HEICO Corp (HEI) 2015 Q1 法說會逐字稿

Hello, and thank you for standing by. Welcome to the first-quarter earnings results conference call.

All lines had been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions)

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 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 or airline purchase decisions, which could cause lower demand for our goods and services, product development, or product specification costs or requirements, which could cause an increase to our cost to complete contracts.

Governmental and regulatory demands, export policies and restrictions, reductions in defense, base, or homeland security spending by US and/or 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 or 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, and economic conditions within and outside the aviation, defense, base, medical, telecommunications, and electronic industries, which could negatively impact our costs and revenues and defense budget cost, 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 10-K, 10-Q, and form 10 -- 8-K.

We undertake no obligation to publicly update or revise any forward looking statements whether as a result of new information, future events, or otherwise, except to the extent required optical by law. I would now like to turn the conference over to Laurans Mendelson, please go ahead.

Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to this HEICO first-quarter FY15 earnings announcement telecon.

I'm 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 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 first-quarter operating results in detail, I'd like to take a few moments to summarize the quarterly highlights. Consolidated first-quarter net sales increased to $268.2 million in the first quarter of FY15. This compared to $266.8 million in the first quarter of FY14.

Our continued year-over-year increase in net sales was principally driven by increased demand for certain of our commercial aerospace and defense products in ETG and flight support, as well as the impact of one of our two recent acquisitions, which were closed in late January 2015. And that was partially offset by expected lower sales, net sales of certain industrial products in our specialty products line. You all remember that we mentioned this expectation in our fourth-quarter 2014 conference call.

Consolidated net income per diluted share was $0.41 in the first quarter of FY15. Excluding the net $0.04 benefit in the first quarter of FY14, which was due to reduction in accrued contingent consideration, our diluted earnings per share was up approximately 11% over the prior year. And those results were $0.02 per diluted share higher than our internal forecast for the first quarter of 2015.

All of you on this call know that we do not give quarterly guidance. We give annual guidance. We feel confident of that. But we do not try to guess quarterly guidance.

We continue to generate strong cash flows from operating activities. First-quarter FY15 cash flow from operating activities was $29.5 million. This compared to $33.5 million in the first quarter of FY14. Generally, our first-quarter cash flow from operating activities is significantly lower than quarterly cash flow generated from operating activities during the balance of the year.

Without going into detail, to explain the $4 million lower cash flow, it's all set forth in the consolidated statements of cash flow. And it's a combination of miscellaneous items. None which really seriously impact or indicate any problem at all with the cash flow. They're line items which you all can see and analyze; things like decrease in current liabilities of $4 million, and things like that.

Our net debt to shareholders equity was 42.9% on January 31, 2015. And net debt, which is debt less cash and cash equivalents, was $336.5 million. And that had principally been incurred to fund acquisitions as well as the payment to special cash dividends in FY14 and FY13.

Our net debt to trailing 12 months EBITDA ratio was approximately 1.37 at January 31, 2015. And that compared favorably to approximately 1.52 at January 31, 2014.

During the first quarter of FY15, we completed two strategic acquisitions. In January 2015, Flight Support acquired 80% of the equity of Aeroworks international holdings, which is headquartered in the Netherlands and maintains significant production facilities in Thailand and Laos, is a manufacturer of both composite and metal parts used primarily in aircraft interior applications, including seating, galleys, lavatory doors, and overhead bins.

Aeroworks has a significant international manufacturing footprint, which marks an important expansion of HEICO's production flexibility. Additionally, Aeroworks brings significant design expertise and manufacturing capabilities to the HEICO network, and that should benefit our customers worldwide.

At the end of January 15, our flight support [alls] group acquired 80.1% of the equity of Harter aerospace. Harter is a globally recognized component in accessory maintenance, repair, and overhaul stations specializing in commercial aircraft accessories, including thrust reverser actuation systems and pneumatics, electromechanical components too.

Harter brings additional impressive MRO expertise and capabilities to the HEICO network. We expect both acquisitions to be accretive to earnings within the first year after closing.

In January 2015, we paid a semiannual cash dividend of $0.07 per share. And this dividend represents a 17% increase over the prior semiannual per-share amount of $0.06, and that was our 73rd consecutive semiannual dividend since 1979.

I would now like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's flight support group. And he will discuss the results of the Flight Support Group.

Thank you. The Flight Support Group net sales increased to $182.1 million in the first quarter of FY15, up from $181.6 million in the first quarter of FY14. Driven mainly by new product offerings in favorable market conditions in our aftermarket replacement parts and repair and overhaul services product lines, as well as additional net sales contributed by a FY15 acquisition, partially offset by the expected lower net sales of certain industrial products in our specialty product line.

This performance follows the Flight Support Group's 19% organic growth in the first quarter of FY14. The Flight Support Group's aerospace and defense product lines experienced organic growth of approximately 5% in the first quarter of FY15, which excludes the industrial products decrease in our specialty products line.

The lower net sales of industrial products, in our specialty products lines principally resulted from reduced demand associated with a particular customer and the related completion of that customer's multi-year orders in late FY14. As a result of the aforementioned lower demand in industrial products, the Flight Support Group experienced a 1% organic revenue decline in the first quarter of FY15 compared to the first quarter of FY14, which showed 19% organic revenue growth and was a tough comparable quarter for us.

The Flight Support Group's operating income totaled $30.7 million and $32.2 million in the first quarter of FY15 and FY14 respectively. The decrease in the first quarter of FY15 principally reflects the previously mentioned lower industrial products net sales.

The Flight Support Group's operating margin was 16.9% and 17.7% in the first quarter of FY15 and FY14 respectively. The decrease in the first quarter of FY15 principally reflects the previously mentioned lower industrial product net sales within our specialty products lines. 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 operating income totaled $19.4 million and $22.9 million in the first half of FY15 and FY14 respectively. The decrease in the first quarter of FY15 is principally attributed to the $4 million net benefit from the accrued contingent consideration reduction in the first quarter of FY14, partially offset by the previously mentioned increase net sales and more favorable product mix for certain of our defense products.

The Electronic Technologies Group's operating margin was 21.8% and 26.2% in the first quarter of FY15 and FY14 respectively. The decrease in the first quarter of FY15 principally reflects the aforementioned prior-year accrued contingent consideration decrease, partially offset by the previously mentioned increase in net sales and more favorable product mix for certain of our defense products.

I turn the call back over to Larry Mendelson.

Thank you, Victor and Eric. Moving on to diluted earnings per share. Consolidated net income per diluted share was $0.41 in both the first quarter of FY15 and FY14. And previously mentioned first quarter FY14 had a net benefit of $0.04 per diluted share associated with the reduction in accrued contingent consideration.

Depreciation and amortization expense decreased by $1.1 million in the first quarter of FY15, down from $12.1 million in the first quarter of 2014. The decrease in the first quarter FY15, again, principally reflects lower amortization expense of certain intangible assets.

R&D expenses total $9.3 million in the first quarter of FY15. That was up from $9.1 million in the first quarter of 2014. Significant ongoing new-product development efforts are continuing at both flight support and ETG as we continue to invest approximately 3% to 4% of each sales dollar into new product development.

Our effective strategy for the last 24 years has been to reinvest a portion of our earnings into the development of new products and services that we can offer at lower cost to our customers, which, in turn, facilitates market share growth sufficient to meet our growth goals. SG&A expenses and SG&A as a percentage of net sales totaled $47.4 million and 17.7% in the first quarter of FY15, as compared to $41.7 million and 15.6% in the first quarter of FY14.

The increase in SG&A expenses and SG&A as a percentage of net sales principally reflects an increase in G&A expenses, reflecting the impact of the previously mentioned decrease in accrued contingent consideration that was recorded in the first quarter of FY14.

Interest expense decreased to $1.1 million in the first quarter of FY15, down from $1.3 million in the first quarter of FY14. That decrease was principally due to a higher weighted average balance outstanding under our revolving credit facility in the first quarter of FY14, which was associated with our FY13 acquisitions, as well as the payment of special cash dividends in FY14 and FY13.

Other income in the first quarter of both periods was not significant, so I won't comment on it. The Company's effective tax rate in the first quarter of FY15 decreased to 29.5% from 33.9% in the first quarter of FY14.

That decrease is principally due to an income tax credit for qualified R&D activities for the last 10 months of FY14 that was recognized in the first quarter of FY15. And that resulted from the retroactive extension of the US federal R&D tax credit, which was done in December 2014 and to cover the calendar year 2014. We continue to estimate our effective tax rate and non-controlling interest rate expressed as a percentage of pretax income to be approximately 39% for the full FY15.

Net income attributable to non-controlling interest was $4.5 million in the first quarter of FY15. That compared to $5.1 million in the first quarter of FY14. The decrease in first quarter of FY15 principally reflects lower allocations of net income to non-controlling interest in the first quarter of FY15 due to the acquisition of certain non-controlling interest during FY14. And that was partially offset by higher earnings of certain of those subsidiaries of the Flight Support Group and ETG in which the non-controlling interest are held.

Moving on to the balance sheet and cash flow. Our financial position and forecasted cash flow remain very strong. Cash flow provided by operating activities totaled $29.5 million in the first quarter of FY15 and consisted primarily of net income from consolidated operations, depreciation and amortization expense, partially offset by some changes in working capital. I commented on that a little bit earlier.

Working capital ratio of 3.1 continues to remain strong as of January 31, 2015. And that was up nicely from 2.8 as of October 31, 2014.

Days sales outstanding, DSOs, of accounts receivable was 52 days January 15, 2015 and January 31, 2014. We continue to closely monitor receivable collection efforts in order to limit credit exposure. We rarely lose very much on accounts receivable losses.

No one customer accounted for more than 10% of our net sales. Our top five customers represented approximately 17% of consolidated net sales in the first quarter of FY15, compared to about 16% in the first quarter of FY14.

Inventory turnover rate was 120 days as of January 31, 2015, and that was close to the 118 days as of January 31, 2014.

Net debt to shareholders equity was 42.9% on January 31, 2015. And net debt, which is total debt less cash and cash equivalents of $336.5 million principally incurred to fund 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 to accelerate growth and maximize shareholder returns.

As for the outlook, we look ahead to the remainder of FY15, and we continue to anticipate organic growth within flight support group product lines that serve commercial aviation markets. And that'll be moderated by lower demand for certain of our industrial related products within the specialty product lines.

We expect improved organic growth within ETG compared to the prior year. And this should reflect increased demand for the majority of our products. During the remainder of FY15, we plan to continue our focus on new product development, further market penetration, executing acquisition strategies, and maintaining our financial strength.

To give you a little bit of color on the acquisition pipeline, at this moment, it is quite robust. As a matter of fact, our executive group had commented earlier today that we probably have never seen it as robust as it is at the moment.

The acquisitions that we are looking at all fall within guidelines that we are used to paying fair prices, which would result in accretive acquisitions of going forward, certainly, in the first year of acquisition. And I can tell you that our entire staff is working quite hard on a number of these transactions.

Based upon our current economic visibility, we continue to estimate full fiscal-year growth in both net sales and net income of approximately 8% to 10% over FY14 levels with consolidated operating margins approaching 18%. In addition, we continue to anticipate depreciation and amortization expense of approximately $48 million, and capital expenditure to approximate $25 million, cash flow from operation expected to approximate $200 million.

In closing, we will continue to focus on intermediate and long-term growth strategies with an emphasis on acquiring profitable businesses at fair prices. And that is the extent of my prepared comments, I would like to open the floor to questions.

Thank you.

(Operator Instructions)

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

Hi, guys.

Good morning, J.B.

I had a question, Larry, on the guidance. You said 8% to 10% on the revenue, which is, I think, unchanged from last quarter, but you made these two acquisitions. And I know you didn't disclose a lot of financial information on those for obvious reasons. But can we just infer from the maintaining of the guidance that those acquisitions fall within that range of revenue that you would have no change?

Yes. J.B., I think when we gave the initial guidance in the fourth quarter in December 2014, I think we did mention that that guidance included to potential acquisitions. They had not been closed at that point, but we were highly confident that they would have closed. So that was included in the initial guidance.

Okay so those were the two deals that were -- okay, good.

That's correct.

Okay, and then maybe one for Eric. Could you remind us what the weighting of industrial is within FSG?

Good morning, J.B. Yes.

The industrial products were, in last year's first quarter, were about 10% of FSG, and in this year's first quarter were about 4% of FSG. So it's a fairly small piece of our business.

Okay, so that had to be a pretty significant drop, this customer rolling off --

It was. It was about a $10 million drop. We had anticipated some additional industrial product demand for some new products and replacement products in that business.

But unfortunately, the manufacturers program slipped a little bit to the right, so that impacted us. But we do anticipate that we will, in our specialty products group, be actually increasing our aerospace exposure. And again, some of that slipped to the right as well, but that should be kicking in really in the second half of the year.

What fell off specifically will not come back. But we do have other products in work again, mostly aerospace, a little bit industrial to pick up the slack there.

J.B., to put a little color on this industrial. I don't want anybody to think that HEICO has decided we're going to go into industrial products and do a big push there. That's not the case at all.

This product was a direct outgrowth of some of the work in R&D that we had done and produced for the aerospace world. And the industrial, certain industrial customers came to us and asked us to produce a product which had similar characteristics but would be used in industrial as opposed to aerospace.

So it was just gravy for us. It was a very good transaction. It was a win-win for the customer. It was a win-win for us.

But we're not going off on a tear, at least not that I know of, that we're going to focus on industrial. We're still heavily in the aerospace business. We want to stay there.

Great. And then one for Victor. Hey, Victor, could you maybe give us some commentary on the sub segments within ETG like you've done the past, pockets of strength and weakness, medical, military, et cetera?

Sure. J.B., thank you, this is Victor.

Overall in the quarter, aerospace was particularly strong for us, which would be our sales into commercial aviation markets would be, I think in terms of growth outlook, was strong for us. And actually as was our medical end markets. Those were strong as well, I think, notably.

Defense was actually pretty good. At least in the period, wasn't shrinking, and we're seeing a little bit of a turnaround there, some growth there.

And commercial space also gave us some growth. And the other miscellaneous markets would have been the headwind in the quarter.

Okay. Thank you.

Larry Solow, CJS securities.

Just one quick global than a specific question. Perhaps it's a little early in the game, but I know you guys build in a certain level of aircraft retirements.

And with the precipitous drop in oil, are you seeing, or anecdotally here, in that airlines are at least hesitating somewhat on a retiring some of these aircraft? Anything in that dynamic going on?

Hi, yes, this is Eric. I'll answer the question.

Yes, we're starting to see that some of the airlines are pushing out their retirement of certain of these aircraft. You're right; with fuel at a low price, it makes a lot more sense to operate these aircraft.

So that will help us. I think the airlines want to see a little bit of a sustained level before they make a major commitment to the older equipment. But as the new stories come out, and it appears that fuel will be staying at a lower level for an extended period of time, we do believe that will help our aftermarket replacement parts and overhaul and repair businesses.

The other thing is, as you know, the older equipment tends to have a little bit less reliability because of its age. So therefore, airlines, probably ultimately, will start investing a little bit in maintaining some additional spares so they can make sure that they can complete some of these additional routes that they're putting up there. So we would anticipate some sort of a benefit in that area.

Great. And just not to harp on the industrial contract, but just quickly can you remind us on the wind down to that program. Did the customer go somewhere else?

I don't think so; I just want to confirm that. Or is it just they completed that program and didn't really -- there was no more demand for it for any particular reason?

Right, you're correct. The customer, we didn't lose the business to a competitor. Actually, what happened there, and I think I mentioned some of this, which you're alluding to in the fourth quarter call, the manufacturer of that particular product didn't know how hot it was going to run.

And as it turns out, it ended up running cooler than they had anticipated. So that eliminated the need for this, basically, this industrial product that we provide, and that has gone away. We completed our orders according to the schedule.

Unfortunately certain replacement demand did not kick in yet. And we've received commitments that we're going to be receiving those orders, but unfortunately, some of that business hasn't yet kicked in and has slipped as often new products do. It slipped a little bit to the right.

But most of that shortfall will ultimately be made up by aerospace products. And so, actually, the timing is quite good because as the demand for one has the decreased, the demand for our aerospace products will fill in. But unfortunately there's a little bit of a gap there.

But you're correct; we did not lose that business to a competitor. That product actually went away.

Got you. And then just last question, just maybe for Victor.

The operating cash flow, the statement, it highlights, I think there was a $1.5 million FX expense that you also credited back on cash flow. Did that -- I assume that did flow through the P&L. Is that above the line?

Carlos will take that question.

Could you repeat the question again? I'm sorry.

Yes, just on the, there was, I think, a $1.4 million FX currency impact I saw on your operating cash flow that you credited back to operating cash flow. I'm just trying to figure out where that came through on the P&L --

Sure. So, that related to partial funding as the Aerowork acquisition as we borrowed in euros here in the US. So the timing of borrowing at one FX rate versus the end of our quarter rate was the result of that benefit that you're speaking of. And that is a reduction of our SG&A expenses and our statement of operations.

Got it. Great. Thanks.

And that number that you see also in the cash flow is a pretax number by the way.

Got you. Appreciate it.

By the way, if we ever, just so you know, if we ever decided to borrow the dollars and repay the euro funding, that would become a real cash benefit.

Right. Got you. Okay, great, thanks.

Tyler Hojo, Sidoti & Company.

Yes, hi, good morning, everyone. Just going back to the guidance for a second. In terms of the top line guidance, 8% to 10% growth, certainly understand that the acquisitions were included in that number when you guided in Q4. But can you just remind us what the organic growth rate is that's embedded in that guidance?

So, Tyler, this is Carlos. As we stated, we haven't changed that organic growth rate. We think, on a weighted average in the FSG, organic growth will approximate roughly 8%. And we've anticipated roughly low-single digits to maybe approaching mid-single digits for ETG organic growth.

Okay. Got it.

And just as we sit here today, I know Larry talked about having a really robust acquisition pipeline. Is there anything else that's on the horizon that perhaps is included in this number?

No, there's nothing included in this number other then a lot of sweat and hard work. We are working very hard. Our diligence teams are deployed. Larry has us working overtime, and we see a very robust pipeline and a lot of opportunities for the company on a go-forward basis.

But to caution you with that statement, you can never guarantee anything is going to close. But I will tell you that we see the market for acquisitions opening up. And we see businesses out there that fit our profile and that look very attractive to us at this point.

Okay, just a question on that topic since you brought it up. You know, the last two deals you did were in FSG. Are you seeing more in FSG, or historically, I think you've done a little bit more in ETG --

I think that it's kind of spread across the board. We see them in both groups. As you know, we're opportunistic buyers, and it's not something that we say we're going to just look at FSG or ETG. We make acquisitions as they come available.

But I would say, at this point they're kind of evenly spread out. The opportunities are kind of evenly spread out.

Yes, okay. Good.

The most important factor is that we had gone for a little bit of a dry spell with drop of interest rates, and we discussed this on prior calls. And now, we're seeing that sellers are coming back into the market at realistic prices and not the 12 and 14 multiples that some people were dreaming about.

And some deals didn't even get done, so I guess people got realistic. And they're putting companies for sale at a fair, what I would call, fair prices that can create a win-win for buyer and seller.

Okay. Great. Thanks.

And maybe just one for Eric. Sorry to do this, but going back to specialty product for industrial.

When are you going to anniversary that? Is it going to be Q3, Q4? I know it was back half that it started rolling off there.

Tyler, that's a very good question. That drag won't be totally off until the fourth quarter, actually, the end of the fourth quarter. We started having an impact, a little bit of an impact, in the fourth quarter of 2014.

But we're going to have, with regard to the industrial products, we'll have negative comp for the first three quarters at sort of the similar rate as we had in the first quarter. And in the fourth quarter the impact will be lesser -- will be down. And actually, by the first quarter of next year, our industrial products sales should be up as the newer equipment kicks in.

Okay. Great.

And just lastly, on industrial specialty products, was there something particularly good about those margins? Or was just the drop in segment margins more to do with decrementals on the volume?

Yes, it was really due to the decrementals on the volume. I would say probably consistent with our other margins of similar products, but we did have the excess capacity. We had excess labor costs. We had excess facility costs, all sorts of costs that we couldn't eliminate quickly enough.

And that's what really impacted our operating income as well as the operating income margin. It was all due to the specialty prices, to this drop in industrial products. And otherwise, the operating income would've been up, and the operating margins would've approximated what they were in the past.

Okay, great. Well, that's all I had. So thanks a lot.

Thank you.

Michael Ciarmoli, KeyBanc Capital.

Hey, good morning, guys. Thanks for taking my questions.

Good morning, Michael.

I don't know who this one's for, but if we look at the guidance, the 8% to 10% growth, how should we be thinking about the remainder of the year? I guess specifically, what drives the growth acceleration in the remaining three quarters?

You're still going to have the industrial headwind. The acquisitions are, obviously, baked in to that growth rate. So what really creates the step up?

You're going to have to see high single digits and then low double-digit growth to meet the revenue guidance. So I'm just wondering if there's -- if it's airline behavior, if you've got line of sight into the order flow, but if you can just give some color?

Michael, I think the growth rates that we've projected are achievable. Most of the, from my perspective, we're probably going to see a little bit easier comps in the second half of FY15, which will, itself, accelerate some of the perception of that growth.

It's going to be principally driven by our existing businesses. We don't factor in acquisitions into these growth targets. And we do see a lot of tailwind in the commercial aviation business right now. As Eric mentioned in his prepared comments, we did see 5% organic growth in the first quarter.

And that was up against almost a 19.5% comp from Q1 last year. So we are seeing nice volume growth. Our customers are behaving as we expected, and we do believe that the 8% to 10% growth, ex any acquisitions, is achievable and still within our reach.

Okay. That's fair, and that's a good segue. You mentioned the 5% organic growth in aero in Flight Support against that tough comp. You've got a tough comp next quarter.

I think this is one of the first times you've parsed out just the aero growth. Can you give us a sense how that 5% trended either sequentially from last quarter, or just how we should be thinking about that aero component growth in relation to the industrial? Is that, that 15.4% comp that you have in the second quarter of 2014, is that all aero defense growth? I'm assuming that was beefed up a bit by the industrial.

I think as Eric mentioned earlier, the industrial for at least Q1, just using rough numbers, was roughly cut in half from Q1 of 2014. That was previously explained. So we're compounding on top of a tough base in the commercial aerospace in the FSG side.

I don't want to discount the fact, also, Michael, that the ETG had some nice growth for the quarter. And they had nice growth both in commercial aero, as Victor previously mentioned, as well as in the medical and space side of the business.

So I think, to sum it up, absent the expected decline in the sales associated with some of our industrial products, which masks what I think was what we considered to be a pretty good quarter in many respects. As I think Larry mentioned earlier, it was a little ahead of our internal estimates for Q1 of 2015.

So we don't see this as being a pattern, if you would, or some sort of major concern. In fact, it was as expected.

Okay. Okay, that's fair. And then maybe just shift into ETG.

Victor, could we get an update on the status of Lucix? I know they had, they were dealing with quality startup issues on some satellite programs.

It looks like the satellite market in general order flow is starting to tick up. So maybe just some color there? And I think the other one, just on the ETG margins.

This had been a mid-20% margin business when we go back a couple years. How should we be thinking about the margins going forward? Is this still a mid-20% business?

Yes. Sort of taking it in reverse order. This is Victor here, Tyler.

Taking it in reverse order, I would say yes to your question on margins, somewhere in the mid-20%s and maybe upper. But it really is very sensitive to product mix. It's also sensitive to the acquisitions we make.

Keep in mind, of course, that we've got about, give or take, 400 basis points of amortization intangible. So when we evaluate the business on what it really it is generating just in terms of true operations, it's about 400 basis points higher typically. And that's -- if you evaluate the business on those terms, they're, basically, a series of very healthy businesses.

In terms of Lucix, that is doing better. I think you may recall I said on the last conference call that we thought it would continue to improve over the year, not, unfortunately, in a linear fashion, but over all. And I think that's happening, and that we would expect as we get to later this year whether it's fiscal year or calendar year, that's a little too granular for me. But I think as we get there, we'll find ourselves in continuously better shape there.

The major technical issues that they had have really dissolved into what I would call the run-of-the-mill garden-variety ones that I think every business sees over the course of its life. So the major ones, I think, have been resolved it appears.

And I think you're right. There's more activity in the satellite market. Let's see how that translates into orders for us there.

At the moment, Lucix is, in talking about margins, a little bit of a drag on our margins still, frankly, below our average. And hopefully, as things continue to improve there, that will change and, hopefully, at least get to our average.

Great. That's perfect. That's all I had, guys. Thank you very much.

Thank you.

Sheila Kahyaoglu, Jefferies.

Thank you, and good morning. Thanks for taking my question. I guess this one's for Victor, and just to elaborate a bit on the last question.

Even if we add back the $4 million of the benefit from Q1 of last year, the volume incrementals were pretty low this quarter. I know you said margins should stay in the mid-20%s. How do we think about volume incrementals? Are they 20% this cycle versus 40% last cycle? If you could give us a little bit more color there?

Sheila, this is Victor. I don't know what you mean by volume incrementals.

I guess just on the 2% organic growth. The incremental was about 5%, the drop through on that organic growth. It was fairly low is my point.

Even if we add back that $4 million from Q1 of 2014. So I was just wondering if it was a mix impact, whether a certain product line or an end market has lower margins?

Yes. I think that, I mean if you look at where we are for the full year, we're sort of targeting in that low-20%s range in the margin. And that's where it'll come through.

Right, okay. So it's not necessarily that Lucix might be well below average and that's what's dragging it down? Or it's the aerospace businesses has lower margins versus defense and space?

The businesses have different margins. And so at any point in time, you find one that may have sort of a higher margin being stronger. It's typical kind of mix thing. And then at another point in time, you find ones that have the lower margins and are stronger, and then you'll have an underperformer, let's say, like Lucix had been.

And it all kind of works into the mix. We don't really look at it on a quarterly basis so much in the ETG.

Going back many years, a lot of people have heard me say this, we're really very focused on the course of the year. And so things can swing around pretty widely over the course of any year.

Okay. That's helpful. And then, Eric, I guess this one's for you again on margins.

Should we expect them to snap back, since it seems like you're cutting back cost given the specialty products line product cut off? Should your margins snap back in the second quarter, or its more second half of 2015?

Yes. We anticipate the margins increasing probably in the second quarter, but definitely more in the second half of 2015. This drop in margins was entirely attributable to the aforementioned industrial -- the completion of those orders. So we do anticipate the margins to snap back in the second half, definitely, in the second half of the year.

Okay. Thanks.

Thank you.

Jonathan Morales, Canaccord.

Good morning, guys. I believe my questions on margins have already been addressed, but I do have one quick question on FSG. Regarding distribution of different types of parts, so surplus, new, PMA, do you see any trends changing maybe now that oil prices are a lot lower?

With regard to the PMA and the new-parts distribution, that business is quite strong. We have had some challenges, and I think the industry in general is having challenges, in the spare parts redistribution, so the used parts business. Because since fewer aircraft are being parted out, that market has become a lot tougher.

So we are seeing headwinds, I think, consistent with the industry in that market. Again, it's a relatively small percentage of our FSG revenues, but definitely that's the one that would have the most headwinds as of now.

Great. Thanks, that's all I needed.

Thank you.

Chris Quilty, Raymond James.

Thank you. Two follow-ups on the acquisition front. First, can you give us, perhaps, a little bit of a background in some of the specific benefits you expect to get out of the Aeroworks acquisition?

And then just a follow-up on the acquisition pipeline. Anything within the pipeline that you would judge as either larger acquisitions, or, perhaps, a horizontal move, something out of the ordinary? Or is it mostly the same stuff?

Chris, this is Eric. I'll be happy to take those questions.

With regard to Aeroworks. Aeroworks has significant operations in Thailand and Laos. They are really the low-cost manufacturer in the particular products in which they operate.

And we're excited because it gives us the opportunity, if some of our customers want low-cost manufacturing, it gives us ready-made low-cost manufacturing. Actually, our partner in that business was with a much larger firm and had tremendous experience in the international and low-cost manufacturing marketplace. And he had spent decades in that area, frankly, learning on somebody else's dime.

And over the last 15 years, he built Aeroworks from scratch. And really had learned a lot of lessons, and we've got a very efficient well-run operation in that area. So if we had tried to greenfield it, there's no way that we would end up with these kinds of results.

He had been there for 15 years and really just did an incredible job and is a great operator and strategist. So we're excited about what that means, specifically for the Aeroworks customers, but also for the rest of the HEICO network because we now have hundreds of people in that area and opportunity to, if so desired, to manufacture products over there.

And it also expands our metal parts business, as well as some additional composite technology. And gives us an operation -- actually two operations, in a Netherlands, so we have aerospace manufacturing now in Europe, as well, for those customers who want that option.

With regard to the acquisitions that are out there, we're looking at all types of businesses. As we mentioned before on the call, we've never been as busy as we are today in terms of acquisitions. I think the word has sort of gotten around that HEICO is definitely a preferred acquirer.

And we're very excited about a number of these opportunities. You don't know how many are going to get completed, but we have never had more acquisitions this far along in the process in our history. So we're very excited. It gets us into many areas, and it's really consistent with our previous strategy and the types of (multiple speakers) we've bought in the past.

Great. And on that note, Carlos, can you just give us a review on the balance sheet side about borrowing capacity, where you're comfortable with leverage, where you're looking to borrow on the grid?

I think --, Chris, this is Carlos -- I think on borrowing capacity it is entirely dependent on the cash generation of the target. So from a leverage perspective right now, we have plenty of capacity, as Larry mentioned in his earlier comments.

We're at a tick under 1.4 levered on trailing 12-month EBITDA. Would we go higher to 3 or 4 times leverage? From my perspective, we would do that, but it would have to be in a situation where we saw the payback of that investment coming down very quickly.

I don't think it's in our DNA as an organization to get too overextended from a leverage perspective. But if we feel confident that the cash generation of the target that we're acquiring will pay itself back relatively quickly or bring us to a more, what I'll call normalized leverage ratio, than we would do it.

Got you. Thank you very much.

Thank you.

(Operator Instructions)

Steve Levenson, Stifel.

Thanks, good morning, everybody.

Good morning.

Just a question in relation to fuel prices again. They're certainly one factor in deciding whether to retire an airplane or continue flying it. I'm just wondering, based on your experience, how much more maintenance expenses are there for a 20-year-old plane versus a 10-year-old plane?

Something along that. Is it necessarily equal? Is it more frequent? Is it a greater number of parts, or just looking to see what your experience has been?

Steve, that's a very good question. With regards specifically to the parts, the newer the aircraft, actually, the more expensive the parts in general. However, as you know they require fewer of them.

So I think that as the older aircraft, roughly, let's just say the 20-year-old, 25-year-old aircraft that had been planned to come out of service. As those remain in service, in order to maintain the reliability of the aircraft and be able to have say 99% or 99.5% completion, they need to be able to hold more components out in the field. So, occasionally, when something goes bad, they can fix it.

So I don't know the specific, if you will, the hourly costs. But I do know they're going to have to requisition and allocate more components out into the field in order to support some of the older equipment. So I think you'll see somewhat of a one-time increase in that area.

Combined with the fact that the part outs have slowed down. So you're not seeing as much -- that business is becoming a little bit tougher.

So they're not just going to be able to take old units, all of the line replaceable units, off of aircraft as easily. They're actually going to have to overhaul some of the stuff that probably would not have been overhauled.

Got it. Thank you. I'm sorry, go ahead.

I hope that answers your question.

That's great additional color. Thanks.

You're welcome. Thank you.

Rene Plussner, private investor.

I am a private investor. And I've done very well, thank you.

I've always looked at HEICO on an annual and longer basis, so I totally understand why you don't give quarterly guidance. Should I be thinking the same now?

And let me just add my own color, which is you've done phenomenally for 20 years, is there any reason you shouldn't continue to? And we thank you for everything you've done.

Rene, well, thank you very much for your compliments. They're much appreciated. We think that it's really business as usual.

We focus on the longer term, as you have indicated. We don't give quarterly guidance, as I'm sure everybody on this call understands, because we can't predict what's going to happen from quarter-to-quarter. We feel confident that we can continue growing at least for the next three to five years.

We can't grow at 20% forever. We understand that, but I think in the foreseeable future, we have a good opportunity to continue. If our revenue is a little over $1 billion, $1.2 billion, $1.3 billion, whatever it is, we still have room to grow. And we do focus on the long-term.

As you know, being a long-term investor in HEICO who has, as you say, done very well, we have to look at the long-term and plow back money in R&D and look to the future. And we just can't go quarter-to-quarter, and we don't. So I think the outlook is still quite good.

And that's all I can say. But I have great confidence that we'll continue doing -- we're not changing our strategy; we're not doing anything different. And we're focusing on high margin, as we always do, strong cash flows. And we'll just try to continue running the business the same as we have.

And I have total confidence you will continue to do so. And thank you.

Thank you very much, Rene.

(Operator Instructions)

Jim Foung, Gabelli & Co.

Hi, I just have one question about your pipeline of acquisitions. Your revenue guidance for this year, 8% to 10%, does not include any future acquisitions? That's correct, right?

That's correct.

So maybe you could just talk a little bit about your pipeline. Can you just bracket for us, if some of these acquisitions closes this year, what do you think is the revenue range from potential deals that could close? And you say it will be accretive to the earnings, so there'll be potential upside to the 18% margin that you're forecasting for this year?

Well, let me say this. Number one, I have, truthfully, no idea which one of these transactions will close. I'm highly confident that we will close some of them. I'm also confident we won't close all of them because that's just the way this thing works.

So I couldn't predict which ones will close and give you a revenue number. Similarly, I don't know what the margin improvement might be as a result of these transactions. They would all be good margin.

I don't recall that we have any transactions that should reduce the margin, but it's possible. And I'm not saying it's happening. It's possible that we make an acquisition and in the first couple quarters, we would see margin erosion until, in that activity.

And that would just, by arithmetic, bring down the overall margin of whichever group it was in. So I would think the margins would then recover as we put our management style into it and get it back. Because were not buying companies to reduce our overall, say, 18% margin.

But to answer your question at this moment Jim, is really impossible because we don't know which of these companies transactions will go through. I can't answer it.

Okay. But over a 12-month period, there's upside to the earnings because the acquisitions would be accretive and you get the revenue bump as well.

That I feel pretty confident that that is an accurate statement. We're conservative, so we don't build it in, but I definitely think what you said is correct.

So on a run-rate basis, there's upside to your earnings then? Okay.

I think so. I hope so. But we don't want to step out and say that at this moment.

But I would hope so, and that's clearly where our strategy is. That's clearly -- we've succeeded in doing it in the past, and we're trying to do it again.

Okay. Great. Thank you. That's all I have.

Thank you, Jim.

(Operator Instructions)

Michael Ciarmoli, KeyBanc.

Thanks, again, guys. Thanks for taking the follow-up. Eric, just a real quick, one point of clarity. I missed your earlier comments.

Did you say you were starting to see some of the airlines push out their retirements? Or did you say you think that is what's going to happen? I just didn't hear you clearly.

We've seen a little bit of it. We've seen a little bit of pushing out of some retirements. I want to be careful and not come across that this is a major trend right now.

We've seen a limited about of that. There's certainly more discussion about that. But as I said, I think the airlines want to see a little bit longer sustained period of lower fuel prices before they make a major commitment to do this.

We are not requisitioning for additional products in case this happens. I mean we'll be ready to support it, but we have not built it into our forecasts.

Perfect. That's helpful. Thanks, guys. Great.

Thank you, Michael.

Thank you, ladies and gentlemen. That does con -- I will now turn the conference back over to Mr. Mendelson for closing remarks.

Thank you. I want to thank you, all the people on this call, for your interest in HEICO. We look forward to speaking to you on the second quarter conference call.

But in the meantime, if you have any questions or comments, we are all available here, Eric, Victor, Carlos, Tom, myself, to answer questions which you may have after this call has ended. So again, thank you, and we look forward to speaking to you on the second quarter call.

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