of fiscal 22, as compared to 5.8 million in the second quarter of fiscal 21. Net income attributable to non-controlling interest was 15.4 million in the first six months of fiscal 22, and that compared to 11.5 million in the first six months of fiscal 21. The increase in the second quarter and first six months of fiscal 22 principally reflects improved operating results of certain subsidiaries of the flight support group in which non-controlling interests are held, and that's inclusive of fiscal 21 and 22 acquisitions. For the full fiscal 22 year, we continue to estimate a combined effective tax rate and non-controlling interest rate of between 25 and 27 percent of pre-tax income. Moving on to the balance sheet and cash flow, our financial position and forecasted cash flow remain extremely strong. Cash flow provided by operating activities was 96.8 million and 194.8 million. in the second quarter and first six months of fiscal 22, respectively, as compared to 102.9 million and 210.1 million in the second quarter and first six months of fiscal 21. During 22, we invested approximately $87 million in 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 an increase in our 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 3.4 times as of April 30, and that was up from 3.2 at times as of October 31, 21. Our DSOs, Day sales outstanding was 45 days as of April 30, 22, and that compared to 41 days as of April 30, 21. We closely monitor all receivable collection efforts in order to limit credit risk exposure. No one customer accounted for more than 10% of consolidated net sales and our top five customers represented approximately 21 and 23 percent of consolidated net sales in the second quarter of fiscal 22 and 21, respectively. Our inventory turnover rate decreased to 150 days for the period ended April 30, 22, and that was down from 153 days for the period ended April 30, 2021. Now for the outlook. We look ahead to the remainder of fiscal 22, and we expect global commercial air travel to continue on a path to recovery, despite the potential for additional pandemic variants. We remain cautiously optimistic 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 pandemic's path and effect, including factors like new variants 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 22 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, all of which collectively position Heiko for future market share gains. In closing, I would like to again thank our incredible team members for their support and commitment to Heiko. They are the ones that make Heiko tick, and grow, and we are very, very proud of our entire team. The remainder of fiscal 22 and beyond looks very promising for Heiko and to me personally, and we thank you all for making Heiko 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 Noah Poponak from Goldman Sachs. Your line is open.

Hey, it's Gavin on for Noah. Good morning.

Good morning. Good morning.

Eric, in FSG, 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 aim to pass through any higher costs? How do you think about pricing?

Yeah, 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 to pass 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 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, you know, to the extent that we would necessarily raise our list prices. So it's, you know, it really depends on the arrangement. But, you know, as you can see from our results, we believe that we've been able to successfully pass along our cost increases along with maintaining our profit margin, while at the same time keeping our customers happy. And I actually have to just add a little anecdote. I was at the MRO conference 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 Heiko. In all of my years, I've never had a meeting quite like this, where they brought their senior leadership to thank Heiko, one, for coming up with our new product 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 Heiko really differentiated itself and was going to be rewarded with not only increased business on products that we currently offer, but increased business on 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'll get our In summary, we'll get our costs covered, we'll maintain or grow our margins a little bit, and most importantly, we will keep our customers happy because there's a huge amount of opportunity for us.

Great. I appreciate all that detail. Maybe just touching on the margin there and FSG, you're back to pre-COVID 2Q19 revenue, but your margin's, I think, better than 100 basis points higher. I mean, is 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 levels?

Yeah, I wouldn't say that there's anything abnormal in the quarter. I want to be careful, though, not to predict. I mean, look, these numbers, I think, are record operating margin percentage for the flight support group, which, frankly, I am amazed. that in this environment, with all 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 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.

Thank you. This is Carlos. I would just add real quickly to that. Keep in mind we've been thinking about the FSG, you know, approaching this 20% OI level. The road or the path to getting there is going to be a little lumpy because as the businesses return to volume levels that we've seen in the past, different parts of the FSG 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.

And your next question comes from the line of Gautam Khanna from Cowan. 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 sub-segment growth within FSG and maybe that was the source of the mixed benefit? Was it led by the PMA business relative to repair and specialized products? Anything there that might explain how quickly margins improved?

Yeah, Gautam, I think the – The PMA business, the parts business 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 the return of our specialty products group. Their volumes have picked up as we thought they would. Their volumes tend to be tied, you know, to the OEM market. And as you probably noticed across the board, that's coming back a little bit. So that's helped us. But I'd say the rate of specialty products increases a little higher than it had been historically, which did have a mixed impact, if you would, on the margin. That's about the only thing. Okay.

Was there any sort of inventory dynamic where, you know, your prices reset faster than the costs reflected in your inventory? So there was a sort of out-of-phase, you know, benefit from pricing that might end up normalizing, you know, as you replenish inventory?

That's a good question. As Eric mentioned, we do have a bit of a delay. It's not like this is instantaneous, any of our price increases. It does come in phases over time. As we renegotiate contracts and discuss 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 nonetheless, I think it will continue. And we will, as Eric said, we'll cover our cost increases. We'll do our best to cover our cost increases. But we're not raising prices in an effort to goose margins and things like that. We're trying to be very friendly to our customers. Again, it's a long-term strategy.

Yep. Yep. And one for Victor maybe. Victor, ETG, can you talk about the bookings, how those have trended, you know, maybe even since the defense budget was formally enacted in March? Have you seen a pickup in RFP activity or, you know, anything you can speak to about the cadence of order flow?

Yeah. It's a good question. Actually, our book to build, and our orders are very strong. And book-to-bill accelerated for us both in the first quarter of the year, the second quarter of the year, you know, so the entire first half versus last year. So that remains strong. Of course, like everybody else, we've got these miscellaneous supply chain challenges, which were greater and seem to be accelerating. They're not overwhelming us, fortunately, but they are accelerating. And that probably contributes to the book-to-bill ratio even more than it usually does. But as far as we're looking at it, book-to-bill is accelerating and strong. Thanks, guys. You're welcome. Thank you.

And your next question is from Larry Solo 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. Very commendable there. Maybe a question for Eric on the – an FSU there, obviously, you know, pretty, pretty remarkable numbers, as you mentioned, almost back to pre COVID levels, I guess, a little bit less, I guess, if we take out the acquisitions, but, but, you know, real strong job. Well, what about in terms of, it's gotta be, you know, I know you won't get specifics, but on the market share gain side, I feel like that must be the, you know, the big deciding this differing factor between you and so many competitors. Can you maybe just, you know, go get a little more high level color on that, on the market share gains and, and, Are they coming from any specific areas? Is it, I assume, mostly existing customers, because you guys are pretty much covered across the commercial aviation, but is that where it's coming from, and is it mostly older, you know, legacy products, or are you sort of mixing it in with some newer stuff there?

Yeah, Larry, that's a great question, and I always give, I mean, I'm very involved with all the businesses, of course, but I always get prepared in the week before these conference calls to get sort of the latest information on what's going on on the ground. And I can tell you that in all of our business areas in which Spike Support operates, we are, in my opinion, gaining market share. I have never seen, in my 32 and a half years at Heiko, I have never seen this level of enthusiasm from our people. And it is absolutely across the board. It's in PMA parts, component repair, distribution, specialty manufacturing, defense sustainment. It is just completely across the board. And I think that 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 we're able to make all decisions for the long haul, the fact that our leadership teams and our salespeople have been with the company for decades. I mean, they know the Heiko mantra and they speak it 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. It's in defense sustainment. It's all across our business. And honestly, it made me feel really, really good.

That's very encouraging. I would assume these market share gains, you get them. They should be pretty long-lasting, I guess, in most of these things, right?

Yeah, I believe that they are long-lasting. We've always spoken about how the trend is up. and that we need to continue. Look, we're not going to have a large impact on any of our competitors. You know, our gains are very, very broad-based, and they're incremental. We're doing very well. But I see just tremendous strength in, 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 some of the slowness perhaps – I know you mentioned sort of supply chain issues, but could some of these issues maybe be – you guys are obviously just a component on a – often a component on making the end product. So if there are supply chain issues from other parts that are delayed, maybe you're not going to deliver your part. So maybe supply chain issues at competitors or just complementary products – Does that also come into play with sort of the slower defense sales?

Larry, I think overall that dynamic does have an effect on us, yes, and 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 in a number of instances, or a few of our subsidiaries, I should say, have mentioned that to us as an issue. And that has been actually happening for a while. And at some point, of course, that will even out, and we should ship all that and get those orders that we're expecting. And you hear the customers say things like, Yeah, it's coming, it's coming, it's coming, but we just can't take any more in the factory or in our plant or out of space, et cetera, et cetera. So expect the order 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 like the rest of the world, and you mentioned a 40-plus million increase in inventories today. to help offset that a little bit, but just in terms of inflationary issues, um, it seems pretty, pretty well under control for you guys. I think you mentioned, uh, selling your expense that you're existing or organic was up less than 3 million. And I think there was, as you said, almost 2 million drop in GNA. So your SG&A was, uh, almost from legacy was basically flat, which is pretty, pretty remarkable. Um, any thoughts on that?

Yeah, I think, I think during, um, First of all, we're structurally very entrepreneurial. We have a lot of different subsidiaries and managers running those facilities that have their roots as a sole proprietor and entrepreneur. And so they know how to adjust because when they learn how to manage that business, it was their wallet, their checkbook, right? And I think those tendencies have benefited Heiko throughout this process. There's no doubt that inflation is part of the equation. And I think that our guys have done an exceptional job at managing that cost. And then also to what Eric mentioned earlier, you know, we've done a pretty good job of, you know, working with our customers to cover the increased costs as best we can. So I think the whole equation at Heichel, because of our structure, allows us to make that happen.

Right. Great. Okay. Excellent. I appreciate all the call. Thanks, guys.

Thanks, Larry. Thank you.

Thank you. And your next question is from Peter Arment from Baird. Your line is open.

Yeah, good morning, everyone. Larry Victor, Eric Carlos. Hey, Eric, I guess I wanted to ask a question on M&A. You guys recently did two deals in the quarter. Are you talking about leaning in a little bit more maybe in the commercial markets, maybe what you're seeing in the pipeline? Is there more activity or your willingness to to do deals, you know, kind of in this recovery period, or do you need to see some more time pass before you kind of engage further?

Yeah, we're very active in the M&A area, incredibly busy, busier than we've ever been. We remain disciplined. You know, we recognize that the market is where the market is, and we've got to be competitive. But, yeah, I think that there are plenty of opportunities and we're working them very, very aggressively.

Okay. Appreciate that. And then just on the – Victor, you mentioned some supply chain, you know, miscellaneous supply chain constraints. Maybe, Eric and Victor, you could just both describe it. Are you seeing any kind of material, you know, lead time stretch out, or are you going to end up just ultimately, like you kind of indicated, carrying a lot more inventory throughout the year?

So this is Victor. I'll give you a perspective for the ETG 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. We have generally, of course, found workarounds around those. And as you know, our inventory approach has been such that we've really minimized the effect of that. But I 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. And, you know, I would say that's probably 50, 70% more in this quarter that we just finished than it was in the prior quarter. And so, again, you know, you're talking about a few percent of sales, not overwhelming, but certainly something. Actually, our growth would have been considerably higher or somewhat higher had we not dealt with that. But we'll continue to let our companies address those and keep it down to sort of a low simmer, as they would say, rather than a roaring fire.

Yeah, and Peter, with regard to the flight 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's no shortage of orders for us. The challenge is going to be making sure that we get everything delivered on time. And I think there could be hiccups down the road. You know, our people tell me about problems, and they ultimately figure out solutions to them. So I would say I'm on high alert watching the inventory restocking issue, but I'm hopeful that we will figure out how to manage through it.

Appreciate that. And then just one last one, Eric. On the new product kind of rollouts, I know you always just kind of talk in generalities, but it sounds like customers are approaching you and there's more opportunities coming up. Maybe if you could Is the pace of the new product introductions, you know, increasing from the past, you know, kind of historical, you know, what you add to your catalog every year? Or are you seeing, you know, just more of an acceleration of adoption?

It would be the latter, more of a greater acceleration of adoption. I think we're very content with the pace. 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. So I think our preference would be to get all that stuff sold first and then to, you know, increase the rate of new product development later. We are, you know, we continually grow, we continually grow in in adjacent, you know, what I call adjacent white spaces. And so there's no change there. But we've got to make sure that we get everything solved. And I think our current volume and rate of product development is really very, very well optimized. We've got the chain balanced. You know, if we increase a new product development, then you've got to increase procurement, manufacturing, inspection, sales. There's a lot of stuff that has to happen in order to support that. So I think we're really well balanced right now.

Appreciate that. Thanks.

Thank you.

And we have the next question from the line of Christine Leewalk from Morgan Stanley. Your line is open.

Good morning, guys. This is Jason on for Christine. Eric and Victor, sort of as we look ahead, how should we think about potential recessionary impacts across both the ETG and FSG businesses?

When you say recessionary impacts, you mean with the markets turning down possibly in the future?

Exactly. So I guess driven by, say, GDP decline, just general recessionary impact.

Yeah, I think we've picked up market share, and we, in a downturn, continue to pick up market share. So I'm not afraid of it, frankly, whatsoever. We don't, at the moment, see that kind of impact. There's no question there's 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 has 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, they risk getting COVID, nobody cares. They're all traveling. Everybody's been cooped up. And I think that trend is going to continue. So I don't see that same, you know, historic 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, you know, relatively strong. X, obviously, Russia, Ukraine, China. I mean, there are some places that are going to see an impact. But I think with, you know, insofar as how it's going to impact HICO, we are so well ingrained at our customers. And they view us, you know, I can't stress it enough, that they no longer view us as this tiny little $30 million company that we were 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. You know, for ETG, the effect the recession would have, it it's fairly muted typically for us because we have a high proportion coming from defense and space and medical combined, those markets which tend not to suffer like the broader economy does in a recession. Now 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-AND markets, which I very often look at as a precursor to overall economic activity, have remained strong and remain healthy. So at this point, you know, 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 you're seeing in the near term and then more on a longer time horizon?

Yeah, so our space business, as you know, is really focused on what I would call the high end in space. We're not on microsats very much. We don't chase those markets. We try to pursue, and we've been successful pursuing them. the very highly engineered, high-end, very often radiation-tolerant or radiation-hardened solution, so for bigger, if you will, more expensive satellites, but not entirely, and 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 I think our opportunities will continue to be in the higher end, more highly engineered products. And 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 we're adding some important value to the customer. And if it's low margin, then we're probably, you know, we'd be looking at something that's more commoditized or they feel they could get elsewhere.

Understood. Thanks, guys.

You're welcome.

Our next question is from the line of Ken Herbert from RBC. Your line is open.

Yes. Hi. Good morning. Good morning, Ken. 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 thinking that through, is there any reason why we shouldn't continue to assume sequential growth for your business into the fiscal third and fourth quarters?

Yeah, I think the booking trends are improving, and so I expect continued growth in the third and fourth quarters. I 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 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, you're not sort of in that, you know, 115%, 120% conversion as it relates to net income for the full year?

Well, I think for the full year, Ken, we should be around those historic benchmarks. You're correct. First six months of this year, we have invested quite a bit in working capital to support the business. And, you know, maybe we invest a little bit more as the year goes on if the revenues continue on pace with what we think they'll 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 the line of Josh Sullivan from Benchmark. Your line is open. Josh Sullivan, your line is open.

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, you know, either geographically or by airline business model? Any entities which historically were more hands-off coming forward in this environment?

Yeah, you know, 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, you know, it's not so much as adding customer names, we are broadening significantly what they're buying from us.

And then just one on the M&A front, you know, in the past you noted private equity was driving up target valuations. You know, obviously the interest rate environment, market environment have changed. Do you think you'll see less interest from private equity and more competition from strategics going forward?

Well, I certainly hope we're going to see less competition from private equity, but As far as strategics, I think Heiko has a unique value proposition. 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 than to partner with Heiko, 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 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 is just greedy and wants to take every penny they possibly can. And typically when private equity wins, it's because of that and that trade-off. So I think that we are, we offer a very unique proposition also for leadership teams. You know, the Heiko model is incredibly motivational. And, you know, when we find good people who know what they're doing, we don't come up with the, you know, 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 and the detail. We understand exactly how they're operating. And we're here to support them. And it works extremely well. So I personally am very optimistic. Yeah, 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, you know, I'm very optimistic. We're very competitive. I mean, nobody sells to us at a, you know, ridiculously lower price than they, you know, sell to somebody else. I mean, we're obviously always competitive if we buy companies. And we're really busy right now. So I'm very optimistic that the trend will continue. Thank you for that. Thanks. Thanks, Josh.

We have Greg Conrad from Jeffries. Your line is open.

Good morning. Good morning. Maybe just Eric, to start, I mean, I know we've touched on this a bunch, but just when you think about the recovery and kind of the data that we see around traffic regionally or narrow body versus wide body, relative to your business, I mean, any surprises in terms of some of those areas or platforms that are maybe recovering, you know, faster than the broader market?

Yeah, and, you know, Greg, as 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, you know, did I think Narrowbody was going to recover in North America in 2022? And I don't recall the exact words I used, but, you know, I said I'd rather, you know, see the data and let it come out, and I don't want to get in front of something like that. But clearly, you know, North America and Narrowbody is doing extremely well. And, frankly, I am shocked as to the pace of recovery at Heico. And I think we are recovering. We have recovered quicker than the industry. 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 hasn't fully recovered. Asia is still struggling. You know, South America is in the process of recovering. It's sort of more like Europe. But, yeah, 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. And the industry overall, I think, is expected to tick up in the second half of the year, whether it's supply chain being alleviated, some of the getting the budget in place, or even some tick up from just supplementals tied to Ukraine. 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, you know, defense overall to maybe improve in the second half of your fiscal year?

Yeah, Greg, I'm going to be very cautious on this because there have just been more surprises, I think, this year in the last, you know, 12 months than usual. You know, one would generally be encouraged by healthy bookings, But, you know, we have, you know, it's six months, right? The back half of the year is six months. So I'm just not sure, and 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 to the tax plus non-controlling interest rate for the year?

Hey, Greg, I'll give you my cleanup comment. The tax and NCI rate should be between 25%, 27%. I expect, you know, 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 in life insurance products. That's a wild card. 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 and somewhere between 7% and 8% in the NCI rate of pre-tax income, percentage of pre-tax income as of right now. Thank you.

You're welcome.

Your next question is from Fitz Kavitsky from Olympic Global. Your line is open.

Hey, good morning, everyone. Hopefully you can hear me. I'm traveling and on my mobile device. We can hear you well. Great. Just was wondering if you could drill down a little more into defense and ETG sales a bit. I'm just wondering as DoD kind of really goes full speed ahead on kind of next generation, you know, R&D efforts like we touched on space, but also hypersonics. You've got, you know, new aircraft efforts like NGAD that are getting a lot of money. And even some of the procurement efforts like F-35 will be well funded for a while. I'm just wondering how you feel HEICO is positioned in these areas, especially the R&D-type spend areas, and do you kind of feel overall like you're well aligned with where DOD is going?

Thanks. Good question, Pete. The answer is definitely we feel very well aligned with where the DOD is going. And, you know, 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. As you saw, we're spending money on the R&D side and product development side. I feel very good about that. The timing, of course, is always very difficult. to anticipate, but we're going to continue making those investments because over time, the yield will resolve.

I appreciate it. Maybe just one last one for me, switching to FSG. I'm just wondering, in the repair and overhaul group, it seems like there is labor tightness in the U.S., and it seems like that would be maybe one of your more blue-collar-focused areas. I'm just wondering if you're having any trouble, you know, sourcing labor there or if you're seeing, you know, an over-average amount of wage pressure in that group. I just wanted to get any color you could provide there.

Yeah, I mean, we – that's a good question. And obviously, a repair and overhaul is more labor-intensive typically than parts as a total percentage of sales. Okay. We do have 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're very happy about the work environment, about the amount of autonomy that they've gotten in doing their jobs. they, I think, feel very, very much appreciated. 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 made a terrible mistake. You know, that they, frankly, they don't operate the same way that Hypo does. And please, please, can I come back? So I think we're in pretty good shape. We're in pretty good shape. Yeah, 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're very proactive in making sure that our people remain whole and that we take care of them and that they're proud to be at HICO And, frankly, they're the reason for our success. So we're in pretty good shape in that area. Great. Thanks for the call. Thank you. Thanks, Pete.

Thank you. And we have Pete Osterland from Truvy Securities. Your line is open.

Hey, good morning. I'm on for Mike Trimoli this morning. Thanks for taking our questions. First, I just wanted to ask, what are you seeing in terms of inventory levels at 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?

Yeah, 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 return to service. So, obviously, there have been some aircraft that have been parked, and those aircraft have to get returned to service, and they require parts. So, we have seen that, but we haven't seen what we believe is the traditional, quote, unquote, restocking. So, that's, and I've asked that question 10 different ways, you know, from many, many different people, and that's what seems to be coming back. So, you know, I believe that's the case.

All right, 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 would always be lagging because that's more of an OEM support business where we, you know, support OEMs. So I have to tell you a little anecdote. I was visiting one of our specialty products businesses about two weeks ago, and our partner, who owns a chunk of the business, and his leadership team thanked me because they said, you know, 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 aircraft. Things were absolutely terrible. And they wanted to cut employment. And I pleaded with them and said, you know, look, we operate a decentralized structure. You can do what – it's 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, this leadership team in this company is never afraid to call me out if they disagree with me on anything. And they were so thankful that they followed that advice. They said, don't worry about, you know, the hit that we're going to take. It's okay. And we need to be there. If we don't have this team, there's 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 wouldn't have been able to do that. So, you know, I think we're, you know, 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. You know, everything is the long game at Heiko. So that's why I think, you know, frankly, the numbers are where they are, and there's more to come on the upside there. Great. Thanks a lot for the color. Thank you.

And we have your next question from Luby Raffetto from UBS. Your line is open.

Thank you. Good morning, guys. Good morning. Carlos, I'm going to go to you first with a couple quick ones. The accrued contingent consideration, was that focused in ETG or FSG? I think there was a benefit in the quarter.

Yeah. Sure. There's a little bit of a benefit from the discount rate in the core. That was split between both segments pretty evenly. You know, the discount rate for value in those liabilities went up from 4% to 6% on average for us, and so that 2% did have an incremental benefit to the company, which, by the way, we haven't seen that in a while. So as the rates rise, those liabilities get discounted, and that's why you see that in the cash flow statement, $1.7 million or $1.8 million.

That makes sense. Sorry. Perfect. Thank you. And then, similarly, there was a $9 million, $10 million outflow in the, I guess, investing activities under other. Just was curious what that was.

Yeah, the majority of that was related to a deposit on a product line acquisition that we're almost complete with. And so, for timely reasons, we made that deposit. We're still doing some investigative work. You know, it's a small product line we're looking to buy. That's why I see it coming in investing activities as well.

All right, perfect. Thank you. And then, 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 mismatch on sort of pricing increases versus cost increases. But I know you said there's 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, you know, a couple years ago?

No, it's all clean, and I'm glad you mentioned that. This is something which I am really proud about, Heiko, 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 them, took these big one-time charges where they 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 uneconomical decisions in order to goose short-term earnings. Tyco does not do that. And if you look at our numbers, it supports that, you know, without taking these one-time charges. So to answer your question, no, it was not a reversal of inventory or receivables or something like that. And as far as pricing goes, we've been, you know, 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 that there, I think it would be incorrect to say that there's been a mismatch in terms of pricing and costs. Because, yes, there are some areas where we were able to realize higher costs sales prices due to costs 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, we were not able to realize higher sales prices when costs went up. So, you know, I wouldn't draw that conclusion that our, you know, margins were driven because of that. I mean, we're operating in 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 flow through the margins.

All right. That's great, Colin. I appreciate it, Eric. And then, Larry, I guess maybe one for you and maybe to Eric's point on uneconomical. Obviously, there's a recent deal sort of for a brakes business went out at 14 times. Is that something you guys, you know, had looked at just not, not worth 14 times?

The answer is we really don't comment on things that we look at or, you know, uh, I think that, uh, paying 14 times for anything I think is a pretty high price, but, uh, it's up to the buyer. If he makes it work, uh, you know, God bless him, let him 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 that's accretive. Historically, you know our style. We'll buy very good companies, but we're not going to reach up to the moon. The real question is, in hindsight, what do these 14, 17-time acquisition deals do 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, we're 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 happen to be very good companies, but the question is how much do you pay for it?

And the other thing, Louis, 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's something for sale, we see most of everything which is for sale. I mean, we're the go-to buyer for a lot of companies. But we've got, you know, various priorities and we've got to do what really makes the most sense for Heiko. And, you know, I want to be careful. If someone's paying a higher price, they probably see a good path to, you know, to realizing very good value. But we've got to focus and focus on the acquisitions which are most meaningful to Heiko.

One other thing. I have learned I have been told by many experts in Wall Street and M&A that roughly 20% of acquisitions are 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. So Heiko 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 I'm not going to buy into the greater fool theory because I want to see my salary double from $1 million to $2 million and so forth. My family's money and our investors' money is hard on the line, and I want to see a payback before I die and wait 50 years to get my money back. So that's the way HICO is structured. And the other thing is, if you look at the market acceptance of HICO and the multiple that we sell at, it appears that a lot of investors appreciate what we do. And I've gotten a letter today. We get 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, saying how they appreciate the way we run the company. And 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 a backlog or orders that would support the future being at 9 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 ten years. And that's how we get our strong cash flow. We're 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 debt at 8%. So, I mean, that's our strategy. Does that answer your question? We all appreciate the honesty.

Yeah, appreciate the honesty.

Do you agree with it, or do you disagree with me?

Oh, no. Larry, no one can disagree with what the family has felt over the last 30 years there and how successful it's been.

That's the right answer. Thank you. Thank you. 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. We have your next question from... Gautam Khanna from Cowan, your line is open.

Yeah, 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 parts pipeline. Has that changed at all over the last couple of years?

No, it has not. It has not. It has not changed. Our pace of approvals, you know, continues, and we have a very good relationship. We've built up a lot of confidence over the years, and 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 HICO and see how we run our PMA analysis have said to us that we really overkill when the development departs, that we go to extremes to make sure they're correct and accurate and probably cost us more money to do that. And I think that that's a very good, we believe that's a very good investment. I think the FAA understands that too, that the extent to which we go to develop parts and 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 junk to go on spacecrafts and the electronics don't work. We have to have parts that work in 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 FSG sales in a normal year are derived from the Chinese market? And I'm just curious if you saw any slowdown, you know, given all their lockdowns and what have you in the quarter related to that region.

Yeah, we don't disclose for competitive reasons. We are active in China. We do not have any manufacturing sites in China, but we are active 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, you know, the air traffic? Will they continue to buy?

I... I'm reluctant to reply to that because I really need to study it by, you know, business unit. Sometimes you can have, I wouldn't want you to form the wrong opinion. You know, sometimes sales can be lumpy due to a big inventory purchase in one quarter or another. So I wouldn't 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, do 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?

Yeah, this is Victor. We did have some sales in Ukraine and Russia in the ETG. So that's actually a headwind for us. I mean, it's not overwhelming. You know, it's sort of in the in the neighborhood of maybe, you know, kind of 1% of sales headwind, I think probably on an ongoing basis is total potential, something like that.

And I would say within the FISA board, the group does, the numbers would be similar.

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.

This is Larry Mendelson again. It's been a long call and a lot of excellent questions. I hope we've been able to satisfy you with the answers. If not, you know where to reach us. Give us a call at any time. We'll try to be very responsive. I thank you for your interest in HICO, and we look forward to speaking with you when we do our third quarter earnings call, which will be sometime in 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.

Thank you. This concludes today's call. Thank you all for participating. You may now disconnect.