Welcome to the HEICO Corporation Third Quarter Fiscal Earnings conference call. My name is Justin and I will be your conference operator for today. 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 COVID-19 pandemic. High-cost liquidity and the amount of 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 should cause an increase to our cost to complete contracts. Governmental and regulatory demands, export policies, and restrictions. Reduction in defense, space, or homeland security spending by U.S. and or foreign customers, or a combination from existing and new competitors. Which could reduce sales or 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 sales. Our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest foreign currencies exchange and income tax rates, economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, and telecommunication and electronic industries, which could negatively impact our cost 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 Security and Exchange Commission, including, but not limited to filing on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or advise any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. As we begin the call, I now turn the call over to Lawrence Mendelson, HEICO's Chairman and Chief Executive Officer.

Thank you very much. And good morning to everyone on the call. We thank you for joining us and we welcome you to this HEICO Third Quarter 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 beginning my review of the operating results, I'd like to take a moment and recognize all of HEICO's talented team members for their extraordinarily high performance during the challenging times brought on by COVID-19. The dedication to HEICO's customers and the safety of their fellow team members continues to be exceptional in our opinion. On behalf of our Board of Directors and management, I want to thank each and every member of HEICO's worldwide team for these efforts and the outstanding results that we are reporting today. I will now summarize the highlights of our third quarter and first 9 months of Fiscal '21. We were very pleased to report consolidated operating income and net sales in the third quarter of fiscal '21 improved 47% and 22% respectively, as compared to the Third Quarter of Fiscal '20, which was the Quarter in which our operating results were most negatively affected by the pandemic. Our performance principally reflects quarterly consolidated organic net Sales growth of 17%, as well as the favorable impact from our Fiscal '20 and '21 acquisitions. The Flight Support Group reported quarterly increases of 250% and 33% in operating income and net sales, respectively, as compared to the third 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 to the prior year. In addition, this marks the 4th consecutive quarter of sequential growth in net sales and operating income at the Flight Support Group. We are very pleased with this trend and we do expect to see it continue. The Electronic Technologies Group reported quarterly increases of 14% and 11% in net sales and operating income respectively, as compared to the third quarter of Fiscal '20. These increases principally reflect the impact from our profitable Fiscal '20 and '21 acquisitions, as well as strong organic net sales for the majority of our products. Our total debt to shareholders' equity improved to 17.4% as of July 31, '21, and that compared to 36.8% as of October 31, '20. Our net debt, which is total debt less cash and cash equivalents, was 117.1 million as of July 31, compared to a very low 5.3% ratio of shareholders' equity as of 07/31/21. And that was down from 16.6% as of October 31, '20. Obviously, we are not a heavily leveraged company and we have a lot of debt capacity and the ability for acquisition and growth. Our net debt-to-EBITDA ratio improved to 0.25% as of 07/31/2021, down from 0.71 times as of 10/31/2020. During Fiscal '21, we successfully completed four acquisitions and have no significant debt maturities until Fiscal '24. We plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes to accelerate growth and maximize shareholder returns. Cash flow provided by operating activities was very strong, increasing 33% to 124 million in the third quarter of Fiscal '21 and that was up from 93.1 million in the third quarter of Fiscal '20. Cash flow provided by operating activities remained strong, increasing 12% to 334.1 million in the first 9 months of Fiscal '21, and that was up from 299 million in the first 9 months of Fiscal '20. In July '21, we paid a regular semi-annual cash dividend of $0.09 per share. And this represented our 86th consecutive semi-annual cash dividend. And it was 12.5% higher than the $0.08 per share cash dividend we paid in January '21. In 06/21, we acquired 80.1% of the assets of Camtronics and FAA-certified part 145 repair station with extensive proprietary FAA designated engineering representative repairs. The remaining 19.9% interest continues to be owned by certain members of Camtronics management team, as well as certain members of the management team of an existing HEICO Flight Support subsidiary. Camtronics is part of HEICO Flight Support, and we expect the acquisition to be accretive to earnings within the first 12 months following closing. Earlier this month, we acquired 89% of Ridge Engineering and the Bechdon Company. Ridge is a leader in performing tight tolerance machining and brazing of large-sized parts in mission-critical defense and aerospace applications. Bechdon provides machining, fabrication, and welding services for aerospace defense and other industrial applications. The remaining 11% interest continues to be owned by certain members of Ridge's and Bechdon management team. These companies are now part of HEICO's Flight Support Group, and we expect these acquisitions to be accretive to our earnings per share within the first 12 months following closing. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Thank you very much. I'd like to start out by first thanking all of HEICO's team members for their incredible dedication and, in particular, their sacrifice in 2020. I think our shareholders and the community at large expect phenomenal results from HEICO. And they automatically think that we're able to pump out these incredible results quarter-after-quarter. But the truth is that all of the businesses we're in are very competitive. Our people have to work incredibly hard. Last year, they went through tremendous personal sacrifices. And the results we see now today, I believe is the result of that hard work and dedication. So, I personally thank all of the HEICO team members for everything they’ve done to make our Company what it is today. Moving on to the prepared remarks, the Flight Support Group's net sales increased 33% to 237.1 million in the third quarter of Fiscal '21, up from 178.2 million in the third quarter of Fiscal '20. The net sales increase in the third quarter of Fiscal '21 is principally from organic growth of 32%. The organic growth is mainly attributable to increased demand for commercial aerospace products across all of our product lines. The Flight Support Group's net sales were 666.7 million in the first 9 months of Fiscal '21 as compared to 731.2 million in the first 9 months of Fiscal '20. The net sales decreased in the first 9 months of Fiscal '21 is principally organic and reflects 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 250% to 42.1 million in the third quarter of Fiscal '21, up from $12 million in the third quarter of Fiscal '20. The operating income increase in the third quarter of Fiscal '21 principally reflects the previously mentioned net sales growth and an improved gross profit margin, mainly due to increased demand for our commercial aviation products. Additionally, we had a decrease in bad debt expense due to certain commercial aviation customers filing for bankruptcy protection in the third quarter of Fiscal '20 last year, as a result of the pandemic's financial impact. The Flight Support Group's operating income was 103.4 million in the first 9 months of Fiscal '21 as compared to 121.6 million in the first 9 months of Fiscal '20. The operating income decreased in the first 9 months of Fiscal '21 principally reflects the previously mentioned lower net sales, as well as higher performance-based compensation expense and the impact from lost fixed cost efficiencies stemming from the pandemic, partially offset by a decrease in bad debt expense. The Flight Support Group's operating margin improved to 17.7% in the third quarter of Fiscal '21, up from 6.7% in the third quarter of Fiscal '20. The operating margin increase in the third quarter of Fiscal '21 principally reflects the previously mentioned increase in net sales, improved gross profit margin, and lower bad debt expense. The Flight Support Group's operating margin was 15.5% in the first 9 months of Fiscal '21, as compared to 16.6% in the first 9 months of Fiscal '20. The operating margin decreased in the first 9 months of Fiscal '21 principally reflects an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned higher performance-based compensation expense in lost fixed cost efficiencies, partly offset by the previously mentioned lower bad debt 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.

Eric, thank you. And first, let me thank all of HEICO's remarkably talented and dedicated team members who delivered yet again, on behalf of each other, on behalf of our customers and on behalf of our fellow shareholders this quarter, as you did throughout 2020 and throughout this year, and frankly before. And as you do in both good times and in challenging times, we are truly grateful for what you do and how you do it. The Electronic Technologies Group's net sales increased 14% to $239.5 million in the third quarter of Fiscal '21, up from $210.9 million in the third quarter of Fiscal '20. The net sales increase in the third quarter of Fiscal '21 principally resulted from our Fiscal '20 and '21 acquisitions, as well as organic growth of 5%. The organic growth principally reflects increased demand from our other electronic, defense, medical, and commercial aerospace products, partially offset by decreased commercial space net sales. As we've historically noted, commercial space revenue recognitions tends to be uneven through the quarters due to factors like 606 accounting and periodic shifting of production resources between commercial and defense space work, which occurred this quarter and saw a total space activity overall in line with our expectations. Importantly, our space orders remain healthy. The Electronic Technologies Group's net sales increased 11% to a record $706.2 million in the first 9 months of Fiscal '21, up from $638.3 million in the first 9 months of Fiscal '20. The net sales increase in the first 9 months of Fiscal '21 principally reflects our Fiscal '20 and '21 acquisitions, as well as organic growth of 2%. The organic growth principally reflects decreased demand for our other electronic and defense products, partially offset by lower commercial aerospace and commercial space product sales. The Electronic Technologies Group's operating income increased 11% to $69 million in the third quarter of Fiscal '21, up from $61.9 million in the third quarter of Fiscal '20. The operating income increase in the third quarter of Fiscal '21 principally reflects the previously mentioned net sales growth, partially offset by a slightly lower gross profit margin mainly from the commercial space products net sales decrease. The Electronic Technologies Group's operating income increased 8% to a record $200.4 million in the first 9 months of Fiscal '21, up from $184.9 million in the first 9 months of Fiscal '20. The operating income increase in the first 9 months of Fiscal '21 principally reflects the previously mentioned net sales growth, partially offset by a lower gross profit margin mainly from a less favorable product mix for defense products and the lower commercial space products net sales, which in turn was partially offset by an increase in net sales of other electronic products. The Electronic Technologies Group's operating margin was 28.8% in the third quarter of Fiscal '21, as compared to 29.4% in the third quarter of Fiscal '20. The Electronic Technologies Group's operating margin was 28.4% in the first 9 months of Fiscal '21 as compared to 29% in the first 9 months of Fiscal '20. The current year's third quarter and 9 month margins are within the anticipated range I frequently discussed on these calls and remain excellent overall margins of which we and our team members are very proud. The operating margin change in the third quarter and 9 months of Fiscal '21 principally reflects the previously mentioned gross profit margin effects from the periodic commercial space sales shift. I'll turn the call back over to Larry Mendelson.

Thank you, Victor and Eric. Moving on to earnings per share, consolidated net income per diluted share increased 40% to $0.56 in the third quarter of Fiscal '21, and that was up from $0.40 in the third quarter of Fiscal '20. The increase in the third quarter of Fiscal '21 principally reflects previously mentioned higher operating income at both operating segments. Consolidated net income per diluted share was $1.58 in the first nine months of fiscal '21, and that compared to $1.83 in the first 9 months of Fiscal '20. The decrease in the first 9 months of Fiscal '21 principally reflects higher income tax expense and lower operating income of Flight Support, partially offset by higher operating income of the Electronic Technologies Group. Depreciation and amortization expense totaled 22.9 million in the third quarter of Fiscal '21, and that was up slightly from 21.9 million in the third quarter of Fiscal '20 and totaled 68.8 million in the first 9 months of Fiscal '21. And that was up from 65.2 million in the first 9 months of Fiscal '20. The increase in the third quarter and first 9 months of Fiscal '21 principally reflects the incremental impact from our Fiscal '20 and '21 acquisitions. Research and development expense increased to $18 million or 3.8% of net sales in the third quarter of Fiscal '21. And that was up from 15.1 million, or 3.9% of net sales in the third quarter of Fiscal '20. R&D expense increased to 52.2 million or 3.8% of net sales in the first 9 months of Fiscal '21. And that was up from 49 million or 3.6% of net sales in the first 9 months of Fiscal '20. As usual, significant ongoing new product development efforts are continuing at both ETG and Flight Support. Our consolidated SG&A expenses were 83.9 million in the third quarter of Fiscal '21 and that compared to 75 million in the third quarter of Fiscal '20. The increase in consolidated SG&A expense in the third quarter of Fiscal '21 principally reflects higher performance-based compensation expense, higher other SG&A expense, and the impact from our Fiscal '20 and '21 acquisitions, partially offset by lower bad debt expense. Consolidated SG&A expenses were 245.1 million in the first 9 months of Fiscal '21, and that compared to 232.8 million in the first 9 months of Fiscal '20. The increase in consolidated SG&A expenses in the first 9 months of Fiscal '21 principally reflects higher performance-based compensation expense and the impact from our Fiscal '20 and '21 acquisitions, and partially offset by reductions in bad debt expense and other SG&A expense. The Company's lower bad debt expense in the first 9 months and third quarter of Fiscal '21 reflects higher bad debt expense in the first 9 months in third quarter of Fiscal '20, and that was due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during the third quarter of Fiscal '20 as a result of the pandemic's financial impact. Consolidated SG&A expense as a percentage of net sales decreased to 17.8% in the third quarter of Fiscal '21. And that was down from 19.4% in the third quarter of Fiscal '20. The decrease in consolidated SG&A expense as a percentage of net sales in the third quarter of Fiscal '21 principally reflects lower bad debt expense, as well as efficiency gained from the previously mentioned net sales growth, partially offset by higher performance-based compensation. Consolidated SG&A expense as a percentage of net sales was 18.1% in the first 9 months of Fiscal '21. And that compared to 17.1% in the first 9 months of Fiscal '20. The increase in consolidated SG&A expense as a percentage of net sales in the first 9 months of Fiscal '21 principally reflects higher performance-based compensation expense, partially offset by lower bad debt expense. Interest expense decreased to $1.7 million in the third quarter of Fiscal '21, and that was down from $2.6 million in the third quarter of Fiscal '20. The decrease was principally due to lower weighted average balance on borrowings outstanding under our revolving credit facility. Interest expense decreased to 6.2 million in the first 9 months of Fiscal '21, down from 10.6 million in the first 9 months of Fiscal '20. That decrease was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility. Other income in the first 9 months and third quarter was not significant. Our effective tax rate was 15.7% in the third quarter of Fiscal '21, and that was up from 13.4% in the third quarter of Fiscal '20. The increase principally reflects a larger deduction related to foreign-derived intangible income, principally resulting from final tax regulations that were issued in the third quarter of Fiscal '20. Our effective tax rate in the first 9 months of Fiscal '21 was 13.3%, and that compared to 3.5% in the first 9 months of Fiscal '20. As previously discussed in a prior quarterly teleconference, HEICO recognized a larger discrete tax benefit from stock option exercises in the first quarter of Fiscal '20 compared to Fiscal '21. And that accounted for the majority of the increase in the year-to-date effective tax rate. In addition, our effective tax rate in the first 9 months of Fiscal '21 reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender value of life insurance policy related to the HEICO Corporation Leadership Compensation plan. Net income attributable to non-controlling interest was 6.8 million in the third quarter of Fiscal '21, and that compared to 3.2 million in the third quarter of Fiscal '20. Net income attributable to non-controlling interest was 18.2 million in the first 9 months of Fiscal '21, and that compared to 16.6 million in the first 9 months of Fiscal '20. The increase in net income attributable to non-controlling interest in both the third quarter of Fiscal '21 and the first 9 months of Fiscal '21 principally reflects higher allocation of net income to non-controlling interest as a result of certain Fiscal '20 acquisitions and an increase in the operating results of certain subsidiaries of Flight Support and ETG in which non-controlling interests are held. For the full Fiscal '21 year, we now estimate a combined effective tax rate and non-controlling interest rate between 22% and 23% of pre-tax income. Our day sales outstanding of receivables improved to 41 days as of July 31, '21. And that was down from 43 days as of July 31, '20. Of course, we monitor all receivable collection efforts in order to limit credit exposure. No 1 customer accounted for more than 10% of net sales. And our top 5 customers represented approximately 22% and 25% of consolidated net sales in the third quarter of Fiscal '21 and '20, respectively. Our inventory turnover rate improved to 150 days for the period ending 07/31/21. And that compared to 154 days for the period ending 07/31/20. Now, for the outlook. Looking ahead to the remainder of Fiscal '21 and to Fiscal '22, we remain cautiously optimistic that the ongoing worldwide rollout of COVID-19 vaccines will positively influence commercial air travel and will benefit the markets we serve. But as we have all learned, it is difficult to predict the pandemic's path and effect, including factors like vaccination rates and new variants, which can impact our key markets. Therefore, we feel it would not be responsible to provide Fiscal '21 net sales and earnings guidance at this time, nor for '22. However, our ongoing conservative policies, very strong balance sheet, and high degree of liquidity enable us to invest in new R&D, execute on our successful acquisition program, and position HEICO for market share gains as the industry recovers. Again, in closing, I would like to thank our incredible team members for their continued support and commitment to HEICO. Without their unwavering passion to exceed customer expectation, our outstanding quarterly results would not be possible. Thank you for making HEICO such an excellent and unique Company. I also want to thank our loyal shareholder base that recognizes that the future is very bright and continue to hold our shares and support our efforts. Thank you. And now I'd like to open the floor for questions.

At this time, I would like to remind everyone that we will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Larry Solow from CJS Securities. Your line is open, please ask your question.

Great. Good morning, guys. And thanks for taking the questions. First question, Larry, and perhaps for you, just on a more macro temperature check. It sounds like, obviously, we realize the very fluid situation with COVID and all. But just, what are you guys seeing? Obviously, a nice large improvement in commercial travel in the first 6 months of the year, and now we're stabilizing down about 20%. Has this driven any changes in customer behavior order trends? And more importantly, the path to full recovery seems like it's still a bit up in the air, but do you still think you can get back to '19 levels, sometime perhaps towards the end of calendar '22? Particularly in FSG and on commercial aviation?

That's a challenging question to answer, almost like asking a fortune-teller about the future. The uncertainty is heightened by factors like the new Delta variant of COVID, which has led to a slowdown with restaurants and increased hesitance among people. Personally, I believe we will continue to see growth through the rest of 2021 and into 2022. We maintain a cautious outlook, wondering if there might be more challenges ahead. Assuming we don't face any further significant setbacks, like another variant or unexpected events, I expect to see continued strength and growth in our markets. However, it isn't our approach to make definite predictions or overly promote our stock. While I have a positive outlook based on current observations, there is always a possibility for unforeseen circumstances. I'd like Eric to add his thoughts as well.

Hi, Larry. Good morning, it's Eric. That's a great question and something we've been discussing extensively. I've spent the last two weeks with our aftermarket leadership and sales and marketing teams, learning about their perspectives and plans. I can tell you that they are all quite optimistic. I believe we are consistently gaining market share and performing well across all our aftermarket sectors. Since we've managed to retain a larger percentage of our workforce compared to our competitors, I feel we are well-positioned for recovery. Specifically answering your question, we have not experienced a decline in business due to the Delta variant so far. The Americas, in general, have been strong. Europe has not really seen a recovery, and Asia, excluding China, hasn't either. I think we have a lot of favorable conditions and increased demand to boost our sales. However, considering the Delta variant's situation in the United States, I think a slight pullback is likely. People continue to travel for both personal reasons and business meetings, but larger conventions have been affected.

Right.

We haven't observed it yet, but it seems reasonable to expect a slight pullback. Typically, there is a small drop in the fall anyway. However, since we haven't seen a recovery in Europe or Asia, excluding China, I believe we have significant potential in those markets. I'm feeling quite optimistic. Regarding when we might return to the 2019 levels, I hope that by the end of 2022, we will be back to those levels. However, that doesn’t mean 2022 will be the same as 2019, as it will take time to reach those figures again. The industry consensus is that 2023 should generally match 2019 for the full year. Keep in mind that our 2023 begins on November 1, 2022. I'm feeling optimistic about our performance despite recent news.

I appreciate your insights. Transitioning to a different topic, I have a quick question for Victor. While I understand you don't provide specific details on individual acquisitions, it seems that the Ridge Engineering and Bechdon group are two distinct purchases combined, and they appear to be larger than some of your previous smaller acquisitions. That's the first part of my question. The second part is that since you lack manufacturing expertise, could there be potential cross-selling opportunities utilizing their technologies, expertise, or capabilities as you explore other businesses? Is that correct?

Well, Larry, this is Victor. Of course, that, as you know, is part of the Flight Support Group being a mechanical manufacturing business and metals-based manufacturing business. And there is some opportunity for cross-selling with some of the things that the ETG does. I don't think it's going to be a tremendous needle mover. But there is some opportunity there, and we'll explore those as we get a little further down the road and a little more time passes.

Got it. Okay. Great. Thank you, guys. Appreciate it.

You're welcome.

Thanks, Larry.

Hey, good morning.

Morning, Josh.

HEICO has always been recognized as a leader in the P$A Market, but I'm interested in your perspective on the DER market. Is Camtronics part of a larger opportunity in DER, or what dynamics are you observing in that market?

Yeah. Josh, that's a great question. I think something that a lot of people often overlook. But yes, HEICO, I believe is the largest independent repair and overhaul group focusing on the components market in the world. And we mean independent, non-OEM, non-airline, non-government affiliated. A key part of that strategy is using the DER repairs. When we combine that with the opportunity to use certain PMA parts, it results in an unbeatable combination. I can tell you that we operate a very decentralized business where we've got businesses that focus on a specific product and Camtronics is particularly good in a number of the products that it does, and it does have DERs. I think we've got the ability to develop more DERs. And I think we're going to do very well because we offer it as a full suite. It's not just walking in and offering a single DER. It's offering lots of different DERs. So yes, I think that's been an important part of the strategy, along with the PMA.

Okay. And then just thinking about the bad debt expense exposure at this point. Last year, obviously was a very tough time for the airlines. But as the government support tapers off going forward, what do you think about your airline partner's financial position, just broadly speaking? Do you think that the bad debt expenses are behind us, or do you think that we should just be cognizant going forward?

I think the stress is behind us, frankly. I feel good about where they are. And I can tell you looking at some of the older patterns and some of the stuff that they're ordering from us that they never bought from us before leads me to believe that HEICO is going to continue to take market share as they've got to focus on cost. And HEICO has treated them very well through these crises. But I really think the airline distress is behind us.

Okay. Thank you.

Thank you.

Good morning, Larry, Victor, Carlos.

Good morning.

Hi.

Eric, maybe just to start with you on, can you maybe just give us a little more color on what you just mentioned on order rates at FSG regarding that you were early on calling the end of the destocking. And we saw surprisingly 16% sequential growth last quarter, but just 3% this quarter. Maybe you could talk maybe a little bit about the cadence of what you're seeing.

Sure. In the second quarter call three months ago, I mentioned that the 16% growth really surprised us, and we were frankly shocked to see it so strong. I cautioned that I didn’t expect that rate to continue, and indeed, it didn’t. However, I’m pleased we were able to maintain our position. After a 16% increase, it’s common to see a pullback, but we managed to exceed what had previously been considered exceptional figures by 3%. In hindsight, it would have been nice to show consecutive 10% growths, but that's not our approach. The airlines we work with are very optimistic, and I've never seen our sales team as positive as they are now. Part of this optimism comes from our gaining market share in the PMA and DER, along with distribution. HEICO is performing well because we remained financially strong during the crisis, retaining a larger portion of our workforce compared to competitors. We’re beginning to see the benefits of that. Evaluating quarter-over-quarter increases can be challenging, but it’s important to note that our primary focus is on profitability. Our margins have greatly surpassed our sales increases. We assess our businesses based on cash flow and profitability; sales alone don’t matter. If sales come without profitability, that's a concern for us. We prefer to invest capital in initiatives that will yield income. I'm genuinely pleased with the earnings we’ve achieved while providing significant savings to our customers. In North America, there may be some impact on flight schedules, but I believe it will be minimal. In Europe and Asia, excluding China, the recovery hasn’t fully materialized yet, offering more upside potential in those regions compared to the minor risks in the U.S. All of our major U.S. operators are very optimistic and are keen on ensuring they receive products, especially given the worries about supply chain shortages. Recent articles highlighted challenges in China, from parts procurement to labor shortages, as well as COVID-related disruptions in Vietnam. As a result, I believe they will be more cautious and might refrain from ordering certain parts. Overall, we’re feeling good.

We're not observing any restocking on the shelves yet as we transition out of the destocking phase. Instead, we are experiencing a more normalized rate that aligns with overall flight activity, and we have not seen a restocking of parts so far.

I would say that is correct. However, looking back, some of the second quarter might have involved a bit of restocking for certain customers. There isn't widespread restocking happening, but in North America, it seems airlines want to ensure they have enough parts available. There may have been a small amount of that in the second quarter, but not to the extent we would expect.

Peter, thanks for the question. I was feeling lonely over there in the corner. Working Capital management on our subsidiaries is fantastic and I expect that to continue. We went through what I'll call challenging times over the last year dealing with COVID and the focus by our subsidiaries on cost management without penalizing the labor force. Just looking for efficiencies and doing the leanest things they could, have been extraordinary. I think that will continue, so I don't expect big changes in the pattern you're seeing. Now, as sales pick up, we will have an investment in receivables. That will happen. I think our inventory is at the right levels right now. The only change I could see is an investment in receivables. But I do anticipate capitals to be strong for this year.

Hey, good morning, guys. Thanks for taking the questions here. I don't know, Eric or Carlos, maybe just to put a finer point on this. This quarter is normally a little bit slower in general, coming off the heavy flying season, we've seen this pick up in Delta here, and I guess you're not going to get the guidance, but if I look at FSG sequential growth, streets got you guys at 13% into the fourth quarter. Given what we're seeing, the softer, as you already telegraphed last quarter, Eric, that 16 wasn't sustainable, but is that too heavy, or do you guys have orders and confirmation that you'll see a step-up in sequential growth into this current quarter we're in now?

Michael, this is Carlos. I'll address the first part of your question, and perhaps Eric will follow up. Due to the uncertainties in the marketplace, we are experiencing real fluctuations. We've faced challenges with order patterns since the Delta variant emerged, which is why we refrained from providing guidance. I don't want to speculate on specific percentages like 13%, 20%, or 5% because we truly don't know. However, I believe that sales will generally continue to increase. We've been consistent in stating that we expect a linear upward trend. We were surprised by the growth in FSG in Q2, but I anticipate we will continue to move back up to 2019 levels by the end of 2022. That should be the expectation; anything beyond that would be a bonus that would please us all, but we do not expect significant fluctuations from quarter to quarter, just a steady progression upwards.

Yes. I think that's a great and very accurate response, Carlos. The only thing that I would add, and also on what you're bringing up here as well as some of the prior questions, is that it's very difficult to predict when the restocking is going to occur. We don't believe that we've seen much restocking to date because our AOG orders have been fairly strong. If people are needing parts right away, they don't have them on the shelf. That leads me to believe that there is a lot of pent-up demand yet to come. I keep mentioning from Europe and Asia ex-China. So, but Mike, it's really hard to predict when it's going to hit. As you know, we get roughly 70% of our orders in the monthly shipment. So, I really don't have visibility to be able to see that. We know that we're winning market share. We know we're developing products. We know that our people are more pumped up than ever. And so, I think that we're going to do exceptionally well and people will continue to fly. I'm sure you've been flying. Everyone's itching to fly. But when that occurs is very hard to predict.

Got it. Yes, understood. That's reasonable. Are you receiving any indications, Eric, from your team or from airlines? We've discussed the timing of the restocking. Given that the majority of your current demand comes from narrow-bodies, should we anticipate, assuming vaccinations continue and international travel begins to recover, that there could be a surge of activity to support some of the widebodies in the fleet that are still largely underused in terms of daily operations as those rates start to improve?

Yeah. I think that will start. But frankly, the wide-body is really going to be more trans-oceanic traffic. My guess is that recovery is shifted more to the right and probably in getting prepared for next summer, my sense is next summer is going to be very strong. It's interesting when I look at our Asian facilities, the vaccination rate is somewhere between 90 and 100%. Our people are vaccinated, at least with one shot. We've been very careful in how we're operating, but we're doing quite well out there. This leads me to believe that there is going to be a big surge in travel. People are going to want to go to Europe, to Asia. They're going to want to come here. I think wide-body demand for parts is going to start taking off and it will be delayed just like the narrow-body was, but it's going to be there. So, we feel good about it.

Got it. Okay. Maybe just one last one for Carlos. The FSG operating margins, you know, very strong sequential growth. I think 3% revenue growth, 18% operating growth, great leverage there. Really high sequential incremental margins. Can that sort of margin expansion continue? Should we be thinking about costs starting to be layered back in, as that top line continues to ramp, or just how should we calibrate ourselves for margin and expansion and cadence going forward?

I think the best way, Michael, for you to look at that is to trend the operating margin up with the revenue growth. We ultimately expect the Flight Support group to get back to 20% GAAP operating margins. And I think if you trend that upwards with the model on revenue growth, you're going to be pretty much in line with at least our expectations at this point. As we rebounded, and as I've mentioned in prior calls, the incremental margins can be a little higher than our decrements because you have things like product flying off the shelf as opposed to manufacturing, right? You can get a bigger bang for the incremental dollar than on the downside. And so, we saw that this quarter, but I wouldn't assume massive leaps in our OI margin. I would trend it with sales growth and get your model back to around 20%. And then at that point, I think what will happen is we'll react similarly to how we have in the past. You have this incremental bump ups in the margin as time passes through efficiencies and growth in sales. Does that help?

Got it. Perfect, thanks. Thanks, guys. I'll jump back in the queue.

Good morning, guys. Thank you for the time. I'll start with maybe ETG. Victor, I don't want you to feel left out. So, what's going on in ETG organic growth looks pretty good up by branded on easy comp. But we've seen a lot of suppliers really decelerate in their defense business. So, maybe if you could talk about what you're seeing in Defense and Space because I believe that accounts for 60% of ETG sales. What's going on, and should we expect any air pockets or softness?

Hi Sheila, this is Victor. Overall, our business is performing well this quarter, as reflected in the numbers. The outlook appears quite positive. However, not all segments are equally strong. We've mentioned previously that we expect the defense sector to stabilize at the very least, given that the budget issues remain unresolved. We anticipate strength in the space sector and believe our other markets will also remain robust. That said, these expectations are contingent on the overall economy and health developments. Currently, we observe notable strength and recovery in the commercial aviation sector. When I mention space, I refer primarily to commercial space as well as our defense-related efforts, and we will need to monitor how defense evolves over time. We typically take a long-term view rather than focusing solely on quarterly performance. In defense, we have structured our business to mitigate the impacts of operational tempo, although we cannot fully escape it. Our focus has mainly been on high-technology areas that are less impacted by current military engagements, such as intelligence, surveillance, reconnaissance, and standoff warfare, which tend to be more stable. We will see how this strategy performs moving forward.

Overall, we're examining a significant number of transactions and conducting due diligence on them. The large transactions, like those involving TransDigm and Parker with Meggit, seem to be at very high prices. We've modeled dozens of public companies to understand how they would integrate with HEICO, and while we believe these firms are paying a premium, they anticipate achieving substantial synergies. Both companies are reputable, and I trust they know what they are doing. Although these prices may be beyond our comfort level, I wish them success with their acquisitions. We are considering many companies and have the financial backing to pursue large transactions. Generally, we take a more conservative approach than TransDigm. Our strategy differs somewhat, but we are encountering numerous opportunities and actively pursuing them. The challenge is that private equity and other investors have access to inexpensive capital, driving up valuations. There appears to be a level of inflation in the M&A space, and we remain cautious in this environment. Our decentralized model means we do not restructure acquired companies aggressively or eliminate jobs. Therefore, we need to proceed carefully. Nonetheless, there are enough potential transactions to allow us to secure our share. I am cautiously optimistic that business will continue as usual for us. Competing against entities with substantial cash reserves is tougher, and while we may not be as aggressive as those competitors, this approach has worked well for us over the past 31 years, and I anticipate we will maintain our current strategy.

Hi. Good morning, guys.

Good morning.

Morning.

Hey, I have a couple of questions. First, at FSG, I was curious about the sequential trend within the quarter. Was the exit rate in July, sales in July, substantially different from the preceding two months? Did you notice any fits and starts throughout the quarter? Can you discuss the trend flows within that quarter?

No, it's Eric. I wouldn't say that we observed any significant trends during the quarter. It was more of a gradual upward shift, but nothing really stood out.

Okay. And then within the segment of FSG, we have the 3 major sub-segments. Any major differences between the 3? Specialized products, repairs, and aftermarket parts and services.

Hey, Gautam. This is Carlos, how are you? The repair group was quite strong in Q3, which we anticipated. It performed very well and really did an excellent job. Parts and repair saw significant increases, which we expected. I don't want to dwell on this too much, but the slowest growing part of the segment was specialty products. We predicted that the OEM cycle would be a bit softer than the aftermarket. However, it's growing well, and we're pleased with its performance. You'll see the breakdown in our quarterly filing on Thursday, so you can review the sales trends in those two areas. Gautam

This is Eric. That's why Carlos pointed out that specialty products are growing the least among the group. Even though it's the smallest percentage, we are confident that as it recovers, we will see a nice rebound because we haven't seen that yet. We have seen some progress, but not to the full extent.

Overall, we are observing a significant number of transactions and are conducting due diligence on them. Regarding the notable transactions you mentioned, specifically TransDigm and Parker in relation to Meggit, both are paying very high prices. We have analyzed various public companies to understand how they might perform when combined with HEICO. While we believe they are paying a premium price, they also anticipate achieving substantial synergies. Both companies are strong, and I trust they are making informed decisions. The prices might be higher than we would typically consider, but I wish them the best in their acquisitions.

Hey. Good morning, everybody.

Good morning.

Morning.

Eric, I wanted to follow up on the Ridge - Bechdon deal. As you mentioned, Flight Support is expected to return to 2019 levels by the end of 2022. How much impact will that deal have on that projection? Also, since the deal didn't close until early in the fourth quarter, I assume we won't know the expenditure related to that until the 10-K. Is there any guidance you can provide on those two points as we consider cash balances and related matters heading into the end of the year?

We didn't disclose the purchase price because the acquisition was not significant relative to our balance sheet. We have a strong balance sheet, so I wouldn't consider it a drain on cash, as we paid with cash on hand at the beginning of this month. Typically, we operate with about half of what we have on the balance sheet, and some of that went towards the acquisition.

Okay, thank you. Eric, is there any impact on the top line? It appears that this is a significant development within FSG compared to what you have done recently. If you could provide some insight.

It's a well-sized company with about 200 employees in the manufacturing sector, and they are quite an impressive organization. We feel privileged to be the chosen home for their business. There were many who would have liked to acquire them. They appreciated HEICO's culture, our long-term commitment, and our approach of building and growing companies instead of selling them. They are set to expand further with new buildings and equipment, which we find very exciting. Conversations with major customers have shown that they are highly regarded and recognized as leaders in their field. We are optimistic about this being a significant growth opportunity. This collaboration presents a solid business prospect with exceptional people. We believe it offers a promising area for expansion. We haven't previously engaged in machining or brazing like this, and I personally have not encountered anything similar. They have achieved remarkable advancements starting from a small operation, fueled by the perseverance and dedication of their founders and team, accomplishing what others deemed impossible. In my 31 years at HEICO, I've seen extensive machining, but nothing compares to what Ridge does. Their close-tolerance machining and brazing are extremely challenging, and I doubt anyone else globally can produce these types of products. Therefore, I see this as a valuable opportunity, contributing to my optimism about our specialty products division, as we anticipate sustained demand as the cycle strengthens in the commercial sector. Combining these products with our military initiatives further supports my positive outlook.

The only significant increase in the corporate cost center is due to performance-based compensation expenses. Going into the first quarter, it was similar to Q2, while Q3 aligned more with the expected run rate. For modeling purposes, you can anticipate that our corporate cost center will represent approximately 1.8 to 2% of revenues for any given year. I want to emphasize that there are no unusual expenses aside from the expected bonuses this year, as there were none last year. Therefore, the comparisons to the prior year are lower primarily because of the absence of performance-based compensation in 2020.

Well, as I indicated earlier, people are paying much higher prices because there is inflation in our economy, and you see that just read the newspaper and they tell you that prices of goods and services are going up to number 1. And the M&A world is seeing the same thing, low-interest rates, just a plethora of money. People are pushing up the prices. I think there is basic inflation in the M&A world. People are paying very high prices, and we are a little bit conservative on that. And also because our model is a decentralized model, we don't go in and clean house with acquisition and throw people out of jobs and all that kind of stuff. So again, we have to be a little bit careful in how we do things. But there are enough transactions and potential transactions out there that will enable us to close on our fair share of what's available. So, I'm cautiously optimistic. I think with us it will be sort of business as usual. It is harder because we are competing with a lot of people with a lot of cash in their pocket, and it's burning a hole in their pocket. We probably won't be as aggressive as those people. But that is just our style, and it's worked for 31 years. I think we'll continue pretty much the way we are.

Hi. Good morning, guys.

Good morning.

Morning.

Hey, I have a couple of questions. First, at FSG, I was curious about the trend during the quarter. Was the sales rate in July significantly different from the previous two months? Did you notice any fluctuations throughout the quarter? Could you elaborate on the trends within the quarter?

No, it's Eric. I wouldn't say that we saw any particular trends during the quarter. It was more of a gradual upward shift, but nothing really stood out.

Okay. And then within the segment of FSG, we have the 3 major sub-segments. Any major differences between the 3? Specialized products, repairs, and aftermarket parts and services.

Hey, Gautam. This is Carlos, how are you? The repair group was quite strong in Q3, which we expected. It performed really well and did an excellent job. Parts and repair were significantly up, just as we anticipated. I don't want to dwell on this too much, but the slowest growing part of the segment was specialty products. We anticipated that since the OEM cycle is somewhat softer than the aftermarket. Nonetheless, it's growing nicely, and we're pleased with its performance. You'll see the breakdown when we file our quarterly report on Thursday, allowing you to review the sales trends in those two areas. Gautam.

This is Eric. Carlos just pointed out that specialty products are growing the least among the group. Although it represents the smallest percentage, we are confident that as it recovers, we will see a nice rebound, which we haven't fully experienced yet. We've observed some growth, but not to the full extent.

Overall, we are observing a significant number of transactions and are conducting thorough due diligence on them. In particular, regarding the major transactions like TransDigm and Parker's acquisition of Meggit, it appears they are paying quite high prices. We've analyzed numerous public companies to gauge how they might perform when combined with HEICO. While we believe these companies are paying a premium, they also believe they can achieve substantial synergies. Both are reputable companies, and I trust they know what they are doing. It may be more than we would typically consider, but I wish them the best of luck and success with their acquisitions.

Hey. Good morning, everybody.

Good morning.

Morning.

Eric, I wanted to follow up on the Ridge - Bechdon deal. You mentioned that Flight Support expects to return to 2019 levels by the end of 2022. Can you explain how much impact that deal will have on those expectations? Also, since the deal didn't close until early in the fourth quarter, I assume we won't know the expenses associated with it until the 10-K is released. Can you provide any guidance on these two points as we consider cash balances and related matters heading into the end of the year?

Carlos here. We didn't disclose the purchase price because the acquisition wasn't significant in relation to our balance sheet. We have a substantial balance sheet. I wouldn't consider them a drain on cash, as we paid with our cash on hand at the beginning of this month. If you look at our cash balance, we usually operate with about half of what we have on the balance sheet. So, some of that amount went towards the acquisition.

Thank you. Eric, can you share any impact on the top line? It seems like this is a significant deal within FSG compared to what you've done recently. If there’s anything to highlight.

It's a well-sized company with about 200 employees in the manufacturing sector, and it's truly an impressive organization. We're honored that they chose us as their home, and we believe many would have desired to acquire this company. They recognized HEICO's strong culture, our long-term dedication, and our approach of building and growing companies rather than selling them. They are poised for further expansion, including new buildings and equipment, which we find very exciting. We've talked to significant customers who value them highly, and according to our clients, they are leading in their field. We are very optimistic that this partnership will present another opportunity for growth, as it's a solid business with exceptional people. This area is a nice fit for us. We haven't previously engaged in machining or brazing like this, and I must say, I’ve never encountered anything like what they've developed. It began as a small company, but due to the perseverance and resolve of its founders and team, they've accomplished what many thought was impossible. Having witnessed a great deal of machining throughout my 31 years at HEICO, I can say I've never seen anything comparable to Ridge. The precision in their machining and brazing is incredibly exacting and difficult to achieve. I doubt anyone else in the world can produce these kinds of products. Therefore, I see this as a fantastic opportunity for us, contributing to my positive outlook for our specialty products division, as I expect continued demand to build in the commercial sector. This, in addition to other initiatives we are pursuing in the military sector, fuels my optimism.