Q4 2022 HEICO Corp Earnings Call
[music].
Welcome to the HEICO Corporation fourth quarter and full year fiscal 2022 financial results call. My name is Tamara and I'll be today's operator.
Certain statements in today's call will constitute forward looking statements, which are subject to risks uncertainties and contingencies.
Heico's actual results may differ materially from those expressed in or implied by those forward looking statements as a result of factors, including but not limited to the COVID-19 pandemic.
It goes liquidity on the amount of and timing of cash generation.
Lower commercial air travel caused by the pandemic and its aftermath.
Airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services.
Product specification costs and requirements, which could cause an increase to our costs to complete contracts.
Governmental and regulatory demands export policies and restrictions reductions in defense space or homeland security spending by U S and or foreign customers.
Or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth.
Development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales our ability to make acquisitions and achieve operating synergies from acquired businesses.
Customer credit risk interest foreign currency exchange and income tax rates.
And on the 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.
Defense spending or budget cuts, which could reduce our defense related revenue.
Parties listening to this call are encouraged to review all of Heico's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K Form 10-Q and form 8-K.
We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information future events or otherwise except to the extent required by applicable law.
And now I'll turn the call over to Warren's Mendelson, Heico's, Chairman and Chief Executive Officer. Please go ahead.
Thank you and good morning to everyone on the call.
We thank you for joining us and we welcome you to the HEICO fourth quarter fiscal 'twenty two earnings announcement teleconference, I'm, Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here. This morning by Eric Mendelson, Heico's co President and President of Heico's flight support.
Group, Victor Mendelson, Heico's co President and President of Heico's, Electronic technologies group, and Carlos Macau, Our executive Vice President and CFO .
Today, My comments will address our consolidated fiscal.
2022.
The quarter results.
Acquisitions and accomplishments followed by a presentation, but this segment results from Eric and Victor Mendelson Heico's co President.
Now before reviewing our record operating results I would like to take a moment to thank all of heico's exceptional team members for delivering another strong quarter.
Your continued focus on exceeding customer expectations and operational excellence has translated into outstanding results for our shareholders.
I'm encouraged by the steady improvement in our businesses during fiscal 'twenty, two and I am very optimistic that this trend will continue into fiscal 'twenty three.
Summarizing the highlights of our fourth quarter fiscal 'twenty two results.
Consolidated fourth quarter fiscal year 'twenty, two net sales and operating income represents record results for HEICO and that was driven principally by record results within the flight support group, mainly arising from the continued rebound in demand.
For our commercial aerospace products and services.
In addition, this marks the ninth consecutive quarter of sequential growth in net sales and operating income for the flight support group.
Consolidated operating income and net sales in the fourth quarter of fiscal 'twenty, two improved 27% and 20% respectively as compared to the fourth quarter of fiscal 'twenty one.
These results, mainly reflect 11% quarterly consolidated organic net sales growth and the favorable impact from our fiscal 'twenty, two and 21 acquisitions.
Consolidated operating margin improved to 24% in the fourth quarter of fiscal 'twenty, two and that was up from 22, 6% in the fourth quarter of fiscal 'twenty one.
Consolidated net income increased 13% to $97 2 million.
Or 70 cents per diluted share in the fourth quarter of fiscal 'twenty, two and that was up from $86 1 million or 62 cents per diluted share in the fourth quarter of fiscal 'twenty one.
Heico's effective tax rate was 23% in the fourth quarter of fiscal 'twenty, two as compared to 18.3% in the fourth quarter of fiscal 'twenty one.
The increase in the effective tax rate for the fourth quarter of fiscal 'twenty, two principally reflects a seven 6%.
Favorable impact from tax exempt unrealized losses in the cash surrender values of life insurance policies related to the HEICO leadership compensation plan and that was recognized in the fourth quarter of fiscal 'twenty two.
As compared to the tax exempt unrealized gains recognized in the fourth quarter of 'twenty. One later on in this call. If anyone has questions about that detail. This is a complicated.
Matter Carlos Macau is here and he will be able to explain that to you.
Truthfully It has no impact on our real operations.
A recent.
Activity in acquisitions.
September 22, our Atg group completed the acquisition of Dread tests and radiation located in <unk>, France, and tread is a leader in the highly specialized field radiation engineering and their services and products.
Are used primarily in space nuclear and medical fields.
In September 'twenty, two our Atg group completed the acquisition of Ironwood electronics located in Eagan, Minnesota, and Ironwood is a leading designer and manufacturer of high performance test sockets and adapters for.
Both engineering and production use of semiconductor devices.
As previously reported our Atg group entered into a purchase agreement to acquire approximately 95% of Excelsior International which is headquartered in Paris, France.
<unk> is a global leader in the design manufacture and sale of high reliability complex.
Yes.
Electronic components and rotary joints assemblies for mostly aerospace and defense applications.
The transactions closing, which remains subject to government approval and customary closing conditions is still expected to occur in the first quarter of fiscal 'twenty, three and would be heico's largest ever acquisition in terms of purchase price and revenues.
<unk>.
These acquisitions all of them are expected to be accretive to heico's earnings per share within a year of the transaction's closing.
At this time I would like to introduce Eric Mendelson co President of HEICO and President of Heico's flight support group and he will discuss the fourth quarter results of the flight support group Eric. Thank you very much.
<unk> support group's net sales increased 33% to a record $346 million in the fourth quarter of fiscal 'twenty, two up from $264 million in the fourth quarter of fiscal 'twenty one.
The net sales increase in the fourth quarter of fiscal 'twenty to reflect strong 22% organic growth as well as the impact from our profitable fiscal 'twenty, two and 21 acquisitions the.
The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued recovery in global commercial air travel as compared to the fourth quarter of fiscal 'twenty one.
The flight support group's operating income increased 60% to a record $77 8 million in the fourth quarter of fiscal 'twenty two up from $48 6 million in the fourth quarter of fiscal 'twenty one.
The operating income increase in the fourth quarter fiscal 'twenty two principally reflects the previously mentioned net sales growth and improved gross profit margin mainly from increased sales within our specialty products and aftermarket replacement parts product lines as well as.
<unk> realized from the higher net sales volume.
The flight support group's operating margin improved to a record 22, 5% in the fourth quarter of fiscal 'twenty two.
Up from 18, 7% in the FERC in the fourth quarter of fiscal 'twenty one.
The operating margin increase in the fourth quarter of fiscal 'twenty two.
Simply reflects decreased SG&A expenses as a percentage of net sales, mainly reflecting the previously mentioned deficiencies as well as the previously mentioned improved gross profit margin.
Now I would like to introduce Victor Mendelson co president of HEICO and <unk>.
President of Heico's electronic technologies group to discuss the fourth quarter results the electronic technologies group.
Thank you Eric the electronic technologies group's net sales increased 6% to a record $268 5 million in the fourth quarter of fiscal 'twenty two.
$253 million in the fourth quarter of fiscal 'twenty. One the net sales increase is mainly attributable to the impact from our profitable fiscal 'twenty, two and 21 acquisitions, partially offset by a slight decrease in organic net sales the organic net sales decline is mainly attributable to.
Decreased defense and space products net sales, partially offset by increased other electronics medical and commercial aerospace products net sales.
Like to point out that the electronic technologies group's backlog remained elevated reflecting strong orders and increasing delays in receiving components and raw materials from some suppliers. These delays have adversely impacted our planned production and shipment of some products during fiscal 'twenty, two but we expect that.
It should benefit us in fiscal 'twenty three as these products ship.
The electronic technologies group's operating income increased 4% to a record $79 9 million in the fourth quarter fiscal 'twenty two up from $76 9 million in the fourth quarter of fiscal 'twenty one.
The increase in operating income principally reflects the previously mentioned higher net sales volume a favorable impact from changes in the estimated fair value of accrued contingent consideration and decreased performance based compensation expense, partially offset by a lower gross profit margin mainly from decreased defense and.
Space net sales.
The electronic technology group's operating margin was 29, 7% in the fourth quarter of fiscal 'twenty, two as compared to 34% in the fourth quarter of fiscal 'twenty, one the lower operating margin principally reflects the previously mentioned lower gross margin, partially offset by the previously mentioned <unk>.
<unk> and the estimated fair value of accrued contingent consideration and a decrease in performance based compensation expense I turn the call back over to Larry levels.
Thank you Victor.
As for the outlook.
As we look ahead to fiscal 'twenty three we anticipate net sales growth in both SSG and atg, principally driven by demand for the majority of our products.
Our largest end market as commercial aerospace.
Which continued to grow during fiscal 'twenty, two and we expect the strong growth trends to continue into fiscal 'twenty three.
Our second largest end market is defense the defense markets were essentially flat for HEICO in fiscal 'twenty two.
So we would all prefer peace global disputes and unrest means more defense equipment is required providing a favorable environment for supply defense suppliers, we were negatively impacted by supply chain matters principally.
For electronic components in fiscal 'twenty, two and that delayed certain delivery schedules.
We expect these external factors to mitigate in fiscal 'twenty, three but we can't predict when and how.
However, we remain very optimistic on the defense industry's future and have seen growth in our orders and our backlog and that supports our optimism.
We will not be providing detailed fiscal 'twenty three net sales and earnings guidance at this time.
We believe that our ongoing conservative policies strong balance sheet high degree of liquidity all enable us to continuously invest in new research and development and execute on our successful acquisition program.
Collectively positions HEICO toward continued growth and market share gains.
In closing I would again like to thank our credible team members for their continued support and commitment to HEICO.
Fiscal 'twenty, three looks very promising and I believe that our culture of ownership and entrepreneurial excellence will provide excellent career growth and opportunities for all your success in fiscal 'twenty three and beyond.
Thank you all.
That you do to make HEICO a great company.
That is the extent of our prepared remarks.
And I would now like to open the line for Comed.
Comments and questions from people who are listening.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
You are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
We will take the first question is from Rob Spingarn with Melius Research. Please go ahead.
Hi, everybody good morning.
It's finished the year very nice numbers today, and then Larry you just mentioned culture and so I think this warrants a high level question for any of you, but with all of the acquisitions over time for HEICO I think many investors would have expected the company to inevitably change over time. So can you talk about how you've been.
Able to maintain the culture and the operational excellence and essentially what drives the consistency and the outperformance.
Sure.
So let me give you.
Eric is dying to answer that question, but since you pose it to me I will respond to I don't want to Duck anybody's question, Rob. So the basic culture of HEICO is one of a decentralized organization, where we give tremendous authority to the operating level as you.
No we have no mid level Vice presidents that filter everything that comes from the operating group up to the corporate and to myself, Eric Victor and Carlos So the first thing we do an acquisition, but most important is really scrutinized and.
<unk> get to know the person who is selling the company to us and how he manages.
And if he treats his people well this is very important as an example, if it goes through the factory and see somebody.
They said the tells US Oh, that's a machine operator that does this and that and that that's not very impressive but some of these people go through the factory and they say.
They stop at a machine it's a Charlie here. This is these are medicines.
And meaning his wife and family Okay, everything good yet Charley how long have you been working for 22 years.
This means an awful lot Rob we understand the relationship between the owner of the company and his Workforces team members.
That goes a long way and we understand how that all works and Thats. The HEICO culture. The other thing is we.
Give tremendous authority and responsibility to the operating person, we believe that the person.
Running the Oregon his organization knows more about his team members is labor force as customers as manufacture everything else than somebody in a corporate office.
With 2000 miles away. So again, it's the authority that we give them and people who are very talented respect. The fact that we give them that authority.
The talented people.
Normally do not like somebody breathing down their neck.
Over supervising them what are you doing what are you doing so I think that has worked very well also we have a very exceptional 401, K plan, where we give employees if they put in 6% we match it normally with 5% in HEICO stock.
Many many of our working people I'm talking about factory workers.
Shipping clerk secretarial help.
Our millionaires summit Multimillionaires all as a result of stock that HEICO has given them they take a personal pride in being a HEICO team member.
Not as though he were.
<unk> and I hate my job and they understand that they are being compensated and rewarded by having shares of heico's stock given to them by the company. They didn't pay for it so that brings their interest.
Line with all shareholders. So we think that most of our people are focused on building HEICO and being part of a team that has a psychological benefit to call somebody a team member as opposed to an employee if youre My employee you work for me.
If you are a team member we all work together.
So all of these things are core part of the HEICO culture.
And I think a lot of that is responsible for our success Eric.
Do you want to add yes, I mean, I think thats a good explanation.
Our acquisitions, and our culture, but I think Rob.
Bill.
Thinking about this.
I think it's even.
More basic than that.
That when we came to this company 33 years ago, We decided we wanted to build something for the long term and it wasn't going to be built for years or a single decade. It was going to be built for multiple decades, and frankly every single thing that we've done in every decision.
We take has been designed to drive sustained long term growth of the business as opposed to any short term focus so when we've got to make decisions on.
Anything from inventory capital expenditures people customer relationships everything is focused on cash generation as a result of.
Yes.
Maintaining low debt and being able to create a culture, which drives long term performance.
Matter of fact last night I was reviewing some of our capital expenditure plans and I saw some of our subsidiaries were buying equipment that frankly wasn't going to impact 'twenty three or fiscal 'twenty for earnings, but it was going to impact it in 'twenty five 'twenty six 'twenty seven and after and I realize.
The results that we're showing today, which are frankly, I think so far above.
What's normal for the industry.
As a result of that long term focus.
And we're really benefiting as a result of decisions that were made 10 years ago 20 years ago 30 years ago that you can't you can't make happen short term and when we people ask me all the time why is that HEICO performed and if you look at over the length of the <unk>.
Economic cycle, we don't have one time write offs, we don't do things that if you will boost the earnings in the short term and I think our culture.
Which has been designed for long term approach is very very different than typical corporate culture or private equity, which obviously has.
Which drive short term results as a result of their compensation structure and everything that they are set out to be so.
Really want to call out the the people that HEICO, because frankly, the ones who get ahead and the ones who are in a position is running our businesses today are in positions of importance or frankly, the steady as they are not the ones who came in and all of a sudden had a quick turnaround and.
Great success, a flash in the Pan our people have worked hard year in year out most over decades, and it's a result of that performance and that discipline and that rigor over decades, which has driven the results that we have today. So.
I just wanted to call out frankly, all of our incredible people are steady eddies, who just continue to work hard year after year and really make this happen. So I think thats really what makes us unique.
Yes, thanks very much for the comprehensive answer I appreciate that.
Okay.
We'll take our next question from Larry Solow with CJS Securities. Please go ahead.
Great. Good morning, Thanks, Scott.
To fully appreciate it.
On the guidance you guys a long successful history.
Thank you provide need to provide the guidance setting us up.
I do appreciate that.
Qualitative outlook, just maybe a couple of questions for Eric and Victor Eric just on.
Specifics, obviously, it feels like Youre aftermarket strong parts of strong I'm sure specialty I think also had a good quarter this quarter, but I'm just trying to figure out.
A little bit of an above average margin year this year.
Some of those drivers does that sort of settle back into more of a historical range as we look out to the car.
Yes.
Hey, Larry This is Carlos let me jump in there I think what we're seeing in the flight support group and it's been amplified, let's say starting in Q2 and run it through the end of the year.
There is some disproportionate growth in specialty products, which has changed the mix a little bit in SSG for the back half of this year, which normally isn't the case normally.
All aspects of the flight support group grow in tandem and usually our story is a margin that's based off volume growth.
I think what we continue to see is our parts and specialty products outperforming some of the businesses within our flight support group, which has because of mix has had an impact on <unk>.
So on the margin up a little bit we're happy to see that.
As Eric mentioned earlier, it's at 22, 5% margin for the quarter all time record.
We're very happy to see that but I think once I think once the mix settles back into its footprint.
We get.
Thrown out of Covid, we will see that margin moderate a little bit would be my expectation.
Okay, Yes that makes.
Yes, yes.
<unk> also just to add I think we did we have seen market share increases.
And.
Frankly tremendous efficiency as a result of the effort of our people.
But I also want to add that the margin that we have.
Was we were still able to drive that margin, even having proper reserves paying people frankly generous bonuses and we did everything for the long term and still came out with those margins made all of our investments and did everything the right way and.
I just couldnt be more pleased with those margins.
So from a high level, Eric obviously.
It feels like commercial aviation.
Seems to be in a good place right now.
The economy may be slowing a little bit lower for sure is slowing.
Assume is it feels like you're going to have a good growth year again, but obviously you can't continue to grow like it did.
Last couple of years, but.
Just any any color on sort of how you feel at the industry today.
Right.
Yes, I feel very very good about how <unk> positioned in the industry and Theres no.
<unk> that.
And that a rising tide lifts all boats, but I think that HEICO is in frankly in a unique position because we positioned ourselves in our <unk>.
<unk> businesses.
<unk>.
I've seen in all of those businesses substantial margin increase as well as market share increase so we're doing really well I mean as a matter of fact and normally I wouldn't call it out but just so you.
You're sort of getting to this.
Whats interesting is that our frankly, our PMA sales are at an all time record and.
If you look flights across the world are still down whatever 20% and we still haven't seen for a recovery in Asia and <unk>.
Somewhat in Europe , Middle East and South America.
And even in the U S to a lesser extent in North America, but HEICO PMA sales are at an all time record.
So.
I think that we've got plenty of.
Power behind Us and I think thats as a result of picking up market share and frankly treating customers right and they know that we've treated them right for 30 years, and we don't take advantage of them and we're very fair, we're very reasonable and they have rewarded us.
With that market share. So it wasn't stuff that we did short term net made it happen. It was stuff that we did long term and they trust us. So I think we're really very much in a virtuous cycle.
Permitting this.
Absolutely Great and then if I may just switch gears real quick.
One quickly for Victor.
I know you've been quiet backyard just quickly obviously it sounds like your largest market defense.
Macro is very favorable and maybe this year was impacted by some supply chain issues than anything else.
How about some of your other larger market space medical.
It feels like the outlook niche industrial all.
Consistently good.
Okay.
Assessment.
Yes.
Good questions Larry.
The.
Those other markets have been very strong for us this year.
And in fact, I think really towards the end of last year as well they've really been star performers are the ones you mentioned medical high end electronics in particular space, a little commercial space, a little certainly less so.
And actually a little softer.
In some instances.
I would expect by the way going forward you've heard me say this before that at some point.
We see those other markets flatten out somewhat and.
Still I think the excellent markets for us, but I would expect them to flatten out or even even soften up a little bit is as the year wears on and as supply chains get worked out and customers deal with their own channels.
Got it great I appreciate that color thanks, guys.
Thank you.
Our next question from Peter Dubicki with Alembic Global Please go ahead.
Hey, good morning, everyone.
I guess, Victor maybe just to just to.
To continue that discussion a little bit.
It looks like we might get sort of high single digit growth this year and kind of the base Dod budgets.
And a lot of Ukraine related spending as well.
Can you give us some puts and takes in terms of if we look at that budget growth, but also consider you know you've talked about the supply chain issues and some people talk about defense contracting officer kind of delays whats kind of the right way to think about all those puts and takes in.
The expectation I think we would all have that you could at least grow at least in line with Dod budget growth at least averaging in over time.
Yes, I certainly think over time.
We should.
Exceed.
D O D budget growth, just knowing our businesses and what we're working on and the things that we do.
But of course in any given period, we may be tied to the defense budget directly or it could be negative rite aid our correlation can be negative one to the defense budget.
I would think that.
Youre absolutely right on some of the procurement specialists at the at the Dod.
Being.
Let's say overwhelmed in their workloads and dealing with work from home conditions and things like that which are definitely in our view delay.
Delayed deferred.
Items from getting put under contract.
The supply chain issues, I think have been bigger for us.
And I think.
They were kind of record level for us in the fourth quarter I was hoping that they would come off in the fourth quarter, maybe we're starting to see a little bit.
Seeing some green shoots in the supply chain, but I think it's too early to call victory there.
And so and then of course, you mentioned the foreign engagements, which I think benefit us I don't think that they are going to cause being.
The major needle movers necessarily in the next quarter or two I think actually if you look at what we make and how those things are getting inserted over there.
I think there are a little longer burn in terms of just the order cycle and production cycle.
But I think as we said in the comments that the dynamic is positive for us.
Okay I appreciate maybe last one for me.
Carlos maybe Carlos.
I think this year was a year of billing some safety stocks.
And if we expect revenue next year, how do you think working capital trends as it does the safety stock issue kind of reverse itself or do we continue to build because of the supply chain issues and higher growth. Just was wondering if you could provide some color there. Thanks guys.
Sure. So we invested in HEICO, we invested in inventory. This year. If you look at our balance sheet you will notice that we have a pretty big investment in working capital, particularly for inventory. So I suspect that as you're pointing out a lot of companies around the world have done that also.
The impact to us going into next year I don't think there is a ton of impact in the flight support side because most of the business that we do in the flight support group is ordered and shipped in the same months, there's not a ton of backlog within our defense business, our specialty products as backlog, but most of the aftermarket is is really.
Build and ship in the same month, so problems, which implies that most of our customers arent stocking our product we have a model with our customers where the parts come when they need it and they don't have to stock our stuff. If they don't want to in fact, if they do want that we usually put consignment cages and their buildings and we handle all of that form so not too much on that.
Slide sports side in Atg I do think that it has been in Vogue, particularly with electronic parts to go heavy on inventory we've done that.
Yes, I think in 'twenty three could there be some sort of inflection where people hit the pause button that's possible.
I think for our businesses, because we're not stuffing channels and over supplying our customers I don't believe it's going to be a major impact HEICO, but I think globally.
There's something out there that we'll record with probably in 'twenty two early 'twenty four.
Okay. Thanks, Scott to answer your question Alright. Thanks.
Your next question comes from Peter Arment with Baird. Please go ahead.
At record levels exceeding that number or maybe if you could just give us a little if you can quantify it that'd be helpful.
Yes, sure. So we estimate that in the fourth quarter that number actually rose by a little more than $20 million to around 47, now I won't identify which subsidiary about half of it actually came in one subsidiary.
And so which had not been experiencing actually had avoided.
The supply chain issues for quite a long time.
And so and they're estimating they will they will ship that in fiscal 'twenty three.
And so.
In some ways there was some improvement.
Over the prior year period, because a number of other companies saw the number shrink, but we had one in particular that was high and then a couple of others that were on the higher side too.
Whereas in the past have been a little more broad broadly distributed.
Okay.
That's helpful and then just Carlos.
Maybe you could just talk to us a little bit about maybe tax rate expectations. When we're thinking about.
Fiscal 'twenty three.
So.
I think for HEICO, we typically run 2021%, sometimes better than that.
This year, our tax rate was amplified for that.
Pretty much most of the year, except Q1 do.
Due to losses in the market and as Larry mentioned earlier in the call. We have investments in life insurance policies, which back or what's called our leadership compensation plan, which is a deferred comp plan for our employees our team members and when the.
Losses on cash surrender value occur, which is impacted by general market trends.
We don't recognize a loss on the P&L, but what we do recognize is either gains or losses in our tax rate as a result of movement in those permanently deferred items.
And so that can have a material impact on our tax rate. This year. It had about a $25 million impact on our tax rate and so that isn't it's not insignificant.
That is the driver of what could move our rate off that 20% bogey that I would normally target.
So if the markets grow our tax rate will be a little lower if the market stays safe stable youll see our tax rate similar to what we had this year and if we have big losses next year in the market overall could.
Could amplify our tax rate a point or two.
Okay.
That's super helpful and just lastly from me on <unk>.
Eric you mentioned kind of.
You kind of got record levels of PMA, but we still have a lot of traffic down in Asia. I was just wondering what how you kind of quantify when we see if China reopened fully what the impact could be on SSG I know you're kind of already a global player in terms of your customer base.
Yes, I mean, we're already doing very well in China.
And.
If China, presumably I mean my expectation.
Speaking with various experts is that China is going to experience hundreds of millions of cases of COVID-19.
They get reported or not is another thing.
So that should have a chilling effect on their domestic travel.
The real question is whether that spreads.
Based on the vaccination rates.
And.
Therapeutics that are available around the world and our.
Natural immunities as a results of everybody else getting infected hopefully it doesn't impact the rest of the world.
But I think China, we're going to see fits and starts.
Air travel went up a lot couple of days ago, and now it's come down.
They're going to be in for a tough 12 months I think as a result of where they are with the virus.
But we feel very strongly and that's why we're wired to.
To continue to take market share and I think we're in a very strong position to do well.
Regardless of how China does but we are doing very well in China currently.
I appreciate all the detail thanks, guys.
Okay.
We will take our next question from Scott <unk> with Credit Suisse. Please go ahead.
Hey, good morning, everyone.
Good morning, Scott.
Victor Good morning.
Following up on Pete's question can you talk a bit more about supply chain trends at Atg you mentioned.
<unk> gotten worst this quarter, but you also talked about seeing some green shoots.
Let me just spend a minute talking about some of the details behind that so what got worse than what the green shoots and have been.
Thank you.
Yes.
So this is Victor the answer is it's particularly on the component side I mean, where we are finding in a lot of our companies have been finding that FP.
FPGA is for example field programmable gate arrays.
Our.
Slow to come in.
They are behind and delivery schedules, we have some other.
Very complex microwave components that are designed specifically for some of the products we make.
And there are only a few vendors for those in the world and.
They are well behind schedule. We've also seen some lead times pull out.
Push out for <unk>.
Go into which subsidiaries, but some polymer related products that are used in some of the things that we make.
So that has been.
I guess, that's been where it's where it is extended out where it's been.
Better has been on some of the lower cost.
More common electronic components.
That are used in circuit boards and other other things that we make.
As well as for some silicones and products.
Interestingly enough some polymer related products, so it's kind of a mixed bag.
Okay that's perfect.
One 5% of sales still the right way to think about Capex for next year.
I think so were probably targeting somewhere around $40 million next year in capex roughly so that's about that's about what your math should produce.
Okay and then last question for you just.
Corporate <unk> into the model.
Thing important to reflect on in terms of cadence there.
Is there a seasonality to that business in a more Q4 weighted anything like that that we should be mindful of.
Sure I mean look I excel as I've, often said that it almost mirrors, it's like a mini atg its got very similar.
The strategy end markets. So I think as the electronic technology group's flexes throughout the year I think youll see accelerated perform the same way the only it's only caveat to that is they are European based company. So there can be external factors in Europe that would impact them there wouldn't impact us here in the states but.
But those macro things, we can't control, so that'll be well known.
As you read the paper, but no I don't think there's any there's nothing.
There is nothing on the table that would cause that business to perform much differently than the overall atg change.
Yes.
Yes.
We'll take our next question from Ken Herbert with RBC. Please go ahead.
Good morning, Hi, good morning, Thank you and a nice quarter.
Thank you.
Okay, maybe Eric I wanted to start off I wanted to see within within SSG, if you're seeing anything yet.
That may think that May lead you to believe that there is some potential slowdown or recession risk amongst your airline customers I'm curious if you're if you're seeing anything yet in terms of delayed maintenance spending.
Downward revisions on work scopes.
Inventory adjustments or anything like that.
And if you think about a potential recession risk free.
For instance, here in the United States, how would that flow through your business, which parts would be initially hit and how should we think about the impact or potential impact of that on the segment.
Yeah. Good question Ken.
To start out no we've not seen any change in order patterns from our customers.
As a result of the most recent economic data.
Things are continuing to be extremely strong.
And as a matter of fact, we just keep on hitting new highs.
However, we all know that if a recession comes and air travel is curtailed there will ultimately be an impact now I think the impact on air travel could be a little less perhaps than it's been in other periods only because we were sort of starved for air travel for about two years.
So that may mitigate a little bit of it.
But certainly the industry will be impacted.
And clearly you can see it in cargo.
Load factors and dedicated cargo aircraft flying.
<unk>.
Those would definitely be curtailed, but I would anticipate that as far as HEICO goes we're in a unique position I believe because of the products that we've developed and.
Although I don't want to sit on this call what they are but I can tell you that a large part of our rebound has been new products that frankly hadn't been sold pre COVID-19.
So in a large part of that is new products that we didn't even offer pre COVID-19.
So I think that we're in a unique position to be able to mitigate that and that is why our PMA results are at a record where as the industry is number of flights are still down 20%, so that would imply upside to us.
One of the things, though that you also have to consider.
Consider is historically.
You've asked the question about.
Destocking and restocking and all of that.
There is no question it would be normal behavior in a time of shortage to overbuy.
And I think that all.
Recoveries do hit a period of over buying the question is when that occurs and nobody tells you Hey, I've ordered 100 parts, but I really only need 80 of them right now and the extra 20 or for the shelf because they want to get those 'twenty on the shelf because they are afraid they can't get them.
So I think thats, a natural risk for the industry.
But I think HEICO Scott.
The ability to mitigate.
Clearly parts and repair would be impacted first.
And then ultimately new aircraft build rates would be impacted second.
If that answers your question.
That's very helpful. Thank you very much and just as a follow up maybe for Eric or for Carlos.
The incremental margins in the fourth quarter of 'twenty, two we're sequentially. The strongest we've seen all this year within the <unk> segment.
Mid <unk>, how should we think about it sounded like maybe some moderation on margins from mix in 'twenty three could could potentially be a scenario, but how should we think about incremental margins as we think about 'twenty three as you based on the comments you just had and sort of what youre seeing today.
Hey, Ken I would.
In a normal.
One for HEICO as I've talked about in the past you should expect the fixed cost of around 15% plus our normal margins, so that would put us around 35% or 36% that would be.
That would be a normal run on a growth that can vacillate, depending on events in a quarter and whats happening, but once we settle into our footprint. Once all of the businesses have kind of settled down and they are growing in tandem again I think that that's what you should expect and hopefully as we get into 'twenty three that will be what.
I would expect to see.
Great Alright, well ill stop there. Thank you very much.
Thanks, Ken.
Our next question comes from Sheila <unk> with Jefferies. Please go ahead.
Good morning, guys. Thank you for the time.
So I wanted to start.
MS. Peters question, Eric that question, you on FSC and your thoughts on the recovery in China.
Ted you were doing really well in China.
How much of your SSG business Hasnt recovered in China and.
Of your 35% of sales Thats International how do we think about that.
Split between SSG and EP, Jim geographic level.
Yes.
Good questions and.
So our sales into China in the flight support group are at an all time record.
We're frankly, well ahead of our 2019 numbers.
So we're doing very well there.
I think there is obviously upside from here I remember I think it was you that a year ago or so and you asked me did I think by the end of 'twenty two narrow body in the U S would it be recovered.
And I said that.
I didn't know and I thought it would be hard.
In fact, not only did narrow body U S recover, but frankly, the whole world overall recovered for us.
So I think we're in a very good position in all of our markets.
It's hard to say exactly.
What's going to happen sort of lay out the next 12 months silver in China, I think it's going to be fits and starts I like reading Your weekly report on number of fights.
That's.
That's got a lot of great data in it.
I think we're well positioned there too to grow our market share and where we're at.
Gaining market share all the time in China.
Sure. So thank you so much for that sat out.
In terms of that.
Victor you've been very busy yourself and I know people started around margin that <unk> be a little bit but they are very strong to end the year. How do we think about that going forward and I think <unk> is 150 basis points. Thanks to the June 2023 margin.
Do we think about that long term opportunity.
Well.
Couple of things.
Excel it does carry a lower margin than the <unk> average.
We haven't said what that is so I can't comment on.
What it might be but.
Without just X XL, excluding XL, yet when I look at it I think you've heard me say this before that I think we're within a.
A couple of points on what I call. The real operating margin right, which is that you can sort of think as a cash flow margin before intangibles amortization, but after depreciation and.
I think that somewhere within a point or two of <unk>.
30%, either up or down on that.
Is the right level and I think I've been pretty consistent on it and accelerate of course will.
Change that somewhat and.
I continue to believe that's the case I mean, there are there are always headwinds and tailwind.
<unk>.
As you've heard me say before I don't really come down with a club on people.
The people run our businesses, if they are giving us at 31% margin instead of 32 or 28, instead of 30 or 29 et cetera.
And I look at it on a on a gross basis and overall basis. So I think our margins should remain healthy and will continue to be pretty proud of them.
Great. Thank you so much.
Welcome.
And our next question comes from Michael Melby with curious Securities. Please go ahead.
Hey, good morning, guys.
Nice results. Thanks for taking my question here.
I guess.
Carlos maybe maybe to dig in I know youre, not giving detailed guidance, but you do have that one liner in the press release, where you called out potentially higher material and labor costs. So.
How should we think about that into 'twenty three obviously, we already cover the SSG margins. They may normalize it sounds like.
PG.
<unk> actually could pick up and then I guess just on the revenue side as well do we expect the normal <unk> seasonality or are we still on the recovery mode here from from Covid.
So.
I think the way to answer that question is we arent, giving guidance, but we do expect the company to perform.
Lets say better than the industry just like our history has been so we do expect growth in our sales I think the stated goal of the company every year when we come out of the box is to grow the bottom line, 15% to 20% and that will be our management teams goal for the year.
We've done it pretty consistently for 32 years and you can see this year, we grew 16% on the bottom line. So.
I think you could reverse engineer, if you're thinking about how to get the pieces of that pie just reverse engineer up from that 15%, 20% bottom line expectation and come up with your numbers, but we're not we're not going to give detailed guidance at this time.
That's fair and then the only other one I had.
Kind of relates to the guidance, but if we look at ETE G.
Should we expect a pickup of that $47 million I mean that would that would give you almost five points of growth. There and then and then think about just kind of a normal potential.
Potential organic recovery supply chain using because it seems like youre going to have you're going to be off to a good start in atg. If you pick up that the lost sales from 22 here.
Well, we don't we don't know Michael when that.
The disruptions from the supply chain fully bleed out right. So we could have more pushes but what I will say is that.
We did have a down year in defense, which was in total greater than that 47 million, referring to so I think what our expectations are is that as we get into 'twenty three we do expect the weed.
We do expect the overall defense market to improve at least as it relates to HEICO and that should be a nice little tailwind for the going into into 'twenty three.
Got it perfect. Thanks, a lot guys.
Alright, Thank you Michael.
Sure.
And our next question comes from Josh Sullivan with the Benchmark Company. Please go ahead.
Hey, good morning.
Good morning, Joe.
Just as demand grows for if iqos PMA and I think youre developing around 400 parts per year.
One what is the duration of the PMA approval process with the FAA. It look like at this point is it getting better I know you've talked a little bit about the work from home dynamic, but then two how are you looking at the PMA opportunity set are you looking to move up the value chain at all.
Hi, Josh This is Eric with regard to the FAA our cycle time is great. It's outstanding.
And so that doesn't hold us up at all.
And with regard to the value set we continue to go after parts similar to what we've done in the past as well as what I'll call adjacent white spaces.
So we continue to really grow the product portfolio, we've got the largest portfolio in the industry by far.
And we're very well diversified across a very.
Very very wide group. So I think we're going to continue to grow our customers are asking us.
To go into more spaces and so we are we're continuing to do that we've treated them very well.
Over the decades, and we've been very reasonable with regard to pricing and a greatly appreciate that so they've been encouraging us and rewarding us.
With.
Frankly, much more business. So I think we're in a unique position there to continue to grow market share.
Got it got it.
And then maybe just moving over to the space exposure, it's been a number of M&A transactions in the market.
New programs are evolving.
How are you looking at the space market and that balance between legacy programs versus gaining some exposure to these growth programs that are ramping up in areas like Leo lunar markets.
Thanks This is victor.
We're looking at that very carefully as always.
There is opportunity in the Leo market for US we've been doing business in the Leo market very strongly and success for Italy successfully for a long time.
And of course, we still think there is some good opportunity in the Geo market and even smaller satellites now in the Geo market.
But we are very careful to avoid some of the more.
Experimental if you will.
Parts of the satellite business, where we would be more of a financial risk.
Partner.
Where we're concerned about margins pricing.
Stability reliability and so on we haven't taken the bait.
To go out and buy.
I can't count the number of exciting space companies that we hear about that and we get a deal book or a teaser on and it's just.
Pun intended straight to the Moon.
We've really been resistant to those opportunities because we also know that they are highly speculative. So we're going to proceed but proceed carefully we want to be a very good value to our customers.
And the ones, we have been serving historically as well as a number of the new ones, who we think are serious about buying our products long term.
Great. Thank you for your time.
Welcome.
Our next question comes from Gautam Khanna with Cowen. Please go ahead.
Hey, good morning, happy holidays guys.
Thank you.
Yes.
Yes, sorry, I joined a little late so I was wondering if <unk> did you guys describe the change in the estimated fair value of accrued contingent consideration.
I was just curious like how big that was and what that related to.
Sure.
Sure. This is Carlos so.
<unk>.
We use contingent earn outs to bridge deal value gaps when we're dealing with sellers right now in the balance sheet, we have roughly $85 million in.
The contingent earn out obligations fair value of $85 million, what winds up happening Gautam is a couple of things one you have to evaluate performance of each of the units.
And re compute if you would what that are not maybe but what really impacted us this fiscal year fourth quarter and throughout the year was the interest rates going up because you have to fair value of those liabilities and as the rates go up those liabilities shrink rate.
So we did have some noise throughout the year for these earn outs in particular, I think we had maybe $2 million or something ran through the numbers for the fourth quarter as credits to expense to reduce that liability as a result of the fed's move in the interest rate and ultimately what that does to longer term.
Or intermediate term risk free rates.
Got it okay, that's very helpful.
And I was curious.
A couple of quarters ago, I think specialized products starting to come back within flight support and <unk>.
If you could just talk a little bit about how that's trending in.
If there is any discernible difference on the defense piece of that versus the defense piece of BTG in terms of supply chain or just demand trends.
Yes.
This is Eric with regard to specialty products, we're doing very well in.
Particular, we also have a lot of.
Exposure, frankly missile defense, and we're doing particularly well in that area, but as well as commercial aviation.
<unk>.
Again, we've got a unique value proposition in those businesses and I think theyre going to continue to grow in.
<unk> gained market share over time, especially as the aircraft the commercial aircraft build rates.
Chris.
Okay, and just one last one for me.
Maybe Victor I CTG broadly speaking what are what is your visibility on the defence and space side.
I'm just curious like how far out do you have orders through and.
How has that changed maybe over the last year.
Sure.
Right now I mean, the backlog for.
Atg is fairly tip.
Typical it's a record backlog by the way and we've had record backlog throughout the throughout the year. In fact I was looking at I think every month.
Through the year with the exception of one we had record backlog so.
As a as a percent of revenue.
It seems to be very strong. So we have some additional visibility into future shipments in part because of this those supply chain issues right, that's a little bit of it.
That is a pretty small fraction actually overall, the slippage of our of our backlog.
And.
In terms of.
Defense outlook I would generally say we are not short lead time.
On our products and so it's at least kind of a good flavor for the next six months at any given moment typically and then.
Sort of it starts to deteriorate from there which is our typical situation I would say, we're probably in a fairly typical.
<unk> now.
Great. Thanks, a lot guys.
Thank you.
The next question comes from Louis Raffetto with Wolfe Research. Please go ahead.
Good morning, guys.
Good morning, good morning.
So Larry.
You haven't had the opportunity so I guess, let's get your take on the M&A marketplace right. Now is kind of heard some mixed things recently, obviously you guys have been busy this past year, but just.
Just what are you seeing out there right now.
I think.
I would say it's normal.
We're spending a lot of time trying to work with the accelerated closing, but we are looking for.
A number of acquisitions in both areas in the atg and in flight support.
The market is a little strange now because sellers want high prices that they saw with low interest rates and buyers, particularly private equity is having more of a struggle raising money. So.
I think I would expect to see prices coming down as long as interest rates are up.
We're very disciplined buyers as you know and we.
<unk>.
I think I'm hopeful that we will see some good opportunities.
We're looking at many now.
Some of the things that we have rejected honestly recently, we've seen some companies.
They were overpriced well overpriced.
We made offers and.
Those offers were not accepted but the deals didn't go either so that people can sell a company. So we'll have to see what's going to happen, we're not going to change our discipline and as you know we look for strong cash flow.
Wanted to see our money back our investment in somewhere between 7% to 11 years and when you pay 16 times EBITDA you can't do it. So we're not playing in that market. We never did we never will.
So I think overall I'm optimistic that we will make our fair share of investments. This past year. We concluded how many callers six deals eight deals.
<unk>.
Thats enough in a year.
Transactions and deals.
Deals we're opportunistic.
We don't force deals when deals are priced properly when we have the right type of company.
That's what we will move on it so I hope that answers your question.
Yes, no that's great color. Thank you Carlos maybe just wanted to I understand no guidance, but what is the acquired sales growth.
Some deals have closed so far look like for FY 'twenty three.
Is it like a $150 million or thereabouts.
You're talking about acquired for next year.
Yes.
Yes, I think it will be between 100 150, I know that's a wide range, but.
But that's about what it's going to look like.
Okay, great. Thank you very much.
Sure. Thank you.
And as a reminder, its star one to ask a question.
And we'll take our next question from Colin Ducharme with Sterling.
<unk> capital.
Please go ahead, hi, good morning, Hi.
Hi, good morning, Thanks, very much for the question in the time I had a couple and.
Maybe I'll just throw them out on the table all at once here Carlos I wondered if you could just speak briefly to just comment on wage pressure and inflation, what's your feeling now and what youre hearing from the subsidiaries, particularly as you roll forward into 2023, and also talk about the Capex a little muted actually from what I may have expected. This.
This past year, you mentioned the step ups as we look forward 12 months can you just talk a little bit more about where that money is going and then maybe for Eric you address the how in terms of margin expansion with SSG you talked about specialty strength can you talk a little bit about the why.
Not in tandem demand in terms of the different.
Components moving together.
Why are customers in particular kind of pulling through specialty here.
And then maybe I'll pause, there and I've got one or two follow ups for Larry. Thanks.
So Colin I'll hit your first two questions and then hike it to layer to Eric on the wage and labor front, we're highly sensitive to that we watch it very closely.
Because we are spread out really all over the country and all over the world there are different dynamics in each market.
The best way that we have found to deal with those dynamics is to allow our folks in the field the general managers running our businesses.
The deal with their local marketplace to deal with the wage pressures and material pressures on the raw material side.
We've also told them that as it relates to pricing to try to work with our customers to protect our margins our objective is to not be.
Those guys, we don't want to be the guys that are known as jacking prices indiscriminately, we want to get paid fairly for what we do and of course, if our input costs do go up we are asking our customers to help us out in that regard to protect our margins and so far knock on wood that strategy has worked very well for us.
On the Capex side.
Did discuss of around $40 million number for next year. This year was a little light in aggregate dollars. It wasn't because we did it by what we needed.
I feel like it's a broken record, but it's because our folks are frugal and if they need it.
$1 million brand new machine.
Our guys will put that in as a capex request and then they'll go out and spend $80000 on a used piece of equipment drop another 10, great Intuit to refurbish it and use that machine for the next decade Thats generally what are dealing with so our capex.
Ex budgets, while I give you that $40 million number for next year.
Not including accelerated by the way, that's just our core business as of today.
There is a high probability like in the past that we understand that but it will not be because our folks didn't get exactly what they need to conduct business and plan for the future.
Does that answer your question Carl.
Thank you yes.
And accounts.
Accounts.
Why.
Why do we have these results in terms of the sales and the earnings.
And I really do believe it starts with our low debt decentralized culture and that permits us to make decisions well in advance and always keep our eye on the long term.
And when you do that people are then able to spend their energy on creating true economic value and so when you look at the.
The crisis that we just went through we had plenty of inventory. We continued to develop parts. We continued to treat our customers extremely well as a result of that and frankly treat our team members very well because they were critical to our business. So I think that is the reason why HEICO continues.
To outperform.
Not just in parts and repair, but it's also in the specialty products business and there are all sorts of cases that I can give you where we can significantly Jack price on customers and we don't do it and we do it.
We don't do it because we want to make sure that we retain that business for the long haul and the short term people can play all sorts of games with regard to pricing inventory all sorts of metrics that you see in the short term, but in the long term you can't get away with that and if we want.
To build this market share like we are doing the only way to do it is to build the long term and to really have that level of trust and frankly, that's how we incentivize our people.
Victor and I E have a whole bunch of bid.
Businesses that we go and we visit we know that people not only running them, but we know the people in charge of the different departments. All the way down very often the people on the shop floor, and we understand who has a long term culture and who fits with the way, we do things and who just plays games. So that's honestly the.
Why.
And why this happens and when.
This management team has been here for 33 years.
I can't think of.
Many management teams and I certainly can't think of any of the tip of my tongue that had been there for 33 years and plan on being there decades longer.
<unk>.
Okay helpful. I appreciate the comment and then maybe just a quick follow up for you. Eric There is just in terms of maybe digging into the why.
The role of value added distribution I mean, you've got smaller private peers that have made distribution in particular central to their business strategy and you guys yourselves did several quarters ago, a string of deals.
Which add bolstered your muscle as it were in this particular area.
Typically you've got some.
Quasi exclusive relationships that go along with those types of <unk>.
Segments of businesses and I'm trying to link back to your comments on today's call on wallet share expansion and I'm wondering whether.
What.
What if any critical role value added distribution in the deals you've done in prior quarters are playing today with the wallet share gains that we're now seeing from you guys.
Yes versus other factors like the price umbrella with Oems et cetera, and maybe a round out final question.
For Larry has just has.
It has a.
Great deal here largest ever has the potential will be a buy or build on that continent for you. All can you just speak to your.
The relative maturity of your deal flow model on that continent, meaning.
Are you satisfied with that.
The width of your M&A funnel. There is it is wide and mature as we perceive the U S. North American M&A funnel to be for you all.
Collin This is Eric I'll take the first part of your question that you asked me.
The y on distribution.
Our distribution companies are in my opinion the single most successful distribution companies in the industry. They started out as small entrepreneurial companies and they continue to run that way. They have got the financial muscle of HEICO behind them. So we're able to buy in.
Inventory that makes sense, but we also are very very realistic on the value of the inventory and the value that we bring to the table you mentioned other companies that are getting into this space and it's becoming.
Interesting space for others, and I would throw out that you've got to be very very careful in the distribution business because what we see very often and if you look in a number of companies you understand what I'm, saying is they have big onetime write offs. They report whatever it is their margin is throughout the economic <unk>.
Michael and then they wait until there is a 911, a global financial crisis, a COVID-19 in order to write off the inventory. If you look at HEICO Theres not a single time that we've done that and the reason is because the all of the people in those businesses are geared to make the correct.
Economic decisions to drive cash flow and long term value and not create short term earnings. So we start with number one the low.
Debt, which permits us to hold the correct inventory not the wrong inventory and number two we are incredibly rigorous and im not aware of anybody else in this industry that is as rigorous as HEICO. When it comes to inventory we make sure that if we've got a problem we take it off the books and we don't spend Matt.
<unk> mid time or People's time, focusing on that but the final thing that we've got in the distribution business, which frankly differentiates us and permits us to do things that nobody else can do is our PMA reach we're the largest in PMA. We're in it all the airlines and.
We have a very very broad.
A group of products. So if somebody for example is distributing a widget on 737, but they're not on the <unk> hundred 20, HEICO is in a unique position to be able to get them in that market. There is nobody else in this industry, who can do that and so when you combine all of the things that I said the low levered.
The correct inventory in the PMA combined with an entrepreneurial approach that is second to none and these folks are into the details unlike anything that you've ever seen and so I think it's a remarkable business.
And.
I want to call it out because I go distribution and our companies in there.
In particular led by steel dynamics Blue Aerospace air cost control or really just absolutely phenomenal and unbeatable in the stuff that they do.
Okay.
Okay.
Hello are you still there.
Yes. Thank you.
So you asked me about our reach in Europe .
We're an opportunistic buyer.
We have reached throughout the U S.
We have reach in Europe , we have a number of operations very successful operations in France, and we've been operating in France for a number of years.
Yes.
When we started we put our toe in the water and we were very successful in our companies in France have expanded multiple times, we've increased employment and.
And actually the economic development people in France visit us often throughout the year and they want us to invest in France. They like what they have seen and they've liked how we've performed were a big taxpayer over there and were a big employer.
Yes, we have reach.
The <unk> transaction.
We have been looking at that we knew that company for four or five years, we've looked at as discussed it and so forth. So.
Yes, we do have reach in Europe .
And when we see a good opportunity there.
We will take it.
But it's not just Europe , but Europe the U S.
The U K too.
No.
Does that answer your question.
Yes, Thank you happy holidays.
Thank you thank you Carl.
Our next question comes from Kristine <unk> with Morgan Stanley . Please go ahead.
Okay.
Hey, good morning, everyone.
Good morning, Warren acreage spin.
Guys the attractiveness of the PMA market. It's clear you guys have made.
That industry is very lucrative.
And now we're seeing another company expand TMA into the hot section of the jet engine like high pressure turbine blades.
Do you think of that.
Market is that right for PMA to enter and would you consider going into that part of the aircrafts.
Hey, Christine this is Eric.
So we're very we're very familiar with everybody in the PMA market and I know exactly what Youre speaking about.
And Ah.
That has been a market that HEICO has decided to not enter and to not participate in.
It is a potential high reward, but it is also a potential very high risk market as well.
And we're very happy in the.
Spaces in which we operate and we think that that really makes a lot of sense from.
Certification manufacturing customer acceptance, so we decided really to focus in this market and where we're very happy with.
Frankly with that decision and we get along with all other companies that provide complementary product in.
We hope that they succeed but it just.
We've picked our spots I would say very carefully.
Thanks, Eric and as that company, where it can be successful and actually get all these parts certified would that change how you evaluate that industry.
No.
It would not.
Christine.
Just a little color on how we look at the world and what our strategy is.
Our strategy is I think you know is controlled growth we focus on 15, 20% bottom line growth, we don't want to hit home runs.
Want to control, our cash flow, which is very strong and everything we do is really focused on cash flow not so much earnings per share and as long as we get strong cash flow from our businesses, including PMA that is what we're looking for we don't have to have one spec.
Tactual of thing in the hot section or that type of thing, but we want a broad.
<unk> of parts highly diversified and the company HEICO in general is very highly diversified I don't know how many parts, we make altogether, but I'm going to guess could be 50100 I mean.
And it's highly diversified and thats intentional. So we don't want to get into one particular product that stands out in other words, if any one product that we may fail to sell or was discontinued.
Nobody would even notice it wouldn't affect the bottomline, the ROA and Thats our strategy. So I mean that goes to the idea of making these hot section parts and so let me remember we do have some hot section parts than we used to make blades and so forth and we have of course combustor.
But.
We want to spread it across a wide number of parts and we don't have to have one spectacular part to accomplish our objective.
I'm glad you mentioned that and one of the other things that that's very very important to us as you can gather from our comments on the call and from knowing us for so many years is our reputation.
And we don't want to do when you offer lots of parts you better be very very careful that the <unk>.
Performance of one part doesn't impact the rest of the portfolio.
We have a unique relationship with our customers I believe with the FAA.
And even our competitors.
And.
Therefore, we've made the decisions that we've made which are right for HEICO and right for our risk profile and for.
The benefits that we want to bring to our customers.
Yes.
Great. Thanks, Larry Thanks, Eric really appreciate the color that's very helpful.
Thank you Christine.
And we will take our next question from Mike Hansen.
At Investor. Please go ahead.
Yes, I'm one of the minorities. Thank you.
A question for Victor According to ECG, when you have sort of a marginal sales increase.
And 1% decrease in margin are the parts of the company that maybe you should deemphasize or spin off and maybe at the end of the day really wasn't worth your investment and your time.
It's a very good question and it's something that our subsidiaries look at all the time, which is to say the appropriateness of making a part or not making apart and there are a lot of decisions that go into that it's not always purely economic.
Although the economics, obviously are the overwhelming majority of it there are times when there is a part that we will make or theres something will make because we're selling something related to that what we don't do is get into loss, making our low margin positions.
But if something is lower than the rest of the margin.
And we feel the business feels they need to continue to offer it or it's still very profitable I E. It may be.
Maybe a contribution margin of 35% and the business is running at 36. So you wouldn't turn away 35% business because it is not 36, you wouldn't make any sense.
Phenomenal the enemy of excellent and so that's that's how we do and it's a good question and that's that's.
Part of the business all the time I would like to add one other thing.
If we're running an operating margin of 28, 30% in Atg and we discover a company that has a 24% operating margin, we will buy that company and it will lower the overall operating margin of the Atg group why will we buy it because of 24% or 20.
5% operating margin is a hell of a good margin and we want that company and so you can't we don't get that focused on absolute margin. Because there are reasons that we might have reduced margin increased margin and we have to be very careful we're talking if you heard me earlier.
About overall cash profitability cash flow and at 24%, even though it's not our 30% we get a hell of a good cash flow. So you have to take all that and when you think about margin you have to understand cash flow is more important than margin, but high margin brings cash flow.
Does that help a little bit.
Yes, that's perfect.
At the same time are there times that you'd really look at the acquisition.
Maybe remain recycling over the dozen years I've been with you.
You've always bought bought button I can I can probably count on two or three companies that I've read that you've spun off.
Yes, so we buy to own forever, we try to make the right decisions.
We never had any disasters blowouts in acquisitions, we've had ones that don't perform as well as others for some period of time.
And then our jobs are to improve those and they do eventually we get them to where they want to be and we do ask ourselves. This question. Mike All the time are we better off with an acquisition then with that and we do that we look back we analyze it historically.
We view it as our jobs to make sure that what we buy performs even if it is not as good of a performance as something else.
You mentioned that we spin off companies, we have only sold two companies.
The entire 30 some years that we run the business one was a medical company, which we wanted to be out of that industry. It was profitable and services business is the services business. It was highly related to labor and so forth and we sold that business I believe.
Leave in 1996.
96, and the other one was a business that.
Honestly, we bought for $7 million and we sold it for something like $72 million in about how many years Victor.
Four years and the reason we sold it is that the operating margin was low.
It was an interesting business, we sold to a company that likes that wanted to be in that business. It wasn't focused on operating margin that business had about a 10% operating margin and it was sucking up cash it was using so much cash that it didn't make sense to own the business, but we paid seven then.
<unk> for 72, so it wasn't a bid date and aside from that we have not sold any.
Eliminated any other businesses and as Victor pointed we thank God, we've never had a bust some businesses performed better or some have been not so good but if you take the overall package.
Again, we're talking about diversification at HEICO, which is a critical strategy for us.
Putting all of those business together as you see they've generated fabulous cash flow and.
I think that.
Our acquisition of.
Performance has been pretty good.
Not close to a 100 acquisitions not having a bus.
Sure.
I think we've done pretty well.
I got a note from the operator, we've actually gone over time, but I will just I will comment we have not sold a business in two.
<unk> 22 years, so that part I can tell you, but unfortunately getting this node from the operator that.
We are over our time by five minutes now.
Thank you for the questions.
And I'll turn the conference back to the speakers for any additional or closing remarks.
So.
This is Larry Mendelson I want to thank you all for participating in this call and for your interest in HEICO. We remain available to you. If you wanted to call Eric Victor and myself Carlos if you have any questions or you want clarification on anything otherwise I want to wish everybody.
Happy holiday season, and a healthy one.
Youre driving a traveling be safe and we look forward to speaking to you.
Some time in mid to late February with our first quarter 'twenty three results. So this is the end of our teleconference.
You all.
And this concludes today's call. Thank you for your participation you may now disconnect.
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