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 COVID-19 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 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 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 fifth consecutive quarter of sequential growth in net sales and operating income at the Flight Support Group. ETG reported quarterly increases of 7% and 4% in net sales and operating income, respectively, compared to the fourth quarter of fiscal '20. These record results principally reflect the impact from our profitable fiscal '21 and '20 acquisitions as well as strong organic net sales growth for the majority of our products. Our total debt to shareholders' equity improved to 10.3% as of October 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 $128.2 million as of October 31, '21, and our net debt-to-shareholders' equity ratio improved to a very low 5.6% as of October 31, '21, down from 16.6% as of October 31, '20. Our net debt-to-EBITDA ratio improved to 0.26x as of October 31, '21, down from 0.71x as of October 31, '20. During fiscal '21, we successfully completed six acquisitions, and we 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 to maximize shareholder returns. Cash flow provided by operating activities remained strong, totaling about $110 million in both the fourth quarter of fiscal '21 and '20. Cash flow provided by operating activities increased 9% to $444.1 million in fiscal '21, up from $409.1 million in fiscal '20. I'd like to now discuss recent acquisition activity. In October '21, we acquired all of the outstanding stock of Passive Wave, which is a designer and manufacturer of radio frequency and microwave components and integrated assemblies, specializing particularly in PIN diode switches, PIN attenuators, PIN limiters, switching assemblies, and integrated subsystems found in defense and other complex electronic applications. Passive Wave is part of the ETG Group, and we expect this acquisition to be accretive to our earnings per share within the first 12 months following closing. In September '21, we acquired 80.1% of the stock of RH Labs, which designs and manufactures state-of-the-art radio frequency and microwave integrated assemblies, subassemblies and components used in a broad range of demanding defense applications, operating in harsh environments, including space. The remaining 19.9% interest continues to be owned by certain members of RH Labs' management team. RH is part of the ETG Group, and we expect this acquisition to be accretive to our earnings per share within the first 12 months following closing. As I discussed during the third quarter earnings teleconference, in August '21, we acquired 89% of the equity interest of Ridge Holding Holdco which owns all of Ridge Engineering and Becton Company. They perform tight tolerance machining and machining of large-sized parts in mission-critical defense and aerospace applications. Becton provides machining, fabricating 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 Becton's management teams. These companies are part of the Flight Support Group and we expect the acquisitions of these companies to be accretive to our earnings per share within the first 12 months following closing. Later on, we will comment on the pipeline for acquisitions, which, at this moment, I can tell you, is very strong, and we're optimistic on that score and the outlook for additional acquisitions. We cannot predict with certainty when they will be closed because we are in substantial due diligence. At this time, I'd like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Thank you. The Flight Support Group'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, 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, 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, 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 and 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 decrease 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 year '21 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, up from $0.45 in the fourth quarter of fiscal '20. The increase in the fourth quarter of fiscal '21 principally reflects the previously mentioned higher operating income at both operating segments. Consolidated net income per diluted share was $2.21 in fiscal '21, 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, up slightly from $23.3 million in the fourth quarter of fiscal '20, and totaled $93 million in fiscal '21, 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, 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, up from $65.6 million or 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, compared to $72.6 million in the fourth quarter of fiscal '20. The increase in consolidated SG&A expense in the fourth quarter of fiscal '21 principally reflects higher performance-based compensation, higher other SG&A expenses, higher selling expenses as well as the impact from our fiscal '20 and '21 acquisitions, partially offset by lower bad debt expense. Our consolidated SG&A expenses were $334.5 million in fiscal '21, compared to $305.5 million in fiscal '20. The increase in consolidated SG&A expense in fiscal '21 principally reflects higher performance-based compensation expense as well as the impact from our fiscal '20 and '21 acquisitions, again, partially offset by a reduction in bad debt expense. The Company recognized higher bad debt expense in fiscal '20 due to potential collection difficulties from certain commercial aviation customers that filed bankruptcy protection during fiscal '20, and that was a result of the pandemic's financial impact on those airlines. Consolidated SG&A expense as a percentage of net sales was 17.6% in the fourth quarter of fiscal '21, up slightly from 17% in the fourth quarter of fiscal '20. Consolidated SG&A expense as a percentage of net sales was 17.9% in fiscal '21 compared to 17.1% in fiscal '20. The increase in consolidated SG&A expense as a percentage of net sales in the fourth quarter and fiscal '21 principally reflects the previously mentioned higher performance-based compensation expense partially offset by lower bad debt expenses. Interest expense decreased to $1 million in the fourth quarter of fiscal '21, down from $2.5 million in the fourth quarter of fiscal '20. That decrease was principally due to a lower weighted average balance of borrowings outstanding under our revolving credit facility. Interest expense decreased to $7.3 million in fiscal year '21, down from $13.2 million in fiscal '20. That decrease was principally due to a lower weighted average interest rate as well as a lower weighted average balance of borrowings outstanding under our revolving credit facility. Other income in the fourth quarter of fiscal '21 and fiscal year '21 was not significant. Moving on to comments about income taxes. Our effective rate in fiscal '21 was 14.8% as compared to 7.9% in fiscal '20. As previously discussed in prior quarterly teleconferences, HEICO recognized a larger discrete tax benefit from stock option exercises in the first quarter of fiscal '20 compared to '21, and that accounted for a majority of the increase in the effective tax rate. Furthermore, our effective tax rate in fiscal '21 reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation leadership compensation plan. Our effective tax rate was 18.3% in the fourth quarter of fiscal '21, down from 22.3% in the fourth quarter of fiscal '20, and the decrease principally reflects the favorable impact of higher tax-exempt unrealized gains in the cash surrender values of life insurance policies related to the HEICO Corporation leadership compensation plan. Income attributable to non-controlling interest was $7.3 million in the fourth quarter of fiscal '21, compared to $5.3 million in the fourth quarter of fiscal '20. The increase in net income attributable to non-controlling interest in the fourth quarter of fiscal '21 principally reflects an increase in the operating results of certain subsidiaries of the Flight Support Group in which non-controlling interests are held. Net income attributable to non-controlling interest was $25.5 million in fiscal '21, compared to $21.9 million in fiscal '20. That increase in net income attributable to non-controlling interest in fiscal '21 principally reflects higher allocations of net income to non-controlling interest as a result of certain fiscal '20 and '21 acquisitions as well as 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 year '22, we anticipate a combined tax and non-controlling interest rate as a percentage of net income to be approximately 25% to 27%. Moving on to our balance sheet and cash flow. As we previously mentioned, cash flow provided by operating activities remained strong, at $110 million in both the fourth quarter of fiscal '21 as well as '20. Cash flow provided by operating activities increased 9% to $444.1 million in fiscal '21, up from $409.1 million in fiscal '20. Our working capital ratio, current assets divided by current liabilities, was 3.2 as of October 31, '21 compared to 4.8 as of October 31, '20. DSOs of receivables improved to 44 days as of October 31, '21 compared to 45 days as of October 31, '20. We continue to closely monitor receivable collection efforts in order to limit our credit exposure. No one customer accounted for more than 10% of net sales, and our five customers represented approximately 22% and 24% of consolidated net sales in fiscal '21 and '20, respectively. Inventory turnover rate was 153 days for the year ended October 31, '21 as well as October 31, '20. The outlook. As we look ahead to fiscal '22, we expect the commercial air travel recovery to continue, particularly in certain domestic travel markets, perhaps slightly less so in international markets, even though the pandemic will likely continue to adversely affect the commercial aerospace industry as well as HEICO. International markets have not recovered to the extent of domestic markets. And while we are very confident of their future recovery and the potential sales increase, timing at this moment is uncertain. We said basically the same thing last year, and we were proven correct, and we're predicting the same thing this year. We remain cautiously optimistic that the ongoing worldwide COVID-19 vaccine rollouts, including boosters, will continue to positively influence commercial air travel and benefit the markets we serve. As we have all continued to see and learn, it's difficult to predict the pandemic's path in effect, including new factors such as new variants, vaccination rates, which can all impact our key markets. Also government activities, government shutdowns, travel restrictions and everything under the sun, therefore, we feel it would not be responsible to provide fiscal '22 net sales and earnings guidance at this time. But our ongoing conservative policies, extremely strong balance sheet and high degree of liquidity enable us to invest in new research and development, execute on our successful acquisition program and position HEICO for market share gains. I would like to end my remarks by again thanking our team members for their continued support and commitment to HEICO during these professionally and personally challenging times. Our executive team continues to be focused on your safety and your professional success. Collectively, we believe we've had great success in '21 and we look forward to all the opportunities ahead in fiscal '22. That's the extent of our prepared remarks, and I'd like to open the floor for questions.

The first question is from Pete Skibitski of Alembic. Pete, 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 a decentralized approach to business, where we've got entrepreneurial people running these businesses and 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 it. And frankly, 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. 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. I'm very proud of how our customers prepared for this and have responded. Some subsidiaries are seeing minimal to no impact while it's more pronounced in others. So it really varies across the business. Companies 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. We're not big believers 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 have a lot of ways to deal with it. Some of our companies have been able to design around issues with replacement components as well. Lead times vary by subsidiary, but overall we've been able to manage those pretty well. On pricing, of course we're seeing price increases on components and materials. We're like everybody else; we've managed those increases pretty well. Sometimes increases are small, sometimes they are larger, depending on the product and the subsidiary. Generally speaking, our customers understand that; they're seeing it across their supply chains, and they've accepted where we've adjusted prices. I expect that we'll have to continue to do that, which will help sustain our margins. It's important for us to keep offering the great value proposition we offer. We are not taking advantage of our customers; we're making sure we continue to offer excellent value while being compensated for our cost increases to sustain our margins.

And also, Pete, just to close, we have a number of our team members on the call, and I want to call them out specifically for their outstanding effort and dedication in making this happen. HEICO, while we're not afraid to invest in inventory, we've got very acceptable inventory turns. Unlike many other peers and competitors in the industry, HEICO did not take a big one-time inventory reserve in 2020 like many other companies did. We are able to support our customers by having proper and lean inventories because we buy the right stuff. That is rare in the industry today. Our people work extraordinarily hard to make sure they buy the right parts on the shelf, and we don't take these big one-time charges. If you look back at HEICO's history over the last 32 years, we have handled inventory obsolescence within our normal results. So again, I'm very proud of our people; they do a phenomenal job focusing on the details and making sure we've got the right parts on the shelf.

That's very helpful, guys. Maybe one last quick one for me. This Omicron variant 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 near-term demand? Is it having any impact at all? Or is it really kind of a black box right now? I'd love to get your feedback.

It's a great question. I did my quarterly reviews with our sales heads last week. As of last week, we did not see an impact. However, it's reasonable to assume this will impact the industry in some way, and we are prepared for it. We're still very optimistic. There's a lot of growth potential because not all of our markets have recovered. We still have a big potential in international markets, in particular Asia, and to a lesser extent Europe and South America, to see recovery. We've got plenty of green shoots ahead. There's no question Omicron will hold back the industry to some extent; we'll have to see what happens due to the severity and transmissibility of the variant in the coming days and weeks. But with HEICO's strong capital structure and focus on the customer, we believe we'll be fine. This is business as usual; the virus is unlikely to disappear soon, and we must be ready. HEICO is resilient, and we'll handle it; our people are resilient, and it won't 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 about incremental margins. If you look at FSG, I think we finished the year in the mid-40s percentage-wise, ETG in the low 20s. How should we think about what a good normalization rate is for both segments? Do they both trend back to the low 30s? Any puts and takes we should be thinking about?

I was pleasantly surprised with how the segments performed in '21. For the FSG, we're on a glide path. We're not expecting huge incremental bumps in their operating income percentage of revenues; we're expecting a glide back up to pre-pandemic levels. Pre-pandemic, we expected the FSG operating margin to approach 20%, and that's our target. From that point forward, history indicates the segment has growth leverage on its cost base, and you can eke out little improvements in margin as sales increase. So that's the direction we're heading for the FSG. ETG is very mix-sensitive, and the margin can bounce around. This year we posted about 30% margins in the quarter, and I'm pleased with that performance, but it could easily be less or more depending on mix and acquisitions. On an annual basis it's hard to predict with certainty where that margin will be. If historically it's been 27% to 30% for a long time, I expect it to stay within that range; it can vacillate due to acquisitions. If we buy a company with a 22% operating margin, that could be dilutive in the near-term, although if it generates cash and is a good purchase, we'd be comfortable; likewise, an acquisition above 40% margin could pull the segment margin up. Principally we look at ETG as a cash-return segment — EBITDA margins in the low 30s are fantastic and I believe that will continue. Does that help?

That's helpful. Maybe just a quick follow-up, Eric. Could you talk about what you're seeing out of your larger customers? I know FSG's top handful of customers represent a substantial portion of sales. What are you seeing there and opportunities to continue to grow share?

Great question. I met with our folks last week, and we're doing extraordinarily well with our top customers. Actually, we're doing extremely well with all of our customers. They've been more committed than ever to HEICO. We've supported them through the pandemic by maintaining new product development, our workforce and standard development rates. We're satisfying them with new products and adjacent products. They're extremely supportive, and I think we're growing market share with them and with everybody. I feel very good about that.

Thank you. The next question is from the line of Larry Solow with CJS Securities. Please go ahead.

Just a couple of follow-ups. The macro still has some crosswinds, but passenger traffic continues to recover consistently. HEICO's recovery seems a bit ahead of the general market and still behind 2019 levels, but ahead of many peers. Can you gauge the pace of recovery within HEICO and comment on market share gains and expectations going forward, particularly on the PMA side?

We continue to see market share gains. In 32 years of doing this, I've never seen a group more enthusiastic about the future than the folks I met with last week. There's plenty of opportunity; some areas haven't recovered yet and we expect recovery in 2022. Our customers are encouraging us to produce more and develop more. Given our strong customer service, competitive pricing, scale and ability to invest, I think the wind is at HEICO's back. For aftermarket businesses we've done particularly well; OEM-exposed businesses haven't seen as much recovery, which provides further upside potential as those markets recover. The narrow-body new-build cycle may not fully recover until around 2024 and wide-body later, but we believe there's ample upside. Our people are working hard and are optimistic.

Just wondering about seasonality. Q1 typically has a seasonal slowdown. Do you expect that this quarter? Or is seasonality skewed because of the overall ramp in spending?

That's a good question. I'm not trying to avoid it, but the truth is I really don't know. My sense is it will be fine but you'll see the traditional seasonality. Omicron isn't going to help things, so I think you'll see the usual seasonal pattern. That is an informed guess based on experience rather than current quarter sales data.

Victor, it sounds like defense and space have been flattish recently and a lot of growth has come from medical and other electronics. Do you expect those trends to shape fiscal '22 similarly?

Yes. As I mentioned on recent calls, our specialized electronic and other markets have been strong and I expect that to continue into '22 based on budgets we've received from subsidiaries. Defense has flattened somewhat and may remain flat or slightly down in the near term. Commercial space strength has moderated; overall I would expect flattening in those areas after a period of strength.

The next question comes from the line of Kristine Liwag with Morgan Stanley. Your line is now open.

Looking at the M&A pipeline, has Omicron affected the opportunities you're seeing? Are you seeing more opportunities or fewer during this uncertain period?

I don't think Omicron has affected this at all. We have a very strong pipeline; in fact it's almost too strong because we're constantly doing due diligence. We have a number of transactions in the pipeline. We can't predict if they'll close — historically most do, but we can't guarantee it. The ones we're evaluating are within HEICO's normal pricing and should be accretive in the first year if they close. There are plenty of opportunities, and we haven't seen a change because of Omicron.

Great. Victor, on space, can you speak to trends? We've seen more space companies raise capital and many have leased back in the past few months. Does that increase the addressable market for you, creating a new pool of customers that could pay suppliers?

We think it does increase our potential market, and we are engaging with some of these companies. The key is to do it profitably and at a production rate that makes sense for our businesses. In space, that's always the challenge. I expect to see more smaller start-ups addressing newer parts of the market, which could provide opportunity for our higher-end products. We're not interested in pursuing lower-end commoditized work just to capture sales.

The next question is from the line of Robert Stallard with Vertical Research. Please go ahead.

Could you go back to the market share situation? Are there particular product areas or aircraft types where you're seeing more success than others?

It's pretty broad-based across the board. We're seeing market share gains across our traditional and historic markets, in all product types and geographies. We generally avoid naming specific customers, product types or geographies publicly because of competitive reasons, but the gains are broad-based.

On the M&A pipeline, is there more activity in Flight Support versus Electronics, or are both seeing a lot of interest?

Both businesses are very strong and both pipelines are active. HEICO has the firepower to deploy capital in both areas, so it's opportunistic rather than mutually exclusive.

The next question is from the line of Ken Herbert with RBC Capital Markets. Please go ahead.

Eric, regarding the faster recovery for domestic travel versus international travel — is it fair to say that maintenance spending with you for domestic fleets in fiscal '22 can be back to pre-COVID levels? How do we think about the recovery for narrow-body versus wide-body or domestic versus international fleets?

It's unlikely domestic narrow-body will be back to 2019 levels in 2022; if it happens, it's more likely toward the end of the year. Some fleets have been retired which creates headwinds. I think 2023 is a more reasonable expectation for full recovery to '19 levels. International and Asia remain much lower; Europe is also struggling more than North America. There's good upside potential in those markets when they recover.

Thanks. On cargo exposure — air cargo has been very strong through the downturn and cargo fleets are older. How is your cargo exposure? Are you seeing greater growth there?

We're doing very well in the cargo market — very strong for the obvious reasons — and we anticipate that will continue. We have very good relationships with cargo customers and a broad product line, so I feel very good about the cargo markets.

If you have any friends running cargo companies, let them know they can save money with HEICO and get value from our solutions.

Two more questions: Given the trend line, do you expect FSG to reach 20% EBIT margins at some point in fiscal '22? Are there headwinds to modeling segment margins?

Ken, as of today there are no real impediments I see other than time. All parts of the Flight Support Group are doing quite nicely. Once we get back to 2019 sales levels, I would expect the FSG to approach that 20% margin. Whether that happens in 2022 is uncertain; it's mainly a timing issue rather than a structural impediment.

The next question is from Michael Ciarmoli with Truist Securities. Please go ahead.

Nice results. Eric or Carlos, staying on domestic versus international: Could you exit fiscal '22 in Flight Support at a quarterly run rate close to 2019? Do you need international and wide-body activity to start spending to get back to that quarterly run rate?

It's reasonable to expect that international and wide-body recovery will be important to returning to 2019 quarterly run rates. We haven't modeled every bifurcated recovery permutation. We feel strongly it will come back and is an important market for us. We're very confident and are continuing to develop products for those markets.

I'm feeling very good about our market share gains. Our sales teams have done a good job being accessible to customers and finding or developing new products to help them be more successful. That's a wildcard that could get us to target levels sooner, but it's hard to quantify.

Got it. On new product development: as LEAP engines and GTFs start to come in for shop visits, do you have content on those platforms? Could that be accretive as those engines come in?

Normally we don't develop products that generate significant sales this early in the life cycle, so I wouldn't expect something material very soon. We don't comment on specific products, but typically new engine platforms take time before material aftermarket content is realized.

The next question is from Gautam Khanna with Cowen. Your line is open.

Happy holidays. First, within FSG sub-segments, how did aftermarket parts, R&O, component repair, and specialized products differ sequentially? Where do you have better visibility into trends for the next quarter or two? Was R&O picking up?

If you're referring to recent quarter trends, Q4 '20 was a weak quarter, but growth has been strong in our parts distribution and repair businesses. They have generally grown in tandem; one quarter one may be stronger and the next quarter flips. Trends in those two businesses are similar and very strong. Specialty Products, which houses some defense and OEM business within FSG, is doing nicely and had nice organic growth in Q4, but for the year it has lagged due to new-build activity being softer. That OEM exposure is tied to Tier 1 purchasing for new Boeing and Airbus builds. I think that business will improve in '22 on top of continued strength in parts and repair.

On M&A, are you seeing more small tuck-ins like recent years, or any larger opportunities that would be more consequential?

We look at opportunities of all sizes — small transactions in the low hundreds of millions as well as larger ones, potentially into the billions. Our criteria remain the same: we focus on cash generation and net income. We won't buy something just to add revenue if it's not accretive.

How many new PMA parts do you anticipate adding to the portfolio over the next 12 to 18 months?

It would be consistent with what we've done historically. We're typically in the 400 to 500 PMA parts per year range. That number can vary depending on complexity, but expect it to be in that area.

The next question is from Noah Poponak with Goldman Sachs. Your line is open.

Where would you pin the likelihood that the cash spent on acquisitions line item in fiscal '22 is the highest amount the Company has ever deployed in a single year?

I'm not sure I understand the exact phrasing of your question. Are you asking whether we will spend more on acquisitions this year than ever before?

We never know in advance. We're opportunistic and will pursue both smaller and larger acquisitions. We would like to deploy more capital in 2022 than ever, but it depends on opportunities that meet our criteria. We have an available unsecured revolver and banks have indicated they would provide additional capacity if needed. We focus on deals that meet our return criteria — typically cash payback in 7 to 10 years — and we won't overpay on speculative futures. So while we'd like it to be our biggest year, we can't predict it.

We are working very hard, and we'd love nothing more than to deploy more capital in 2022 than ever. We are careful with shareholder capital; we do our homework and run all scenarios. But we're very focused and would love it to be the largest acquisition year in our history if the right opportunities present themselves.

Thanks, that's helpful. One other question on international and corporate travel: this seems driven by government restrictions and policies. From your close relationships with airlines, are there signals on what needs to change for cross-border travel to recover meaningfully? Is it Asia moving away from zero-COVID, or coordinated cross-border discussions, or case counts? Any incremental detail you can provide on logistic pathways would be helpful.

Airlines are focused on doing everything they can to encourage travel — vaccinations, testing, and adapting to government requirements. They are resilient and creative and will adapt to different government rules. The industry has matured to manage COVID as an ongoing issue; airlines will be flexible and try to keep people traveling. There's not one single magic toggle; we'll have to manage across a range of outcomes.

The next question is from Colin Ducharme with Sterling Capital Management. Please go ahead.

Carlos, a couple on cash flow deltas: trying to link demand to contributors on the cash flow statement — AR, inventory, and change in current liabilities. Can you anecdotally tell us what you're hearing from subsidiaries about the increase in AR? Is the current liability change due to deferred revenue builds or other items?

A lot to unpack. Regarding receivables, Q4 receivables increased somewhat in line with sales growth — FSG sales were up 34% over Q4 '20 — so you see a build in receivables to support that growth, which is a good thing. The quality of receivables is good; we haven't seen issues from subsidiaries. Inventory build is also correlated to sales growth and is a quarterly function — with 20% overall sales growth in Q4, a modest inventory build is expected. We've encouraged subsidiaries to go long on inventory if needed to address lead-time issues and shortages. Regarding current liabilities movement, remember in fiscal '20 the Company had little to no performance-based compensation in FSG; now you have bonuses, commissions and accrued selling activity that increases accruals at year-end until paid. Much of the movement in current liabilities is performance-based compensation related.

Helpful. On capital allocation, you've got a lot of dry powder. Will you prioritize the M&A pipeline (putting balance sheet to work) versus a share repurchase program? You are very underlevered — why not be more aggressive with buybacks while still maintaining a conservative posture?

We focus on long-term value and growing the company. We are underlevered now, and we do not intend to use buybacks to shrink the company. Our strategy for 31 years has been to grow the company through acquisitions and organic growth to create shareholder value. We believe our long-term shareholders appreciate that approach. We're not going to change our disciplined acquisition policy to pursue buybacks simply to please short-term market participants. We'll continue to grow the company aggressively when we find the right acquisitions.

I appreciate that posture and your history, but as long-term shareholders ourselves we press on the point of shareholder-per-share value through modest buybacks in conjunction with M&A. Just pushing the point respectfully.

We hear you. We always run all scenarios and we look at everything. We're thorough in our analysis and very optimistic on acquisitions currently.

The next question is from Louis Raffetto with UBS. Your line is open.

On M&A: can I confirm that acquired sales for 2021 were about $70 million? Based on what's already closed for '22, will that be about the same or a little less?

You're right on the number for 2021. For 2022, based on what's closed today it may be a bit less, but if things go according to plan we hope to have more. Again, we plan on deploying capital and hope to have larger acquired sales next year if deals close.

For deals that don't close, what are the typical reasons? Due diligence findings, someone else outbids you, or other reasons?

There are many reasons — due diligence discoveries, terms, business changes. Lots of different things can happen, and we can't give a single reason.

I will add that it's pretty rare for us to get to serious due diligence and contract negotiations that don't close. Once we get to a certain point, deals tend to close.

The next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.

Two for Eric. First, FSG tends to keep a large discount to OEMs. Given suppliers and OEMs raising prices, how are you thinking about pricing? You're likely seeing cost and labor headwinds — how are you gauging pricing and passing through increases?

Yes, we're seeing cost pressures and are focused on maintaining margins. We'll move along with the industry and pass through increases where appropriate. We don't want to take advantage of our customers, but we do expect to be compensated for cost increases. Sometimes there can be a lag due to contracts, but our intention is to move with industry pricing to sustain margins.

On Omicron and recent variants — having been through previous variants, do you see any change in airline behavior relative to case peaks versus revenues? How does that work for you?

Thus far variants have produced natural variation in day-to-day ordering patterns, making it hard to isolate an effect. Sales and bookings have been strong. It's reasonable to assume Omicron will impact us; it depends on severity and transmissibility. We're watching it closely, but it's not changing our business practices. With a strong balance sheet and great people, we're confident we'll navigate it. In fact, increased strain on airlines could position HEICO to pick up market share.

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; we appreciate it. We are available to answer questions — you can call Victor, Eric, Carlos, or myself. We look forward to the next call, which will be at the end of February for the first quarter of fiscal '22. I wish everybody a very happy and healthy holiday season. Stay healthy, 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.