HEICO Corp (HEI) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FY14 second-quarter earnings results and first six months of FY14 conference call.

(Operator Instructions)

Your host today is Laurans A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation.

Before the conference call begins, I will read the following statement. Certain statements made in this 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 and outside of 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 the HEICO filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, which whether as a result of new information, future events or otherwise except to the extent required by applicable law.

Thank you. I will now turn the conference over to Mr. Mendelson. Please, go ahead.

Thank you very much. Thank you and good morning to everyone on the call. We, again, thank you for joining us. We welcome you to HEICO's second-quarter FY14 earnings announcement telecon. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation and I'm joined here this morning by Eric Mendelson, HEICO's co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's co-President and President of HEICO's Electronic Technologies Group; Tom Irwin, HEICO's Senior Executive Vice President; and Carlos Macau, our Executive Vice President and CFO.

Before reviewing our second-quarter operating results in detail, I'd like to take a few moments to summarize the highlights. Our consolidated net sales, operating income and net income, in the first six months of FY14 represent record results for HEICO, driven principally by record net sales and operating income within Flight Support and Electronic Technologies. Consolidated second-quarter FY14 net income and operating income are up 20% and 10% respectively, on a 19% increase in net sales over the second quarter of FY13.

Consolidated net income and operating income in the first six months of FY14 are up 28% and 25% respectively, on a 21% increase in net sales over the first six months of FY13. Consolidated net income per diluted share increased 20% to $0.42 in the second quarter of FY14, up from $0.35 in the second quarter of FY13.

Our Flight Support Group set an all-time quarterly net sales and operating income record in the second quarter of FY14 by improving 26% and 22%, respectively, over the second quarter of FY13. The increases principally reflect organic growth of about 15%, and additional net sales contributed by a FY13 acquisition.

Cash flow provided by operating activities increased to $55 million in the first six months of FY14. That was up from $44.5 million in the first six months of FY13. As of April 30, 2014, the Company's net debt to shareholders equity ratio was 57.9%, with net debt of $415.2 million.

As discussed in our last conference call in February, we acquired the 20% non-controlling interest held by Lufthansa Technik in four of the Company's existing subsidiaries, those principally operating in specialty products and distribution within our HEICO Aerospace subsidiary. LHT still maintains a 20% ownership in HEICO Aerospace, the leading producer of PMA parts and component repair and overhaul services.

At this time, I'd like to introduce Eric Mendelson, co-President of HEICO and President of HEICO's Flight Support Group and he will discuss the results of Flight Support.

Thank you. The Flight Support Group's net sales increased 26% to a record $194.9 million, and increased 28% to a record $376.5 million in the second quarter and first six months of FY14 respectively, up from $155.2 million and $294.2 million in the second quarter and first six months of FY13 respectively.

The increase in the second quarter of FY14 reflects organic growth of approximately 15%, as well as additional net sales of $15.7 million from a FY13 acquisition. The organic growth principally reflects new product offerings and improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines.

The increase in the first six months of FY14 reflects organic growth of approximately 17%, as well as additional net sales of $31.3 million from a FY13 acquisition. The organic growth principally reflects new product offerings in improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines and within our specialty products lines.

As previously announced, HEICO is especially proud of the accomplishments of one its Flight Support Group's subsidiaries, Sunshine Avionics, who has become HEICO's second subsidiary to attain ANAC certification. ANAC is the agency responsible for the regulation and the safety oversight of civil aviation in the country of Brazil. This achievement will permit Sunshine Avionics to offer their advanced avionics repair services to the numerous airline and MRO customers in Brazil.

The Flight Support Group's operating income in the second quarter of FY14 increased 22% to a record $36.9 million, up from $30.3 million in the second quarter of FY13, and increased 27% to a record $69.1 million in the first six months of FY14, up from $54.5 million in the first six months of FY13. The increase in the second quarter and first six months of FY14 principally reflects the previously mentioned net sales growth.

The Flight Support Group's operating margin was 18.9% and 18.4% in the second quarter and first six months of FY14 respectively, as compared to 19.5% and 18.5% in the second quarter and first six months of FY13. The decrease in the second quarter of FY14 principally reflects the impact of additional amortization expense from our successful FY13 acquisition.

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 7% to $89.7 million in the second quarter of FY14, up from $83.9 million in the second quarter of FY13, and increased 9% to a record $177.2 million in the first six months of FY14, up from $162.8 million in the first six months of FY13. The increase in the second quarter and first six months of FY14 resulted from additional net sales of $4.1 million and $12.2 million, from a FY13 acquisition as well as organic growth of approximately 2% and 1% respectively.

Organic growth in the second quarter of FY14 was principally driven by our space and aerospace businesses, tempered by softer sales in our defense-related businesses. Organic growth for the first six months of FY14 was principally driven by our aerospace business, offset by softer sales in our defense-related businesses.

The Electronic Technologies Group's operating income decreased 10% to $18.1 million in the second quarter of FY14, down from $20.2 million in the second quarter of FY13. The decrease in the second quarter of FY14 principally reflects a less favorable product mix for certain of our space and defense products partially offset by a $2.3 million reduction in the fair value of the contingent consideration related to the FY13 Lucix acquisition, principally due to less favorable projected market conditions during the future earn-out period.

The Electronic Technologies Group's operating income increased 15% to a record $41 million in the first six months of FY14, up from $35.8 million in the first six months of FY13. The increase in the first six months of FY14 is principally attributed to the overall impact of the acquired business.

The Electronic Technologies Group's operating margin was 20.2% and 24.1% in the second quarter of FY14 and FY13 respectively. The decrease in the second quarter of FY14 principally reflects the previously mentioned less favorable product mix, principally at Lucix, and in certain defense products. Excluding Lucix's results, ETG operating margins were approximately 22% in the second quarter of FY14.

The Electronic Technologies Group's operating margin increased to 23.2% in the first six months of FY14, up from 22% in the first six months of FY13. The increase in the first six months of FY14 principally reflects the overall impact of the acquired business, partially offset by a less favorable product mix for certain of our space and defense products.

Now, I turn the call back over to Larry Mendelson.

Moving on to diluted earnings per share. The consolidated net income per diluted share increased 20% and 28%, to $0.42 and $0.83 in the second quarter and first six months of FY14. That was up from $0.35 and $0.65 in the second quarter and first six months of FY13 respectively. The increase in the second quarter in the first six months of FY14 principally reflect the previously mentioned growth within both of our operating segments.

Consolidated net income per diluted share includes a $0.05 benefit in the first six months of FY14. That was from a reduction in the fair value of the contingent consideration related to a prior-year acquisition, and that was net of lower than expected operating income at the acquired business. If you want more color on that when I'm finished with my prepared remarks, we will be able to give it to you.

Depreciation and amortization expense increased by $3.8 million and $7.7 million in the second quarter and first six months of 2014. That was up from $8.3 million and $16.4 million in the second quarter and the first six months of 2013. The increase in both periods, principally reflects higher amortization expense of intangible assets recognized in connection with our FY13 acquisition.

Research and development expense increased 21% and 23%, to $9.3 million and $18.4 million in the second quarter and first six months of 2014 respectively. That was up from $7.7 million and $15 million in the second quarter and first six months of 2013, respectively. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies and we continue to invest over 3% of each sales dollar into new product development. You will all recall that this is a strategic model that we follow and have followed for the past 22 years. We believe it to be the lifeblood of our business.

SG&A expenses increased 13% to $50.8 million, and 6% to $92.5 million in the second quarter and first six months of FY14 respectively, up from $44.8 million and $87.4 million in the second quarter and first six months of FY13. The increase in the second quarter and first six months of FY14 principally reflect the incremental impact from acquired businesses and additional costs incurred at our existing businesses to support consolidated organic sales growth. That was partially offset by the previously mentioned reduction in fair value of contingent consideration associated with the FY13 acquisition of Lucix.

SG&A expense as a percentage of net sales decreased from 18.8% in the second quarter of FY13 to 18% in the second quarter of FY14. That, principally, reflects the impact of the fair value adjustment, again, of the contingent consideration earn-out liability. SG&A expenses as a percentage of net sales decreased from 19.2% in the first six months of 2013 to 16.8% in the first six months of FY14. Again, principally reflecting the impact of reduced contingent consideration as well as the impact of higher sales volumes on the fixed portion of SG&A expense.

Interest expense in the second quarter and first six months of FY14 were $1.4 million and $2.7 million respectively. That was up from $800,000 and $1.4 million in the second quarter and first six months of FY13. The increases principally reflect a higher weighted-average balance outstanding under our revolving credit facility, and that was associated with borrowings that we used to fund acquisitions. Interest rates on our revolving credit facility remained low at approximately 1.3% per annum as of April 30.

Other income in the second quarter and first six months of FY14 was not significant. Income taxes, our effective tax rate in the second quarter of FY14 decreased to 31.8% from 34.1% in the second quarter of FY13. The decrease is principally attributed to the impact of the previously mentioned reduction in the fair value of contingent consideration associated with the FY13 acquisition of Lucix acquired by means of a non-taxable stock transaction.

The effective tax rate in the first six months of FY14 increased to 32.9%, up from 31.3% in the first six months of FY13. The increase is principally attributed to the benefit we recognized in the first quarter of FY13 from the retroactive extension of the R&D tax credit, as well as the subsequent expiration of the credit in December 2013, which limited the R&D tax credit recognized in the first six months of FY14.

Additionally, the increase is the result of a larger income tax deduction we recognized in the first quarter of FY13 for the special and extraordinary cash dividend, which we paid in December 2012, to participants of the HEICO savings and investment plan. Furthermore, the aforementioned increases were partially offset by the impact, again, of the previously mentioned reduction in the fair value of contingent consideration. Our full-year combined tax rate and non-controlling interest rate, expressed as a percentage of pretax income, is now anticipated to be 42%, down from our prior expectation of 43%.

Net income attributable to non-controlling interests were $4.4 million and $9.5 million in the second quarter and first six months of 2014 respectively. That compared to $5.3 million and $10.4 million in the second quarter and first six months of 2013. The decrease in net income attributable to non-controlling interests in the second quarter of FY14 reflects the purchase of certain non-controlling interests during the second quarter of FY14 resulting in lower allocations of net income to the non-controlling interests.

The decrease in net income attributable to non-controlling interest in the first six months of FY14 reflects purchases of non-controlling interest during FY13 as well as the second quarter of FY14. Of course, that results in lower allocations of net income to the non-controlling interest.

Moving on, now to the balance sheet and cash flow. Our financial position and cash flow remain extremely strong. Cash flow provided by operating activities increased to $55 million in the first six months of 2014. That was up from $44.5 million in the first six months of FY13. That reflected, principally, increased earnings, higher depreciation and amortization expense and an increase in non-cash value adjustments relating to contingent considerations. We continue to expect cash flow provided by operating activities to approximate $160 million in FY14.

Our working capital ratio is a strong 3.4 as of April 30, 2014. That's up nicely from 2.7 as of October 31, 2013.

DSOs of accounts receivable was 52 days as of April 30, 2014. That was comparable to the 50 days as of October 31, 2013. Of course, we continue to closely monitor all receivable collection efforts in order to limit credit exposure. Those of you who have been with us for a long time know that HEICO does not have any significant losses in accounts receivable.

No one customer accounted for more than 10% of net sales and our top five customers represented approximately 17% of consolidated net sales, both in the second quarter of FY14 and FY13. Inventory turnover rate was 110 days as of April 30, 2014. That was comparable to the 111 days as of October 31, 2013.

Net debt to shareholders equity ratio was 57.9% as of April 30, 2014. With net debt, which we define as debt less cash and cash equivalents, of $415.2 million, principally incurred to fund the acquisitions as well as the payment of special cash dividends in FY14 and FY13. We have no significant debt maturities until FY19. We plan to utilize our financial flexibility to aggressively pursue high-quality acquisition opportunities.

As you know, HEICO is not a financially constricted Company. We have more than enough available cash and credit facilities to do all the things that we want to do, whether it's CapEx, acquisition, dividends and so forth. Financially, we are considered a very strong credit.

As we look ahead to the remainder of FY14, we continue to anticipate organic growth within our product lines that serve commercial aviation. We expect organic growth within ETG, consistent with prior years, reflecting higher demand for the majority of our products, moderated by lower demand for certain of our defense-related product.

During the remainder of FY14, we plan to remain focused on new product development, market penetration, executing our acquisition strategies and maintaining our financial strength. Based upon the current economic visibility, we are increasing our estimate of FY14 year-over-year growth in net income to 12% to 14% over the prior year. That is up from our prior growth estimate, which we gave you about three months ago, at that time it was 10% to 12%.

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 will approximate $25 million. Depreciation and amortization expense to approximate $49 million. Cash flow from operations, again, should approximate $160 million.

That is the extent of my prepared remarks. I would like the operator, now, to open the lines for questions.

(Operator Instructions)

Tyler Hojo, Sidoti & Company.

Firstly, I was hoping to talk a little bit more about some of the impressive growth within the Flight Support business, 15% organic? I'm most curious about what the impact of weather was, if any, in regards to that growth rate? If you could maybe just comment a little bit on what you are seeing real time, in terms of, perhaps, some restocking in the industry?

I'm going to turn it to Eric, but my 30,000-foot comment is, we really didn't see much on weather.

When it comes to restocking, we don't see that much on restocking. Probably 60% or 70% of our shipments are from orders in the same month. We don't do that much on roadables where you would have restocking issues. I can let Eric give you more color.

Tyler, I don't know what more I can really add to that other than, while some other companies spoke about weather being an excuse for some shortfalls, we really haven't seen that. I haven't heard that excuse from our business units. I don't think that that's an issue for us.

We also somewhat have a culture where if there would be weather delays, our business units would figure out how to make it up elsewhere. That may not even bubble up to my desk.

Then, as far as restocking, as we've said, now, for the last couple of years, airlines are running inventories very, very lean. Even the most successful airlines are trying not to hold inventory.

We, for our products, really haven't seen a restocking. We see it operating pretty much hand to mouth, as it has been for the last couple of years. Albeit volumes are up, so that's, I think, what's driving some of our performance. I would not say that it's due to restocking.

Okay. That's helpful. I don't know if you've seen the numbers, yet. As we sit here thus far, 21 days through May, have you seen anything noticeable in terms of the trends within your core aftermarket levered products?

We need to be careful about commenting outside of the reporting periods, but I would say it's just business as usual.

Okay. Got it. Lastly, from me, could you remind us what your guidance bakes in, just in regards to capacity or air traffic growth this fiscal year?

I'm going to ask Tom is going to respond to that.

Yes, Tyler. Actually, early in the year, we commented on our sales growth by segment, actually. Our overall sales growth of 12% to 14%, and about 60% of that we thought would be organic in the commercial aviation side, or FSG. If you equate that to ASM growth forecast 18th, it continued to run about mid-single digits.

Again, on a macro basis, we like to target organic growth in the commercial aviation aftermarket at 1.5 to 2 x times the ASM growth or MRO spend, which isn't reported as frequently or statistically. I think it's still in that range.

We have some tough comps in the second half of this year for the Flight Support Group, given the growth in the second half, the organic growth last year of like 14% and 17%, I think. That being said, overall, we are still looking at that range of organic growth in Flight Support Group on a full-year basis.

Got it. Thanks so much. Appreciate it.

Julie Yates, Credit Suisse.

Nice quarter, guys.

Thank you.

Question for Victor on the ETG margins. Do expect the mid to (inaudible) in the second half and just be rebound back into the mid-20%s? How should we be thinking about the margin profile the rest of the year?

I would say that we are looking, probably, to the lower 20%s, somewhere in that range, for the balance of the year. I would look for it later in the year, at this point. I don't think that it's a third-quarter event.

Okay. Last quarter, I think you mentioned some concern over the defense softening in the second half of the year. Do you have any better visibility, here? I think you are now saying organic growth can be consistent with last year in the historical, low single-digit range. Any update?

Yes. I think it's pretty much what I said on our last call. That is, we've started to see it really leak into the longer-cycle businesses that we have and not just shorter-cycle businesses. I would expect that to continue.

I think where we are seeing strength, better strength, would be in some of our space businesses and some of the aerospace and the other general markets that we serve. I'm not looking for it in defense.

Okay. Understood. Then, on the acquisition pipeline, what are you guys seeing? Prices have been pushing up for a while. What's the appetite in FSG versus ETG based on availability and pricing?

I think the appetite is really equal. We don't have a particular plan for one business over the other. We are sensitive to pricing.

Sometimes, a particular market can command higher pricing than another, because it's getting more interest. Sometimes, it's better for us to wait that out as we've done in the past. I think that's always worked to our benefit.

We are very careful on the defense side. We see a lot of opportunities there, but we are careful. We like to bake in additional haircuts when we look at those on top line and margins and bottom lines and so forth on those opportunities, so that we are conservative in our forecasting.

Julie, just to add, over on the Flight Support side, obviously, pricing is significantly up. It seems like the aftermarket has been discovered by the world as the great secret of a great business model. Where we understand it very well, we're are very cautious and we want to make sure that we do well in both the good times as well as the tougher times.

We've got a number of opportunities that we are looking at right now. Of course, we tend to be a preferred acquirer. We really need to find those circumstances where the qualities of the Company, in terms of the touchy feel that we use in our operating style is valued by the seller, in order to find a transaction that works for us. We are working on a number of transactions right now.

Okay. Great. Thank you very much.

J.B. Groh, D.A. Davidson.

I have a quick one for Eric. Teeing off some of the other questions on organic growth. Has your development pace changed materially over the last few years? I know you used to give a number of PMAs that you thought you would get in the year. I understand you don't want to get too detailed on that. Is your capability of putting more PMAs through the system increased and has that helped with the growth?

Yes, again, we tend not to give out details because, frankly, our competitors are on this call and listen and respond accordingly. That is certainly not helpful to HEICO.

I can tell you, in a very broad sense, that our development pipeline remains consistent with prior-year periods and we continue to develop into adjacent markets. We continue to develop new products and new technologies that are really very exciting and very much appreciated by our customers. Doing things that, frankly, nobody else in the industry does and very often that our competitors believe is not doable. So, we continue to have a major focus in that area. There's no change at all.

Okay. Is the margin potential consistent with what you've been getting, in terms of some of these new product lines and areas that you haven't played in in the past?

Yes. Absolutely. I'd say they are consistent, if not better, than what we've done in the past.

Okay. Great. Thank you, that's all I had.

One of the important things to note, is that, basically, the newer technologies that have come out, the newer products, that served the same purpose as prior-generation products, typically have price points that are much higher than the prior generation. The margin potential is often enhanced. Remember, we are not only in engine, but we also do components. We're all around the aircrafts.

Right. Thank you.

Arnie Ursaner, GJS (sic - see analyst listing "CJS") Securities.

This is Lee Jagoda from CJS Securities for Ernie. Larry, can you talk a little bit about the status and the issues you've had that have affected Lucix in the first half? Then, as we move through Q3 and Q4, how does that develop? As a follow up, the amount that's remaining on the earnout for 2015?

Again, at 30,000 feet, Lucix had a sizable backlog when we acquired it. A few of the contracts had cost overruns, which I think you are seeing in the results. I think that's what's impacting the initial -- the first quarter and the second quarter.

Those cost overruns will, of course, are painful to take them. At the same time, the cost overruns have the effect of reducing cash that we will require as a payout to the former Lucix shareholders. Whereas we had a total potential liability earnout from $50 million, which we had estimated would actually be somewhat less, at this time, the $50 million is going to be considerably less. Every dollar we save on that is really cash in our pocket. That's the positive and the negative side of the whole thing.

We believe that once these cost overruns are out of the way, and they are cost overruns that we had to complete for very important customers, we think that the credibility that Lucix will derive from doing the job right and sticking with it, will be made up in the future. If you recall, about a year or two ago, we bought a company, 3D in France. The first six months, it hit the bottom line and we had the contract flow drop. We said that was affecting ETG and that we expected it to turn around.

I think the Lucix situation, at this point, we look at in the very same way. We do believe that it will turn around. We do believe that additional contracts will fill in. We expect that the situation will straighten itself out.

I can't guarantee it because these contracts are complex, and as you know, they are on satellites. The electronics of the satellite are very complex issues to deal with. I think that's the overall picture.

As we see the likelihood of the earnout being reduced, we have been required under the accounting rules to reduce our liability for the earnout. The accounting treatment of that is to take some of it into income, which lessens the impact of the loss. It's an accounting -- truthfully, to me, it's an accounting nightmare. Suffice it to say, a lot of the losses made up by the reduction in the ultimate earnout, which is cash in our pockets.

I'm going to let Victor comment, if he has anything more to say about that.

I think you've covered it pretty well.

Lee, this is Tom Irwin. The last part of your question regarding the remaining amount that we have recorded as a liability, at this point, is around $12 million.

That's $12 million out of the initial $30 million. Originally, it was $50 million, and then $20 million drop, but it's $12 million is the remaining liability.

Okay. One more bookkeeping question, just to be clear. Your guidance for net income growth of 12% to 14%, is that on a reported basis or after adjusting for the earnout reversals and taking that out of the numbers?

That would be GAAP reporting. It's all inclusive of positives than negatives adjustments.

Great. Thanks very much.

Kevin Ciabattoni, KeyBanc Capital.

One quick follow up on Lucix. You talked about the cost overruns. Has anything changed there from the demand side, from when you closed the acquisition of the business last year through now? Or, has it been purely those cost overruns on the contracts?

Kevin, this is Victor. I will answer that for you. The satellite business, and we knew this when we bought Lucix based on other businesses that we have, tends to be volatile in terms of orders.

You'll go a series of months with no orders whatsoever and then all of a sudden it's like feast or famine, you have a huge order month. In fact, we had a huge order month somewhat recently. It's been a little quieter lately. That could work its way into our production later in the year, or we could have orders come in and move forward.

At this point, I will say it's a fairly typical sort of cycle that we are seeing. I would expect that over the course of our ownership of the business we have to look at this a little longer cycle, one to two years, if you will. We judge the performance of the business on that basis because of the volatility and the size of the orders. They tend to be very large individual orders, as opposed to, let's say, production line orders of the sort that come in regularly and on a pro rata basis.

Okay. Thanks. That's helpful.

I just want to add one other bit of color. When we purchased Lucix, we expected A, it to be lumpy, because of what Victor just described. Number two, that Lucix, in the future, would have a very, very great future in the space business.

We didn't really expect it to be an immediate impact. We didn't expect it to have this immediate loss either, but we thought that the future for the products that it makes and the customers it serviced, would be a longer-term type of an investment.

That's the color. We are not ready to write it off or we're not terribly upset with what's happened. We don't like it, but we think the future still is pretty bright.

Okay. Thanks. Just shifting to commercial aerospace. Curious as to what kind of opportunities you are seeing or expect to see on the A380? Starting to see the first of those aircraft due for heavy maintenance visits and Lufthansa with the ownership stake, they've got a pretty substantial fleet already. Just wondering what you guys are expecting to see from that platform?

Obviously, the A380 is doing quite nicely. There are a number of them out there. We need to be very careful though, unfortunately, Kevin, on what we comment on specific platforms. As I said, our competitors are listening to what we say very intently.

We do view it as an excellent platform for us. We do already have plenty of content on it.

Again, it has the same dynamics that all of the other aircraft have, where typically one manufacturer charges a lot of very high prices for the spare parts and the repair services. I think that there's a lot of very good opportunity.

Also, as you rightly point out, Lufthansa is the major operator of the A380. Of course, they own 20% of HEICO Aerospace, so there's tremendous opportunity there. I think we are in a unique position to be able to work with our partner to solve their needs.

Of course, Lufthansa is partnered with Air France in the components business, there. I think that there's very good opportunity for us there, as well as all around the difference fleets.

Perfect. Last one for me. Another one for you, Eric.

Just looking at what appears to be a pretty strong interior retrofit cycle, are you guys seeing any uptick there, just given your mix shift away from the engine and more towards components, interior components? Just curious as to what you guys are seeing there in terms of an order flow?

We are active, as you mentioned, in that space. We do very well in it. Yes, the airlines want to continue to retrofit their cabins. I think that provides great opportunity for HEICO. Huge opportunity for us in many of the different areas in which we operate in that space.

Alright, thanks. That's all I had.

Sheila Kahyaoglu, Jefferies.

This one is for Victor. In terms of ETG, do you mind elaborating on the magnitude of the decline in defense? Maybe, what you saw on a sequential basis?

Also, in terms of the profitability level, if you exclude the one-time items, you are in the high teens margin level, where as you've been operating under 20% plus margin rate. How should we think about that going forward?

Sheila, I think if you take out just for Lucix, as I said, we are around 22%. I think that's consistent there.

In terms of what we are seeing in defense, for the most part, we are seeing a softness that's coming from what our people tell me appears to be budgetary issues out of their customers. They tend to see things that they tell me are slipping out to the right, if you will, but the demand remains there. As far as we're concerned, we take that out of our planning and we take that out of our assumptions to be conservative. Could that add back in later? I suppose so.

We take what we are given and discount it a little bit further. That's, essentially, what we're seeing.

Okay. Back on the margins then. We should expect it to remain around a 22% level, or does it tick back up to the mid 20%s?

I would say I would look in the lower 20%s. It's possible for the mid 20%s. Right now, if I look at the mix of where we are, some of the things that I said to you on our defense side, that they're telling me they expect to see stronger, but we want to be a little bit more conservative. I would expect to see lower 20%s for the time being. We will see where we are as we get into next year.

Okay. Got it. One for Eric. In terms of new products we've been driving growth for the last few quarters. Are you also reaching out to new customers? Do you mind elaborating on that a bit?

Yes. We absolutely have a tremendous focus on reaching out to new customers. We bring new customers on board. Again, there's obviously there's new customers, people who haven't purchased products from us, and there's not a lot of those out there. What we also define -- somewhat of a new customer would be a customer for the type of product that they haven't purchased from us in the past.

There's a tremendous amount of opportunity in that area for us. We continue to win over customers where they haven't purchased certain product lines. There's a lot of opportunity, a lot of stuff that they can buy from HEICO, significant cost savings, turn-time advantages in component repair as well as distribution. We see a lot of expansion there, a lot of expansion opportunities.

Got it. Thank you.

Ken Herbert, Canaccord.

Victor, I first just wanted to ask, could you just remind us again, or, Tom, maybe, of the 3% to 4% implied organic top-line growth for ETG. How does that parse out by the legacy defense or military business versus space and verse the industrial business?

Ken, this is Tom Irwin. In terms of our overall segment organic growth, we are still in the consolidated full FY14 numbers in ETG around 2% to 4%. That was a build up based on growth in space and aerospace and some industrial. T

hen, if you will, going into the year, our estimates on defense would be potentially a drag of 5% to 10%. That was the buildup to the roughly 2% to 4%. At this point, our outlook for the full year hasn't materially changed by market segment.

Okay. Great. That's helpful. Eric, if I could, it's been a while, but you rifled down for a few quarters. Are you seeing any change in the business from when you are acquired it either on the missile defense opportunities or, perhaps, on the interior side? How would you comment on the track of that business relative to your expectations now?

I would say where it's performing consistent with our expectations. We have an excellent leadership team there, and a great team member base. They are performing very well in all segments of their business.

Obviously, there's different opportunities in different areas and business cycles a little bit. As you mentioned, missile defense tends to be a little bit lumpy. Overall, I would say the Company has performed extremely well and we are very happy with it.

Thank you very much. Nice quarter.

Thank you

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We look forward to speaking to you about three months from now on the third-quarter earnings call. Have a good summer and we will speak to you in the near future. Thank you all.

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