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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. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] 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; [indiscernible] 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 as 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 [receiving/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.
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 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 remained 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 even a 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. And 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. And 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 and from now on, I'll call it 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 the 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 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 start. We have no significant debt maturities until fiscal 2024. And 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 phase of challenging business conditions, coupled with our optimism of 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 the 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 a 75% of the equity interest in transformational security and intelligent devices. These two companies design and 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.
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 reflects 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 follows the 13% and 12% organic growth reported in the year in 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 reflects 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 in 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 that the operating margin decreases 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 in fixed cost efficiencies loss 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.
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 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.
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 reflect the incremental impact from our fiscal 2020 and 2019 acquisitions.
Research and development, significant ongoing new product 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 consolidated 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&AA expense in the fourth quarter of 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 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 a 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 and that resulted from more stock options being exercised, as well as the strong appreciation in HEICO stock price during the option-ease holding period.
Our effective tax rate in the fourth quarter of fiscal 2020 was 22.3%, and that 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, and that 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. And 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 and that 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, which is of course current assets divided by current liabilities 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 reflect 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 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, 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 – operating high cash generating businesses across a diverse base of industry, besides commercial aerospace and these industries are defense, space, and other high-end markets, including electronics and medical, puts us in 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. And I want to thank each and every member of HEICO's global team to understand that the Board of Directors and I value your commitment to our collective safety and success during these challenging times. 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 Instructions] Your first question comes from Peter Arment with Baird. You may now ask your question.
Hi, yes. Good morning, Larry, Eric, Victor, Carlos.
Good morning.
Good morning, Peter.
Eric, I guess I just will start with you on FSG. The 9% sequential improvement, maybe you could just provide a little color of 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?
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 question 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.
And, you know, 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.
So, 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. I would say, you know, for the last couple of – probably the last week or so, things have gotten a little quieter. But that's not necessarily atypical because normally around the holiday season things start to slow down. But I think, given the news that we see with the pandemic, it's sort of 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. And in looking – and speaking with our customers about the flight schedules that they're operating in 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. And in discussions with a number of airlines, you know, they recognized that they can't continue to operate the schedules that they're operating based on the purchases that they're making.
So, 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, you know, what we see in terms of the infection rates.
No, that's really helpful. And you mentioned the bad debt expense. Can you quantify, like, what the margin would have been without that additional expense in FSG?
Hey, Peter, this is Carlos. So, the additional bad debt wasn't that significant in the quarter, maybe [$1.5 million] something like that. Remember, we took about $7.5 million in Q3 to deal with some bankruptcies and in Q4, it was kind of the normal noise. So, you'd have to add about, I guess, [9 million] back to the annual margin to see what that would be.
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 kind of performance comp. How do we think about that as we're thinking about fiscal 2021?
I think that performance-based comp is going to [flux] with sales, Peter. So, I'm not anticipating getting back to 2019 performance-based comp levels in 2021. But they will [flux] with our sales and profitability. So as things pick up there in 2021, we'll probably see some increase in the bonus, and performance based comp expenses, but it will be commensurate with our profitability growth.
Thanks very much. Thank you.
Your next question comes from [indiscernible] with Credit Suisse. You may now ask your question.
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?
So, good morning, Scott. So, 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. And we're, I think, very good at operating in this space and we understand where the landmines are. And I think that there are a number of companies out there which are being bid up at really, you know, prices that don't make sense.
And so, to answer your question, if it's a high-quality company and we think that we can accelerate the growth, would we be more aggressive on it? Sure. However, if – you know, a lot of these businesses don't meet that criteria, and, you know, frankly, people look at HEICO and they 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 know, it’s 20% something CAGR over 31 years without any leverage, you know, how hard can this be? And, you know, they get into this space and they realize, in fact, it's pretty hard.
And we've got people who really know what they're doing and we've got this unique product offering where we're able to combine PMA, repair and distribution into the aftermarket, and have, you know, outside of a couple of the – you know, the airframe, engine or a couple of the large component OEMs. We've got the largest aftermarket sales force, and it's extremely synergistic where these businesses are able to feed business to each other and we've learned a tremendous amount along the way.
So, – and then the other thing I would say, we're also fairly conservative when we look at them in terms of inventory reserves and in terms of not pressing, you know, the pricing on below – you know, we want to make sure that we've got a very good business for generations to come. And we're not trying to, you know, if you will, burn the furniture, you know, take everything out of the fields in order to hit our numbers. And that is the culture that we've created and our people understand that.
And so, I think that when you look at some companies that may really be doing things in the short-term in order to get a high price and then they want to get a high multiple of that, honestly, that's somewhat of a fool's errand and not something that we want to do. So sorry for the long answer, but if it truly is a HEICO run company, yes, you know, HEICO style run company, yes, we would pay a higher price for it. But frankly, we haven't – you know, you don't see that very often.
So – and then, with regard to larger transactions, as our [debt] says, we – you know, HEICO is very open to all sorts of different transactions. We believe that we've got a differentiated model in terms of how we run the business and how we treat our people. And so, yes, if we found a larger deal, we would, you know, definitely want to go ahead and act on it. But, you know, of course, there can be no assurance and my comment should not be meant – should not be interpreted as there's one on the horizon. But we're always focused on where we can grow.
And, you know, frankly, by having this culture, we really – you know, in a sense, it's like planting, you know, a lot of seeds in the ground to make sure that the future is going to be very good, and we've got that. And we're very confident on the future because of that. And even when a crisis happens like this, we treat our people very nicely because, you know, as we say, they are our greatest asset. And if you don't treat – other people may say, their people are the greatest asset and then they go and cut them and do all sorts of things, whereas HEICO has been willing to suffer the financial consequences of creating our people, right. You know, we're not afraid to go ahead and have reduced earnings so we can come out of this thing, very strong.
So acquisitions really need to line up like that and we've made a number of them, where, you know, typically the founder entrepreneurs share that same vision, where they really put the people ahead of short-term profits because they know that that leads to long term, you know, superiority. So, I hope that answers your question, but if not, I'd be happy to expand on it in any way.
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?
I think all things would be on the table. Frankly, it's our preference to use cash because we're believers in the stock. You know, the stock has performed extremely well. And 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 and billions of dollars of acquisitions. So, now with the added flexibility that we've got with our new line of credit that, you know, Carlos worked so hard to arrange, we've got a lot of flexibility there. But yes, I mean, we would be open – I mean, one of the things that we need to be open to is some people may be concerned at selling it, if you will, you know, a lower point in the cycle. So therefore, they may request our stock as a way to be able to play, you know the up-cycle. So, I think in that case, we would be sensitive to it, but cash is definitely our preference.
Yes, let me just add to that. You know, I think the bottom line to the whole thing 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. And we would consider giving stock under the right circumstances. As Eric says, we always prefer cash, and the reason we prefer cash is because when we make accretive acquisitions, the value of the whole company goes up. So whatever stock we give, really is – we've given out too much stock because the stock price goes up. So, it's better for all existing shareholders to – for us to use cash. But if there is a real [indiscernible] desirable acquisition, we're going to make that acquisition and we're going to do it in the best way we can. So we've definitely would consider cash stock or combination.
Thank you and Happy Holidays, guys.
Thank you.
Thanks, Scott.
Your next question comes from Josh Sullivan with The Benchmark. You may now ask your question.
Hi, good morning.
Good morning, Josh.
Just on the other robust product development programs, you highlighted there in the opening remarks, can you just give us, you know, 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? You know, do you think, you know, the aircraft type retirements makes you think differently about your PMA portfolio at this point?
Hi. Yes, I would say that we maintain – this is Eric, we maintained our pace of PMA. You know, we could have increased it. I think one of the things which is – and why we've got, you know, plenty of opportunity, one of the things that we also have to be a little sensitive to is that a lot of people, including ourselves, took pay reductions this year. Some people were furloughed. There were some layoffs. And we wanted to be sensitive to make sure that the, if you will, the pain was – you know, the sacrifice was throughout the company. So while we could have increased new product development, you know, we kept it consistent thinking that that was really the right thing in order to show that everybody in the company was in this together.
Having said that, I'm very proud that we've come out with, you know, the similar number of PMAs that we've done. I can tell you that 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 customers and defense customers are very confident about the use of these products. So, I'm – you know, it gives me a great – you know, a great optimism for the future, especially when talking to our sales executives and going through the details with them and seeing why they too are very optimistic.
Yes. And then just, you know, as you look for that eventual rebound in commercial in the second half that you're expecting, outside of just a traffic recovery, you know, 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, you know, confidence that the second half is going to work out as you're thinking it's going to?
Well, I think, the first half is going to, sort of be a continuation of what we've seen, you know, frankly, since May, where we've been coming out of the bottom. You know, it sort of comes out in fits and starts and, you know, it moves ahead, then it sort of settles in and then it moves ahead and then it settles in. And I really would anticipate more of that type of progress, I would say, probably through – you know, or until perhaps the beginning or through our second quarter.
Then what we've seen is, you know, when you talk to the airlines, they're operating the equipment in excess of what, you know the spare parts that they are purchasing. Early in the crisis, there was a destocking phenomenon. I don't really see that anymore. I think the airlines are now very much living hand to mouth and I think that destocking has occurred already.
So, in terms of products going forward, I think, you know, it's going to be our standard mix of products. I think airlines will continue to try to defer expensive maintenance as much as possible, however, not in a way that would impact their – you know, the return to service of the equipment. So, I would say, in general, heavy maintenance and engine visits will be, if you will, the last to recover. And then, you know, with everything improving along the way sort of linear with a flight demand. You know, some of the line maintenance stuff needs to be replaced, even if they're not flying that much than the components. But again, the expensive stuff, we expect, would be definitely stacked to the later part of the recovery.
Got it. Appreciate the time. Thank you.
Thank you.
Your next question comes from Greg Konrad with Jefferies. You may now ask your question.
Good morning. Just to follow up on, you know, one of your last points, I mean, you mentioned declines across product lines. I mean, any noticeable difference in the quarter between aftermarket replacement and repair and overall and what you're seeing in terms of recovery, given the sequential improvement in the quarter?
You know, I would say it's similar. Oh! Good morning, Greg. This is Eric, I should say. I would say that it is similar between the replacement parts and the repair. You know, it's all in the same ballpark. One could be ahead or behind in a particular month or quarter, but it's all in the similar zip code, I would say.
And then, maybe just one on ETG, can you maybe talk about the bridge for ETG margins, given some of the fiscal year 2020 drivers around lower performance-based compensation and net sales growth, which was somewhat offset by, you know, the gross margin pressures, which seem to reverse in Q4? How are you thinking about the trajectory there just given some of those moving pieces outside of volume?
Greg, this is Victor. I'm not sure I'm following the question, the trajectory for margins…?
Yes, just you had a really strong Q4 where some of the gross margin pressures seem to reverse, and, you know, you did over 31% margins, which were impressive. I mean, how do you think about, you know, mix and maybe lower performance-based compensation expense as kind of headwinds, tailwinds to fiscal year 2021?
Yes. I mean, I don't think of it very much in terms of performance-based compensation so much as the mix and the business is doing well, first, on their own independently and good margin performance at the operating level, the individual businesses. And if you look in the mix, as we had told you earlier in the year, we expected that our space revenues, commercial space revenues would be healthy, which they were, would be strong, which they were, that's a decent margin. Some of those operations are good margin operations for us, so I wouldn't say this was a surprise to us.
And keep in mind, Greg that our margins – I mean we guide to this frequently in the ETG, our margins fluctuate over the course of the year. That is a typical year for us. This is nothing unusual for us and I would anticipate that's – the past is prelude and we don't really do anything to try to manage the margins or manage the earnings into a particular quarter or period. We really manage to maximize profitability, so this is a reflection of that.
Thank you.
You're welcome.
Your next question comes from Gautam Khanna with Cowen. You may now ask your question.
Hey, good morning, guys. Happy Holidays.
Good morning.
Good morning, Gautam.
Hey, just wanted to ask a couple of questions. First on ETG, I was curious – I think it was last quarter where you guys cited some order delays, some shipment delays, some lumpiness, if you will. That kind of dampened down the Q3 number and has that all been caught up now as of Q4? Or are you still seeing kind of a backlog built in that business?
Yes, I mean, with disruptions – this is Victor by the way.
Yes.
And good morning. Look, that is continuing, that kind of thing and it just – it sort of – I would say it ebbs and flows a little bit. I would expect that with the pandemic's numbers, that COVID cases numbers rising, we may see more of that in a few months ahead, I don't know. But it comes through, you know, it's in supply chain; it can be on the customer side, where the customer doesn't show up to do an acceptance and test procedure or their transportation doesn't show up and can be a week or two late. It's nothing that fundamentally shifts the business and then eventually catches up and it seems to come and go with this pandemic.
I through much of the fourth quarter, started to reappear again as the pandemic numbers began to increase later in October and, you know, I would expect that to be the case until this thing gets under control. And so, I'm optimistic that as it gets more under control with the vaccine, we'll see less of it.
Okay. And a follow-up, Victor, on that, you know, Lockheed and some of the other – the defense primes have largely guided for next year and I just wanted to understand again, and years past, you've talked about kind of the relationship between ETG’s sales growth and that of the defense large cap primes. Could you update us on sort of what that relationship is in terms of the lag because they're – you know, they're guiding low-to-mid single digits basically? I'm just wondering, when does ETG start to see that glide path, you know, in that [ballpark]?
Yes its – and it's a good question. Of course, keeping in mind that defense is about usually around half of the ETG’s business that can fluctuate up and down a bit, but it's somewhere in that ballpark. And then, you've got the other markets that we serve, which are, of course, significant, which is a little different than the large defense primes, which are much more heavily defense, although you do see some commercial space in the defense primes as well in their numbers.
So, I think it's difficult to find a one-to-one correlation between the defense primes and our ETG businesses. And really what we do is we look down and we drill down into the individual businesses. We have and in turn the individual programs that they're on and the products that they're on. And to be honest with you, we don't always know. As you're aware, the products we make are respond to a specification, to a customer need, a specific customer need as opposed to their design or blueprint, let's say. And so, they'll tell us, as an example, they need something that does a very specific function and performs in a very specific area and we'll produce that and they may not tell us what is going on. Very often when we figure it out, we usually can figure it out, but they may not share with us exactly what it's going on. So, that's why there's not a one-to-one correlation to it.
As a rule of thumb, as we've said before, we don't think defense budgets grow to the sky, and that at some point, we see, you know, defense, as a rule of thumb, flatter than it was over the past, let's say, four years or so. And we'll just have to see how that all plays out.
Okay. And may I ask Eric just a couple of questions. First, I was curious, you know, there's been this argument [floated that lessors] may become a bigger part of the market just given the airline financial challenges. And I wonder has there been any change [afoot] in terms of lessors or willingness to utilize PMA parts? Do they today and are you seeing any change in behavior where they're more open to utilizing more PMA?
You know, that's a very good question. The answer is yes. We are making progress on lessors using HEICO parts. You know, we're very careful that when we go out, we don't promote PMA parts, we promote HEICO parts to the lessors, you know, given HEICO’s market cap and technical capabilities, technical history, product success. So, we're very careful to promote HEICO in that way.
And we've had a number of, you know, very good successes. Number one, if airlines negotiate in a request, the right to be able to use HEICO parts or PMA parts, the ER parts upfront in the lease, very often, they're able to get that concession because the airlines know that the vast majority of airlines out there operate using these parts. So they’re really – that is not a reduced marketability on the product, number one.
Number two, there are a number of lessors that are coming out and offering really like power by the hour, thrust by the hour, aircraft by the hour, where they take responsibility for the overhaul and maintenance of that particular product and those lessors are using our parts very aggressively.
So, we see – you know, so the answer is yes, we've seen progress. However, there is a lot of opportunity out there because there's been a fair number of leases that have been signed in the past were by airlines – some airlines where, if you will, [indiscernible] into giving away that right and now that certain lessors want to try to extract value in order to – you know, in order to, frankly make more money. So, the airlines need to be very vigilant in request to this upfront, and then they're able to get that concession.
Okay. And maybe just given the commentary around, you know, the amended credit agreement and some of the questions on M&A, I am curious if you think there's actually some opportunity for more transformational acquisitions? I mean, in other words, different profiles and what you've done over the past couple of years where it's more tuck-ins that or [plug-and-play], do you see any big swing opportunities, you know, multi-billion dollar assets that are available for sale and that you'd actually care to transact with? I'm just curious, like, does this shake out with COVID and everything else, shake loose some attractive assets that you could utilize your valuation to pounce upon [indiscernible] now?
We’ve spent a fair amount of time studying the market and we're aware of our peers. And I think if an opportunity ever presented itself, you know, we would certainly act on it. I think that we've got a very differentiated model where we treat our people extraordinarily well. And I think for a [seller], you know, whether it's a larger public company or a private company, I think that is a point of value in something which differentiates us. So, yes, we could use, you know, our balance sheet to go ahead and do that and I can tell you that we're always out looking and reviewing, you know, the market out there for these kind of opportunities.
Okay, I apologize for asking [indiscernible].
Let me add one thing, we have a few 100 people on the line right now. So, let me give everybody on the line an open invitation, if they have a wonderful acquisition for us to make, if they want cash, if they want stock, whatever the [notes], whatever you want, if you've got a great company and you want a wonderful home, give us a call, and we're going to talk to you. So, you know, we'll use whatever medium of exchange is necessary to make a great acquisition.
And that's regardless of size.
Right. It can be. We have – in the past, we've looked at some very large transactions, and we've been priced out of the market. Some of them were good; some of them were, you know, not so good, and – but we don't pay 14 or 12 times EBITDA, it's just – you know, that's not in our strategy. So, you know, and quite a bit, we've been able to grow compounded. The bottom line is 19% and stock price is [24]. So, we have a model which is somewhat unique and I think Eric described the very aptly. We really believe in the culture of HEICO.
What the analysts can't relate in their reports is the quality of the management. I must say that – and I'm not talking about myself or even Eric, or Victor, but the people who are team members of HEICO, in my opinion, are truly extraordinary individuals. They're entrepreneurial; they're smart; they watch every dollar; they work 24/7. And this is an asset that doesn't appear on the balance sheet and I think the great strength of HEICO lies in its very, very capable array of team members.
And again, if any of them are on the phone, I want to thank them personally, but I do want the investing public to understand that this is a great, great asset that doesn't appear in a 10-K or Q or analyst reports. But to me, it's the culture that drives the bottom line and the success of HEICO.
I appreciate that answer. One last one for me, and I apologize for taking so much time is, Eric, have you seen any competitive changes in the industry, you know, just given that there is more interest in the HEICO part portfolio, what are the OEMs doing to push back against that and that potential share loss if anything?
You know, the OEMs, our competitors are doing what they've always done. And, you know, they – we have to fight very hard for each piece of business that we have. I would say nothing really has changed in the playbook. You know, HEICO has become a very well respected, distinguished competitor out there and I think we're continuing to gain share and we're doing very well, so there's really no change, you know, in that regard.
You know, having said that, our strategy within the parts business is to take a minority market share. You know, we only go for a 30% market share. So, as long as we're able to pick up that market share, you know, at terms, which makes sense for our customers as well as for ourselves, we, you know, cap that market share, you know, around that level because we want to make sure that our competitors also have a very good, you know, business strategy for their market share.
So, I think that our competitors have got very good – you know, our OEM competitors have very good business plans. I think they're going to continue to do very well. And I think there's plenty of opportunity for HEICO in there as well.
Thank you very much, guys.
Thank you.
Your next question comes from Ken Herbert with Canaccord. You may now ask your question.
Hi, good morning, and Happy Holidays, everybody.
Good morning, Ken. Happy Holidays to you.
Thank you. First, Eric, if I could, I just wanted to see if we could unpack the comments that I think both you and Larry have made around expectations to be able to sort of take share coming out of this. I'm just curious if you could provide any specifics on what you're seeing today either in terms of maybe RFPs or code activity or maybe, you know, issues with availability of OEM parts or other things that give you increased confidence just beyond the environment that should obviously favor, you know, favor price and other aspects coming out of this? But is there anything more specific you would point to around the share gain confidence?
I would say, it's really, Ken, the same things that you pointed out. It's price; it’s having a competitor; it's having somebody else, you know, large and respected out in the field and that's really, I think, what's driving it. You know, the airlines entered this, you know, recession or this crisis very strong. And then, of course, as time has gone on, you know their business models have really been challenged. And when I speak with our sales folks, you know, they explain to me that, you know, frankly fear, uncertainty and doubt what our competitors, our OEM competitors try to push is reasons why not to buy our product really doesn't hold up.
So, they believe that we're going to be able to develop additional products because that's what the customers are asking for. They want us to go into these other products; they want us to develop our – you know, broaden our product line; and they're willing to buy it. So, as a result, we go ahead and continue to develop it. It's not only on in the parts area, but it's also in the repair area as well. So, I think it will continue to be a very competitive market. But, you know, that's what really gives me the confidence that we're going to do quite well.
Okay. And as we think about the organic opportunities from an investment standpoint in FSG, it sounds like across the organization, you've obviously got the ability to step up investments. Are there any particular areas, Eric, you'd identify where you're seeing maybe a greater spending, and when I say areas, either, you know, expanding your distribution capabilities, expanding the, you know, maybe the repair capabilities or the PMA portfolio? Other areas that are maybe getting a little more investment from you or you're looking at, as perhaps a little more attractive coming out of this?
No, I would say it's all of our areas are where we're continuing to invest. I mean, you hit on all of them, PMA repair and distribution, we see very good opportunities in all of those. I think that we provide a unique balance in all of those businesses. You know, there's obviously the nexus in how they connect across the top, which nobody else can bring. And then, in addition, you know, we operate them as small businesses where we're very knowledgeable about the details and that really helps our customers as well as, our manufacturers, our principals. And then, we've got the balance sheet of a larger organization, so we're able to compete, you know, like a larger company would. So, I think we're in a very unique space.
That's great. And if I could just one final one for Victor, it sounds like space – you're pretty – continue to be pretty optimistic on your space market, is it possible for you to, sort of break out the government versus commercial space, as they're sort of relative contribution within the segment? And maybe just provide a little bit more color on what you're seeing on the commercial side in terms of opportunities or how you expect this to grow in 2021 for you?
Sure, Ken. You know, and by the way, I don't want to overstate space, it's been good for us this year. I think it's looking promising going into next year, but I don't want to overstate it to lead you to believe that it's going to be stratospheric, no pun intended. But, it is moving in the right direction for us and we have some good opportunities and we are pursuing them.
And when I refer to space, by the way, we're referring two commercial space, in fact, and defense space is encompassed within the defense number that we report, so we don't actually break it out separately and that's why you hear us refer to that. And I would expect that the opportunities for us in the space markets are more in what I would consider some of the larger satellite markets or satellite opportunities, some of the constellations, actually, but some of the larger constellations, and less in the very new space, very, very small set market, I don't think that's going to be the big market for us. But there certainly is an increased interest in both satellite opportunities as well as Earth observation and space exploration that's benefited us and I think it will continue to benefit us.
That doesn't mean, by the way, that we won't have periods where space – you know, we won't have quarters where space is lower for us. It is still a somewhat volatile realm, but overall, we like it and think it's moving in the right direction.
Great. Thank you very much, and congratulations on the strong year and the cash generation.
Thanks, Ken.
Thank you.
Thank you very much.
Your next question comes from Michael Ciarmoli with Truist. You may now ask your question.
Hey, good morning, guys. Thanks for taking the question and Happy Holidays.
Good morning.
Victor, maybe just to stay on ETG, what was the organic growth? I know it was negative in the quarter, do you actually have the organic growth number? And I know you're not going to give much detail on 2021, but do you think ETG, you know, can grow organically in 2021?
Let me take it in reverse order there. I think we can have organic growth in 2021, but it's early in the year, there are a lot of things that will dictate what happens there and which is why we didn't issue guidance on the year. But I – our companies are certainly working toward that and I would – I have optimism that we can accomplish that at this point, but I want to let the year get further in. But right now, I would be surprised if we don't get organic growth in fiscal 2021, but let's see how the year wears on and what happens.
Okay.
And in terms of 2020, Carlos, yes [indiscernible].
How are you doing Michael?
Good.
For the year, organic growth in ETG was roughly flattish to down a percent and that was principally driven by aerospace. Remember that roughly 10% or so of the segment is commercial aerospace and it's going to follow the same trend as our FSG segment, so that was down. Other businesses did above what we expect them to do this year, absent logistical challenges of COVID and some of the disruptions that Victor mentioned earlier. So, I share Victor's optimism for next year. I think that the businesses can grow. I think that the commercial aerospace portion of ETG will mimic the recovery patterns in the FSG and that will be a bit of an anchor, probably in the early part of the year and then pick up towards the end of 2021.
Thank you. Got it and that’s helpful.
And let me add, I mean, I can say that, internally, our businesses are budgeting for organic growth. But you know what, we're always, me, in particular, very cautious, very conservative, and I don't – you know, we like to over deliver, to be honest with you, outperform. And so, you know, I'd rather comment further on that as we get a little deeper into the year, but that's certainly what we're planning for internally.
Got it. Got it. And then, I don't know if it's Carlos or Eric, on the FSG margin, I guess, you know, taking out that bad debt expense, 11% or so last quarter, it looks like close to 12% this quarter. You know, I know, the first quarter is usually seasonally weaker, but should we expect kind of this continued margin progression as, you know, the market recovers? And if you do get that, that second half 2021 strength, I mean can we expect you guys to get into the teens? You know, I don't expect you to get all the way back up to the upper teens 20% or maybe a total recovery, but is that the right way to think about the margin progression for FSG?
I think – Michael this is Carlos. I think you're on the right path. So, as Eric mentioned earlier, we are thinking about next year in terms of a bit of a continuation of what we saw in Q4 into the early part of 2021 with a gradual progression upwards towards the back end of 2021. And I think during that back-end period, you'll see our margins improve and I think in the early part of the year, you should see them slightly improve. So, I – could we get to the low teens? Yes. I mean, I think that's definitely in the cards for us, and obviously, we hope to do better.
But, you know, when we have more visibility, Michael, on next year, we'll – you know, I'm hopeful we could restore guidance at some point. But when we do at that point, I'll give you all the details you need. But right now, what I've told you is about all I can [indiscernible] prepare to talk about at the moment.
And Mike, this is Eric. Just also to add some color, you know, picking up on, you know, what I answered in one of the questions earlier, we could have generated higher operating margins, but we felt it was really important to take care of our people. And, you know, I think a lot of other companies are very, you know, sort of aggressive with their people. You know, other people say, other companies say their people are the most important, but then they don't act that way.
And we’ve really tried to act that way and as a result, the margin had taken a hit and we have been fully prepared, you know, recognizing that we've got to invest in our people and that's not to say that our team members haven't, you know, shared in the sacrifice because they had tremendously. But we've done everything we possibly could to, you know, hang on to them and to have them sacrifice less than other organizations and we think that HEICO will be rewarded, you know, with their loyalty and dedication coming out of the crisis. So, you know, we're very cognizant of the margins and, you know, and why we think that we can get them to increase moving forward.
Got it, helpful. And then, just one last one, on performance comp into next year, is that – I mean, any color around – should we think of that as being a slight headwind just given, you know, what took place in 2020? Or kind of a net neutral to margins? Or, you know, just how do we think about the mechanics there?
You know, I let Carlos explain on the specifics. But in general, incentive comp is based on performance. So first, the performance has to be there then the incentive comp will kick in. But Carlos can then explain the details.
Oh! Well, I couldn't have said it any better, Eric. I mean, I think the – as the operations improve and our profitability goes up, there will be incentive comp that's commensurate with that growth. But I don't expect it to be at 2019 levels next year. But I do hopefully knock on wood, as things progress into 2021 and our profits increase, I would expect a performance-based comp to increase also. But, you know, if you're modeling and thinking about on the number side, whatever your estimates are for growth and profitability, we're going to have some growth in our performance comp that's commensurate with that move.
Yes.
Got it. All right, very good. Thanks, guys.
Thanks, Mike. Thank you.
Your next question comes from [indiscernible] with Goldman Sachs. You may now ask your questions.
Hey, good morning, everyone.
Good morning, [indiscernible].
Hey, just staying on that FSG margin, actually, the sequential incremental, so, you know, just the drop there of the EBIT on the higher revenues sequentially using the adjusted number is 22% and you've talked about the 30% decremental and then a higher than 30% incremental on the way back up. Recognizing everything you just said on the different cost components, but you've taken out some cost and, you know, maybe you'll have costs coming back like you just said on a – when you have good incrementals. Should I care about that number at all? Or is it just kind of irrelevant because its one quarter and everything is still sort of funky?
No, I would – and this is Carlos, I would say that in the quarter – we had some headwinds in Q3 and four relative on the margin side to inventory reserves, which I don’t think will repeat itself going forward. So that had a bit of a drag on our incrementals. So, I think you've probably captured it correctly. I wouldn't focus so much on just one quarter. But I do think the incrementals will be better on a go-forward basis than are decrementals then going down.
That's the inventory obsolescence expense that's in the gross margin separate from the bad debt expense that's in the segment margin?
That’s correct.
Can you quantify how much of that's been in excess of normal over the last two quarters?
Yes, I think in the last – in the last couple quarters, we've probably had evenly between two quarters about $14 million worth of incremental increases in our inventory reserves. And most of that, no, it has been a result of us recognizing that many airlines over the last six months have come out [indiscernible] and discussed some of their fleet reduction plans and retirement of certain types of planes.
And so, what we did rather than try and fool ourselves and keep that product [indiscernible] on the shelves, we took a very conservative approach, and said, if the airline is going to put down, let's say, an A300, then we probably need to reserve for some of that inventory might have sitting around to support that portion of the fleet. So, we didn't take those charges [indiscernible] we’ve got that kind of out of our way now and that would be one aspect, if you will, of the margin that I don't anticipate repeating going forward.
Sorry, that's $14 million in both 3Q and 4Q individually, above and beyond…
[Indiscernible] quarter.
$7 million a quarter, $7 million a quarter.
$14 million totally, you know, in the back half of the year.
Okay. I mean, even $7 million a quarter would take – you know, if I adjust it for the bad debt, then I adjust it for that, it would put your margins more in the mid-teens in the back half of 2020 already. And then, should I be working in back half of 2021 a better than 30% incremental off of that?
At this point, no, I don't know that I would go that high. As we get into 2021, I'm happy to help you with that math, but I don’t know that I would guide you to that right now.
Okay. Last quarter, you said incremental is better than 30, was that…
Last quarter I said our incremental should rise faster than our decrements.
Right.
It went down, but I don't think I gave any numbers.
Okay.
Because we really don’t know. These incremental are dependent on mix, which part of each segment rose faster, so it's – you know, it's not like HEICO has one product, and it's very easy to just do the math. We've got such a diverse product base, which [indiscernible].
Sure.
It does make it a little more difficult to pinpoint, you know, without guidance out there where that – you know, what does incrementals are going to look like.
Appreciate that. I guess I'm just trying to get at whatever the incrementals are going to be or whatever you sort of think of the incremental as being in a framework, right, it's a company with a 30% incremental, it's going to vary quarter-to-quarter. That calculation can get wonky. Was that a statement working off of the lower margins knowing that the lower margins had the inventory obsolescence? Or is that – or was that a statement last quarter that's just sort of the broad long-term framework of a company's incremental decremental?
It's a broader long-term framework. I don't think we were looking at any specific quarterly adjustments and making that statement. I do think it's more of a broader long-term view.
Got it. Okay. The company has always maintained, as you've alluded to, a reasonably conservative balance sheet, degree of leverage, you know, relative to the consistency of the margins and cash flows. You've just been handed what will be hard to, you know, knock on wood, harder to ever repeat in terms of severity of downturn, yet, you didn't have a negative cash flow quarter? Does that have you rethinking the optimal balance sheet leverage going forward to continue to do deals and enhance the equity returns?
You wanted to?
Yes.
Go ahead.
This is Larry [indiscernible]. What we do is we model in a controlled growth pattern and that's our strategy.
Right.
So, we have said publicly that we aim for a bottom line growth of 15% to 20% annually and that's accurate. And we think in the relative near future, we can continue that growth. I mean, historically, over 31 years, we've done 19%. So in order to accomplish that growth, the controlled growth, we can do it very well using the debt strategy that we have implemented. There is no need for us to go out and do anything greater.
Now saying that, people have asked, would you do a transformational transaction, a major acquisition or something else? And the answer is, yes, if it is really going to benefit the bottom line. Too often, we see and we're approached by investment bankers with ideas that we can make HEICO bigger. We can double HEICO or increase it 60%. But they're talking about the topline. And we're focused on increasing the bottom line and cash flow. And so, if the opportunity presented itself to increase the bottom line, we would do that and we would probably take on more debt.
The key to taking on the debt is how quickly it would be repaid because we don't want to be up at six or seven times like some other companies. We don't feel comfortable there nor do we need to do that to grow at the 15% to 20% target. And I think, speaking to shareholders, which we do a lot as you know, they like the idea of the steady growth and we do too and we are the [long-view] shareholders. So, it's a strong, steady growth.
When the market collapsed in March, the banks weren't calling on us. We didn't sell debt at a 10% and we slept well every night. So, I guess – I don't know if that answers your question, but in the…
It does.
Yes, so that's really the way we look at it. I guess you could say it’s conservative, but – and in the past, we've been criticized by some people who've said, oh! Why don't you put on more debt and you can do all this stuff? And it's just that is HEICO’s strategy and that's what we're known for, so…
Got it. I mean, you know, that's really the question is any rethinking of that, so that helps me. And then, last one, related to that controlled growth, is the pace of new product intro, which if I understand correctly, you know, in given periods of time could be faster, but there's a controlled growth element. How would you think through that, Larry or Eric, if there's an opportunity to take market share because the industry has situation presented, but you normally have that controlled growth, you know, how above and beyond will you go with pace of new product intro 2021, 2022 with those sort of competing interests?
I think what we will do, we will reach for the sky as long as it will benefit the cash flow and the bottom line and that we see it's going to be strong, real growth. You know, we're not into financial engineering and you can see in the last quarter, we had 177% of reported income was cash. So that's our whole game, if you will. It's the cash flow; it’s the bottom line. And anything we can do [indiscernible] to accomplish that, we are going to do it, for sure.
Okay.
And having said that, I agree completely. You know, I think that our current level of new product development is a good level. It's a level at which we made sure that we've got, you know, a lot of customers and they're excited about the different products that we're coming out with. So, I really expect that we will continue to stay the course. Now if we see, you know, a significant change in the approval rate at our customers, then, you know, we could revisit it. But I would say, right now, we're very comfortable with what we've got going right now.
It was also very encouraging to find out that a lot of our customers were working on improving the use of our parts from their homes. And they were, you know, continuing to focus in this area because it continues to be a major cost driver for the airlines. The airlines know very clearly that if HEICO doesn't exist, their prices go way up. And where we're a, you know, significant part of their strategy.
Okay. Excellent. Thanks so much.
Thanks [Noah].
Thank you [Noah].
Your next question comes from Colin Ducharme with Sterling Capital. You may now ask your question.
Hi, good morning. Thanks for the opportunity to ask a question. First question, really in the theme of just visibility maybe best for Victor, and then for Carlos. Victor, you've given us some good comments on where you're seeing opportunity, particularly outside of the commercial aero realm within ETG. I'm just trying to kind of roll up some of the detail that you offered, if you could help us just characterize, you know, within ETG, apart from commercial – from the, you know, portion of that segment that does have commercial aero leverage, can you characterize the visibility you today see and compare it perhaps where that visibility for that portion of the business was pre-pandemic, just trying to kind of understand, you know, your confidence there? And then, linking that to the overall business, maybe best for Carlos would be, you know, still with suspended guidance, can you help us think through what framework or pre-conditions you need to see before you get incremental confidence to re-establish that guidance? And then, I had a follow up for Larry next.
So, Colin hi, this is Victor. It's a good question. It's an interesting mix what's going on now. Visibility is certainly less than it was pre-pandemic and what we're seeing though and what we found in the businesses that are serving the high-end electronics market, things that I would consider more connected to the general economy, the broader economy, that of late, there has been – over the past few months, a marked increase in demands, a marked increase in orders, a marked increase in inquiries, coding activity and things of that sort. And the level of activity is markedly better than it was earlier in the year.
And so, that leads me to be generally optimistic. It seems that people are asking to pull in orders. They're asking for faster deliveries. They're more concerned with that than they were. In the very early days of the pandemic, we had an interesting phenomenon where customers were actually looking to accelerate orders because they were worried about the supply chain and things getting delayed. There were stories, of course, of product not making it from the Far East, particularly China, where the virus originated. And so, they were worried about that. And so, there was an acceleration. And then all of a sudden, that stopped, and it flipped around and it was going the other way for a while. And now that's reverted.
And so that seems to be very positive and the visibility question is, well, how does that hold up? How long does that hold up? How does that work? Where does it stabilize and so on? One of the key things I think about is we're about to – within a few months, we'll anniversary out of the start of the pandemic. And so, everything will feel much more positive and be much more positive as a result of that.
By the way, on commercial aviation, the 10% or so of ETG that is usually commercial aviation, you know, that's been improving as well. We've seen some nice signs and improvement there and the future order outlook. I think as the year wears on, that will do better. Also, on the medical side, I think that offers us some upside potential because things had slowed down there. If you recall, there was a – there were fewer medical procedures and people just not going to the doctor, et cetera during the pandemic, I think that will start to switch around. So that impacted some of our businesses and the components that we sell. The question is one of timing. So that's why I say it's less visibility as a rule of thumb.
So, generally speaking, I believe it turns in the right way and it is turning in the right way. The question is when and exactly how keeping in mind, you know, we're already halfway through, a little more actually halfway through than halfway through our first fiscal quarter. So, [indiscernible] a little bit different than most people’s [year-end] as that starts to filter through it. It can – you know, it becomes a question of does that push through in the third quarter, odes it push through in the fourth, or does it wind up being at the end of 2020? But our fiscal, excuse me at the end of 2021, but our fiscal 2022 and we'll just have to see how that falls out. Was that helpful?
Yes, thank you.
You're welcome.
I would just add this, once we see the cadence of orders from the airlines being a little bit more stable, if you would, and the flights and the number of aircraft in the air are a little more predictable and more flying that would probably give us the confidence if there is an organization to reinstate our guidance and think a little bit more, you know, broadly about doing that. But right now, there is so much – you know [indiscernible] of our customers are acting so differently as far as how they spend or maintaining their fleet that is – you know it’s just not in our best interest to try and thank them at this moment. But I do anticipate during fiscal 2021 that that fog, if you would, will lift and people will have a little bit of visibility as the year progresses. So – and that point we'll discuss and as the management team reinstating guidance and if we can, we will do so.
Okay, understood. I appreciate that. And then just a couple of follow ups quick one for Eric and then maybe a longer, more thoughtful one for Larry. Eric, I heard you say earlier within FSG PMA, you, I think, characterize competitive conditions as having not changed. Just wanted to link that back to that regulatory announcement, I guess it was now a little over a year ago with CFM and potentially loosening some soil for you guys to plant some seeds there within PMA. I know we've had a pandemic since that announcement that has kind of upended that end-market, but just wanted to verify whether you’ve see any tangible evidence of any competitive movement whether it's, you know, tangible or anecdotal there, that will be great.
And then for Larry, from an M&A standpoint and potential currency used for deals, there's been some conversation on this call of potential for transformational deals much larger and quantum than what you've done in the past. You know, I remember I guess it was 20 some odd years ago, where we created the A shares and that was, you know, in anticipation of, at the time, what could have been a transformational deal. So there is some history with the, you know, willingness to pay stock, but, you know, just wanted to ask you, you know, has the currency been a sticking point to get folks, you know, kind of over the hump? You know, I've always thought that that 80:20 you know, equity share ownership with the put calls that you typically have kind of takes care of that participation and upside for sellers. And so, you know, is that structure – you know, has that been a sticking point?
And then, relatedly, if you were to consider use of stock for a more transformational deal, do the criteria, the financial and accretion criteria change at all? i.e., do you pull your horns in and perhaps become a little more conservative because you're using, you know, stock for a larger purchase because since you've been such good stewards of the, you know, stock over the longer haul, perhaps you’d have a little more caution when doing – you know, thinking of a move like that? Thank you very much.
So that's a great question and the way you structure it is really shows your understanding of HEICO and you go all the way back to the 1999 and the transaction that we were considering most people have forgotten about that and how the A stock came into being, but you have a great long history and a good memory.
So to answer your question, we will make any accretive acquisition using any medium of exchange that we can. We'll use [indiscernible]; we’ll use [gold bullion]; we'll use stock; we'll use cash; we'll use bonds; we'll use notes, as long as it meets the criteria that we have set forth, which I think I've explained and that is cash flow bottom line.
Now, keep in mind, the difficulty in which we operate. Most industrial companies or even aerospace companies operated margins which are 50% or less than our margin. The trick and the reason we use strong margins is because strong margins generate strong cash flow. It's not rocket science [is very good].
Number two, this management is really compensated because of our stock ownership, just like every shareholder out there. And we are completely aligned with every shareholder, every [indiscernible]. If we selfishly make a good acquisition or we generate cash and it goes to the bottom line, the stock price goes up, yes, we benefit because we're the largest group of shareholders. However, every shareholder benefits [indiscernible] with what we have.
In other companies, many companies, I believe that the motivation is bifurcated. The management generally owns little equity, and therefore, the management wants to grow the company because the topline, even if the operating margins are 8% or 10%, the topline can double. That requires the use of a lot of cash, it sucks up cash. But the management who is generally there for three to seven years sees his or her compensation double it. They grow the topline from $2 billion to $5 billion, the compensation, the managers compensation goes from $3 million to $6 – whatever the number is.
In our case, we own a large number of shares. So, if the stock goes up 10 points and I'll define it for you, it's public, if we own $12 million or $14 million, and I don't know the exact number, but if you include the 401(k) because we're very concerned about the success and the financial stability of our people, our team members, if that goes up 10 points, we make $140 million or $200 million in equity value. Now, do I care if my salary goes up $3 million? Of course, not.
So, to answer your question, we will make transactions that generate cash flow accretion and stock value. And however – again, whatever currency we must use, we will do it. I can tell you as an example, we're negotiating, we're talking to somebody now and they came to us and they said, we only want to sell for stock. And I said, well, normally, you know, we'd prefer to give cash. We normally give cash, but for you, because we want this acquisition, whatever you want, we’ll give. You want cash; you want stock, whatever you want, we will give you. So, I don't – does that kind of answer your question?
I have to work [indiscernible] my models, but thank you.
We're not sure about Bitcoins. In fact, I got to ask Carlos, if we can use Bitcoin.
Like you said, we use whatever we have to.
Whatever we have to do, we'll use.
Hello?
Thank you. Your next question comes from the line of Louis Raffetto with UBS. You may now ask your question.
Hey, good morning, guys.
Good morning.
Good morning.
I was hoping you mentioned Bitcoin. I was the one missing thing in there, but [indiscernible] 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, you know, 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?
It was – Louis, it was flat ETG. This is Victor. It was flat, organic growth in the fourth quarter.
That's correct. That's correct. Louis, roughly, in the fourth quarter, we probably had in ETG around $16 million worth of acquired sales in the numbers. So that will…
Okay.
You know that will – we have no reason to think that that won't continue going forward and most of the acquisitions, you know, occurred in August and Q4, so we got the benefit of most of that. And, of course, that’s probably a decent run rate, I would guess.
Okay, that's perfect. And Eric, just one for you, one to follow-up. I know you've mentioned before that between parts and MRO is kind of same ballpark. But if I go back to last quarter, it was kind of down 40 in parts down 60 in MRO, so, you know, business down 40%. So, are we looking for – was there a kind of an improvement in MRL and parts was flattish? Or any additional color you can give there?
So, let me take a look at some of my numbers here. I mean, it was all really in the same – as I said, the same ballpark there. So, I wouldn't say that there was much of a difference. You know, in any one quarter, one can be, you know, based on the prior comp, one can be ahead, you know, versus the other. You know, if you look at 2019, in the fourth quarter, we had 12% organic growth in Flight Support and on against the comp in 2018, 13% growth. So it's 25% growth over, you know, two annual quarters there. So things can move around, you know, based on this.
You know, in general, I would say that the parts and – the parts business would be down less than the component repair. The way that that normally works is in component repair, you can end up having some in the pipeline, which has been approved by the customers. So there can be a little bit of a lag there. And as a result, it could lag where the component repair comes back a little after the parts come back because first they have to procure the parts in order to be able to do the component repair. But I would say that it was all, you know, in a similar ballpark. Component repair was down more than parts, but I wouldn't get too wrapped around that because it can vary a little bit, as I said, quarter-by-quarter.
I know, that's perfect. Thank you.
You're welcome. It’s similar to Q3, I'd say.
[Operator Instructions] We have a follow up question from Colin Ducharme with Sterling Capital. You may now ask your question.
Yes. Sorry for the follow up. Eric, I did just want to get a color on that comment with the European regulatory action a little over a year ago linking to your comments FSG PMA, that competitive conditions hadn't changed. Thanks.
Thank you, Colin. I'm glad you asked that because we went on to the next question before we had an opportunity to answer on that. Yes, we – I would say that we're – we continue to be encouraged based upon the conversations that we've heard. You know, we don't like to speak about, you know, particular product lines or customers, but we do believe that there's been good progress in that area. It has sent a very clear message regarding engine, you know, alternative parts for engines, whether it's PMA or DER repair. So again, I think that it – there have been, you know, nice conversations and some good – you know, good results coming out of that enforcement action.
Thanks.
Thank you.
[Operator Instructions] Presenters, there are no further questions on queue, you many continue.
If there are no further questions, I want to thank everybody on this call for participating and for their interest in HEICO. As you know, we remain available to you by phone. If you have any other further questions or information that you'd like, you can call Carlos, Eric, Victor, myself, we’ll be happy to respond. And I want to wish you all a very happy, healthy holiday season. Hopefully, when we next speak, which will be the report of our Q1 sometime in late February, most of you will have received your COVID vaccine. And we'll be on the way to continued good health. So Happy Holidays to everyone. And again, thank you very much.
Thank you, presenters. And thank you ladies and gentlemen for joining fiscal year 2020 fourth quarter and end of the year earnings results call. You may now disconnect.