Welcome to the HEICO Corporation fourth quarter and full year fiscal 2022 financial results call. My name is Samara, and I'll be today's operator. Certain statements in today's call will constitute forward-looking statements which are subject to risks, uncertainties, and contingencies.
HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to, the COVID-19 pandemic, HEICO's liquidity and the amount and timing of cash generation, lower commercial air travel caused by the pandemic and its aftermath, airline fleet changes or airline purchasing decisions which could cause lower demand for our goods and services, product specification costs and requirements which could cause an increase to our cost to complete contracts, governmental and regulatory demands, export policies and restrictions, reductions in defense, space, or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors which could reduce our sales, our ability to introduce new products and services at profitable pricing levels which could reduce our sales or sales growth.
Product development or manufacturing difficulties which could increase our product development and manufacturing costs and delay sales, our ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest, foreign currency exchange and income tax rates, economic conditions, including the effects of inflation within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries which could negatively impact our costs and revenues, and defense funding or budget cuts which could reduce our defense-related revenue. Parties listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
I now turn the call over to Larry Mendelson, HEICO's Chairman and Chief Executive Officer. Please go ahead.
Thank you and good morning to everyone on the call. We thank you for joining us, and we welcome you to the HEICO fourth quarter fiscal 2022 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I am joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group, Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group, and Carlos Macau, our Executive Vice President and CFO. Today, my comments will address our consolidated fiscal 2022 fourth quarter results, acquisitions, and accomplishments, followed by a presentation of the segment results from Eric and Victor Mendelson, HEICO's Co-Presidents. Before reviewing our record operating results, I would like to take a moment to thank all of HEICO's exceptional team members for delivering another strong quarter.
Your continued focus on exceeding customer expectations and operational excellence has translated into outstanding results for our shareholders. I'm encouraged by the steady improvement in our businesses during fiscal 22. I am very optimistic that this trend will continue into fiscal 2023. Summarizing the highlights of our fourth quarter fiscal 2022 results, consolidated fourth quarter fiscal year 2022 net sales and operating income represents record results for HEICO. That was driven principally by record results within the Flight Support Group, mainly arising from the continued rebound in demand for our commercial aerospace products and services. In addition, this marks the ninth consecutive quarter of sequential growth in net sales and operating income for the Flight Support Group. Consolidated operating income and net sales in the fourth quarter of fiscal 2022 improved 27% and 20% respectively, as compared to the fourth quarter of fiscal 2021.
These results mainly reflect 11% quarterly consolidated organic net sales growth and the favorable impact from our fiscal 2022 and 2021 acquisitions. Consolidated operating margin improved to 24% in the fourth quarter of fiscal 2022. That was up from 22.6% in the fourth quarter of fiscal 2021. Consolidated net income increased 13% to $97.2 million or $0.17 per diluted share in the fourth quarter of fiscal 2022. That was up from $86.1 million or $0.62 per diluted share in the fourth quarter of fiscal 2021. HEICO's effective tax rate was 23% in the fourth quarter of fiscal 2022, as compared to 18.3% in the fourth quarter of fiscal 2021.
The increase in the effective tax rate for the fourth quarter of fiscal 2022 principally reflects a 7.6% unfavorable impact from tax-exempt unrealized losses in the cash surrender values of life insurance policies related to the HEICO Leadership Compensation Plan, and that was recognized in the fourth quarter of fiscal 2022 as compared to the tax-exempt unrealized gains recognized in the fourth quarter of 2021. Later on in this call, if anyone has questions about the detail, this is a complicated matter. Carlos Macau is here, and he will be able to explain that to you. Truthfully, it has no impact on our real operations. Our recent activity in acquisitions in September 2022, our ETG group completed the acquisition of TRAD Tests & Radiations located in Labège, France.
TRAD is a leader in the highly specialized field of radiation engineering, and their services and products are used primarily in space, nuclear and medical fields. In September 2022, our ETG group completed the acquisition of Ironwood Electronics located in Eagan, Minnesota. Ironwood is a leading designer and manufacturer of high-performance test sockets and adapters for both engineering and production use of semiconductor devices. As previously reported, our ETG group entered into a purchase agreement to acquire approximately 95% of Exxelia International, which is headquartered in Paris, France. Exxelia is a global leader in the design, manufacture and sale of high reliability, complex, passive, electronic components and rotary joint assemblies for mostly aerospace and defense applications.
The transaction's closing, which remains subject to government approval and customary closing conditions, is still expected to occur in the first quarter of fiscal 2023 and would be HEICO's largest ever acquisition in terms of purchase price and revenues. These acquisitions, all of them, are expected to be accretive to HEICO's earnings per share within a year of the transaction's 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 fourth quarter results of the Flight Support Group. Eric?
Thank you very much. The Flight Support Group's net sales increased 33% to a record $346 million in the fourth quarter of fiscal 2022, up from $260.4 million in the fourth quarter of fiscal 2021. The net sales increase in the fourth quarter of fiscal 2022 reflects strong 22% organic growth as well as the impact from our profitable fiscal 2022 and 2021 acquisitions. The organic growth mainly reflects increased demand for the majority of our commercial aerospace products and services, resulting from continued recovery in global commercial air travel as compared to the fourth quarter of fiscal 2021. The Flight Support Group's operating income increased 60% to a record $77.8 million in the fourth quarter of fiscal 2022, up from $48.6 million in the fourth quarter of fiscal 2021.
The operating income increase in the fourth quarter of fiscal 2022 principally reflects the previously mentioned net sales growth and improved gross profit margin, mainly from increased sales within our specialty products and aftermarket replacement parts product lines, as well as efficiencies realized from the higher net sales volume. The Flight Support Group's operating margin improved to a record 22.5% in the fourth quarter of fiscal 2022, up from 18.7% in the fourth quarter of fiscal 21. The operating margin increase in the fourth quarter of fiscal 2022 principally reflects decreased SG&A expenses as a % of net sales, mainly reflecting the previously mentioned efficiencies as well as the previously mentioned improved gross profit margin.
Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the fourth quarter results of the Electronic Technologies Group.
Thank you, Eric. The Electronic Technologies Group's net sales increased 6% to a record $268.5 million in the fourth quarter of fiscal 2022, up from $253 million in the fourth quarter of fiscal '21. The net sales increase is mainly attributable to the impact from our profitable fiscal 2022 and 2021 acquisitions, partially offset by a slight decrease in organic net sales. The organic net sales decline is mainly attributable to decreased defense and space products net sales, partially offset by increased other electronics, medical and commercial aerospace products net sales.
I'd like to point out that the Electronic Technologies Group's backlog remained elevated, reflecting strong orders and increasing delays in receiving components and raw materials from some suppliers. These delays have adversely impacted our planned production and shipment of some products during fiscal 2022, but we expect that they should benefit us in fiscal 2023 as these products ship. The Electronic Technologies Group's operating income increased 4% to a record $79.9 million in the fourth quarter of fiscal 2022, up from $76.9 million in the fourth quarter of fiscal 2021. The increase in operating income principally reflects the previously mentioned higher net sales volume, a favorable impact from changes in the estimated fair value of accrued contingent consideration, and decreased performance-based compensation expense, partially offset by a lower gross profit margin, mainly from decreased defense and space net sales.
The Electronic Technologies Group's operating margin was 29.7% in the fourth quarter of fiscal 2022 as compared to 30.4% in the fourth quarter of fiscal 2021. The lower operating margin principally reflects the previously mentioned lower gross margin, partially offset by the previously mentioned changes in the estimated fair value of accrued contingent consideration and a decrease in performance-based compensation expense. I turn the call back over to Larry Mendelson.
Thank you, Victor. As for the outlook, as we look ahead to fiscal 2023, we anticipate net sales growth in both FSG and ETG, principally driven by demand for the majority of our products. Our largest end market is commercial aerospace, which continued to grow during fiscal 2022, and we expect the strong growth trends to continue into fiscal '23. Our second-largest end market is defense. The defense markets were essentially flat for HEICO in fiscal 20 22. Though we would all prefer peace, global disputes and unrest means more defense equipment is required, providing a favorable environment for defense suppliers. We were negatively impacted by supply chain matters, principally for electronic components in fiscal 2022, and that delayed certain delivery schedules. We expect these external factors to mitigate in fiscal 2023, but we can't predict when.
However, we remain very optimistic on the defense industry's future and have seen growth in our orders and our backlog, and that supports our optimism. We will not be providing detailed fiscal 2023 net sales and earnings guidance at this time. We believe that our ongoing conservative policies, strong balance sheet, high degree of liquidity, all enable us to continuously invest in new research and development and execute on our successful acquisition program, which collectively positions HEICO for continued growth and market share gains. In closing, I would again like to thank our incredible team members for their continued support and commitment to HEICO. Fiscal 2023 looks very promising, and I believe that our culture of ownership and entrepreneurial excellence will provide excellent career growth and opportunities for all your success in fiscal 2023 and beyond. Thank you all that you do to make HEICO a great company.
That is the extent of our prepared remarks. I would now like to open the line for comments and questions, from people who are listening.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal for questions. I'll take the first question from Rob Spingarn with Melius Research. Please go ahead.
Hi, everybody. Good morning.
Good morning.
Nice finish to the year. Very, very nice numbers today. You know, Larry, you just mentioned culture, and so I think this warrants a high-level question for any of you. With all of the acquisitions over time for HEICO, I think many investors would have expected the company to inevitably change over time. Can you talk about how you've been able to maintain the culture and the operational excellence and essentially what drives the consistency in the outperformance?
Well, that... Shall I?
Well, let me give you Eric is dying to answer that question, but since you posed it to me, I will respond. I don't wanna duck anybody's question, Rob. The basic culture of HEICO is one of a decentralized organization where we give tremendous authority to the operating level. As you know, we have no mid-level vice presidents that filter everything that comes from the operating group up to the corporate and to myself, Eric, Victor, and Carlos. The first thing we do in acquisition, the most important, is really scrutinize, analyze, get to know the person who is selling the company to us and how he manages. If he treats his people well, this is very important.
As an example, if he goes through the factory and he sees somebody, and they said, he tells us, "Oh, that's a machine operator, that's a this and that and that," that's not very impressive. Some of these people go through the factory and they say, They stop at a machine and say, "Charlie, here, these are Mendelson's. How's Anne?" Meaning his wife. "Family okay? Everything good? Charlie, how long have you been working for 22 years." This means an awful lot, Rob. We understand the relationship between the owner of the company and his workforce, his team members. That goes a long way, and we understand how that all works. That's the HEICO culture. The other thing is we give tremendous authority and responsibility to the operating person.
We believe that the person running his organization knows more about his team members, his labor force, his customers, his manufacturer, everything else, than somebody in a corporate office, a 1,000 or 2,000 miles away. Again, it's the authority that we give them. People who are very talented respect the fact that we give them that authority. Talented people normally do not like somebody breathing down their neck and over-supervising them. What are you doing? What are you doing? I think that has worked very well. Also, we have a very exceptional 401 plan, where we give employees, if they put in 6%, we match it normally with 5% in HEICO stock.
Many, many of our working people, I'm talking about factory workers, shipping clerks, secretarial help, are millionaires, some are multimillionaires, all as a result of stock that HEICO's given them. They take a personal pride in being a HEICO team member. It's not as though, "Hey, I'm working, and I hate my job." They understand that they are being compensated and rewarded by having shares of HEICO stock given to them by the company. They didn't pay for it. That brings their interests aligned with all shareholders. We think that most of our people are focused on building HEICO and being part of a team. There's a psychological benefit to call somebody a team member as opposed to an employee. If you're my employee, you work for me. If you are a team member, we all work together.
All of these things have developed into a part of the HEICO culture, and, I think a lot of that is responsible for our success. Eric, do you wanna add?
Yeah, I mean, I think that's a good explanation of, you know, our acquisitions and our culture. I think, Rob, you know, as I was, you know, thinking about this, I think it's even more basic than that. It's that when we came to this company 33 years ago, we decided we wanted to build something for the long term. It wasn't gonna be built for years or a single decade. It was gonna be built for multiple decades. Frankly, every single thing that we've done, every decision that we take, has been designed to drive sustained long-term growth of the business as opposed to any short-term focus.
When we've got to make decisions on, you know, everything from inventory, capital expenditures, people, customer relationships, everything is focused on cash generation as a result of also maintaining low debt and being able to create a culture which drives long-term performance. You know, as a matter of fact, last night I was reviewing some of our capital expenditure plans, and I saw some of our subsidiaries were buying equipment that frankly wasn't going to impact 2023 or fiscal 2024 earnings, but was gonna impact it in 2025,20 26, 2027 and after. I realize that the results that we are showing today, which are, you know, frankly, I think so far above, what's normal for the industry, are as a result of that long-term focus.
We're really benefiting as a result of decisions that were made 10 years ago, 20 years ago, 30 years ago, that you can't make happen short term. When we look, you know, people ask me all the time, you know, why is it HEICO performs? If you look at over the length of the economic cycle, we don't have one-time write-offs. We don't do things that, if you will, boost the earnings in the short term. I think our culture, which has been designed for long-term approach, is very, very different than typical corporate culture, or private equity, which obviously has, you know, which drives short-term results as a result of their compensation structure and, you know, everything that they're set out to be.
I really wanna call out the people at HEICO, because frankly, the ones who get ahead and the ones who are in positions running our businesses today are in positions of importance are frankly the steady eddies. They're not the ones who came in and all of a sudden had a quick turnaround and, you know, a great success, a flash in the pan. Our people have worked hard year in, year out, most over decades, and it's a result of that performance and that discipline and that rigor over decades, which has driven the results that we have today. You know, I just wanna call out, frankly, all of our incredible people, our steady eddies, who just continue to work hard year after year and really make this happen. I think that's really what makes us unique.
Thanks very much for the comprehensive answer. Appreciate that.
You're welcome.
Thank you.
I'll take our next question from Larry Solow with CJS Securities. Please go ahead.
Great. Good morning. Thanks, guys. Well, I totally appreciate on the guidance, you guys' long successful history. I certainly need to provide specific guidance anyhow. I do appreciate the sort of qualitative outlook. Just maybe a couple questions for Eric and Victor. Eric, just on specifics, obviously, it feels like your aftermarket is strong, parts are strong. I'm sure specialty, I think, also had a good quarter this quarter. I'm just trying to figure out, you had a little bit of an above-average margin year this year. Some of those drivers, does that sort of settle back into more of an historical range as we look out, you know, to the coming year?
Hey, Larry, this is Carlos. Let me jump in there. I think what we're seeing in the Flight Support Group, it's been amplified, let's say, starting in Q2 and running through the end of the year, is some disproportionate growth in specialty products, which has changed the mix a little bit in FSG for the back half of this year, which normally isn't the case. Normally, all aspects of the Flight Support Group grow in tandem, usually, our story is a margin that's based off volume growth. I think what we continue to see is our parts and specialty products outperforming some of the businesses within the Flight Support Group, which has, because of mix, has had an impact on pulling the margin up a little bit. You know, we're happy to see that.
I mean, as Eric mentioned earlier, it's a 22.5% margin for the quarter, all-time record. We're very happy to see that. I think once the mix settles back into its footprint, you know, once we get completely thrown out of COVID-19, we'll see that margin moderate a little bit, would be my expectation.
Okay. Yeah. That makes sense. I just. Yeah. Yeah.
Larry, also just to add, I think we did, you know, we have seen market share increases, and frankly, tremendous efficiency as a result of the effort of our people. I also wanna add that the margin that we have was, you know, we were still able to drive that margin even having, you know, proper reserves, paying people, frankly, generous bonuses. You know, we did everything for the long term and still came out with those margins, made all of our investments, and did everything the right way. I just couldn't be more pleased with those margins.
Yeah, absolutely. From a high level, Eric, obviously, it feels like, you know, commercial aviation seems to be in a good place right now. The economy may be slowing a little bit, or for sure is slowing. I just assume it feels like you're gonna have a good growth year again, but obviously, you can't continue to grow like you did, the last couple of years. Just any color on sort of, you know, how you feel about the industry today?
Yeah. I feel very good about HEICO's position in the industry. You know, there's no question that a rising tide lifts all boats. I think that HEICO is in, frankly, in a unique position because we've positioned ourselves in our various businesses. You know, I've seen in all of those businesses substantial margin increase as well as market share increase. We're doing really well. I mean, as a matter of fact, normally I wouldn't call it out, but just so, you know, you're sort of getting to this.
You know, what's interesting is that our, frankly, our PMA sales are at an all-time record. You know, if you look, flights across the world are still down, you know, whatever, 20%, and we still haven't seen full recovery in Asia and, you know, somewhat in Europe and Middle East and South America, and even in the, in the US to a lesser extent, North America. HEICO PMA sales are at an all-time record. You know, I think that we've got plenty of, you know, power behind us, and I think that's as a result of picking up market share and frankly, treating the customers right. They know that, you know, we've treated them right for 30 years, and we don't take advantage of them.
We're very fair, we're very reasonable, and they've rewarded us with that market share. It wasn't stuff that we did short term that made it happen, it was stuff that we did long term, and they trust us. I think we're really very much in a virtuous cycle, which is permitting this.
Absolutely. Great. Then if I may just switch gears real quick to more quickly for Victor. I know you've been quiet back there. Just quickly, obviously, it sounds like your largest market defense, macro is very favorable, and maybe this year we've been impacted by more supply chain issues than anything else. How about some of your other larger market space, medical? It feels like the outlook there, rich industrial, you know, consistently good. Is that sort of a fair assessment?
Yeah, I mean, good questions, Larry. The, those other markets have been very strong for us this year. In fact, I think really toward the end of last year as well, they've really been star performers, all the ones you mentioned, medical, high-end electronics in particular, commercial space a little, you know, certainly less so, and actually a little softer in some instances.
I would expect, by the way, going forward, you've heard me say this before, that at some point, we see those other markets flatten out somewhat and, still, I think be excellent, markets for us, but I would expect them to flatten out or even soften up a little bit as the year wears on and as supply chains get worked out and, you know, customers deal with their own shelves.
Got it. Great. I appreciate that call. Thanks, guys.
Thank you.
We'll take our next question from Pete Skibitski with Alembic Global. Please go ahead.
Hey, good morning, everyone.
Morning, Pete.
I guess, Victor, maybe just to continue that discussion a little bit, you know, it looks like we might get sort of high single-digit budget growth this year and kind of the base DoD budgets and, you know, a lot of Ukraine-related spending as well. Can you give us some puts and takes in terms of, you know, if we look at that budget growth, but also consider, you know, you talked about the supply chain issues and some people talk about defense contracting officer kind of delays. What's kind of the right way to think about all those puts and takes and, you know, the expectation I think we would all have that you could at least grow, you know, at least in line with DoD budget growth, at least averaging it over time?
Yeah. I certainly think over time, we should exceed DoD budget growth, just knowing our businesses and what we're working on and the things that we do. Of course, in any given period, we may be tied to the defense budget directly, or it could be negative, right? Our correlation could be a negative one to the defense budget. I would think that you're absolutely right on some of the procurement specialists at the DoD being, let's say, overwhelmed in their workloads and dealing with work from home conditions and things like that, which have definitely, in our view, delayed, deferred, items from getting put under contract.
The supply chain issues, I think, have been bigger for us, and I think, you know, they were at a kind of record level for us in the fourth quarter. I was hoping that they would come up in the fourth quarter. Maybe we're starting to see a little bit, seeing some green shoots in the supply chain, but I think it's too early to call victory there. Of course, you mentioned the foreign engagements, which I think benefit us. I don't think that they are going to cause, you know, be major needle movers necessarily in the next quarter or two.
I think actually, if you look at what we make and how those things are getting inserted over there, I think they're a little longer burn, in terms of just the order cycle and production cycle. I think, as we said in the comments, that, the dynamic is positive for us.
Okay. I appreciate. Maybe last one for me, for Carlos, maybe. Carlos, just, you know, I think this year was a year of, you know, building some safety stocks. If we expect, you know, revenue up next year, how do you think working capital trends? Does the safety stock issue kinda reverse itself or, you know, do we continue to build because of these supply chain issues and higher growth? Just was wondering if you could provide some color there. Thanks, guys.
Sure. Sure. we invested, I mean, HEICO, we invested in inventory this year. If you look at our balance sheet, you'll notice that we have a pretty big investment in working capital, particularly for inventory. I suspect that as you're pointing out, a lot of companies around the world have done that also. The impact to us going into next year, I don't think there's a ton of impact on the flight support side because most of the business that we do in the Flight Support Group is ordered and shipped in the same month. There's not a ton of backlog. Within our defense business on specialty products, there's backlog, but most of the aftermarket is really build and ship in the same month. you know, which implies that most of our customers aren't stocking our product.
We have a model with our customers where the parts come when they need it, and they don't have to stock our stuff if they don't want to. In fact, if they do want that, we usually put consignment cages in their buildings and we handle all that for them. Not too much on the Flight Support side. In ETG, I do think that it has been in vogue, particularly with electronic parts, to go heavy on inventory. We've done that. Yeah, I think in 2023, could there be some sort of inflection where people hit the pause button? That's possible.
I think for our businesses, because we're not stuffing channels and oversupplying our customers, I don't believe it's gonna be a major impact to HEICO. I think globally, yeah, I think there's something out there that we'll reckon with probably in 2023, early 2024.
Okay. Thanks, guys.
Does that answer your question? All right, Pete. Thanks.
The next question comes from Peter Arment with Baird. Please go ahead.
Yeah, good morning, Larry, Victor, Eric, Carlos. Happy holidays.
Good morning. Good morning, Peter. Good morning.
Yeah. Hey, Victor, last quarter, you kind of quantified the supply chain pushout. I think it was around $25 million sales. You just mentioned it kind of at record levels. Is it so exceeding that number? Or maybe if you just give us a little if you can quantify it, that'd be helpful.
Yeah, sure. We estimate that in the fourth quarter, that number actually rose by a little more than $20 million to around $47 million. I won't identify which subsidiary. About half of it actually came in one subsidiary, and so which had not been experiencing, actually had avoided, the supply chain issues for quite a long time. And they're estimating they will ship that in fiscal 2023. You know, in some ways, there was some improvement, over the prior period because a number of other companies saw the numbers shrink.
We had one in particular that was high and then a couple of others that were on the higher side too, whereas in the past, had been a little more broadly distributed.
Okay. That's helpful. Then just, Carlos, maybe you could just talk to us a little bit about tax rate expectations when we're thinking about fiscal 2023.
I think for HEICO, we typically run 20%-21%, sometimes better than that. This year, our tax rate was amplified for the pretty much most of the year except Q1, due to losses in the market. As Larry mentioned earlier in the call, we have investments in life insurance policies which back our, what's called our HEICO Corporation Leadership Compensation Plan, which is a deferred comp plan for our employees, our team members. When the losses on cash surrender value occur, which is impacted by general market trends, we don't recognize a loss on the P&L, but what we do recognize is either gains or losses in our tax rate as a result of movement in those permanently deferred items. That can have a material impact on our tax rate.
This year, it had about a $25 million impact on our tax rate. That's not insignificant. That's, that is the driver of what could move our rate off that 20% bogey that I would normally target. If the markets grow, our tax rate will be a little lower. If the markets stay safe and stable, you'll see our tax rate similar to what we had this year. If we have big losses next year in the market overall, could amplify our tax rate a point or two.
Okay. That's, that's a great one. Just lastly for me, Eric, you mentioned kind of, you know, you're kind of at record levels for PMA, but we still have a lot of traffic down in Asia. I was just wondering how you kind of quantify when we see, you know, if China reopened fully, you know, what the impact could be on FSG. I know you're kind of already a global player in terms of your customer base.
Yeah. I mean, we're already doing very well in China. You know, if China presumably, I mean, my expectation in, you know, speaking with various experts is that China's going to experience hundreds of millions of cases of COVID. Whether they get reported or not is another thing. That should have a chilling effect on their domestic travel. You know, the real question is whether that spreads. I... You know, based on the vaccination rates and therapeutics that are available around the world and our natural immunities as a result of everybody else getting infected, hopefully it doesn't impact the rest of the world. I think China, we're gonna see fits and starts. You know, the air travel went up a lot a couple days ago, now it's come down.
You know, they're gonna be in for a tough 12 months, I think, as a result of, you know, where they are with the virus. We feel very strongly, and that's why we're wired, you know, to continue to take market share. I think we're in a very strong position to do well, you know, regardless of how China does. We are doing very well in China currently.
Appreciate all the details. Thanks, guys.
Thank you.
We'll take our next question from Scott Deuschle with Credit Suisse. Please go ahead.
Hey, good morning, everyone.
Good morning, Scott.
Good morning.
Victor, just following up on Pete's question. Can you talk a bit more about supply chain trends at ETG? I know you mentioned that some things have gotten worse this quarter, you also talked about seeing some green shoots. Maybe just spend a minute talking about some of the details behind that. What got worse and what the green shoots look like then? Thank you.
Yes. This is Victor. The answer is, it's particularly on the component side. I mean, we're finding, and a lot of our companies have been finding that FPGAs, for example, field-programmable gate arrays, are slow to come in. They're behind in delivery schedules. We have some other, very complex microwave components that are designed specifically for some of the products we make, and there are only a few vendors for those in the world, and they are well behind schedule. We've also seen some lead times push out for, I won't go into which subsidiaries, but some polymer-related products that are used in some of the things that we make. That has been, I guess, that's been where it's extended out.
Where it's been better has been on some of the lower cost, and more common electronic components that are used in circuit boards and other things that we make. As well as for some silicones and products, interestingly enough, some polymer-related products. It's kind of a mixed bag.
Okay. That's super helpful. Thank you. Carlos, is 1.5% of sales still the right way to think about CapEx for next year?
I think so. You know, we're probably targeting somewhere around $40 million next year in CapEx, roughly. That's about what your math should produce.
Okay. Then last question for you. Just, you know, as we incorporate Exxelia into the model, anything important to reflect on in terms of cadence there? Like is there seasonality to that business, you know, more Q4 weighted? Anything like that we should be mindful of? Thank you.
Sure. I mean, look, Exxelia is I've often said that it almost mirrors, it's like a mini ETG. It's got very similar business strategy and markets. I think as the Electronic Technologies Group fluxes throughout the year, I think you'll see Exxelia perform the same way. The only caveat to that is they are a European-based company, there can be external factors in Europe that would impact them, that wouldn't impact us here in the States. Those macro things we can't control. That'll be well known as you read the paper. No, I don't think there's nothing, there's nothing on the table that would cause that business to perform much differently than the overall ETG.
Change.
Great. Thank you very much.
Yeah.
We'll take our next question from Ken Herbert with RBC. Please go ahead.
Morning.
Hi, good morning. Thank you. A nice quarter.
Thank you.
Hey, maybe Eric, I wanted to start off. I wanted to see within FSG if you're seeing anything yet, that may lead you to believe that there is some potential slowdown or recession risk amongst your airline customers. I'm curious if you're seeing anything yet in terms of delayed maintenance spending, you know, downward revisions on work scopes, you know, inventory adjustments, anything like that. If you think about a potential recession risk, for instance, here in the United States, how would that flow through your business? Which parts would be initially hit, and how should we think about the impact or potential impact of that on the segment?
Yeah, good question, Ken. To start out, no, we've not seen any change in order patterns from our customers as a result of the most recent economic data. Things are continuing to be extremely strong. As a matter of fact, we just keep on hitting, you know, new highs. However, you know, we all know that if a recession comes and air travel is curtailed, there will ultimately be an impact. Now, I think the impact on air travel could be a little less perhaps than it's been in other periods, only because we were sort of starved for air travel for about two years. That may mitigate a little bit of it. Certainly, the industry will be impacted.
You know, clearly, you could see it in cargo load factors and dedicated cargo aircraft flying. You know, those would definitely be curtailed. I would anticipate that as far as HEICO goes. We're in a unique position, I believe, because of the products that we've developed. Although I don't wanna cite on this call what they are, but I can tell you that a large part of our rebound has been new products that frankly hadn't been sold pre-COVID. A large part of that is new products that we didn't even offer pre-COVID. I think that we're in a unique position to be able to mitigate that, and that is why our PMA results are at a record, whereas the industry's, you know, number of flights are still down 20%.
That would imply upside to us. I think one of the things though that you also have to consider is, you know, historically, you've asked the question about, you know, destocking and restocking and all that. There's no question it would be normal behavior in a time of shortage to overbuy. I think that all, you know, recoveries do hit a period of overbuying. The question is when that occurs. You know, nobody tells you, "Hey, I've ordered 100 parts, but I really only need 80 of them right now, and the extra 20 are for the shelf." Because they wanna get those 20 on the shelf because they're afraid they can't get them. I think that's a natural risk for the industry. I think HEICO's got the, you know, the ability to mitigate.
Clearly parts and repair would be impacted first, and then ultimately new aircraft build rates would be impacted second. If that answers your question.
That's very helpful. Thank you very much. Just as a follow-up, maybe for Eric or for Carlos. You know, the incremental margins in the fourth quarter of 2022 were, you know, sequentially the strongest we'd seen all this year within the FSG segment, you know, mid-40s. How should we think about. It sounded like maybe some moderation on margins from mix in 2023 could potentially be a scenario. How should we think about incremental margins as we think about 2023, based on the comments you just had and sort of what you're seeing today?
Again, I would, you know, in a normal run for HEICO, as I've talked about in the past, you should expect the fixed cost of around 15% + our normal margin. That would put us around 35% or 36%. That would be a normal run on growth. You know, that can vacillate depending on, you know, events in a quarter and what's happening. Once we settle into our footprint, you know, once all the businesses have kind of settled down and they're growing in tandem again, I think that's what you should expect. Hopefully, as we get into 2023, that'll be what I would expect to see.
Great. All right. Well, I'll stop there. Thank you very much.
Thanks, Ken.
Our next question comes from Sheila Kahyaoglu with Jefferies. Please go ahead.
Good morning, guys. Thank you for the time.
Morning.
I think it was Peter Arment's question, Eric Mendelson, that questioned you on FSG and your thoughts on the recovery in China. You said you were doing really well in China. You know, how much of your FSG business has recovered in China? Of your 35% of sales that's international, how do we think about that split between FSG and ETG and geographically?
Yeah, good questions. So our sales into China in the Flight Support Group are at an all-time record. You know, we're frankly well ahead of our 2019 numbers. We're doing very well there. You know, I think there's obviously upside from here. I remember, I think it was about a year ago or so, you asked me did I think by the end of 2022, narrow body in the U.S. would it be recovered. I said, "You know, I didn't know, and I thought it would be hard." In fact, not only did narrow body U.S. recover, but you know, frankly, the whole world overall recovered for us. I think we're in a very good position in all of our markets.
It's hard to say exactly what's gonna happen to lay out the next 12 months over in China. I think it's gonna be fits and starts. I like reading your weekly report on number of flights. That's got a lot of great data in it. I think we're well positioned there to grow our market share, and we're gaining market share all the time in China.
Sure. thank you so much for that shout-out. In terms of Victor, you've been very busy yourself, and I know people have flirted around margins at ETG a little bit, but they, you know, were very strong to end the year. How do we think about that going forward? I think Exxelia is 150 basis points diluted to 2023 margins. You know, how do we think about that long-term opportunity?
Couple things. Exxelia does carry a lower margin than the ETG average. We haven't said what that is, so I can't comment on, you know, what it might be. Without just Exxelia, excluding Exxelia, when I look at, I think you've heard me say this before, that I think we're within, you know, two points on what I call the real operating margin, right? Which is, you know, you can sort of think as a cash flow margin, but before intangibles amortization, but after depreciation. You know, I think that-Somewhere within a point or two of 30%, either up or down on that, is the right level. I think I've been pretty consistent on it. Exxelia, of course, will change that somewhat.
I, you know, I continue to believe that's the case. I mean, there are always headwinds and tailwinds and, as you've heard me say before, I don't really come down with a club on people. You know, the people who run our businesses, if they're giving us a 31% margin instead of 32 or a 28 instead of 30 or 29, et cetera. I look at it on a, on a growth space as an overall basis. I, you know, I think our margins should remain healthy and we'll continue to be pretty proud of them.
Great. Thank you so much.
You're welcome.
Our next question comes from Michael Ciarmoli with Truist Securities. Please go ahead.
Hey. Good morning, guys. Nice results. Thanks for taking the question here. I guess, Carlos, maybe to dig in. I know you're not giving the detailed guidance, but, you know, you do have that one-liner, you know, in the press release where you called out potentially higher material and labor costs. just how should we think about that into 2023? Obviously, you know, we already covered the FSG margins. They may normalize. Sounds like, you know, ETG, you know, pre-Exxelia could pick up. I guess just on the revenue side as well, do we expect the normal FSG seasonality or are we still in the recovery mode here from COVID-19?
I think the way to answer that question is we aren't giving guidance, we do expect the company to perform, let's say, better than the industry, just like our history has been. We do expect growth in our sales. I think the stated goal of the company every year when we come out of the box is to grow the bottom line 15%-20%, and that will be our management team's goal for the year. You know, we've done it pretty consistently for 32 years, and you can see this year we grew 16% on the bottom line. I think you could reverse engineer. If you're thinking about how to get the pieces of that pie, just reverse engineer up from that 15%-20% bottom line expectation and come up with your numbers.
We're not gonna give detailed guidance at this time.
That's fair. The only other one I had that kind of relates to guidance, but if we look at ETG, you know, should we expect a pickup of that $47 million? I mean, that would, that would give you almost, you know, five points of growth there and then, and then think about just kind of a normal, you know, potential organic recovery, supply chain easing. Because it seems like you're gonna be off to a good start in ETG if you pick up the lost sales from 2022 here.
We don't know, Michael, when the disruptions from the supply chain fully bleed out, right? We could have more pushes. What I will say is that, you know, we did have a down year in defense, which was in total greater than that $47 million you're referring to. I think what our expectations are is that as we get into 2023, we do expect the overall defense market to improve, at least as it relates to HEICO, and that should be a nice little tailwind for these going into 2023.
Got it. Perfect. Thanks a lot, guys.
All right. Thank you, Michael.
Our next question comes from Josh Sullivan with The Benchmark Company. Please go ahead.
Hey, good morning.
Good morning, Josh.
Just as demand grows for HEICO's PMAs, I think you're developing around 400 parts per year, one, what is the duration of the PMA approval process with the FAA look like at this point? Is it getting better? I know you've talked a little bit about the work from home dynamic. Two, you know, how are you looking at the PMA opportunity set? Are you looking to move up the value chain at all?
Hi, Josh. This is Eric. With regard to the FAA, our cycle time is great. It's outstanding. That doesn't hold us up at all. With regard to the value set, we continue to go after, you know, parts similar to what we've done in the past, as well as, you know, what I'll call adjacent white spaces.
We continue to really grow the product portfolio. We've got the largest portfolio in the industry by far, and we're, you know, very well diversified across a very wide group. I think we're going to continue to grow. Our customers are asking us to go into more spaces and we're continuing to do that. You know, we treated them very well over the decades and we've been very reasonable with regard to pricing, and they greatly appreciate that, so they've been encouraging us and rewarding us with, you know, frankly, much more business. I think we're in a unique position there to continue to grow market share.
Got it. Got it. Then maybe just moving over to the space exposure. You know, there's been a number of M&A transactions in the market, a lot of new programs evolving. How are you looking at the space market and that balance kind of between legacy programs versus gaining some exposure to these growth programs that are ramping up in areas like LEO and the lunar markets?
Thanks. This is Victor. We're looking at that very carefully as always. There's opportunity in the LEO market for us. We've been doing business in the LEO market very strongly and successfully for a long time. We still think there's some good opportunity in the GEO market, and even smaller satellites now in the GEO market. We are very careful to avoid some of the more experimental, if you will, parts of the satellite business where we would be more of a financial risk partner, where we're concerned about margins, pricing, stability, reliability, and so on.
You know, we haven't taken the bait to go out and buy. I can't count the number of exciting space companies that we hear about when we get a deal book or a teaser on, and it's just, pun intended, straight to the moon. You know, we've really been resistant to those opportunities because we also know that they're highly speculative. We're gonna proceed, but proceed carefully. We wanna be a very good value to our customers and the ones we have been serving historically, as well as a number of the new ones who we think are serious about buying our products long term.
Great. Thank you for the time.
You're welcome.
Our next question comes from Gautam Khanna with Cowen. Please go ahead.
Hey, good morning. Happy holidays, guys.
Hey, good morning.
Hey, sorry, I joined a little late. I was wondering at ETG, could you guys describe the change in the estimated fair value of accrued contingent consideration? I'm just curious, like how big that was and what that related to.
Sure. This is Carlos. You know, we use contingent earn-outs to bridge deal value gaps when we're dealing with sellers. Right now on the balance sheet, we have roughly $85 million in contingent earn-out obligations, fair value of $85 million. What winds up happening, Gautam, is a couple things. One, you have to evaluate the performance of each of the units and recompute, if you would, what that earn-out may be. What really impacted us this fiscal year, the fourth quarter and throughout the year, was the interest rates going up because you have to fair value those liabilities, and as the rates go up, those liabilities shrink, right? We did have some noise throughout the year for these earn-outs.
In particular, we had a, you know, maybe $2 million or something ran through the numbers for the fourth quarter as credits to expense to reduce that liability as a result of the Feds moving the interest rate and ultimately what that does to longer-term or intermediate-term risk-free rates.
Got it. Okay. No, that's very helpful. I was curious, you know, a couple quarters ago, I think specialized products started to come back within Flight Support. If you could just talk a little bit about how that's trending and if there's any discernible difference on the defense piece of that versus the defense piece of ETG in terms of supply chain or just demand trends?
Yeah. We're, this is Eric. With regard to specialty products, we're doing very well. In particular, we also have a lot of exposure, frankly, in missile defense, and we're doing particularly well in that area, but as well as commercial aviation. You know, again, we've got a unique value proposition in those businesses, and I think they're gonna continue to grow and gain market share over time, especially as the aircraft, the commercial aircraft build rates, increase.
Okay. Just one last one for me. Maybe, Victor, at ETG, broadly speaking, you know, what is your visibility on the defense and space side? I'm just curious, like, how far out do you have orders through, and how has that changed maybe over the last year?
Sure. Right now, the backlog for ETG is fairly typical. It's a record backlog, by the way. We've had record backlog throughout the year, in fact. I was looking at, I think, every month through the year at the exception of one, we had record backlogs. As a percent of revenue, it seems to be very strong. We have some additional visibility into future shipments, in part because of those supply chain issues, right? That's a little bit of it. Although that is a pretty small fraction, actually, overall, the slippage of our backlog. In terms of a defense outlook, I would generally say we are not a short lead time on our products.
You know, it's at least kind of a good flavor for the next six months at any given moment, typically. Then, you know, sort of it starts to deteriorate from there, which is our typical situation. I would say we're probably in a fairly typical situation now.
Great. Thanks a lot, guys.
Thank you.
The next question comes from Louis Raffetto with Wolfe Research. Please go ahead.
Good morning, guys.
Morning, Lewis.
Good morning, Louis.
Larry, I think you haven't had the opportunity, so I guess let's get your take on the M&A marketplace right now. I've kind of heard some mixed things recently. Obviously, you guys have been busy this past year, but just what are you seeing out there right now?
I think, I would say it's normal. We're spending, you know, a lot of time trying to work with the Exxelia closing, but we are looking for, at a number of acquisitions in both areas, in ETG and in Flight Support. The market is a little strange now because sellers want high prices, that they saw with low interest rates. Buyers, particularly private equity, is having more of a struggle raising money. I think I would expect to see prices coming down as long as interest rates are up. We're very disciplined buyers, as you know, and I think I'm hopeful that we will see some good opportunities. We're looking at many now.
Some of the things that we've rejected, honestly, recently, we've seen some companies and they were overpriced. We made offers and those offers were not accepted, but the deals didn't go either, the people couldn't sell the company. We have to see what's gonna happen. We're not gonna change our discipline. As you know, we look for strong cash flow. We wanna see our money back, our investment in somewhere between seven to 11 years. When you pay 16 x EBITDA, you can't do it. We're not playing in that market. We never did, we never will. I think, overall, I'm optimistic that we will make our fair share of investments. This past year, we concluded how many, Carlos, six?
It was eight deals.
8 deals, you know, so that's enough in a year, eight transactions. You know, deals, we're opportunistic. We don't force deals. When deals are priced properly, when we have the right type of company, that's what we will move on it. I hope that answers your question.
Yeah, no, it's great, Carlos, thank you. Carlos, maybe just one again, I understand the guidance, but what does the acquired sales growth, you know, based on deals that closed so far look like for FY 23? Is it like $150 million or what thereabouts?
Are you talking about acquired for next year?
Yes. Yes, exactly.
It could be between about. Yeah, I think it'll be between $100 and $150. I know that's a wide range, but that's about what it's gonna look like.
Okay, great. Thank you very much.
Sure.
Thank you.
As a reminder, it's star one to ask a question. We'll take our next question from Colin Ducharme with Sterling Capital. Please go ahead.
Hi, good morning.
Morning.
Good morning.
Thanks very much for the question and the time. I had a couple, maybe I'll just throw them out on the table all at once here. Carlos, wondered if you could just speak briefly to just comment on wage pressure and inflation, what you're feeling now and what you're hearing from the subsidiaries, particularly as you roll forward into 2023. Also talk about the CapEx, a little muted actually from what I may have expected this past year. You mentioned the step up as we look forward 12 months. Can you just talk a little bit more about where that money is going? Then maybe for Eric, you addressed the how in terms of margin expansion with FSG. You talked about specialty strength. Can you talk a little bit about the why?
You know, not in tandem demand in terms of the different components moving together, but why are customers in particular kind of pulling through specialty here? Maybe I'll pause there, and I, and I've got one or two follow-ups for Larry. Thanks.
Colin, I'll hit your first two questions and then hike it to Eric. On the wage and labor front, we're highly sensitive to that. We watch it very closely. Because we are spread out really all over the country and all over the world, there are different dynamics in each market. The best way that we have found to deal with those dynamics is to allow our folks in the field, the general managers running our businesses, to deal with their local marketplace, to deal with the wage pressures and material pressures on the raw material side. We've also told them that as it relates to pricing, to try to work with our customers to protect our margins. Our objective is to not be those guys.
You know, we don't wanna be the guys that are known as jacking prices indiscriminately. We want to get paid fairly for what we do. Of course, if our input costs do go up, we're asking our customers to help us out in that regard to protect our margins. So far, knock on wood, that strategy's worked very well for us. On the CapEx side, I did discuss around a $40 million number for next year. This year was a little light in aggregate dollars. It wasn't because we didn't buy what we needed. I feel like it's a broken record, but it's because our folks are frugal.
If they need a, you know, a $1 million brand-new machine, our guys will put that in as a CapEx request, and then they'll go out and spend $80,000 on a used piece of equipment, drop another $10,000 into it to refurbish it and use that machine for the next decade. That's generally what I'm dealing with. Our CapEx budgets, while I give you that $40 million number for next year, you know, not including Exxelia, by the way, that's just our core business as of today, there's a high probability, like in the past, that we understand that, but it will not be because our folks didn't get exactly what they need to conduct business and plan for the future. Does that answer your question, Colin?
Helpful. Thank you. Yes.
Colin, so you asked why, you know, why do we have these results, you know, in terms of the sales and the earnings. I really do believe it starts with our low-debt, decentralized culture, and that permits us to make decisions well in advance and always keep our eye on the long term. When you do that, people are then able to spend their energy on creating true economic value. So when you look at, you know, the crisis that we just went through, we had plenty of inventory. We continued to develop parts. We continued to treat our customers extremely well as a result of that, and frankly, treat our team members very well because they were critical to our business. I think that is the reason why HEICO continues to outperform.
It, you know, it's not just in parts and repair, but it's also in the specialty products business. There are all sorts of cases that I can give you where we can significantly jack price on customers, and we don't do it. We don't do it because we wanna make sure that we retain that business for the long haul. You know, in the short term, people can play all sorts of games with regard to pricing, inventory, all sorts of metrics that you see in the short term. In the long term, you can't get away with that. If we wanna build this market share like we're doing, the only way to do it is to build it long term and to really have that level of trust. Frankly, that's how we incentivize our people.
I mean, Victor and I each have a whole, you know, bunch of businesses that we go and we visit. We know the people not only running them, but we know the people in charge of the different departments all the way down, very often, to people on the shop floor. We understand who has a long-term culture and who fits with the way we do things and who just plays games. That's honestly the why in, in why this happens. You know, this management team has been here for 33 years. I don't I can't think of many management teams, and I certainly can't think of any off the tip of my tongue, that have been there for 33 years and plan on being there decades longer, so.
Okay. Helpful. I appreciate the comment. Then just maybe just a quick follow-up for you, Eric, there. It's just in terms of maybe digging into the why. The role of value-added distribution, I mean, you've got smaller private peers that have made, you know, distribution in particular central to their business strategy. You guys yourselves did several quarters ago a string of deals, which add, you know, bolstered your muscle, as it were, you know, in this particular area. Typically, you've got some quasi-exclusive relationships that go along with those types of segments and businesses. I'm trying to link back to your comments on today's call on wallet share expansion.
I'm wondering whether what, if any, critical role value-added distribution and the deals you've done in entire quarters are playing today with the wallet share gains that we're now seeing from you guys?
Yeah
V ersus other factors like the price umbrella with OEMs, et cetera. Maybe a round out final question for Larry. It's just, Exxelia has a, you know, great, you know, deal here, largest ever, has the potential to be a buy and build on that continent for you all. Can you just speak to your the relative maturity of your deal flow model on that continent? Meaning, you know, are you satisfied with, you know, the width of your M&A funnel there? Is it as wide and mature as, you know, we perceive the U.S. and North American M&A funnel to be for you all? Thank you very much.
Colin, this is Eric. I'll take the first part of your question that you asked me, you know, the why on distribution. Our distribution companies are, in my opinion, the single most successful distribution companies in the industry. They started out as small entrepreneurial companies, and they continue to run that way. They've got the financial muscle of HEICO behind them, so we're able to buy inventory that makes sense. But we also are very, very realistic on the value of the inventory and the value that we bring to the table. You know, you mentioned other companies that are getting into this space, and it's becoming, you know, an interesting space for others.
I would throw out that you've got to be very, very careful in the distribution business because what we see very often, and if you look into a number of companies, you'll understand what I'm saying, is they have big one-time write-offs. They report whatever it is their margin is throughout the economic cycle, and then they wait until there's a 9/11, a global financial crisis, a COVID-19, in order to write off the inventory. If you look at HEICO, there's not a single time that we've done that. The reason is because all of the people in those businesses are geared to make the correct economic decisions to drive cash flow and long-term value and not create short-term earnings. So we start with, number one, the low debt, which permits us to hold the correct inventory, not the wrong inventory.
Number two , we are incredibly rigorous, and I'm not aware of anybody else in this industry that is as rigorous as HEICO when it comes to inventory. We make sure that if we've got a problem, we take it off the books, and we don't spend management time or people's time focusing on that. The final thing that we've got in the distribution business, which frankly differentiates us and permits us to do things that nobody else can do, is our PMA reach. We're the largest in PMA. We're in at all the airlines, and we have a very, very broad group of products. If somebody, for example, is distributing a widget on a 737, but they're not on the A320, HEICO is in a unique position to be able to get them in that market.
There's nobody else in this industry who can do that. When you combine all the things that I said, the low leverage, the correct inventory, and the PMA, combined with an entrepreneurial approach that is second to none. These folks are into the details unlike anything that you've ever seen. I think it's a remarkable business, and, you know, I wanna call it out because HEICO Distribution and our companies in there, in particular led by Seal Dynamics, Blue Aerospace, Air Cost Control, are really just absolutely phenomenal and unbeatable in the stuff that they do.
Hello? Are you still there?
Yes. Thank you.
Okay. You asked me about our reach in Europe. We're an opportunistic buyer. We have reach throughout the U.S. We have reach in Europe. We have a number of operations, very successful operations in France, and we've been operating in France for a number of years. When we started, we put our toe in the water, and we were very successful, and our companies in France have expanded multiple times. We've increased employment. Actually, the economic development people in France visited us often throughout the year, and they want us to invest in France. They like what they've seen. They've liked how we've performed. We're a big taxpayer over there, and we're a big employer. Yes, we have reach. The Exxelia transaction, we have been looking at that.
We knew that company for four or five years. We've looked at it, discussed it, and so forth. Yes, we do have reach in Europe, and when we see a good opportunity there, we will take it. It's not just Europe. It's Europe, the U.S., the U.K. too. Does that answer your question?
Yes. Thank you. Happy holiday.
Thank you.
Thank you, Colin.
Our next question comes from Kristine Liwag with Morgan Stanley. Please go ahead.
Hey, good morning, everyone.
Good morning.
Good morning, Kristine.
You know, guys, you know, the attractiveness of the PMA market is clear. You guys have made that industry very lucrative. Now we're seeing another company expand PMA into the hot section of a jet engine, like high pressure turbine blades. How do you think of that market? Is that right for PMA to enter, and would you consider going into that part of the aircraft?
Hi, Kristine Liwag. This is Eric Mendelson. You know, we're very familiar with everybody in the PMA market, and I know exactly what you're speaking about. That has been a market that HEICO has decided to not enter and to not participate in. It is a potential high reward, but it is also a potential very high-risk market as well. We're very happy in the spaces in which we operate, and we think that that really makes a lot of sense from certification, manufacturing, customer acceptance. We've decided really to focus in this market, and we're very happy with, frankly, with that decision. You know, we get along with all of the companies that provide complementary products, and, you know, we hope that they succeed.
It just, you know, we picked our spots, I would say, very carefully.
Thanks, Eric Mendelson. If that company were to be successful and actually get these parts certified, would that change how you evaluate that industry?
No. It would not.
Kristine, can I just shoot a little color on how we look at the world and what our strategy is? What our strategy is, as I think you know, is controlled growth. We focus on 15%-20% bottom line growth. We don't wanna hit home runs. We wanna control our cash flow, which is very strong. Everything we do is really focused on cash flow, not so much earnings per share. As long as we get strong cash flow from our businesses, including PMA, that is what we're looking for. We don't have to have one spectacular thing in the hot section or that type of thing. We want a broad offering of parts, highly diversified, and the company, HEICO in general, is very highly diversified. I don't know how many parts we make altogether, but I'm gonna guess could be 50,000, 100.
I mean, and it's highly diversified, and that's intentional. We don't wanna get into one particular product that stands out. In other words, if any one product that we make failed to sell or was discontinued, nobody would even notice it. It wouldn't affect the bottom line at all, and that's our strategy. I mean, that goes to the idea of making these hot section parts and so on. Remember, we do have some hot section parts, and we used to make blades and so forth, and we have, of course, combustors and... We wanna spread it across a wide number of parts, and we don't have to have one spectacular part to accomplish our objective.
Good , I'm glad you mentioned that. One of the other things that's very, very important to us is, as you can gather from our comments on the call and from knowing us for so many years, is our reputation. We don't wanna. You know, when you offer lots of parts, you better be very, very careful that the performance of one part doesn't impact the rest of the portfolio. We have a unique relationship with our customers, I believe, with the FAA, and even our competitors. Therefore, we've made the decisions that we've made, which are right for HEICO and right for our risk profile and, you know, for the benefits that we wanna bring to our customers.
Great. Thanks, Larry. Thanks, Eric. Really appreciate the color. That's very helpful.
Thank you, Kristine.
I'll take our next question from Mike Hanson, private investor. Please go ahead.
Yeah, I'm one of the minorities. Thank you. Question for Victor. According to ETG, when you have sort of a marginal sales increase and a 1% decrease in margin, are there parts of the company that maybe you should de-emphasize or spin-off, and maybe at the end of the day, it really wasn't worth your investment and your time?
Mike, it's a very good question, and it's something that our subsidiaries look at all the time, which is to say the appropriateness of making a part or not making a part. There are a lot of decisions that go into that. It's not always purely economic, although the economics obviously are the overwhelming majority of it. There are times when there's a part that we will make or there's something we'll make, because we're selling something related to that. What we don't do is get into loss-making or low-margin positions.
If something is lower than the rest of the margin, and we feel or the business feel they need to continue to offer it or it's still very profitable, i.e., it may be, it may be a contribution margin of 35% and the business is running at 36%, so you wouldn't turn away 35% business because it's not 36%. You wouldn't make, in a sense, you know, phenomenal the enemy of excellent. So that's how we do it. It's a, it's a good question, and that's, a part of the business all the time.
I'd like to add one other thing. If we're running an operating margin of 28%, 30% in ETG, and we discover a company that has a 24% operating margin, we'll buy that company, and it will lower the overall operating margin of the ETG group. Why will we buy it? Because a 24% or 25% operating margin is a hell of a good margin, and we want that company. We don't get that focused on absolute margin because there are reasons that we might have reduced margin, increased margin, and we have to be very careful. We're talking, if you heard me earlier, about overall cash profitability, cash flow. At 24%, even though it's not our 30%, we get a hell of a good cash flow. You know, you have to take all that.
When you think about margin, you have to understand cash flow is more important than margin, but high margin brings cash flow. Does that help a little bit?
Yeah, that's perfect. At the same time, are there times that you really look at an acquisition and say, maybe we made a mistake? Over the 12 years I've been with you've always bought, bought, and I can probably count the two,three companies that I've read that you've spun off.
Yeah. We, you know, we buy to own forever. We try to make the right decisions. We've never had any disasters, blowouts in acquisitions. We've had ones that don't perform as well as others for some period of time, and then our jobs are to improve those, and they do eventually. We get them to where they wanna be. We do ask ourselves this question, Mike, all the time: Are we better off with an acquisition than without it? We do that, we look back, and we analyze it historically, and we view it as our jobs to make sure that what we buy performs, even if it's not as good of a performance as something else.
By the way, you mentioned that we've spin-off companies. We have only sold two companies, in the entire 30 some years that we've run the business. One was a medical company, which we wanted to be out of that industry. It was profitable, and-
Services business.
It was a services business. It was highly related to labor and so forth. We sold that business, I believe, in 1996 or 1995.
Yeah, 96.
The other one was a business that, honestly, we bought for $7 million, and we sold it for something like $72 million in about how many years, Victor?
Four.
About four years. The reason we sold it is that the operating margin was low. It was an interesting business. We sold it to a company that liked that wanted to be in that business and wasn't focused on operating margin. That business had about a 10% operating margin, and it was sucking up cash. It was using so much cash that it didn't make sense to own the business. We paid $7, and we sold it for $72, so it wasn't a bad day. Aside from that, we have not sold any or, you know, eliminated any other businesses. As Victor Mendelson pointed, we thank God, we've never had a bust. Some businesses have performed better, some have been not so good.
If you take the overall package, again, we're talking about diversification at HEICO, which is a critical strategy for us. Putting all those business together, as you see, they've generated fabulous cash flow. You know, I think that our acquisition performance has been pretty good. Not, you know, close to 100 acquisitions, not having a bust, you know, I think we've done pretty well.
Mike, I got a note from the operator. We've actually gone over time, but I will comment, we have not sold a business in 22 years.
Yeah.
That's that part I can tell you. Unfortunately, I'm getting this note from the operator that we are over our time by five minutes now. Thank you for the questions.
I'll turn the conference back to the speakers for any additional or closing remarks.
This is Larry Mendelson. I wanna thank you all for participating in this call and for your interest in HEICO. We remain available to you if you wanna call Eric, Victor, myself, Carlos, if you have any questions or you want clarification on anything. Otherwise, I wanna wish everybody a happy holiday season, a healthy one. If you're driving or traveling, be safe. We look forward to speaking to you sometime in mid to late February with our first quarter 2023 results. This is the end of our teleconference. Thank you all.
This concludes today's call. Thank you for your participation. You may now disconnect.