HEICO Corp (HEI.A) 2010 Q1 法說會逐字稿

Good morning. At this time I would like to welcome everyone to HEICO Corporation Fiscal 2010 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. Laurans Mendelson, Chairman and CEO of HEICO Corporation. Please, go ahead, sir.

Nicole, thank you very much and good morning to everybody on this call. Again, we thank you for joining us and we welcome you to the HEICO First Quarter Fiscal 2010 Earnings Announcement Teleconference. I am Larry Mendelson. I'm the CEO of HEICO Corporation and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's flight support group; Victor Mendelson, HEICO's Co-President and President HEICO's Electronic Technologies Group; and Tom Irwin, HEICO's Executive Vice President and CFO. Before we begin, Victor Mendelsonwill read a statement.

Thank you. 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 and-or implied by those forward-looking statements as a result of factors, including but not limited to lower demand for commercial air travel or airline fleet changes, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space, or homeland security spending by US and-or foreign customers; or competition from existing and new competitors, which could reduce our sales; HEICO's ability to introduce new products and product-pricing levels, which could reduce our sales or sales growth; HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk, interest rates and economic conditions within and outside of the aviation, defense, space, medical, telecommunications, and electronics industries, which could negatively impact our cost and revenues.

Those listening to today's call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Forms 10K, 10Q and 8K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Thank you.

Thank you, Victor. Now, before reviewing the operating results for the first quarter in some detail, I'd like to take a few moments to summarize the highlights.

Despite continued weakness in our commercial aviation markets, we are pleased to report that our first quarter of 2010 net sales, operating income, and net income all improved over the first quarter of 2009. Net income per diluted share increased 5% to $0.44 per diluted share for the first quarter of '10, up from $0.42 per diluted share in the first quarter of '09. Keep in mind that '09 included a $0.04 benefit from the settlement of an income tax audit.

Although demand for flight support products and services continued to Brocade e negatively impacted by reduced airline capacity resulting in a decrease in net sales of 6%, operating margins improved by over 2%, reflecting the impact of a favorable product sales mix. Within electronic technologies, we are seeing some strengthening in demand for our satellite, defense, and medical equipment products. For the first quarter of '10, net sales of ETG were up 36% due to additional sales from two fiscal '09 acquisitions, one completed in May and the other in October as well as organic growth of approximately 6%.

In January we paid our 63rd consecutive semi-annual cash dividend since 1979. Our cash flow and balance sheet remain extremely strong. Cash flow from operating activities was $20.3 million for the first quarter of '10, representing 172% of reporting net income, up from $5.2 million in the prior year. As of January 31, the Company's net debt to shareholders' equity was just 7.1% with net debt, which is total debt less cash, of $35.9 million. We have no significant debt maturities until 2013.

Furthermore, last week we announced the acquisition of DB Control which produces high powered devices used in both defense and commercial applications. This was our 38th business acquired since 1990 and represents another example of our continuing strategy to acquire profitable and well managed businesses. We believe that DB Control is a unique company, offering us more participation in a growing part of defense budgets as reliance on high power radar and electronic warfare systems increased. We continue to look at other acquisition opportunities as well.

Moving on to the detail of our statements, net sales, consolidated net sales in the first quarter of '10 increased 4% for $135.5 million, up from $130.4 million in the first quarter of '09. Net sales of flight support were $93.8 million in the first quarter of '10 compared to $99.6 million in the same period in '09. Net sales of electronic technologies increased to $42.1 million the first quarter as compared to $31 million for the same period in '09. These results reflect the previously discussed sales of flight support and electronic technologies segments.

Net sales for the first quarter of '10 by market were composed of approximately 65% from commercial aviation versus 71% in the prior year, 22% from defense and space versus 16% in '09, and 13% from other markets which includes medical, communication, telecommunication, and electronics and this was about the same as in the prior year.

Our consolidated operating income in the first quarter of '10 increased 14% to $24.5 million, up from $21.5 million in the first quarter of '09. This reflects higher operating income from both flight support and electronic technologies. Operating income of flight support in the first quarter of '10 increased 7% to $16.7 million, up from $15.6 million in the first quarter of '09 as a result of a more favorable product mix, including the impact from the sales of some products previously written down as slow moving. Operating of ETG in the first quarter of '10 increased 31% to $11.2 million up from $8.5 million in the first quarter of '09. This reflects the impact of the fiscal '09 acquisitions as well as the organic sales growth I mentioned earlier.

Consolidated operating margin for the first quarter of '10 improved to 18.1% compared to 16.4% in the first quarter of '09. This is principally a result of higher margins within flight support. Operating margins of flight support improved to 17.8% in the first quarter of '10, up from 15.7% in the first quarter of '09. This increase reflects the more favorable product sales mix I discussed earlier. Operating margin of ETG remained very strong at 26.6% for the first quarter of '10 compared to 27.6% in the first quarter of '09.

Diluted earnings per share increased to $0.44, about 5% in the first quarter of '10, up from $0.42 in the first quarter of '09. As mentioned previously, the first quarter of '09 earnings per share included a $0.04 per diluted share benefit related to the settlement of an income tax audit.

Depreciation and amortization expenses were $4.3 million in the first quarter of '10 compared to $3.5 million in the first quarter of '09 and the increase primarily reflects higher amortization expense related to the intangible assets acquired as part of the '09 acquisitions by Electronic Technologies. Research and development expense increased 7% to $5.1 million in the first quarter of '10 up slightly from $4.8 million in the first quarter of '09. For the full year of 2010 - fiscal year, of course - we're targeting 600 to 700 new PMAs and DER repairs this year.

Significant ongoing new product development efforts continue within Electronic Technologies and we are confident as we have always been about these expenditures that they will, the new product development expenditures towards new product development will be well rewarded through future growth and we remain committed to this long-term strategy despite the short-term uncertainty in the economy.

SG&A expenses were $25.6 million in the first quarter of '10 compared to $22.5 million for the first quarter of '09. The increase is mainly due to the additional operating costs associated with the two ETG acquisitions during 2009. SG&A spending as a percentage of net sales increased to 18.9% for the first quarter of '10, up from 17.2% in the first quarter of '09 and this reflects the lower net sales volumes within flight support and the increase in amortization expense of intangible assets associated with the 2009 ETG acquisitions.

Interest expense in the first quarters of '09 and '10 were not significant and that's due to our low debt levels and a very lower variable interest rate under our revolving credit facility. As I referenced earlier, our net debt is only $35.9 million as of January 31, 2010.

Other income and expense in both periods were not significant. Our effective tax rate increased to a more normal 34.8% in the first quarter of '10 versus 27.6% in the first quarter of '09. The increase reflects the benefit of the audit settlement reached with the IRS during the first quarter of '09 and that related to our qualified R&D tax credits. Net income attributable to controlling interest which was previously referred to as minority interest totaled $4.2 million in the first quarter of '10, compared to $4 million in the first quarter of '09. The increase is attributable to the '09 acquisition of an electronic technologies subsidiary in which a non-controlling interest exists as well as higher earnings of certain other ETG subsidiaries in which non-controlling interests also exist.

Moving on to the balance sheet and cash flow, as you all know, our financial position and cash flow remain extremely strong. Cash flow from operating activities in the first quarter of '10 total $20.3 million, up significantly from $5.2 million in the first quarter of '09 as our investment in working capital decreased by about $13 million in the current quarter. Our working capital ratio which of course is current assets divided by current liabilities is a strong $3.8 million as of January '10 up from $3.7 million as of October '09.

DSOs and accounts receivable equal 51 days at January 31, 2010 compared to 50 days in October 31, 2009. You know that we manage our credit exposure by closely monitoring all receivable collection efforts. Our inventory turnover rate as of January 31, 2010 equaled 153 days versus 133 as of October '09. That reflects lower sales volume in flight support in the first quarter of '10 as well as an increase in inventory levels of approximately $4 million. No one customer accounted from more than 10% of net sales and our top five customers represented approximately 21% of consolidated net sales in the first quarter of '10 compared to 22% in '09.

Year to date net payments on our revolving credit facility totaled $12 million during the first quarter of '10 and CapEx in the first quarter of fiscal '10 were approximately $2.2 million or at a rate slightly below our current estimate of $12 million to $15 million for the full fiscal 2010.

Looking forward into the crystal ball as our outlook, we look to the balance of fiscal '10 and we expect continued softness during the first half of calendar 2010 in our commercial aviation markets which represent about 68% of our annual sales. While the consensus opinion within the industry continues to expect the recovery within the airline industry in the latter half of 2010, we believe that too, the strength and exact timing of such a recovery is uncertain at this point.

Based on this aviation market outlook and the conditions within our other major markets, we are raising our fiscal 2010 net sales targets to a range of $575 million to $585 million representing growth of 7% to 9% over fiscal '09 and we are raising our net income per diluted share targets to a range of $1.78 to $1.82, representing growth of 8% to 10% over fiscal 2009.

We continue to expect consolidated operating margins for the full year to approximate 17%. These targets include our recent acquisition of DB Control but exclude the impact of any potential acquisition opportunities, future acquisitions. We continue to expect 2010 cash flow provided by operating activities to remain strong and to approximate $75 million to $80 million.

In closing, I'd like to say that despite continued near-term challenges, we will continue to focus on intermediate and long-term growth strategies with an emphasis on development of new products and services to meet the needs and demands of our customers as well as focusing on strategic acquisition opportunities that complement our existing operations.

To point out to some of those on the line who are new to HEICO, that has been a strategy that we have consistently followed for the past 20 years and it's one that has driven our bottom line growth to a compound of about 18% to 19% compound bottom line growth over 18, 19 years and a stock price that has compounded probably a little in excess of 20%.

So, with those comments, I would like to ask Nicole, our Operator, to open the floor for any questions and we'll try to respond.

Thank you, sir. (Operator Instructions) Our first question is from Tyler Hojo of Sidoti and Company.

Good morning, everyone.

Good morning, Tyler.

I was hoping you guys could maybe talk a little bit more about the guidance. Is the entire increase to the top line based on the DB Control business and is perhaps the base business? Have any of your assumptions for the base business changed on the updated guidance?

Tyler, this is Tom Irwin. I would say not significantly changed in terms of the base business. In terms of the revenue, much of that does come from the acquisition. Our previous guidance was $565 million to $580 million. So, it was a slightly broader range obviously early in the year as well. And we've narrowed the range and obviously upped the bottom and top revenue guidance numbers.

Would it be possible to tell us what you expect DB Control to add for the year?

We do not break out the contribution of DB. It was a privately held business. It's not a material transaction. So, therefore we do not disclose private information. What we can say is that DB is consistent with our acquisition strategy, as Larry mentioned, of acquiring higher margin, well managed businesses. Typically we've said that the range of revenue from an acquisition is on an annual basis $20 million to $30 million. I think we used to say $10 million to $30 million but more recently the numbers have narrowed to maybe $20 million to $30 million. On an annual basis, of course, it will only be in there for a partial year and we commented in the press release on DB and Victor can add some commentary that we do expect it to be accretive within the first year but again near-term it doesn't have a significant impact in terms of EPS guidance.

What did you pay for DB?

Again, specific financial details weren't disclosed but it would be consistent with our strategy of acquiring businesses at target EBIT multiples of five to six times. That will put you in a range. When you do the math of our strategy, again, we do not price deals based on sales but it works out comparable or approximately equivalent of one-time sales. But again we're looking at earnings contribution as a multiple of earnings. But if a business does a 20% operating margin you get pretty close to one to one point something sales.

Alright. I give up on asking about that. Just one follow-up for me. You didn't mention R&D expense. Are you still looking at about $22 million for the year? What was R&D for the quarter?

Yes. I thought we had covered it. The R&D expense for the first quarter was about $5.1 million and I would say typically that runs relatively constant during the year. So, on an annual basis, $20 million, $21 million something, roughly, about 4% of sales.

Okay. Great. I'll let somebody else ask. Thanks a lot.

Okay. Thank you.

Your next question is from Ken Herbert of Wedbush.

Yes. Good morning. Thank you.

Good morning.

Specifically, a question on the flight support group first. I noticed with the comments you made about some one time items, I guess that's my question. The margin increase on the sales -- site sales decline due to the items, should that be thought of as one time item that you mentioned or is that something we can potentially see in the second and third quarters as well?

This is Tom Irwin again. As Larry mentioned, the margin improvement in flight support group that I think you're referring to is about 200 basis points or 2% and we commented on favorability of product mix including the sale of some previously written down or reserved slow moving inventory. I think that's probably what you're referring to. The answer is the impact of the slow moving inventory was about half of that margin improvement. The rest would've been impacted by such things as more higher margin products than repair services as a mix of business and so on and so forth. But the purer, slow moving impact was again around $1 million. And to the extent that near-term those sales weren't repeated and obviously that would be sort of a one time, one quarter. And with a little bit more color, we actually commented -- I think it was the third quarter of last year that we increased our reserves by about $1 million as a result of slowing demand for certain products and again we commented at the time it was not obsolete inventory but our policy is to reserve it and I think effectively much of that turned around in this quarter.

Okay. Thank you. And if I could, you maintained a fairly cautious outlook on the commercial after market. Are you seeing anything here -- even into the first two months of calendar 2010 and the last month of your first quarter, that you would indicate that we are seeing -- are you seeing any sort of sequential uptick in the after market? Any opportunities there?

Ken, this is Eric. Yes. We are seeing sequential improvements in the after market. As I've mentioned in previous conference calls there continues to be a tremendous level of interest and demand for our product. Going forward, developing new products that we don't currently offer, the airlines have got to increase their savings, they've got to reduce their cost levels. Our competitors continue to increase prices substantially and the customers are looking to us for relief. So, yes, we are seeing -- we are seeing firming interest in our products and we anticipate as well with the rest of the industry that the second half of 2010 is going to see recovery. There has not been a substantial recovery in the sales of mature profits. We have not seen mature volumes trend up substantially. The thing that's providing HEICO with the growth opportunity is the new products that we continue to develop, the new PMA, the DER repair, distribution, manufacturing, all of those in areas where we are very active.

Great. Gentlemen, thank you very much for the color and excellent quarter.

Thank you.

The next question is from Steve Levenson of Stifel.

Thanks. Good morning, everybody.

Good morning.

In the R&D investments that you're making, are they focused on a particular engine series or classification of parts or a particular aircraft?

No. I think they're typically as we see they're across the board. They're engine parts, they're accessory parts, they're -- you know, parts throughout the aircraft.

Okay. Thanks. Delta has recently said that they may add some MD80s and 90s rather than buying new planes. That sounds like something good for you. Can you give us your thoughts on that, please?

Yes. This is Eric speaking, Steve. Yes. Delta I think has come out and said that the MD80s and MD90s would be good because they're fully depreciated, have very favorable economics right now and their plan is to continue to use those aircraft. I'm not sure if they're going to be acquiring additional ones, but they're going to maintain the ones they've got in the fleet.

Your relationship with Delta right now is - ?

We don't comment on any particular customer or product information for competitive reasons, but I can say that in general our relationship with airlines around the world is excellent. Delta is a partner of ours. They're a substantial customer. And I'm sure everything with them will be consistent with our other customers.

Okay. Thanks. Last item is on M&A, the DB deal, obviously fits right into what you're looking for. Do you think you'll see more on the electronic technologies side or flight support side and what are the potential targets, dealings if you can give us the body language on pricing? Have they come to realize it's not what it was?

Sure. We've seen opportunities on both sides of the business at this point. As you know, if you look at our history, we're opportunistic. We make acquisitions as they make sense, when they make sense, and we're not gearing toward just one particular segment of the business versus another. At the moment, there seem to be more ripe opportunities in the ETG businesses than flight support but that historically can change on a dime. And in terms of pricing expectations out of sellers, I would say there really hasn't been much change in fact over the last few years period, one way or the other. So, it's kind of business as usual for us. There are plenty of opportunities but we're very, very discerning as to what we're buying and while we're working on some that always look very good, we really never know what will happen until closing.

Got. Thank you very much.

You're welcome.

Your next question is from Eric Hugel of Stephens.

Good morning, guys.

Good morning.

Just a question on FSG, the sales, conversations that we've had previously about the stability last year in that sort of $97 million, $98 million, $99 million range, you're scraping along the bottom, this quarter dropped down to a little under $94 million. Should we think about that as a further deterioration? You saw things worsen from that level? Or is this more seasonal and we should see more of a snap back to those levels maybe as we go forward and your second half recovery? How should we think about that?

This is Eric Mendelson speaking. Again, the sales were down because we had less sales of lower margin products, whether it was at management services or repair services. And we of course had higher sales of higher margin products. The way the Company is structure, we're structured to drive operating income and drive return to the shareholders. Sales is really not the number that we're focused on, it's the earnings. I would not say at all that there's been a deterioration in the overall sales level, it's just a matter of the lower margin products, we sold fewer of them and they have much less importance to the Company than the higher margin products and we're doing better in the higher margin areas. I would not say that there's a deterioration whatsoever.

Okay. Fair enough. With regards to the margins in the FSG business, 17.8% at those sales levels, pretty impressive. Although if you look back a couple of years, not sort of out of whack with where you've been, but a bit out of whack if you look at sort of last year and the sales levels. I understand. But if you read into your guidance, you did 18.1% this quarter and you're expecting full year operating margins to be 17%, I'm assuming the expectation is that you're not expecting -- you're expecting margins for FSG to probably be more in that sort of 15%, 16% range as we go forward?

Eric, this is Tom Irwin. I think going into the year our comments were relative to same in margins, just generally as you're pointing out, segment margins in FSG were down last year to about 15% from running 17%, 18% in previous periods. Our comment was it was volume increases. We would expect that to go back towards eventually the 18%. But maybe not there immediately. It was high in the first quarter as we discussed and again about half of that 200 basis points improvement or about 1% is reflective of that slow moving which brings that roughly 18% number back into the 17%. So, I think we're absent that one time situation that we realized in the first quarter which may or may not happen but certainly can't predict going forward. I think we're back North of last year's 15% but probably not reaching the longer-term goal, except on a run rate basis until the volumes pick up.

I mean, when you talk about in terms of the mix, in terms of the top line, higher margins and all this, I assume you're talking about higher margins. You're talking your PMA business versus your services business. I mean, can you talk about -- I'm assuming when you're talking about sort of sales, you saw that sales of the slow moving, written down product, that's sort of older, sort of very high margin type of stuff. Can you talk about within that sort of mix are you starting to really see any consistency in that demand or is it sort of still spotty and unpredictable?

I just want to clarify one thing. The high margin sales that we referred to was not old and slow moving. It was slow moving because sales in the past had fallen down, so therefore the inventory theoretically looked higher. This was all very -- we were completely confident. This wasn't for an old product or an old engine or anything like that. This was just where the accounting system that we are bound to use, required to use because of consistency relates inventory to sales over a period of time. So, if sales in the period of time that we're using as a base decreases because of a fall in the general market and the inventory level is higher, we are required to write that down. So, that wasn't old stock and one time stuff and things like that. I just wanted to clarify that.

Thanks for that. I guess -- lastly and I'll let other people get on. You made some comments, maybe I misunderstood you, but you said 600 to 700 new parts and DER parts starts this year? Is that your target?

Yes.

How does that compare, I guess last -- when you gave the guidance for last quarter when we were talking about 500 new PMA parts. Is that just sort of saying you're just adding the DER parts on a cost -- now where you add in?

Yes. We have been saying 400 to 500 PMA parts and give or take 200 DER repairs. It is the same thing. There is no change.

Great. Thanks a lot, guys.

Your next question is from Chris Quilty of Raymond James.

Good morning, gentlemen. That was my first --

Good morning, Chris.

Hi, Larry. That was my first question. So, I'll move to the second which is you had a pretty big year over year jump in the contribution from the military and space. I think it was 22% up from 16%. Does that simply reflect the fact that your ETG segment as a portion of the mix is up about seven points year over year or are you actually seeing stronger underlying growth within that segment relative to the commercial aviation and other sectors?

Chris, this is Tom. I'll let Victor come up on terms of the market but a big contributing factor to that was of course the acquisition of VPT in May of last year which has a large component of defense products. So, the mix and you're correct. The electronics business is now contributing 30% to 31% of our consolidated sales. If you go back over history, it's more like 75% flight support group and 25%, so the mix within ETG is higher with the organic growth this year as well as the acquired businesses, particularly the defense market. I'll let Victor comment.

Yes. Chris, I would say we've seen some improvement. We have seen at least in the quarter some improvement in some of the medical markets that we serve and as well as some of the defense related businesses in terms of orders as well. I think it's a little too earlier for us to know exactly what has strong legs on it at this point. We're still getting as the economy shifts around here, we're still getting our sense of that.

Okay. I think your statement that you're interested in some more defense oriented acquisitions, certainly at a time when a lot of people seem to be retrenching from it and projecting long-term budget declines, can you talk a little bit through your thought process and philosophy there on why you think targeting more defense than aviation acquisitions might be a better move.

I wouldn't say we're targeting defense more than aviation at this point. I think we're targeting both and where the opportunities are is where we're going to act. So, at the moment, as I said earlier, there seem to be opportunities in the ETG side which is not strictly defense, by the way. So, our thinking though on defense is that we have to be very careful and very selective. We've had a general bias against just making broad based defense acquisitions. In fact, if you look at what we've done over the last few years, we sort of adopted that posture a few years ago. What we're looking at now are things that we believe specifically continue to be growth areas within the budget that are not the gold-plated solutions, the 99% solutions Secretary Gates talks about, the bias against. We're looking for things that are more detection oriented. This is as a rule of thumb. Things that seem to have more legs to them. But we are not -- I just want to emphasize, we are definitely not preferring defense over commercial aviation and we continue to seek acquisitions in both. In fact, if you look, our last acquisition before DB Control, DukaneSeacom, that is predominantly a commercial business.

Got it.

Chris, I want to add a little more color to that. The latest acquisition, DB, is really a niche business that makes a certain critical part for extremely high powered radars and one of the programs that it's sole source on is Predator and some of the other UAVs that are flying around and when we did our due diligence into what is expected there, in some cases, at some parts of the Defense Department, the Army are talking about quadrupling their capacity in those kinds of things. I think the area -- UAVs is a particularly hot area and we believe that that's going to have a lot of legs to it and there's going to be an awful lot of that kind of product being required. So, that's the kind of thing we're looking for. Very niche stuff that's probably going to be increased, not decreased.

I think you're on the right track there. So, keep up the good work.

Thank you.

Your next question is from Arnie Ursaner of CJS Securities.

Good morning. First question relates to Lufthansa. They've been on -- can you just update us on the status of their strike and if you see it having any impact on your results?

Yes. Arnie, this is Eric. I don't see any significant impact on the Lufthansa strike on our results. They canceled a number of their flights or had a part of their schedule for one day and then they're phasing it back in over the next couple of days. But this is a standard thing in the airline industry with labor issues. There's a lot of that going on in Europe right now. I wouldn't say there's anything of major significance there.

So, they're basically negotiating to get back to work. I want to follow-up with either -- with Tom, I guess, on the math on the one time item related to favorable product sales. I think you've given us enough pieces of the puzzle to try to quantify it. I think you indicated you'd written down about $1 million of product. You indicated it accounted for about half of the 200 basis point margin improvement. If I take $1 million of sales arbitrarily, assume an 80% margin, that gets me right to half of the 200 basis point margin improvement. And if I frankly bring that back to EPS it takes away -- you had about a $0.03 earnings impact from this if I've done my math right. Care to comment?

Correct expect that the EPS impact is about really less than $0.03, more like $0.02. That is because you have to remember the flight support group, we own 80% of it. If you do the math, it's more like after taxes and after minority interest it's slightly less than $0.02.

Yes. I hadn't adjusted for the 80%. Thank you. Going back to Tyler's question. He gave up but I'm not going to on your guidance as it relates to DB Control. Once again, let's do some math there. You target $20 million to $30 million of revenue. You'll have it for about nine months even if it's at the very low end of your revenue views of acquisitions and even if it shows no growth, it implies you are cutting back your core revenue in the business. So, either DB is much smaller than your normal or in fact you're cutting back your overall core revenue guidance. Which is it?

Again, we haven't disclosed and don't intend to disclose a specific revenue and earnings contribution for DB. It's not material. In any acquired business, we're very, very cautious when we first acquire them and bring them in. Perhaps we're conservative. Perhaps we're going to be correct in terms of whatever estimate it is. But as a practical matter, newly acquired business, we don't assume synergies under the current accounting rules which are different for us this year. You may recall new purchase accounting rules, transaction costs, as an example, get expenses. In particular there's some drag on first year acquisitions opportunities as well, irrespective of what our revenue expectations are.

My final question relates to your comments in your prepared remarks about first half of airline industry slowness, but you'd also been indicating that your customers had been dramatically reducing inventory, had been under ordering even relative to their current trends. So, my question relates to what are you seeing from customer activity as it relates to your inventories versus overall demand trends for the industry. Are in fact -- were they so under inventoried that they in fact will have to come back with orders relatively soon?

This is Eric. I think you're referring to some of the destocking comments in prior conference calls. The airlines, as you know in 2009 significantly brought down their inventory. I would not say that they brought them down to levels which are unsustainable where we've seen a major snap back. They do need to start off ordering some parts that they hadn't ordered but I wouldn't call it a restocking. They're not buying stuff and sticking it on the shelf. We're not seeing double sales or anything like that in order to being able to service their fleet. I think they see light at the end of the tunnel. They brought down their inventories. I think we commented on the last conference call that we thought we were at the bottom and it was going to be up from here. And that comment relates to both mature parts as well as to new parts going forward. I think that's what we're starting to say. Again, the decline in sales first quarter '10 as compared to first quarter '09 was due to lower margin products. I would not read it across into the higher margin products.

Thank you very much.

You're welcome.

(Operator Instructions) The next question is from J.B. Groh of D.A. Davidson.

Good morning, guys.

Hi, J.B.

I just wanted to clarify a question. You mentioned material volumes are still pretty slow within that active PMA catalogue. Is there any way to quantify what percentage of your active catalogue is parts that have been developed within the last 24 months and what's older?

Just to comment, you mentioned volumes being slow. I wouldn't say that volumes are necessarily slow. But I can say if you look at the number of PMAs we've got -- there are roughly 6,000 of them and approximately 1,000 of them were developed in the last two years. A more relevant measure of our new product development activity is the PMA and DER activity. That's why we're now speaking about that because there's significant expenditure and contribution from that activity as well.

Got you. But when you talked about the material volumes, obviously that relates to maybe older platform aircraft?

Oh, mature volumes. Yes. It would -- we consider mature volumes anything which has been out there a number of years.

Okay. But not specific to an aircraft platform? My thinking was that utilization is obviously going to increase on a newer platform A320, 737 NG before it increases on some of the older aircraft.

Yes. That is correct. Although when we use the term mature, we mean mature in terms of being in the HEICO catalogue.

Got you. Okay. So it could be a fairly mature part for a relatively new aircraft?

Yes.

Great. Thanks a lot. Good job, guys.

Thank you.

Your next question is from Chris Donaghey of SunTrust Robinson Humphrey.

Hi, guys. This is actually Rob Takacsfor Chris. I'm sorry if I missed this but what is the assumed tax rate for FY '10 and share count?

This is Tom Irwin. I'd say probably the first quarter effective tax rate which was round number 35% and going into the year I think our comment was it would be more normal in that range. Then the minority interest ran about 16% in the first quarter. In the previous commentary, we said you should look at both the taxes and the minority interest to the aggregate because sometimes there's some swings between the two and then back when you combine the two it's been reasonably consistent, absent unusual tax circumstances in the 50% to 52% range.

Okay. And do you have -- okay. Thank you.

Your next question is a follow-up question from the line of Tyler Hojo.

Hi. I was hoping you might be able to comment on what kind of recovery in air traffic is basically assumed in the guidance that you've provided?

Tyler, this is Eric. I think we -- the consensus in the industry is that the recovery is really going to occur in the second half of 2010. For us -- I'm sorry. The second half of calendar 2010. That would really since our third quarter ends July 31, that would really only impact our fourth quarter. So, that's what I would say is the generally assumed consensus right now. You can see, if you've flown recently, the airplanes, the load factors are higher. The yields are higher. They destocked all of the inventory. They've deferred maintenance. So, that' why I think people are optimistic on a recovery. It's just the exact timing of that recovery is what's uncertain. But, you know, consensus would be second half of 2010.

I get the timing thing. But what about -- maybe if you could speak to kind of the scope of the recovery?

When you say scope of recovery, what are you looking for?

How robust of a recovery are you assuming in this guidance range?

It's a fairly modest recovery. We're not expecting doubling of sales or anything like that but a continuing firming and an increase in mature volumes that would when combined with our new product volumes, have a positive impact on us.

Just to add more color, we have not tried to be overly optimistic on the economic recovery and make assumptions, pie in the sky assumptions. I think you know historically we have been on the conservative side of giving guidance. If it comes back stronger, that's great and it will be reflected in the bottom line and the top line, but we're not expecting a robust boom, all of a sudden the number of flights are going to sore and so forth. I think we're expecting, as Eric said, a very modest, slow recovery. We can do very, very well in managing the Company even under those circumstance. So, we manage with weak assumptions and if we get better assumptions, then everybody is very, very happy. If we don't, we've been extremely realistic and nobody will be disappointed with what we told them.

I appreciate that color. That's what it seemed like. Okay. Great. Thanks.

We have an additional follow-up question from the line of Eric Hugel.

I noted an announcement, I think it was out of CIR Corp that there was some kind of distribution deal with one of your subsidiaries, Seal Dynamics. Is there anything meaningful there in terms of impact to HEICO?

Just that it shows Seal Dynamics continued growth. Seal is a very effective distributor for certain midsized and smaller OEMs. Really has very good technical knowledge of the products that it provides and it provides incredible sales focus that I don't think exists -- or I haven't seen anywhere else in the industry. So, CIR Corp is a company that selected Seal. I think we're going to see additional distribution agreements signed, new distribution agreements signed for Seal Dynamics and I think it just exhibits the growth and supports the growth that we're talking about. We talk about how we save a customers a lot of money over on the new parts side as well as the repair side, but also on the distribution services these are often OEMs or companies that are approved by OEMs to be in the market and don't have as much market share as they would like. We're able to go into the airlines, take advantage of some very important relationships and increase the basket of savings. So, I think CIR Corp saw that and hopefully we're going to have others that jump on board as well.

Is there any exclusivity here with regards to these products or are you just going to be one of many that's expanding their distribution space?

No. I believe it is exclusive. I don't have that detail directly in front of me right now but in general our distribution is exclusive. If we're going to go out there and we're going to really make a meaningful contribution to our principals, we need to have the exclusive distribution to be able to drive that for them.

So, this could theoretically add a couple of million dollars to your top line, correct?

Yes.

Okay. Fair enough.

It takes a little while to pick up the sales and transfer all the sales over, but in the aggregate, yes, the additional distribution agreements can be very helpful.

Eric Hugel. Great. And just corporate expense, you did what? About $3.2 million for the quarter? Is that a good run rate to think about as we go through the year? Maybe a little higher with the DB acquisition coming in line.

This is Tom Irwin. Yes. Exactly. DB as an example, some additional SG&A amortization, but it's been running pretty consistently around 2.5% of sales. So, I think depending on what revenue we ultimately hit in our expectations, it should be somewhere in that range.

And can you give us sort of a guesstimate with regards to now with the DB acquisition coming in, what we should be targeting for D&A for the year?

I would say it would be annualized plus -- annualized first quarter and then add maybe $1 million roughly. Typically an acquisition will run somewhere in that range. And it's a partial year so on an annual basis it may be a couple million if you're modeling multi year. I realized I didn't finish the second half of an earlier question about the share count. We ran about 27 million shares outstanding, diluted shares outstanding. At this point we have no reason to expect major changes in terms of the share count on a go forward basis for certainly the rest of this year.

Thanks a lot, guys.

There are no further questions at this time. Gentlemen, are there any closing remarks?

We'll end up by saying thank you to everybody on this call, those who are interested in HEICO. If you have further questions you know where to reach us. Tom, Eric, Victor, and myself and we'll be happy to try to respond to your questions. Next time, which will be quarter two which will be sometime in the month of May, we look forward to speaking to you then and hope you all have a good day.

Thank you. This concludes today's conference. You may now disconnect.