HEICO Corp (HEI.A) 2002 Q2 法說會逐字稿

Good morning. My name is Leticia. At this time, I would like to welcome everyone to the HEICO Corporation's second quarter fiscal 2002 conference call. All lines have been placed on mute to prevent background noise. After the speaker's remarks there will be a question and answer period. If you would like to ask a question during this time press * and the number 1 on your phone keypad. To withdraw, press * and the 2 on your keypad. I will turn the call over to Mr. Laurans Mendelson, C.E.O., president and chairman of the board of HEICO corporation. Thank you, you may begin.

Thank you. Good morning to everyone on this call. Welcome to the HEICO second quarter fiscal 2002 earnings announcement teleconference. This is Laurans Mendelson. I am the C.E.O. of HEICO corporation and I am joined this morning with Eric Mendelson, president of the Flight Support Group; Victor Mendelson, president of the Electronic Group and general council; and Tom Irwin, HEICO's executive vice president and C.F.O. Before we begin, I am going to ask Victor Mendelson to read a brief statement.

Thank you. Certain matters discussed in this conference call will include forward-looking statements, which involve risks and uncertainties. HEICO's actual experience may differ materially from those discussed as a result of factors, including, but not limited to demand for commercial air travel, product specification costs and requirements, governmental demands, competition on military programs, ability to introduce new products, product pricing levels, commercial airline passenger travel, airline fleet changes, U.S. government export policies and restrictions, military program funding by U.S. and non-U.S. government agencies, HEICO's ability to make acquisitions and achieve operating from such acquisitions, interest rates and economic conditions within and outside of the aerospace defense and electronics industries. Parties listen to this conference call are encouraged to review all of HEICO's filings with the SEC, including, but not limited to filings on form 10-k, 10-q and 8-k. Thank you.

Thank you, Victor. Now, before reviewing our second quarter results in detail, I would like to take a few moments to summarize the highlights. While sales and earnings were negatively impacted by reduction in airline travel and the erosion in [JT8D] [JT8D] parts sales following 9-11, our no-n[JT8D] part sales are up significantly. We are seeing definite improvement in the commercial aviation parts market. Our ability to replace [JT8D] part sales is being clearly demonstrated by the following: 1, a 14 percent increase in sales of F.A.A.-approved replacement parts in Q2, 02, versus q1 '02. Next, new product approvals. 90 percent of which were for non[JT8D] F.A.A. approved replacement parts were at record levels for the first half of fiscal '02. Three, our latest partnership, which we announced yesterday with UAL, and incidentally, UAL does not operate a [JT8D] fleet. As we reported, we expect to add significant non-[JT8D] revenue through this strategic relationship. Four, our successful diversification into non-commercial aerospace markets as demonstrated by growth in our defense- related sales, which currently account for about 25 percent of consolidated sales and which are also contributing strong margins. I would like to note our second quarter fiscal '02 results were highlighted by continued strong cash flow, which we believe demonstrates the high quality of HEICO's earnings. Also, a budgeted 50 percent increase and it may go more than that, in R and D expenditures in fiscal '02. This will negatively impact fiscal '02 results, but benefit future periods. For example, the increase in R and D in the second quarter penalized earnings over 3 cents a share. However, we expect that will significantly benefit the future as we have seen from past operations. Lastly, since 9-11, more airlines have begun discussions with us regarding some form of strategic alliance with HEICO. Now, I would like to get into some of the detailed comments on the second quarter results. Consolidated revenues in the second quarter '02, increased by about a million 3, or 3 percent over the second quarter of '01. The increased sales primarily reflect newly acquired businesses offset by lower commercial after-market parts and service sales in the Flight Support Group. This was as a result of the 9-11 events. The second quarter '02 sales represented a 5 percent increase over sales in Q1, of '02, reflecting increases in both Flight Support Group and Electronic Technologies Group sales. The Electronic Technologies Group sales increased 5.7 million or 67 percent, to $14.1 million in Q2 of '02, versus $8.4 million in the second quarter of fiscal '01. The increase reflects the acquisitions of Analogue Modules and IAS, as we expanded our capabilities to include Laser, navigation and power supply technologies. This increase was partially offset by the continued weakness in sales of EMI Shielding Products to the electronics and communication industries. We have discussed the EMI Shielding situation in prior conference calls. Compared to Q1 '02, electronic technology sales increased 10 percent or $1.3 million from the first quarter of '02, due to increased sales from defense-related contracts. Flight Support Group in q2 of '02, decreased 13 percent, from the second quarter of '01, down to 29 million from 33.3 million in Q2 of '01, reflecting the continued impact of 9-11 on commercial airline customers. These decreases were partially offset by sales of newly acquired businesses. However, second quarter '02 Flight Support Group sales increased 700,000 from 28.4 million in the first quarter of '02, due mainly to a 14 percent increase in PMA replacement part sales, partially offset by lower sales to the OEM market. I think you can see that the PMA replacement part market appears to be coming back very well. As expected, sales of F.A.A. approved replacement parts were off 20 to 25 percent in Q2 of '02, compared to prior year second quarter. After having increased at double digits throughout fiscal '01, until September 11th, reflecting capacity reductions made by airlines, particularly older [JT8D]-powered aircraft in the aftermath of 9-11. As previously mentioned, PMA part sales are up 14 percent in the second quarter, compared to Q1 of '02, reflecting replacement of capacity by the airlines, as well as additional product offerings by HEICO. It is clear to us by the results that we are able to replace [JT8D] sales with sales of non-[JT8D] products. Operating income, the consolidated operating income in '02, was 6 million versus 8.4 in Q2 of '01. Operating income in Q2 of '02, reflects lower sales and earnings within the Flight Support Group. Again, resulting from events of 9-11, and its impact on our commercial airline customers, as well as a budgeted increase of $1.4 million for new product expenses. This is a little more than 3 cents per share in the quarter. These were partially offset by operating income of some of the acquired businesses. Operating income in Q2 slightly exceeded Q1 '02, by 200,000 dollars, mainly due to higher sales, which I mentioned before, partially offset by a charge related to excess inventory of about $300,000 at one of our components repair facilities. Operating income in Q2 of '02, excludes amortization of goodwill in accordance with SFAS 142, which we adopted in '02. Operating income of Flight Support Group was 3.8 million in Q2 of '02, versus 7.7 million in Q2 of '01, again reflecting lower sales post 9-11 and higher new product development expense, partially offset by the elimination of goodwill amortization. Flight Support Group operating income in q2 of '02, decreased by $350,000 from 4.2 million in Q1 of '02. The operating income of Electronic Technologies Group increased [STKHR*-] 1.4 or 71 percent to 3.4 million in q2 of '02, versus the second quarter of '01. This reflects additional earnings from the acquisitions, as well as the elimination of goodwill amortization, partially offset by the weakness in economic conditions in certain technology industries, which continues to impact the demand for EMI Shielding products. Compared to Q1 of '02, operating income in the second quarter of fiscal '02, increased by 26 percent, or $700,000 from the 2.7 million in the first quarter. The increase primarily reflects higher sales of defense-related contracts. As a point of information, while HEICO could have abandoned its long-term growth strategies by reducing new product development spending and cutting back our marketing efforts to benefit short-term operating results and show investors higher net income in the short term, we do not manage earnings and we have stayed the course and have increased our new product and marketing efforts in light of the continued success of that program. We did this with the expectation those efforts, while having a negative impact on near-term earnings will provide benefit in future periods. Consolidating operating margins totaled 14 percent in q2 of '02, consistent with Q1 of '02, versus 20 percent in q2 of '01. The decrease compared to Q2 of '01, reflects lower margins in Flight Support Group, primarily attributed to lower sales of PMA parts, about a 3 percent decline, lower margins on repair and overhaul, again 3 percent decline, higher research and development expenses, and slightly lower margins in Electronic Technologies Group due to lower sales of higher margin EMI Shielding products, all offset by elimination of goodwill amortization. The operating margins with Flight Support Group reflect the impact of lower sales and higher R and D offset by elimination of goodwill amortization. The operating margins within Electronic Technologies Group were 24 percent in Q2 of '02, versus 21 percent in Q1 of '02, and again, 24 percent in Q2 of '01. Consolidated EBITDA margins were 19 percent in '02, up from 17 percent in Q1 of '02, but down from 29 percent in Q2 of '01. The EBITDA margins of Flight Support Group were 16 percent in Q 2 '02, down slightly from 17 percent in Q1 of '02 and 29 percent in Q2 of '01. The EBITDA margins of Electronic Technologies Group were 26 percent in Q2 of '02, up from 24 percent in Q1 of '02, and down from 30 percent in Q2 of '01. Diluted earnings per share was 18 cents in the second quarter of '02, versus 22 cents in the second quarter of '01, and 13 cents in the first quarter of '02. As previously reported, the company adopted SFAS 142, beginning in the first quarter of '02, this eliminated the periodic amortization of goodwill. The higher earnings per share in the second quarter '02, versus the first quarter of '02, of course, reflect higher net income in the second quarter of '02, which was 3 million 970 thousand, compared to 2 million 828, in the first quarter of '02. The increase in net income in the second quarter of '02, compared to the first quarter, reflects higher sales and earnings. In addition, net income in the second quarter reflects a pre-tax income of 1 million 230 thousand dollars or about 3 cents a diluted share, related to increase in the gain on the sale of the Trielectron product line, which we sold in September of 2000. This gain results from the elimination of certain reserves upon the expiration provisions of the sales contract. Moving on to R and D expense, it was [inaudible] in Q2 of '02, compared to 1.4 million in second quarter of fiscal '01. The incremental R and D expense of 1.2 million in the second quarter, which we consider fundamental to our long-term growth, reduced diluted earnings per share by 3 cents in Q2 of '02, versus '01. The addition of new F.A.A. approved parts, particularly for non-[JT8D] aircraft continue to be critical to long-term growth, in light of the apparent acceleration of retirements of the [JT8D]-standard fleet in the aftermath of 9-11. We currently have approximately 800 parts in development, over 90 percent of which are for non-[JT8D] engines. We have over 2500 parts approved by the F.A.A., 65 percent of which are non-[JT8D]. New parts released by R and D group necessary fiscal 02 continued at a strong level and pretty much as budgeted for the period. SG and A expenses remained approximately level in the second quarter of '02, compared to the first quarter of 02, and down slightly from the second quarter of '01, with the elimination of goodwill amortization being partly offset by the SG and A expenses of newly acquired businesses, as well as our accelerated marketing efforts. Interest expense in the second quarter of '02, was 474,000, approximately level with the 512,000 in the second quarter of '01. However, interest expense in Q2 of '02 was $300,000 lower than interest expense in '02, due to lower interest rates and lower borrowings as the debt is paid down from cash generated from operation. That cash generation has been quite strong. Other income non-operating income in Q2 of '02, increased, versus the second quarter of '01, as a result of the gain on the product line, which I mentioned earlier. Partially it was offset by the inclusion in '01 on the gain of the sale of property and other investments that totaled $800,000. The company's effected tax rate decreased to 35.8 percent in Q2 '02, from 38.9 in Q2 of '01. This was primarily as a result of the elimination of goodwill amortization. Adjusted to exclude goodwill amortization in Q2 of '01, the effective tax rate would have been 36.7 percent. Moving on to our balance sheet and cash flow, I would like to point out that we believe that our financial position remains extremely strong. Cash flow from operations total 6.3 million in Q2 of '02, and 10.3 million in the first half of '02. That exceeded net income by 59 percent and 51 percent, respectively, and represents a significant increase over cash flow from operations of 3.3 million in the first half of fiscal '01. Our working capital ratio further improved to 4.7, as of April 30th, versus 3.9, as of October 31st, '01. DSO's of account receivables as of approximately 30th, decreased by nine days to 54 days, compared to 63 days as of October 31, '01. I think this improvement reflects our continuing and successful efforts to manage receivable collection efforts and maximize cash flow from operations. During the period, no customer represented more than 10 percent of consolidated sales. The top five customers represented less than 22 percent. Inventories increased by 4.3 million, since October 31, '01. Excluding inventory of acquired business and represents increase in inventory turnover rate of 14 days. As we discussed in our first quarter conference call, and as we expected, this increase is mainly associated with higher inventory balances in the flight support group, necessitated by new products and inventory orders placed prior to 9-11. The inventory turnover rate is down about 13 days from January 31, '02, as the sales of these new products begin. Long-term debt to capitalization remains low at 25 percent, as of April 30th. It compares consistently with October 31, '01, when it was about 26. Borrowings under our revolving credit facility total 66 million, as of April 30th, versus 65 million on October 31st. This was a result of a small acquisition during Q1 of 02 and as of today, 57 million of our 120 million dollar revolver remains unused. Capital expenditures in the first half of '02 were 3.3 million and in line with annual budget of 6 to 7 million. Looking forward, as the outlook, we are pleased with the recovery of sales to commercial airline customers as reflected by the 14 percent increase in sales of F.A.A. approved replacement parts in Q2 of '02, over the first quarter of '02. Having full and approximately 20 to 25 percent below prior year levels in Q1 of '02, following the events of 9-11. We are seeing definite improvement in commercial aviation markets and we remain confident of our business model. The strategic relationship with United Airlines announced yesterday is expected to provide the company with between 100 to 150 million dollars of non[JT8D]-revenue over the next seven years. With the addition of the new relationship with United, we now have alliances with three of the world's largest and finest airlines. These companies are important, major providers of engineering and maintenance services for aircraft and aircraft engines. We are extremely proud they have selected HEICO as their partner. Again, since 9-11, more airlines have begun discussions with us regarding some form of strategic alliance with HEICO. Revenues from defense customers represented about 25 percent of total revenues in the first half of '02. They increased over 70 percent compared to the first half of '01. We expect continuing strength in this market. Approximately 10 percent of our first half '02 sales were from customers other than the aviation and defense industries, including industrial, medical, electronics and telecommunications. Our growth in these non-commercial aerospace markets, have allowed us to cushion the impact of the September 11th events. As I previously noted, while we could have abandoned long-term growth strategies by reducing spending and cutting back on marketing to benefit short-term operating results, we continue to stay the course and, in fact, have increased new product and marketing efforts in light of our continued success. We did this with the expectation and the knowledge that such efforts, while having a negative impact on near-term earnings will provide significant benefits in future periods. As we look forward to the balance of fiscal '02, we expect continued improvements, despite softness in commercial aviation markets. Based on current market conditions and customer order patterns, we are targeting revenues in fiscal '02, to be up 10 to 15 percent over the first half of fiscal '02, and earnings to be up 25 to 40 percent in the same period. Furthermore, based on current market expectations and our success to date in developing and marketing new products and services, we continue to target fiscal '03 earnings at levels consistent with current analyst expectations, which are generally in the range of 90 to 95 cents per share. In closing, we are confident that HEICO's strong financial position, as well as its strong cash flow, the continuing development and marketing of new products and services, the acquisition opportunities, as well as the long-term growth trends within the industries in which we participate will continue to provide substantial opportunity for sustainable growth. That is the conclusion of my prepared comments and analysis of our second quarter. I would like to open the floor for any questions which you may have.

At this time, I would like to remind everyone, to ask a question, press * and 1 on your telephone keypad. We will pause for a moment to compile the Q and A Roster. First question from Steve [Whartman].

Good morning. In terms of the acquisitions, how much revenue did they provide on a year-over-year basis. Internal growth number. I will give that to Tom Irwin.

In the second quarter, little over 7 million of the revenue growth was from acquired businesses.

Okay. Can you also talk about the trend by month that you saw during the quarter in terms of PMA sales?

Eric. The product of the 9-11 event was November. We have been building from November on through April and actually April was up quite significantly, approximately 30 percent over November's numbers. So, we are seeing a nice continual build there.

Steve, I would like to add one thing. We watched this internally, we have charge, but there is an interesting observation that we have made. I guess I would like to explain it to all the listeners. From about May or June of 2000, until 9-11, the monthly sales increase in PMA parts was probably running at an annual rate of growth of about give or take, 40 percent, which was a very strong - I am looking at a chart and can see the slope of the growth. It is quite impressive. On 9-11, the entire chart shifted down because the PMA sales and certain other engine part sales did drop, of course, for all the reasons we know. However, once it bottomed out in November, the growth continued at the same slope as it had continued. So, if you will, the line shifted down because sales were reduced, but the parts growth continued at approximately the same rate. To us, that is a confirmation that what we are doing by investing in new part development, and of course, marketing it, is really the right program and that the hurt we suffered to our revenue was mainly a result of the older [JT8D] product line. Does that give you color on it?

Definitely. Okay. Going into other things, the 24 percent margin ESG was high given the shielding products were down. Do you think this is sustainable in this area?

Yes.

Are there any products contributing to the healthy margin?

Well, I think we operate in niche markets, as you know. I think all of our product lines are in ETG group have strong margins. They are specialized block box products. They are high-tech products. I don't know if Victor wants to add more.

No, I think that is correct. The margins are across the board. There are anomalies in there at all times, but they all fall in that range.

I would also like to mention, Steve, the people that run those businesses, we think are truly outstanding. They know the industries they operate in. They are really top-notch individuals.

Okay. Moving to the guidance a little bit. 25 to 40 percent increase for the second half, does that include the gain in the second quarter or exclude that?

That is based on first half results of 30 cents per share, which would include the gain.

Okay.

Pull out the special item and the earnings would be higher percentage.

Right. Okay. The interest expense, even though rates are down, it seemed low at 3 percent, there was nothing abnormal in the quarter there?

No, we have a good credit rating. We constantly hammer the financial strength of our company. The banks like us and that is just the interest rate we pay.

Okay. Thanks a lot, guys.

Your next question is Jim Larkin.

Good morning. Could you review your R and D numbers? I fell behind in that part of your statement?

Sure. Tom Irwin will give that to you.

In the second quarter of this year, R and D expense was about 2.6 million, which was up 1.2 million overall and actually the increase in the Flight Support Group was 1.4 million. On a year to date basis, that is equivalent to about 5.2 million dollars in consolidated R and D this year for increase of 2.2. We are budgeting for FY02, increase of 3 million for the full year, which is as I made reference to earlier, that is equivalent to 7 cents.

One other thing I would like to add. When we talk about R and D, on of the things that we need with increased R and D is additional marketing support, because, as you know, the development of the products and it is the marketing of the products together with tying up capital to put them on the shelf. If we develop them and don't have them available for sale, it is a whole process and a whole cycle. So, with R and D almost invariably will come some additional marketing expense, too.

That will show up in SG and A?

It will.

Are there any r and did the d contributed by your partners going on now?

Yes, there are, but not a significant amount at this point.

Okay. Give us color on the Lufthansa relationship and how it would compare with United and American, and maybe how Lufthansa played out over 3 years? How long does it take for programs to gain traction and maybe just compare and contrast your partnership with American and United to Lufthansa.

Jim, I will give the meat of that question to Eric, but would like to say the relationship with Lufthansa is exceptional and outstanding. They are very, very helpful and they are a great customer. In general, these relationships take time to build. On day one, it was a slow process. I think American and United clearly will begin to be stronger and stronger. They are still great customers, but these relationships strengthen. Eric will give you more color on that.

Jim, as you know, Lufthansa is a 20 percent shareholder of HEICO Aerospace and invested 50 million in turn for that stake. The strategic relationships with American and United are a little different. They involve investments in a variety of ways. The - I guess to answer your question, the essence is they have committed to buy our product line and to co-develop parts with us going forward that they need for their fleets. Of course, they will buy the parts and most of our product line ex-from us. It takes time for the inventory to burn off. Once we have parts available, we try to coordinate so they have a minimal inventory on the day we are able to supply the parts, that does take time for the run REIT to kick in. I think that is what my father was alluding to in the time lag there. We expect them - the United one, in particular, to come on strong. United is the world's second largest airline after American. It has a tremendous number of products across all sorts of engines and airframe components, we will develop for them. So, I expect it will be beneficial for us.

Okay. Great. Can you on your minority income line, is that with Lufthansa in that line?

Yes, that is correct.

One more item. Can you give the DNA number, can you repeat that?

For the -

For the quarter.

Actually, I think it is in the press release. I guess it is the six-month number. You are correct. It was 2.[inaudible] for the 6 months and the first three months were about 1.1 million.

You are right. They are in the cash flow statement. Sorry. Thanks a lot.

Your next question comes from Sue Ketzmer.

Good morning. I want to hone back in on the numbers for the year. Correct me if I am wrong, we are at 80 cents and now you are looking at 60 to 65 cent range?

I think from the 30 cents first half of the year based on our targeted growth of 25 to 40 percent would put it into i-60 to 68 or 70 cents on the math.

Okay. I guess what really are the swing factors here? I mean, it is a big gap between 25 to 40 cents. Is it an air traffic rate issue or what are the swing factors here?

Tom.

There are two primary factors. One, probably due to a slow dip in minimal recovery from last year's economic downturn. Particularly in the U.S. and Europe. We have seen a reluctance of the airlines to replace capacity. They are replacing it, but it is slower than I think generally the industry originally contemplated. In fact, it is slow most recently in April and so on and so forth. We have tried to cluster that into our estimates going forward. Secondly, we contemplate with the United Airlines agreement inked, that we will be accelerating both new product development, both research and start-up manufacturing costs, higher marketing costs. We think that will have a near-term impact on margins, at least for the rest of this year. Long-term, we still think that operating income margins in the 20 percent range are attainable for HEICO, but obviously at this point, they are below that and higher R and D and higher market.

Okay. Your forecast for the year, is it based on a certain level of air traffic? What rate are you guys estimating?

It is based more on the recent order patterns for replacement parts and our contracts on the defense side and scheduled deliveries etc. Relative to the aerospace side, it is the trends we have seen in the last 4 or 5 months.

One of the things we are struggling with is trying to come up with a prediction, because airlines as you know, are pressed for cash flow right now, they are holding back purchases and so forth. You know, deep down, we might even think that the sales revenue in the second half could accelerate. Truthfully, I was talking to Eric this morning, he thinks that we could do better than what we are talking about. But, it is very difficult to predict and to come out and to say that this is going to happen, we don't want to do that. We would rather err on the side of conservatism. We don't manage the earnings. We could do some things to get closer sto80 cents by cutting back and doing stuff. We probably could get close, but we figure that 2002 fiscal of 2002 is a tough year. We are going to do what we have to do to grow the cash flow and to grow the earnings for the future. We will put these products on the shelf and sell them to United and so forth. Maybe we could do better, I am not saying we could and we will, but you know, maybe we will.

Okay. Fair enough.

I would rather tell, as quickly as we know, we would rather tell you what we see, than tell you after the results are in.

Okay. Fair enough. Thanks.

Your next question comes from Chris Quilty.

Good morning, gentlemen. I will follow up on R and D spending. Has anything changed in your approach towards particular parts, either for March commercial engines or some things you are doing in overhaul and the regional aircraft market and anything change in terms of head count or personnel?

The answer really is the concept and the strategy hasn't changed. We obviously are spending 50 percent more, so we have more people and more expenditure in what we are doing. We are cranking out record numbers of new products. I mean, the thing that has really changed is that this year I think we are targeting 250 or 300 new products. Chris, you remember a few years ago we were doing 30 and if we were lucky, 50. Not only that, but the rejected sales value of each new part is at least the average is at least double what it was in the past. So, all of these things we see going into the future continue strength. Eric, do you want to add to that?

No, other than most of the development spend suggest for non[JT8D]. We got over 130 new F.A.A. approvals in the first half of this year. 90 percent of those were for non-[JT8D]. We are focused on the non-[JT8D]. The 10 percent that was [JT8D] was for the 200-series engine, which our partner, American Airlines, operates approximately 750 engines. There is still a tremendous use for that engine. We will support them. We are continuing to develop across an array of both engine and airframe components.

One other thing. We are developing products, which for competitive reasons, we don't want to discuss them. We do have a couple of black box projects we are working on. These are for products that already fly on different platforms and again, for competitive reasons. These are not necessarily engine parts, but they are parts which we think have strong markets and we don't want to discuss them. We hope they will have big returns.

Okay. Uh, the latest agreement with United, along with the early agreement with American, both those companies, I believe have agreements with OEM for overhaul services. How does your agreement with them play into their ability or willingness to source parts despite the relationship with the OEMs?

Eric.

Airlines have to buy most of the products from the OEM. The OEM is initially the only authorized provider of spare parts for an engine or airframe. Of course, once those products are in service, we are able to come in and prove our ability to replace the parts through the F.A.A. and sell them to the airline. I think it is a major statement the airlines are making that they want to develop with us, these parts. They will commit to buy those parts from us exclusively, once we have them developed. I don't think this changes the fact the airlines will continue to buy from the OEM and will continue to do various deals with the OEM as they see fit. They have made the statement they want an alternative. They don't want to buy everything from the OEM. This is a good way to keep the OEM honest. This is a strategic position they are taking. They need to ensure there is competition in the after market. They will continue to buy a majority of the products from the OEM, through certain repair services. Whatever HEICO can bring to the table, they will be favorably disposed to give it to us to ensure we are there for the long term.

Fair enough. Specifically on Flight Support Group, would you expect incremental sequential - sorry, would you expect sequential sales growth from the current level on a go-forward basis.

Yes. We do. As my father mentioned we were growing at a 40 percent annual rate from June of 2000, until September 11th. Of course, there was a one-time shift in the parts level sales. The growth curve continues to be very strong and obviously, the opportunity for increased [JT8D] sales has disappeared, but we expect sequential improvement going forward.

Okay. On the Electronic Technologies Group, which I presume is where the vast majority of the military sales are. Can you break down beyond Santa Barbara Infrared, which other subsidiaries have a large component in military sales?

Yes, Inertial Airline Services and Analogue Modules, principally.

Are they doing gyros?

Principally gyros, but they do other repair management for some foreign military sources, too.

Okay. And what is the opportunity going forward? I mean, you reported good growth numbers here in the existing quarter. I think it was 70 percent sales. If you scratch out the acquired sales, what would the military growth look like?

It would be in double digits in terms of pure internal. Again, that would be primarily from defense contract growth, that of SBIR, and Analogue Modules, since they are newly acquired business.

Okay. And the prospect on a go-forward basis overall, what trends would you expect from that sector?

I would expect that will continue to increase. What we have started to do is to some degree, cross-market between the different businesses and I guess we will see how that pans out. I would expect to see we will continue to grow on the military side.

In acceleration of growth?

No.

Incidentally, Chris, we have set up between the different subsidiaries, some marketing offices and those marketing offices are focused almost exclusively or exclusively on the military segment. So, what we have done in certain locations in the United States, set up an office to obtain military business and represent our various subsidiaries, both in the Flight Support Group in cases and in the Electronic Technologies Group, and use those offices as a focal point for marketing products that are manufactured and worked on in the various HEICO groups throughout the country.

One big area you guys you didn't talk about.

I will talk about acquisitions. The trail has been very tough. People in the past six months, people want prices that they could have gotten two years ago. We are not willing to pay those prices. We are very conservative, as you well know. We have a number of acquisitions on the drawing boards, numbers. They would have to be accretive or we would not make them. We are keeping our powder dry. There are a large number. In some cases, you know, we do a lot of due diligence and we do a lot of market study. Truthfully we had a transaction we thought we were going to do and after doing thorough due diligence, we decided to back away from it. As a result of market analysis. So, when we are ready to announce them, we will announce them. The backlog of the pipeline is filled and we are working as diligently as we can.

Very good. Keep up the good work.

Thanks, Chris.

There are no further questions.

Okay. I want to thank you all for your participation. If you have any questions, I am available, as are Tom, Eric and Victor. If there are questions, we would be happy to entertain them. With that, we thank you all and have a very good day.

Thank you for participating in today's teleconference. You may now disconnect.