Heico Corp Q1 FY2022 Earnings Call

Welcome to HEICO's Fiscal Year 2022 First Quarter Earnings Results Conference Call. My name is Polly, and I will be the operator assisting today. Certain statements made during this call will constitute forward-looking statements which are subject to risks, uncertainties, and contingencies. HEICO's actual results may differ materially from those expressed and/or implied by those forward-looking statements as a result of factors including but not limited to the severity, magnitude, and duration of the pandemic, HEICO's liquidity and the amount and timing of cash generation; lower commercial air travel caused by the pandemic and its aftermath; airline fleet changes or airline purchasing decisions which could cause lower demand for our goods and services; product specification costs and requirements which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors which could reduce our sales, our ability to introduce new products and services at profitable pricing levels which could reduce our sales or sales growth; product development or manufacturing difficulties which could increase our product development and manufacturing costs and delayed sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk, interest, foreign and current exchange and income tax rates; economic conditions, including the effects of inflation within and outside of the aviation, defense space, medical and telecommunications 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 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 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 turn the call over to Laurans Mendelson, HEICO's Chairman and Chief Executive Officer. You may begin, sir.

Polly, thank you, and good morning to everyone on this call. We thank you for joining us and welcome you to HEICO's first quarter fiscal '22 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 our operating results in detail, I would like to take a moment to thank all of HEICO's talented team members for delivering another strong quarter. Your continued focus on exceeding customer expectations and operational excellence has translated into excellent results for shareholders, and I'm encouraged by the steady improvement in the operating results over the past 18 months. I'm also optimistic that this trend will continue during the remainder of this fiscal year. I will now summarize the highlights of the first quarter fiscal '22 results. Consolidated operating income and net sales in the first quarter of fiscal '22 improved 23% and 17%, respectively, as compared to the first quarter of fiscal '21, driven mainly by our 13% quarterly consolidated organic net sales growth as well as the favorable impact from our fiscal '21 acquisitions. The Flight Support Group reported quarterly increases of 103% and 37% in operating income and net sales, respectively, as compared to the first quarter of fiscal '21. These results principally reflect strong 48% quarterly organic growth for commercial aerospace parts and services. Additionally, this marks the sixth consecutive quarter of sequential growth in net sales and operating income at Flight Support. Our total debt to shareholders' equity improved to 10.1% as of January 31, '22, and that was down slightly from 10.3% as of October 31, '21. Our net debt, which we define as total debt less cash and cash equivalents, of $112.3 million at January 31, '22, compared to shareholders' equity ratio improved to 4.8% as of January 31, '22, and that was down slightly from 5.6% as of October 31, '21. Our net debt-to-EBITDA ratio improved to 0.22x as of January 31, '22, and that was down slightly again from 0.26x as of October 31, '21. We have no significant debt maturities until fiscal '24, and 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 $78 million in the first quarter of fiscal '22, that compared to $107.2 million in the first quarter of fiscal '21. The decrease is principally attributable to an investment of $54.8 million in working capital, partially offset by an $18 million increase in net income from consolidated operations. The investment in working capital includes a $29.6 million increase in inventories, which reflect strategic buys within distribution businesses and to support an increase in the consolidated backlog, as well as a decrease in accrued expenses resulting from the payment of fiscal '21 accrued performance-based compensation. We added to inventory to prevent inventory shortages. So our companies would not be running out of stock and could complete their manufacturing and processes and ship. We think that, that was a very wise decision. In January '22, we paid our regular semiannual cash dividend of $0.09 per share. This represented our 87th consecutive semiannual cash dividend since 1979. In January '22, we reported that our Sierra Microwave subsidiary designed and manufactured flight-critical components in the James Webb Space Telescope, which is considered to be the premier observatory of the next decade. We take great pride in their involvement in this amazing feat. Moving over to recent acquisition activity; February 22, we announced that Flight Support entered into an agreement to acquire 74% of the membership interest of Pioneer Industries LLC, a specialty distributor of spares for military aviation, marine, and ground platforms. The remaining 26% will continue to be owned by certain members of Pioneer's management team, and closing is expected to occur in the second quarter of fiscal '22. We expect this acquisition to be accretive to earnings within the first 12 months following closing. In my own mind, this was a very timely acquisition because of the events taking place in Ukraine. We think our military budget is probably going to be discussed for some additional military budgets, and I would not be surprised to see that. We continue to find excellent M&A opportunities, which meet our high standards for acquisition. Due diligence is ongoing on many of these opportunities, and I'm optimistic that we will be successful in closing additional transactions in fiscal '22, all of which I believe will be accretive to earnings. 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 37% to $272.7 million in the first quarter of fiscal '22, up from $199.3 million in the first quarter of fiscal '21. The net sales increase reflects strong organic growth of 30% as well as the impact from our profitable fiscal '21 acquisitions. The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services resulting from continued recovery in global commercial air travel compared to the first quarter of fiscal '21. The Flight Support Group's operating income increased 103% to $52.4 million in the first quarter of fiscal '22, up from $25.8 million in the first quarter of fiscal '21. The operating income increase principally reflects an improved gross profit margin, mainly from the previously mentioned net sales increase across all of our product lines. Additionally, the operating income increase reflects the previously mentioned net sales growth and the benefit of SG&A efficiencies realized from higher net sales volume. The Flight Support Group's operating margin increased to 19.2% in the first quarter of fiscal '22, up from 13% in the first quarter of fiscal '21. The operating margin increase principally reflects the previously mentioned improved gross profit margin as well as a decrease in SG&A expenses as a percentage of net sales, mainly reflecting the previously mentioned efficiencies. Now, I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.

Thank you, Eric. The Electronic Technologies Group's net sales were $222.3 million in the first quarter of fiscal '22, which was comparable to the $223.6 million in the first quarter of fiscal '21. The Electronic Technologies Group experienced continued growth in medical and other electronics products net sales, as well as from the impact of our fiscal '21 acquisitions, offset by a slight decrease in defense and space product net sales in the first quarter of fiscal '22. As has historically been the case, Electronic Technologies Group sales tend to be lumpy by quarter, and we expect that this year's three remaining quarters of sales will each be greater than the first quarter sales, which were reduced as a result of many team members being out from work as the Omicron variant surged. We witnessed the same issue at both vendors and customers, particularly in January, which delayed production, deliveries, and orders at various subsidiaries. We expect these effects to be resolved during the remainder of our year. The Electronic Technologies Group's operating income was $55.6 million in the first quarter of fiscal '22 as compared to $60.1 million in the first quarter of fiscal '21. The decrease principally reflects a lower gross profit margin, mainly from an increase in new product research and development expenses as a percentage of net sales to support ongoing new product and development activities as well as lower levels of efficiencies on SG&A expenses during the quarter. The Electronic Technologies Group's operating margin was 25% in the first quarter of fiscal '22 as compared to 26.9% in the first quarter of fiscal '21. The lower operating income as a percent of net sales principally reflects an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned reduced efficiencies as well as the previously mentioned lower gross profit margin. I turn the discussion back over to Laurans Mendelson.

Consolidated net income per diluted share increased 24% to $0.63 in the first quarter of fiscal '22 and that was up from $0.51 in the first quarter of fiscal '21. The increase principally reflects the previously mentioned higher consolidated operating income. Depreciation and amortization expense totaled $23.2 million in the first quarter of fiscal '22 and that was up slightly from $23 million in the first quarter of fiscal '21. Significant ongoing new product development efforts are continuing at both Electronic Technologies and Flight Support and this is critical for the development of new products and technologies that fuel our growth. R&D expense increased to $18.4 million or 3.8% of sales in the first quarter of fiscal '22 and that was up from $16.2 million or 3.9% of sales in the first quarter of fiscal '21. Consolidated SG&A expenses were $91.4 million in the first quarter of fiscal '22 as compared to $78.1 million in the first quarter of fiscal '21. And that's in line with our large net sales growth and is inclusive of a $3.8 million higher corporate expense, mainly attributable to increased performance-based compensation expense as well as the suspension of corporate salary reductions as of the end of the first quarter of fiscal '21. Consolidated SG&A expense as a percentage of net sales was 18.6% in the first quarter of fiscal '22 and that compared to 18.7% in the first quarter of fiscal '21, a slight drop. Interest expense decreased to $0.8 million in the first quarter of fiscal '22, down from $2.4 million in the first quarter of fiscal '21, due to a lower weighted average borrowing balance outstanding under our revolving credit facility. The effective tax rate was 4.1% in the first quarter of fiscal '22 and that compared to 2.9% in the first quarter of fiscal '21. The slight rate increase reflects an unfavorable impact from tax-exempt unrealized losses in the cash surrender value of life insurance policies relating to the HEICO leadership compensation plan during the first quarter of fiscal '22 as compared to tax-exempt unrealized gains recognized on such policies in the first quarter of fiscal '21, partially offset by a larger tax benefit from stock option exercise recognized in the first quarter of fiscal '22. HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal '22 and '21, with figures of $17.8 million and $13.5 million, respectively, due to strong appreciation in HEICO stock price during the option lease holding period. Net income attributable to noncontrolling interest was $7.3 million in the first quarter of fiscal '22, compared to $5.7 million in the first quarter of fiscal '21, primarily reflecting aggregate increase in the operating results of subsidiaries in which noncontrolling interests are held. For the full fiscal year '22, we continue to estimate a combined effective tax rate and noncontrolling interest rate of between 25% and 27% of pretax income. Our financial position and forecasted cash flow remain very strong. Working capital ratio improved to 3.6x as of January '22, up from 3.2x as of October 31, '21. We continue to closely monitor all receivable collection efforts in order to limit our credit exposure. No one customer accounted for more than 10% of net sales, and our Top 5 customers represented approximately 22% and 24% of consolidated net sales in the first quarter of fiscal '22 and '21. Inventory turnover rate decreased to 154 days for the period ended January 31, '22 and that was down from 164 days for the period ended January 31, '21. As we look ahead to the remainder of fiscal '22, we expect global commercial air travel to continue on a path to recovery despite the potential for additional pandemic variants. We remain cautiously optimistic that the ongoing worldwide COVID-19 vaccine rollout, including boosters, will continue to positively influence global commercial air travel and benefit the markets we serve. However, it remains very difficult to predict the pandemic's path and effects, including factors like new variants, vaccination rates, potential supply chain disruption, and inflation which can impact our key markets. Therefore, it would not be responsible to provide fiscal '22 net sales and earnings guidance at this time. However, we believe that our ongoing conservative policies, very strong balance sheet, and high degree of liquidity enable us to continually invest in new research and development, take advantage of periodic strategic inventory purchasing opportunities, and execute on our successful acquisition program, all which collectively position HEICO for market share gains. In closing, I would like to thank our incredible team members for their continued support and commitment to HEICO. The remainder of fiscal '22 looks very promising. I do believe that our culture of ownership and entrepreneurial excellence will provide the necessary foundation to win in the marketplace. And now I would like to open the floor for questions.

Your first question comes from Robert Spingarn with Melius Research.

Hi, good morning, everybody. Larry, thank you for all the color. I have a couple of questions here for Victor and for Eric. Victor, I guess I'd start with the R&D and you talked about the margin pressure there. Is that elevated R&D across all of your product lines? Or is there a specific target market? And so where are you concentrating that spend? And is there a seasonality here? Because I see a similar margin decline last year in the first quarter. So would you expect margins to rise from here?

Rob, thank you for your questions. The spending is quite extensive across our product lines, although it does differ by business. There might be seasonal aspects to consider, but I'm not sure this year if that applies. Throughout the year, some of our businesses may require more spending at certain times, which can impact our planning. The majority of our R&D expenses are associated with personnel, followed by costs from third-party vendors, testing, and purchasing parts, some of which are discarded due to destructive testing. Each case would need to be evaluated individually. Regarding our margins, as I've mentioned previously, if you add approximately 400 to 500 basis points for amortization, we reach around 30% on an operating basis, which I view as related to cash flow. These margins are quite substantial, and I believe we'll remain near that target, although it may fluctuate slightly from quarter to quarter.

Okay, all right. That's very helpful. And then, Eric, I've got one for you. Just really on the supply chain. Are you seeing concerns from the airlines about the ability to procure enough spare parts from the OE component manufacturers, that's maybe driving an accelerated interest in your products?

Good morning, Rob. That's a very good question. We made the conscious decision to retain a higher percentage of our people, and to make sure that we invested in inventory in order to be able to support the market when it recovered. So the short answer is yes. I think that we are picking up some market share due to competitors not being able to supply. But I think the majority of the market share that we're picking up is because customers are approving parts that they hadn't purchased before from us. My people are more optimistic than I've ever seen them in terms of HEICO's market share capture and what the future looks like for us. So yes, some of the short-term lack of supply has helped, but I think it's more about really the long-term development positioning of the product line which has helped us so much.

So it's really driven by the value opportunity that the customers are looking for?

Correct.

Correct.

Okay. Is there any evidence that this is also increasing the pace of new part development? Are airlines and customers approaching you and asking if you can develop these other parts that you currently do not have for similar reasons?

The answer is yes. I would say that the airlines have been fairly lean in terms of staff going through the crisis. While they've had to focus on many things, I think that the opportunities that we're seeing are more driven by us in the recent past rather than being driven by the customers but the customer support is just as strong, if not stronger, than it was in the past. Again, it's due to the competitive nature of our products and the desire for the airlines to have alternative sources at competitive prices.

Okay. Thank you so much. Appreciate it.

And your next question comes from the line of Peter Arment with Baird.

Yes, good morning, Larry, Victor, and Carlos.

Good morning.

Hey Eric, I wanted to revisit the topic of margins. It's great to see that you've made a full recovery. Are you noticing any structural gains as a result of the pandemic? I know you've been focused on cost management, but you've also been cautious with pricing. Could you share your thoughts on margins?

You're talking structural gains in margins specifically as opposed to end customers?

Yes.

The 19.2% honestly surprised me on the upside. We thought that we would get back to our historical level, but I thought that it was going to take a longer period of time in there. And I think that speaks to frankly, the strength of our people and the strengths of the product offering. So we'll have to see what develops going forward. But I don't see any reason why we shouldn't get back to our old margins fairly soon and possibly exceed them. I want to be careful and not get in front of myself and predict an increase in them. But I can tell you, based on the confidence that I see coming out of the sales and marketing group as well as the businesses, I think that that's a real possibility.

That's really helpful. And then just on Eric, just staying on the kind of the demand environment. How did you see the cadence of orders during the quarter, because you obviously had to deal with Omicron. And are you seeing any changes now as we kind of prepare for it or could be a busy spring and summer season?

Yes. As I've mentioned in the fourth quarter call in December, we thought Omicron would be negative. And of course, in general, it was negative for the industry. However, there has been very strong strength. I would say the quarter was fairly consistent across it. The forecast going forward is consistent as well and very strong. I think that's a combination of our market share gains as well as the market just being strong.

I appreciate it for all the color. Thanks, guys.

Thank you.

And your next question comes from the line of Peter Skibitski with Alembic Global.

Hey, good morning, everyone. Just a follow-up on Peter's question with regard to FSG margin rate. I think we're really talking about a lot of positive volume impact. I'm interested in just the net inflationary impact to the business. Are you guys seeing gains net of inflation or is inflation holding you back? I guess that kind of gets to pricing? Could you talk about all that?

Yes, absolutely. With regard to gains, I feel very confident in our ability to maintain gains net of inflation. We've been very cognizant to ensure that we pass those added costs on to our customers. We're not trying to take advantage of them to change the value proposition, but we do need to make sure that we get our costs covered. So I can tell you that our businesses, yes, they have seen cost increases in all the usual areas, and they've been extremely proactive in making sure that we get those price increases to maintain our margins and not give up ground because of inflation.

All right, appreciate that. Just one last one for me. Maybe you guys are anticipating this a week or two weeks ago, but certainly with the news this morning of the Russian invasion, do you foresee any near-term impact to your business? Do you change how you manage the business? And do you get concerned about supplies, like titanium, that sort of thing? Just interested in your kind of top-level thoughts.

Yes. If you look at our businesses, I think one of the key strengths of HEICO is the decentralized nature. We've got these basically 60 decentralized business units who are each very intimate and knowledgeable about the products that they use and they work very quickly with their suppliers to get what they need. That's not to say that we don't have occasional shortages as we do. However, I would not say that there is no one input that is so predominant that would have a major impact across all of HEICO. Specifically, if you look at titanium coming out of Russia, yes, we are a user of titanium. But I think that we've got the ability to buy titanium in the quantities that we use from a variety of sources. So we're typically able to mitigate that. And typically, it's not going to be a major impact to us like it would be to other folks who require very, very large quantities of this. I think events of today prove the importance of having a strong defense, not only in the United States and in NATO but around the world. When the world goes through periods of time without conflict, I think events like today serve as very good reminders that there'll always be somebody out there who wants to destabilize. The best way to ensure peace is through a strong defense. We continue to be very bullish on defense as well as the commercial side, and we really like the nature of our businesses.

Great. Thanks, guys.

Thank you.

And your next question comes from the line of Larry Solow with CJS Securities.

Hi, it's actually Lee Jagoda for Larry this morning. Good morning.

Good morning.

So returning to the discussion on inflation and pricing, considering that both you and the OEM parts producers are experiencing inflation and are adjusting prices to account for these increases, how does this affect the difference between OEM parts and PMA parts? And does this make you more competitive during times of rising material costs?

I would say that it does make us more competitive. The OEM responses tend to be very aggressive, and they tend to be in excess of their true cost changes. So we've got the ability to create additional value to ensure that we cover our costs and make sure our margins don't shrink as a result of it. I think it does make our product offering even more compelling.

Okay. And then just looking at the FSG revenue in Q1, it looks like we're about 5% below where we were in Q1 of 2019. Obviously, not all organic because we have some M&A in there, but that was also despite the Omicron impact during Q1. So if we look forward and assume that the Omicron impact is less in the next few quarters than it was in Q1, is it a reasonable assumption to think that FSG revenue looks closer to where it was in 2019 for the full year, just given the Q1 performance? And if for some reason, that's not the case, what are the other factors we should be thinking about to make that not the case?

So this is Carlos. If we exclude the acquisitions we've made since then, we anticipate a gradual increase for the rest of the year until we reach those levels. I hope we achieve that overall, but we expect that by the end of this fiscal year for HEICO, we should be at a run rate similar to 2019, possibly by the end of this year or the first quarter of '23. That has been our objective since the start of this crisis and aligns with our expectations. While we're not providing guidance for the entire year, I hope this helps clarify where you're heading with your question.

It is helpful. And was your commentary on FSG specifically or both segments?

FSG specifically.

And your next question comes from the line of Ken Herbert with RBC Capital.

Hey, hi. Thanks. Carlos, maybe I could just follow up on that or Eric. It looks like organically, the last three quarters, FSG revenues have grown about, call it, mid-single digits sequentially. Is there any reason that sort of sequential growth in the segment shouldn't change as we think about the next three quarters here or for the year?

Hi Ken, it's Eric. I think that we're going to continue, as I mentioned, to grab market share. Our sequential growth will continue. If you look, our first quarter was frankly well ahead of what anybody expected. And I can tell you, in particular, over on the aftermarket side, the quarter-over-quarter change was really quite strong. So I think yes, as the year continues, we're going to continue to post increases. I don't know if Carlos has got added color on.

Yes. I think, Kevin, that's probably the right way to look at it because what that does is it grinds us north as opposed to assuming that we'll have peaks and valleys throughout the year. We continue to believe that it's just going to be more of a linear run back to the 2019 levels. And whether it's 5%, 4%, 10%, whatever it is, it's going to get us back at a rate that is more linear than jumping, at least in the FSG. To Eric's point, one thing that's hard to predict is the strength that we're going to have in any one particular market segment. I think Eric is pointing out that our aftermarket was incredibly strong in Q1, which typically for HEICO is probably our down quarter, it's been historically our softest quarter due to fewer travel days, and operations being limited. We were very pleased with the FSG's performance in Q1. It exceeded what we thought the company would do.

That's great. If I project that, it seems like you have another quarter of relatively easy comparisons this period, given the timing. In the second half of fiscal '22, however, you will be facing more difficult comparisons within FSG. Nevertheless, it appears that you should still be able to achieve significant growth compared to historical averages and potential traffic growth. Is there anything else you would highlight, Eric, that might help to sustain above-trend growth in the latter half of the year based on current market conditions?

I think we're going to be comfortably ahead in the back half of the year as well. Given everything that we know today with regard to Omicron, Ukraine, I feel confident in predicting continued growth. When you look at our commercial aftermarket, the quarter-over-quarter change has really been very, very good. If our growth is going to continue, based on what we see today, it's not going to be limited in our first and second quarter. We're going to grow substantially in the third and fourth quarter as well.

Great. No, that's excellent. And if I could, just one for Victor. You called out, Victor, in the quarter, some supply chain and Omicron-related disruptions. Is it possible to size that a little bit or maybe think about within the defense portfolio, specifically within ETG, how that could have looked organically, excluding some of these one-time disruptions?

Yes. It's a good question. The answer is, the disruptions I was talking about are mostly actually people-related, I think as I commented. I think at one point in January, I made a rough estimate that we had close to 10%, maybe 8% of our people in ETG out because of COVID, either they had it or exposed to somebody who had it or they were caring for somebody. There was a point in January when the country and the world were experiencing that surge. I went into January believing our sales would be at least $10 million higher than where they wound up. And that's why I pointed out. ETG is a great business. They're great margins over time, but it tends to be lumpy like that. Something else I should comment on; I think I've been saying it for over a year now that we thought defense budgets would moderate, drop, or flatten out at the very least. Now what's transpired recently may change that calculus who knows. We'll see. But this is not outside of our contemplation, certainly.

Great. Thank you very much, Victor.

Thank you.

Our next question comes from the line of Michael Ciarmoli with Truist Securities.

Hey, good morning, guys. Thanks for taking the questions here. Maybe, Eric, just can you give a little bit more color on what you're seeing from your customers regarding wide-body ordering and parts procurement? It seems like the airline industry, in general, is getting ready for a pretty big uptick in international travel. Are you seeing that demand flow through yet?

Yes, we are starting to see widebody recovery. If you look at the statistics, obviously, domestic is stronger and followed by Europe. Of course, Asia and South America are still depressed. But we do see continued recovery in those markets, including the wide-body. People are getting ready for a good wide-body increase in demand here.

Back to Ken's line of questioning. I mean, as these carriers prep for the summer season, does that create a step function increase at all in your 2Q FSG revenues and maybe bleed into early 3Q? Or do you think you've kind of got all that contemplated?

I think our forecast takes that into account. And that's one of the reasons why I continue to be very bullish, particularly in our aftermarket area but also in our new OE equipment areas as well, seeing continued growth throughout the fiscal '22 and '23 due to market share gains as well as recovery.

Got it. And then back to the FSG margins. I mean you're still basically running revenue maybe give or take $50 million below your quarterly run rate high. You've been getting really good incrementals. You talked about the efficiencies. I mean, you're in shooting distance already with the margins. Assuming you've got some sustained efficiencies, better cost takeout. I mean could we see these FSG margins get into that 22% to 23% range once we're fully recovered?

Mike, this is Carlos. Look, we do expect at some point in the future here in the near future that we will get back to approximately 20% operating margins on a sustained basis. During COVID, we're thankful we didn't structurally change the business. As such, we kept that structure in place. I would be cautious to model in or think about expanded margins at higher interest. I think that what you'll see in the FSG is once we level out and get back to '19 run rate growth, you ought to witness what happened historically. If you look back over 15 years, you will see FSG's margins just had incremental pickups, that was a function of growth in the business and really efficiencies on our fixed costs and SG&A expenditures. I think that would continue, but I wouldn't anticipate that for the near term. That's more of an intermediate play.

No, that's great. And if I could, just one for Victor. You called out in the quarter, some supply chain and Omicron related disruptions. Is it possible to size that a little bit or maybe think about within the defense portfolio, specifically within ETG, how that could have looked organically, excluding some of these one-time disruptions?

The disruptions I was talking about are mostly actually people-related. I think at one point during January, I made a rough estimate that we had close to 10%, maybe 8% of our people in ETG out because of COVID, either they had it or exposed to somebody who had it or they were caring for somebody. So it affected our productivity but should resolve itself over the course of the year. In general, we saw a dip of about $10 million in revenue due to that disruption.

Could you share your insights on the submarkets, particularly regarding repair and component repair compared to the PMA parts? Are the trends similar, or are you noticing any discrepancies? What might account for those differences?

I would say that our commercial aftermarket, including PMA, repair, and distribution, is all showing similar improvement. While there has been notable strength in the PMA segment, our overall aftermarket is performing exceptionally well. There may be instances where one segment outperforms another, but they are all in comparable positions. Our current and projected inductions align with these figures. We have the flexibility to increase capacity if needed, and we will monitor market developments closely.

Additionally, we started to see life out of Specialty Products to become a tailwind for us going into '22.

Thanks, guys. I appreciate it.

And at this time, there are no further audio questions. Are there any closing remarks?

The only closing remarks are, we thank everybody that's been on this call for their interest in HEICO and for their questions. We look forward to having our second quarter call in about three months from now. We wish you all a very good day and we look forward to speaking with you. If you have questions in the meantime about HEICO, Eric, Victor, Carlos, and I are available. Give us a call, send us an email, and we'll set up an appointment to speak with you. Thank you and that's the end of our comments for this morning.

And thank you for your participation. This concludes today's conference. You may now disconnect.