HEICO Corp (HEI) 2014 Q1 法說會逐字稿

Good morning. My name is Jennifer, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Heico Corporation FY14 first-quarter earnings results conference call.

(Operator Instructions)

Your host for today is Laurans A. Mendelson, Chairman and Chief Executive Officer of Heico Corporation. Before the conference call begins, I'll read the following statement.

Certain statements made in this call will constitute forward-looking statements, which are subject to risk, 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, or airline purchasing decisions, which could also cause lower demand for our goods and services; product development, or 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 foreign customers, or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and product pricing levels, which could reduce our sales and sales growth; product development difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest and income tax rates; economic conditions within the outside the aviation defense space, medical, telecommunications and electronic industries, which could negatively impact our cost and revenues; and defense budget cuts, which could reduce our defense-related revenue.

Those listening to this call are encouraged to review all of Heico's filings with the Securities and Exchange Commission, including, but not limited to, the filings on form 10K, 10-Q, and form 8-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of our new information, future events or otherwise, except in the extent required acceptable by law.

Please go ahead with your conference call, sir.

Thank you very much, and good morning to everyone on the call. And we thank you for joining us. We welcome you to the Heico first-quarter FY14 earning announcement telecon.

I am Larry Mendelson. I'm the Chairman and CEO of Heico Corporation. And I'm joined here this morning by Eric Mendelson, Heico's Co-President and President of the Flight Support Group; Victor Mendelson, Heico's Co-President and President of Heico's Electronic Technologies Group, otherwise known as ETG; Tom Irwin, Heico's Senior Executive VP; and Carlos Macau, our Executive Vice President and CFO.

Before reviewing our first-quarter operating results in detail, I would like to take a few moments to summarize the quarterly highlights. In November 2014, we did extend the term of our existing unsecured credit facility. We extended it through December 2018, and we increased the committed funding to $800 million.

This new facility has provisions for additional credit expansion up to an aggregate of $1 billion. Not only were we able to increase the overall size of our revolving credit facility, but did so in a very cost-effective manner, and we retained our low cost of borrowing, which at the present time is about 1.4%. We believe that Heico's current credit facility will continue to provide us with the financial flexibility to grow our Business organically and through strategic acquisition.

In January 2014, we paid a cash dividend of $0.06 per share, plus a special and extraordinary dividend of $0.35 per share. The regular semi-annual cash dividend represents a 7% increase over the prior semi-annual per-share amount of $0.056, which, of course, is adjusted for our 5-for-4 stock split in October 2013. And this was our 71st consecutive semi-annual dividend since 1979.

In January 2014, we were pleased to report that Forbes magazine had included Heico as one of the 100 best small companies in Forbes's 2013 annual list of such businesses. And this marked the 7th year that Heico has been included in the list of Forbes 200 best small companies, and the third year of Heico's inclusion in the top-100 list.

Consolidated first-quarter fiscal net income and operating income are up 38% and 44%, respectively, on a 23% increase in net sales over the first quarter of FY13. Our flight support group's net sales and operating income improved 31% and 33%, respectively, over the first quarter of 2013. Those increases principally reflect strong organic growth of approximately 19%, as well as additional net sales of $15.6 million, contributed by an acquisition which we made in FY13.

Consolidated net income per diluted share increased 37% to $0.41 in the first quarter of FY14, and that was up from $0.30 in the first quarter of FY13. Cash flow provided by operating activities increased to $33.5 million in the first quarter of FY14, and that represented 122% of net income. That was compared to $13.3 million in cash flow in the first quarter of 2013. As of January 31, 2014, the Company's net-debt-to-shareholders'-equity ratio was 50%, with net debt, which is total debt less cash, of $364 million.

Now I would like to introduce Eric Mendelson, Co-President of Heico and President of Heico's Flight Support Group, to discuss the results of the flight support group.

Thank you. The flight support group's net sales increased 31% to $181.6 million in the first quarter of FY14, up from $139 million in the first quarter of FY13. The FY14 first-quarter increase reflects organic growth of approximately 19%, as well as additional net sales of $15.6 million from a FY13 acquisition. The FY14 first-quarter organic growth principally reflects new product offerings and continued improving market conditions within our after-market replacement parts, and repair and overhaul services product line, and within our specialty product lines.

The flight support group's operating income in the first quarter of FY14 increased 33% to $32.2 million, up from $24.2 million in the first quarter of FY13. The increase in the first quarter of FY14 is primarily attributed to the previously mentioned net sales growth.

The flight support group's operating margin in the first quarter of FY14 increased to 17.7%, up from 17.4% in the first quarter of FY13. The increase in the first quarter of FY14 principally reflects the previously mentioned higher net sales volumes.

Consistent with our past practice of increasing our ownership in certain non-wholly owned subsidiaries, on February 18, 2014, Heico Corporation acquired the 20% non-controlling interest held by our partner, Lufthansa Technik, in four of our existing subsidiaries, principally operating in the specialty products and distribution businesses within our Heico Aerospace Holdings Corp subsidiary.

Pursuant to this transaction, Heico Aerospace Holdings Corp declared dividends proportional to the ownership, 80%/20%, to Heico and Lufthansa. And Heico transferred the businesses to Heico Flight Support Corp, a wholly owned subsidiary of Heico. We did not record any gain or loss in connection with the transaction.

Lufthansa's dividend approximates $67 million, and will be funded through a borrowing under our existing credit facility. After the transaction, Lufthansa still remains a 20% owner in Heico Aerospace Holdings Corp, the leading producer of PMA parts in component repair and overhaul services.

Heico Aerospace has grown significantly, and generated substantial cash flow since Lufthansa partnered with us over 16 years ago. This transaction rewards Lufthansa with $67 million in cash, and at the same time, permits Heico to increase its ownership in four very successful businesses.

Lufthansa has been, and continues to be, a great partner and customer of Heico Aerospace, and we look forward to our continued mutual success. This transaction does not impact the breadth of PMA parts offered by Heico Aerospace Holdings Corp.

Now I would like to introduce Victor Mendelson, Co-President of Heico and President of Heico's Electronic Technologies Group, to discuss the results of the electronic technologies group.

Thank you, Eric. The electronic technologies group's net sales increased 11% to $87.5 million in the first quarter of FY14, up from $78.8 million in the first quarter of FY13. The increase in the first quarter of FY14 principally reflects additional net sales of $8.1 million from a FY13 acquisition, and organic growth of approximately 1%.

The electronic technologies group's operating income in the first quarter of FY14 increased by 47% to $22.9 million, up from $15.5 million in the first quarter of FY13. The increase in the first quarter of FY14 reflects a $4-million increase in operating income as a result of the decrease in accrued contingent consideration related to a FY13 acquisition, partially offset by lower-than-expected operating income at the acquired business, principally due to unanticipated costs associated with certain contracts in the backlog at acquisition. The acquired business is one of those ETG businesses that can be lumpy, and while we have lowered our near-term outlook, we remain confident in the Business and its management team going forward. The balance of the increase in operating income primarily results from the increase in net sales.

The electronic technologies group's operating margin in the first quarter of FY14 increased to 26.2%, up from 19.7% in the first quarter of FY13. The increase in the first quarter of FY14 principally reflects the aforementioned increase in operating income from the FY13 acquired business.

Turn the call back over to Larry Mendelson.

Thank you, Victor. The diluted earnings per share consolidated net income per diluted share increased 37% to $0.41 a share in the first quarter of FY14, and that was up from $0.30 in the first quarter of FY13. That increase was principally reflecting the previously mentioned year-over-year growth within both of our operating segments, as well as the $0.04 benefit from the previously mentioned reduction in the value of a liability for contingent consideration related to a prior-year acquisition, and that, too, was offset by lower-than-expected operating income at that acquired business.

Depreciation and amortization expense increased by $3.9 million in the first quarter of FY14. That was up from $8.1 million in the first quarter of 2013, and that increase in the first quarter of 2014 principally reflects higher amortization expenses of intangible assets recognized in connection with our FY13 acquisitions.

R&D expense increased 24% to $9.1 million in the first quarter of 2014, and that was up from $7.3 million first quarter of 2013. We have significant ongoing new product development efforts, and at both flight support and ETG, and we continue to invest between 3% and 4% of each sales dollar into new product development.

SG&A expense was $41.7 million and $42.7 million in the first quarter of FY14 and FY13, respectively. The decrease in SG&A reflects previously mentioned $7-million reduction in the value of contingent consideration, partially offset by a $4.7-million increase in SG&A expenses attributable to FY13 acquired businesses, and a $1.3-million increase in SG&A expenses pertaining to existing business, which, the majority of that was incurred in selling expense necessary to support our organic sales growth.

SG&A expenses as a percentage of net sales decreased from $19.7 million in the first quarter of FY13 to $15.6 million in the first quarter of 2014, and principally reflecting the impact of reduced contingent consideration, which we talked about before, as well as the impact of higher sales volumes on the fixed portion of SG&A expenses.

Interest expense in the first quarter of 2014 increased to $1.3 million from $0.6 million -- $600,000 -- in the first quarter of FY13. That increase was principally due to a higher weighted average balance outstanding under our revolving credit facility during the first quarter of FY14, and that was associated with the FY13 acquisitions, as well as the funding of our special dividends, which were in 2014 and 2013. Other income in both years was not significant; I won't comment on it.

The effective tax rate in the first quarter of 2014 increased to 33.9% from 27.8% in the first quarter of FY13. That increase principally due to an income tax credit for qualified R&D activities for the last 10 months of FY12 that was recognized in the first quarter of FY13, and that resulted from the retroactive extension of Section 41 of the Internal Revenue Code called Credit For Increasing Research Activities, as well as the expiration of Section 41 on December 31, 2013, that limited the tax credit which could be recognized in the first quarter of FY14.

In addition, the increase is the result of a larger income tax deduction recognized in the first quarter of FY13 under section 404(k) of the Internal Revenue Code for the special and extraordinary cash dividend paid in December 2012 to participants of the Heico Savings and Investment Plan.

For full FY14, we estimate an effective tax rate of about 34.5%. And we continue to anticipate a combined effective rate for income taxes and non-controlling interest as a percentage of pre-tax income to approximately 43%, which is comparable to FY13.

Net income attributable to non-controlling interest was $5.1 million in the first quarter of 2014 compared to $5 million in the first quarter of 2013, and that principally reflects higher earnings of subsidiaries which have non-controlling interest, partially offset by the impact of redemptions of non-controlling interest, which result in no earnings allocations to the redeemed ownership.

Moving on now to our balance sheet and cash flow, as I mentioned earlier, our financial position and forecasted cash flow remain strong. Cash flow provided by operating activities increased to $33.5 million in the first quarter of FY14, and that was up from $13.3 million in the first quarter of FY13.

The increase in cash flow from operating activities principally reflects our increased earnings for the quarter, as well as the timing of certain tax payments. We do expect cash flow provided by operating activities to approximate $160 million in FY14. Our working capital ratio is a strong 3 times as of January 31, 2014, and that's up slightly from 2.7 times as of October 31, 2013.

DSOs of receivables was 52 days as of January 31, 2014, and that was comparable to the 50 days on October 31, 2013. And of course, we closely monitor all receivable collection efforts, and we try to limit our credit exposure.

No one customer accounted for more than 10% of sales. Our top five customers represented approximately 16% of consolidated net sales in the first quarter FY14, and that compared to 15% in the first quarter FY13. Inventory turnover rate was 118 days as of January 31, 2014, compared to 111 as of October 31, 2013, and that principally reflects an increase in inventory levels to support anticipated customers' demand and projected sales growth during the remainder of FY14.

Net debt to shareholders' equity was 50% as of January 31, 2014, with net debt of $364 million. And that was principally incurred to fund our FY13 acquisitions, as well as the payment of special cash dividends in FY14 and FY13. We have no significant debt maturities until FY19, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisition opportunities.

As for the outlook, when we look ahead in the remainder of FY14, we continue to anticipate organic growth within our product lines that serve the commercial aviation markets. We expect overall organic growth within ETG, pretty consistent with the prior year, reflecting higher demand for the majority of our products, moderated by lower demand for certain defense-related products. During the remainder of FY14, we plan to continue our focus on new product development, further market penetration, executing our acquisition strategies, and maintaining our financial strength.

Based upon our current economic visibility, we are increasing our FY14 year-over-year net income growth estimate to between 10% and 12%, up from a prior 8% to 10% growth estimate. We continue to estimate FY14 year-over-year growth in net sales of 12% to 14%. Our full-year FY14 consolidated operating margin should approximate 18%.

CapEx should approximate $25 million. Depreciation and amortization approximate $49 million. And cash flow from operations, as I said earlier, to approximate $160 million.

Consistent with our long-term growth goals, management continues to target net income growth averaging 20% over the next one to three years, including the effects of additional acquired businesses, which we would expect but we can't guarantee.

In closing, we will continue to focus on intermediate and long-term growth strategies, with an emphasis on acquiring profitable businesses at fair prices. That is the extent of our prepared remarks, and I would like to open the lines now to questions from those listening in.

Thank you.

(Operator instructions)

The first question is from JB Groh with DA Davidson.

Good morning, guys.

Good morning, JB.

Congratulations on the quarter.

Eric, I'm not sure how granular you want to get with this 19% organic growth, but you mentioned new product offerings were a big driver, and I look at Q1 margin was a little bit lower than some of the margin numbers you put forth last year. Is the new product growth go hand-in-hand with maybe a little bit lower margins than we saw in some of the quarters last year, or is that just a typical Q1 thing?

Yes, I wouldn't say that I would see any change in the margin. We've had, as you know, tremendous focus in our non-engine PMA business over the last number of years, and now it's over 50% of our total PMA business.

So we continue to invest a lot of dollars in that area. We focus in that area. Basically 10 years ago, we pretty much -- all of our business was engine business. Now over half of our business is non-engine. So we're investing a lot of money in that space and really focusing very hard in there, and I would anticipate that that will continue. But the margins will remain, I think, consistent with what we've been in the past.

But the non-engine stuff probably has a little lower margin than the engine?

No, not materially. I would say, in general, it is in the same ballpark area. A lot of customers are asking us to develop additional non-engine parts.

I would say that our breadth of product in that space continues to grow substantially, and we have got a significant more number of areas in ATA Chapters that we plan on penetrating very heavily over the next, I'd say, one, two, three years. But I would say that the margins will be consistent with what we have seen in the past and nothing materially different.

And then kind of sizing the -- obviously the non-engine market is probably multiples of the engine market, correct, in terms of the potential PMA parts that you could do?

Well we have done a lot of the engine parts. We continue to do more engine parts, and interestingly enough, whereas a couple of years ago people were getting a little bit concerned over the aggressiveness and aggressive behavior from the engine OEMs, there's been a bit of a backlash in that area recently, in particular with the value of assets at the end of the lease.

What's happened is the lessors have now started to realize that when there is not sufficient competition for the overhaul of an engine, there is not sufficient demand for the parting out of those engines at the end of life. So what's happening is the lessors are starting to realize that the high OEM market shares on certain engine products is not very good for the value that they're able to obtain when they part out the engines at the end of life.

So just, for example, taking something that we don't participate in, you know, Rolls-Royce Trent engines, that's not an area of focus for us. But on Rolls-Royce Trent engines, when a lessor wants to breakdown an engine, typically there's only one buyer of engine material, and that would be Rolls-Royce because they control a large percentage of the overhauls of those product. So what happened?

In former engines or the other engines, the owner of the engine would breakdown the engines into pieces and then sells those pieces at, let's just say, roughly 50% to 60% of the new price. Well if Rolls-Royce was selling a part, say, for $100 and it cost them $10 to make it where they have 90% gross margins, why would they spend $50 or $60 on a surplus part? They'd rather just make a brand-new part, which is superior anyway, and sell that to their customer, even if they had to do that at the reduced price.

So the airlines are now starting to see this, and they're getting very concerned. And that's why we've seen renewed interest in our engine business, and we continue to develop more engine parts in that area. That is not, though, [for closing] our focus on the component space.

So we continue to develop, very aggressively, more components going into areas that we have never been in in the past. So I anticipate we're going to continue to focus in both areas.

Okay, and can you comment maybe on what you sort of think customer inventory levels are?

I would say they are consistent with what we have seen in the past. I did sales reviews with our regional heads last week, and we don't see a re-stocking.

I mean, we see that the airlines are running lean. There is no intention for them to hold more inventory. So I don't anticipate -- I mean to answer your question, we don't think that we have seen restocking, and we don't think that it is going to be coming.

I think that our sales improvement has been a result of being very aggressive in all of our businesses, picking up more distribution lines in our distribution businesses, as well as doing very well in our specialty product, and, of course, our PMA and repair business. So it's really, I think, due to execution across the board. As opposed to restocking.

Great, and one other quick one for Victor. Victor, could you set of let us know kind of the pockets of strength and weakness within ETG? Obviously military-driven business, probably a little bit of a headwind, but kind of help us out there?

Yes, that's a good question, JB. I would say in the quarter, actually, defense business quarter over quarter was pretty good. First quarter to first quarter this year versus last year was actually pretty healthy, although I think our mix deteriorated in that business, and it contributed less of a margin than it has historically. So sort of a mixed bag there.

I would expect that to continue, and I would expect to see more -- when I say expect it to continue, I mean that I would expect that we would see kind of more mixed-sensitive negativity, and I would expect to see that the revenue from defense would start to come in as I have talked about before with the defense budget.

In the rest of the businesses, it was kind of a decent mix with our kind of general electronics holding up pretty nicely and some of our space doing well, some of it a little bit softer.

Okay. Thank you, guys.

You're welcome.

Your next question is from Tyler Hojo with Sidoti & Company.

Good morning, Tyler.

Yes, I was just curious on the top-line guidance to start. Obviously maintaining that, and I get that you guys are historically pretty conservative, but when I look at kind of the aggregate 12% organic growth that you put up, and obviously the 19% in FSG, you're guiding to, I think, 6% to 7% organic for the year. How does that square, because it certainly seems like Q1 probably came in above your expectations?

Tyler, this is [Tom Irwin]. Tyler, I think it has always been our policy, particularly early in the year to not over promise, as Larry says. As specifically by segment, we do have more challenging comps in the second half of the year in FSG, and as Victor mentioned, we see some potential concern in ETG on defense in the second half of the year.

So for all those reasons, I think we try to remain conservative in our outlook. We always try to do better, and certainly there are some potential upsides, but I think at this point we're more comfortable keeping the growth target revenue in the ballpark of what we saw going into the year.

Tyler, what I want to add to that, and I think you've heard me say [bizwack] say this before. Our business unit leaders, the guys that run these businesses, are extremely talented, hard-working, focused, incentivized and conservative because they have learned, as we have learned, that it doesn't pay to over promise.

So they give us what they consider is their baseline forecast. And we rolled those up, and Carlos and Tom and their people roll them up, and it comes up to the top line, and normally those estimates understate what's really going to happen.

But we don't want to go out there and tell the world that, yes, we are going to do this, that, and the other thing, and then come short. And we don't want to influence the bottoms-up reporting and estimated that our people that run these businesses do.

So just adding to what -- that is a little color to what Tom is saying. I mean, we would hope and estimate that those numbers do go up, but at this point, particularly early in the year, the first quarter, we just stated in what we think is a conservative manner and I believe reflects the way our people put their numbers together and roll them up to us. I don't know if that gives you a little more color into how we get to it.

No, that's helpful, and that's what I figured you would say. But I guess maybe just as a follow-up, when we look at the segment level and how that kind of rolls up into the consolidated guidance, has that changed at all? I think in the fourth quarter, you were looking for roughly 12% to 14% growth per segment.

This is Tom Irwin again.

I would say overall, we don't contemplate in our internal updated outlook substantial changes from the mix in terms of segment mix from what we saw going into the year. When you look at combined growth with both acquisitions and organic growth is pretty comparable, and I think our organic growth estimates haven't really changed substantially from going into the year on a segment basis.

Okay, that's fair. And I guess just lastly for me, for Eric, I guess. Pretty interesting color that you just provided JB, in regards to new part introductions. I was just curious, what you're expecting in terms of PMA and DER expectations, and maybe if you could just comment on where the bulk of those are going? Is there more of a shift back to engine introductions?

No, I would say for the last number of years, we have been focused on the non-engine area. Again, roughly 10 years ago we had zero sales in the non-engine area. Today, it now makes up over half of our PMA sales.

So there continues to be a lot of focus in that area. I think that focus is accelerating. We continue to do engine as well. I would say probably the change with regard to the engine market is that lessors and owners of assets, including airlines, realized that there's not going to be much residual value if there isn't competition in the after-market.

So they're starting to wake up, and I think we see some good potential in that area. But that doesn't change our focus in the non-engine area. And to answer your question, we're developing the numbers that are consistent with what we've done in the past, and I don't see any major change. Maybe we will increase it somewhat as we continue to go into additional non-engine products, but I think it will be somewhat consistent with it.

Wonderful. That's all I had. Thanks a lot.

Thank you.

Your next question is from Arnie Ursaner with CJS Securities.

Relates to your guidance for the upcoming year. Is that on reported or adjusted numbers please?

I got to ask Tom to respond.

Yes, basically our guidance is based on reported numbers. It's been our policy not to report non-GAAP. I know some companies do, excluding times, excluding certain items or their non-GAAP disclosure. But our policy is to [historically] to report GAAP numbers, and so our guidance is consistent with our as reported numbers.

Okay, and again, I know you guys attempt to be conservative, but mathematically it would imply to have an 18% operating margin for the year, we as analysts would have to cut Q2, Q3 and Q4, and I seriously doubt that that's your intention, but just making sure you are aware of the math.

My second question relates to the transaction that you mentioned with Lufthansa. Who initiated the transaction, why now and what's the rationale behind it?

Well, the summary, we probably talked about this for the past couple of years. But I'll -- and it just happened when it happened after negotiation. We have very strong relationship with them as you know. Wolfgang Mayrhuber is on our Board, and this is just something that has developed over the years as a result of good business relationships, but I'll let Eric add the color to that.

Yes, Arnie, as you know Lufthansa has been our partner for about 16 years in owning 20% of much of our Flight Support Group in Heico Aerospace Holdings Corp. We have not paid -- neither party has wanted dividends, basically, over the last 16 years, and this was just a way to reward both LHT and Heico for the patience. A lot of cash built up in the Company, and this was a way to distribute the cash.

We have received comments, frankly, from a lot of shareholders at investor conferences, including yours, where shareholders have said to us, hey, you guys have built up a lot of cash. You're looking at acquisitions. Why don't you consider taking out LHT, Lufthansa, in some of their positions?

And then I think we responded to that. We have no desire to sell any of our Businesses, and we don't need the cash from it. So we decided to take our dividend in kind. LHT took theirs in cash. Why did we do it? You know, because it makes financial sense for both parties, and the business case is still intact.

We continue -- they remain an owner of 20% Heico Aerospace, and this doesn't change any of our PMA or pair offerings. So that's why we did it.

Okay, thank you.

Thank you, Arnie.

Your next question is from Sheila Kahyaoglu with Jefferies.

Good morning.

Good morning, Sheila.

I guess, Eric, this one is for you a little bit. The 19% growth was clearly spectacular. A few of our companies and distributors have commented about weather having an impact and given the quarter-closing period for Heico, do you think there's a bit of a push forward in demand into Q2 for this? Or weather was really not an impact with all of the flight cancellations?

No, I don't really see it is an impact with regard to the flight cancellations. I haven't heard that before. I would need to specifically go ask that question, but again our quarter ended January 31. So we would have received, I would say, most of our orders by January 15 or something. I don't think that was material.

You know we'll sort of find out after the fact, but I don't think it was material. I think that our 19% comes from the focus on the additional PMA parts, in particular the non-engine parts, as well as the distribution area picking up additional principals. We've been very successful in that area, as well as specialty products, really just across the board with execution in all of our businesses.

Okay, and not to pick on the margins in the quarter, but is there a differential between the engine PMA parts and the non -- and the component piece in terms of margin? Or how do you think about the margin progression within FSG?

I would think it's pretty consistent that there is not a significant difference between the two areas. So I don't anticipate a significant difference there.

We are being very aggressive in the non-engine area. So maybe in going out to secure additional business, we would be more aggressive and we could see slightly lower margins in that area, but that is really to be seen. To date, it has been very similar between the two.

Okay, got it. And then just one for Victor. If you don't mind just discussing the Lucix acquisition a bit more and maybe where the opportunities you see and what's been disappointing or pleasantly surprising.

Yes, hi, this is Victor. Sheila, also a good question, I think.

Lucix -- I think where we see the opportunity in Lucix is in a few places. They have a great heritage and success rate particularly on large satellites. As we'd say, the GEO satellites have been strong for them. They're continuing to pick up opportunities. Their backlog is actually very strong there and has increased.

We have an excellent team there. We have a very talented team, so we think it' s also a good complement to the other business that we're doing in space. I think there's opportunity generally in the market.

That's one of the things that attracted to us. We feel that it is a growing market, and that there is just growth from the market itself in addition to the market share and the new products that Lucix is developing. And of course, as I mentioned, that very talented team there which has great respect and admiration from its customers, which we learned when we did some pretty intensive due diligence talking with these customers and having some pretty detailed conversations.

I think where it's been disappointing, if I could maybe go that far, has been on something that I think we have seen before in businesses and we'll see again. And that is they've had some technical issues on a couple of programs that slow them down, which meant that they had to spend more getting through those issues, and it also meant that they couldn't work on other very profitable or successful revenue for the Business and that's short-term in nature.

As I said, I've seen it before, and I expect that we will see it again at various businesses, including Lucix. But given kind of the history there, their backlog, what we know about them, their management team, and the fact that we have experienced this kind of thing before many times, we still feel very good about the Business. And we expect that the back-half of this year will be good for them.

Okay thank you very much.

You're welcome.

Thank you Sheila.

Your next question is from Ken Herbert with Canaccord.

Hi. Good morning.

Good morning.

First, just to ask, relative to when you gave the initial guidance last December, has anything changed with what you've seen in the Business over the last 2 to 3 months?

It looks like the increase in the net income in the guidance arguably reflects the accounting adjustment in the quarter, but I'm just wondering, fundamentally, either of the segments, FSG or ETG, if anything's fundamentally changed in your outlook on the Business?

This is Tom Irwin. I think at a very high level, that we commented on the things that have changed, that is the Lucix re-work and the outlook and so on and so forth. But other than that, I would say no material changes.

Okay, and then, Larry, I just wanted to follow-up. I mean you clearly, with the credit line, you've got very good capacity now. How would you characterize the acquisition pipeline, and is there anything you would talk about today as maybe an opportunity, from a technological or preference standpoint, that perhaps you are looking at?

Well, we never get into the details and get too granular on acquisition because they're kind of fleeting. I mean, we can be looking at a dozen or more acquisitions and wind up with one or none. And as far as specifically what we're looking at for competitive reasons, we really don't like to comment specifically.

But I can tell you, in general, that the acquisition area is what I would say normal, sort of. Pricing is, as you've read in the newspapers, is getting more difficult. Probably the average price that people are asking is at least the turn more than we've been used to paying.

In some cases, we're willing to do that if we can either get synergy or if we can look at it and say on a going forward-basis, even though we're paying a higher multiple than we would like to pay, say we would have to pay 8 or 9 times trailing. When we look at it, we feel confident that the backlog or orders or whatever it might be that when we get it we'll be back 6 to 7.5 times.

So it's a very fluid situation. We are looking at a number of transactions. We are doing due diligence, and if I were guessing, I would say we would probably do -- historically, we've done 2 to 3 a year. I would guess that probably seems likely that we will do that, but I can't guarantee it because we don't know.

The other thing is we are very thorough in due diligence. As you probably know, we've done 48 acquisitions. They've all been winners and some bigger winners than others, but we haven't made mistakes in the acquisition area and we don't want to start now. So we're very cautious, and we take a lot of time to do the due diligence.

So I can't tell you what the results -- I mean, we've gone down to the wire and found that people have misrepresented and cooked the books and done all kinds of things. So I really don't -- I can't predict with accuracy, except based upon historical generality, that we'll do 2 to 3, and I think it's probably pretty likely.

Okay, now that's helpful.

And then finally, Victor, just a quick question, how should we think about organic growth within the ETG segment as we progress through 2014. I mean, obviously I know the issues you've mentioned with recent acquisitions, but how should we think about that moving forward? I mean, do we see much strengthening here as we get firming up on the defense budget, at least here in the United States, or is the cadence for that business as we move through the year?

Yes, this is Victor. It's a good question. I would say that we're looking to, maybe, the low-single digits if we do get growth this year, and really I think we are expecting that principally as a result of what we think would happen on the defense side.

But you never know. We could get positive surprises there, too. It's sort of unsettled there. So I would feel more comfortable saying the low-single digits, that we would be kind of very happy to be doing the low-single digits.

Great. Thank you very much.

You're welcome.

Thank you.

Your next question is from Michael Ciarmoli with KeyBanc.

Nice quarter.

Thank you Michael.

Maybe, Eric, just to stay on this theme, you mentioned sort of airlines being concerned about a lack of availability for parts, or the lessors, when looking at these engines. That begs the question. You mentioned Rolls-Royce in the trend. Are you guys looking to potentially PMA parts where there is sort of the monopolistic share right now by the OEMs? Do see that as an opportunity for you guys to sort of accelerate some of your PMA adoption?

Well, as you know, Michael, we don't like to talk specifically about customers or competitors for obvious reasons. So I cannot comment specifically on the trend.

But we continue to look in areas where there isn't competition. And also, of course the airlines realized that they -- it's very important to have a competitive balance in there.

We are not in there trying to replace or displace the OEM on what they provide. We are trying to provide a little bit of competition in the area in which we operate, and I think the airlines recognize it is very important to have that competitive balance in there.

So I would say that was more the idea that I was trying to get across. But we are always looking in areas in which we don't operate, and we are always very responsive to the customers and what they want.

You typically get approached by airlines by carriers for requests. Are you seeing any kind of interest from the lessors who are saying, basically, my residual engine value is getting hurt. Would you guys consider entering the space? Are those dialogues starting to happen?

Yes, we have had success with lessors approving the use of our parts. I think it's also more of an education process for the airlines so they know up front that they should not enter into contracts that prohibit the use of alternative material.

They don't need to decide up front when they sign a lease that they're going to use it, but I think just to have the flexibility to be able to use it is what is so important. And I think that areas where they don't have the competitive balance, they're starting to realize that, uh oh, that's not a very good position to be in. So I think that is why there's greater interest in those areas.

Okay, that's fair. And then maybe just staying on FSG specifically on the margins. Can you help us out with sort of the current mix in that segment between your actual parts and what's flowing through your component repair facility? I mean, is there -- are you seeing an uptick in services? Is that having any impact on your margins in that business?

I would say that the typical balance that we've had, which is about two-thirds parts and one-third services, remains, and I would not say there is any particular focus or strength in one of the areas. I think that the strength that we're seeing is really not necessarily the tide going up, but I really do believe it's execution on our people's behalf and our teams going out and finding these opportunities and harvesting them.

Okay, and then maybe another quick one on FSG. I know Sheila asked a little bit about weather and kind of the impact there. We heard a lot of companies talk about the month of December having an impact with holidays, with other customers just trying to shore up their balance sheets. And I know that you guys are January-end, but did the create a little bit of additional softness in the quarter on sales or is that a lot of that made up in the month of January?

Typically as you know, December tends to be a weaker month for all of the reasons, and January tends to be stronger month. So frankly, the first quarter for us is always a nail-biter because November, you've got Thanksgiving in preparation for the holidays, December is always slow by nature, and we always make it up in January.

So we came through this year, and everything worked out, but I wouldn't say that we saw anything very different than what we've seen in prior years.

Okay, and then just real quickly, Victor, on ETG. The current mix in that business, is it still about one-third industrial, 20% space, call it 35% aerospace, and maybe 10% commercial aerospace? Is that sort of the right way to think about the revenue mix there?

Close. It moves around. It's a little bit shy, it's around one-third defense. I would say general electronics is more in the quarter range, you know, about one-quarter. And our space business, the commercial space, is getting up to be close to around one-quarter as well.

So if you look at the mix that way, 20% to 25%, again it's going to bounce around for sure, and some of that is going to be sensitive to acquisitions. But based on our current mix of businesses, that would be the case.

Okay, perfect. Thanks a lot guys.

You're welcome.

And your final question is from Steve Levenson with Stifel.

Thanks. Good morning, everybody.

Good morning, Steve.

Just a question. I don't know if you calculate this. If you do, great. If you don't, maybe you could take a guess. On a ratio between newer planes coming into their service interval and aircraft retirements, my guess is it might have been less than one a year ago. And I would just be interested to see what you think it was a year ago, where it is today, and where you think it will be a year from now?

Steve, this is Eric, and I guess you are referring to the aircraft that Airbus and Boeing are producing. They're producing in the area of 1,400 aircraft a year, and they're saying general thinking is roughly half of them are for new growth and half of them are for retirement of existing aircraft.

For us, it is a very complex number because you have got obviously 700 aircraft coming out. Those can be lower margin because they were developed a long time ago and maybe were set in on some prices.

But you've got this fleet of 15,000 aircraft that are aging one year. So that is offsetting it. So it is a complex equation, but we're guessing that roughly half of the new aircraft that are delivered are for growth, half are for retirement.

I don't know if that specifically answers your question? If not I would be happy to --

That gets in the area. I guess I was just looking to see if you see the aircraft being retired going down as a percentage of the aircraft that are going to require service in the next year or two?

I honestly would have to study it. Without looking at the numbers, I can't answer that. I'm guessing that it's going to be -- maybe it would go down a little bit if the base is going up, but it is not something that we look at and we spent much time on.

Okay, thanks.

Last one is on your expansion of non-engine parts. Are there any new materials or new technologies that you will be using that are going to require capital investment that goes a little bit above what you have been doing historically? Or do you think you still stay that range?

No, I think we still stay in that range. On the non-engine part area, we've got of course this large component-repair business. So we know how where the parts go, and we know how they operate. So we're not going to have to make additional capital expenditures because, for example, if we come out with some various non-engine parts, we can test them in our own facilities where we performed the overhaul of the unit.

So I wouldn't think that there's going to be substantial capital expenditures, anything more than what we've done in the past. I think we have got sufficient facilities to be able to handle that.

Got it. Thanks very much.

Thank you.

Thank you.

There are no further questions. I'll now turn the conference back to Mr. Mendelson for closing remarks.

Yes, thank you all for joining in. If you know where to reach us if you have additional questions.

I do want to say one thing, and that is to thank all of our team members who do, I think, an extraordinary job. We have the business unit leaders who give outstanding leadership. I don't want to mention each person's name.

Those out there know who you are, but I think without doubt, you are an incredible group of people. Talented, hard-working, focused and I can tell you on behalf of Heico's Board of Directors, our executive management, we thank you and we give you tremendous respect and regards.

So I have no other further comments. We look forward to speaking to you on the Q2 call in about three months from now, and again, contact us if you have any questions or comments. Thank you, and that ends this session.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect your lines.