HEICO Corp (HEI) 2011 Q1 法說會逐字稿

Again, good morning to everyone on the call. We thank you for joining us, and we welcome you to the Heico first-quarter fiscal 2011 earnings announcement teleconference. I'm Larry Mendelson; I'm the CEO of Heico Corporation, and I'm joined here this morning by -- with 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 Tom Irwin, Heico's Executive Vice President and CFO. Before we begin, Victor Mendelson will read a statement.

Good morning. Thank you. Certain statements in today's conference 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, 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 cost to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space, or homeland security spending by US and our 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, and Heico's ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest and income tax rate; and economic conditions within and outside of the defense, space, medical, aviation, telecommunications and electronic industries, which could negatively impact our costs and revenue.

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 statement, whether as a result of new information, future events or otherwise. Thank you.

Thank you, Victor. And now, before reviewing the operating results of the first quarter in detail, I would like to take a few moments to summarize the highlights of our record-setting first-quarter results. We are very pleased to report record quarterly highs in consolidated net sales, operating income, net income, and earnings per share for the first quarter of fiscal 2011, driven principally by record sales within our Flight Support Group, and strong sales within Electronic Technologies. Flight Support set record first-quarter sales and improved earnings with increases of 29% and 45%, respectively, due principally to significant organic growth of approximately 24%.

In December 2010, we acquired an 80% interest in Blue Aerospace, a leading supplier, distributor and integrator of military aircraft parts and support services, primarily to foreign military organizations allied with the United States. We have now acquired over 40 businesses since 1990, and Blue Aerospace represents another example of our long-standing strategy to acquire profitable, well-managed businesses at fair and reasonable prices. We believe that Blue Aerospace is a unique company with outstanding management offering us the opportunity to grow our participation in foreign and domestic defense budgets.

Within Electronic Technologies, we are seeing continued strength in demand for our defense and electronic products. For the first quarter of 2011, net sales of Electronic Technologies were up 28%, reflecting additional net sales from a fiscal-2010 acquisition, and organic growth of approximately 12%. First-quarter earnings of Electronic Technologies improved 39% over the prior year.

Net income per diluted share increased by 43% to $0.50 for the first quarter of 2011, up from $0.35 in the first quarter of 2010. Net income per diluted share for the first quarter of 2011 includes $0.02 from the benefit of the retroactive extension of the R&D income tax credit. In January 2011, we paid our 65th consecutive semiannual cash dividend since 1979, and that was paid at a rate of $0.06 per share. Our cash flow and balance sheet remains extremely strong. Cash flow from operating activities was $23.5 million for the first quarter of 2011, representing 138% of net income, up from $20.3 million in the prior year. As of January 31, the Company's net debt to shareholders' equity ratio was a very low 1.8%, with net debt, which is total debt less cash, of just $10.3 million. We have no significant debt maturities until 2013.

Lastly, we would also like to congratulate Tom Irwin, Heico's Executive Vice President and CFO, for recently being awarded the Top CFO award for a public company by the South Florida Business Journal. We are very fortunate to have him at Heico.

Now drilling down to some of the details, we will start with net sales. Our consolidated net sales in the first quarter of 2011 increased 29% to a record $174.2 million, up from $135.5 million in the first quarter of 2010. Net sales of Flight Support increased 29% to a record $120.6 million in the first quarter of 2011, up from $93.8 million for the same period in 2010, reflecting significant organic growth approximating 24%. And this reflected increased commercial airline capacities, as well as sales of approximately $3 million, which was added by an acquisition.

Net sales of Electronic Technologies increased 28% to $53.9 million in the first quarter of 2011, as compared to $42.1 million in the same period in 2010. The increase of 28% is due to additional revenues totaling about $7 million, contributed by an acquisition completed after the first quarter of fiscal 2010, as well as strong organic growth of about 12%. This organic growth in ETG principally reflects continued strength in customer demand for certain of our defense and electronic products, and is somewhat above our longer-term organic growth estimates of mid- to upper-single digits for ETG.

As we have pointed out in the past, revenue and profits of ETG may vary considerably from quarter to quarter due to variations in shipping schedules and product margins. Historically, these variations have balanced out over the full fiscal year. Our net sales in the first quarter of 2011 by market were composed approximately 63% from commercial aviation, versus 65% in 2010, 22% from defense and space in both 2011 and 2010, and 15% from other markets including medical, telecommunications and electronics, versus 13% in 2010.

Moving on to operating income, our consolidated operating income in the first quarter of 2011 increased 32% to $32.4 million, up from $24.5 million in the first quarter of 2010; and this reflects higher operating income from both Flight Support and ETG. Operating income of Flight Support in the first quarter of 2011 increased 22% to $20.4 million, up from $16.7 million in the first quarter of 2010, principally as a result of the higher sales volume. Operating income of Electronic Technologies in the first quarter of 2011 increased 39% to $15.5 million, up from $11.2 million in the first quarter of 2010; and this reflects organic sales growth and the impact of the fiscal-2010 acquisition.

Our consolidated operating margin in the first quarter of 2011 improved to 18.6% compared to 18.1% in the first quarter of last year, principally as a result of higher margins within ETG. Operating margins of ETG improved to 28.8% in the first quarter of 2011, up from 26.6% in the first quarter of 2010, and this reflects a more favorable sales mix. Operating margins of Flight Support were 16.9% in the first quarter of 2011 compared to 17.8% in the first quarter of 2010. And as we discussed last year, the first quarter of 2010 includes the favorable impact from the sale of some product previously written down as slow-moving. Operating margins in the first quarter of 2011 improved to 16.9% from 15.8% reported in the fourth quarter of fiscal 2010; and again, this reflects higher sales volume.

Diluted earnings per share increased 43% to a record $0.50 in the first quarter of 2011, up from $0.35 in the first quarter of 2010. As we previously mentioned, the first quarter of 2011 includes a $0.02 per diluted share benefit from the retroactive extension of the R&D tax credit. Fiscal-2010 diluted earnings per share has been adjusted retrospectively to reflect our 5-for-4 stock split, which happened in April 2010. Depreciation and amortization expense was approximately $4.3 million in both the first quarter of 2011 and 2010.

R&D expense increased 10% to $5.6 million in the first quarter of 2011, up from $5.1 million in the first quarter of 2010. We are budgeting approximately $22 million for the full fiscal year. And we are confident that this investment in new products and services will be well rewarded in the future, and will help lower our customers' costs while at the same time making it possible for us to gain market share and increased unit volumes. We are targeting new PMAs and DER repairs this year, sufficient to meet our growth goals. Significant ongoing new-product development efforts, of course, continue within ETG.

SG&A expenses were $31.6 million in the first quarter of 2011, compared to $25.6 million in the first quarter of 2010; and the increase is mainly due to the operating cost of the fiscal 2011 and 2010 acquisitions. SG&A spending as a percentage of net sales decreased to $18.1 million in the first quarter of 2011, down from 18.9% in the first quarter of 2010; and of course, this reflects the impact of higher net sales volumes on the fixed portion of SG&A expense within Flight Support, ETG and corporate expense.

Interest expense in the first quarters of both years was not significant due to our low debt levels and low variable interest rate under our revolving credit facility. As I referenced earlier, our net debt is only $10.3 million as of January 31, 2011. Other income and expense in 2011 and 2010 was not significant.

Heico's effective tax rate decreased to 30.4% in the first quarter of 2011, down from 34.8% in the first quarter of 2010, and the decrease is principally due to what I mentioned before, the income tax credit for qualified R&D activities for the last 10 months of fiscal 2010 that was recognized in the first quarter of fiscal 2011. The additional fiscal-2010 tax credit was recorded pursuant to the December 2010 retroactive extension of Section 41 of the Internal Revenue Code, and that is Credit for Increasing Research Activities, to cover the period January 1, 2010, through December 31, 2011.

Net income attributable to non-controlling interest totaled $5.4 million in the first quarter of 2011, compared to $4.2 million in the first quarter of 2010, and the increase is principally related to higher earnings at Flight Support, in which a 20% non-controlling interest is held, by [Lufthansa] of course, as well as higher earnings of certain flight support subsidiaries in which non-controlling interest exists.

Moving on to the balance sheet and cash flow, our financial position and cash flow remains very strong. Cash flow from operating activities in the first quarter of 2011 totaled $23.5 million, up 16% from $20.3 million in the first quarter of 2010. Our working capital ratio, of course current assets divided by current liabilities, is a strong 3.5 times as of January 31, 2011, and that's up from 3.2 times in October 31, 2010. DSOs and receivables decreased to 49 days on January 31, 2011, down from 50 days as of October 31, 2010; and of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposure.

Inventory turnover rate as of January 31, 2011, equaled 125 days, up slightly from 117 on October 31, 2010, and that reflects the impact of the December 2010 acquisition on that computation. The inventory turnover rate as of January 31, excluding the recent acquisition, is 119 days. No one customer accounted for more than 10% of net sales, and our top five customers represented approximately 18% of consolidated net sales in the first quarter of 2011, compared to 21% in 2010. CapEx in the first quarter of 2011 was about $1.6 million, and we continue to estimate CapEx for the full fiscal 2011 to be in the $10 million to $12 million range.

Looking forward, in our Flight Support Group's market, the commercial airline industry generally expects a continued increase in capacity during 2011. In our Electronic Technology Group market, we generally see stable or increasing demand for our product. Based on the current economic visibility, we expect continued year-over-year sales and earnings growth for the remainder of fiscal 2011. Based on current market conditions within our aviation and other major markets, we are estimating fiscal 2011 growth of 13% to 15% in net sales, and 15% to 17% in net income; and this is up from our prior growth estimates of 10% to 12%. These estimates include the recently announced acquisition of Blue Aerospace, but exclude the impact of any additional acquisitions, should they occur.

Consistent with our long-term growth goals, management continues to target net income growth of 20%, including the impact of any potential acquisition opportunities, but it is still too early in the year for us to make such predictions in fiscal 2011. Current sales and earnings estimates for the balance of fiscal 2011 consider the potential variability of revenue and profits of ETG due to variations in shipping schedules and product margins, which I mentioned earlier. We continue to expect fiscal-2011 cash flow provided by operating activities to remain very strong, and to approximate $90 million to $100 million.

In closing my prepared remarks, we will continue to focus on intermediate and long-term growth strategies, with an emphasis on the development of new products and services to meet the needs of our customers, and strategic acquisition opportunities that complement our existing operation. This strategy, of course, is the same one that we have followed for the past 20 years, and has resulted in our very strong growth of about 21% compounded in the stock value over 21 years.

That is the extent of my prepared comments, and I would like to open the floor for any questions which the listening audience may have.

(Operator Instructions) Your first question comes from the line of Tyler Hojo with Sidoti and Company.

Good morning, everyone.

Tyler, good morning.

I was hoping that maybe first you could speak to the updated fiscal '11 guidance. It looks like at the high end of the EPS guidance range, quarterly earnings will average out for the remainder of fiscal '11 around $0.47 a quarter, obviously down from where you were in Q1. I am wondering if that is perhaps tax rate, perhaps it's the higher-than-expected ETG margins in the quarter, maybe if you could provide some general commentary around that?

Tom Irwin probably will comment.

Yes, good morning, Tyler. Your numbers are correct. And in fact, as Larry mentioned, two things, one, we do expect a higher tax rate going forward if you add the retroactive impact, which reduced income tax in the first quarter about $1 million. That adds about three percentage points to the tax rate. The tax rate will go up. Number two, as Larry commented, we are not projecting that the ETG Group would retain the same margins nor sales levels, that business in the first quarter and historically has been lumpy and was a very strong quarter by our expectations and based on what we have in backlog and orders shipped for the rest of the year, we may not be able to maintain that level of revenue and earnings, and Victor can comment on some of the specifics later. But those are the two biggest factors. I think generally we look for Flight Support Group to continue at a strong growth level, but again ETG may be a bit lumpy.

Tyler, this is Larry, I want to point out too, as you well know because you know the Company quite well, we really target the full fiscal year. We don't give guidance on a quarterly basis, and part of that is because we really can't do it. We don't know how because of ETG and shipment changes and so forth. So we look at the entire year. I know the street likes to look at quarter by quarter, and I don't blame them, but we really target the full fiscal year. And then however that rolls out is the way it rolls out. But in our guidance, we feel more confident of annual guidance than we would any quarter.

Certainly understood. Just to maybe clarify some of the statements that Tom was making. What is the tax rate that is now embedded in the guidance for fiscal '11, and what are the operating margins on the segment level that are anticipated in the guidance as well?

Okay, again, we don't disclose operating margins by segment. As we previously stated, our expectations are for the full 2011 our consolidated operating margins will be comparable to last year. That remains the case inherent in our updated estimate.

With respect to the taxes, we discussed that going into this year at our fourth quarter earnings call, and as we introduced our outlook for this year, that on a combined basis taxes and minority interest would run about 49% and that is still in the ballpark with again taxes maybe being 33.5% to 34% and then the residual to 49% being a rough estimate of non-controlling interest. Obviously that percentage may move around as we spoke previously with the earnings in one particular unit that may or may not have non-controlling interest, and whether the non-controlling interest is in an LLC, which is taxed as a partnership, et cetera. So they, as the tax rate goes up due to non-controlling interest, it tends to reduce the percentage that is non-controlling interest. So that's why we look at those two captions as a total.

Okay, great. Just a last question from me. Maybe we could talk about the organic rate of growth in the Flight Support Group. I think it was 24%. Just -- clearly, that was an impressive level. I'm just curious as to what drove that? Was that some of the inventory restocking or the deferred maintenance that seems like we've been waiting for at least the last couple of quarters? Just curious if that is sustainable or if that's just driven by one-time items?

Okay, Eric will respond to that question.

The 24% that we saw in the first quarter, we do not believe was as a result of inventory restocking. We've gone out and checked -- we were very positively encouraged by the numbers, we thought that they were extremely strong especially compared to other folks in the space. And we went out and checked with our major customers to see if they are increasing their inventory levels, increasing their months on hand, their safety stock. The answer came back, no, they are not. They are still living very much hand-to-mouth, they are maintaining minimal inventories. So we believe, based on the information we got back, we believe that the increased demand was due to parts that they needed in order to build engines and components. So they are probably, later down the road, there could be an increase in inventory levels if they want to keep months on hand -- increased number of months on hand, but we have not seen that to date.

Tyler, we much prefer this situation to the inventory build, the accordion action of inventory using and so forth. So we are much happier with this result when the airlines really are lean and mean and the orders flow is very strong and realistic.

I agree. That's great news. Thanks, I'll jump back in the queue.

Thank you.

Your next question comes from the line of Rama Bondada with the Royal Bank of Canada.

Good morning. I wanted to touch upon what you were -- Eric you were talking about the commercial after-market organic growth rate. So you are basically saying this is capacity and traffic demand coming through, not restocking. Is there any more color you can give us in terms of platform-wise, so some of the older planes coming out of the desert that are going through C Checks, D Checks and need to have parts replaced? Or is this a straight current fleet, not desert planes?

I would say it is -- Rama, it is primarily related to the newer fleet. There was a little bit of increase in demand on the older stuff but primarily it was the current generation that has come back. It was due to an increase in buying demand of the airlines. I mean those of us who have flown recently know the flights are very full, the load factors are very high. And it's also a certain catch-up on the deferred maintenance, but it's just not a restocking and increasing of inventory levels, to our knowledge.

Okay. Turning to Electronics Group, Victor or Larry, can you give us some puts and takes by end markets here? What we're seeing in the top line?

Yes, Rama, this is Victor, it has been strong across all of the end markets for us -- defense, industrial, medical, space, homeland security. So it was an excellent quarter, I would say we were firing on all cylinders. It was also a strong order flow on top of that, so it was well-balanced.

Was there any one particular area that was stronger than the others?

I would say defense was probably stronger than some of the others, but space was also very strong for us, and we had pretty good improvement over prior year as well on product that goes into medical equipment. But I guess number one would be defense, number two would be space.

Last question. I know you guys don't give segment margin guidance, but in the past you have said that ETG was 26% to 28% was the long-term goal, we are at 28.8%, I realize it's just one quarter, but does this change the long-term goal for the margins in ETG? And also the same thing with Flight Support Group, you have said in the past 16% -- or 17% to 18%. We are sitting pretty close to 17% right now.

Rama, I think you are right. As we mentioned, we think for the full year, we're still going to be relatively coupled with last year in terms of consolidated operating margins. By segment, as you pointed out, and I think that's still the case, we do look for some modest improvement in operating margins within Flight Support Group. And again relative to last year where we were right about 28%, that was at the high end of the range. So that could come down in terms of the full-year estimates for 2011. That being said, again, 26% or 27% are still outstanding operating margins in the Electronic Technologies Group.

Rama, just one comment from Larry, you made a spectacular call a few weeks or a month ago when you wrote your last report. You are right on the money, so I congratulate you for that.

Thank you.

Your next question comes from the line of Arnie Ursaner with CJS Securities.

Hi. Can you hear me? Sorry, I was muted. First of all, congratulations on the quarter and congratulations to Tom on his well-deserved award.

Thank you, Arnie.

My first question relates to the margins in Flight Safety Group. You compared them to Q4, but Q4 had a $600,000 inventory reserve and you also had higher-than-expected comps. So if you adjust Q4 the 15.8% is somewhat misleading, the adjusted number is at least 16.4%, if not higher. One of the questions I have is you showed a 50-basis-point improvement in operating margins on 24% revenue growth, how should we be thinking about your leverage in this segment?

Arnie, this is Tom Irwin. I think, as you are pointing out, we were down to about 15.5% in the fourth quarter last year for the points that you made, last year in the first quarter we were about 17.8%. And again, as Larry mentioned, that had about roughly $1 million, or roughly 1% change or 16.5% or 16.8% roughly last year adjusted to exclude the slow-moving inventory benefit. So we are roughly up a little bit. Some of the revenue growth has been in the lower margin businesses, particularly repair services, as well as the parts business.

I think, at this point we think again there is a little bit of upside going forward in terms of the operating margins of the Flight Support Group Segment, to the 17% range in change versus what we ran in the first quarter. Near-term, I've seen some major changes in mix and buying opportunities. We don't see a huge upside near-term, longer-term, again, we continue to target the 18%-plus operating margins that we ran several years ago in that segment with the existing mix of business.

But you don't expect to get there this year?

Not to 18% in this year, no. That is not inherent in our estimates at this point. It's not as if we're not trying.

Okay, and again I know you try to guide very conservatively at the beginning of the year, and you mentioned when you did your Q4 call you had done a bottoms-up approach that had been done three or four months even before the call. We look at the IATA data and it is showing a very dramatic acceleration, and yet despite that you are growing at three times the rate of the industry and you indicated it is not inventory destocking. You obviously are gaining share from someone or some other factor is causing your growth to be a multiple of the industry. I guess the question we're all grappling with is how sustainable is this?

The answer is, Arnie, that we don't know, honestly we don't know. As you pointed out, we are conservative in our outlook and we try not to get ahead of ourselves and make rosy predictions of what might happen in the future. Between December, when we gave first guidance based upon what we could see and orders on the books and now, we have actually increased our growth by about five points, almost 50%. In turn we said we would be 10 to 12, now we say 15 to 17, so that is a 50% increase in the growth.

We do that because we feel more confident as we get further on in the year. The answer is that we really don't know. We are optimistic, we are shooting at the 20% target, which we say we want to get to 20%, and we have done that historically and better. But at this point in the cycle and the year, after one quarter, we don't want to go out and stick our necks out and say, oh yes, we are going to do great things and then disappoint somebody. So we'd rather be -- as you know, it is very hard for us to make that commitment because we don't want to misguide or mislead anybody. We would rather be conservative and if it comes through it then comes through and it shows up. I know Eric wants to add a little color to that.

Arnie --

Hello?

Hello?

Yes, I'm here.

Okay, something went -- we went out with the line. As we mentioned in the past, whenever the airlines have financial distress, they realize that they've got to get more serious about other cost-cutting measures. After this most recent economic downturn, I think we mentioned that the airlines had been working very hard to spec out additional HEICO parts and we felt very confident that when the demand resumed, that we would be well-positioned in order to take advantage of that. So I think with the 24% internal growth -- organic growth in the Flight Support area, you are seeing a lot of that hard work which is finally paying off. Very hard work I would say over the last two years in particular, getting these new parts developed and approved for our customers.

Arnie, to be very frank with you, and I have said this before on calls, that if we don't do better, I am going to be very disappointed. But that doesn't mean to say we can go out and say definitely we are going to do better. Knowing how things work and being in this business for over 20 years, I get a sense of what may happen, but to tell the investing public what I think may happen rather than having hard facts, we don't like to take that route. But I am very optimistic that things will get better.

Can I ask two more quick questions? One is when you provide your guidance, you don't include unannounced acquisitions, but subsequent to providing your guidance you did Blue Aerospace. And you didn't disclose the revenue contribution from Blue Aerospace, but assuming it's in your normal zip code of $20 million to $30 million of revenue, you are raising your annual guidance by $18 million after a blowout first quarter. What am I missing here in this math?

No, it's not -- it's nothing -- I shouldn't say nothing to do with Blue Aerospace, Blue Aerospace is not really why we moved up the guidance. We moved up the guidance because we saw the order flows and all parts of the business and so forth. Did Blue Aerospace help? Yes, it contributed, of course, it's a wonderful little company. But the big boost came from across the board. It's across the board on our business. Does that answer your question?

Well, again, you're conservative, so we will leave it at that. My final question is the weather in your January quarter was some of the worst snows we have seen both not only in the US, but in Europe where a significant number of flights were canceled. What weather impact did your customers tell you or what are you seeing from that?

Arnie, we down here in South Florida, we didn't see any snow, we don't know what you're talking about. The answer is, it is what it is. The flow -- we try -- again, I am trying to tell you, A, how I feel and at the same time -- which is very positive, but at the same time not get out in front of what the hard numbers show. So do I think we'll do better? I said I would be disappointed if we didn't. I would be disappointed if we're not conservative. But that doesn't mean -- you can't take that to the bank. And I want to tell somebody, this is what I am thinking and I want to go on hard facts. We prefer to be a Company that relies upon real orders, hard facts and so forth, and if it takes another three months to show up in the numbers and we have them -- hard numbers in the bag, we would rather be thought of as a Company that you can really count on and we tell you the right thing.

And also Arnie from an operational perspective, that's also how our people are wired. They work very hard and they only count something when we've got it. Because we've always got a lot of campaigns going on and we don't know exactly what we are going to end up selling, and our folks are very conservative when they give me the numbers and we roll it up and we do make adjustments for it, but by nature this is a conservative industry. We have very hard-working people and they don't want to promise something unless they're very confident that it's going to come through and that is what's reflected in all of our guidance, that same culture.

The're really, Arnie, internally the guys are trained to be very conservative when they put forth the numbers. They are also trained to try to turn in the most incredible results because we incentivize them based upon the numbers. So they don't want to tell us they are going to do X-plus and then come in at X. They want to tell us they will do X and then they surprise and get a big bonus. Some of these guys earn a lot of money for their performance, and that's how we incentivize them and that's the way the organization works. I guess they take it from the top down. I am that way and we push it down in the organization.

Thank you very much.

Thanks, Arnie.

Your next question comes from the line of Steve Levenson with Stifel Nicolaus.

Good morning, everybody, congratulations, Tom, and would you like to see some of the snow?

Well we are going up to Boston later this afternoon so it may be inevitable.

Nice weather today. Just a question, even though the fleets are small in the Mid-East carriers where the turmoil is going on right now, is there potential for any impact or is that so small to be balanced out by traffic in other areas?

Yes, we really don't expect the -- whatever is happening in the Middle East to make any significant impact on us.

Okay, thanks. And then a question on M&A focus going forward. The more recent acquisition had to do with foreign military. With budgets coming down a bit, do you think there will be more MRO? Are you more focused on military right now or commercial or is it still an opportunistic approach?

I think it's still a very opportunistic approach. We look at companies in niche markets to do niche things and Blue is a classic example. As an example, Blue works well with certain other companies that we have. It is somewhat slightly synergistic with some of the things we are doing and we can expand some of the -- we believe we can expand some of the other businesses that we have by working together with Blue. So, Blue has, as I mentioned, a great management. Smart guys, hard-working, good people, and this is an opportunistic good acquisition. The other ones that are on the -- in the due diligence process, things we are looking at right now, all have the same basic opportunistic features.

Steve, this is Eric, also just to add on the comments on Blue, we believe, as most decent business people do, that you bet on a management team. You bet on the ethics and the success of a group of people. And when we like the team and we fall in love with them, we go after that business, as opposed to sometimes selecting the business and then making sure we're happy with the team.

Got it. Thank you very much.

Thank you, Steve.

Your next question comes from the line of JB Groh with D.A. Davidson.

Good morning, guys.

Morning, JB.

Question, I just want to hammer this guidance a little more, the $18.5 million increase. You've got what, roughly 10 months of Blue Aerospace, correct?

Oh, 10 -- you mean for the annual --

Right.

The incremental roughly.

So I'm just trying to -- off other people's questions. How much of that increase of the 13% to 15% top line, how much of that increase from the 10% to 12% is from the Blue Aero and how much is just strength in the overall businesses I think is what we're trying to drive at?

Probably half-and-half.

Half-and-half? Okay, fair enough. And then maybe, Eric, can you talk about what you're hearing from customers on the surge on oil prices? I know we saw one airline pare back some capacity growth plans just get your thoughts on that? And maybe qualitatively give us a feel for how the parts development effort is going and any changes there?

Yes, I would be happy to do that. With regard to oil prices, obviously that impacts the airlines, depends whether they can push it through, depends whether it's a sustained increase or not a sustained increase. But the one thing I think, whenever there is an exogenous event like this it reiterates in the minds of the airlines that they've got to be very diligent to continue all of their cost-cutting initiatives without sacrificing quality or dependability. And that plays very well to HEICO in our favor.

So right now, I am sure the very capable CFOs of the airlines are talking with their management teams about the concerned about oil prices and they are sending out the orders that they've got to be very careful and save money whenever possible, and that's where HEICO can play a very important role because we can obviously reduce their cost and still maintain their quality of service and dependability levels. So I think that it will continue to drive our business in a positive way. As far as the development, we are continuing to find a additional parts that we want to develop for our customers. Customers want additional savings, and we have a lot of robust activity in that area.

And I think one thing you said struck me is that there is not an inventory rebuild. We have obviously seen some older planes getting retired, so I guess it points to the fact that your strength and your growth here has really been driven on the newer platforms, CFM56-powered stuff that's really driving the growth. Is that a fair statement?

Yes, I would say not only CFM56, but many different I would say current generation fleets are what's driving the increase. And, yes, there was a certain amount of deferred maintenance that occurred. They've got to catch up and do some of that, but there's not a general restocking. Still the inventories are very lean out there. .

Great. Okay, thanks guys, great quarter.

Thank you.

Your next question comes from the line of Chris Quilty with Raymond James.

Good morning, gentleman. You may have mentioned this in the script and I just missed it, but did you give a breakdown of the ETG segment by end market?

No, but -- no.

But no changes from the historical mix between military, space, healthcare, industrial?

More or less, not. It's within shooting distance, I would say, of what we have seen historically.

Okay. Has there been any of those particular end markets that have contributed to some of the recent growth?

Well, I think as I talked about earlier, number one would have been defense, number two would have been space. But it was pretty good across all of the end markets and all the product lines.

Switching gears, I know we've talked about in the past, but with a little bit of time in the rear view mirror, have you seen any impacts from the United-Continental merger?

Chris, we have to be very careful about speaking about specific customers because our competitors are on this call, and we welcome them listening to what we are doing but we really have to be very careful specifically talking about any particular customers. I can tell you that in general, maybe another way to answer the question, in general, with all the mergers out there, they have not negatively impacted HEICO.

Okay. And in the past you've -- past calls you have talked about the fact that during the economic downturn you had a number of customers who may have used a limited number of HEICO parts that basically expanded the breadth of products that they are using. Have you seen those gains stick with customers? And are you continuing to see follow-through in terms of their use of your entire portfolio?

Absolutely. We are developing new parts for them, they are buying existing product. I think our pipeline is very full of great opportunities for, I would say recent customers.

Okay, and I know they are less frequent than in the past, but any good opportunities in the next year or two here to pick up major airline customers?

Well we've got most of the major airlines already on board, so I think the challenge is just selling them more products. They are buying X number from us and they can Y additional and we are very focused on selling them the additional products. We are already there, we've got people on site, and it's just a matter of pushing more parts through the funnel.

Chris, this has always been the case. Our biggest growth has come from selling additional parts to existing customers. That's where our real growth -- if we added a customer in the past, it was glacial -- the growth was glacial. Of course it's picked up over time but it's more parts to existing customers.

Yes, and also Chris, I should add, we sign contracts on a regular basis and we no longer announce it for competitive reasons. Because what we learned was that in the past, we were very foolish. We told -- we made announcements and we told people what we were doing and to whom we were selling and then other folks would go in there and try to compete with us. So we have gotten much wiser and we don't make customer announcements any longer. In general, people can see our revenue growth, they can see our earnings growth, and that is we think the major thing that people are focused on. And rather than giving specific details about the operation which will just come back and create problems for us, we think it's in our shareholders' interest to not do that.

Fair enough. Final question, just a generic question on the M&A environment, it seems like some of the multiples across different industry groups have climbed back a bit, are you finding any more difficulty in closing transactions or finding the appropriate type of multiple that you generally pay?

As a general comment, no, it hasn't -- the issue is not been the multiple, the issue has been finding quality. It is interesting in the turnaround -- and this is just a general comment, a lot of companies that could not sell in the downturn or did not want to sell because they saw their earnings fall off a cliff came back into the market and expected people to pay, or certainly us to pay, prices that made no sense. Or they trumpeted earnings like hockey sticks, which we felt were not warranted and would not happen. So that's really where we saw the problem. And not only that, but once we got into it, some of the quality of earnings just weren't there. So it's more of a quality issue than the pricing issue. There are still companies that we are looking at within our price targets that work fine for us.

Great. Thanks and congratulations.

Thank you, Chris.

Your next question comes from the line of Omir Khalid with Stephens.

Good morning guys.

Good morning.

Just a quick question, not to beat a dead horse here, but going back to the 24% organic growth in the FSG segment, would you guys care to give a little bit of color as maybe how much of that was due to some of the industrial businesses that get classified in FSG?

The answer is basically the 24% organic growth was all in our commercial aviation business. The industrial group is pretty small in the health segment and didn't change quarter over quarter that much. If you go back and look at our conference calls last year we did have some increases in the industrial products in the second and third and a lesser degree in the fourth quarter of last year. But the first quarter comparable or roughly the same.

Okay, perfect. And in terms of sustainability on this growth, do you guys see this trend continuing for the next quarter or two at least at this pace?

Again, in terms of the rate, obviously at 24%-plus organic growth we had favorable comps, that is our first quarter of last year was actually down about 6% from the first quarter of the previous year. So some of the growth is a recovery. We were down to about $93 million in that segment in the first quarter of last year. As inherent in our estimates again our continued strength in the Flight Support Group, I would say on a quarterly basis, $120 million-plus, we don't again expect that, that would go backwards. It doesn't have the lumpiness characteristics as the ETG group. But obviously, as we go into the -- particularly into the third and fourth quarter, the comps will get harder in terms of percentage growth. It will still be good growth, but obviously not in the 20%-plus organic growth rate.

Alright. Thank you guys.

Thank you.

Your next question comes from the line of Ken Herbert with Wedbush Securities.

Yes, hi. Good morning. Thank you.

Good morning, Ken.

Just wanted to follow-up on that question. Eric, specifically if we are looking at the same kind of activity we have seen in the first quarter, and I can appreciate maybe part of the FSG growth is you had some deferred maintenance that finally hit, but obviously you indicated you are not seeing any restocking yet. Is there any reason we don't continue to see the same sequential growth pattern through the rest of this year within FSG that we have seen over the last few quarters?

Well it's possible, we may but we really don't know. Our orders come in -- the majority of our orders come in, in the month of shipment, so our visibility, we don't have concrete visibility into the future. So we don't really know what the numbers are going to be. Obviously, the first quarter of last year, we've got very favorable comparisons with that. I would say we would not see any of the numbers going backwards from where they are now, things are continuing to firm. But 24% quarterly organic growth, I would say to be able to do in perpetuity is not realistic. But going forward, I'm sure we're going to continue to grow. How much is just difficult to guess. And that's why we baked in the numbers in our guidance on what we think we can do.

So it sounds like, obviously the year-over-year growth may not see comparable levels, but from this base where we are now, call it $121 million for FSG as we go through the year, there's obviously continued upside to that number through the course of the year.

I guess then another question on -- within FSG, would you identify greater strength in the quarter from obviously the parts business versus the repair business or comparable growth within each side of the business?

I would say it would be in both, first quarter of last year to first quarter of this year. It really -- this strength was across the board.

Okay. Great. Considering obviously the parts business better margin profiled than the repair business, as you look at the incremental margins then over the course of the year, we clearly -- sequentially 30% in this quarter was really strong. Is there any reason to think for this full year that we should not see continued -- as the volumes continue to increase, especially on the part side, that we aren't going to continue to see incremental margins in the low 30s for the FSG segment over the course of the year?

Well again, I think, as we mentioned, relative to the Flight Support Group, we see opportunity to move the operating margins at the group level up modestly. Again, to the extent we have also organic growth in the repair services business, which again is a very profitable business, we like it but the margins are -- particularly incremental margins are not as high as the parts business, as you are pointing out. I think we see modest opportunities, but not dramatic opportunities in terms of margin improvement going forward for this year.

Okay. Okay great. I do just have one final question, again on Flight Support because it was such an impressive quarter and very encouraging to see the fundamentals coming back like they are. When you look at your PMA business, do you -- are you seeing perhaps any greater growth in the non- engine versus the engine parts? Anything unique as you continue to push into other parts of the plane outside of the engine that we should be maybe thinking about in that business?

We are all over the airplane, and we are seeing I would say growth in all of those areas. I would not say the growth is confined to any one area. It's really strength across the board for us.

Okay. Great. Well I appreciate the color and congratulations, again. Thank you.

Thank you.

Your next question comes from the line of Jim Foung with Gabelli and Company.

Hi. Good morning, everyone.

Good morning, Jim.

I've got all my questions answered. But let me just ask you one about your net-debt-to-equity. It's incredibly low here, 2%. I was just wondering after having done quite a few acquisitions and integrating them successfully, are you thinking about or would you consider making bigger targets, bigger acquisitions to leverage the Company a little more?

The answer is absolutely if we had the opportunities. We would consider that. We have plenty of dry powder, as you point out. But we are disciplined, as you know, Jim, and we do not want to pay a very high multiples, or multiples of 10 and 12 times EBITDA to buy companies because we think the risk is high.

But we are looking, and we have looked, at larger and we have considered considerably larger acquisitions and if they are sensible to make we will definitely make them. We are looking at a number of transactions that, if we were to close them since we paid cash, we would increase the debt-to-equity. But we are a very conservatively run Company and historically we are not going to spend the money because it burns a hole in our pocket.

We run the Company, Jim, I think as you know, and target 20% bottom line growth. We want to get to 20% bottom line growth, and that is our goal. Sometimes we do better. We do what we have to do financially to accomplish that objective. That is the number one objective to the growth -- consistent growth of the Company. So I don't know if that's answered your question, but that's what we would do.

No, it's good insight. So if you were to close on some of these transactions, what would be the revenue range? Could you just share with us?

It could be all over the lot. We have looked at companies where it would be -- I don't like to really go -- historically $20 million to $40 million revenue, we have looked at companies in the hundreds of millions of dollars of revenue. It all depends on how we can -- what we can pay for them, how accretive they will be to our bottom line, how the cash flow will look, how the leverage will look. Each one really is a different calculation.

That would be a game changer for you to do something like a $100-plus-million in revenues.

It could happen. We have looked at companies that have had more than $100 million in revenue.

Right. So I guess you're now looking into big, bigger things with the same criteria and principals that you've developed from the early acquisitions. That's great. And I guess lastly, just in terms of -- we talked earlier about getting more revenues per customer, and I guess just the last, could you touch on potentially doing new products in different parts of the aircraft? Are you considering doing a new product platform in the areas of aircraft that you are not in a big way currently?

We are continuing -- we are in the engines, we are in the components, we are all over the air frame. So for competitive reasons, we don't like to talk too much about specifically what we are targeting, but I would say it's very broad-based.

Okay. So it's just an ongoing type of thinking in terms of how to get more revenues per customer?

Exactly, Jim.

Great. Well great quarter, and again my congratulations to Tom for his well-deserved award.

Jim, thank you very much.

(Operator Instructions)Your next question comes from the line of Tyler Hojo with Sidoti and Company.

Hi, just two clean-up questions here. How many PMA and DER parts are you anticipating to roll out this year? I believe it was 700 before. Is that still the same?

Tyler, we've made a basic decision that when we make these announcements, a lot of people, particularly the competition, drills down and follows us and they try to figure out what we are doing and it is really not helpful from an operating point of view. So we have decided to discontinue it. Earlier in my prepared statement, I said we were going to develop enough parts -- DER repairs and PMAs to accomplish our growth objectives. That way, it makes it murky enough that the competition can't focus on what these guys are doing.

You really have to be at the helm to see how this can interfere, really, with our growth. It does become a problem. We get questions, we get competitors, we get customers coming back to us and it does not help us from an operating point of view. So we just thought we would discontinue it, but rest assured that we are going to focus on enough to continue the growth targets that we talk about.

Okay. That definitely makes sense, but just from a standpoint of being able to get more parts through the approval process, nothing has changed in that regard?

No. Nothing has changed. Also, a part of this is the nomenclature of the part, letting people -- and the selling value of the part and the revenue stream from the part. If we say we have X number of parts we could make fewer parts at higher revenues and all that stuff, so we think it's better to take the position that I've just stated.

Definitely understand that. And just last one from me, your prior guidance range I think embedded airline capacity growth of about 5% to 7%, just wondering what the expectation is for either capacity growth or air traffic that is in the updated guidance?

I would say what we read so far is probably still roughly, broadly, internationally it's probably still in that range. Maybe it is up a point or something like that. But I think most FY '11 capacity numbers internationally are still in that 5% to 7% range. Nobody's hit 10% in their estimates yet, again on a broad market basis. Some individual markets are higher than that, lower than that, but I would say that's our expectation as to what ultimately a year from now on a look-back basis the numbers will come in.

Okay, great. I appreciate all the color.

Thank you.

Your next question comes from the line of Herbert Wilson, private investor.

Hi guys. Herb Wilson here.

Good morning.

Good morning, everybody. I just wanted to thank you as a shareholder for many years of the great job you are doing. End of subject.

Herb, we appreciate that and we thank you very much, you are too kind. We are trying very hard. Thank you very, very much.

Lots of good luck.

Thank you.

At this time there are no further questions.

We thank you all for your interest in HEICO and your participation in this morning's call. We look forward to speaking with you in the next earnings call, Q2 earnings call, which should be sometime in May. Until then, if you have any questions or comments, I am available, and Tom is, Victor, Eric. Please give us a call and we will try to be responsive to your questions. Thank you again.

This concludes today's HEICO Corporation fiscal 2011 first quarter earnings conference call. You may now disconnect.