Welcome to the HEICO Corporation Fourth Quarter and Full Year Fiscal 2021 Financial Results Call. My name is Renz, and I'll be your operator for today's call. 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, magnitude and duration of the COV19 pandemic, HEICO's liquidity and the amount and timing of cash generation; lower commercial air travel caused by the COVID-19 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 of our cost to complete contracts, governmental and regulatory demands, export policies and restrictions; reductions in defense, space or homeland security spending by U.S. and our foreign customers or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk, interest, foreign currency exchange and income tax rates; economic conditions, including the effects of inflation within and outside of the aviation, defense space, medical, telecommunications and electronics industries, which could negatively impact our costs and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. As we begin the call now, I turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer.

Thank you, Renz, and good morning to everybody on this call. We thank you for joining us, and we welcome you to HEICO's fourth quarter and full year fiscal '21 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. Before reviewing operating results in detail, I'd like to take a moment to thank all of HEICO's talented team members for delivering another outstanding year. Your continued focus on exceeding customer expectations and operational excellence has translated into another year of outstanding results for shareholders. I am encouraged that our success will continue into the next fiscal year and that will be driven by the confidence and respect that I have for all of HEICO's exceptional team members. Now summarizing the highlights of our fourth quarter and full year fiscal results, we are pleased to report much improved quarterly operating results within both Flight Support and Electronic Technologies. Consolidated operating income and net sales in the fourth quarter of fiscal '21 improved 29% and 20%, respectively, as compared to the fourth quarter of fiscal '20. Our performance principally reflects quarterly consolidated organic net sales growth of 16%, and the favorable impact from our fiscal '21 and '20 acquisitions. The Flight Support Group reported quarterly increases of 126% and 34% in operating income and net sales, respectively, as compared to the fourth quarter of fiscal '20. These substantial increases principally reflect increased demand for the majority of our commercial aerospace products and services, resulting from some recovery in global commercial air travel as compared with the prior year. This marks the…

Thank you. The Flight Support Group's net sales increased 34% to $260.4 million in the fourth quarter of fiscal '21, up from $193.6 million in the fourth quarter of fiscal '20. The net sales increase in the fourth quarter of fiscal '21 is principally from organic growth of 28% as well as the impact from our profitable fiscal '21 acquisitions. The organic growth is mainly attributable to increased demand for our commercial aerospace products across all of our product lines. The Flight Support Group's net sales increased to $927.1 million in fiscal year '21, up from $924.8 million in fiscal year '20. The net sales increase in fiscal year '21 principally reflects the impact from our profitable fiscal '21 and '20 acquisitions, partially offset by lower demand for the majority of our commercial aerospace products and services resulting from a decline in global commercial air travel attributable to the pandemic. The Flight Support Group's operating income increased 126% to $48.6 million in the fourth quarter of fiscal '21 and up from $21.5 million in the fourth quarter of fiscal '20. The operating income increase in the fourth quarter of fiscal '21 principally reflects the previously mentioned net sales growth and an improved gross profit margin. The improved gross profit margin principally reflects the higher net sales, a more favorable product mix across all of our product lines and a decrease in inventory obsolescence expense. The Flight Support Group recognized higher inventory obsolescence expense in the fourth and third quarters of fiscal 2020, following the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers due to the pandemic's financial impact. The Flight Support Group's operating income increased 6% to $151.9 million in fiscal year '21, up from $143.1 million in fiscal year '20. The operating income increase in fiscal year '21 principally reflects lower bad debt expense due to certain commercial aviation customers filing for bankruptcy protection in fiscal '20. As a result of the pandemic financial impact, the previously mentioned decrease in inventory obsolescence expense and an improved gross profit margin, partially offset by higher performance-based compensation expense. The Flight Support Group's operating margin improved to 18.7% in the fourth quarter of fiscal '21, up from 11.1% in the fourth quarter of fiscal '20. The operating margin increase in the fourth quarter of fiscal '21 principally reflects the previously mentioned higher net sales, improved gross profit margin and lower inventory obsolescence expense. The Flight Support Group's operating margin improved to 16.4% in fiscal year '21 and up from 15.5% in fiscal year '20. The operating margin increase in fiscal year '21 principally reflects the previously mentioned lower bad debt expense in inventory obsolescence expense, partially offset by higher 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.

Right, thank you. The Electronic Technologies Group's net sales increased 7% to a record $253 million in the fourth quarter of fiscal '21, up from $236.7 million in the fourth quarter of fiscal '20. The net sales increase in the fourth quarter of fiscal '21 principally resulted from organic growth of 5% as well as the impact from our fiscal '21 and '20 acquisitions. The organic growth principally reflects increased demand for our other specialized electronic, medical and commercial aerospace products, partially offset by lower defense products net sales in some subsidiaries. The Electronic Technologies Group's net sales increased 10% to a record $959.2 million in fiscal '21, up from $875 million in fiscal '20. The net sales increase in fiscal '21 principally reflects our fiscal '20 and '21 acquisitions as well as organic growth of 3%. The organic growth was mostly driven by increased demand for our other specialized electronic and medical products, partially offset by decreased commercial aerospace products net sales. The Electronic Technologies Group's operating income increased 4% to a record $76.9 million in the fourth quarter of fiscal '21, up from $73.9 million in the fourth quarter of fiscal '20. The operating income increase in the fourth quarter of fiscal '21 principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin, mainly from lower net sales of defense products, partially offset by an increase in net sales of other specialized electronic commercial aerospace and medical products. The Electronic Technologies Group's operating income increased 7% to a record $277.3 million in fiscal year '21, up from $258.8 million in fiscal '20. The operating income increase in full fiscal year '21 principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin, mainly from a decrease in defense and space products net sales, partially offset by the increase in other specialized electronic products net sales. The Electronic Technologies Group's operating margin was a very strong 30.4% in the fourth quarter of fiscal '21 as compared to 31.2% in the fourth quarter of fiscal '20. The operating margin decreased in the fourth quarter of fiscal '21 principally reflects the previously mentioned lower gross profit as well as higher performance-based compensation expense. The Electronic Technologies Group's operating margin was 28.9% in fiscal year '21 as compared to 29.6% in fiscal '20. The operating margin decrease in fiscal '21 full year principally reflects the previously mentioned lower gross profit margin. I'll turn the call back over to Larry Mendelson.

Thank you, Victor. Moving on to earnings per share. Consolidated net income per diluted share increased 38% to $0.62 in the fourth quarter of fiscal '21, and that was up nicely from $0.45 in the fourth quarter of fiscal '20. The increase in the fourth quarter of fiscal '21 principally reflects previously mentioned higher operating income at both operating segments. Consolidated net income per diluted share was $2.21 in fiscal '21, and that compared to $2.29 in fiscal '20. The decrease in fiscal '21 principally reflects higher income tax expense, partially offset by previously mentioned increase in the operating income of ETG and Flight Support, and lower interest expense. Depreciation and amortization expense totaled $24.2 million in the fourth quarter of fiscal '21. That was up slightly from $23.3 million in the fourth quarter of fiscal '20, and totaled $93 million in fiscal '21, which was up slightly from $88.6 million in fiscal '20. The increase in fourth quarter and fiscal '21 principally reflects incremental impact from our fiscal '20 and fiscal '21 acquisitions. Research and development expense increased to $16.7 million or 3.3% of net sales in the fourth quarter of fiscal '21, and that was up slightly from $16.6 million or 3.9% of net sales in the fourth quarter of fiscal '20. R&D expense increased to $68.9 million or 3.7% of net sales in fiscal '21, and that was up from $65.6 million or again, 3.7% of net sales in fiscal '20. As traditionally has been the case, significant ongoing new product development efforts are continuing at both Electronic Technologies and the Flight Support Group. SG&A Expense was $89.5 million in the fourth quarter of fiscal '21, and that compared to $72.6 million in the fourth quarter of fiscal '20. The increase in consolidated SG&A expense in the…

[Operator Instructions] We have our first question from the line of Pete Skibitski with Alembic. Your line is now open.

Guys, I wanted to ask about supply chain issues. You seem to be avoiding some of the worst case issues that some of your peers are having with regard to things like sourcing semiconductors and even sourcing labor. Are you guys seeing any issues like that at all? Or if so, how have you been able to kind of mitigate the impact?

Pete, it's Eric speaking. Thanks for your question. With regard to that, we've been able to handle it. I think that HEICO's model of decentralized approach to business where we've got entrepreneurial people running these businesses, running all the functions within the businesses, it's their responsibility to figure out how to get it done. And you can see from the fourth quarter numbers, they've done that. Now, obviously, it's becoming a bigger challenge. We all read about that in the newspaper. And there definitely will be bumps in the road. We've seen prices go up. We've seen shortages in various areas, but we're just dealing with. And frankly, the numbers would have been the sales and the earnings would have been even better had we not had some of this. But I think overall, we are optimistic that we're going to be able to manage it. But -- and then Victor can update on the Electronic Technologies Group.

Yes. Overall, the situation, as you know, and we've talked about in prior calls, it's been manageable with very limited shipping delays for us out to our customers. And so, I'm very proud of how our customers were prepared for this and have responded to it. And some subsidiaries are seeing minimal to no impact while it's more pronounced than others. So it really varies across the business. Companies generally -- within HEICO, generally entered the shortage with sufficient stock, and we're ordering ahead, which is really, as Eric pointed out, a benefit of our decentralized model, where our subsidiaries decide what to do is as you've heard say on this call before on these calls, we're not a big believer in just-in-time inventory management, we let our companies decide what they need to have and to project, and that's worked out very well. I would expect maybe it becomes a little more pronounced as we get into '22. But we found that we have a lot of ways to deal with it. Some of our companies have been able to design around with replacement components as well. And the lead times vary by subsidiaries. But overall, we've been able to manage those pretty well. I'll just make a comment, too, because the natural follow-on to that is, well, are you seeing price increases on your components and on your material. And the answer to that, of course, is yes. We're like everybody else, you read in the newspapers, where I think we've managed those pretty well. Sometimes those price increases are fairly low. Sometimes they're much more, again, depending on the product and the subsidiary. But generally speaking, our customers understand that. They're seeing this across their supply chains, and they're doing it with it in their own pricing. So, they've accepted where we've adjusted prices, and I expect that we'll have to continue to do that. And that, of course, will continue over the year ahead. Of course, as an aside, it is very important for us to keep offering this great value proposition that we offer. And so what we're not doing is taking advantage of our customers for it. We're making sure that we continue to offer an excellent value, but we do expect to be compensated for our cost increases as well as to sustain our margins on those increases.

And also, Pete, just to close, this is Eric again. We have a number of our team members on the call, and I want to call them out specifically for their outstanding effort and results and dedication in making this happen. HEICO, while we're not afraid to invest in inventory. We've got very acceptable inventory turns. And I think unlike our many other peers and competitors in the industry, HEICO did not take a big onetime inventory reserve in 2020, special inventory reserve like so many other companies did. And we are able to support our customers by having proper and, I would say, lean inventories because we buy the right stuff. And I think that is very, very rare in industry today. Our people work extraordinarily hard to make sure they buy the right stuff. And if you look across the industry, there are plenty of companies who take this big onetime charges and they blame it on all sorts of one February, 10-year event like a financial crisis or COVID or 911 or all sorts of things that happen. And if you look back at HEICO's history over the last 32 years, never have we taken such a charge. We have -- yes, we do have inventory obsolescence, and we handle that within our normal results. So again, really, I get very emotional and passionate about this because our people really do a phenomenal job by focusing on the details, making sure we've got the right parts on the shelf, and we don't take these big onetime charges, whereas it seems to be standard in the industry outside of FICO.

Yes. That's very helpful, guys. Maybe one last quick one for me. Maybe just one more for Eric. This Omicron varies seems so recent, almost really after the quarter closed. Can you give us a sense if you've gotten any feedback from your customers yet about how that could impact kind of near-term demand? Is it having any impact at all? Or it's really kind of a black box right now, I think. So I would love to get your feedback.

Yes. I did. It's a great question. I'm sure people -- it's a burning question people want to know what's going on with that. I did my quarterly reviews with our sales heads last week. And as of last week, we did not see an impact. However, I don't think you have to really be a genius to figure out that this is going to impact the industry in some way. I think it's reasonable to assume that it will, and we are prepared for it. But I think things -- we're still very, very optimistic. There's a lot of growth potential because not all of our markets have recovered. So we still have a very big potential in the international markets, in particular, in Asia, and to a lesser extent, in Europe and South America to see recovery. So I think that we've got plenty of, if you will, green shoots ahead of us. But there's no question that the Omicron will hold back the industry. We'll have to see really what happens over the coming days and weeks due to the severity and trendiness of the variant. But again, we think that with HEICO's structure of strong capital structure as well as really focusing on the customer, focusing on the details that we're going to be fine, and we're just going to get right through this. And this is really just going to be business as usual. I mean there's no reason to think that this virus is going to disappear anytime soon, and we just got to be ready. And HEICO is resilient, and we'll handle it. And our people are very resilient. So it's not going to hold us back.

Our next question comes from the line of Peter Arment with Baird. Your line is now open.

Larry, Victor Carlos and happy holidays everyone. Carlos, I guess maybe I wanted to start with you, really just if we could talk a little bit just about incremental margins. I know -- but if you look at FSG, I think we finished the year in the kind of the mid-40s percentage-wise, ETG in the low 20s. Do you expect -- how should we think about kind of what a good normalization rate is for both segments? Do they both trend back to the low 30s? Or any puts and takes we should be thinking about?

Well, I think that as far as '21 was, I was pleasantly surprised with how the segments performed. As we've talked about in the past, the FSG is on a glide path. We're not expecting huge incremental bumps in their OI percentage of revenues. We're expecting more of a glide path back up to pre-pandemic levels. Pre-pandemic levels, we expected the FSG's operating margin to approach 20%. And I think that that's our target. That's what we're heading back to. And then from that point forward, we ought to see what history has told us that the segment has growth leverage, if you would, on their cost base and you eke out little improvements in the margin as you go along and power more sales. So in my opinion, I think that's the direction we're heading with the FSG. ETG is a very mix sensitive segment, and the margin can bounce around. This year, we posted 30% margins, and I'm tickled to best with our fourth quarter performance. But we could easily have posted less or more. It is that mix sensitive, and it's very acquisition-sensitive. So on an annual basis, it's really hard to predict with great degree of certainty where that margin could be. I would tell you that if it's been 27% to 30% for a long time, I expect it to stay within that it could vacillate and it could be due to things such as acquisitions. For example, if we bought a company with a 22% operating margin. I assume as an investor, you'd be very happy with us, but that would be dilutive to the overall segment margin. As long as we're still on a ton of cash, we would be indifferent to that, but we get questions about the margin, right? So that's how we're approaching it. And by the way, the alternatives could happen. We could buy over 40% margin, and it can pull it up. So that is what I believe the future holds for the ETG. We principally look at it as a cash return segment. The EBITA margin of EBITDA margin in that segment is fantastic. It's in the low 30s, and I believe that will continue. Does that help?

That's helpful. Yes, very helpful. I appreciate that. And then maybe just as a quick follow-up, Eric. Maybe you could just talk about maybe any of your, what you're seeing out of your larger customers, I know that FSG, I think the top kind of handful of customers represent at least 1/4 or 1/3 of your sales. So, maybe what you're seeing there and the opportunities for you guys to continue to grow share?

Yes, a great question, and so I met with our folks last week. And we're doing extraordinarily well with our top customers. Actually, as a matter of fact, I think we're doing extremely well with all of our customers. They've seen through the pandemic to be more committed than ever to HEICO. I think we've supported them extraordinarily well. We maintained our new product development. We maintained our workforce. We maintained our standard development rates. So, we're satisfying them with all sorts of new and product adjacency products. So they're extremely supportive of us. So I feel very good. And I think that we are growing market share with them and with everybody. I don't know if that's sort of the color that you were looking for. I don't know anything else you'd like to know, please let me know.

Thank you. The next one, we have the line of Larry Solow with CJS Securities. Please go ahead.

Just a couple of sort of follow-ups. Obviously, the macro still some cross wins there, but it does look like passenger traffic, as you mentioned, continues to recover on a fairly consistent basis. Just trying to gauge the pace of recovery within HEICO, obviously, it seems like you guys are certainly a little bit ahead of that. You're still behind 2019 levels, pre-pandemic, but your recovery seems to be a little bit ahead of the general market. So just trying to gauge what you're seeing from customers and your market share gains and your expectations going forward, particularly on the PMA side.

Yes. A great question, Larry. We do continue to see market share gains. I can tell you are extremely bullish. In 32 years of doing this, I've never seen a group more pumped up about the future than the folks I met with last week. We went over things in great detail, and they are extraordinarily bullish. They're also bullish because there's plenty of opportunity out there. There are areas that haven't recovered yet. And we're optimistic that we're going to see recovery in some of those areas in 2022. And our customers are really encouraging us to produce more and to do more and develop more. So I would say, the future outlook is very, very good. I mean, when you go through a crisis like this, there is no logical reason why people shouldn't buy more from us. I mean we're -- we have the best customer service and we've got the most competitive prices. And it's from a company with an $18 billion market cap. So you're not dealing with a little startup. You're dealing with somebody who can go ahead and invest and put the right inventory on the shelf and pay people and develop products stand behind that product. So I think, frankly, the wind is too HEICO is back right now. And I would anticipate that that's going to continue. I'm very bullish about that, very bullish for the future. That's specifically with the aftermarket with the -- with our businesses that are more exposed to the OEM build cycle. We have not seen as much recovery in those areas. And frankly, that provides also a great optimism and potential for the future because those markets have not recovered. If you look narrow-body market is an expected on the new-build side to recover until pick year 2024, say, and on the wide-body until maybe 2028. And of course, the wide-body peak, the new-build production, I think, peaked back in 2015 areas. So, I think we've got plenty of upside in those markets as well. Our people have worked extraordinarily hard across all of our businesses. And the ones that are more OEM exposed have not seen the success that the ones that have been more aftermarket exposed have seen. So I know that they're working extremely hard. They're pumped up. They see it's coming down the road, but we got to hang in there. And of course, with HEICO at our strong levels and strong levels of sales and customer relationships and customer service and basically no debt, I think we're in a very good position to take advantage of all this.

Right. How about just, Eric, while you got the mic there? Just on the sort of -- I know you're not giving guidance. But near term, I know usually sort of your Q1, you get the seasonal slowdown as it's the peak season, obviously, most points are getting out in the air and getting only the real need man. Do we see that slow down? Do you expect that this quarter? Or is it seasonality a little bit skewed because of the overall ramp in spending and whatnot?

Yes, that's a good question. And it's -- I'm not trying to not answer it, but the truth is I really don't know. I mean my sense is it's going to be fine. But yes, you'll see that traditional seasonality. And of course, the Omicron isn't going to help things. So my guess is that you would see it. But that truly is a guess and not based on sales through 45 days into the quarter, but instead, just based on having done this for so many years, yes, I think you'll see the seasonality and it should be standard in that regard.

Got you. And then just one quick, Victor, it sounds like just at least this quarter, maybe the last couple of quarters, defense and space sort of flattish and a lot of your growth has been coming from the medical and the other electronics and industrial piece, which I know has been really strong. Is that sort of where you think sort of we really given guidance, but from a high level '22 will kind of shape out with similar trends?

Yes. Larry, so you may recall in a couple of the last calls, I'd mentioned that our specialized electronic, high-end electronic and other markets were strong for us, and I expected that to continue. And I would expect that to continue into '22 based on the comments that we -- or the budgets round that we've received from our subsidiaries. In terms of defense, as I've also talked about in a number of the calls, we kind of expected that to flatten out, maybe turned down a little bit. And I would expect to see that trend continue at least in the near term. And I think commercial space probably it's a little early to say for sure. But I would say that, that trend is more flattening and after we've had a lot of strength there.

The next one, we have the line of Kristine Liwag with Morgan Stanley. Your line is now open.

I guess looking at the M&A pipeline, has Omicron affected the opportunities that you're seeing? Are you seeing more opportunities or less opportunities, as we kind of see this uncertain period for long?

So the answer is, I don't think Omicron has affected this at all. We have a very strong pipeline. As a matter of fact, I would have to say it's almost too strong because we are wrapped up in doing due diligence constantly. We have a number of transactions that are in the pipeline. As you know, we can't predict if it's going to close. I mean historically, if we go by past experience, we know most of them probably will close, but we can't guarantee it. But I think the ones we are looking at are all well within HEICO's normal pricing and the fact that we would expect them to be accretive in the first year and so forth if they close. And there are plenty of opportunities out there. So I don't think we've seen any change because of this situation.

Great. And maybe a question for Victor. Victor, on space, can you speak to any trends that you're seeing? And then also, we've seen more space companies successfully raised capital and many have leased back in the past few months. Does that increase the addressable market for you, especially now you've got this new pool of customers that could potentially pay their suppliers?

Kristine, it's a very good question. We think it does increase our potential market, and we are dealing with some of these companies. The key, of course, is to be able to do it profitably and to do it in a production rate that makes sense for our businesses. And that's, in space, that is always the challenge. And so at this point, I would say, in terms of your question on trends, then the trends overall, I would expect to see more of these smaller start-up businesses addressing newer parts of the market. And hopefully, that gives us some more opportunity on some of our higher end products, in particular. We're not interested really in going is down to the lower end of the market just to capture sales.

The next one, we have the line of Robert Stallard with Vertical Research. Please go ahead.

Maybe you could go back to the share -- market share situation. And I was wondering, if there was any particular product areas or aircraft types, where you're seeing more success than others?

Yes, I would say that it really is pretty much across the board, Rob. It -- we're seeing it in all of our traditional and historic markets. I would just say that it's very broad-based. As you know, we're electing to go into specifics with regard to customers, geography, product types as we've got competitors on the call. And I'm sure you and our investors recognize and appreciate that. But it is very broad-based, I would say, it's across all of our product types and really in all geographies.

Okay. And then on the M&A pipeline, it sounds like you're -- but I was wondering if there's any waiting on the Flight Support Group versus the Electronics? Or are they both seeing a lot of interest?

I think they're both very strong. Both businesses are very strong. We're very busy in each area. And fortunately, HEICO has got the firepower where we can afford to deploy capital in both. So it's not mutually exclusive. It's really more opportunistic.

The next one, we have Ken Herbert with RBC Capital Markets. Please go ahead.

Yes. Eric, I wanted to start with you first. I wanted to follow up on the comments and everything we're seeing regarding the faster recovery for domestic travel versus international travel. Is it fair to say that when you look at your airline customers here in the United States or North America and Europe, that their maintenance spending with you for their domestic fleet in 2022, your fiscal '22 can be back to sort of pre-COVID levels. I mean how do we think about the business recovery for you and the timing for predominantly the narrow-body versus wide-body or domestic versus international fleets?

Yes, great question, Ken. I would say, I don't think it's likely that the domestic narrow body will be back to '19 levels in '22. If it is, I think it's more towards the end of '22. We're doing extremely well, but I want to be really careful to not get ahead of ourselves here. There are certain fleets that have been retired. So that's going to be a bit of a headwind. So maybe if it happens, it's by the end of the year. But it's certainly -- I'm at this point, not anticipating that the domestic narrow-body will be back to the levels that it was at in '19. I think 2023 is probably a more reasonable guess. And I think we've got to be conservative, I mean, with regard to Omicron and who knows what comes next. But we're assuming that this virus is going to be here for a while, and we're going to have to -- everybody's going to have to live with it. So I think that, that's probably a more prudent thing. In terms of the international, Asia is still very low. And Europe is likewise also struggling more so than the North American market. So, I do think that we've got a good upside potential in those markets.

Okay. Thanks for the detail there. As you look at -- I wanted to ask about your cargo exposure. I mean cargo has clearly been -- air cargo, very strong, obviously, through this downturn. The cargo fleet tends to be older, tends to represent roughly sort of 10% of the total fleet for the larger aircraft. How is your cargo exposure? And can you comment about if that's maybe a nice opportunity where you're seeing greater growth? Or how do we think about you relative to the cargo markets?

Yes, another great question. We're doing very well in the cargo market. Very strong for all of the obvious reasons, we anticipate that, that is going to continue. The cargo market should continue to stay strong as a result of the questions going on out there. We've got very good relationships with those customers. We're we offer a very broad product line. So I have to say I feel really good about the cargo markets.

So if you have any friends that are running these cargo companies, make sure they know that they can save a lot of money with HEICO and that if you want to still get free delivery with your purchases, they should come book to HEICO for some solutions.

We'll definitely pass it on. If I could, just one final question for you, Eric, obviously, the trend line would imply that you sort of get back to 20% EBIT margins at some point in fiscal '22, just looking at the strong performance of the business. Is there any reason at some point this year, you don't hit that level? Or are there other maybe headwinds we should keep in mind as we think about sort of modeling out segment margins for you?

Ken, it's Carlos. Let me take that one. As we're sitting here today, other than time, there's no real headwind that I see. I mean both of the -- all three of the product divisions, if you would, within Flight Support are doing quite nicely. As Eric said, the Specialty Products Group is lagging a bit for the OEM cycle. I do think that once we get back to the '19 levels, and then the key is back to the '19 levels. Once we get to that point, we ought to start approaching that 20% margin. As Eric just mentioned, we're not real sure if we're going to see that in '22. But once we do, I build very strongly that we ought to those levels. So it's a timing issue, Ken, not an impediment to getting there. It's just time.

The next one, we have the line Michael Ciarmoli with Truist Securities. Please go ahead.

Nice results. Maybe Eric or Carlos, just to stay on Ken's line of question there on the domestic versus international, I think, Carlos, you may have mentioned or maybe it's come up that possibly, you could exit fiscal '22 here in FSG at somewhere close to that quarterly run rate. But if we think about international, where I think we're still down 30% on takeoffs and landing, Omicron is going to have an impact. Do you need that international and that wide-body activity and your customers to start spending on our wide-body fleet to get back to that quarterly run rate in '19 in FSG?

Yes. I think that, that would be a reasonable expectation. I mean when we anticipate the wide-body in the international markets are going to come back and they're going to come back with a vengeance. So I think we're going to do very well. To sort of -- to be honest with you, we have not modeled bifurcated recovery and figuring out all the combinations and permutations of the recovery. We feel strongly we know that it is going to come back. It is an important market for us. And -- but I think we're going to do very well. We continue to develop product for it. So if that gives you any feeling of our confidence in it, we're still very confident in it.

Yes, I would just add to that, that I'm feeling very good about our market share gains in the segment. I think that our sales folks have done a good job of going out and being accessible to our customers, finding new product, helping them find new products that will help them be more successful. So that's a bit of a wildcard because I can't quantify it for it, but it's something that we're seeing. And that could be additive, which could get us there, could get us there a little sooner.

Got it. And Eric, are you hearing anything from your customers? I mean sure, as we sit here today and Omicron, but obviously, these airlines are thinking six, seven months ahead. I mean, do you think there's a scenario where they start to really prep the wide-body fleet for a heavier summer travel season in international markets? And could that be a significant tailwind maybe as soon as late 1Q and then into the second quarter where you really see a lot of that prep work being done?

Yes. I think that's entirely possible. My feeling is people are going to travel next summer regardless of Omicron. And yes, I think that, that is reasonable to -- they definitely are going to prepare it in advance.

Got it. And then I'll just try one on some of the new product development. And we're going to start seeing some of the LEAP engines, GTFs start to come in for shop visits. Do you guys have content on those platforms? Should we expect that, that could be sort of accretive business to you as those engines start coming in?

Yes. Normally, as you know, we don't develop product, we don't have significant sales of products this soon in the life cycle. So we don't like to comment on specific products, but normally to in the life cycle that would not be something material.

Thank you. We have the line of Gautam Khanna with Cowen. Your line is now open.

Happy holidays in advanced. Just wanted to follow up on a couple of questions that have been asked. Any sense for -- so first of all, within the sub-segments at FSG, I don't know if you covered this, but kind of the relative sequential growth. So by aftermarket parts versus R&O, component repair versus specialized products, how do those differ, if at all? And what are you seeing kind of where do you have better visibility of how trends are moving into the next quarter or 2? Was R&O picking up or what can you say?

So I guess if you're talking about the recent quarter sort of trends or where things are pointing, it's coming off a pretty weak Q4 '20, but the growth has been very strong in our parts of distribution and our repair. They have grown in tandem, one quarter one is a little more strong next quarter that flips. But the trends in those two businesses are very similar. It's very strong. They're coming back. Eric mentioned earlier that Specialty Products, which houses some defense and a lot of our OEM business within the Flight Support Group. That business is doing quite nicely. We had a nice organic growth in Q4. I'd say, for the year, it's lagged a little for the reasons that Eric gave, I think that, that business generally is tied to the new build activity and how those Tier 1s are purchasing to go into the big guys, the Boeings and Airbus and that has been softer. And to Eric's point earlier, that is the part of the FSG that I think we'll see some improvement in '22, on top of all of the continued growth and strength within the parts and repair business. Does that help, Gautam?

Yes, it does. So just to be a finer point on it, sequentially, did component repair kind of tracked out of the aftermarket parts for the sequential?

Yes.

That's good to see. All right. Just switching to M&A. You mentioned the pipeline is pretty busy these days. Anything promising that might be more consequential from a size perspective? Or do you kind of anticipate that it's going to be kind of like last year or the last two years where it's been more smaller tuck-ins or are you seeing bigger opportunities?

We look at opportunities of all sizes. And so, we are looking at a variety of sizes now and it really remains to be seen which ones. And of course, we have to be careful, frankly, at this point because who we're talking with, we don't want anything -- anybody on this call to start figuring out that kind of thing But we suffice it to say that we'll continue to look at transactions that are small ones and in the hundreds of millions, and frankly, even in the billions, although, again, our criteria remains the same for the acquisition. So we're not going to go buy something just for the sake of putting up revenue that's not accretive. As you know, to us, it's all about the cash generation, the net income.

Okay. And then -- that's helpful. And then maybe one for Eric, just on -- over the next 12, 18 months, how many new PMA parts do you anticipate adding to the portfolio?

Yes, it would be consistent with what we've done in the past. We're typically in that 400 to 500 area per year. And so I think it's going to be consistent with that. The number -- just you know, the numbers can go up and down a little bit depending on complexity and the type of product and all that. Obviously, more complex products, could they do take longer. So there would be fewer of them, but it moves around in that area.

The next one, we have the line of Noah Carpenter with Goldman Sachs.

It's Noah Poponak. Nice to hear from you. Where would you pin the likelihood that the cash spent on acquisitions line item on the cash flow statement in fiscal '22 is the highest number that the Company deployed in a given year in its history?

I'm not sure I understand the question. I think what Noah was asking is, are we going to spend more on that equity?

We never know we never know. So I mean, we're open to making acquisitions low, and we want to make very large acquisitions. So it all depends on the opportunities. We are an opportunistic acquirer and we'll spend in the $1 billion we'll spend in the $100 million. So -- but I -- we don't know. I really don't know the answer.

But I can tell you, we are working very hard, and we would love nothing more than to be able to deploy more capital in 2022 than we've ever done in any single year. So -- but it's -- as Dave said, estimate on what's going to happen. We've got to do our homework. And we're very careful with HEICO's money because it belongs to the shareholders. Of course, we're -- some of large shareholders. And we want to make sure that we're spending people's money correctly. So -- but we're very much focused, and we would love for it to be the biggest year in our history.

No, we are -- I think I mentioned before, we are looking at a number of transactions. And the problem is we never know until we get to the closing table, whether they're really going to close. We run into due diligence glitches, data glitches where we ask for material. And since we do a very, very thorough due diligence because again, in my mind, we're spending our money and the shareholders are our partners, and we're spending our money, which is their money, and we don't want to make mistakes. So on the surface, I would say that we've earmarked -- obviously, we have $1.5 billion revolver, unsecured revolver that we can draw on. And of course, the banks have said to us they will give us many multiples of that should we want it. So it's just very hard to tell, but we would like to do it if the deals that are presented to us fit in our wheelhouse, if they meet the standards. And you know the standards we look at are the cash payback in 7 to 10 years, and we don't want to pay 14x EBITDA with pie in the sky in the future and so forth. So that strategy has served us very well, and we're going to continue that strategy. So it's really impossible to give you the answer. I know you did want -- I'd love to know the answer myself, but we're trying to spend as much as we'll possibly be effective for the HEICO program.

No. And I'm looking for that commentary along the spectrum of possible outcomes. So that -- everything you guys provided there is super helpful, and I appreciate it. Just one other one for me is back to this conversation around international and corporate travel since that's kind of the million-dollar question here for the industry in terms of when that kicks in. I mean it seems to be very much up to government restrictions and policies on cross-border. And I just wondered if you are hearing any light you can help shed here from your teams or your customers on how that plays out? Like what has to happen? Is it Asia going away from zero COVID? Or is it -- are there cross-border discussions that are taking place with the airlines right now? Or is it just cases? Or can you just never know? I mean just given how obviously close you guys are to the industry, I wondered if there was any incremental detail you can provide there on how that can actually play out logistically?

Yes. I think the airlines are very much focused, obviously, on this matter. They want to do everything they possibly can in order to encourage travel, and encourage vaccinations and testing and all that stuff. So I think they're going to be very flexible. And as different governments come out with different requirements, they're going to -- they need to be resilient and figure out just how to handle it. So I think that the industry is maturing to a point where we're all prepared for COVID to hang around for a while, and we've just got to do the best we can to really get through this, but keep everybody traveling. So they're very resilient and creative when it comes to that.

So, it sounds like we're still without a lot of specifics on how cross-border can evolve from here and you just have to manage the business across a range of possible outcomes.

Exactly. You got it. Yes. Yes, all right.

The next question, we have the line of Colin Ducharme with Sterling Capital Management.

I got a couple for Carlos. Carlos, maybe I'll just start quickly on some of the cash flow deltas. And what I'm trying to do here is just link through the windshield demand environment to what you're hearing at the subsidiary level. And then kind of link that to kind of deltas on the cash flow statement, AR being one, inventory being two, and then your change in current liabilities being three. And can you maybe just anecdotally tell us what you're hearing from the subsidiary level on the increase in AR, I'm assuming that's just increased -- improved demand environment, specifically on the FSG side. And then, linking that to your change in current liabilities, is that deferred revenue build mapping to that same trend? And then I got a quick follow-up for you.

All right. So well, there's a lot to unpack there. Let me start with receivables. So as you pointed out, during the fourth quarter, which receivables for us generally is a function of quarters. Sales in the FSG were up 34% over '20. So what you're seeing is you're seeing a little bit of build in receivables to deal or the growth in receivables to deal with that growth in sales, which, in my judgment is a good thing. When we look at the quality of those receivables, they're in real good shape. And nothing from the subsidiaries is bubbling up, saying there's any problems that I'm very pleased with the quality of the receivables. And I think the growth is attenuated compared to our revenue growth. Look, the inventory build with sales increasing, again, inventory to a great extent, is also a quarterly function, right? The ebbs and flows kind of in three-month increments. And with 20% growth in the overall business occurring in Q4 on the sales side, the building inventory of $10 million or whatever it was -- is not so bad year-over-year. I was actually quite pleased with that. And if you heard earlier on the call, we have encouraged our subsidiaries if they need to, to go long on inventory to deal with any potential lead time issues or shortages. So I'm actually -- the working capital management in that regard, I'm very pleased with. And I think the liabilities that you're pointing out, the current liability trend, remember, in fiscal '20, the Company did not have in the FSG, any discernible performance-based compensation. There may have been pockets of it. But for the most part, it was not much to zero. And so this here, what you have on top of what I consider the outstanding performance for the segment, you have bonuses, performance base pay plus you have commissions that may not have been around last year for sales growth. And you have a lot of that selling activity that gets jammed in accruals at year end and until you pay it out. And so a lot of the movement in that caption is performance-based comp related. Does that help you?

Yes. That's very helpful. I appreciate the detail. So I guess, a little bit different than what I was kind of expecting and mapping out here. Maybe I'll just leave you with a quick follow-up, higher level here, cap structure and just conservative posture here. You guys are -- you have a lot of dry powder, arguably more than you've had in many, many years. You talk about a healthy M&A pipeline. Is that an either/or, meaning the healthy M&A pipeline and the ability to put the balance sheet to work there versus getting more aggressive with perhaps a share repurchase program, something along those lines? You're in an EBITDA growth scenario, you're going to naturally delever in the medium term. Why not put the balance sheet -- take a step towards a more aggressive posture, yet still overall, stepping back, be situated very, very conservatively. If you can just speak to cap structure and view on glide path over the medium term, you guys are just very, very underlevered at the moment today here.

So the answer is, we do not work in the short term. HEICO is a long term -- medium, long-term investment. You are correct. We are underlevered and we understand that. Earlier in the call, I mentioned that there are many acquisitions that are in the pipeline. We're looking at many. We do not hope and we do not intend to stay underlevered this way. So we don't have any thoughts about share purchase, repurchase to shrink the Company. We always believe in growing the Company, and that's the strategy that we have followed for 31 years, which has resulted an extraordinary growth for the shareholders. So we're not going to change the basic policy, the discipline that we use. And we're not going to, again, shrink the Company, shrink the capitalization to please speculators and traders and everything else. We're going to grow this company for long-term shareholders and of which we're probably the largest one and all the shareholders are our partners. So we feel that it's in the best interest. The other thing is the response of the shareholder community to our shares at the multiple that it sells at apparently, I believe, and after we speak to many of these institutional shareholders, they are very pleased with that policy. So again, we're going to stick to it we're not going to shrink it. And hopefully, we're going to grow it aggressively. I hope that answers your question.

Yes, that's very helpful. And I totally respect that posture in the history and all the value you guys have generated. But if I -- in all due respect, my press on you, Larry, we're long-term shareholders as well. And while we totally respect that history, in the view of not an either/or, but putting a balance sheet to work without kind of shrinking the Company, but thinking in the guys of per share ownership. And that's essentially what we're talking about in terms of shrinking the denominator, creating value on a per share basis over time. So that would just be quick press. And again, I say that with all due respect of all the strategy and value that you've created.

Okay. We hear you. And look, we're always running all the scenarios, we look at everything. I can promise you, we're very, very thorough in our analysis but very optimistic on acquisitions at the moment.

[Operator Instructions] We have our next question from the line of Louis Raffetto with UBS. Your line is now open.

So I want to sort of come back to this M&A from two points. First, can I just confirm, it looks like for 2021, acquired sales is about $70 million. And as we looked at '22 based on what's already closed, is it going to be sort of about that, maybe a little bit less?

You're asking what the acquired sales are for the year, Louis.

Yes. So I think '21 was about $70 million. And I think based on what you've already completed, now what you might or might not complete, just again, it looks like maybe it will be a little bit less than that already for '22?

You're right on the number. And I think that if things go according to plan, we would hope to have more. Again, what we've been saying is we plan on deploying capital clinics hopefully hopefully we can do that and have larger acquired sales next year.

I mean, I'm just looking for what's done because our -- to Larry's point, you don't know when you'll be able to close things, but if we sort of do step to that side of the M&A side. For the deals that you haven't been able to sort of complete, what has been, at the end of the day, is it just that the due diligence comes back? Is it somebody else outbids you? Any color you can provide there?

There are all kinds of reasons for this, Louis. We can't give you one single reason. Lots of different things happen things you discover and due diligence, terms, all kinds of reasons.

Business can change. They're going to be changed. All kinds of things have happened.

We don't have -- I can say this. We don't have many that it's very few that we get to serious due diligence and contract negotiations that don't close. That's pretty rare for us, not unheard of. But once we usually get to a certain point, the deals tend to close.

Okay. Great. That's awesome Eric. And then Carlos, just one for you around cash flow. So obviously, cash flow in fiscal '21 was actually, I think, the highest it's ever been. Understanding you're not giving guidance for '22, but any reason that it wouldn't necessarily grow in '22? And then any idea around the CapEx? I know you've given -- you tend to give that in the past.

We like to grow the Company every year, 15% to 20% in normal times. And so next to that would be growth in operating cash flow. We really don't want to have earnings and no cash flow, right? So that growth we like to see work in tandem, which is a function of good management on the working capital side, right? So, that all that net income earning falls to cash in the cash provided by operating activities. So I would expect that to continue. There's now in my judgment right now, there's no impediments to that occurring next year. What was your second question?

Just around CapEx next year. I know in the past, you have at least -- I mean, we -- this year was up a little bit, but.

Yes. We just finished our CapEx budgets or longer. I think we could be somewhere around $45 million next year is kind of my guess right now. But that could even flow, but that's kind of the peg we have on the ground at the moment.

The next one, we have the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

So maybe two for Eric, if that's okay. Eric. I think we talked about ETG pricing a little bit in the beginning of the call. But I was wondering about FSG. You tend to keep a 40% to 50% discount. And just given, I'm guessing suppliers and OEMs are raising their prices. How are you thinking about price? How are you gauging that, especially I'm sure you're seeing cost headwinds and labor headwinds as well? So if you could just talk about the pricing environment.

Yes, great question, Sheila. Yes, we are seeing cost pressures, and we are very focused to make sure we maintain our margins. So I think we're going to move along with the industry, and we're going to do what the industry does. And -- but clearly, it's our intention to pass along those increases as long as they exist. We don't want to take advantage of our customers, but we need to make sure that we get our, whatever cost increases we've had passed on. Sometimes there can be a little lag if there's a contract. However, it's fully our intention to move along with the industry.

Okay. And then maybe just one on Omicron and like this last variant. You guys have been through two variants now. How do you guys think about like the peak of what our case is versus your revenues? Like do you guys see any changes in airline behavior? How does that work for you guys?

Yes. I mean we haven't thus far. There's natural variation. So in the day-to-day ordering patterns, so it's hard to see. I mean, look, our sales and bookings have been extraordinarily strong. But I think it is reasonable to assume that Omicron is going to impact us. And it really depends on the severity of the cases as well as the transmissiveness of the variant. So, we're watching it closely. We're not changing any of our business practices as a result of it. We're making sure that we've got the parts on the shelf. It's -- we assume that it will hit different regions at different times, and it will sort of spread around the world. It's nice to see that there have been a number therapeutics that have been developed to be able to assist and complement the vaccines. So I don't think anybody anticipates that this is going to be a showstopper or as dramatic as Delta, other variants were. But it's just something that we're going to have to live with. And we're just going to have to run the business accordingly. So, we're working through it. It's not really changing any of our behavior. And fortunately, since we have a very strong balance sheet. And even more importantly, a phenomenal group of people, we're going to get right through this. So it doesn't -- it's not causing us to lose any sleep whatsoever. And frankly, the more strain the airlines have, I think the better position HEICO is in to pick up share.

Thank you. We don't have any further questions at this time. Presenters, please continue.

This is Larry Mendelson again. I want to thank everybody on this call for your interest in HEICO, and we appreciate it. We are available to answer questions. You can call Victor, Eric Carlos, myself. And we look forward to the next call, which will be I guess, end of February for the first quarter of '22 -- fiscal '22. And I wish everybody a very happy and holiday -- happy and healthy holiday season, good health, stay healthy, stay away from COVID, and we will speak to you in late February. Thanks very much.

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