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Welcome to the HEICO Corporation Third Quarter 2024 Financial Results Call. My name is Samara, and I will be your operator for today's call. Certain statements in this conference 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. Factors that could cause such differences include, among other things, the severity, magnitude, and duration of public health risks, such as the COVID-19 pandemic, HEICO's liquidity and the amount and timing of cash generation; lower commercial air travel, 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 costs to complete contracts; governmental and regulatory demands, export policies and restrictions; reductions in defense, space, or homeland security spending by US 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; cybersecurity events or other disruptions of our information technology systems could adversely affect our business; and our ability to make acquisitions including obtaining any applicable domestic and/or foreign governmental approvals; and achieve operating synergies from acquired businesses; customer credit risk, interest, foreign currency exchange, and income tax rates; and 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. Parties listening to this call are encouraged to review all of HEICO's filings within 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 statement, 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.
Samara, thank you very much and good morning to everyone on this call. We thank you for joining us, and we welcome you to this HEICO third-quarter fiscal '24 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. And I am joined 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. Now before reviewing our operating results, I would like to take a moment to thank all of HEICO's talented team members for their contribution to our record-setting performance. Your continued focus on exceeding customer expectations and operational excellence translated into excellent results for our shareholders. I remain very optimistic about the future of HEICO. Over the past 16 quarters, we've experienced incredible growth in our commercial aviation markets after emerging from one of the darkest times in aerospace history when air travel slowed to a crawl amid the COVID-19 pandemic.
I couldn't be prouder of the professionalism and tenacity of our team members, who demonstrated unwavering dedication to serving our customers during this period of rapid growth. Their ability to meet the challenge of accelerated growth is commendable, and this includes the remarkable Wencor team members who joined the HEICO family last year. In addition, I am pleased with the progress and effort our team members have made serving customers in the defense industry. I expect that growth in this global industry will continue despite the outcome of the upcoming elections, and the softer results we realized over the past few years appear to be in the rearview mirror. Now let's summarize the highlights of our third-quarter fiscal '24 record results. Consolidated operating income and net sales in the third quarter of fiscal '24 represent record results for HEICO and improved by 45% and 37%, respectively, compared to the third quarter of fiscal '23.
Consolidated net income increased 34% to a record $136.6 million or $0.97 per diluted share in the third quarter of fiscal '24, up from $102 million or $0.74 per diluted share in the third quarter of fiscal '23. The Flight Support Group set all-time quarterly net sales and operating income records in the third quarter of fiscal '24, improving 68% and 72%, respectively, compared to the third quarter of fiscal '23. These increases principally reflect strong 15% organic growth mainly attributable to increased demand for the Flight Support Group's commercial aerospace products and services and the impact from our profitable fiscal '23 and '24 acquisitions. Consolidated EBITDA increased 45% to $261.4 million in the third quarter of fiscal '24, up from $179.8 million in the third quarter of fiscal '23. Our net debt-to-EBITDA ratio was 2.11x as of July 31, '24, down from 3.04 times as of October 31, '23.
Our excellent operating results have allowed us to achieve our forecast made a year ago that our net debt-to-EBITDA ratio would return to historical levels of about 2 times within roughly one year to 18 months following the Wencor acquisition, excluding any impact from further acquisitions. Our acquisition pipeline is extremely robust with opportunities in both Flight Support and the Electronic Technologies Group. We intend to follow our time-tested strategy of opportunistic acquisitions that continue to expand the cash-generating ability of HEICO. Cash flow provided by operating activities increased 47% to $214 million in the third quarter of fiscal '24, up from $145.9 million in the third quarter of fiscal '23. In July '24, we increased our regular semi-annual cash dividend by 10% to $0.11 per share. This represented our 92nd consecutive semi-annual cash dividend since 1979. I would like to now discuss our recent acquisition activity.
You may recall that in December '23, we announced the acquisition of exclusive perpetual licenses and certain assets from Honeywell International to support the Boeing 737NG and the 777 cockpit display and legacy displays product lines, which have been performing extremely well for us. As a result, in May '24, we completed a second transaction with Honeywell International, under which we acquired additional licenses and certain assets to further enhance the manufacturing of these new products, including screens for military variants of the Boeing 737NG and 777 cockpit displays and legacy displays product lines. Last week, we announced that the Flight Support Group acquired the aerial delivery and descent divisions of Capewell Aerial Systems. The purchase price of this acquisition was paid in cash, principally using proceeds from our revolving credit facility. We expect this acquisition to be accretive to our earnings within the first year following the acquisition. At this time, I’d like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO Flight Support Group, and he will discuss the third-quarter results of the Flight Support Group. Eric?
Thank you very much. The Flight Support Group's net sales increased 68% to a record $681.6 million in the third quarter of fiscal '24, up from $405 million in the third quarter of fiscal 2023. The net sales increase reflects the impact from our fiscal 2023 and 2024 acquisitions and strong 15% organic growth. The organic net sales growth mainly reflects increased demand across all of our product lines. As we continue to experience excellent organic growth within the FSG, we've also been highly successful in supplementing growth through acquisitions. Last week, we acquired Capewell, a Connecticut-based leading provider of proprietary aircraft cockpit, emergency egress, and aerial delivery products for both the commercial aerospace and defense markets. I am very impressed with their manufacturing process and strict adherence to high reliability and quality products, which help ensure pilot and troop safety worldwide.
They also have an excellent staff of people who will fit extremely well within the HEICO family. The Wencor operations continued to exceed our expectations, and we are convinced this was an excellent investment for HEICO. Wencor's entrepreneurial culture and record of producing high-quality products have allowed us to achieve success in the marketplace. Our customers continue to find great value in our larger aftermarket product offerings for their aerospace parts and component repair and overhaul needs. We continue to operate Wencor as a stand-alone business operation. However, we have made very good progress in working together and serving our customers in a combined seamless fashion. Some examples of how we are now working together include: 1) utilization of all HEICO and Wencor PMAs and DERs at all of our repair stations; 2) commercial and defense aftermarket sales cooperation; 3) Wencor e-commerce platform lists all HEICO non-competitive PMAs; 4) Wencor is utilizing HEICO's manufacturing base, in particular, our specialty products and Electronic Technologies Group, to quote new products; 5) engineering and regulatory cooperation; 6) sharing best-in-class vendors; and 7) driving various back-office synergies, such as payroll and export compliance, that will help offset the cost of additional regulatory compliance, such as Sarbanes-Oxley and HEICO's FAA ODA program.
The Flight Support Group's operating income increased 72% to a record $153.6 million in the third quarter of fiscal '24, up from $89.2 million in the third quarter of fiscal '23. The operating income increase principally reflects the previously mentioned net sales growth and an improved gross profit margin, partially offset by an increase in intangible asset amortization expense. The improved gross profit margin principally reflects higher net sales within our aftermarket replacement parts and repair and overhaul parts and services product lines. The Flight Support Group's operating margin increased to 22.5% in the third quarter of fiscal '24, up from 22.0% in the third quarter of fiscal '23. Given that acquisition-related intangible amortization expense consumed approximately 270 basis points of our operating margin in the third quarter of fiscal '24, the FSG's cash margin before amortization, or EBITA, was approximately 25.2%, which is excellent in absolute terms and is 180 basis points higher than the comparable Flight Support Group cash margin of 23.4% in the third quarter of fiscal '23.
I am extremely pleased with these results. The increased operating margin principally reflects the previously mentioned improved gross profit margin, as well as lower acquisition costs, partially offset by the previously mentioned higher intangible asset amortization expense. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the third-quarter results of the Electronic Technologies Group. Victor?
Thank you, Eric. The Electronic Technologies Group's net sales were $322.1 million in the third quarter of fiscal 2024, as compared to $325.9 million in the third quarter of fiscal 2023. The slight net sales decrease principally reflects lower other electronics and medical products net sales, partially offset by increased defense, space, and aerospace product net sales. This situation is in line with our expectations as we've commented on our earnings conference calls over the last few quarters and is consistent with inventory destocking at some customers. We continue to anticipate quarterly volatility in the ETG's defense net sales, but the overall trend remains very positive. As expected, other electronic net sales were lower during the third quarter of fiscal '24 compared to the third quarter of fiscal '23. We believe these order trends in these markets have bottomed, and we are seeing improved orders in some of our companies in these other markets.
These other markets typically equate to between 25% and 30% of our sales. We continue to expect an overall return to growth in these end-markets and businesses during the first half of fiscal '25. The ETG's record backlog and strong overall orders support our optimism, and as the non-A&D markets improve, we expect a healthy tailwind into our next fiscal year. Orders for commercial aviation and defense products have been very robust, and we are very pleased with our business performance, like at Exxelia, which continues to meet our performance expectations, including growing its profit margins. Further, our order book and quotation activity for fiscal 2026 is building nicely. The Electronic Technologies Group's operating margin improved to 23.5% in the third quarter of fiscal '24, up from 22.8% in the third quarter of fiscal '23. Before acquisition-related intangibles amortization expenses, our operating margin was above 27% as those intangibles amortization expenses consume around 400 basis points of our margin.
That's how we judge our businesses as that most closely correlates to our cash. When we look at how our businesses are doing on an operating basis, we are very pleased with the overall margins and their continued improvement. The operating margin increase reflects the previously mentioned improved gross profit margin, partially offset by lower levels of SG&A efficiencies. I turn the call back over to Larry Mendelson.
Thank you, Victor. Now for the outlook. As we look ahead to the remainder of fiscal '24, we remain optimistic about achieving net sales growth for both FSG and ETG. This growth is expected to be largely fueled by the contributions from our fiscal '23 and '24 acquisitions, along with sustained demand for the majority of our products. Additionally, we are committed to ongoing product and service innovation, further market penetration, and maintaining our financial strength and flexibility. In conclusion, I want to again express my gratitude to the exceptional team members for their unwavering support and dedication to HEICO. Our strategy of building a diversified portfolio of outstanding businesses continues to deliver positive outcomes for our shareholders. Our key markets are very strong, and fiscal '24 is shaping up to be another successful year. Thank you as shareholders for your continued trust. I remain very optimistic about the future for HEICO. And now we'll open the floor to questions.
分析師問答
We'll take our first question from Robert Spingarn with Melius Research.
Well, good morning, and a very nice quarter.
Thank you very much Rob, good morning to you.
I thought I'd start with the end-markets. Eric, FSG's organic growth rate accelerated compared to the previous two quarters. Does this reflect the maturing integration between HEICO and Wencor, or is it simply a result of strengthening demand in the end-market and aftermarket?
Yes. I think that's a great question, Rob, and I spent a lot of time in business reviews and with our sales folks, in particular, over the last month going over a lot of the details. There is no question that the market remains strong. But I do think the reason why the incredible 17% growth rate was so outstanding is because of really two factors. One, we continue to win in the marketplace. HEICO is an accumulation or a combination of a lot of individual businesses working as hard as they can, planning years in advance, developing these products, having them on the shelf, and being able to hit the demand and get them sold when the market needs them. So I think that's number one. Really, everybody's sort of, if you will, all the unsung heroes who are working their rear ends off every day to make this happen. So that's probably the first reason. The second would definitely be due to the addition of Wencor and the broadening of our product line.
I think in speaking with our customers, we’re viewed as a much more complete supplier. I mean, HEICO today has transitioned tremendously over the last many decades. Our customers are very confident in purchasing additional products from us, whether it is parts, distribution, PMA, or repair. I think we are growing our market share. So it's really, I think, yes, a strong market, but more I think, really focusing on the detail by our businesses and the broadening of the product line through Wencor and the 737 and 777 display unit acquisitions.
Okay. And then notwithstanding the strong growth, there have been some airlines out there talking about overcapacity that's been a bit of a theme here. Are you seeing any evidence of that in the order patterns so far?
No, we really don't, actually. As a matter of fact, the number of airlines have sort of trimmed back their purchases. They, if you will, in hindsight, I think over-ordered a bit in 2023, took more than they needed in 2023. So we do have anecdotal evidence of certain customers cutting back this year. But that was really offset by strength at other customers. So I think we continue to do very well. And that gets to the beauty of the HEICO model in that we've got all these individual business units who control their own destiny. If they are short in one area, they figure out how to make it up in another area. This doesn't roll up to my desk after the fact and instead they are doing this in real-time. So in summary, no, I mean, the market for us remains quite strong.
Okay. And then just on the OE side, both you and Victor have some exposure to commercial OE. Are you seeing any slowdown in orders on the OE side because of the slower-than-expected production ramps both at Airbus and Boeing? Or do you continue to ship at the higher target rates and they are just taking inventory?
Yes, we've definitely seen a reduction off of forecast due to their build rates. There is no question Airbus is doing, I think, better than Boeing in that area. But yes, definitely on the commercial OE production, things are softer than expected. That, of course, has been offset by our strength in the defense side, and we expect that strength to continue into 2025, 2026, and after based on our conversations with our customers and what they want there.
Okay. And then here is a question, Larry I thought I would ask you this question, but anybody please jump in. You continue to be acquisitive. You just did another deal. How would you characterize the M&A pipeline as it stands today, maybe relative to the prior year or so? Is there any change in behavior from private equity folks who are out there with properties to sell?
Rob, this is Eric. I'll take that just for a moment. Of course, a year ago, we were largely focused on Wencor as our largest deal in the history of the company, over $2 billion, which consumed a tremendous amount of capital as well as effort. But I can tell you that our pipeline today remains incredibly robust. We have a lot of projects in the works. Our acquisitions teams are nonstop running around the country. I think we worked very hard to differentiate ourselves as the buyer of choice. We'll keep our fingers crossed that some of these will come to fruition. In conversations, I can tell you that on all of our recent acquisitions, HEICO's reputation has been key to getting those deals done and has made us a particularly attractive counterparty for our sellers and partners. The pipeline remains very strong.
Rob, this is Larry. I know you asked me the question, but Eric already addressed it. What he mentioned is correct. Our pipeline is very full, and we are currently considering more acquisitions than we can handle. This is keeping our staff quite occupied, and we are focusing more on non-private equity deals, which are in our best interest. Although we do notice some private equity opportunities, the pricing is quite high, making it difficult for us to compete. Thankfully, we have enough non-private equity deals to meet our needs. Currently, it is a buyer's market for us.
Got it. And just quickly, Carlos, if I could ask you what the blended organic growth rate was in the quarter. Thank you.
You're talking about for the company as a whole?
Yes. So when you factor all in, yes.
Yes. So all in, it was a tick over 7% organic growth for the whole company.
Okay, excellent. Thank you all.
We'll take our next question from Bert Subin with Stifel.
Hey, good morning and thank you for the questions.
Good morning Bert.
Maybe, Eric just to start with you on the FSG side. I think you mentioned sort of accelerating growth, organic growth of 15%, extremely impressive. Last quarter, you had talked about the aftermarket replacement parts side being, I believe, 21% growth, and you called out about one-fourth of that being priced with the discount relative to OEM being close to the widest you've ever seen it. So I'm curious, how did that change in the fiscal third quarter? Was pricing increases an element of that growth? Or does it continue to be more of a volume story?
Yes. Hi Bert. The short answer is that it's primarily about volume. This quarter, the parts business grew by 17%. Last quarter, it was 21%, as you noted. Most of the change is due to volume, with some contribution from pricing. However, I would emphasize that it is largely on the volume side. We have been consistent in passing our price increases onto customers to address rising costs, including labor, special processes, materials, and purchased products. So, the majority of the growth is definitely from volume, with price playing a much smaller role.
Eric, looking ahead for FS, regarding the aftermarket replacement parts business, there's been discussion earlier about the airline sector experiencing reduced capacity and lower yields. It seems this hasn't impacted us yet. Do you believe there is a chance to capture significant market share in the event of a slowdown, as it could make our portfolio more appealing to customers who previously opted for PMA parts to a lesser degree? Or do you think the situation might lead to a balance between pricing and volume? I'm interested in your perspective on how the next few quarters might unfold if we face a slowdown.
Yes, we haven't observed any signs of a slowdown so far. In fact, the opposite seems to be true. Typically, when there is a slowdown, volumes decrease, and that’s when we are able to gain additional market share. Customers recognize the need to take advantage of our cost savings on parts and repairs during those times. When the economy rebounds, we tend to bounce back even stronger because we have increased our market share. Customers appear to be enthusiastic about the HEICO product line; they are looking for competition and expect fair competition, which HEICO offers. I believe we will perform well and definitely gain market share, as well as secure more parts and repairs if that situation arises.
Very helpful. And just one last question for Victor. Victor, if we look at the ETG business over the last several quarters, it sort of bounced around from positive to negative on the organic side, sort of averaged about 0%. I think that business is meant to be a sort of longer term low to mid-single-digit organic. I guess sort of a two-part question. One, I think earlier in the year, you were expecting this more significant ramp in the back half. I'm just curious what changed that outlook? And then two, as you go into FY '25, is there a potential that growth sort of exceeds your longer-term growth target just as a function of recovering?
Yes. Thank you, Bert. These are good questions. I don’t think where we are and so far in the back half of the year has really been a surprise to us. I tried to hint in the second quarter call that for example, margins were higher in that period that we would look for an average over the course of the year. So it’s not really too far out of line, maybe slightly. We are doing the budgets for fiscal '25. Looking at our backlogs and order rate, it feels to me as though we would have a stronger growth rate in fiscal 2025. It’s a little premature for me to say that with certainty because our companies now do their budgets and submit them in early October, but right now, that's how it feels.
Thanks very much.
We'll take our next question from Larry Solow with CJS Securities.
Thank you very much. Good morning everyone, and I appreciate your questions. Congratulations on the impressive growth, and Victor, it sounds like there is also good bookings growth on your end. It seems we can expect a couple of strong quarters ahead. Eric, I have a question for you. I appreciate the details on Wencor. It appears you are realizing some revenue synergies by combining many common services. I'm curious if you can provide any insight on whether the organic growth at Wencor has kept pace with or even surpassed the overall growth of FSG in the past few quarters.
I would say it is very consistent with FSG. I mean, we look at the various Wencor businesses, and their organic growth is very consistent. I mean, there can be little anomalies here or there, but in general, they are doing very well and consistent with the legacy HEICO businesses.
Has the PMA parts offering increased? Has it grown even more? Have you expanded your overall parts offering? Does that contribute to growth in the last few quarters?
Yes, it has. The overall offering has grown, and we've really seen the advantages of that, and frankly, the customer enthusiasm around it.
Got you. Just a question, it sounds like the Capewell acquisition is a nice little tuck-in. Can you provide more details on that? It seems to be in specialty products, so it's going to be a bit more niche with higher profit margins and potentially more variable sales, bigger quarters at times. Is that the right way to understand it?
It is a strong business with two primary product lines. One focuses on the commercial and military aerial descent sector, which includes cockpit egress solutions that allow for exit in case the cockpit door is obstructed. This is essential for cargo aircraft and tankers during emergencies. They offer a highly developed, well-established product used in both commercial and military aircraft, serving as the only means for personnel to evacuate when necessary. The second aspect of their business involves descent solutions for parachuting from aircraft or dropping tanks and other equipment using C130s or C-17s, featuring advanced parachutes and various attachment and aerial drop mechanisms that are vital. We believe this is an excellent business, well-regarded by its customers, and a pioneer in its field. Capewell was the first company to create the device allowing paratroopers to jump from planes and detach upon landing without being dragged by their parachutes. This is a robust business with a niche focus that fits seamlessly within our Specialty Products Group, which is well-integrated with our overall Flight Support offerings. We are very enthusiastic about it.
Excellent. I guess just last question, maybe pass to Carlos. Just on the margin, you mentioned, respectively, on the FSG and ETG up to 25% and 27% on the cash operating margin. Perhaps not so much in the next quarter or two, but where do you see those margins over the next three to five years? I mean can they continue to pick up on the cash side you look at?
The answer to your question is, as we continue to grow the volume of the business, we do expect to eke out incremental margin gains consistent with our history. As the base of the business grows, the amount of overhead needed to support it becomes lower relative to that growth. I expect we'll get that. If you look back a decade and look at the margin gains, that's kind of what I would expect going forward once we sell into our footprint here in the FSG and ETG. I do think you're talking about an EBITA margin, so it's pretty elevated; we are happy with it this quarter. I think that as we move forward, that should continue to stabilize and provide incremental improvements.
Great. Excellent, thanks everybody.
We'll take our next question from Peter Arment with Baird.
Thanks, good morning Larry, Eric, Victor, Carlos. Nice results. Victor, could you talk a little bit about the booking rates and the confidence, especially regarding ETG growth for next year? Could you provide some insights on the end-markets you are observing? I assume defense constitutes nearly 50% of your segment. Is that growing in the mid-single digits, and are there other areas that are experiencing some softness? Maybe just a bit more detail on that? Thanks.
Yes. So Peter, the defense part of the business and commercial aviation have really been extremely strong, experiencing double-digit growth. That is where some of our longer-term bookings really come on the defense side. We're seeing those fill out beyond '25, as well as some of the quote activity and order indications for 2025 and beyond. Right now, I feel like defense is a good leader for us. Commercial aviation has been phenomenal. When I take that together, I look at the other markets, which are down consistent with what others are seeing, and it looks like those order rates are bottoming out. It appears that our customers have used up the excess inventory and the orders are coming in. If you add a sort of six-month lead time on that, it gets us into fiscal '25. That is why I say I feel like there will be a nice tailwind from that next year. Of course, I can't be certain on that, but that’s just how it feels right now.
Hi, Peter, this is Carlos. I want to clarify that you are correct about the 50% figure for the segment. However, at this moment, we are tracking at approximately 40%. As I have mentioned before, once the mix stabilizes, I anticipate that our defense numbers will eventually align more closely with the 50% target. Currently, we are still lagging a bit, sitting at around 40% for defense this quarter.
Okay. That's helpful. Carlos, sticking with you, the leverage has decreased to 2.1 turns as you anticipated. Considering the active M&A pipeline and your desire to reduce leverage, what are your updated thoughts on your leverage targets?
By nature, we're an acquisitive company, and we set out an aggressive timetable to pay down some of the debt that we had, and we've done that. I think the opportunities abound. As long as we can keep our leverage under three, there are opportunities for us. The goal is to find very profitable companies that don't disrupt that leverage, ones that have real high EBITDA, which has been our history. We like high-margin businesses, so the more acquisitions we do with higher margins, the less impact it has on our leverage. That's where I'm steering things when we talk internally about these deals.
Terrific, I’ll leave it there. Thanks guys.
We'll take our next question from David Strauss with Barclays.
Good morning. Thanks for taking my question. I wanted to ask about working capital. Last year, you had a fairly big inventory build. This year, fairly big inventory build. How are you thinking about potentially slower growth or working capital or maybe working capital just coming down on an absolute basis from here?
Hi, David, this is Eric. I'll start out with sort of the big picture and then Carlos will get into the specifics on the financials. HEICO has always focused on customer service, making sure that we capture all of the incremental sales that we can capture. Coming out of COVID, HEICO recovered much quicker than most due to not cutting our people or trimming our inventories too much, resulting in our ability to support the market when others weren't. That’s been a huge HEICO advantage. Victor and I are very focused on all of our business units, reviewing working capital, especially how the inventory and receivables have increased. Obviously, receivables, that's up due to the huge increase in sales. But with regard to inventory, our businesses have outstanding performance in having the correct inventory on the shelf. There are many companies where their inventory grows, and they can't sell it, leading to issues. HEICO has very robust inventory reserve policies to ensure proactive management. We want to slow the growth of inventory, but it is really key to our business. The 17% organic growth we had in the aftermarket business is only possible through increased inventories. But Carlos will get into the specifics.
I would say that the rate of increase in inventory spend has come down relative to the growth in the business. Our sales for the quarter were up 37% comparatively, and our inventory spend is not ramping at that pace. So I'm happy with that. We had firm commitment inventory that some of our subsidiaries made two years ago due to lead times, and we made good on those. We're not the type of company that disrupts our vendor base; we expect them to be good to us. The rate of those firm orders has come down. That said, I expect the use of working capital, particularly inventory, to come down a little bit. It will continue to grow a bit as the business grows, but that’s just part of the dynamic of growth.
Just to add one other anecdote, the purchase of the 737NG and 777 display unit business was the purchase of a product line. A good chunk of the inventory increase was due to that acquisition. When that stripped out, the increase is much smaller.
Great. Thanks for the detailed answer. The other question I had on FSG margins, I know you talked about the year-over-year improvement. But margins did drop. GAAP margins did drop a little bit sequentially. What drove that 50 basis point drop sequentially? Was that mix or something else?
What we've told folks is that we expect the segment to run between 22%, maybe as high as 23%, like it has for the last quarter. There is nothing unusual happening in the margin sequentially. I think there typically is a little shift in mix. Some of the commercial business was down in Specialty Products. The parts business is doing well. The repair business is growing also, which is a bit less accretive than the parts business. You’re going to have puts and takes as we settle the business into its vertical footprints.
From an operating perspective, a year ago our EBITA margin in the third quarter was 23.4%. This year, despite the acquisition of Wencor at a lower cash margin, we've been able to increase the cash margin up 180 basis points to 25.2%. Those numbers are outstanding. As Carlos says, they just bounce around. That's why we say it is going to be within a certain range, but that's just standard noise.
Got it. Okay, thanks very much.
Thank you.
We'll take our next question from Pete Skibitski with Alembic Global.
Good morning guys. I guess to start with, Eric. Last quarter, you guys talked about the supply chain negatively impacting the repair business. And I think maybe it sounds like it did a bit this quarter as well just because it sounds like parts kind of drove the business. So can you talk through, do you see any light at the end of the tunnel there? Or maybe more specifically, what's going on with the supply chain?
Yes. I would say, Pete, we definitely have supply chain problems all over the business. Our vendors are challenged. There's a huge demand out there, and we really got to be on top of the supply chain and vendors to ensure they are prioritized. We still have a large backlog of past due. Frankly, that's driven by certain vendors' inability to produce according to their commitments. I don’t see a tremendous amount of improvement in the aviation supply chain. Demand is just outstripping supply. A lot of people retired, shut down, or lost their special processes. Despite the industry's high-tech nature, many less documented processes went away during the down period. This is why HEICO fought to keep our workforce intact, as we knew we'd want to be ready for when the industry came back.
Okay. So you would say just going forward, you expect the parts business to grow faster because that business you are less beholden to suppliers versus the repair business?
It's hard to say which will grow faster. We are confident in both. When you ship individual parts, you are less impacted by a particular supplier's inability to supply. With the complex assembly of airplanes, if you miss one of the 200 parts on a bill, you're not shipping that unit. That complicates things. All our businesses are performing quite well despite the past-due backlog.
Okay. That's helpful. I appreciate that. And if I could just ask one to Victor. Victor, you touched on it, but I was wondering if you could talk more about the medical and other areas in ETG. I imagine the medical portion had that COVID-type surge and now it is normalizing. Is the broader economy negatively impacting the other portion of medical and other? Or is that growing more strongly than medical?
Yes. I think what happened in medical is we had very strong orders back in '21, '22. Some of it was stronger, but a lot of it was weaker. The manufacturers concluded they had too much on the shelves and some of the orders did not materialize. We are now seeing more customers coming back asking us to pull orders in. I don’t know if it's a sign of a broader economy as well mixed into it, but there are definitely higher expectations for health care delivery and manufacturers.
Okay. So it sounds like you think that the destocking is about over in the next quarter or so?
Yes, that’s how it feels to me. I've seen some signs, so to speak, indicating we're at the bottom. We are seeing much higher quote activity, which usually means orders not far behind.
We'll take our next question from Louis Raffetto with Wolfe Research.
Hi, good morning gentlemen.
Good morning Louis.
Maybe I can just start with a couple of things I noticed. Impairment charge, not something we see from you guys. So just curious if you had any sort of additional information about that. And is that at all related to the change in the contingency consideration as well? Just not sure if those kind of offset each other on the income statement or if one was in one spot and one was somewhere else.
The impairment charge and the contingent liability reversal were both within the ETG segment. They were for two different subsidiaries. One was related to a business in the space industry where some of the end-markets have changed, and revenue projections came down. This was a trade name impairment; the business is doing fine, but our expectation was a little higher when we bought it. The contingent earnout was due to a change in circumstances at one of our subsidiaries, making it unlikely they'd meet the earn-out objectives. They happened at the same time; they net out, so it was a non-event.
All right. Appreciate the color, Carlos. And then maybe just the Capewell deal. I know it is not hugely material, but anyway, just to size at least from a cash usage in the fourth quarter?
I don't believe it's going to be a big cash usage. We borrowed for the majority of the acquisition; it should be a good deal for us. It's a good margin business. It is an immaterial acquisition for HEICO, so we're not providing too much financial detail, but it's not dilutive to segment margins, if that is part of your question.
I'm really excited about this business, the technology, the people, and the capability. Capewell is a critical business, with products in commercial and military aircraft. All these advancements will drive huge demand. This is a good space to be in.
Really appreciate it. Thank you.
We'll take our next question from Ken Herbert with RBC Capital Markets.
Hi, good morning Eric. Maybe, Eric, I just wanted to start with you in the FSG segment. You've basically been 2x-ing your organic growth relative to volume growth in the industry. As you think about normalizing, now you have Wencor and the opportunities from price, share gain, secular trend in PMA growth, is 2x volume growth the right way to continue to think about your aftermarket opportunity in the segment beyond fiscal '24?
We certainly hope so. I don’t know whether 2 times is the correct number. We’ll find out. There’s no question we had significant growth in excess of the market, and there is still a lot out there. We worked really hard to make that happen. If you had asked me years ago whether we'd be at this number, I wouldn’t have thought so. Our people continue to surprise us, and we hope for continued strong performance.
As I think about the share opportunity, are you seeing it more from new customers or greater capture at additional customers, with some differentiation?
We pretty much sell to every single major airline in the world, so this is really a story of additional capture at those airlines. That's the key for us.
Okay. And just finally, can you quantify the Honeywell product line impact in the second quarter growth?
I don’t know if we’re providing that, but as Carlos mentioned, roughly $217 million of sales in the quarter were inorganic, mostly from Wencor and the legacy display business.
Perfect.
Our next question comes from Sheila Kahyaoglu with Jefferies.
Thanks so much. All of them good morning. A few questions, if that's okay. I'll start out with Victor and then go to Eric for the last one. Victor, maybe can you talk about just to double check, the trade name impairment, that $6 million is offset by the contingent liability this quarter, so they net out. And give us an idea of cash margins, 27% cash margins this quarter versus 28% last year, kind of what happened there? How do we think about pre-Exxelia cash margin?
Sure. I'll let Carlos answer on the impairment and the cash margins. I'll just comment that the Exxelia business penalizes us by about 200 basis points of margin.
So the impairment and contingent earn-out are both in ETG, but they were for two different subsidiaries, so they net out. One is related to a business in the space industry. Nothing spectacular; the business is doing fine but our expectation was higher regarding the trade name value. The contingent earn-out was due to a change in circumstances at another subsidiary making it unlikely they'd meet the earn-out objectives, which happened simultaneously this quarter.
Got it. So they net out each other?
They do, yes. The contingent earn-out change and the impairment. One was about $5.5 million in ETG, positive; the negative was a $6 million earn-out. So roughly about a $500,000 drag. Not significant to the operating margin.
Thanks, Carlos. Good morning. I wanted to just ask about cash margins year-over-year. I think they were down 100 bps. Is that right? In ETG?
Yes, down just a tick. I think that is due to the volume drop. The other electronic products, non-defense, and non-space lines of business we serve is roughly 30% of the segment. That business is down, as Victor talked about earlier. What's contributing to some of the drag is that the SG&A spend hasn’t really materially changed. We don't have knee-jerk reactions at HEICO if a business has a challenge; we want to retain that talent and keep that overhead spend, so that when the business turns, we're ready. That contributed to the inefficiencies in SG&A. Once those sales come back, which we expect they will, that inefficiency will go away.
Actually, the cash margin at ETG went up roughly 70 basis points from last year. So it has improved.
Okay. Sorry, I must have had the wrong number. I'm going to get to you, Eric, I promise. But Victor, you've been in this role for 12 quarters now. Why do you think the defense markets are lagging behind when even some underperforming competitors are starting to experience double-digit growth in defense?
We had double-digit defense growth this year, so I don't think we're underperforming. I think we have excellent defense growth this year.
Okay. Got it. So that 30%, that's the drag. And then last question, Eric...
You laid out seven opportunities, revenue or cost synergies that have happened with Wencor. Can you talk about PMA focus going forward, in terms of HEICO and Wencor combining to go to an airline? What we do, we still go as individual businesses to the airlines, which is typical of the HEICO model. Even pre-Wencor, within the HEICO parts group or repair group, there were many subsidiaries. We send those individual businesses to ensure they support their products and find opportunities. However, there may be an overall HEICO parts group contact and as well as a HEICO repair group contact. When it comes to dealing with the airline, we make sure that each individual business is well tied in to do that.
Got it. Thank you so much.
We'll take our next question from Michael Ciarmoli with Truist Securities.
Thanks for taking the question. Eric, just back to Ken's line of questioning, and even what you've been talking about. You are outgrowing the market, you're getting the synergies and cross and upsell opportunities from Wencor. I guess the sequential revenue growth, two-part question here, in FSG, sequential growth has ticked higher every quarter, you are over 5%. How do we think about FSG growth if and when Boeing and Airbus can start getting these planes out the door? Would you expect to see some pressure on your volumes? Are you seeing airlines operating older equipment longer?
I certainly hope not. While I understand logically what you are saying, it's also counterbalanced by many aircraft delivered in the last 10 years. Those aircraft are significantly more expensive to maintain than the older ones and they are getting ordered year after year. So yes, to the extent there is greater retirement, it could reduce sales. However, this is being mitigated by this huge group of aircraft that have been recently delivered, especially with our higher content on these newer aircraft. I am very bullish. Our HEICO team is not invested for one cycle; we are focused on the long haul. There will inevitably be little bumps here and there.
Got it. That's helpful. And then just one last quick one, shifting gears back to Capewell, specifically the aerial descent. Is that company and their product lines a competitor with TransDigm's airborne systems? Or are they complementary?
I think they are complementary. Many of the release mechanisms are sold to TransDigm as very complementary in the market.
I’ll jump here guys. Thanks for taking my question.
We'll take our next question from Gautam Khanna with TD Cowen.
Hi, good morning everyone. I have a quick question for Eric. Regarding the aftermarket replacement parts, did you observe any noticeable differences in growth rates among different product types, such as engine parts compared to airframe parts, or items sold through distribution channels versus direct sales? Is there a way to differentiate, or is it all fairly similar?
I would say it's all the same. I'm not aware of any major trends in one area versus another. There are always puts and takes in the quarter based on many factors, but the strength was broad-based.
It was. Okay. In terms of the Wencor integration, I know you generally don’t fully integrate. However, you do have some common product development opportunities. Where do we stand regarding the level of integration compared to where you expect to be in a year or two? Are we about 50% of the way there? I'm just curious about that.
We’ve done a great job, but I think that there is more. I don’t want to tip our competitors off as to additional stuff that we can do, but there is still plenty of gas in the tank. The combination of HEICO and Wencor will keep giving. As we continue to acquire businesses, we will need more team members to step up and take on more responsibility. There is enormous opportunity for promotion with our acquisitions and organic growth. Our people at HEICO are doing well and working hard.
Thank you, Eric. And Victor, just one for you. In the past, you’ve called out space at times as something that lagged. How is that business trending within ETG?
Yes. Overall, it's roughly flattish for us this year; it's an important business. Carlos, do I have that right?
Yes, it is flattish for the quarter. It is up a little bit for the quarter.
Perfect. Thanks guys. Appreciate it.
We'll take our final question from Tony Bancroft with Gabelli Funds.
Good morning gentlemen and congratulations on a great quarter, and I thought a great job with the Capewell acquisition.
Thank you. We're glad that you're safe with our Capewell devices.
Regarding the displays acquisition from Honeywell, looks like a great business as well. A lot of opportunity for integration there. Are there any other programs on the display side like that out there?
We think the display unit is a really good market to be in. We already do some displays. This acquisition will allow us to combine their IP with HEICO's quality and turn-time that our customers expect. I’m very, very excited about this. It fits extremely nicely within our avionics package at HEICO.
Thank you. Great job.
And at this time, I will turn the conference back to Laurans Mendelson for any additional or closing remarks.
I would like to thank everybody for participating in our third-quarter earnings call. We look forward to speaking with you at our fourth-quarter call towards the end of December. If anybody has any questions, please don't hesitate to reach out to Carlos, Victor, or me, or our dad. We're happy to speak with you and answer any additional questions you have. We thank you very much for your interest in HEICO. We hope you appreciate the great results we've put forth today and look forward to a terrific fourth quarter. Stay well and enjoy the rest of your summer. Thank you very much. This concludes the call.
Thank you, and thank you for your participation. You may now disconnect.