Earnings Call Transcript - HEI Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing-by and welcome to the Fiscal Year 2020 Fourth Quarter and End of the Year Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today’s conference is being recorded. Certain statements in today’s call will constitute forward-looking statements, which are subject to risk, 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 a cash generation; the 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 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 competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth, product development or manufacturing difficulties, which could increase our product development and manufacturing costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense, space, medical, telecommunications, and electronic 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 or reading a transcript of 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. I'd now turn the call over to Laurans A. Mendelson, HEICO's Chairman and Chief Executive Officer. Thank you. Please go ahead.

Laurans Mendelson, Chairman and CEO

Thank you very much, and good morning to everyone on this call. We thank you for joining us, and we welcome you to this HEICO fourth quarter and full fiscal 2020 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Erich 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 Macao, our Executive Vice President and CFO. Now before reviewing our fourth quarter and full fiscal year results, I'd like to take a few moments to discuss the impact on HEICO’s operating results from the COVID-19 global pandemic. The results of operations in fiscal 2020 were significantly affected by the COVID-19 global pandemic. The effects of the pandemic and related actions by governments around the world to mitigate its spread has impacted our employees, customers, suppliers, and manufacturers. Since the beginning of the pandemic in March 2020, we have implemented health and safety measures at our facilities in accordance with the CDC guidelines to protect team members and mitigate the spread of COVID-19. Most of our facilities are considered essential businesses and have remained operational during the pandemic. We are thankful for the outstanding commitment of our team members towards our customers, shareholders, and each other during these very challenging times. The board of directors and management of HEICO are truly humbled by the dedication of our team members to their company during these unprecedented times. Currently, we believe the recent vaccine progress will most notably result in a gradual recovery in demand for our commercial aerospace parts and services, commencing in fiscal 2021. As demand for air travel slowly recovers, we remain very confident in our ability to offer cost-saving solutions and robust product development programs that we expect to increase our market share and allow us to have an even stronger presence within the commercial aviation market. I'd like to take a few moments to summarize the highlights of our full fiscal 2020 and fourth quarter results. Despite the many challenges faced in fiscal 2020, HEICO has continued to generate excellent cash flow. Our cash flow provided by operating activities was very strong at $409 million and $437.4 million in fiscal 2020 and 2019 respectively. Cash flow provided by operating activities totaled $110.2 million or 177% of reported net income in the fourth quarter of fiscal 2020, as compared to $124 million in the fourth quarter of fiscal 2019. As all of you know, HEICO’s most important metric is cash flow. I think that the results of 2020 operations, particularly the fourth quarter, are clearly indicative of the success. We are encouraged by the sequential improvements in our fiscal 2020 consolidated fourth quarter operating results over the third quarter of fiscal 2020. During the fourth quarter, we experienced increases in consolidated operating income, net income, and net sales of 30%, 15%, and 10%, respectively. In fact, despite the continued impact of the pandemic on demand for our commercial aerospace parts and services, the Flight Support Group’s operating income and net sales in the fourth quarter of fiscal 2020 improved sequentially, by 78% and 9% respectively, as compared to the third quarter of fiscal 2020, a significant improvement. The Electronic Technologies Group, which I will now refer to as ETG, set all-time quarterly net sales and operating income records in the fourth quarter fiscal 2020, improving 8% and 14% respectively, over the fourth quarter of fiscal 2019. These increases principally reflect the excellent operating performance of our fiscal 2020 acquisitions, as well as continued disciplined cost management on the part of our operating teams. We recently entered into an amendment to extend the maturity date of our revolving credit agreement by one year to November 23, and to increase the committed capital to $1.5 billion. In addition, our credit facility continues to include a feature that will allow the company to increase capacity by $350 million or become a $1.85 billion facility through increased commitments from existing vendors or the addition of new lenders and can be extended for an additional one-year period. We are very thankful for the continued support of our existing Bank Group. Their loyalty to HEICO is demonstrated by this credit facility amendment which further offers us the financial flexibility to pursue our disciplined strategy of acquiring high-quality businesses at fair prices. Our net debt, which we define as total debt, less cash and cash equivalents of $333 million, compared to shareholders equity ratio improved to 16.6% as of October 31, 2020, and this was down from 29.8% as of October 31, 2019. Our net debt-to-EBITDA ratio improved to 0.71 times as of October 31, 2020, down from 0.93 times as of October 31, 2019. Keep in mind this is after making six acquisitions during the year. During fiscal 2020, we successfully completed six acquisitions, four of which were completed since the pandemic started. We have no significant debt maturities until fiscal 2024. We plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes and accelerate growth to maximize shareholder returns. As we reported yesterday, we declared an $0.08 per share regular semi-annual cash dividend on both classes of common stock payable January 21, 2021, to shareholders of record as of January 7, 2021. This cash dividend will be our 85th consecutive semi-annual cash dividend since 1979. HEICO’s strength in the face of challenging business conditions, coupled with our optimism for the future, gave our Board of Directors the confidence to continue paying our normal cash dividend. While this is very important to all of our shareholders, it is especially important to our team members, the vast majority of whom are fellow HEICO shareholders through their personal holdings in their 401(k) plan. Let's talk about some of the new fourth quarter acquisitions. As I discussed during the third quarter teleconference, we completed three acquisitions in August through our ETG Group. First, we acquired 75% of the equity interest in transformational security and intelligent devices. These two companies design, develop, and manufacture state-of-the-art technical surveillance countermeasures equipment. Next, we acquired approximately 90% of the equity interest of Connect Tech. Connect Tech designs and manufactures rugged, small form factor embedded computing solutions used in rugged commercial and industrial, aerospace and defense, transportation, and smart energy applications. These acquisitions are expected to be accretive to earnings 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.

Eric Mendelson, Co-President and President of Flight Support

Thank you. The Flight Support Group’s net sales were $924.8 million in fiscal year 2020, as compared to $1,240.2 million in fiscal year 2019. The Flight Support Group's net sales were $193.6 million in the fourth quarter of fiscal 2020, as compared to $324.7 million in the fourth quarter of fiscal 2019. The net sales decreases are principally organic and reflect lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March 2020, due to the pandemic. Net sales in fiscal 2020 follow the 13% and 12% organic growth reported in the year and fourth quarter of fiscal 2019 respectively. The Flight Support Group’s operating income was $143.1 million in fiscal 2020, as compared to $242 million in the fiscal year 2019. The Flight Support Group’s operating income was $21.5 million in the fourth quarter of fiscal 2020, as compared to $62.2 million in the fourth quarter of fiscal 2019. The operating income decreases principally reflect the previously mentioned decrease in net sales, a lower gross profit margin, and an increase in bad debt expense due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal 2020 as a result of the pandemic’s financial impact, partially offset by a decrease in performance-based compensation expense. The lower gross profit margin principally reflects an increase in inventory obsolescence expense, mainly resulting from the announced retirement of certain aircraft types and engine platforms by our commercial aerospace customers due to the pandemic's financial impact. Additionally, the lower gross profit margin reflects the impact from lower net sales within our repair and overhaul parts and services and aftermarket replacement parts product lines. The Flight Support Group’s operating margin was 15.5% in fiscal 2020, as compared to 19.5% in fiscal 2019. The Flight Support Group’s operating margin was 11.1% in the fourth quarter of fiscal 2020, as compared to 19.2% in the fourth quarter of fiscal 2019. The decrease in operating margins principally reflects the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned higher bad debt expense and fixed cost efficiencies lost resulting from the pandemic's impact, partially offset by lower 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.

Victor Mendelson, Co-President and President of Electronic Technologies Group

Thank you, Eric. The Electronic Technologies Group's net sales increased 5% to a record $875 million in fiscal 2020, up from $834.5 million in fiscal 2019. The increase in fiscal 2020 is attributable to the favorable impact from our fiscal 2020 and 2019 acquisitions, partially offset by an organic net sales decrease of 1%. The organic net sales decrease is principally due to lower sales of commercial aerospace and medical products, largely attributable to the pandemic, partially offset by increased sales of defense and space products. The ETG’s net sales increased 8% to a record $236.7 million in the fourth quarter of fiscal 2020, up from $219.5 million in the fourth quarter fiscal 2019. The increase in the fourth quarter of fiscal 2020 is attributable to the favorable impact from our fiscal 2020 acquisitions, and the anticipated increase in commercial space revenues. The Electronic Technologies Group's operating income increased 5% to a record $258.8 million in fiscal 2020, up from $245.7 million in fiscal 2019. The increase in fiscal 2020 principally reflects the previously mentioned net sales growth, lower performance-based compensation expense, and a decrease in acquisition-related expenses, partially offset by a lower gross profit margin. The lower gross profit margin is mainly due to a decrease in net sales and a less favorable product mix of certain commercial aerospace and medical products, partially offset by increased net sales of certain defense products. The ETG’s operating income increased 14% to a record $73.9 million in the fourth quarter fiscal 2020, up from $64.6 million in the fourth quarter of fiscal 2019. The increase in the fourth quarter of fiscal 2020 principally reflects the previously mentioned net sales growth and improved gross profit margin. The improved gross profit margin principally reflects a more favorable product mix and increased net sales of certain space and defense products, partially offset by a decrease in net sales of certain commercial aerospace products. The Electronic Technologies Group's operating margin improved to 29.6% in fiscal 2020, up from 29.4% in fiscal 2019. The ETG’s operating margin improved to 31.2% in the fourth quarter of fiscal 2020, up from 29.4% in the fourth quarter fiscal 2019. The increase in the fourth quarter of fiscal 2020 mainly reflects efficiencies gained from the previously mentioned net sales growth and the improved gross profit margin. I turn the call back over to Larry Mendelson.

Laurans Mendelson, Chairman and CEO

Thank you, Victor. Moving on to diluted earnings per share, consolidated net income per diluted share decreased 4% to $2.29 in fiscal 2020, as compared to $2.39 in fiscal 2019. Consolidated net income per diluted share decreased 27% to $0.45 in the fourth quarter of fiscal 2020, as compared to $0.62 in the fourth quarter of fiscal 2019. Those decreases principally reflect the previously mentioned lower operating income of Flight Support, partially offset by lower income tax expense, less net income attributable to non-controlling interest, as well as lower interest expense. Depreciation amortization expense totaled $88.6 million in fiscal 2020, up from $83.5 million in fiscal 2019, and totaled $23.3 million in the fourth quarter of fiscal 2020, up from $21.8 million in the fourth quarter of fiscal 2019. The increase in the fiscal year and fourth quarter of fiscal 2020 principally reflects the incremental impact from our fiscal 2020 and 2019 acquisitions. Research and development efforts are continuing at both ETG and Flight Support. R&D expense was $65.6 million in fiscal 2020, or about 3.7% of net sales, and that compared to $66.6 million in fiscal 2019 or 3.2% of net sales. R&D expense was $16.6 million in the fourth quarter fiscal 2020 or 3.9% of net sales, and that compared to $17.9 million in the fourth quarter of fiscal 2019 and that was 3.3% of net sales. SG&A expenses decreased by 14% to $305.5 million in fiscal 2020 and that was down from $356.7 in fiscal 2019. The decrease in consolidated SG&A expense in fiscal 2020 reflects a decrease in performance-based compensation expense, a reduction in other G&A expenses, and a reduction in other selling expenses, including outside sales commissions, marketing and travel. These decreases were partially offset by the impact of our fiscal 2019 and 2020 acquisitions, as well as the previously mentioned increase in bad debt expense, and that was due to collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during fiscal 2020 as a result of the financial impact of the pandemic. Consolidated SG&A expense decreased by 18% to $72.6 million in the fourth quarter fiscal 2020, down from $88.8 million in the fourth quarter of fiscal 2019. The decrease in consolidated SG&A expense in the fourth quarter fiscal 2020 reflects a reduction in other general and administrative expense, decrease in performance-based compensation expense, and the reduction in other selling expenses including outside sales commission, marketing and travel. The decreases were partially offset by the impact of our fiscal 2020 and 2019 acquisitions, as well as the increase in bad debt expense. Consolidated SG&A expense as a percentage of net sales dropped to 17.1% in fiscal 2020 and that was down slightly from 17.4% in fiscal 2019. The decrease in consolidated SG&A expense as a percentage of net sales in fiscal 2020 again is due to lower performance-based compensation expense and a decrease in other selling expenses, partially offset by the impact of higher other G&A expense as a percentage of net sales and an increase in bad debt expense. Consolidated SG&A expense as a percentage of net sales increased to 17% in the fourth quarter fiscal 2020, and that was up slightly from 16.4% in the fourth quarter of fiscal 2019. The increase in consolidated SG&A expense as a percentage of net sales in the fourth quarter of fiscal 2020 reflects higher other general and administrative expense as a percentage of net sales due to the decreased sales volume and the aforementioned increase in bad debt expense, partially offset by a decrease in lower performance-based compensation expense and a decrease in other selling expenses. Interest expense decreased to $13.2 million in fiscal 2020, and that was down significantly from $21.7 million in fiscal 2019, and decreased to $2.5 million in the fourth quarter fiscal 2020, down from $5.2 million in the fourth quarter of fiscal 2019. Decreases were principally due to a lower weighted average interest rate on borrowings outstanding under our credit facility. Our effective tax rate in fiscal 2020 was 7.9%, as compared to 17.8% in fiscal 2019. The decrease in fiscal 2020 is mainly attributable to a larger tax benefit recognized in fiscal 2020 from stock option exercises compared to fiscal 2019 that resulted from more stock options being exercised, as well as the strong appreciation in HEICO stock price during the option-holding period. Our effective tax rate in the fourth quarter of fiscal 2020 was 22.3%, compared to 19.8% in the fourth quarter of fiscal 2019. Net income attributable to non-controlling interest was $21.9 million in fiscal 2020, compared to $31.8 million in fiscal 2019. The decrease in fiscal 2020 principally reflects a decrease in operating results of certain subsidiaries of Flight Support, in which non-controlling interest are held, as well as the impact of a dividend paid by HEICO Aerospace in June 2019, that effectively resulted in the transfer of 20% non-controlling interest held by Lufthansa Technik in eight of our existing subsidiaries, and that was transferred back to our Flight Support Group. Net income attributable to non-controlling interest was $5.3 million in the fourth quarter of fiscal 2020. That compared to $6.9 million in the fourth quarter of fiscal 2019. The decrease in the fourth quarter of fiscal 2020 principally reflects a decrease in the operating results of certain subsidiaries of the Flight Support Group in which non-controlling interest are held. For the full fiscal year 2021 at the present time, we anticipate a combined tax and non-controlling interest rate of approximately 23% to 24%. Moving on to the balance sheet and cash flow, as you will know our financial position and forecasted cash flow remained very strong. Previously, I mentioned cash flow provided by operating activities was consistently strong at $409.1 million and $437.4 million in fiscal 2020 and 2019 respectively. Cash flow provided by operating activities totaled $110.2 million or 177% of net income in the fourth quarter of fiscal 2020 compared to $124 million in the fourth quarter of fiscal 2019. We currently anticipate capital expenditures of approximately $40 million in fiscal 2021, and that would be up from the $22.9 million spent in fiscal 2020. Our working capital ratio improved to 4.8 as of October 31, 2020 as compared to 2.8 as of October 31, 2019. Days sales outstanding, DSOs of accounts receivable improved to 45 days as of October 31, 2020, and that compared favorably to the 47 days as of October 31, 2019. 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 sales and our Top 5 customers represented approximately 24% and 20% of consolidated net sales in fiscal 2020 and 2019, respectively. Our inventory turnover rate increased to 153 days for the year ended October 31, 2020 as compared to 124 days for the year ended October 31, 2019. That increase in turnover rates principally reflects certain long-term and non-cancelable inventory purchase commitments, which were based on pre-pandemic net sales expectations and also to support the backlog of certain of our businesses. Now, the outlook. As we look ahead to fiscal 2021, the pandemic will likely continue to negatively impact the commercial aerospace industry as well as HEICO. Given this uncertainty, HEICO cannot provide fiscal 2021 net sales and earnings guidance at this time. However, we do believe our ongoing fiscal conservative policies, healthy balance sheet, and increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers. In addition, our time-tested strategy of maintaining low debt and acquiring high cash-generating businesses across a diverse base of industries, besides commercial aerospace, including defense, space, and other high-end markets such as electronics and medical, puts us in a good financial position to weather this uncertain economic period. We are cautiously optimistic that the recent vaccine progress should generate increased commercial air travel, and will result in a gradual recovery in demand for our commercial aerospace parts and services commencing in fiscal 2021. I'd like to conclude my remarks by again thanking all of HEICO's talented team members who have worked very hard to exceed our customers’ expectations during these difficult times, which were brought on by the COVID-19 pandemic. Their dedication to HEICO's customers and to the safety of their fellow team members has been exemplary. I am confident that our future is bright and we will exit this COVID-19 period as a stronger and more competitive company. Those are the extent of my prepared remarks, and I would now like to open the floor for questions.

Operator, Operator

Your first question comes from Peter Arment with Baird. You may now ask your question.

Peter Arment, Analyst

Hi, yes. Good morning, Larry, Eric, Victor, Carlos.

Eric Mendelson, Co-President and President of Flight Support

Good morning.

Laurans Mendelson, Chairman and CEO

Good morning, Peter.

Peter Arment, Analyst

Eric, I guess I just will start with you on FSG. The 9% sequential improvement, could you just provide a little color on what you're seeing? I mean, we saw I guess a modest pickup in flight activity quarter-over-quarter, compared to the Q3, but what are you hearing from your or seeing from your customers in terms of their behavior?

Eric Mendelson, Co-President and President of Flight Support

Yeah, I would say, we’re – well, first of all, good morning, Peter, and thanks for your question. We are, I would say, very encouraged by seeing the pickup. Conversations with our customers remain very strong. They're very interested and excited about our product. We believe that we're going to come out of the pandemic with greater market share. In conversations with our sales VPs, I really questioned them on the particular products that we're coming out with, as well as why specifically each one of them felt that we would be growing market share. They claim that the conversations with the customers are causing them to understand that HEICO is viewed as a very significant part of the supply chain. We've matured into a nice-sized company and there's no reason why they shouldn't be buying a greater number of our products. I think we were correct when we called the bottom in May, expecting that May was going to be the bottom and that things were going to trend up. I can tell you that November was a very good month and things were looking very good. However, I would say, you know, for the last couple of weeks, things have gotten a little quieter. But that's not necessarily atypical because normally around the holiday season things start to slow down. Given the news that we see with the pandemic, it's logical that the second half of December and January may be a bit quieter. But having said that, the vaccine news, of course, was very good. When speaking with our customers about their flight schedules and the inventory that they have, you know, as I pointed out in our August call, the flight schedules were really far in excess of the spare parts purchases. Discussions with a number of airlines indicated that they recognize they can't continue to operate the schedules that they're operating based on the purchases that they're making. We anticipate an improvement, in particular in the second half of our fiscal year, and obviously, the timing is going to be very dependent on the vaccine news, and what we see in terms of the infection rates.

Peter Arment, Analyst

No, that's really helpful. And you mentioned the bad debt expense. Can you quantify what the margin would have been without that additional expense in FSG?

Carlos Macao, CFO

Hey, Peter, this is Carlos. So, the additional bad debt wasn't that significant in the quarter, maybe around $1.5 million. Remember, we took about $7.5 million in Q3 to deal with some bankruptcies and in Q4, it was kind of the normal noise. If you look at the annual margin, you'd have to add about $9 million back to it to see what that would be.

Peter Arment, Analyst

Okay. And then, Carlos, just one quick one and then I'll jump back in queue. Larry mentioned SG&A was down 14% year-over-year, and I think over $30 million of it is tied to performance compensation. How do we think about that as we're thinking about fiscal 2021?

Carlos Macao, CFO

I think that performance-based compensation is going to vary with sales, Peter. I'm not anticipating getting back to 2019 performance-based compensation levels in 2021. But they will fluctuate with our sales and profitability. So as things pick up in 2021, we'll probably see some increase in the bonus and performance-based compensation expenses, but it will be commensurate with our profitability growth.

Peter Arment, Analyst

Thanks very much. Thank you.

Operator, Operator

Your next question comes from an indiscernible voice with Credit Suisse. You may now ask your question.

Unidentified Analyst, Analyst

Good morning. Eric, with where airspace names are currently trading, have you considered increasing the multiple you would be willing to pay for a high-quality commercial air company, maybe a multiple that's higher than your historic norms? And then, as a follow-up, given the current valuation of HEICO stock, would you consider doing an all-stock or combination of cash and stock for a larger acquisition?

Eric Mendelson, Co-President and President of Flight Support

So, good morning, Scott. With regard to the pricing, you know, I think that we're definitely flexible on pricing. I think that a lot of people – you know, frankly, there's a lot of private equity in the space right now, and they look at the results. You know, we've had this long cycle where commercial and defense have done very well. I think we're very good at operating in this space and we understand where the landmines are. A number of companies out there are being bid up at prices that don't make sense. Would we be more aggressive on a high-quality company and we think that we can accelerate the growth? Sure. Many of these businesses, however, do not meet that criteria, and frankly, people look at HEICO and say, well, you know, these guys didn’t know what they were doing and they entered this business 31 years ago. Look at how well HEICO has performed with the stock. I don't – it’s 20% something CAGR over 31 years without any leverage, you know, how hard can this be? They get into this space and realize that it’s pretty hard. We’ve got people who really know what they are doing; we have a unique product offering where we can combine PMA, repair, and distribution into the aftermarket and have, outside of a couple of the large component OEMs, the largest aftermarket sales force. It’s extremely synergistic where these businesses can feed business to each other. We’ve learned a tremendous amount along the way. We're also fairly conservative when we look at them in terms of inventory reserves and pricing. We want to make sure that we’ve got a very good business for generations to come. We want to plant, you know, a lot of seeds in the ground to make sure that the future is good, and we’re very confident about that. Even when crises happen like this, we treat our people very nicely because, as we say, they are our greatest asset. If you don’t treat your people well and cut them, that won’t work in the long run.

Unidentified Analyst, Analyst

I guess just kind of on the follow up, if it were to be a larger acquisition say, in the north of a few billion dollars, would you consider doing all-stock or a combination of cash and stock to finance the acquisition?

Eric Mendelson, Co-President and President of Flight Support

I think all things would be on the table. Honestly, it's our preference to use cash because we believe in our stock. You know, the stock has performed extremely well. If you look at the 82 acquisitions we’ve made to-date, I don't think that we've given out more than a million dollars of stock for billions of dollars in acquisitions. With the added flexibility that we've got with our new line of credit, we can pursue various transaction types. Yes, we would be open to a larger deal with cash or stock, but cash is definitely our preference.

Laurans Mendelson, Chairman and CEO

Yes, let me just add to that. The bottom line is it depends on the deal; it depends on how much we want it; it depends on what the seller is looking for, and so forth. We would consider giving stock under the right circumstances. As Eric says, we always prefer cash. The reason we prefer cash is that when we make accretive acquisitions, the value of the whole company goes up. Whatever stock we give is a function of the stock price going up. It’s better for all existing shareholders to use cash. But if there’s a desirable acquisition, we're going to make that acquisition and we're going to do it in the best way we can. So we would definitely consider cash stock or a combination.

Unidentified Analyst, Analyst

Thank you and Happy Holidays, guys.

Laurans Mendelson, Chairman and CEO

Thank you.

Eric Mendelson, Co-President and President of Flight Support

Thanks, Scott.

Josh Sullivan, Analyst

Hi, good morning.

Eric Mendelson, Co-President and President of Flight Support

Good morning, Josh.

Josh Sullivan, Analyst

Just on the robust product development programs, you highlighted there in the opening remarks, can you just give us some color on the current pace of development? I know you outlined some R&D figures there, but have you increased the pace of PMA submissions? Do you think the aircraft type retirements makes you think differently about your PMA portfolio at this point?

Eric Mendelson, Co-President and President of Flight Support

Yes, I would say that we have maintained our pace of PMA. We could have increased it, but we chose to keep it consistent to show that everybody in the company was in this together. Luckily, we came up with a similar number of PMAs. We're very aggressively developing new products. Our subsidiaries really have a very good grasp on the products that they're going after, and we continue to grow into adjacent whitespaces. Our airline and defense customers are very confident about the use of these products. So, I'm very optimistic for the future, especially when talking to our sales executives and getting their feedback.

Josh Sullivan, Analyst

Yes. As you look for that eventual rebound in commercial in the second half that you're expecting, outside of just a traffic recovery, what kind of activity or class of products would you expect to see from the airlines picking up in the first half that would really give you confidence that the second half is going to work out as you're thinking it's going to?

Eric Mendelson, Co-President and President of Flight Support

Well, I think the first half will be a continuation of what we've seen since May, coming out of the bottom. It's a bit of fits and starts, but I would anticipate that type of progress, probably until the beginning of our second quarter. The airlines were operating equipment in excess of the spare parts that they were purchasing. Early in the crisis, there was a destocking phenomenon. I don’t really see that anymore; they’re very much living hand to mouth. In terms of products going forward, it will be our standard mix. Airlines will try to defer expensive maintenance as much as possible, but not in a way that impacts their return to service of their equipment. I anticipate that heavy maintenance and engine visits will be the last to recover.

Josh Sullivan, Analyst

Got it. Appreciate the time. Thank you.

Eric Mendelson, Co-President and President of Flight Support

Thank you.

Greg Konrad, Analyst

Good morning. Just to follow up on, you know, one of your last points, I mean, you mentioned declines across product lines. Any noticeable difference in the quarter between aftermarket replacement and repair and overall and what you're seeing in terms of recovery?

Eric Mendelson, Co-President and President of Flight Support

I would say it's similar. Good morning, Greg. It’s all in the same ballpark. One could be ahead or behind in a particular month or quarter, but all are similar.

Greg Konrad, Analyst

And then, maybe just one on ETG. Can you talk about ETG margins, given some of the fiscal year 2020 drivers around lower performance-based compensation and net sales growth? How do you think about the trajectory there?

Victor Mendelson, Co-President and President of Electronic Technologies Group

I'm not sure I'm following the question.

Greg Konrad, Analyst

Yes, just you had a strong Q4, some gross margin pressures seem to have reversed, so what trajectory do you see moving forward?

Victor Mendelson, Co-President and President of Electronic Technologies Group

I think of this as solid performance from the businesses operating independently and managing towards profitability. The ETG margins fluctuate throughout the year, and we anticipate that the past will be a precursor for the future. This is typical, and we don’t manage margins or earnings into a particular quarter; we focus on maximizing profitability.

Gautam Khanna, Analyst

Hey, good morning, guys. Happy Holidays.

Laurans Mendelson, Chairman and CEO

Good morning.

Carlos Macau, CFO

Good morning, Gautam.

Gautam Khanna, Analyst

Hey, I just wanted to ask a couple of questions. First on ETG, I was curious – I think it was last quarter you cited some order delays, some lumpiness, if you will. Has that all been caught up as of Q4?

Victor Mendelson, Co-President and President of Electronic Technologies Group

It’s continuing. I'd say it's a little variable and we may see more of that in a few months again. It ebbs and flows a bit. With COVID numbers rising, we'll likely see supply chain disruptions again. But it has been nothing that fundamentally shifts the business; it all catches up eventually.

Gautam Khanna, Analyst

And also, do you think there's a relationship between ETG’s sales growth and that of the defense large cap primes?

Victor Mendelson, Co-President and President of Electronic Technologies Group

It's difficult to find a one-to-one correlation because we serve multiple markets. As a rule of thumb, defense budgets have fluctuations, and we believe that they may not grow significantly based on prior years.

Gautam Khanna, Analyst

Okay. Underscored by that, I’m curious, have you seen any changes with the lessors possibly becoming a bigger part of the market?

Laurans Mendelson, Chairman and CEO

Yes, we are seeing good progress with lessors using HEICO parts. We promote HEICO parts, and we’ve had successes there. If airlines request the right to use HEICO parts upfront in the lease, they are often able to get concessions. Many airlines operate using these parts as they understand that they will not be affected negatively in terms of marketability.

Gautam Khanna, Analyst

So, there’s been an increase in willingness to utilize PMA parts?

Laurans Mendelson, Chairman and CEO

Yes, that's a very good observation. They are looking to extract value in order to monetize more effectively.

Gautam Khanna, Analyst

Okay. I appreciate that answer. Just to round things out, you think there are opportunities for more transformational acquisitions given the current market?

Eric Mendelson, Co-President and President of Flight Support

We’ve studied the market and are aware of our peers, and we always look for opportunities for transformational deals. Our differentiated model and treatment of our people set us apart.

Victor Mendelson, Co-President and President of Electronic Technologies Group

We're open to any kind of acquisition to make a great deal, regardless of size. We don't pay overly inflated prices.

Greg Konrad, Analyst

Good morning. Just to follow up on, you know, one of your last points, I mean, you mentioned declines across product lines. Any noticeable difference in the quarter between aftermarket replacement and repair and overall and what you're seeing in terms of recovery?

Eric Mendelson, Co-President and President of Flight Support

I would say it's similar. Oh! Good morning, Greg. I would say that it is similar between the replacement parts and the repair.

Louis Raffetto, Analyst

I was hoping you mentioned Bitcoin. I was the one missing thing in there, but is interesting as well. Victor, I just want to go back to you, just make sure I have this for the fourth quarter. What was the organic growth for ETG? Was it flat, down a little, up a little? And then, either you or Carlos, can you help us baseline what the acquired sales will look like, you know, based on deals so far into 2021?

Victor Mendelson, Co-President and President of Electronic Technologies Group

It was flat, organic growth in the fourth quarter.

Carlos Macau, CFO

In the fourth quarter, we probably had around $16 million worth of acquired sales in the numbers.

Josh Sullivan, Analyst

Hi, good morning.

Eric Mendelson, Co-President and President of Flight Support

Good morning, Josh.

Josh Sullivan, Analyst

Just on the robust product development programs, you highlighted there in the opening remarks, can you just give us some color on the current pace of development? I know you outlined some R&D figures there, but have you increased the pace of PMA submissions? Do you think the aircraft-type retirements makes you think differently about your PMA portfolio at this point?

Eric Mendelson, Co-President and President of Flight Support

Yes, I would say that we have maintained our pace of PMA. We could have increased it, but we chose to keep it consistent to show that everybody in the company was in this together.

Laurans Mendelson, Chairman and CEO

If there are no further questions, I want to thank everybody on this call for participating and for their interest in HEICO. We remain available to you by phone if you have any other further questions or information that you'd like.

Operator, Operator

Thank you, presenters. And thank you ladies and gentlemen for joining the fiscal year 2020 fourth quarter and end of the year earnings results call. You may now disconnect.