HEICO Corp (HEI) 2022 Q4 法說會逐字稿

Welcome to the HEICO Corporation Fourth Quarter and Full Year Fiscal 2022 Financial Results Call. My name is Samara, and I'll be today's operator.

Certain statements in today's call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to, the COVID-19 pandemic; HEICO's 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 risks, interest, foreign currency exchange and income tax rates; economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue.

Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.

I now turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer. Please go ahead.

Thank you, and good morning to everyone on the call. We thank you for joining us, and we welcome you to the HEICO Fourth Quarter Fiscal '22 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation; and I am joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO.

Today, my comments will address our consolidated fiscal 2022 fourth quarter results, acquisitions and accomplishments, followed by a presentation of the segment results from Eric and Victor Mendelson, HEICO's Co-Presidents.

Now before reviewing our record operating results, I would like to take a moment to thank all of HEICO's exceptional team members for delivering another strong quarter. Your continued focus on exceeding customer expectations and operational excellence has translated into outstanding results for our shareholders. I'm encouraged by the steady improvement in our businesses during fiscal '22, and I am very optimistic that this trend will continue into fiscal '23.

Summarizing the highlights of our fourth quarter fiscal '22 results. Consolidated fourth quarter fiscal year '22 net sales and operating income represents record results for HEICO, and that was driven principally by record results within the Flight Support Group, mainly arising from the continued rebound in demand for our commercial aerospace products and services. In addition, this marks the ninth consecutive quarter of sequential growth in net sales and operating income for the Flight Support Group.

Consolidated operating income and net sales in the fourth quarter fiscal '22 improved 27% and 20%, respectively, as compared to the fourth quarter of fiscal '21. These results mainly reflect 11% quarterly consolidated organic net sales growth and the favorable impact from our fiscal '22 and '21 acquisitions. Consolidated operating margin improved to 24% in the fourth quarter of fiscal '22, and that was up from 22.6% in the fourth quarter of fiscal '21. Consolidated net income increased 13% to $97.2 million, or $0.70 per diluted share in the fourth quarter of fiscal '22, and that was up from $86.1 million or $0.62 per diluted share in the fourth quarter of fiscal '21.

HEICO's effective tax rate was 23% in the fourth quarter of fiscal '22 as compared to 18.3% in the fourth quarter of fiscal '21. The increase in the effective tax rate for the fourth quarter of fiscal '22 principally reflects a 7.6% unfavorable impact from tax-exempt unrealized losses in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan, and that was recognized in the fourth quarter of fiscal '22 as compared to the tax-exempt unrealized gains recognized in the fourth quarter of '21. Later on in this call, if anyone has questions about the detail, this is a complicated matter, Carlos Macau is here, and he will be able to explain that to you. Truthfully, it has no impact on our real operations.

Our recent activity in acquisitions, in September '22, our ETG Group completed the acquisition of TRAD Tests & Radiations, located in Labege, France. And TRAD is a leader in the highly-specialized field of radiation engineering, and their services and products are used primarily in space, nuclear and medical fields.

In September '22, our ETG Group completed the acquisition of Ironwood Electronics, located in Eagan, Minnesota. And Ironwood is a leading designer and manufacturer of high-performance test sockets and adapters for both engineering and production use of semiconductor devices.

As previously reported, our ETG Group entered into a purchase agreement to acquire approximately 95% of Exxelia International, which is headquartered in Paris, France. Exxelia is a global leader in the design, manufacture and sale of high reliability, complex, passive electronic components and rotary joint assemblies for mostly aerospace and defense applications. The transaction's closing, which remain subject to government approval and customary closing conditions, is still expected to occur in the first quarter of fiscal '23 and would be HEICO's largest ever acquisition in terms of purchase price and revenues.

These acquisitions, all of them are expected to be accretive to HEICO's earnings per share within a year of the transaction closing.

At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the fourth quarter results of the Flight Support Group.

Eric?

Thank you very much. The Flight Support Group's net sales increased 33% to a record $346 million in the fourth quarter of fiscal '22 up from $260.4 million in the fourth quarter of fiscal '21. The net sales increase in the fourth quarter of fiscal '22 reflects strong 22% organic growth as well as the impact from our profitable fiscal '22 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 fourth quarter of fiscal '21.

The Flight Support Group's operating income increased 60% and to a record $77.8 million in the fourth quarter of fiscal '22, up from $48.6 million in the fourth quarter of fiscal '21. The operating income increase in the fourth quarter fiscal '22 principally reflects the previously mentioned net sales growth, an improved gross profit margin, mainly from increased sales within our specialty products and aftermarket replacement parts product lines as well as efficiencies realized from the higher net sales volume.

The Flight Support Group's operating margin improved to a record 22.5% in the fourth quarter of fiscal '22, up from 18.7% in the fourth quarter of fiscal '21. The operating margin increased in the fourth quarter of fiscal '22 principally reflects decreased SG&A expenses as a percentage of net sales, mainly reflecting the previously mentioned efficiencies 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 fourth quarter results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales increased 6% to a record $268.5 million in the fourth quarter of fiscal '22, up from $253 million in the fourth quarter of fiscal '21. The net sales increase is mainly attributable to the impact from our profitable fiscal '22 and '21 acquisitions, partially offset by a slight decrease in organic net sales. The organic net sales decline is mainly attributable to decreased defense and space products net sales, partially offset by increased other electronics, medical and commercial aerospace products net sales.

I'd like to point out that the Electronic Technologies Group's backlog remained elevated reflecting strong orders and increasing delays in receiving components and raw materials from some suppliers. These delays have adversely impacted our planned production and shipment of some products during fiscal '22, but we expect that they should benefit us in fiscal '23 as these products ship.

The Electronic Technologies Group's operating income increased 4% to a record $79.9 million in the fourth quarter of fiscal '22, up from $76.9 million in the fourth quarter of fiscal '21. The increase in operating income principally reflects the previously mentioned higher net sales volume, a favorable impact from changes in the estimated fair value of accrued contingent consideration and decreased performance-based compensation expense, partially offset by a lower gross profit margin, mainly from decreased defense and space net sales.

The Electronic Technology Group's operating margin was 29.7% in the fourth quarter of fiscal '22 as compared to 30.4% in the fourth quarter of fiscal '21. The lower operating margin principally reflects the previously mentioned lower gross margin, partially offset by the previously mentioned changes in the estimated fair value of accrued contingent consideration and a decrease in performance-based compensation expense.

I turn the call back over to Larry Mendelson.

Thank you, Victor. As for the outlook, as we look ahead to fiscal '23, we anticipate net sales growth in both FSG and ETG, principally driven by demand for the majority of our products. Our largest end market is commercial aerospace, which continued to grow during fiscal '22. And we expect the strong growth trends to continue into fiscal '23.

Our second largest end market is defense. The defense markets were essentially flat for HEICO in fiscal '22. Though we would all prefer peace, global disputes and unrest means more defense equipment is required, providing a favorable environment for supply defense suppliers. We were negatively impacted by supply chain matters, principally for electronic components in fiscal '22, and that delayed certain delivery schedules. We expect these external factors to mitigate in fiscal '23, but we can't predict when. However, we remain very optimistic on the defense industry's future and have seen growth in our orders and our backlog and that supports our optimism.

We will not be providing detailed fiscal '23 net sales and earnings guidance at this time. We believe that our ongoing conservative policies, strong balance sheet, high degree of liquidity, all enable us to continuously invest in new research and development and execute on our successful acquisition program, which collectively positions HEICO for continued growth and market share gains.

In closing, I would again like to thank our incredible team members for their continued support and commitment to HEICO. Fiscal '23 looks very promising, and I believe that our culture of ownership and entrepreneurial excellence will provide excellent career growth and opportunities for all your success in fiscal '23 and beyond. Thank you all that you do to make HEICO a great company.

That is the extent of our prepared remarks. And I would now like to open the line for comments and questions from people who are listening.

(Operator Instructions) We'll take the first question from Rob Spingarn with Melius Research.

Nice finish to the year, very nice numbers today. And Larry, you just mentioned culture. And so I think this warrants a high-level question, for any of you. But with all of the acquisitions over time for HEICO, I think many investors would have expected the company to inevitably change over time. So can you talk about how you've been able to maintain the culture and the operational excellence? And essentially, what drives the consistency in the outperformance?

Well -- Well, let me give you -- Eric is dying to answer that question. But since you posed it to me, I will respond. I don't want to duck anybody's question, Rob. So the basic culture of HEICO is one of a decentralized organization, where we give tremendous authority to the operating level. As you know, we have no mid-level vice presidents that filter everything that comes from the operating group up to the corporate and to myself, Eric, Victor and Carlos.

So the first thing we do in acquisition, the most important is really scrutinize, analyze, get to know the person who is selling the company to us and how he manages. And if he treats his people well, this is very important. As an example, if he goes through the factory and he sees somebody and they said, he tells us, "Oh, that's a machine operator, that's this and that, that." That's not very impressive. But some of these people go through the factory and they say, they stop at a machine and say, "Charlie here, this is Mendelson's house and meeting his wife, family okay, everything good. Charlie, how long have you been working, for 22 years." This means an awful lot, Rob. We understand the relationship between the owner of the company and his workforce, his team members. That goes a long way, and we understand how that all works. And that's the HEICO culture.

The other thing is we give tremendous authority and responsibility to the operating person. We believe that the person running the -- his organization knows more about his team members, his labor force, his customers, his manufacturer, everything else than somebody in a corporate office, 1,000 or 2,000 miles away. So again, it's the authority that we give them and people who are very talented, respect the fact that we give them that authority. Talented people normally do not like somebody breathing down their neck and over supervising them. What are you doing? What are you doing? So I think that has worked very well.

Also, we have a very exceptional 401(k) plan where we give employees if they put in 6%, we match it normally with 5% in HEICO stock. Many, many of our working people, I'm talking about factory workers, shipping clerk, secretarial help, are millionaires, some are multimillionaires, all as a result of the stock that HEICO has given them. They take a personal pride in being a HEICO team member. It's not as though, "Hey, I'm working and I hate my job," and they understand that they are being compensated and rewarded by having shares of HEICO stock given to them by the company, they didn't pay for it. So that brings their interest aligned with all shareholders.

So we think that most of our people are focused on building HEICO and being part of a team. There's a psychological benefit to call somebody a team member as opposed to an employee. If you're my employee, you work for me. If you are a team member, we all work together. So all of these things are what we call part of the HEICO culture. And I think a lot of that is responsible for our success.

Eric has -- do you want to add?

Yes. I mean I think that's a good explanation of our acquisitions and our culture. But I think, Rob, as I was thinking about this, I think it's even more basic than that. It's that when we came to this company 33 years ago, we decided we wanted to build something for the long term and it wasn't going to be built for years or a single decade. It was going to be built for multiple decades.

And frankly, every single thing that we've done and every decision that we take has been designed to drive sustained long-term growth of the business as opposed to any short-term focus. So when we've got to make decisions on everything from inventory, capital expenditures, people, customer relationships, everything is focused on cash generation as a result of also maintaining low debt and being able to create a culture, which drives long-term performance.

And as a matter of fact, last night, I was reviewing some of our capital expenditure plans. And I saw some of our subsidiaries were buying equipment that frankly wasn't going to impact '23 or fiscal '24 earnings, but was going to impact it in '25, '26, '27 and after. And I realize that the results that we are showing today, which are, frankly, I think, so far above what's normal for the industry are as a result of that long-term focus and we're really benefiting as a result of decisions that were made 10 years ago, 20 years ago, 30 years ago that you can't make happen short term.

And when we look -- people ask me all the time, why is that HEICO performs? If you look at over the length of the economic cycle, we don't have onetime write-offs. We don't do things that if you will, boost the earnings in the short term. And I think our culture, which has been designed for long-term approach is very, very different than typical corporate culture or private equity, which obviously has -- which drive short-term results as a result of their compensation structure and everything that they're set out to be.

So I really want to call out the people at HEICO because, frankly, the ones who get ahead and the ones who are in positions running our businesses today and are in positions of importance are frankly the steady Eddies. They're not the ones who came in and all of a sudden had a quick turnaround and a great success to flash in the pan. Our people have worked hard year in, year out most over decades. And it's a result of that performance and that discipline and that rigor over decades, which has driven the results that we have today.

So I just want to call out, frankly, all of our incredible people are steady Eddies, who just continue to work hard year after year and really make this happen. So I think that's really what makes us unique.

We'll take our next question from Larry Solow with EJS (sic) [CJS] Securities.

Great. Thanks, guys. I fully appreciate on the guidance. I think you guys have long successful history, certainly you need to think you provide -- need to provide specific guidance anyhow. So -- but I do appreciate the sort of qualitative outlook.

Just maybe a couple of questions for Eric and Victor. Eric, just on specifics, obviously, it feels like your aftermarket was strong, parts are strong. I'm sure specialty, I think, also had a good quarter in this quarter. But I'm just trying to figure out, you had a little bit of an above-average margin year this year. Some of those drivers, does -- is that sort of settle back into more of an historical range as we look out to the coming year?

Larry, this is Carlos. Let me jump in there. I think what we're seeing in the Flight Support Group, and it's been amplified, let's say, starting in Q2 and running through the end of the year is some disproportionate growth in specialty products, which has changed the mix a little bit in FSG for the back half of this year, which normally isn't the case. Normally, all aspects of the Flight Support Group grow in tandem. And usually, our story is a margin that's based on volume growth.

I think what we continue to see is our parts and specialty products outperforming some of the businesses within the Flight Support Group, which has -- because of mix has had an impact on pulling the margin up a little bit. We're happy to see that. I mean, as Eric mentioned earlier, it's a 22.5% margin for the quarter, all-time record. We're very happy to see that. But I think once the mix settles back into its footprint, once we get completely thrown out of COVID, we'll see that margin moderate a little bit. It would be my expectation.

And Larry, also just to add, I think we did -- we have seen market share increases and frankly, tremendous efficiency as a result of the effort of our people. But I also want to add that the margin that we have was we were still able to drive that margin even having proper reserves, paying people, frankly, generous bonuses, and we did everything for the long term and still came out with those margins, made all of our investments and did everything the right way. And I just couldn't be more pleased with those margins.

Yes, absolutely. And from a high level, Eric, obviously, it feels like commercial aviation seems to be in a good place right now. The economy may be slowing a little bit for sure, it's slowing. I just assume it feels like you're going to have a good growth year again, but obviously, you can't continue to grow like you did the last couple of years, but -- just any color on sort of how you feel like the industry today?

Yes, I feel very, very good about HEICO's position in the industry. And there's no question that a rising tide lifts all boats. But I think that HEICO is in, frankly, in a unique position because we positioned ourselves in our various businesses. And I've seen in all of those businesses, substantial margin increase as well as market share increase. So we're doing really well. I mean, as a matter of fact, and normally, I wouldn't call it out, but just -- so you're sort of getting to this.

What's interesting is that our, frankly, our PMA sales are at an all-time record. And if you look flights across the world are still down, whatever, 20%, and we still haven't seen full recovery in Asia and somewhat in Europe and Middle East and South America and even in the U.S., to a lesser extent, North America. But HEICO PMA sales are at an all-time record. So I think that we've got plenty of power behind us. And I think that as a result of picking up market share and frankly, treating the customers right. And they know that we've treated them right for 30 years, and we don't take advantage of them.

And we're very fair, we're very reasonable, and they've rewarded us with that market share. So it wasn't stuff that we did short term that made it happen. It was stuff that we did long term, and they trust us. So I think we're really very much in a virtuous cycle, which is permitting this.

Absolutely. Great. And then if I may just switch gears real quick -- a little more quickly for Victor. I know you've been quiet back there. Just quickly, obviously, it sounds like your largest market defense macro is very favorable and maybe this year, it was impacted by some more supply chain issues than anything else. How about some of your other larger market space, medical, it feels like the outlook there (inaudible) consistently good. Is that sort of a fair assessment?

Yes. I mean -- good questions, Larry. The -- those other markets have been very strong for us this year. And in fact, I think really and toward the end of last year as well, they've really been star performers, all the ones you mentioned, medical, high-end electronics, in particular, space a little -- commercial space, a little -- certainly less so and actually a little softer in some instances.

And I would expect, by the way, going forward. You've heard me say this before that at some point, we see those other markets flatten out somewhat. And still, I think, the excellent markets for us, but I would expect them to flatten out or even soften up a little bit as the year wears on and as supply chains get worked out and customers deal with their own [shelves].

We'll take our next question from Pete Skibitski with Alembic Global.

I guess, Victor, maybe just to continue that discussion a little bit, it looks like we might get sort of high single-digit budget growth this year and kind of the base DoD budgets and a lot of Ukraine related spending as well. Can you give us some puts and takes in terms of if we look at that budget growth, but also consider -- you've talked about the supply chain issues and some people talk about defense contracting officer kind of delays? What's kind of the right way to think about all those puts and takes? And the expectation, I think we would all have that you could at least grow, at least in line with DoD budget growth, at least averaging it over time?

Yes. I certainly think over time, we should exceed DoD budget growth, just knowing our businesses and what we're working on and the things that we do. But of course, in any given period, we may be tied to the defense budget directly or it could be negative, right? Our correlation would be negative on to the defense budget. I would think that you're absolutely right on some of the procurement specialists at the DoD being, let's say, overwhelmed in their workloads and dealing with work-from-home conditions and things like that, which have definitely, in our view, delay -- deferred items from getting put under contract.

The supply chain issues, I think, have been bigger for us. And I think -- they were kind of record level for us in the fourth quarter. I was hoping that they would come off in the fourth quarter. Maybe we're starting to see a little bit -- seeing some green shoots in the supply chain, but I think it's too early to call victory there.

And so -- and then, of course, you mentioned the foreign engagements, which I think benefit us. I don't think that they are going to cause the major needle movers necessarily in the next quarter or 2. I think actually, if you look at what we make and how those things are getting inserted over there, I think they're a little longer burn in terms of just the order cycle and production cycle. But I think, as we said in the comments that the dynamic is positive for us.

Okay. I appreciate it. Maybe last one for me, for Carlos, maybe. Carlos, just I think this year was a year of building some safety stocks and if we expect revenue up next year, how do you think working capital trends? Does the safety stock issue kind of reverse itself? Or do we continue to build because of the supply chain issues and higher growth? Just was wondering if you could provide some color there.

Sure, sure. So we invested -- I mean, HEICO, we invested in inventory this year. If you look at our balance sheet, you'll notice that we have a pretty big investment in working capital, particularly for inventory. So I suspect that as you're pointing out, a lot of companies around the world have done that also. The impact to us going into next year, I don't think there's a ton impact on the Flight Support side because most of the business that we do in the Flight Support Group is ordering shipped in the same month. There's not a ton of backlog.

Within our defense business on specialty products, there's backlog, but most of the aftermarket is really build and ship in the same month. So -- which implies that -- most of our customers aren't stocking our product. We have a model with our customers, where the parts come when they need it. And they don't have to stock our stuff if they don't want to. In fact, if they do want that, we usually put consignment cages in their buildings, and we handle all that for them. So not too much on the Flight Support side.

ETG, I do think that it has been involved, particularly with electronic parts to go heavy on inventory. We've done that. And yes, I think in '23, could there be some sort of inflection where people hit the pause button? That's possible. I think for our businesses because we're not stuffing channels and oversupplying our customers, I don't believe it's going to be a major impact to HEICO. But I think globally, yes, I think there's something out there that we'll reckon with probably in '23, early '24.

Our next question comes from Peter Arment with Baird.

Larry, Victor, Eric, Carlos, happy holidays. Victor, last quarter, you kind of quantified the supply chain push out. I think it was around $25 million of sales. You just mentioned it was kind of at record levels, so exceeding that number? Or maybe if you could just give us a little -- if you can quantify it, that would be helpful.

Yes. Sure. So we estimate that in the fourth quarter, that number actually rose by a little more than $20 million to around $47 million. Now I want to identify which subsidiary, about half of it actually came in one subsidiary. And so -- which had not been experiencing, actually had avoided the supply chain issues for quite a long time. And so -- and they're estimating they will ship that in fiscal '23. And so in some ways, there was some improvement over the prior period because a number of other companies saw the numbers shrink. But we had a one in particular, that was high and then a couple of others that were on the higher side, too, whereas in the past, have been a little more broadly distributed.

Okay. That's helpful. And then just, Carlos, maybe you could just talk to us a little bit about the tax rate expectations when we're thinking about fiscal '23?

So I think for HEICO, we typically run 20%, 21%, sometimes better than that. This year, our tax rate was amplified for the pretty much most of the year, except Q1, due to losses in the market. And as Larry mentioned earlier in the call, we have investments in life insurance policies, which back -- what's called our Leadership Compensation Plan, which is a deferred comp plan for our employees, our team members.

And when the losses on cash surrender value occur, which is impacted by general market trends, we don't recognize a loss on the P&L. But what we do recognize is either gains and losses in our tax rate as a result of movement in those permanently deferred items. And so that can have a material impact on our tax rate. This year, it had about a $25 million impact on our tax rate. And so that isn't -- it's not insignificant. That is the driver of what could move our rate off that 20% bogey that I would normally target.

So if the markets grow, our tax rate will be a little lower. If the markets stay stable, you'll see our tax rate similar to what we had this year. And if we have big losses next year in the market overall could amplify a tax rate a point or 2.

Okay. That's super helpful. And just lastly for me on -- Eric, you mentioned kind of your -- kind of at record levels for PMA, but we still have a lot of traffic down in Asia. I was just wondering how you kind of quantify when we see if China reopened fully, what the impact could be on FSG. I know you're kind of already a global player in terms of your customer base?

I mean, we're already doing very well in China. And if China, presumably -- I mean, my expectation, in speaking with various experts, is that China is going to experience hundreds of millions of cases of COVID, whether they get reported or not, it's another thing. So that should have a chilling effect on their domestic travel. The real question is whether that spreads. I -- based on the vaccination rates and therapeutics that are available around the world and our natural immunities as a result of everybody else getting infected, hopefully, it doesn't impact the rest of the world.

But I think China, we're going to see fits and starts. The air travel went up a lot a couple of days ago. Now it's come down. They're going to be in for a tough 12 months, I think, is a result of where they are with the virus. But we feel very strongly, and that's why we're wired to continue to take market share. And I think we're in a very strong position to do well regardless of how China does. But we are doing very well in China currently.

We'll take our next question from Scott Deuschle with Credit Suisse.

Victor, just following up on Pete's question. Can you talk a bit more about supply chain trends at ETG? You mentioned some things have gotten worse this quarter, but you also talked about things and green shoots. Maybe just spend a minute talking about some of the details behind that. So what got worse and what the green shoots have been?

So this is Victor. The answer is it's particularly on the component side. I mean we're finding -- and a lot of our companies have been finding that FPGA, for example, field programmable gate arrays are slow to come in. They're behind in delivery schedules. We have some other very complex microwave components that are designed specifically for some of the products we make. And there are only a few vendors for those in the world, and they are well behind schedule.

We've also seen some lead times pull out -- push out for, I won't go into which subsidiaries, but some polymer-related products that are used in some of the things that we make. So that has been -- I guess, that's been where it's extended out. Where it's been better has been on some of the lower cost and more common electronic components that are used in circuit boards and other things that we make as well as for some silicones and products, interestingly enough some polymer-related products. So it's kind of a mixed bag.

Okay. That's super helpful. And Carlos, is 1.5% of sales still the right way to think about CapEx for next year?

I think so. We're probably targeting somewhere around $40 million next year in CapEx, roughly. So that's about what your math should produce.

Okay. And then last question for you. Just as we go incorporate Exxelia into the model, anything important to reflect on in terms of cadence there? Like is there seasonality to that business in a more Q4 weighted, anything like that we should be mindful of?

Sure. I mean, look, Exxelia is -- I've often said that it almost mirrors, it's like a mini ETG. It's got very similar business strategy and markets. So I think as the Electronic Technology Group flexes throughout the year, I think you'll see Exxelia perform the same way. The only -- it's only caveat to that is they are European-based companies. So there can be external factors in Europe that would impact them, that wouldn't impact us here in the States. But -- but those macro things we can't control. So that will be well known as you read the paper. But no, I don't think there's any -- there's nothing on the table that would cause that business to perform much differently than the overall ETG.

We'll take our next question from Ken Herbert with RBC.

Nice quarter. Maybe, Eric, I wanted to start off. I wanted to see within FSG, if you're seeing anything yet that may think -- that may lead you to believe that there is some potential slowdown or recession risk amongst your airline customers? I'm curious if you're seeing anything yet in terms of delayed maintenance spending, downward revisions on work scopes, inventory adjustments, anything like that? And if -- and if you think about a potential recession risk, for instance, here in the United States, how would that flow through your business? Which parts would be initially hit? And how should we think about the impact or potential impact of that on the segment?

Good question, Ken. To start out, no, we've not seen any change in order patterns from our customers as a result of the most recent economic data. Things are continuing to be extremely strong. And as a matter of fact, we just keep on hitting new highs. However, we all know that if a recession comes and air travel is curtailed, there will ultimately be an impact. Now I think the impact on air travel could be a little less perhaps than it's been in other periods, only because we were sort of starved for air travel for about 2 years. So that may mitigate a little bit of it. But certainly, the industry will be impacted.

And clearly, you can see it in cargo load factors and dedicated cargo aircraft flying, those would definitely be curtailed. But I would anticipate that as far as HEICO goes, we're in a unique position, I believe, because of the products that we've developed. And although I don't want to cite on this call what they are, but I can tell you that a large part of our rebound has been new products that, frankly, hadn't been sold pre-COVID.

So -- and a large part of that is new products that we didn't even offer pre-COVID. So I think that we're in a unique position to be able to mitigate that and that is why our PMA results are at a record, where as the industry is -- number of flights are still down 20%. So that would imply upside to us.

I think one of the things though that you also have to consider is historically, you've asked the question about destocking and restocking and all that. There's no question it would be normal behavior in a time of shortage to overbuy. And I think that all recoveries do hit a period of over buying. The question is when that occurs. And nobody tells you, hey, I've ordered 100 parts, but I really only need 80 of them right now and the extra 20 are for the shelf, because they want to get those 20 on the shelf because they're afraid they can't get them.

So I think that's a natural risk for the industry. But I think HEICO has got the ability to mitigate. Clearly, parts and repair would be impacted first and then ultimately, new aircraft build rates would be impacted second, if that answers your question.

And just as a follow-up maybe for Eric or for Carlos. The incremental margins in the fourth quarter of '22 were sequentially the strongest we've seen all this year within the FSG segment, mid-40s. How should we think about -- it sounded like maybe some moderation on margins from mix in '23 could potentially be a scenario. But how should we think about incremental margins as we think about '23? As you -- based on the comments you just had and sort of what you're seeing today?

Ken, I would -- in a normal run for HEICO, I've talked about in the past, you should expect the fixed cost of around 15% plus our normal margin. So that would put us around 35% or 36%. That would be a normal run on growth, that can vacillate depending on events in the quarter and what's happening. But once we settle into our footprint. Once all the businesses have kind of settled down and they're growing in tandem again, I think that, that's what you should expect. And hopefully, as we get into '23, that will be what I would expect to see.

Our next question comes from Sheila Kahyaoglu with Jefferies.

So I wanted to start out, I think, it was Peter's question, Eric, that question view on FSG and your thoughts on the recovery in China, and you said you were doing really well in China. What -- how much of your FSG business has recovered in China? And of your 35% of sales of international, how do we think about that split between FSG and ETG and geographically?

Yes. Good questions. And so our sales into China in the Flight Support Group are at an all-time record. We're frankly well ahead of our 2019 numbers. So we're doing very well there. I think there is obviously upside from here. I remember, I think it was about a year ago or so, and you asked me, did I think by the end of '22, narrowbody in the U.S., would it be recovered. And I said, I didn't know, and I thought it would be hard. But in fact, not only did narrowbody U.S. recovery, but frankly, the whole world overall recovered for us.

So I think we're in a very good position in all of our markets. It's hard to say exactly what's going to happen to sort of lay out the next 12 months over in China, I think it's going to be fits and starts. I like reading your weekly report on a number of fights, and that's got a lot of great data in it. But I think we're well positioned there to grow our market share, and we're gaining market share all the time in China.

Sure. In terms of -- Victor, you've been very busy yourself. And I know people have started around margins at ETG a little bit, but they were very strong to end the year. How do we think about that going forward? And I think Exxelia is a 150 basis points dilutive to 2023 margins. How do we think about that long-term opportunity?

Well, a couple of things. Exxelia does carry a lower margin than the ETG average. We haven't said what that is, so I can't comment on what it might be. But without just Exxelia, excluding Exxelia, when I look at -- I think you've heard me say this before, that I think we're within a couple of points on what I call the real operating margin, right, which is -- you can sort of think is a cash flow margin before intangibles amortization, but after depreciation.

And I think that somewhere within a point or 2 of 30%, either up or down on that, is the right level. And I think I've been pretty consistent on it. And Exxelia, of course, will change that somewhat. And I continue to believe that's the case. I mean there are always headwinds and tailwinds. And as you've heard me say before, I don't really come down with a club on people. People run our businesses if they're giving us a 31% margin instead of 32% or at 28% instead of 30% or 29%, et cetera. And I look at it on a gross basis and overall basis. So I think our margins should remain healthy, and we'll continue to be pretty proud of them.

And our next question comes from Michael Ciarmoli with Truist Securities.

Nice results. I guess, Carlos, maybe to dig in. I know you're not giving the detail of the guidance, but you do have that one liner in the press release where you called out potentially higher material and labor costs. So just how should we think about that into '23? Obviously, we already covered the FSG margins, they may normalize. It sounds like ETG, (inaudible), Exxelia could pick up. And then I guess just on the revenue side as well, do we expect the normal FSG seasonality? Or are we still in the recovery mode here from COVID?

So I think the way to answer that question is we aren't giving guidance, but we do expect the company to perform, let's say, better than the industry. Just like our history has been. So we do expect growth in our sales. I think the stated goal of the company every year when we come out of the boxes to grow the bottom line 15% to 20%, and that will be our management team's goal for the year.

We've done it pretty consistently for 33 years. And you can see this year, we grew 16% on the bottom line. So I think you could reverse engineer. If you're thinking about how to get those pieces of that pie just reverse engineer up from that 15% to 20% bottom line expectation and come up with the numbers, but we're not going to give detailed guidance at this time.

That's fair. And then the only other one I had, it kind of relates to guidance. But if we look at ETG, should we expect a pickup of that $47 million? I mean that would give you almost 5 points of growth there and then think about just kind of a normal potential organic recovery supply chain easing because it seems like you're going to have -- you're going to be off to a good start in ETG if you pick up that -- the lost sales from '22 here?

We don't know, Michael, when that the disruptions from the supply chain fully bleed out, right? So we could have more pushes. But what I will say is that we did have a down year in defense, which was in total greater than that $47 million you're referring to. So I think what our expectations are as we get into '23, we do expect the overall defense market to improve, at least as it relates to HEICO. And that should be a nice little tailwind for these going into '23.

And then our next question comes from Josh Sullivan with The Benchmark Company.

Just as demand grows for HEICO's PMAs and I think you're developing around 400 parts per year. One, what is the duration of the PMA approval process with the FAA look like at this point? Is it getting better? I know you talked a little bit about the work-from-home dynamic. But then two, how are you looking at the PMA opportunity set? Are you looking to move up the value chain at all?

Josh, this is Eric. With regard to the FAA, our cycle time is great. It's outstanding. And so that doesn't hold us up at all. And with regard to the value set, we continue to go after parts similar to what we've done in the past as well as what I'll call adjacent white spaces. So we continue to really grow the product portfolio. We've got the largest portfolio in the industry by far. And we're very well diversified across a very, very wide group.

So I think we're going to continue to grow. Our customers are asking us to go into more spaces. And so we're continuing to do that. We've treated them very well over the decades. And we've been very reasonable with regard to pricing, and they greatly appreciate that. So they've been encouraging us and rewarding us with, frankly, much more business. So I think we're in a unique position there to continue to grow market share.

Got it. And then maybe just moving over to the space exposure. There's been a number of M&A transactions in the market, a lot of new programs evolving. How are you looking at the space market in that balance kind of between legacy programs versus gaining some exposure to these growth programs that are ramping up in areas like LEO and the (inaudible) markets?

Thanks. This is Victor. We're looking at that very carefully as always. There's opportunity in the LEO market for us. We've been doing business in the LEO market very strongly and successfully for a long time. And of course, we still think there's some good opportunity in the GEO market and even smaller satellites now in the GEO market. But we are very careful to avoid some of the more experimental, if you will, parts of the satellite business, where we would be more of a financial risk partner, where we're concerned about margins, pricing, stability, reliability and so on.

We haven't taken the bait to go out and buy. I can't count the number of exciting space companies that we hear about. We get a deal book or a teaser on and it's just pun intended straight to the moon. And we've really been resistant to those opportunities because we also know that they're highly speculative. So we're going to proceed, but proceed carefully. We want to be a very good value to our customers. And the ones we have been serving historically as well as a number of the new ones who we think are serious about buying our products long term.

Our next question comes from Gautam Khanna with Cowen.

Happy holidays, guys. Yes. Sorry, I joined a little late. So I was wondering at ETG, did you guys describe the change in the estimated fair value of accrued contingent consideration? I was just curious like how big that was and what that related to?

Sure. This is Carlos. So we use contingent earn-outs to bridge deal value gaps when we're dealing with sellers. Right now, on the balance sheet, we have roughly $85 million in the contingent earn-out obligations, fair value of $85 million. What winds up happening, Gautam, is a couple of things. One, you have to evaluate performance of each of the units and recompute, if you would, what that earn-out may be. But what really impacted us this fiscal year is the fourth quarter and throughout the year was the interest rates going up because you have to fair value those liabilities. And as the rates go up, those liabilities shrink, right? So we did have some noise throughout the year for these earn-outs. In particular, we had maybe $2 million or something ran through the numbers for the fourth quarter as credits to expense to reduce that liability as a result of the Fed's move in the interest rate and ultimately, what that does to longer term or intermediate term risk-free rates.

Got it. Okay. No, that's very helpful. And I was curious, a couple of quarters ago, I think specialized products started to come back within Flight Support. And if you could just talk a little bit about how that's trending, and if there's any discernible difference on the defense piece of that versus the defense piece of ETG in terms of supply chain or just demand trends?

Yes. We're -- this is Eric. With regard to specialty products, we're doing very well. In particular, we also have a lot of exposure, frankly, in missile defense, and we're doing particularly well in that area, but as well as commercial aviation. Again, we've got a unique value proposition in those businesses, and I think they're going to continue to grow and gain market share over time, especially as the aircraft -- the commercial aircraft build rates increase.

Okay. And just one last one for me. Maybe, Victor, at ETG, broadly speaking, what are -- what is your visibility on the defense and space side? Just curious like how far out do you have orders through and how has that changed maybe over the last year?

Sure. Right now, I mean, the backlog for ETG is fairly typical. It's a record backlog, by the way, and we've had record backlog throughout the year. In fact, I was looking at, I think, every month through the year, with the exception of one. We had record backlog. So as a percent of revenue, it seems to be very strong. So we have some additional visibility into future shipments in part because of those supply chain issues, right? That's a little bit of it, although that is a pretty small fraction actually overall, the slippage of our backlog.

And in terms of defense outlook, I would generally say we are not short lead time on our products. And so it's at least kind of a good flavor for the next 6 months at any given moment typically. And then sort of it starts to deteriorate from there, which is our typical situation. I would say we're probably in a fairly typical situation now.

The next question comes from Louis Raffetto with Wolfe Research.

So Larry, I think you haven't had the opportunity. So I guess let's get your take on the M&A marketplace right now. I know I've kind of heard some mixed things recently. Obviously, you guys have been busy this past year, but -- just what are you seeing out there right now?

I think I would say it's normal. We are spending a lot of time trying to work with the Exxelia closing. But we are looking for at a number of acquisitions in both areas in ETG and in Flight Support. The market is a little strange now because sellers want high prices that they saw with low interest rates and buyers, particularly private equity is having more of a struggle raising money. So I think I would expect to see prices coming down as long as interest rates are up.

We are very disciplined buyers, as you know. And we -- I think I'm hopeful that we will see some good opportunities that we're looking at many now. Some of the things that we've rejected honestly, recently, we've seen some companies, and they were overpriced, well overpriced, and we made offers and those offers were not accepted, but the deals didn't go either. So the people didn't sell a company.

So we have to see what's going to happen. We're not going to change our discipline. And as you know, we look for strong cash flow. We want to see our money back our investment in some ways between 7 to 11 years. And when you pay 16x EBITDA, you can't do it. So we're not playing in that market. We never did. We never will. And so I think, overall, I'm optimistic that we will make our fair share of investments. This past year, we concluded how many, Carlos, 6?

It was 8 deals.

8 deals. So that's enough in a year, 8 transactions. And deals -- we are optimistic. We don't force deals when deals are priced properly when we have the right type of company, that's what we will move on it. So I hope that answers your question.

Yes. No, that's great color. Carlos, maybe just one again, I understand the guidance, but what is the acquired sales growth? Based on deals have closed so far look like for FY '23? Is it like $150 million or about?

Are you talking about acquired for next year? It could be a...

Yes, next year, exactly.

Yes. I think it will be between $100 million and $150 million. I know that's a wide range, but that's about what it's going to look like.

(Operator Instructions) And we'll take our next question from Colin Ducharme with Sterling Capital.

I had a couple -- maybe I'll just throw them out on the table all at once here. Carlos, I wondered if you could just speak briefly to just comment on wage pressure and inflation, what's your feeling now and what you're hearing from the subsidiaries, particularly as you roll forward into 2023? And also talk about the CapEx, little muted actually from what I may have expected this past year. You mentioned the step-up as we look forward 12 months. Can you just talk a little bit more about where that money is going?

And then maybe for Eric, you addressed the how in terms of margin expansion with FSG. You talked about specialty strength. Can you talk a little bit about the why not in tandem demand in terms of the different components moving together? Why are customers in particular kind of pulling through specialty here? And then maybe I'll pause there. And I've got one or 2 follow-ups for Larry.

So Colin, I'll hit your first 2 questions and then hike it to Eric. On the wage and labor front, we're highly sensitive to that. We watch it very closely because we are spread out really all over the country and all over the world, there are different dynamics in each market. The best way that we have found to deal with those dynamics is to allow our folks in the field, the general managers running our businesses, to deal with their local marketplace, to deal with the wage pressures and material pressures on the raw material side.

We've also told them that as it relates to pricing, to try to work with our customers to protect our margins. Our objective is to not be those guys. We don't want to be the guys that are known as jacking prices indiscriminately. We want to get paid fairly for what we do. And of course, if our input costs do go up, we are asking our customers to help us out in that regard to protect our margins. And so far, knock on wood, that strategy has worked very well for us.

On the CapEx side, I did discuss around a $40 million number for next year. This year was a little light in aggregate dollars. It wasn't because we didn't buy what we needed. I feel like it's a broken record, but it's because our folks are frugal. And if they need a $1 million brand-new machine, our guys will put that in as a CapEx request and then they'll go out and spend $80,000 on a used piece of equipment, drop another $10,000 into it to refurbish it and use that machine for the next decade. That's generally what I'm dealing with.

So our CapEx budgets, while I give you that $40 million number for next year, not including Exxelia, by the way, that's just our core business as of today, there is a high probability like in the past that we underspent that, but it will not be because our folks didn't get exactly what they need to conduct business and plan for the future.

Does that answer your question, Colin?

Helpful. Yes.

And Colin, so you asked why. Why do we have these results in terms of the sales and the earnings? And I really do believe it starts with our low debt decentralized culture. And that permits us to make decisions well in advance and always keep our eye on the long term. And when you do that, people are then able to spend their energy on creating true economic value. And so when you look at the crisis that we just went through, we had plenty of inventory. We continue to develop parts. We continue to treat our customers extremely well as a result of that and frankly, treat our team members very well because they were critical to our business.

So I think that is the reason why HEICO continues to outperform. And it's not just in parts and repair, but it's also in the specialty products business. And there are all sort cases that I can give you, where we can significantly jack price on customers, and we don't do it. And we do it -- we don't do it because we want to make sure that we retain that business for the long haul.

In the short term, people can play all sorts of games with regard to pricing, inventory, all sorts of metrics that you see in the short term. But in the long term, you can't get away with that. And if we want to build this market share like we're doing, the only way to do it is to build it long term and to really have that level of trust. And frankly, that's how we incentivize our people.

I mean, Victor and I each have a whole bunch of businesses that we go and we visit, we know the people, not only running them, but we know the people in charge of the different departments, all the way down very often to people on the shop floor. And we understand who has a long-term culture and who fits with the way we do things and who just plays games. So that's honestly the why and why this happens and we're -- this management team has been here for 33 years. I don't -- I can't think of many management teams, and I certainly can't think of any off the tip of my tongue that have been there for 33 years and plan on being there decades longer.

Okay. Helpful. I appreciate the comment. And then just maybe just a quick follow-up for you, Eric, there. It's just in terms of maybe digging into the why, the role of value-added distribution, I mean you've got smaller private peers that have made distribution in particular, central to their business strategy. And you guys yourselves did several quarters ago a string of deals, which add -- bolstered your muscle as it were in this particular area.

Typically, you've got some quasi-exclusive relationships that go along with those types of segments and businesses. And I'm trying to link back to your comments on today's call on wallet share expansion. And I'm wondering whether -- what -- what, if any, critical role, value-added distribution, the deals you've done in prior quarters are playing today with the wallet share gains that we're now seeing from you guys versus other factors like the price umbrella with OEMs, et cetera?

And maybe a round out final question for Larry. It's just Exxelia has a great deal here, largest ever has the potential to be a buy and build on that continent for you all. Can you just speak to your -- the relative maturity of your deal flow model on that continent, meaning are you satisfied with the width of your M&A funnel there? Is it as wide and mature as we perceive the U.S. in North American M&A funnel to be for you all?

Colin, this is Eric. I'll take the first part of your question that you asked me, the why on distribution. Our distribution companies are, in my opinion, the single most successful distribution companies in the industry. They started out as small entrepreneurial companies, and they continue to run that way. They've got the financial muscle of HEICO behind them. So we're able to buy inventory that makes sense. But we also are very, very realistic on the value of the inventory and the value that we bring to the table.

You mentioned other companies that are getting into this space, and it's becoming an interesting space for others. And I would throw out that you've got to be very, very careful in the distribution business because what we see very often, and if you look into a number of companies, you understand what I'm saying is they have big onetime write-offs. They report whatever it is, their margin is throughout the economic cycle. And then they wait until there's a 9/11, a global financial crisis, a COVID in order to write-off the inventory.

If you look at HEICO, there's not a single time that we've done that. And the reason is because the -- all of the people in those businesses are geared to make the correct economic decisions to drive cash flow and long-term value and not create short-term earnings. So we start with, number one, the [low] debt, which permits us to hold the correct inventory, not the wrong inventory. And number two, we are incredibly rigorous, and I'm not aware of anybody else in this industry that is as rigorous as HEICO when it comes to inventory. We make sure that if we've got a problem, we take it off the books, and we don't spend management time or people's time focusing on that.

But the final thing that we've got in the distribution business, which frankly differentiates us and permits us to do things that nobody else can do is our PMA reach. We're the largest in PMA. We're in at all the airlines, and we have a very, very broad group of products. So if somebody, for example, is distributing a widget on a 737, but they're not on the A320, HEICO is in a unique position to be able to get them in that market. There is nobody else in this industry who can do that.

And so when you combine all the things that I said, the low leverage, the correct inventory and the PMA combined with an entrepreneurial approach that is second to none. And these folks are into the details unlike anything that you've ever seen. And so I think it's a remarkable business, and I want to call it out because HEICO distribution and our companies in there, in particular, led by Seal Dynamics, Blue Aerospace, Air Cost Control are really just absolutely phenomenal and unbeatable in the stuff that they do.

Hello, Are you still there?

Yes.

Okay. So you asked me about our reach in Europe. We're an opportunistic buyer. We have reached throughout the U.S. We have reached in Europe. We have a number of operations, very successful operations in France, and we've been operating in France for a number of years. When we started, we put our toe in the water, and we were very successful, and our companies in France have expanded multiple times. We've increased employment and actually, the economic development people in France visited us often throughout the year, and they want us to invest in France. They like what they've seen, and they've liked how we've performed. We're a big taxpayer over there, and we're a big employer.

So yes, we have reached the Exxelia transaction. We have been looking at that. We knew that company for 4 or 5 years. We've looked at it, discussed it and so forth. So yes, we do have reach in Europe. And when we see a good opportunity there, we will take it. But that -- it's not just Europe, it's Europe, the U.S., the U.K., too.

So does that answer your question?

Yes. Happy holidays.

Our next question comes from Kristine Liwag with Morgan Stanley.

The attractiveness of the PMA market is clear. You guys have made that industry very lucrative. And now we're seeing another company expand PMA to the hot section of the jet engine, like high-pressure turbine blades. How do you think of that market? Is that right for PMA to enter? And would you consider going into that part of the aircraft?

Kristine, this is Eric. So we're very familiar with everybody in the PMA market, and I know exactly what you're speaking about. And -- that has been a market that HEICO has decided to not enter and to not participate in. It is a potential high reward, but it is also a potential very high-risk market as well. And we're very happy in the spaces in which we operate, and we think that, that really makes a lot of sense from certification, manufacturing, customer acceptance. So we've decided really to focus in this market, and we're very happy with -- frankly, with that decision. And we get along with all other companies that provide complementary products, and we hope that they succeed. But it just we've picked our spots, I would say, very carefully.

And if that company were to be successful and actually get these parts certified, would that change how you evaluate that industry?

No. It would not.

Kristine. Can I -- just a little color on how we look at the world and what our strategy is? Our strategy, as I think you know, is controlled growth. We focus on 15%, 20% bottom line growth. We don't want to hit home runs. We want to control our cash flow, which is very strong. And everything we do is really focused on cash flow, not so much earnings per share. And as long as we get strong cash flow from our businesses, including PMA, that is what we're looking for. We don't have to have one spectacular thing in the hot section or that type of thing. But we want a broad offering of parts, highly diversified, and the company, HEICO, in general, is very highly diversified. I don't know how many parts we make go altogether, but I'm going to guess it's going to be a 50,000. I mean and it's highly diversified, and that's intentional.

So we don't want to get into one particular product that stands out. In other words, if any one product that we make failed to sell or is discontinued, nobody would even notice it. It wouldn't affect the bottom line at all. And that's our strategy. So I mean that goes to the idea of making these hot section parts. And so remember, we do have some hot section parts, and we used to make blades and so forth, and we have, of course, combustors, but we want to spread it across a wide number of parts, and we don't have to have one spectacular part to accomplish our objective.

And -- I'm glad you mentioned that. And one of the other things that's very, very important to us is we gathered from our comments on the call and from knowing us for so many years is our reputation. And we don't want to -- when you offer lots of parts, you better be very, very careful that the performance of one part doesn't impact the rest of the portfolio. We have a unique relationship with our customers, I believe, with the FAA and even our competitors. And therefore, we've made the decisions that we've made, which are right for HEICO and right for our risk profile and for the benefits that we want to bring to our customers.

And we'll take our next question from [Mike Hanson], private investor.

Yes, I'm one of the minorities. A question for Victor. According to ETG, when you have sort of a marginal sales increase and a 1% decrease in margin, are the parts of the company that maybe you should deemphasize or spin-off? And maybe at the end of the day, it really wasn't worth your investment in your time?

Mike, it's a very good question. And it's something that our subsidiaries look at all the time, which is to say the appropriateness of making a part or not making a part, and there are a lot of decisions that go into that. It's not always purely economic, although the economics, obviously, are the overwhelming majority of it. There are times when there's a part that we will make, or there's something we'll make because we're selling something related to that. What we don't do is get into loss-making or low-margin positions.

But if something is lower than the rest of the margin, and we feel or the business feels they need to continue to operate or it's still very profitable, i.e., it may be a contribution margin of 35% and the business is running at 36%. So you wouldn't turn away 35% business because it's not 36%. You wouldn't make in a sense phenomenal, the enemy of excellent. And so that's how we do it. It's a good question, and that's a part of the business all the time.

I'd like to add one other thing. If we're running an operating margin of 28%, 30% in ETG, and we discover a company that has a 24% operating margin, we'll buy that company, and it will lower the overall operating margin of the ETG Group. Why will we buy it? Because a 24% or 25% operating margin is a hell of a good margin. And we want that company. And so you can't -- we don't get that focused on absolute margin because there are reasons that we might have reduced margin, increased margin, and we have to be very careful. We're talking -- if you heard me earlier about overall cash profitability, cash flow. And at 24%, even though it's not our 30%, we get a hell of a good cash flow. So you have to take all that and when you think about margin, you have to understand cash flow is more important than margin, but high margin brings cash flow. Does that help a little bit?

That's perfect. But at the same time, other times, if you really look at an acquisition and say maybe remain (inaudible) over the dozen years I've been with you, you've always bought, bought, bought, and I can probably count the 2, 3 companies, but I've read that you've spun off.

Yes. So we buy to own forever. We try to make the right decisions. We've never had any disasters, blowouts and acquisitions. We've had ones that don't perform as well as others for some period of time. And then our jobs are to improve those, and they do. Eventually, we get them to where they want to be. And we do ask ourselves this question, Mike, all the time. Are we better off with an acquisition than without it? And we do that, if you look back, we analyze it historically. And we view it as our job is to make sure that what we buy performs, even if it's not as good of a performance as something else.

By the way, you mentioned that we spin off companies. We have only sold 2 companies in the entire 30-some years that we've run the business. One was a medical company, which we wanted to be out of that industry. It was profitable and...

Services business.

It's a services business. It was highly related to labor and so forth and, we sold that business, I believe, in 1996 or (inaudible) and the other one was a business that, honestly, we bought for $7 million, and we sold it for something like $72 million in about how many years, Victor, about 4 years. And the reason we sold it is that the operating margin was low. It was an interesting business. We sold it to a company that liked that, wanted to be in that business and wasn't focused on operating margin. That business had about a 10% operating margin and it was sucking up cash. It was using so much cash that it didn't make sense to own the business. But we paid $7 million, and we sold it for $72 million. So it wasn't a bad day.

And aside from that, we have not sold any or eliminated any other businesses. And as Victor pointed, we -- thank God, we've never had a bust. Some businesses have performed better, some have been not so good. But if you take the overall package, again, we're talking about diversification at HEICO, which is a critical strategy for us. Putting all those businesses together, as you see, they've generated fabulous cash flow, and I think that our acquisition performance has been pretty good. Not -- close to 100 acquisitions, not having a bust, I think, we've done pretty well.

Mike, I got a note from the operator, we've actually gone over time. But I'll just -- I will comment, we have not sold a business in 22 years. So that part I can tell you. But unfortunately, I'm getting this note from the operator that we are over our time by 5 minutes now. Thank you for the questions.

And I'll turn the conference back to the speakers for any additional or closing remarks.

So I -- this is Larry Mendelson. I want to thank you all for participating in this call and for your interest in HEICO. We remain available to you if you want to call, Eric, Victor, myself, Carlos, if you have any questions or you want clarification on anything. Otherwise, I want to wish everybody a happy holiday season, a healthy one. If you're driving or traveling, be safe, and we look forward to speaking to you sometime in mid to late February with our first quarter '23 results. So this is the end of our teleconference. Thank you all.

And this concludes today's call. Thank you for your participation. You may now disconnect.