Q4 2020 HEICO Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the fiscal year, 2024th quarter and the year earnings results Conference call. At this time all participants are in a listen only mode I forget speaker's presentation from all of your question on sort of fashion.

To ask a question during the session. He will lead to press star one on your telephone please be advised that the beef conference is being recorded if you require any further assistance. Please press star zero 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 the severity solitude enter leashing optical if it's on team from that make HEICO is liquidity that'd be about and timing of the cash generally.

Ration door commercial air travel costs played a cool, but my team from dynamic and its aftermath.

Like fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services products, a specification costs and requirements, which could cost from increased or cost to complete contracts.

Well from mental ever go before he demands export policies on a restriction reduction 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 aspirin.

Credible pricing levels, which could reduce our sales force field qual product development or manufacturing difficulties, which could increase our product development and manufacturing cost and believe sales.

<unk> ability to make acquisition and achieve operating synergies from acquired businesses.

Customer credit risk interest foreign currency exchange and income tax rates economic condition with either outside off the obligation defense pace that Nicole telecommunications and electronics industries, which could negatively impact our cost and revenue and defense.

Pending or budget cuts, which could reduce our defense related revenue parties, receiving listening to this call or reading a transcript of this call are encouraged to review all of Heico's filings with the Securities <unk> Exchange Commission, including but not limited to filings on form 10-K.

Form 10-Q on form eight k., we undertake no obligation to publicly update or revise any forward looking statements, whether it's a result of new information future events or otherwise except to the extent of acquired applicable law I'd now turn the call over to lines, even though.

Sinn Heico's chime in and Chief Executive Officer. Thank you. Please go head.

Thank you very much and good morning to everyone on the call we back on for joining US and we welcome you to this HEICO fourth quarter fiscal on Wednesday earnings announcement telecom on where.

The non <unk>, Chairman and CEO, Michael Corporation, and I'm joined here. This morning by Eric Mendelson Heico's co President and.

President on HEICO flight support group.

Victor Mendelson Heico's co president and President of Heico's Electronic technologies group.

Carlos Macau, our executive Vice President and CFO.

Now before reviewing our fourth quarter reported fiscal year results I'd like to take a few moments to discuss the impact on.

Hi goes on operating zone.

On the COVID-19 global cash.

The results of operations in fiscal 2015 were significantly affected by nine.

Right.

Okay.

The effects of the pandemic and related actions by governments around the world to mitigate these rare impacted on our employees customers suppliers and manufacturers.

Since the beginning of the pandemic anymore.

When we.

We have implemented health and safety measures on your facility in accordance with the CDC guidelines.

<unk> team members.

Mitigate the spread of growth was 90.

Most of our facilities are considered essential businesses and remain operational during the bad debt.

We are thankful for the outstanding commitment of our team members towards our customers shareholders and each other during these very challenging times.

The board of directors.

On management, HEICO or truly humbled by the dedication of our team members to their company during these on president.

Currently.

We believe the recent vaccine progress well, most notably resolved in a gradual recovery in demand for our commercial aerospace parts and service is coming.

Commencing in fiscal 21.

As demand for air travel slowly recovers, we remain very confident in our ability to walk from cost saving solutions and robust product development programs that we expect to increase our market share and allow us to.

You have even a stronger presence within the commercial aviation Mark.

I'd like to take a few moments to summarize the highlights of our full fiscal 2020 and fourth quarter results.

Despite the many challenges faced in fiscal Wednesday, HEICO has continued to generate excellent cash flow.

Our cash flow provided by operating activities.

It was very strong at $409 billion.

And 437.4 billion this growth 2019, respectively.

Cash flow provided by operating activities totaled $110.2 billion.

For 177%.

Reported net income in the fourth quarter fiscal 20.

As compared to 124 million in the fourth quarter of fiscal 19.

All of you know HEICO most important metric is cash flow and I think that are the result of 2020 operations, particularly the fourth quarter or clearly indicative of the success.

We are encouraged by the sequential improvements in our fiscal 20 consolidated fourth quarter operating results over the third quarter of fiscal 20.

And during the fourth quarter, we experienced increases in consolidated operating income.

Net income and net sales.

Okay, 30%, 15% and 10% respectively.

In fact, despite the continued impact from the pandemic on demand for our commercial aerospace parts and services.

The flight support group's operating income and net sales in the fourth quarter or physical Wendy.

True sequentially by 78, and 9%, respectively as compared to the third quarter fiscal twins.

A significant improve.

The electronic technologies group now on I'll call. It E. G set all time quarterly net sales and operating income record in the fourth quarter of fiscal 20, improving eight and 14% respectively over the fourth quarter of fiscal 19.

These increases principally reflect excellent operating performance of our fiscal 20 acquisitions as well as continued disciplined cost management on.

Other parts of our operating teams.

We recently entered into an amendment to extend the maturity date of our revolving credit agreement by one year to November 23.

Andrew increased the committed capital to $1.5 billion.

In addition, our credit facility continues to include a feature that will allow the company to increase the capacity by 350 mid or become a $1.85 billion facility.

Through increased commitments from existing lenders or the addition of new lenders and can be extended for an additional one year period.

[noise], we're very thankful for the continued support from our existing Bank group.

Their loyalty to HEICO as demonstrated by this credit facility Amendment further offers us the financial flexibility to pursue our disciplined strategy of acquiring high quality businesses at fair price.

Our net debt, which we define as total debt less cash and cash equivalents.

On a $333 million compared.

Compared to shareholders equity ratio improved to 16.6% as of October 31, 20.

And this was down from 29.8% as of October 31, 19.

Our net debt to EBITDA ratio.

True 2.71 times as of October 31, 20 down from <unk> 0.93 times as of October 31, 19 keep in mind. This is after making six acquisitions during the year.

During fiscal 20, we successfully completed six acquisitions for which were completed since the pandemic star.

We have no significant debt maturities until fiscal 2004, and we plan to utilize our financial strength and flexibility.

Resolutely pursue high quality acquisitions of various sizes and accelerate growth to maximize shareholder returns.

As we reported yesterday, we declared an eight cents per share regular semiannual cash dividend on.

On both classes of common stock payable January 21, 2021 to shareholders of record as of January seven Twentytwenty one this.

This cash dividend will be on were 85th consecutive semi annual cash dividend.

Since 1979.

[noise] HEICO strength in the face of challenging business conditions, coupled with our optimism on the future.

Our board of directors, the confidence to continue paying our normal cash dividend.

Well this is very important to all of our shareholders. It is especially important to our team members the vast majority of whom our fellow HEICO shareholders.

Through the personal holdings and therefore on case plan.

[noise] [noise], let's talk about some of the new fourth quarter acquisition.

As I discussed during the third quarter teleconference. We completed three acquisitions in August through our CTG group.

First we acquired a 75% of the equity interest in transformation on security and intelligent devices. These two companies to design and develop and manufacture state of the art technical surveillance countermeasures equipment.

Next.

We acquired approximately 90% of the equity interest of connected to.

Connect tech.

Zions and manufactures rugged small form factor embedded computing solutions used in rugged commercial and industrial aerospace and defense transportation and smart energy application.

These acquisitions are expected to be accretive to earnings within the first 12 months following closing.

At this time I would like to introduce Eric Mendelson co President of HEICO and President of Heico's flight support group and he will discuss the results of the flight support group. Thank you.

The flight support group net sales were 924.8 million in fiscal year 20, as compared to 1 billion $240.2 million in fiscal year 19.

Flight support groups net sales were $193.6 million in the fourth quarter fiscal 20, as compared to $324.7 million in the fourth quarter of fiscal 19.

The net sales decreases are principally organic and reflects lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March Twentytwenty due to the pandemic.

Net sales in fiscal 20 follows that 13% and 12% organic growth reported in the year in fourth quarter of fiscal 19, respectively.

The flight support groups operating income was $143.1 million in fiscal 20 as compared to $242 million in the fiscal year 19.

The price support groups operating income was $21.5 million in the fourth quarter fiscal 20, as compared to $62.2 million in the fourth quarter of fiscal 19.

The operating income decrease is principally reflects the previously mentioned decrease in net sales a lower gross profit margin and an increase in bad debt expense due to potential collection difficulties from certain commercial aviation customers debt buyout for bankruptcy protection during fiscal 20.

As a result of the Pandemics financial impact, partially offset by a decrease in performance based compensation expense.

The lower gross profit margin principally reflects an increase in inventory obsolescence expense, mainly resulting from the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers due to the Pandemics financial impact at this.

Finally, the lower gross profit margin reflects the impact from lower net sales within our repair and overhaul parts and services and aftermarket replacement parts product lines.

The price of work groups operating margin was 15.5% in fiscal 20 as compared to 19.5% in fiscal 19.

The flight support groups operating margin was 11.1% in the fourth quarter of fiscal 20 as compared to 19.2% in the fourth quarter of fiscal 19.

The decrease the operating margin decrease is principally reflects the previously mentioned lower gross profit margin and an increase in SDMA expenses as a percentage of net sales mainly from the previously mentioned higher bad debt expense and fixed cost efficiencies.

Cost, resulting from the Pandemics impact, partially offset by lower performance based compensation expense.

Now I would like to introduce Victor Mendelson co president of HEICO and President of Heico's Electronic technologies group to discuss the results of the electronic technologies group. Thank you Eric.

The electronic technologies group's net sales increased 5% to a record $875 million in fiscal 20 up from $834.5 million in fiscal 19.

The increase in fiscal 20 is attributable to the favorable impact from our fiscal 20, and 19 acquisitions, partially offset by on organic net sales decrease of 1%. The organic net sales decrease is principally due to lower sales of commercial aerospace and medical products largely attributable to the pandemic.

Partially offset by increased sales of defense and space products. The Lpgs net sales increased 8% to a record $236.7 million in the fourth quarter fiscal 20 up from $219.5 million in the fourth quarter fiscal 19 income.

The increase in the fourth quarter fiscal 20 is attributable to the favorable impact from our fiscal 20 acquisitions.

And the anticipated increase in commercial space revenues.

The electronic technologies group's operating income increased 5% to a record $258.8 million in fiscal 20.

Up from $245.7 million in fiscal 19, the increase in fiscal 2000, partially true principally reflects the previously mentioned net sales growth lower performance based compensation expense and a decrease in acquisition related expenses, partially offset by a lower gross profit margin.

The lower gross profit margin is mainly due to a decrease in net sales on less favorable product mix of certain commercial aerospace and medical products, partially offset by increased net sales of certain defense products. The TGF operating income increased 14% to a record $73.9 million.

In the fourth quarter fiscal 2000 up from $64.6 million in the fourth quarter fiscal 19.

The increase in the fourth quarter fiscal 20, principally reflects the previously mentioned net sales growth and improved gross profit margin improved gross profit margin principally reflects a more favorable product mix and increased net sales of certain space and defense products, partially offset by a decrease in net sales of certain commercial.

Aerospace products.

The electronic technologies groups operating margin improved to 29.6% in fiscal 20 up from 29.4% in fiscal 19.

The TGF operating margin improved to 31.2% in the fourth quarter fiscal 20 up from 29.4% in the fourth quarter fiscal 19.

The increase in the fourth quarter fiscal 20, mainly reflects efficiencies gained from the previously mentioned net sales growth and the improved gross profit margin.

I turn the call back over to Larry Mendelson.

Thank you Victor.

Moving on to diluted earnings per share on consolidated net income per diluted share decreased 4% to $2 from 29 cents in fiscal 20 as compared to $2 from 39 cents in fiscal 19 concern.

Consolidated net income per diluted share decreased 27% to 45 cents in the fourth quarter of fiscal 20 as compared to 62 cents in the fourth quarter of fiscal 19.

Those decreases principally reflects the previously mentioned lower operating income of flight support.

Partially offset by lower income tax expense.

Less net income attributable to non controlling interest as well as lower.

Interest expense.

Depreciation and amortization expense totaled 88.6 million in fiscal 20 up from 83.5 million in fiscal 19.

And total 23.3 million in the fourth quarter of fiscal 2000 feet up from $21.8 million in the fourth quarter of fiscal 19.

The increase in the fiscal year and fourth quarter of fiscal 20, principally reflects the incremental impact from our fiscal 20 and 19 acquisitions.

Research and development.

Significant ongoing new product development efforts are continuing at both VTG and flight support.

R&D expense was 65.6 million in fiscal 20.

Or about 3.7% of net sales and that compared to $66.6 million in fiscal 19 on.

For 3.2% of net sales.

R&D expense was $16.6 million in the fourth quarter of fiscal 24.9% of that sales and that compared to $17.9 million in the fourth quarter fiscal 19.

And that was 3.3% of net sales.

SGN a expenses consolidated.

Decreased by 14%.

The $305.5 million in fiscal 20, and that was down from 356.7 in fiscal 19.

The decrease in consolidated SGN a expense in fiscal 20 reflects a decrease in performance based compensation expense.

A reduction in other gene in a expenses and the reduction in other selling expenses, including outside sales commissions marketing and travel.

These decreases were partially offset by the impact of our fiscal 19 and 20 acquisitions.

As well as the previously mentioned increase in bad debt expense.

And that was due to.

Collection difficulties from certain commercial aviation customers.

Thats filed for bankruptcy protection during fiscal 20, as a result of the financial impact of the pandemic.

Consolidated SGN, a expense decreased by 18% to $72.6 million in the fourth quarter fiscal 2000 down.

Down from 88.8 million in the fourth quarter fiscal 19.

The decrease from consolidated as DNA expense in the fourth quarter fiscal 2000.

Reflects a reduction in other.

General and administrative expense decrease in performance based compensation expense and the reduction in other selling expenses, including outside sales Commission marketing a drought.

The decreases were partially offset by the impact of our fiscal 2019 acquisitions.

As well as the increase in bad debt expense.

Consolidated EPS DNA expense as a percentage of net sales dropped to 70.1% in fiscal 20 and that was down slightly from 17.4% in fiscal 19.

The decrease in consolidated as DNA expense as a percentage of net sales in fiscal 20.

Again is due to lower performance based compensation expense and a decrease in other selling expenses, partially offset by the impact of higher other DNA expense as a percentage of net sales.

And an increase in bad debt expense.

Consolidated as DNA expense as a percentage of net sales.

Increased to 14 on sorry, 17% in the fourth quarter fiscal 20, and that was up slightly from 16.4% growth.

Fourth quarter of fiscal 19.

The increase in consolidated as Gionee expense as a percentage of net sales on the fourth quarter fiscal 17, Rick.

Reflects higher other Gi general administrative expense as a percentage of net sales due to the decreased sales volume and the aforementioned increase in bad debt expense, partially offset by a decrease in lower performance based.

Compensation expense and a decrease in other selling expenses.

Interest expense decreased to $13.2 million in fiscal 2000 feet and that was down significantly from 21.7 million in fiscal 19.

And it decreased to two and a half million in the fourth quarter fiscal 20 down from 5.2 million from the fourth quarter fiscal 19.

Decreases were principally due to a lower weighted average interest rate on borrowings outstanding under our credit facility.

Our effective tax rate in fiscal 220 was 7.9% as compared to 17.8% fiscal 19.

The decrease in fiscal 20 is mainly attributable to a larger tax benefit recognized in fiscal 20 from stock option exercises compared to fiscal 19.

And that resulted from more stock options being exercised as well as the strong appreciation in HEICO stock price during the option to use holding period.

Our effective tax rate in the fourth quarter fiscal 20 was 22.3% and that compared to 19.8% in the fourth quarter of fiscal 19.

Net income attributable to non controlling interest was 21.9 million in fiscal 20.

That compared to $31.8 million in fiscal 19.

The decrease in fiscal 20, principally reflect a decrease in operating results of certain subsidiaries of flight support.

In which non controlling interest or sales as well as the impact of a dividend paid by HEICO aerospace.

June 19.

2019 that is that effectively resulted in the transfer of 20% non controlling interest held by both tons of technique in eight of our existing subsidiaries and that was trends.

Transferred back to our flight support group.

Net income attributable to non controlling interest was $5.3 million in the fourth quarter of fiscal 2000 feet and that compared to $6.9 million in the fourth quarter fiscal 19.

The decrease in the fourth quarter of fiscal 20.

Typically reflects a decrease in the operating results of certain subsidiaries of the flight support group in which non controlling interest Park Hill.

For the full fiscal year 21 at the present time, we anticipate a combined tax and non controlling interest rate of approximately 23% to 24%.

Moving on to the balance sheet and cash flow.

As you all know our financial position and forecasted cash flow remain very strong.

Previously I mentioned cash flow provided by operating activities was consistently strong.

$409.1 million.

One of the $37.4 million in fiscal 20 and 19, respectively.

Cash flow provided by operating activities totaled 110.2 million.

Were 177% of net income in the fourth quarter fiscal 20.

Net compared to $124 million in the fourth quarter of fiscal 19.

We currently anticipate capital expenditures of approximately $40 million in fiscal 21.

And that would be up from the 22.9 million spent in fiscal 20.

Our working capital ratio, which is of course current assets divided by current liabilities improve.

To 4.8 as of October 31, 20, as compared to 2.8 as of October 31 19.

Daniel Day sales outstanding Dsos of accounts receivable approved improved to 45 days as of October 31 20.

Net compared favorably to the 47 days as of October 31, 19, we.

We continue to closely monitor on receivable collection efforts in order to limit our credit exposure.

No one customer accounted for more than 10% of sales and our top five customers represented approximately 24 and 20% of consolidated net sales in fiscal 20 and 19, respectively.

Our inventory turnover rate increased to 153 days for the year ended October 31, 20, as compared to 124 days for the year ended October 31 19.

Net increase in turnover rate principally reflects certain long term and non cancellable inventory purchase commitments.

Which were based on pre pandemic net sales expectations.

And also to support the backlog of certain of our business.

No.

Now the outlook.

As we look ahead to fiscal 21 the.

The pandemic will likely continue to negatively impact commercial aerospace industry as well as HEICO.

Given this uncertainty HEICO cannot provide fiscal 21 net sales and earnings guidance at this time however.

However, we do believe our ongoing fiscal conservative policies healthy balance sheet increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers.

In addition, our time tested strategy of maintaining low debt and acquiring.

Operating a high cash generating businesses across a diverse base of industry be.

Besides commercial aerospace and these industries are defense space and other high end markets, including electronics and medical.

Puts us in good financial position to whether this on certain economic period.

We are cautiously optimistic that the recent vaccine progress.

Should generate increased commercial air travel and will result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal 21.

I'd like to conclude my remarks by again thanking all of Heico's talented team members, who have worked very hard to exceed our customers' expectations. During these difficult times.

Which were brought on by the COVID-19 pandemic.

Their dedication to heico's customers.

And so the safety of their fellow team members has been exemplary.

And I want to thank each and every member of HEICO as global team too.

To understand that the board of directors and on value your commitment to our collective safety on success. During these challenging times I am confident that our future is bright and we will exit this COVID-19 period as a stronger.

Sure and more competitive company.

Peter Arment with bird excuse me don't ask a question.

Yes, good morning, Larry Eric Victor Carlos on.

Eric I guess I just start with you on the F. S. G. The 9% sequential improvement maybe you could just provide a little color what you're seeing I mean, we saw a I guess a modest pick up in flight activity quarter over quarter compared to the Q3, but what are you hearing from your seeing from your customers in terms of their behave.

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Yeah, I would say where well first of all good morning, Peter and thanks for your question. We are I would say very encouraged by see the pick up conversations with our customers remain very strong they're very interested and excited about our product we believe that.

We're going to come out of the pandemic with greater market share.

In conversations with our sales Vp's I really question them on the could.

Particular products that were coming out with as well as why specifically.

Each one of them felt that we would be growing market share.

And they claim that the conversations with the customers.

R.

Causing them to understand that heico's viewed as a very significant part of the supply chain, we've matured into a nice sized company and there's no reason why they shouldn't be buying a greater number of our products. So I think we were correct when we called the bottom in May.

Expecting that made was going to be the bottom of net things were going on to trend up I can tell you that November was a very good months.

And things were looking very good I would say.

For the last couple of.

Probably the last week or so.

Things have gotten a little quieter, but that's not necessarily.

A typical because normally around the holiday season things start to slow down, but I think given the news that we see with the pandemic it sort of logical that.

The second half of December and January may be a bit quieter.

But having said that the vaccine news of course was very good and in looking and speaking with our customers about the flight schedules that they're operating in the inventory that they have.

As I pointed out in our August call.

The.

Flight schedules were really foreign excess of the spare parts purchases and in discussions with a number of airlines.

Day recognize that they can't continue to operate the schedules that they're operating.

Based on the purchases that they're making so we anticipate a an improvement in particular in the second half of our fiscal year and obviously the timing is going to be very dependent on the vaccine news and.

What we see in terms of the infection rates.

No. That's that's really helpful and you mentioned the bad debt expense.

Can you quantify like what the what the margin would have been without.

That additional expense and FSC.

Peter This is Carlos so the the additional bad debt.

Wasn't that significant in the quarter, maybe a million dollars to ask something like that will never we took about seven $5 million on Q3.

To deal with some bankruptcies and and Q4 was kind of a normal noise. So you'd have to add about I guess non non back to the annual margin to to see what that would be okay.

And then Scarless just one quick one and then I'll jump back and cute Larry mentioned SG&A was down 14% year over year, and I think over $30 million or is tied to kind of performance cop. How do we think about that is we're we're thinking about physical 21.

I think that performance based comp is going to flush with sales theater. So.

I'm not anticipating getting back to 19 performance based comp levels and 21, but they will flex with our sales and profitability. So as things pick up there. It's 41 will probably see some.

Some increase in the bonus and proportionate kompak senses, but it will be correct commensurate with our profitability growth.

Thanks very much thank you.

Your next question comes from Scott and the Kids with credit Suisse, keeping them ask a question.

Good morning.

Eric with where aerospace names are currently trading have you considered increasing the multiple you would be willing to pay for high quality commercial era company may.

Maybe a multiple that's higher than your historic norms, and then as a follow up given the current valuation of HEICO stock would you consider doing an all stock or combination of cash and stock for a larger acquisition.

So good morning, Scott so with regard to the pricing.

I think that we're definitely flexible on pricing I think that a lot of people frankly, there's a lot of private equity in the space right now and they look at the results. We've had this long cycle, where commercial and defense have done very well.

And where I think very good at operating in this space and we understand where the land mines are and I think that there are a number of companies out there which are being bid up at really price is that don't make sense and so to add.

To your question, if it's a high quality company and we think that we can accelerate the growth would we be more aggressive on it sure.

However.

A lot of these businesses don't meet that criteria and frankly people look at HEICO and they say well these.

Guys didn't know what they were doing and they entered this business 31 years ago look at out how well HEICO is performed with the stock I Dunno 20, something percent CAGR over 31 years without any leverage how hard can this day and.

They get into this space and he realized in fact, it's pretty hard and we've got people, who really know what they're doing and we've got this unique product offering. We're we're able to combine PMA repair and distribution into the aftermarket and have outside of Ah.

Couple of the airframe engine or a couple of a large component Oems we've got the largest aftermarket salesforce and it's extremely synergistic where these businesses are able to feed business to each other and we've learned a tremendous amount on the way so.

And then the other thing I would say, we're also fairly conservative when we look at them in terms of inventory reserves in in terms of not pressing the pricing envelope.

We want to make sure that we've got a very good business for generations to come and we're not trying to if you will burn the furniture.

Take everything out of the fields in order to hit our numbers and that is the culture that we've created and our people understand that and so I think that when you look at some companies that may.

It'd be doing things in the short term in order to get a high price and then they want to get a high multiple off that honestly, that's somewhat of a fools errand and not something that we want to do so sorry for the long answer, but if it truly is a HEICO run company, yet HEICO style run company, Yes, we would.

Pay a higher price for it but frankly, we haven't.

You don't see that very often.

So and then with regard to a larger transactions.

As our debt says we.

I goes very open to all sorts of different transactions. We believe that we've got a differentiated model in terms of how we run the business and how we treat our people and so yes. If we found a larger deal we would definitely want to go.

Head and act on it but of course, there can be no assurance in my comments should not be meant it should not be interpreted as there's one on the horizon.

But we're always focused on where we can grow and frankly by having this culture we've really.

In a sense, it's like planting a lot of.

Seeds in the ground to make sure that the future is going to be very good and we've got that.

And we're very confident on the future because of that and even when a crisis happens like this we treat our people.

Very nicely because.

We say there are greatest asset and if you don't treat other people may say there are people are the greatest that's it and then they go on cut them and do all sorts of things where it was HEICO has been willing to suffer the financial consequences of creating our people right. We're not afraid to go ahead and have reduced earnings. So we can.

Come out of this thing a very strong so acquisitions really need the lineup like that and we've made a number of them where typically the founder entrepreneurs sure that same vision, where they really put the people ahead of short term profit because they know that that leads to long term superior.

Alrighty, So I hope that answers your question, but if not I'd be happy to expand on it in any way.

I guess it just kind of on the follow up if it were to be a larger acquisitions day in the north of a few billion dollars would you consider doing all stock or a combination of cash and stock to finance the acquisition.

I think all things would be on the table frankly, it's our preference to use cash because we're believers in the stock.

<unk> is performed extremely well.

And if you look at the 82 acquisitions, we've made to date I don't think that we've given out more than a million dollars of stock in billions of dollars of acquisitions. So now with the added flexibility that we've got with our new line of credit debt Carlos work too hard to a range.

We've got a lot of flexibility there.

But yes, I mean, we would be open I mean, one of the things that we need to be open to is some people may be concerned debt selling it if you will lower point in the cycle. So therefore, they may request, our stock as a way to be able to play the upcycle. So I think in that.

Case, we would be sensitive to it but cash is definitely our preference.

Yeah, let me just add to that.

I think.

The bottom line to the whole thing is it depends on the deal is depends on how much. We wanted it depends on what the seller is looking for and so forth and we would consider giving stock.

Under the range circumstances as Eric says, we always referred cash in the reasonably prefer cash is because when we make accretive acquisitions.

The value of the whole company goes up so whatever software give really is we've given out too much stock.

Because the stock price goes up so it's better for all existing shareholders too for us to use cash, but if there is a real juicy desirable acquisition.

We're going to make that acquisition and we're going to do it from the best way. We can so we definitely would consider cash or combination.

Thank you and happy holidays guest.

Thank you thanks.

Your next question comes from Josh Sullivan with a benchmark give me now ask you a question.

Hey come on it.

Morning, Josh.

Just just on the other robust product development programs.

Highlighted there on the opening remarks can you just give us some color on the current pace of development I know you you outline some r&d's figures there, but have you increase the tastes of TMA submissions do you think.

The aircraft type retirements makes you think differently about your PMA portfolio at this point.

Hi, Yes, I would say that we maintain this is Eric we maintained our pace of PMA.

We could have increased it I think one of the things which is.

And while we've got plenty of opportunity one other things that we also have to be a little sensitive too is a lot of people including ourselves.

Took pay reductions this year. Some people were furloughed there were some lay offs and we wanted to be sensitive to make sure that if you will the pain was the.

Sacrifice was throughout the company. So while we could have increased new product development. We kept it consistent thinking that that was really the right thing in order to.

Show that everybody in the company was in this together, having said that I am very proud that we've come out with.

Similar number of Pma's that we've done I can tell you that were very aggressively developing new product our subsidiaries really have a very good grasp on the products that they are going after and we continue to grow into adjacent white spaces are airline customers and.

Defense customers are very confident about the use of these products so on it.

Gives me a great gray.

Great optimism for the future, especially when.

Talking to our sales executives and.

Going through the details with them and seeing why they too are very optimistic.

And then just you know as you look for that eventual rebound commercial on the second half that you're expecting you outside of just the traffic recovery.

What kind of activity or class of products would you expect to see from from the airlines picking up on the first task that would really give you confidence with the second half was gonna work out cause it is you're thinking that's going to.

Well I think the first half is going to sort of be a continuation of what we've seen.

Frankly, since may where we've been coming out of the bottom it's sort of comes out in fits and starts it.

It moves ahead, then it sort of settles and then it moves ahead and then it settles in and.

And I really would anticipate more of that type of progress I would say probably through.

Around until perhaps the beginning or through our second quarter. Then what we've seen is when you talk to the airlines, they're operating the equipment in excess of what the spare parts that they are purchasing.

Early in the crisis, there was a destocking phenomenon I don't really see that any more I think the airlines are now very much living hand to mouth and I think that Destocking has occurred already.

So in terms of products going forward I think it's going to be our standard mix of products I think airlines will continue to try to defer.

Expensive maintenance as much as possible however.

However, not in a way that would impact there.

The return to service of the equipment, So I would say in general heavy maintenance and engine visit.

Visit will be if you will the last to recover.

And then with everything.

Improving along the way sort of linear with a fight demand some of the line maintenance stuff needs to be replaced even if they're not flying that much then the components, but again the expensive stuff, we expect would be definitely stacked to the later part of the recovery.

Appreciate that thank you.

Thank you.

Your next question comes from correct Conrad with Jeffrey excuse me on them ask you a question.

Good morning.

Just to follow up on one of your last point I mean, you mentioned declines across product lines I mean, any noticeable difference in the quarter between aftermarket replacement and repair on overall and what you're seeing in terms of recover recovery given the sequential improvement in the quarter.

I would say it's similar.

Good morning, Greg This is Eric I should say.

I would say that it is similar between the replacement parts and the repair. It's all in the same ballpark one could be ahead or behind in a particular month or quarter, but it's all on the similar ZIP code I would say.

And then maybe just one on on <unk> can you maybe talk about the bridge for Atg margins given some of the fiscal year 20 drivers around lower performance based compensation and net sales growth, which was somewhat offset by the gross margin pressures, which seem to reverse in Q4, how are you thinking.

About the trajectory, they're just given some of those moving pieces outside of volume.

Great. Greg. This this is Victor I'm not sure on.

Following the question.

The trajectory for margins.

Yeah, just you had a really strong queue for whereas where some of the gross margin pressure seem to reverse and you did over 31% margins, which were impressive I mean, how do you think about.

Mix and maybe lower performance based compensation expense it kind of headwinds tailwind fiscal year 21.

I mean, I don't I don't think of it very much in terms of performance based compensation so much as the mix.

And the business is doing well first on their own independently and good margin performance at the operating level the individual businesses.

If you look in the mix as we had told you earlier in the year, we expected that hour space.

Revenues commercial space revenues would be healthy.

Which they where would it be strong which they word that's a decent margin. Some of those operations are a good margin operations for us.

So.

I wouldn't say this was a surprise.

To us and keep in mind the.

Greg that.

Our margins and we guide to this frequently.

In the E T. G. R. R. R margins fluctuate over the course of the year that is a typical year for US. This is nothing unusual for it for us and I would anticipate that's passed as prelude and we don't really do anything to try to manage the margins or manage the earnings into a.

Killer quarter, a period, we really managed to maximize profitability. So this is a reflection of that.

Thank you you.

You're welcome.

Your next question comes from <unk>, which Cohen keep no asked a question.

Hey, good morning, guys happy holidays.

And good.

Hey, I just wanted to ask a couple of questions first on a T. G. I was curious I think it was last quarter, where you guys cited some order delays from shipment delays. Some lumpiness. If you will that kind of dampen down the Q3 number.

Has that all been caught up now as a cue for are you still seeing kind of a backlog built in that business.

Disruptions this is Victor Python way and good morning.

Look that that is continuing that kind of thing and it just it sort of I would say it ebbs and flows a little bit I I would expect that with the pandemics numbers that Covid cases numbers rising what we may see more of that in a few months ahead I don't know.

<unk>.

But it comes through.

In supply chain it can be on the customer side, where the customer doesn't show up to do an acceptance and test procedure or their transportation doesn't show up in and can be a week or two late it's nothing that fundamentally shifts the business and it eventually catches up and.

It it seems to come and go with this pandemic I think it was better through much of the fourth quarter.

Started to reappear again as the pandemic numbers began to increase later in October and.

I would expect that to be the case until this thing gets under control and so on I'm optimistic that as it gets more under control with the vaccine, we'll see we'll see less of it.

Okay, and a follow up Victor on that.

Lockheed and.

Some of the other the defense price of largely guided for next year and I just wanted to.

I understand again in years past, you've talked about kind of the relationship between.

<unk> sales growth and that of the defense large cap prime's could.

Could you could you.

Update us on sort of what that relationship is in terms of the lag because they're they're guidance low to mid single digits basically I'm just wondering when does atg start to see that glide path.

Yeah, it's market.

It's a good question of course, keeping in mind that defense is about usually around half of the edg's business that can fluctuate up and down a bit but it's somewhere in that in that ballpark and then you've got the other markets that we serve which are of course significant.

Which is a little different than the large defense price, which are much more heavily defense. Although you do see some commercial space in the defense primes as well.

Their numbers so.

I think it's difficult to find a one to one correlation between the defense price and our atg businesses and really what we do is we looked down and we drill down into the individual businesses, we have and in turn the individual programs that they are.

On in the products that they are on on to be honest with you we don't always know.

You are aware the products, we make our.

Respond to a specification to a customer need a specific customer need as opposed to their design or blueprint, let's say, so they'll they'll tell us as an example, they need something that does a very specific function and performs and very specific.

Area and will produce that and they may not tell us what is going on very often we figure it out.

Efficiently can figure it out, but they may not share with us exactly when it's going on so that's why there's not a one to one correlation to it as a rule of thumb as we've said before we don't think defense budgets grow to the sky and that at some point we see.

Fence.

As a rule of thumb.

Platter.

Then then it was over the past, let's say four years or so.

Well, we'll just have to see how that I'll play zone.

Okay and May I ask Eric just a couple of questions first I was curious.

If there's been this argument floated that lessors may become a bigger part of the market.

Just given the airline financial challenges and I Wonder has there been any change a foot in terms of lessors willingness to.

[noise] utilized PMA parts do they today and are you seeing.

Any change in behavior.

Where they're more open.

To utilizing more PMA.

That's a very good question. The answer is yes, we are making progress on let stores using HEICO parts.

We're very careful that when we go out we don't promote PMA parts from both HEICO parts to the vet sores, given heico's market cap in technical capabilities technical history products fifth so we're very careful to to promote HEICO in that way.

Yes, and we've had a number of.

Very good successes number one if airlines negotiate in a request the right to be able to use HEICO parts are PMA parts of the ER parts.

Up front in the least very often they are able to get that concession because the airlines know that the vast majority of airlines out there operate.

Using these parts. So there really is not a reduced marketability on the product number one number two there are a number of less stores that are coming out and offering really like power by the hour thrust by the hour aircraft by the hour where they take responsibility for.

The overhaul and maintenance of that particular product and those.

Verse stores are using our.

Using our parts very aggressively so we see the answer is yes, we've seen progress. However, there is a lot of opportunity out there because there's been a fair number of.

Leases that have been signed in the past whereby airlines, where some airlines, where if you will forward into giving away that right and now certain stores wanted to try to extract value in order to.

In order to frankly make more money.

So the airline seemed to be very vigilant and request. This upfront and then they are able to get that concession.

Okay and.

Maybe just given the commentary on around the the the amended credit agreement in.

Some of the questions on M&A I am curious if if you think there's actually some opportunity for more transformational acquisitions I mean.

In other words different profiles on what you've done over the past couple of years, where it's more tuck ins that.

Plug and play or do you see any big swing opportunities.

Multibillion dollar assets that are on.

Available for sale on that you would actually care to to.

[noise] to transact with that I'm, just curious like does this shakeout with Covid and everything else shake loose some attractive assets that you could utilize your evaluation.

To pounce upon.

What day were literally now.

We spend a fair amount of time studying the market and we are aware of our peers and I think a an opportunity ever presented itself.

We would we would certainly act on it I think that we've got a very different very differentiated model.

We treat our people extraordinarily well and I think for a.

Cellar, whether it's.

Larger public company or a private company I think that is eight point of value and something which which differentiates us. So yes, we could use.

Our balance sheet to go ahead, and do that and I can tell you that we're always out looking and reviewing.

The market out there for these kind these kind of opportunities.

Right.

I apologize for asking.

Alright, let me.

Let me other one thing we have a few hundred people on the line right now so let me give everybody on the line and open invitation if they have a wonderful acquisition for us to know if they want cash if they won't stop whatever that notes whatever you want if you've got a great company and you want a wonderful home give.

US a call and we're going to talk to you. So.

We'll use whatever medium of exchange is necessary to make a great acquisition and that's regardless of size right.

Can be we have in the past we've looked at some very large transactions and we've been price out of the market. Some of them were good some of them were not so good and.

But we don't pay 14 12 times EBITDA on it just.

It's not in our strategy so.

In spite of it we've been able to grow compound is the bottom line is 19% of stock price 24th. So we have a model, which is somewhat unique and I think Eric.

Described it very happily.

We really believe in the culture of HEICO, what the analyst.

Can.

Relate in their reports.

Is the quality of the management and I must say that and I'm not talking about myself or even Erica Victor but.

The people who are team members of HEICO in my opinion are truly extraordinary individuals.

The entrepreneurial they're smart they watch every dollar they work 24, seven and this is an asset that doesn't appear on the balance sheet.

And.

I think the great strength of HEICO lives.

<unk>.

Very very capable array of team members and again, if any of them on the phone I want to thank them personally, but I do want the investing public to understand that this is a great great asset that doesn't appear on the 10-K or a Q or analysts reports, but to me.

It's a culture that draws the bottom line and the success of HEICO.

I appreciate that answer one last one for me and I apologize for taking so much time is.

Eric have you seen any competitive changes in the industry just given that there is more interest in the.

The HEICO part portfolio.

What are the oem's doing to push back against that and that potential sure loss if anything.

Yeah.

And our competitors are doing what they've always done and.

We have to fight very hard for each piece of business that we have I would say nothing really has changed in the playbook.

Hi goes become a very well respected distinguished.

[noise] competitor out there and I think we're continuing to gain share and we're doing very well. So there is.

Really no change.

In that regard.

Having said that our strategy within parts business is to take a minority market share. We only go for a 30% market share so as long as we're able to pick up that market share.

Terms, which makes sense for our customers as well as for ourselves we.

We kept that market share around that level, because we want to make sure that our competitors also have a very good.

Business strategy for their market share so.

I think that our competitors have got very good.

Competitors have very good business plans I think they're going to continue to do very well and I think there is plenty of opportunity for HEICO in there as well.

Thank you very much guys. Thank you.

<unk>.

Your next question can Mr from Ken Herbert weighted Canaccord human I'll ask you a question.

Hi, good morning, and happy holidays everybody.

Good morning, and happy holidays to you.

Thank you, but first Eric if I could I just wanted to see if we could unpacks. The comments. So I think both you and Larry have made around expectations to be able to sort of take share coming out of this I'm. Just curious if you could provide any specifics on.

What you're seeing today, either in terms of maybe rfps or or quote activity or maybe you know issues with availability of OEM parts of other things that give you increased confidence just beyond the the environment that should obviously favor you know favorite price and in other aspects coming out of this but is there any.

Seeing more specific you would point to around the the the share gain confidence.

I would say, it's really can the same things that day you pointed out.

It it's price, it's having a competitor it's having somebody else.

Large and respected out on the field.

And that's really I think what's driving it.

The airlines.

Entered this.

Recession or this crisis.

Very strong and then of course as time has gone on their business models have really been challenged and when I speak with our sales folks.

To me that frankly fear uncertainty and doubt what our competitors are OEM competitors tried it pushes reasons why not to buy our product really doesn't caught up so they believe that we're going to be able to develop additional products because that's what the customers are asking.

Four they want us to go into these other products they want us to develop our broaden our product line and.

They are willing to buy so as a result, we go ahead and continue to develop and it's not only on in the parts area, but it's also in the repair area as well. So I think it will continue to be a very competitive market, but.

That's what really gives me the confidence that.

We're going to do quite well.

Okay, and as we think about the organic opportunities from an investment standpoint in N F. S. G. I it sounds like across the organization, you've obviously got the ability to to step up investments are there any particular areas, Eric you'd identify where you're seeing maybe a greater greater spend.

Being and when I say areas either.

No expanding your distribution capabilities, expanding the maybe the repair capabilities or or the PMA portfolio are there areas that are that are maybe getting a little more investment from you where you're looking at.

Perhaps a little more attractive coming out of this no.

No I would say, it's all of our all of our areas are aware, we're continuing to invest you hit on all of them PMA repair and distribution, we see very good opportunities and all of those I think that we provide a unique balance.

All of those businesses.

Obviously, the Nexus and how they connect across the top which nobody else can bring and then in addition.

We operate them as small businesses were were very knowledgeable about the details and that really helps our customers as well as.

Our manufacturers are principles.

And then we've got the balance sheet of a large organization. So we're able to compete.

Like a larger company would so I think we're in a very unique space.

That's great and if I could just one final one for Victor it sounds like space, you're pretty continue to be pretty optimistic on your space market is it possible for you to sort of break out the government versus commercial space is there sort of relative contribution within the segment.

And maybe maybe just provide a little bit more color on what you're seeing on the commercial side in terms of opportunities or how you expect us to to grow in 21 for you.

<unk>.

And by the way I don't want to overstate space.

It's been good for us this year I think it's looking promising going into next year, but I don't want to overstate it to lead you to believe that it's.

It's going.

To be stratospheric no pun intended but it is moving in the right direction for us and we have some good opportunities and we are pursuing them and when I refer to space by the way we are referring to commercial space in fact.

And defense space is encompassed within the defense number that we report so we don't actually break it out separately.

And that's why you here is refer to that.

And I would expect that the opportunities for us in this space markets are more in what I would consider some of the larger satellite markets or.

Satellite opportunities.

Some of the constellations actually but some of the larger constellations and less in the very new space very very small set market I don't think that's going to be the big market for us.

But there certainly is an increased interest in.

Both satellite opportunities as well as Earth observation.

Space exploration that has benefited us on I think it will continue to benefit us that doesn't mean by the way that we won't have periods where.

Space.

Headquarters, where space is lower for us.

It is still a somewhat volatile realm, but overall, we like it and think it's moving in the right direction.

Great. Thank you very much and congratulations on the strong year on the cash generation.

Thank you. Thank you very much.

Your next question comes from Michael's her moly the tourist human I'll ask you a question.

Hey, good morning, guys. Thanks for taking the question and happy holidays.

Victor maybe just to stay on T. G. What was the the organic growth I knew it was negative in the quarter do you actually have the the organic growth number and I know you're not gonna give much detail on 21, but do you think he T. G. You know can can grow organically and 21.

Let me take it in reverse order there.

I think we can have organic growth in 21, but it's.

Yes, it's early in the year there are a lot of things that will dictate what happens there on that which is why we didn't.

We didn't issue.

<unk> on the year, but our.

Our companies are certainly working toward that and I would I have optimism that we can accomplish that at this point, but I want to let the year.

To get further and but right now I would I would be surprised if we don't get organic growth.

In physical 21, but let let's see how the year year wears on on what happens.

And in terms of 20.

Carlos Yes, that'd be great How're you doing Michael.

For the for the year.

Organic growth on Atg was roughly prior to sit down on a percent.

And that was principally driven by aerospace remember that roughly 10% or so of the segment is commercial aerospace and it's going to follow the same trend is our SSG segments. So that was down other businesses did abawi expect them to do this year absence.

Logistical challenges of Covid and some of the disruptions in Victor mentioned earlier so.

I sure Victor's optimism for next year, I think that the businesses can grow I think that the commercial aerospace portion of atg will mimic their.

Covered pattern SSG and that will be a bit of an anchor probably in the early part of the year and then pick up towards the end of 21 and you got it and let me add I mean, I can say that internally our businesses are budgeting for organic growth, but you know us we're always named particular very.

Cautious very.

Conservative and I don't.

We'd like to.

Over deliver to be honest with you outperform and.

So.

I'd rather common.

Comment further on that as we get a little deeper into the year, but.

What we're planning for internally.

Got it got it and then I don't know if this carlos or for Eric on on the F. S. G margin I guess it taken out that bad debt expense, 11% or so last quarter looks like close to 12% this quarter.

I I know the first quarter is usually seasonally weaker but should we expect kind of this continued margin progression as you know the the market recovered and if you do get that that second half 21 strength I mean can can we expect you guys to get into the teens you know I I don't expect to do it all the way back up.

To the upper teams 20 percentage will maybe a total recovery, but it's at the right way to think about the margin progression impressive at first street.

I think Michael this is Carlos I think you're on the right path, So as Eric mentioned earlier.

We are thinking about next year in terms of.

A bit of a continuation of of what we saw on queue for the early part of 21 with it with a gradual progression upwards towards the back end of 21, and I think during that that could period, you'll see our margins improve.

And I think in the early part of the year, you should see them slightly improve so I could we get to the to the low teens, yes, I mean, I think that's definitely on the cards for us and obviously, we hope to do better but.

Well, we have more visibility Michael on next year.

Hopefully could restore guidance at some point, but.

When we do at that point I will give you all the details you need but for right now.

What I told you about all I can prepared to talk about at the moment. It. Mike. This is Eric just also to add some color picking up on what I.

Answered one other questions earlier.

We could have generated higher operating margins, but we felt that was really important to take care of our people and.

I think a lot of other companies are very.

Sort of aggressive with their people other people say other companies say there are people are the most important but then they don't act that way and we really tried to act that way and as a result, the margins had taken a hit and we have been fully prepared.

Recognizing that we've got to invest in our people now that's not to say that our team members haven't shared and the sacrifice because they have tremendously.

But we've done everything we possibly could to hang on to them and to have them sacrifice less than other organizations and we think that HEICO will be rewarded.

With their loyalty and dedication coming out of the crisis. So.

We're very cognizant of the margins and.

And why are we think that we can get them to increase moving forward.

Got it helpful. And then just just one last one on performance comp into next year is that it I mean any any color around should should we think of that as being a slight headwind just given you know what what took place in 20 or kind of a net neutral to Martin's or just how do we think about the mechanics there.

Outlet Carlos explain on the specifics, but in general incentive comp is based on performance. So first the performance has to be there then the incentive comp will kick in but Carlos can then explain the details well Hell I can.

<unk> said, it any better Eric I mean, I think the the operations improve our profitability goes up there will be.

Instead of comp that's commensurate with that growth, but I don't expect it to be at 19 levels next year.

But I do hopefully knock on wood as things progress on the 21 and our profit to increase I would expect our performance based comp to increase also but.

<unk> thinking about it on the number side.

Whatever your estimates on our for growth and profitability, we're going to have some growth on our performance call that's commensurate about that movie.

Got it alright very good thanks.

Thanks, Mike.

Your next question comes it from and know what's opponents sled Goldman Sachs email after questions.

Hey, good morning, everyone. Good morning.

Hey, just staying on that F. S G margin actually be.

A sequential incremental so just the the the drop their of EBIT on the higher revenue sequentially using the adjusted number is 22%.

And you've talked about the 30% detrimental on a higher than 30% incremental on the way back up recognizing everything you just said on the different cost components, but you've taken out some costume you'll have cross coming back like you just said on when you have good incrementals.

Should I care about that number at all are.

Or is it just kind of irrelevant, because it's one quarter and everything is still sort of funky.

No I would <unk> this call us I would say.

That in the quarter, we had some headwinds in Q3 and four relative on the margin side to inventory reserves, which I know will repeat itself going forward. So that had a bit of a drag on our on our incrementals. So I think.

Captured it correctly I wouldn't focus so much and just one quarter, but I do think the incrementals will be better than a go forward basis that are decrementals net is going down.

That's the <unk> inventory obsolescence expense that's in the gross margin separate from the bad debt expense that's on the segment Martin.

Correct.

Can you quantify how much that's been in excess of normal the last two quarters.

Yeah, I think in the last in the last couple of quarters, we probably had evenly between the two quarters about $14 million worth of.

Incremental increases in our in our in our inventory reserves and most of that no. Other has been a result of us recognizing that many airlines over the last six months from now.

And discuss some of their fleet reduction plans on retirement, a certain types of planes.

And so what we did rather than try and for ourselves and keep that product that full day on the shelves and took a very conservative approach and said if the if the airlines is going to put down let's see on a three hunger then we probably need to reserve for some inventory might have sitting around the support that portion of the fleet. So we just take us.

Charges and therefore, we've got that kind of out of our way now and that would be one aspect. If you wanted the margin that I don't anticipate repeating on forward.

Sorry, that's that's 14 million in both <unk> individually above and beyond at seven in the quarter, seven or Florida, seven accord 14 total in the back half of the year.

Okay, I mean, even even seven a quarter would would take adjusted for the bad debt then I adjusted for that it would put your margins more in in the mid teens in the back half of 20 already.

And then should I be working and back half of 21.

A better than 30% incremental off of that.

At this point no I don't know that I would.

We're gonna hide as we get into 21 I'm happy to help you with that last day.

I don't know that I would do that right now.

Okay last quarter, you said incrementals better than 30 was that last quarter I, Sir incremental should rise faster than our decrements right one day.

But I don't think I gave any numbers.

Hello, This is incrementals independent on mix, which part each segment gross faster so.

It's not like HEICO has one product and it's very easy to just do the math I've got such a diverse product base what's your.

Does make it a little more difficult to.

Pinpoint.

Without guidance out there where that what those incrementals are going to look like.

Oh I appreciate that I guess I'm, just trying to get at.

Whatever the incrementals are going to be or whatever you sort of think of the incrementals as as being in a framework right. It's a company with a 30% incremental it's kind of very quarter to quarter that calculation can get wonky.

Was that a statement working off of.

The lower margins, knowing that the lower margins had the inventory obsolescence.

Or is that or was that a statement last quarter. That's just sort of abroad long term framework of accompanying incremental dark brown.

Broader long term framework I don't think we were looking at any specific quarterly adjustments and making that statement I do think it's more of a broader long term view.

Got it okay.

The company has always maintained as you've alluded to a reasonably conservative balance sheet.

A degree of leverage relative to the consistency of the margins in cash flows.

<unk> just been handed what will be hard to you know knock on wood hard to ever repeat in terms of severity of downturn. Yet you didn't have a negative cash flow a quarter does that have you rethinking the optimal balance sheet leverage going forward to continue to.

Deals and enhance the equity returns.

Okay.

You want to go ahead.

This is Larry.

What we do.

As we model in a controlled growth pattern and that's on a strategy.

We have said publicly that we aim for a bottom line growth.

15% to 20% annually and that's accurate and we think in the relative near future. We can continue that growth I mean, historically over 31 years, we've done 19%.

So in order to accomplish that growth the control growth.

We can do it very well using the day.

Strategy that we have implemented there is no need for us to go out and do anything greater now saying that.

People have this would you do a transformational transaction, a major acquisition or something else and the answer is yes.

It is really going to benefit the bottom line.

Too often we see and we're growth by investment bankers.

With ideas that we can make HEICO bigger, we can double or increased 60%.

But they're talking about the top line and we're focused on increasing the bottom line and cash flow and so if the opportunity presented itself to increase the bottom line.

We would do that and we will probably take on more debt. The key to taking on the debt is how quickly would be repaid because we don't want to be up at six or seven times like some other companies. We don't feel comfortable there nor do we need to do that to grow at the 15% to 20%.

Target and I think speaking to shareholders.

We do a lot as you know.

They like the idea of the steady growth and we do too and we have the largest shareholders. So it's a strong steady growth.

When the market collapsed in March.

The banks foreign calling on US we didn't so that is a 10% and we slip will every night. So I guess I don't know if that answers your question, but in the Red Ducky.

So that's really the way we look at it I guess you could say is conservative.

But.

And in the past we've been criticized by some people who've said Oh why don't you put it on on when debt and you can do all this stuff and it's just that is HEICO strategy and that's what we're known for so.

Yeah that that's really the question is any any rethinking of that so that that helps me and then last one related to that controlled growth is the pace of new product intro, which if I understand correctly and given periods of time could be faster, but there's a controlled growth element.

How would you think through that Larry or Eric if if there's an opportunity to take market share because the industry has situation presents it but you normally have that control growth how how how.

How above and beyond will you go with peace of new product intro of 2021, and 2022 with those sort of competing interests.

I think what we will do we will reach from the Sky.

As long as it will.

As the other the cash flow and the bottom line and that we see it's going to be strong real growth.

We're not into financial engineering.

And you can see in the last quarter, we had 177% reported incongruous cash. So that's our whole game. If you will it's the cash flow. It's the bottom line and anything we can do no to accomplish that we're going to do it for sure.

And they're having said that day I agree completely I think that our current level a new product development is.

Is a good level.

It's a level at which we made sure that we've got.

A lot of customers and they are excited about the different products that were coming out with so I really expect that we will continue to stay the course now if we see a significant changes in the approval rate.

Our customers then we could revisit it but I would say right now we're very comfortable with with what we've got going right. Now. It was also very encouraging to find out that a lot of our customers were working on improving the use of our parts from their homes and.

They were contain.

Continuing to.

Focus in this area because it continues to be a major cost driver for the airlines. The airlines know very clearly that if HEICO doesn't exist their prices go way up and.

There were a significant part of their strategy.

Okay excellent. Thanks, so much.

No. Thank you know.

Your next question chemist from calling disarm let's try on Capitol Hill ask a question.

Hi, good morning, Thanks for the opportunity to ask a question Uhm first question really in the theme of just visibility may be best for Victor and then for Carlos Victor you, you've given us some good comments on where you are seeing opportunity, particularly outside of the commercial arrow realm within a T. G G.

Just trying to kind of roll up some of the details that you offered if you could help us just characterize.

N E T G a park from commercial from the.

Portion of that segment that does have commercial era leverage.

Can you characterize the visibility you today see and compare it perhaps where that visibility for that portion of the business was pre pandemic.

I'm, just trying to kind of understand your confidence there and then linking that to the overall business may be best for Carlos would be.

Still with suspended guidance can you help us think through what framework or preconditions, you need to see before you get incremental confidence to reestablish that guidance and then I had a follow up for Larry next.

So calling this is victor it's a good question.

It's an interesting mix, what's going on now visibility is certainly less than it was pre pandemic and.

What we're seeing though and what we've found in in the businesses that are serving the high end electronics market things that I would consider more connected to the general economy. The broader economy that ugly there has been over the past few.

Months a.

A marked increase in demands a marked increase in orders.

A marked increase in inquiries quote quoting activity and things of that sort and the level of activity is markedly better than it was earlier in the year.

And so that leads me to be generally optimistic it seems that people are asking to pull in orders, they're asking for faster deliveries, they're more concerned with that than they were in the very early days of the pandemic. We had an interesting phenomenon where customers, we're actually looking to accelerate.

Orders because they were worried about the supply chain and.

Things getting delay there were stories of course of product not making it from the far east, particularly China.

Where the virus originated and.

So they were worried about that and so there was an acceleration and then all of a sudden that stopped and and flipped around and it was going the other way for awhile and now that's that's reverted.

And so that seems to be very positive.

And the visibility question is while how does that hold up how long does that hold up how does that work where does it stabilizes. So on one of the key things I think about is we're about to within a few months will anniversary out.

The start of the pandemic on so everything will feel much more positive NB much more positive as a result of that.

On by the way on commercial aviation.

10% or so of atg that is usually commercial.

Commercial aviation.

That's been improving as well we've seen some nice signs of improvement there in the future order outlook I think is the year wears on that will do.

Better also on the medical side I think that offers us some upside potential because things had slowed down there if you recall.

There was a.

There were fewer medical procedures and.

People just not go into the Doctor et cetera. During the pandemic I think that will start to switch around so that impacted some of our businesses and the components that we sell the.

The question is one of timing. So that's why I say, it's less visibility as a rule of thumb. So generally speaking I believe it turns on the right way and it is turning in the right way. The question is when and exactly how keeping in mind we're already.

Half way through a little more actually halfway through then halfway through our first fiscal quarter.

So are you as a little bit different.

Than most people's year and is that starts to filter through it.

It becomes a question of does that pushed through in the third quarter. This a pushing on the fourth or does it wind up being at the end of 2020, but our physical excuse me at the end of 2021, but our physical twenty-two and we'll just have to see how that fall channel.

Is that helpful.

Okay. Thank you.

Welcoming.

I would just add that once once we see the cadence of orders.

From the airlines being alone anymore.

Stable if you would end on the flights and the number of aircraft in the air on predictable offline that would probably give us the confidence as an organization to reinstate our guidance and take a little bit more.

Broadly about about doing that but right now there is so much.

Each of our customers are acting so differently as far as how they center maintain that fleet that it's just not our best interests to try and I think at this moment, but.

Do anticipate during fiscal 21 that debt.

Fogg, if you wouldn't will list.

It will have a little better visibility as the year progresses. So at that point, we'll discuss in the management team, they're saving guidance from can we will do so.

Okay understood I appreciate that and then just a couple of follow ups quick one for Eric and then maybe a longer more thoughtful one for Larry Eric I heard you say earlier within F. S. G. PMA U I think characterized competitive conditions as having not changed just wanted a link that back to that regulatory announcement.

I guess it was now a little over a <unk> a.

Year ago, with CFM and potentially loosening some soil for you guys to plant some seeds there within PMA I know we've had a pandemic since that announcement that has kind of up ended that and market but.

Just wanted to verify whether you've seen any tangible evidence of of any competitive movement, whether it's.

Tangible or anecdotal there that will be great and then for Larry from an M&A standpoint, and potential currency used for deals there's been some conversation on this call a potential for transformational deals much larger on quantum on what you've done in the past I remember I guess it was 20, some odd years ago, where we created the <unk>.

Shares and that was in anticipation of at the time, what could have been a transformational deal. So there is some history with the willingness to pay stock, but you know I just wanted to ask you. You know has the currency been a sticking point to get folks you know kind of over the hump.

I've always thought that that 80 20 equity share ownership with the put calls that you typically have kind of takes care of that participation an upside for sellers.

And so you know is is that structure has that been a sticking point and then relatedly.

If you were to consider use of stock for a more transformational deal do the criteria the financial on accretion criteria change at all I E. Do you pull your horns in and perhaps become a little more conservative because you're using stock for for a larger purchase because since you've been such good.

Uhm stewards of the.

Stock over the longer haul, perhaps you'd have a little more caution when doing.

Thinking of a move like that thank you very much.

So that's a great question and the way you structured is really shows your understanding of HEICO and you go all the way back to the 1999 and the transaction that we were considering most people are forgotten about that and how the stock came into b, but you have a great long history on a good memory. So.

Answer your question.

We will make.

Any.

Accretive acquisition using any medium of exchange.

We can we'll use one from.

We'll use gold bullion, where you stock was used cash will use bonds will use notes.

As long as it meets the criteria that we have set forth, which I think I've explained and that is cash flow bottom line now keep in mind.

Difficulty.

In which we operate.

Most industrial companies.

Or even aerospace companies operating margins, which are 50% or less than our margin.

The trick.

The reason, we use strong margins does because strong margins generates strong cash flow, it's not rocket science is very good.

Number two.

This management is really compensated because of our stock ownership just like every shareholder out there and we are completely on line with every shareholder every Sherwood if we selfishly make a good acquisition or we generate.

Sure.

And it goes to the bottom line the stock price goes up yes, we benefit.

Because we are the largest group of Cheryl However, every shareholder benefits Perry pursue with what we have.

In other companies many companies I believe.

That the motivation.

Is bifurcate.

The management generally owns little equity.

And therefore, the management wants to grow the company because the top line, even if the operating margins are eight or 10% the top line can double.

That requires the use of a lot of cash it sucks up cash, but the management, who is generally there for three to seven years sees his or her compensation.

They grow the top line from 2 billion, two 5 billion the compensation managers compensation goes from 3 million six whenever the number is.

In case, we own a large number of shares so if the stock goes up 10 points of defiance. It for you. It's public if we on 12 or $14 million and I don't know the exact number but if you include the 401k, because we are very concerned about the <unk>.

Success, and the financial stability of our people our team members.

If that goes up 10 points.

Make 140 million or $200 million in equity value.

Now do I care, if my salary goes up $3 million of course on.

So to answer your question, we will make.

Transactions that generate cash flow.

Accretion and stop that.

However, again whenever currency, we must use we will do it.

I can tell you as an example.

Negotiating we're talking to somebody now.

And they came to us and they said, we only want to sell for stop.

And I said well normally.

We prefer to give cash we normally give cash.

But for you because we want this acquisition whatever you want we will give you on cash you on staff whatever you want we will give.

So does that kind of answer your question.

So I'll have to work lump them into my models, but thank you [laughter].

We're not sure about bitcoins I've got it is Carlos if we could.

Like you said, we'll use whatever we have whatever we have to do with us.

Hello I'm here. Your next question comes from the line at release Raffetto would you be asking me to ask a question.

Hey go on guys from one.

Nine.

I was hoping you mentioned Dick White I was that was that was the one missing thing in there, but want them as interesting as well Victor I just wanted to go back to you just to make sure I have this for for the fourth core.

What was the organic grocery T. J was it was it flat download it up a little and then either you were Carlos can you help us based on on what day acquired sales will look like based on deals so far into 21.

It was.

Louis It was flat.

The Atg this is Victor it was flat.

Organic growth in the fourth quarter, that's correct that's correct.

Lewis.

Roughly in the fourth quarter, we've probably had.

And ACG around $16 million worth.

Acquired sales.

And the numbers.

Okay.

That.

Yeah that will we have no reason to think that that will continue on forward.

And most of the acquisitions occurred in August in queue Force. So we got the best and most of that and of course, that's probably a decent are on right now I guess.

Okay. That's that's perfect and Eric just one for you wanted to follow up I know you mentioned before that uhm between parts and MRO is kind of same ballpark, but if I go back to last quarter was kinda down 40, and parts down 16 MRO. So.

Business down 40%. So are we looking for was there a kind of an improvement in MRO and it's parts was flattish or any additional color you can give their.

Uhm.

So let me take a look at some of my numbers here I mean, it was all really in the same.

As I said the same ballpark there.

So.

I wouldn't say that there was much of a difference in any one quarter one can be based on the prior comp on can be ahead versus the other.

If you look at 2019 in the fourth quarter, we had.

12% organic growth and played support and on against the comp in 2018, 13% growth So is 25% growth over.

Two annual quarters, there so things can move around based on this.

In general I would say that the.

Parts and the parts business would be down less than the components. There the way that that normally works as in component repair you can end up having some in the pipeline, which has been approved by the customers. So there can be a little bit of a lag there and as a result, it could lab, where the component repair.

Comes back a little after the parts come back because first day of to procure the parts in order to be able to do the component repair.

But I would say that it was all.

Similar in a similar ballpark component repair was down more than parts, but I wouldn't get too wrapped around that because it can vary a little bit as I said quarter by quarter.

Alright, that's perfect. Thank you.

You're welcome is similar to Q3 I would say.

Once again participants happy with like to ask a question. Please press star than the number one on your telephone keypad to ask a question. Please press the number one on your telephone keypad, we have a follow up question from calling in to calm with Sterling cat.

Though you may not ask a question yeah, sorry for the follow up Eric I did just want to get a color on that comment what day European regulatory action, a little over a year ago linking to your comments F. S. G. PMA that competitive conditions hasn't changed. Thanks. Thank you I'm glad you asked that because we went on to the next question before I had opportunity.

Fortuity answer on that.

Yes, we I would say that where we continued to be encouraged.

Based upon the conversations that we heard we don't like to speak about.

Take your.

Product lines, our customers of but we do believe that there has been good progress in that area. It has sent a very clear message regarding.

Engine.

Alternative parts for engines, whether it's PMA or repair so again I think that it.

There have been.

Nice conversations and some good.

Good results coming out of debt enforcement action.

Thanks.

Thank you.

Again, if you would like to ask a question. Please press star tend to number one on your telephone keypad.

For sensors, they're they're no further question on.

Okay.

If there are no further questions I want to thank everybody on this call for participating in for their interest in HEICO.

As you know we remain available to you by phone if you have any other further questions or information that you like you can call Carlos.

So we'll be happy to respond.

And I wanted to issue.

All very happy healthy.

Holiday season, hopefully when we next speak which will be.

Quarter of our queue one sometime in late February most of you will have received your.

Covid vaccine and.

Will be on the way to continue.

Continued good health, so happy holidays to everyone and again, thank you very much.

Thank you for centers and thank you, ladies and gentlemen for joining fiscal year, 2024th quarter and and I'll be your earnings results call. He may now disconnect.

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