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Edited Transcript of HEI earnings conference call or presentation 27-May-20 1:00pm GMT

Q2 2020 HEICO Corp Earnings Call

HOLLYWOOD May 28, 2020 (Thomson StreetEvents) -- Edited Transcript of HEICO Corp earnings conference call or presentation Wednesday, May 27, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos L. Macau

HEICO Corporation - Executive VP, CFO & Treasurer

* Eric A. Mendelson

HEICO Corporation - Co-President & Director

* Laurans A. Mendelson

HEICO Corporation - Chairman of the Board & CEO

* Victor H. Mendelson

HEICO Corporation - Co-President & Director

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Conference Call Participants

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* Barry George Haimes

Sage Asset Management, LLC - Managing Partner and Portfolio Manager

* Colin R. Ducharme

Sterling Capital Management LLC - Executive Director & Portfolio Manager

* Gautam J. Khanna

Cowen and Company, LLC, Research Division - MD & Senior Analyst

* Joshua Ward Sullivan

The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst

* Kenneth George Herbert

Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst

* Lawrence Scott Solow

CJS Securities, Inc. - MD

* Louis Harold Raffetto

UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Peter J. Arment

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the HEICO Corporation Fiscal Year 2020 Second Quarter Earnings Results Conference Call.

Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors, including the severity, magnitude and duration of the COVID-19 outbreak; HEICO's liquidity and the amount and timing of cash generation; the continued decline in commercial air travel caused by the COVID-19 outbreak; lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our cost to complete contracts, governmental and regulatory demands; export policies and restrictions; reductions in defense, space or Homeland Security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development cost and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense space; medical for the communications and electronic industries, which could negatively impact our cost and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue.

Parties listening to or reading a transcript of this call are encouraged to review all of HEICO's 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, whether as a result of new information, future events or otherwise, except to the extent required by applicable law.

I would now like to hand the conference over to your speaker today, Mr. Laurans Mendelson, HEICO Chairman and Executive Officer. Please go ahead, sir.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [2]

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Thank you, and good morning to everyone on the call, and we thank you for joining us, welcome you to the HEICO Second Quarter Fiscal '20 Earnings Announcement Teleconference. 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; and Carlos Macau, our Executive VP and CFO.

Before reviewing our second quarter operating results in detail, I'd like to take a moment to thank all of HEICO's talented team members. You have responded with distinction to the unprecedented challenge of serving our customers and your local communities during the onset of the COVID-19 global pandemic. I am humbled by your collective actions and unwavering commitment to HEICO's success. I strongly believe your contributions to HEICO's entrepreneurial values and ownership culture will continue to produce a winning formula in the marketplace despite the near-term challenges that we face as a result of the COVID-19 outbreak.

I'll now take a few moments to discuss our second quarter operating results. The results of operations for the 6 and 3 months ended April 30, 2020, have been affected by COVID-19. The effects of the outbreak and related actions by governments around the world to mitigate its spread have impacted our team members, customers, suppliers and manufacturers. In response to the economic impact from the outbreak, we, at HEICO, have implemented certain cost reductions including layoffs, temporary reduced work hours, temporary pay reductions within various departments of our businesses, including our entire executive management team and our Board of Directors.

Our response to the outbreak, including implementing varying health and safety measures at our facilities, including supplying and requiring the use of personal protective equipment, staggering work shifts, body temperature taking, increasing work-from-home capabilities, consistent and ongoing cleaning of workspaces in high-touch areas and establishing processes aligned with the Center for Disease and Control guidelines to work with any individual exposed to COVID-19 on the necessary quarantine period and the process for the individual to return to work.

With respect to our results of operations, approximately half of our net sales are derived from defense, space and other industrial markets including electronics, medical and communications. Demand for products in that half of our business has not been fundamentally impacted, and its operational results remained materially consistent with the financial expectations prior to the outbreak. However, we have experienced, and expect to continue experiencing, periodic operational disruptions resulting from supply chain disturbances, staffing challenges, including some of our customers, temporary facility closures, transportation interruptions and other conditions, which slow production or may increase cost. While these issues have not yet been material, it is possible to predict their future impact -- it is impossible to predict their future impact. And our current experience indicates that the likely effect will be to delay orders and shipments measured in weeks and months and to temporarily increase some costs and this as opposed to profoundly changing our business overall.

Fortunately, many of our defense and medical component design, manufacturing and supply operations are believed to be crucial suppliers to markets with continuing strong needs. While it has not had a material impact on consolidated net sales, demand for our components used in medical equipment, such as ventilators, x-ray systems, sterilization equipment, personal protective equipment all increased as a result of the outbreak. The remaining portion of our net sales is derived from commercial aviation products and services. The outbreak has caused significant volatility and substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, our businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020. Once commercial air travel resumes, cost savings will most likely be a priority for our commercial aviation customers. And we do anticipate recovery in demand for our commercial aviation products, which frequently provide aircraft operators with significant cost savings. Furthermore, we believe that our cost-saving solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within this market.

Consolidated net income increased 22% to a record $197.3 million or $1.44 per diluted share in the first 6 months of fiscal '20, and that was up from $161.1 million or $1.18 per diluted share in the first 6 months of fiscal '19. Consolidated operating income increased 1% to $219.2 million in the first 6 months of fiscal '20, and that was up from $217.1 million in the first 6 months of fiscal '19. Our consolidated operating margin improved to 22.5% in the first 6 months of fiscal '20, and that was up from 22.1% in the first 6 months of fiscal '19.

Cash flow provided by operating activities was strong, increasing 15% to $205.9 million in the first 6 months of fiscal '20, and that was up from $178.3 million in the first 6 months of fiscal '19. We continue to forecast positive cash flow from operations for the remainder of fiscal 2020. Our net debt, which is total debt less cash and cash equivalents of $393.4 million as of April 30, compared to shareholders' equity ratio decreased to 20.8% as of April 30, 2020. And that was down from 29.8% as of October 31, 2019.

Net debt-to-EBITDA ratio decreased to 0.72x as of April 30, '20, and that was down from 0.93x as of October 31, '19. During fiscal '20, we successfully completed 2 acquisitions, and we have completed 5 acquisitions over the past year. We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions, to accelerate growth and maximize shareholder returns.

At this time, I would 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 very much.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [3]

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The Flight Support Group's net sales decreased 18% to $252 million in the second quarter of fiscal '20 as compared to $308.3 million in the second quarter of fiscal '19. The Flight Support Group's net sales decreased 7% to $553.0 million in the first 6 months of fiscal '20, as compared to $595.5 million in the first 6 months of fiscal '19. The net sales decrease in the second quarter and first 6 months of fiscal '20 is principally organic and reflects lower demand across all of our product lines resulting from the significant decline in global commercial air travel beginning in March 2020 due to the outbreak.

The Flight Support Group's operating income decreased 24% to $47.5 million in the second quarter of fiscal '20, as compared to $62.2 million in the second quarter of fiscal '19. The Flight Support Group's operating income decreased 5% to $109.6 million in the first 6 months of fiscal '20 as compared to $115 million in the first 6 months of fiscal '19. The operating income decreased in the second quarter and first 6 months of fiscal '20, principally reflects the previously mentioned decrease in net sales and a lower gross profit margin, mainly within our aftermarket replacement parts and repair and overhaul parts in products -- service product lines, partially offset by a decrease in performance-based compensation expense.

The Flight Support Group's operating margin decreased to 18.9% in the second quarter of fiscal '20 as compared to 20.2% in the second quarter of fiscal '19. The decrease principally reflects the previously mentioned lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from the previously mentioned lower performance-based compensation expense. The Flight Support Group's operating margin increased to 19.8% in the first 6 months of fiscal '20, up from 19.3% in the first 6 months of fiscal '19. The increase principally reflects a decrease in SG&A expenses as a percentage of net sales, mainly from lower performance-based compensation expense, partially offset by the previously mentioned lower gross profit margin.

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

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [4]

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Thank you, Eric. The Electronic Technologies Group's net sales increased 2% to $219 million in the second quarter of fiscal '20, up from $214.5 million in the second quarter of fiscal '19. The increase is attributable to the favorable impact from our fiscal '19 and 20 acquisitions, partially offset by an organic net sales decrease of 2%. The organic net sales decrease is mainly attributable to lower space product shipments, partially offset by increased demand for our space products.

The Electronic Technologies Group's net sales increased 7% to a record $427.4 million in the first 6 months of fiscal '20, up from $398.9 million in the first 6 months of fiscal '19. The increase is attributable to the favorable impact from our fiscal '19 and '20 acquisitions as well as 2% organic growth, mainly due to increased demand for our defense products, partially offset by lower space product shipments.

The Electronic Technologies Group's operating income decreased 3% to $65.5 million in the second quarter of fiscal '20 as compared to $67.4 million in the second quarter of fiscal '19. This decrease principally reflects a lower gross profit margin, mainly due to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales of our defense products as well as the previously mentioned net sales growth and lower performance-based compensation expense.

The Electronic Technologies Group's operating income increased 3% to a record $123 million in the first 6 months of fiscal '20, up from $119 million in the first 6 months of fiscal '19. The increase principally reflects the previously mentioned net sales growth and lower performance-based compensation expense partially offset by a lower gross profit margin, mainly due to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales in our defense products.

The Electronic Technologies Group's operating margin was 29.9% in the second quarter of fiscal '20 as compared to 31.4% in the second quarter of fiscal '19. The Electronic Technologies Group's operating margin was 28.8% in the first 6 months of fiscal '20 as compared to 29.8% in the first 6 months of fiscal '19. The decrease in the second quarter and first 6 months of fiscal '20 is mainly due to the previously mentioned lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales mainly from lower performance-based compensation expense.

Let me turn the call back over to Larry Mendelson.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [5]

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Thank you, Victor. Moving on to diluted earnings per share. Consolidated net income per diluted share decreased 8% to $0.55 in the second quarter of fiscal '20, and that compared with $0.60 in the second quarter of fiscal '19. The decrease principally reflects the previously mentioned lower operating income of the Flight Support Group.

Consolidated net income per diluted share increased 22% to $1.44 in the first 6 months of fiscal '20, and that was up from $1.18 in the first 6 months of fiscal '19. That increase principally reflects an incremental discrete tax benefit from stock option exercises recognized in the first quarter of fiscal '20.

Depreciation and amortization expense totaled $21.7 million in the second quarter of fiscal '20, up from $20.5 million in the second quarter of fiscal '19 and totaled $43.3 million in the first 6 months of fiscal '20, up slightly from $40.5 million in the first 6 months of fiscal '19. The increase in the second quarter and first 6 months of fiscal '20 principally reflects incremental impact from our fiscal '19 and '20 acquisitions.

Research and development expense was $16.8 million in both the second quarter of fiscal '20 and '19, and increased 6% to $33.9 million in the first 6 months of fiscal '20, and that was up from $32 million in the first 6 months of fiscal '19. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies as we continue to invest between 3% and 4% of each sales dollar into new product development.

Our consolidated SG&A expenses decreased by 22% to 20 points -- to $70.7 million in the second quarter of fiscal '20, and that compared to $90.2 million second quarter of fiscal '19. Our consolidated SG&A expenses decreased by 10% to $157.8 million in the first 6 months of fiscal '20, and that compared to $174.5 million in the first 6 months of fiscal '19. The decrease in consolidated SG&A expense in the second quarter and the first 6 months of fiscal '20, principally reflects lower performance-based compensation expense and reductions in other selling expenses, including outside sales, commissions, marketing and travel, partially offset by the impact from the fiscal '19 and '20 acquisitions.

Consolidated SG&A expense as a percentage of net sales decreased to 15.1% in the second quarter of fiscal '20, and that was down from 17.5% in the second quarter of fiscal '19. That decrease in consolidated SG&A expense as a percentage of net sales in the second quarter of fiscal '20, principally reflects lower performance-based compensation expense, partially offset by some inefficiencies resulting from the overall impacts of the outbreak. Consolidated SG&A expense as a percentage of net sales decreased to 16.2% in the first 6 months of fiscal '20, and that was down from 17.8% in the first 6 months of fiscal '19. The decrease in consolidated SG&A expense as a percentage of net sales in the first 6 months of fiscal '20 principally reflects lower performance-based compensation expenses.

Interest expense decreased to $3.8 million in the second quarter of fiscal '20, and that was down from $5.5 million in the second quarter of fiscal '19. And it decreased to $8 million in the first 6 months of fiscal '20, down from $11 million in the first 6 months of fiscal '19. The decrease in second quarter and first 6 months of fiscal '20 was principally due to a lower weighted interest rate on borrowings outstanding under our revolving credit facility.

Other income in the second quarter in 6 -- first 6 months of fiscal '20 and '19 was not significant. Our effective tax rate in the second quarter of fiscal '20 was 22.6% as compared to 22.5% in the second quarter of fiscal '19. Our effective tax rate in the first 6 months of fiscal '20 was 0.3% compared to 14.5% in the first 6 months of fiscal '19.

As previously mentioned, HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal '20 and '19. And this accounted for the majority of the decrease in our year-to-date effective rate. The larger benefit from stock option exercise recognized in the first quarter of fiscal '20 was the result of more stock options exercised as well as the strong appreciation in HEICO's stock price during the optionees' holding period. The majority of options exercised, which generated this cash windfall for HEICO, were approaching their 10-year expiration dates.

Net income attributable to noncontrolling interests were $5.5 million in the second quarter of fiscal '20 compared to $8.3 million in the second quarter of fiscal '19. Net income attributable to noncontrolling interest was $13.4 million in the first 6 months of fiscal '20, and that compared to $17 million in the first 6 months of fiscal '19.

The decrease in the second quarter and first 6 months of fiscal '20 principally reflects the impact of a dividend paid by HEICO Aerospace in June 2019, which effectively resulted in the transfer of the 20% noncontrolling interest held by Lufthansa Technik in 8 of our existing subsidiaries back to HEICO's Flight Support Group.

Our financial position and forecasted cash flow remains very strong. As I previously discussed, cash flow provided by operating activities was very strong, increasing 15% to $205.9 million in the first 6 months of fiscal '20, and that was up from $178.3 million in the first 6 months of fiscal '19. We continue to forecast positive cash flow from operations for the remainder of fiscal '20.

Our working capital ratio improved to 4.4x as of April 30, as compared to 2.8 as October 31, '19. Our day sales outstanding of receivables improved to 44 days as of April 30, '20, compared to 45 days compared to April 30, 2019. Of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposure. No 1 customer accounted for more than 10% of net sales, and our top 5 customers represented approximately 24% and 21% of consolidated net sales in the second quarter of fiscal '20 and '19, respectively.

Our inventory rate increased to 139 days for the period ending April 30, 2020, and that compared to 126 days for the period ended April 30, 2019. The increase in the turnover rate reflects certain inventory purchase commitments based on pre-outbreak net sales expectations and also to support the backlog of certain of our businesses.

Now let's talk about the outlook. Our results of operation for the second quarter and first 6 months of fiscal '20 have been affected by the outbreak. In our quarterly report on Form 10-Q for the 3-month period January -- ending January 31, 2020, we provided financial guidance for fiscal 2020, but noted that it excluded any impact from the coronavirus outbreak because it was such an early stage. As noted within our Form 8-K filed on April 15, 2020, we withdrew our fiscal '20 financial guidance due to the recent developments pertaining to the impact from the outbreak.

HEICO entered the outbreak with a healthy balance sheet that included strong cash position and nominal debt. We cannot estimate the duration and magnitude of the outbreak and cannot confidently predict when demand for our commercial aerospace products will return to pre-outbreak levels. However, we believe that HEICO is favorably positioned for long-term success despite the short-term challenges created by the outbreak in the global economy. Our time-tested strategy of maintaining low debt and acquiring and operating high cash-generating businesses across a diverse base of industries beyond commercial aerospace, such as defense, space and other industrial markets, including electronics and medical, puts us in a good financial position to weather this period of economic uncertainty. Accordingly, we continue to forecast positive cash flow from operations for the remainder of fiscal 2020.

I would like to end by thanking our team members for their continued support and commitment to HEICO during these professionally and personally challenging times. Our executive team is focused on your safety and your professional success. We will exit this outbreak stronger than before. That strength will manifest from our culture of ownership, our mutual respect for each other and the unwavering pursuit of exceeding our customers' expectations, and we thank all of our team members for all of the things you do to make HEICO an exceptional company.

I would also like to point out that HEICO's executive team has gone through at least 3, 4, maybe 5 situations similar to this COVID-19 outbreak. We went through the 9/11. We went through SARS. We went through the 2008 financial collapse. And in every event, HEICO came back stronger and more profitable than before. I am completely confident and our management team is completely confident that we will, again, repeat this performance.

So again, thank you, all. And now we can open the floor for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) For the first question, we have Robert Spingarn from Crédit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [2]

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Larry, I'm going to have a couple of questions on FSG, so I guess these will go to Eric. And look, Eric, obviously, this is an incredibly dynamic situation. And we -- I think we can all appreciate the lack of visibility due to the virus. But how would you characterize the cadence of Q2, February through April? How do we think about it in components as this thing accelerated? And then how might we frame that in the context of when a bottom is? To be clear, you wouldn't have reached that in the quarter.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [3]

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Thank you, Rob. That's a very good question, and we've spent a lot of time internally thinking about that and looking at what happened. Basically, February was an outstanding month. It was a short month, but had it been the length of the other months, it probably would have been a record month for us. And we entered March very strong. I would say that March, overall, was quite decent. It did start coming off in the second half of the month, but still, we were able to hold our own in March. April was the point where we really started to get impacted. And of course, we still had some backlog that was preordered before the month began, so April started coming down. And you can see the results where they are now.

I think we are hopeful that May is probably the bottom of the crisis. It's very hard to say that with all certainty. May has not concluded yet. We're starting to get June orders. Remember, we get most of our orders in the month of shipment. So it's very hard to have visibility. But as we can see, as enthusiasm in the country starts improving, as therapeutics or vaccines look like they're coming along and people are getting more comfortable with the idea of traveling, we think that it should be up from here. That would really be our internal guess.

If you want to get into the numbers, we've stress tested our sales and earnings to make sure that we can withstand whatever may come our way. And we believe that within the Flight Support Group, based on the current expense levels, that we can sustain a drop of sales in flight support in the 50% to 60% area and still breakeven. Now that 50% to 60% drop in Flight Support sales would imply probably a 70% to 80% drop in the aftermarket. But with all of the business units, we've run those numbers. We understand what that is. And when I say breakeven at 50% to 60% down, that is after writing off all of the inefficiencies and the under-absorbed overheads that would end up getting incurred in a reduced volume environment.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [4]

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Okay. And then just -- I appreciate all that. That's very helpful. One other thing I wanted to ask you and perhaps to just compare with what we've heard from some of your peers, and this has to do with used serviceable material in the parked fleet. Some of your peers have noted that it's not really an issue until price points get above about $5,000. Would you agree with that? And what is FSG's exposure at those higher levels, if at all?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [5]

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I would agree with that. And I've been on the calls where people have suggested those numbers. We think the $5,000 mark is probably a good number. I can tell you that less than -- and we have not disclosed this in the past due to competitive reasons, but based on where we are in the cycle and the crisis, I think it's something which is reasonable to speak about now, that only less than 10% of our PMA sales have -- less than 10% of our PMA sales volume is driven by parts that cost over $5,000. So therefore, we believe that our focus on the type of products that we've done would tend to not lend themselves to as much cannibalization as a result of used serviceable material.

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Operator [6]

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Next question for you is from Peter Arment from Baird.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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Eric, I guess you're going to be popular today, so I'll continue to talk about FSG. I guess, maybe you could just talk a little bit about when you said that stress test regarding FSG, how does that -- how are you thinking about that with -- in the context of all the retirements that we're hearing about or when you think about the age of fleet? What that's going to look like? How do you think about that?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [8]

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Yes. Peter, that's a great question. What we see right now, the initial impact, of course, is if the airlines aren't flying the aircraft, they don't need the parts. And they need to burn off their inventories, and we've been through various examples of how destocking works. But basically, if an airline is using, let's just say, 100 units of a particular widget before the crisis and they wanted to maintain, let's just say, 3 months of inventory on hand, that would be 300 units. If due to consumption, the demand hypothetically falls 50%, then they would only be using 50 units. And if they wanted the whole 3 months of inventory and, of course, in some cases, they want to hold less due to the financial impact that they are suffering right now, they would only need 150 pieces. So therefore, if they had 300 on the shelf, they only need 150. They're going to have to burn through 150 pieces before they place those orders. So I think that's the initial impact that everybody in the industry is seeing.

Then you've got a further breakout in the economy between components and engines. So we believe that the sales of component overhaul, component parts, is going to be fairly linear to number of flights or available seat miles because airlines typically are not going to remove a serviceable component from a serviceable airplane and stick it on another aircraft and then end up with an unserviceable airplane that they just cannibalized. So we think that the sales of component overhaul and component parts will come back first.

We believe that the engines will be more impacted and that airlines will figure out how to not induct engines and not either swap them off aircraft that have good engines as needed or just delay the engines going into the shop. And then, of course, heavy maintenance is the last part. So roughly 2/3 of our PMA sales are in the component area. And we expect that, that is going to come back before the engines and the heavy maintenance.

Now how does -- your question was on retirements. So airlines have obviously faced with a dilemma. Do they continue to fly the existing equipment or do they go ahead and take deliveries? We could have a whole debate on this. Our belief is that in areas where airlines are going to lose significant deposits, they're going to take those deliveries. But by and large, they're going to defer the maintenance on the planes that require the most dollars to be able to fly but that it will make sense to go ahead and make that equipment serviceable before they take deliveries of new aircraft. And I'm not saying that deliveries of new aircraft is going to shut off. It's not, but we think that, that's going to be more seriously impacted. So that's sort of how we look at the market.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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That's very helpful color. And if I could just ask one, Larry, just regarding thoughts on M&A. I know you've had kind of an active pipeline before COVID-19. Maybe just give us your thoughts on deploying capital now during this environment.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [10]

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Well, we -- we're in a very -- as you know, because you read our reports, we're in a very strong capital position. We have very low debt, very low leverage. We have great availability. We are actively in the market. We are doing due diligence on a number of projects. As you can imagine, with the travel restrictions and difficulty in COVID, the due diligence process is extended because we can't get out to the locations as often and as thoroughly as we might like. But I would say that we're ready to make the acquisitions if they make sense. We don't change our basic principles. We won an acquisition that's going to be accretive, that's going to have cash flow, that's going to earn its keep, so to speak. If we write a check, we expect to bring that acquisition in-house and have it accretive in the first year.

In the aerospace group, there are companies which are suffering. So in order to pay the price that they may want doesn't really work for us. It doesn't work in our model, and we're not going to get ourselves in a cash crunch. We -- I have said for many years that HEICO is not an aerospace or electronics company. It is a vehicle that generates strong cash flow, and that's what we do. And we will make decisions based upon our cash flow profitability. But I can tell you that I wouldn't be surprised if we were to announce an -- I can't definitely tell you because you never know until the deal closes, if it will. But I can tell you, we have an appetite. We have the financial capability, and we are active as we can possibly be.

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Operator [11]

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Next question is from Larry Solow from SJ (sic) [CJS] Securities.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [12]

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Good to hear your voices, and hope all your families are doing well. Just a few follow-ups. Just on the aircraft retirement question. Obviously, a lot of talk about retirement of planes going forward. Can you sort of just speak to that drop off versus -- I know there's been a -- over the last 10 years or so, a big build-out of new aircraft, and a lot of those probably have not -- have been on warranty. So you guys haven't been benefiting from that. Will there be some offset there as you look at it, obviously, we don't know exactly how many planes get retired, but I imagine there'll be some offset as some of these newer aircraft go off warranty. Is that a fair statement?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [13]

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Yes. I think the -- Larry, this is Eric. As you said, as the aircraft come out of warranty, they really come into our sweet spot. There's all debate over what's going to be permanently retired and what's going to be temporarily retired. I think that there's a fair amount of optimism that a lot of equipment does go back into service. Of course, there's been a delay in the production of new equipment, and of course, the bill rates have been reduced. So again, we're optimistic because even if you assume an aggressive retirement schedule. You've still got all of the other equipment aging 1 year per year. The fleet is approximately 25,000 aircraft. So even if a chunk of aircraft come out, then -- so be, if they will, we don't think we're going to be hit as a result of cannibalization that badly. And yes, there will be a short-term impact. But we think that as the lion share of the aircraft that remain in service age, that, that will provide plenty of opportunity for us in terms of our sales, whether it's parts or repairs.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [14]

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Okay. And just in terms of, obviously, again, hard to read in the future, but in prior downturns, although this could be a little bit a little bit more extraordinary. But in prior downturns, obviously, the motivation of the incentive and demand for PMA parts has spiked and could very well happen again this time around. Just in terms of the outlook for you guys have sort of maintained a level of new parts per year. Without getting into specifics, is there any thought of maybe as we look out in the future, maybe increasing the amount of PMA parts you introduce on an annual basis if demand does increase?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [15]

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Yes. It's something that we are capable of doing. We've done a very thorough review of our new product development pipeline, wanting to make sure that everything that we've -- that we're spending money on and that we're going to develop and source that, in fact, there's going to be a need for us. So we've gone ahead and done that. At this moment, we haven't increased the amount of new product development, but we're basically holding it roughly steady and consistent with prior years because we want to make sure that we're able to support the airlines coming out of this crisis. And we think we're going to be in a very good position to be able to support the airlines. And I know that this is sort of my perspective and as a result of my involvement with HEICO. But I really do believe that it's important that people not conflate the growth in PMA with the growth of HEICO in that, I think, airlines look at HEICO. HEICO is a $10 billion market cap company. We're a respected and serious industry participant. All of the major companies are aware of us. And as I've said many times, the PMA industry is not an easy business to be in. It's very difficult, and we have to fight for every single piece of business that we have. So I'd be very careful about making a statement -- and I don't mean you, but I mean people, making a statement that PMA is going to do very well coming out of this crisis. I have a lot of confidence that HEICO is going to be able to do very well coming out of this crisis because of the products that we offer and our financial stability. Looking at other companies, I'm not so sure. I think that they're going to have a lot of they're going to have a lot of pressure. If you look at other companies, sort of how they've done over a longer period of time, the PMA space has not been very good for them. So I think our model of continuing to develop new parts and making sure that we take care of the customers and we're very fair on pricing, I think, really wins us a lot of friends. And for that reason, I'm very optimistic on our future.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [16]

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Right. So it sounds like an opportunity for you to hopefully take some potential take some market share.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [17]

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Yes. I do feel that our market share is going to continue to go up. Our market share in PMA was already high, but it's even gone higher. So -- and I anticipate that's going to continue.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [18]

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Great. I'm going to -- just switching gears on a question for Victor, keep him on his toes.

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [19]

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Thanks, Larry. I was starting to feel like chopped liver here.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [20]

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Never, never. Just quickly for you. Obviously, some of your businesses are somewhat more insulated -- well, certainly against the consumer, the defense and the medical side. And I think you mentioned space, you expect a rebound in the back half. How about just on the -- sort of on the general industrial piece of your business, which I think is, I don't know, 20% -- 15%, 20% of the segment. Is that piece maybe more susceptible to a downturn?

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [21]

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Larry, I would say, that is more susceptible. It's held up pretty well. It's been choppier, though, overall. And it's harder to predict. I think it will be softer than the rest of the business, certainly than space and defense. And we'll just have to see how it plays out.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [22]

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Fair enough. Okay. Just lastly, follow up on the -- just on the accounts receivable. You -- is there any way to sort of decipher the aging of your receivables? Has that gotten materially different over the last quarter? And then just last question, just you took a little bit of a drawdown on your revolver. What's the sort of thoughts on that?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [23]

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Thanks for the question, Larry. So the receivables are actually very high quality right now. We did a good job on collections during the quarter. And as you can see from the press release, receivables are down as a source of cash for us. So that was very good. The aging has not deteriorated. I mean, candidly, I am worried about airline bankruptcies and that impact on our receivables. We don't tend to have high concentrations within any one airline or any, what I'll call, significant exposures. But for the health of the industry, I do worry about that and we'll see how that plays out over the next 3 to 6 months.

As far as the draw, you're correct, we had -- we took a draw in March, and I did that preemptively to make sure that if the banks, for whatever reason, seized up as we saw back in the financial crisis that HEICO wasn't at the mercy of the banks in the case where we needed to draw on the line for an acquisition or for whatever capital needs we had. And so I took the draw in a proactive state. You could see we didn't use it. We have about close to $350 million sitting on the balance sheet right now. And my carrying cost for that is so low that I'm going to let it sit there for a while. And if we use it for acquisitions, great. If not, we'll just repay the line with it.

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Operator [24]

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Next question is from Gautam Khanna from Cowen.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [25]

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I had a couple of follow-up questions. I guess, the first -- I don't know, Eric, if you could characterize this, but in terms of kind of what you're seeing in current orders and demand on the PMA side, should we just assume it's sort of down in line with available seat miles? Or is there any discernible difference at this point? I'm just curious, we all assume that you're going to pick up share relative to just general aftermarket part suppliers. But I wonder, like in this -- in the current environment, is it just kind of Armageddon, everything is down at or around the same rate as ASMs or worse? Or anything you can say about kind of May trends?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [26]

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Yes, that's a great question. In the past, in order to sort of keep things simple, we used to say that the greatest proxy for the aftermarket was really available seat miles. Ultimately, passenger seat miles would impact available seat miles, but available seat miles were really the driver. And as we got into this crisis, we realized, yes, I mean, obviously, that's important. But just the number of flights is also very important. Most of our sales have always been on the narrow-body product. So wide-body is what's, obviously, most impacted right now or even more impacted than narrow-body. And most of our sales are over on the narrow-body.

So I would say, number of flights is probably the highest correlated to the aftermarket right now, and the thing that we're really looking at. But remember, the other issue that you've got, as I mentioned earlier, was the destocking phenomenon. And that is extremely sharp and extremely painful in the beginning because everybody's got to burn off their inventory. And until that happens, it's very hard to see a rebound. But I would say, that's probably the big driver for us, the number of flights.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [27]

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And to follow-up on that, is there any way you can give us some rule of thumb on the mix of PMA that you guys have? How -- what percentage is narrow-body versus wide-body so that we are tracking the right data points, 75-25?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [28]

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I don't have that with me, but I'm guessing that the 75-25 is probably a good guess on what it is. It sometimes can get a little complicated because some of the components can go on a narrow-body aircraft as well as a wide-body aircraft. So you have to make all sorts of assumptions. But I would say, yes, the 75% narrow-body is probably a good rough approximation of it.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [29]

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Okay. That's really helpful. Victor, I was also wondering, in your business, what are sort of bookings trends looking like? Obviously, we have very difficult comparisons this year because of the great growth last year. But I just want to see like how much do we have left in terms of organic growth? What's your visibility at this point? If you could speak to that.

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [30]

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Bookings in the ETG are -- they tend to get batched in the business, particularly on the defense side and the space side. So they tend to come in, in large amounts. And so recently, within the last couple of months, we've had some very large orders that have come in. So order flow on defense and space has been pretty strong for us. And that's why we made the comment in the release that we had softer shipments in space. We didn't say softer demand. We referred to softer shipment because demand in space for us remains strong.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [31]

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Okay. And those convert in the second half. Would you expect or...

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [32]

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Yes. That would be -- that will start to materialize in the second half of the year as well as in 2021 -- fiscal 2021, for us.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [33]

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Okay. And Larry, one last one for you, if you don't mind, you talked a little bit about the acquisition pipeline and certainly, the interest in doing acquisitions. How would you...

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [34]

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The acquisition pipe, we are looking. We're doing due diligence on a number of companies. Again, earlier, I commented on acquisitions and it's more difficult because of logistics issues getting out, doing the due diligence. We do a very thorough due diligence. We go out to factories, we look at how they're manufacturing, what their manufacturing processes are. In addition, to financial, we study the markets. And so we do a very thorough due diligence process. It's more difficult because we can't get out to the sites as easily because of the COVID.

But again, we have a great appetite. Our appetite for acquisition has not changed at all. And as a matter of fact, we're cautiously optimistic that we will see some opportunities. Maybe people will be willing to sell at prices that match our strategy because we don't pay 14 or 12x EBITDA. And we're hoping that some of the competition that we used to get from private equity might be less because of the -- their -- private equities' less ability to raise funds in this environment. We have plenty of availability, capital. We're not capital constrained. We have very low debt level. So we are aggressively looking for acquisitions.

Now saying that, many companies have seen, particularly in the aerospace side, have seen their revenues drop. And we normally do not pay prices based upon future promises. We want companies that will carry their weight, generate cash flow, generate the margins that we demand at HEICO. So our discipline has not changed, and we will never want to grow just to be bigger. We only will grow to be more cash flow positive. So I think the opportunities are out there. I think, over the next 6 months or a year, I would think we will see more opportunities. And we're open for business. We'd like to make as many good transactions as we can.

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Gautam J. Khanna, Cowen and Company, LLC, Research Division - MD & Senior Analyst [35]

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Would you say that there's larger acquisition opportunities that have showed up in the pipeline -- kind of shown up as of late or are there...

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [36]

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No, I think it's all -- it's pretty much the same. The mix is pretty much the same. We look at large ones. We look at smaller ones. We -- again, the key for us is not big. The key -- investment bankers come to us and they bring us deals where there's 7% or 11% operating margins, they're big. But we're not interested in big. We want cash flow. So we want 20%, 30% operating margins that really earn their keep with great entrepreneurial management. Just to be big, HEICO is not a company that wants to grow to just be big. We will always grow to be cash flow big. That's where we want to be big. And so the size of the company is not nearly as important as the profitability and the cash flow.

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Operator [37]

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Next question here, we have Ken Herbert from Canaccord.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [38]

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Really nice quarter.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [39]

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Thank you, Ken.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [40]

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Eric, I just wanted to start with you. I wanted to follow-up on a comment you made earlier regarding your expectations maybe for the recovery as you look at the aspects of the aftermarket component versus engine versus heavy maybe. And as you think about, for your business, maybe a delay or a lag in the engine recovery relative to component, is that maybe a matter of months, maybe a matter of quarters? Any sort of quantification or how you're sort of expecting the recovery to play out on engine versus component and timing would be very interesting.

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [41]

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Yes. Ken, that's a very good question. I know you've been writing about this topic and very much focused on it, which I think is very good. My personal belief is that airlines are not going to induct engines until they absolutely have to. So I think that, that is, again, the last thing to come back. I think there'll be heavy maintenance. I don't think there are going to be many to induct heavy maintenance until they absolutely have to. And with engines, I think they're going to wait. So how much longer that is from components. I think it's really on very much a case-by-case basis. But I'm guessing that it could be 6 months delayed from when the components come in. But it's really -- it's something that we're going to have to look at depending on the particular engine type and the airline that is operating it. But I definitely expect them to really want to conserve cash. And of course, engines that need a lot of life-limited parts, those, it goes without saying, are really going to be at the end of the line. And I think those are the -- as a part of the aftermarket, that's really going to experience the most short-term and perhaps intermediate term pain. And those will end up getting overhauled, but I think that's just further down the line.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [42]

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Yes. That's very helpful. Do you get a sense that as you look out over the next 6 to 12 months or so, as things do come back that relative to prior downturns, there will be more sort of green time availability on the engine fleet today, which certainly could further sort of depress the timing of the engine recovery?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [43]

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I think, yes. I think definitely, the airlines are going to manage the green time very effectively. There are also lessors out there who are being very creative and very innovative on buying up engines with green time, buying up aircraft, taking off the engines to the point where the engines don't have to be overhauled as much. And there are less orders out there who recognize that what airlines care about is thrust. They want safe thrust. And I think a number of OEMs have gotten away with conflating their sales of spare parts with the quality or the aftermarket demand for the remarketability of those engines. And we've seen lessors go out there and recognize that airlines are just as happy to operate engines, which have alternative material in them. And the airlines are able to achieve savings, the lessors are able to make money. So I do think that engines that have more OEM material and require more of the life-limited parts are going to be delayed. And definitely, the green time engines are going to be used first.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [44]

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Great. And if I could, Eric, just 1 more, I appreciate all the extra detail you're giving today. As you think about the cash preservation or conservation approach from the airlines, which I completely agree with. Do you think that presents any incremental opportunities for you with emerging market airlines or airlines that historically have not been where you maybe had a less representation relative to more established airlines? Does this current environment maybe provide the opportunity for you to accelerate the work with some customers that you've historically not done as much work with?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [45]

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Yes. Absolutely, Ken. We believe that there is a lot of opportunity for us in those markets. Those discussions were actually occurring before the COVID crisis. They had really picked up in the months before COVID. And now with the airlines being really behind the 8 ball, we anticipate I think, really for HEICO, and that goes to my earlier comment in that HEICO is recognized as a serious industry player with a $10-plus billion market cap, and we're able to stand behind these products. So I think that we are going to disproportionately benefit on the rebound. And I think these airlines are going to see the opportunity that a HEICO solution can give them. So yes, I do anticipate us being able to sort of mitigate the downturn and pick up market share as a result of picking up some of these customers where we didn't do as much with them in the past.

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Operator [46]

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Next question, sir, we have Josh Sullivan from the Benchmark Company.

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Joshua Ward Sullivan, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [47]

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You guys have had more of an entrepreneurial acquisition model with your portfolio companies. Can you talk about the relationship in this environment? How much are you directing to those portfolio companies to implement disciplined cost reductions versus what they're doing organically?

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [48]

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We -- Josh, it's Victor. We really don't direct our companies to take actions. We expect them to do what's right for the business. That doesn't mean we don't have discussions with them about it. But ultimately, we expect them to be the same company as they were pre-acquisition. And you've heard us say that the key is buying right, that if you buy the right business and you buy the right kind of company that does the right things, then you don't have to direct them post acquisition. So our companies took it upon themselves to take the actions that they've taken individually, and they've done what's right at the local level. And they're the right ones to make those judgments because they need to make sure they save where they can save. But at the same time, we know that we'll come out of this, and we need to grow, and HEICO is a growth company, and we'll continue growing. So we have to take the right actions across the board.

The other part is one of motivation, that we don't want to demotivate our managers by ruling from on high, so to speak, and ruling from on top. So it's a combination of those things. And what we have noticed, and again, over a period of decades dealing with downturns and crises is that it works. It actually is very effective that we get to the levels we need to get to and we get the reductions that we need to get. But we do it in a much more humane way and a much less disruptive way than the companies that come out and say, "That's it. We're getting rid of 20% of our people," and then people are quaking in their boots as to who's next. And we find better, I think, better and creative ways to keep our folks motivated and happy.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [49]

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Josh, this is Larry. Just to add to what Victor said, I agree completely. To simplify it, you think of the carrot and a stick. So in a decentralized company as HEICO is, we would much prefer the carrot than stick. And all of the business unit managers and presidents of the companies are incentivized, to a very high degree, to produce good results. They are also basically entrepreneurial when we acquired the company, as Victor told you. So by incentivizing them to do the right thing, we don't have to hit them with a stick.

These guys are really, really smart operators. They are terrific. So that's the benefit that we get running a highly decentralized company. Now they report to us. We know what they're doing. We get financial reports weekly, but these people are known entities, and they know exactly what to do. These -- we have a group, I would say, what doesn't show up in the financial statement is the brilliance of the managers that we have running these companies. So I think that's at the heart of it.

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Joshua Ward Sullivan, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [50]

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And then just kind of relatedly, as far as the free cash flow outlook, if May isn't the trough for commercial aerospace, how sensitive is that guidance? Or any thoughts around that?

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Operator [51]

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Apologies, everyone. We will assume the conference in a moment.

Ladies and gentlemen, apologies again for the interruption. The conference will resume shortly.

Again, Ladies and gentlemen, we will resume shortly.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [52]

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5381666.

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Operator [53]

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Ladies and gentlemen, the speakers are now back.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [54]

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Okay. So Josh, are you still there?

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Joshua Ward Sullivan, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [55]

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Yes. Yes, I'm here.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [56]

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I'm sorry, there's something -- we must have had a power failure here, and the system went down and just disconnected. Did you get -- were you satisfied with -- did you get the whole answer?

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Joshua Ward Sullivan, The Benchmark Company, LLC, Research Division - Senior Equity Research Analyst [57]

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We did. I was actually just beginning the next one. And just as far as the free cash flow outlook, if May isn't the trough for commercial aerospace. How sensitive is that free cash flow guidance, essentially?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [58]

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Josh, this is Carlos. I just want to reiterate, we haven't given free cash flow guidance. The guidance we've given is that we will remain cash flow positive. We have measured -- it was a very -- a highly variable cost structure, which allows us to flex the business and maintain cash flow positive. So I want to be very careful that we're not putting numbers to that because as a management team, we're dealing with this without the luxury of having a certainty in the future here.

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Operator [59]

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For the next question, we have Sheila Kahyaoglu from Jefferies.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [60]

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Eric, you're popular today. So I apologize, and I know you've talked about this a bunch, but I want to delve in more into the PMA market, and I know you guys have the best share because of your product offering and your rigorous process behind it. I wanted to see how you're thinking about balancing airlines, choosing lower cost products, and also the aircraft ages, aircraft being retired at, say, 18 years old versus 24 years old. So how that -- those 2 things balance each other as you think about gaining share in this market?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [61]

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Sure, Sheila, that's a good question. And I've been reading your material throughout the whole crisis. I found it very interesting with the -- a lot of the data that you've had in there. I think the big driver is going to be the aircraft that need first heavy maintenance and then engine maintenance. And I think that's going to be the driver before the age. In other words, you could have hypothetically an 18-year-old aircraft that needs a lot of money to be put in it in order to fly, whereas you just overhauled a 24-year old aircraft, and you're going to end up deciding to fly the 24-year old aircraft because from a cash perspective, you don't need to put money in it. So I think it's going to be very much based on an airline by airline, fleet by fleet, aircraft serial number by serial member, as they figure out which aircraft they're going to use. But we are in the process -- we're part of a study, whereby we've got somebody looking into this for us to be able to determine what areas are going to be impacted the most and, basically, come back online. So I think that's really how we look at it, more on a cash-in basis as opposed to a straight age basis.

Now having said that, if you've got 2 aircrafts, hypothetically, and they both need the same number of dollars to be made viable, then obviously, to the extent you own both of them, then you would pick, obviously the younger one because you would have a longer life in that. However, I think a lot of this gets very complicated because it depends what's leased, what airlines are able to give back, what's owned, what's fully depreciated. And it's a fairly complicated calculation. So I don't think it's going to be a, "one size fits all" approach.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [62]

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Okay. No, that makes sense. I appreciate the extra color and I think you guys will always prove the market wrong in some ways and myself wrong. In terms of 10% of your business that's actually OE, I believe, within FSG, can you talk about your expectations for that part of the business? And then on your breakeven forecast of 50% to 60% decline, does that assume any sort of cost cutting? Or is that just the current SG&A compression we've seen thus far?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [63]

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Yes, that's a good question, Sheila. Let me start with the second part of the question. We have done layoffs we -- our #1 asset is our people. So we've been very careful to try to impact our people the least as possible. Having said that, with the current reality and the reduced level of business, we've had to make some adjustments. So we have done layoffs. We have done furloughs, we have done voluntary programs where people are not working 1 or 2 days a week. And then we've also done wage -- temporary wage reductions, which we've all taken in order to be able to pitch it. When you put all of that together, we've calculated that our breakeven on FSG is we can withstand a drop of 50% to 60% in total sales. And if you assume roughly that FSG is approximately 80% aftermarket and let's just say the aftermarket is down, pick a number, 70%, then that implies, basically, a 70% to 80% drop in the aftermarket. We think that initially, the drop in the OEM sales, initially coming out of the chute, wasn't as much because they have certain amount on order, but that is going to start to kick in.

So we anticipate, again, aftermarket down sharply, but OEM not down as much, but that reduction is going to last longer than the aftermarket because we anticipate the aftermarket is going to come back first. So I would say that's sort of how do we look at it.

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Operator [64]

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Next question. We have Michael Ciarmoli from SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [65]

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Maybe Eric and Carlos on this -- to kind of say on Sheila's question. If we look at the second quarter here, the falloff that you saw in April probably assumes -- maybe revenues were down 50% or so. I mean should we think about FSG being down in that 50% to 60% range for the next 2 quarters or so? And I just wanted to tie in the SG&A down at 15% or so of revenues for the quarter, I think you guys usually run at kind of 17.5%. I mean, are you resizing the business, that low level of SG&A sort of implies that the full year revenue run rate, maybe it comes in below $1.7 billion or so. Is that the right way we should be thinking about this, the current SG&A in the quarter? And then, I guess, the kind of what you just said, Eric, with the aftermarket down sharply in terms of tying together a growth rate for the next quarter or 2?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [66]

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Yes. So Mike, this is Eric, and that's a great question. We have to be careful because we have withdrawn guidance because we truly don't know what the numbers are going to be. We've seen the impact thus far. We see that airlines are not flying. We care about our people. As I said, #1 it's about our people. And so we obviously had to reduce our cost structure to be able to live with this new reality, but we want to make sure that we're able, in terms of new product development, developing new stuff as well as maintaining our sales force and maintaining the leadership in our businesses, that we are able to respond.

So that's why we're providing this, if you will, a framework that FSG can be down 50% to 60% in revenue, and still breakeven. It does -- as that revenue falls, we do approach more of the breakeven area. And the reason we give the range of 50% to 60% is it depends very much on mix. But the other thing, which is very important to note is that we've always had -- this has gone back 30 years. We've always had an extremely conservative accounting model and accounting standards. One of the old tricks in manufacturing is that when volumes fall, one of the ways that companies can delay taking the pain is basically by increasing cost in pulling in the block costs that ends up getting amortized or increasing the standard costing of products going forward. We're very careful to not do that. So we write-off when we have excess manufacturing costs and underutilized overhead. We're very careful to write that off. So we don't have future pain. So when I say that our numbers are down you can withstand a drop of 50%, 60% and still breakeven, that's after taking all of the inventory reserves and writing off all of the excess manufacturing costs and not putting them into inventory, not putting them into fixed assets and not doing things that we think are really -- would penalize the long term. We want our businesses to understand very clearly how they're doing in the short term. And if companies play around and they play games and they end up reporting higher short-term profits, in order to delay the pain, then that just confuses the team members on really where you stand. So I hope that gives you a little bit of idea or color into how we're thinking about this.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [67]

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Yes. No, that's extremely helpful. And then just another one, Eric. On your customers and looking at the fragility of the airlines here, have you done an analysis of your airline customer base from the big majors down to the ultra low-cost carriers to maybe -- as you're stress testing the model to get a sense of which one of your customers might really be at risk of bankruptcy or failure here as this kind of pandemic carries on? And certainly, there's going to be some failures out there, I'd imagine, but have you kind of looked at the customer list from that regard?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [68]

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We have -- but it becomes, honestly, very complicated to build the revenue model based on that. We do look at it. But Carlos, we'll let him comment on our accounts receivable process, but we are careful with regard to companies that are at risk of filing for insolvency or bankruptcy. And yes, we do get stung and we like to make sure that we're supporting our customers, but we want to do so in an intelligent way, and Carlos can expand on that.

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [69]

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Mike, this is Carlos. So big, big concern on your part. I mean, we're all reading the papers and seeing the industry e-mail. There will be some -- there probably will be some bankruptcies in the airline space. And I don't know if it's going to be domestic, foreign, I don't know what geography -- we're going to see it. And the one thing we've done to try and limit that exposure is we've sat down with all of our folks who meticulously (inaudible), make sure that they're mindful about the collecting side. And they're not overextending HEICO. We don't want to be anybody's bank. By the same token, we still have to conduct business in a relatively normal fashion with these customers because we don't want to burn any customer's good will by acting too unusual during this time period. So it's a fine line we got to balance.

I would say, during the quarter, our receivables were in very good shape. The age of the receivables was very new. There wasn't a lot of any stuff overextended. But going into Q3 and 4, we just have to be mindful. And if there are bankruptcies, we'll deal with it. But because of our diversified platform and the fact that we are dealing with multiple airlines across the globe, we don't have a ton of exposure or concentration in any 1 airline that could cause us major issues. I hope that makes sense.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [70]

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It does. It does. And then just a point of clarification on Josh's question. You guys mentioned or even in the press release that you can maintain positive cash from operations. So not necessarily free cash flow, but clearly, you guys are comfortable in looking at maybe working capital, managing inventory, some of those variable costs. So clearly, cash from ops is going to be positive for the remainder of the year?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [71]

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Yes. That's the scenario Eric described a little while ago, if we stress test the business at extreme levels, we still wind up with positive cash flow.

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Operator [72]

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Next question is from Colin Ducharme from Sterling Capital.

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director & Portfolio Manager [73]

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I hope the HEICO family is all healthy and safe. I had a quick clarification for Carlos. Regarding the expense rationalization kind of framework. You've talked about the playbook a bit. Bottom-up, very entrepreneurial, which is consistent with prior messaging at the subsidiary level. But clarifying, so substantially all of that expense reduction, has that been bottom-up and coming from the constituent businesses versus being framed top-down?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [74]

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That's correct, Colin. So I think as Victor mentioned earlier, we're very -- first of all, we -- our guys that manage these businesses are incredibly entrepreneurial. And the one thing we have noticed about them is they don't change much. When they own the business and they ran it, they ran it using their check book and just because HEICO is either co-invested with them or acquired the business, it doesn't seem to change the way that they manage or the frame of references they have on how to deal with both good and challenging times. And so what we've noticed is that these folks at these subsidiaries, because we allow them to operate in a decentralized fashion, they do make good decisions, and they do tighten their belts when they need to. They're very aware of and conscientious of working capital management, of listening to their customers, understanding demand as best that they can during this time period. And so we haven't -- we don't have a need or we haven't felt the -- we haven't felt it necessary that we'd be heavy handed in these circumstances. They have done the right things. It just so happens that with them doing what they need to do to manage their businesses, which we had also contribute at the corporate level by taking some pay reductions by the executives and the corporate staff and are also Board of Directors. So we've sort of all contributed, if you would, to the collective misery of challenging times. And of course, we hope that this is short-term and that we can all get back to normal as soon as possible.

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Colin R. Ducharme, Sterling Capital Management LLC - Executive Director & Portfolio Manager [75]

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Okay. And I wanted to get -- take a look at the M&A kind of outlook and perhaps view it in a different lens. Larry was very clear in that a nice frame for HEICO is a vehicle for free cash flow, and you're looking for solid cash flow from your targets over time. Recognizing that, that frame has been consistent over time. One could also equally recognize the unique nature of this crisis. You guys have been through several, but none as far as I know, have seen seat miles collapse, 95-ish percent. And so I guess, my question is, maintaining that free cash frame are you willing to consider targets that our long-term quality assets with a quality longer-term outlook, which are distressed in nature today and facing liquidity pinches, where you could foresee them becoming part of the HEICO family and expanding your aperture, given the unique complexion of this crisis?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [76]

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Let me answer -- this is Larry. We will look at those kinds of companies, depending upon what we think their ultimate profitability will be. So the answer is yes. We are inclined not to pay up for pie in the sky in the future. But there are some companies that we know of now that we're looking at that meet those kind of qualifications that you just mentioned. We'll have to see how they work out, what the price is, if they're for sale, so -- yes, but we would consider -- so the answer to your question is yes.

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Victor H. Mendelson, HEICO Corporation - Co-President & Director [77]

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And this is Victor. I'll just add to that. We cast a very broad net in the acquisitions we look at and look for. So we consider many different transactions and different styles, and that's very important to what we do. So we understand we've got to look at a lot of things and consider many things in order to find the right one. So we are willing to look and consider all style of deals, even ones that may not be performing well and even may be distressed at this point.

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Operator [78]

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Next question, we have Louis Raffetto from UBS.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [79]

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Going. So sorry, Eric, to get under here, but going to go. So I know in the past, you said that you traditionally didn't get onto an airplane until it was about 10 years old. So is that still the case? Is that primarily just for the PMA business? Or do you think that applies for sort of MRO as well?

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Eric A. Mendelson, HEICO Corporation - Co-President & Director [80]

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No. I think -- to clarify what I meant or what I said or what I meant to say was that we typically don't get on a new airplane until it doesn't have meaningful revenue to us until 10 years after the first delivery. But not 10 years after each aircraft is delivered. And it's probably shorter than that, maybe it's 7 years or something like that. I would say that's the case more on the PMA and the repair side. On the distribution side, we would be on it right away. We'd be on it immediately. And of course, in the specialty products, we would occur -- we would achieve revenue even before it's delivered, so to put a little bit of color into that thought.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [81]

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No, that's great. And so I know if we go back to kind of like 2014, '15, '16 area when flight support didn't have that strong growth. One of the things you guys talked about back then, and you heard from other people in the industry, was that the age of the fleet was kind of younger given the dynamics of increased retirements and newer planes coming in. So I guess, do you -- I don't know if anyone could argue with the fact that the age of fleet is likely to get quite a bit younger than the coming year or 2. Do you think you'd be able to offset that with share gains?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [82]

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Yes. So I think what you're referring to in the 2014-'15 time, was the reason our sales were lower then was because we had something like -- I don't have the numbers in front of me, but something like 22% organic growth in the year or 2 before that. So I think what happened was a lot of equipment got deferred. There was a lot of deferred maintenance, there was massive sales. We way outperformed in the period before. So then it slowed down a little bit in that period. I think that's probably the thing that drove the lower sales growth in the '14, '15 time frame.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [83]

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Okay. Great. And then just 1 follow-up on the M&A. So maybe, Larry, might be best for you. You've traditionally talked about wanting deals, I think you said earlier, 20% type of margins. I guess, how do we circle that with the fact that FSG has, call it, roughly 20% margins, correct me if I'm wrong, but I'm guessing that the PMA at market has higher margins and specialty products has lower margins. So is there a lot of opportunity there?

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [84]

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Yes. We think that -- I mean, look, there's no question that it is hard to find those types of businesses over on the FSG side. I would say, more often than not, we're probably lower than that in terms of margins and then through our ability to increase the sales and to increase the profitability of the business going forward, we get it closer up to our area. But I would say, the 20% is something that we like to be. Sometimes, we're able to find a business that's over 20%. But I wouldn't say that, that is a walkaway point. If we see a very realistic path, then we could start with something that's below that number.

Just to clarify, I will not go for a company that has a very low margin, unless it's a bolt-on acquisition where we know. So if we buy a company, we bought loss companies at within FSG. We have purchased loss companies and within 3 months, they have become big profit makers. Why? Because we strip that -- we moved the location, we closed the factory and we merge it into 1 of our other operations. And then all of a sudden, it goes from -- they could be a loss to over 20%.

Keep in mind, we're looking for -- remember this because I don't know if you keep this in mind when you write your reports. We are looking for constant cash flow and growth. That's what HEICO is all about. We get aerospace, electronic technologies, whatever. HEICO is a vehicle to generate cash flow. And we do it through those 2 divisions, which normally has high margins. And I think if you understand that, you'll understand HEICO better.

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Operator [85]

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And presenters, last question, we have Mr. Barry Haimes from Sage Asset Management.

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Barry George Haimes, Sage Asset Management, LLC - Managing Partner and Portfolio Manager [86]

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I had 2 questions, I think, both quick. One, can you, for FSG, just give us what the revenue decline was in the month of April, just so we have a marker on sort of where things were? And then second question was do you have any idea, roughly, the number of planes in the narrow-body fleet globally? And then how many MAXes are built and sitting on the sidelines waiting to come into that fleet when we get approval, if and when we get approval?

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Carlos L. Macau, HEICO Corporation - Executive VP, CFO & Treasurer [87]

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Yes. So we -- the first question, Barry, with regard to April, we don't break out the specific numbers within the quarter. But I think you can do some back of the envelope math and sort of get an idea of where that is. The reason that we're not giving that out is because it's not necessarily representative of, if you will, the bottom or how the entire quarter operated. With regard to the number of narrow-body aircraft, I don't have that in front of me, but I think it's somewhere in the 20,000 aircraft area. And with regard to the MAX, I think there are approximately 400 that were delivered that have been parked. And then Boeing has got approximately another 400 in various stages of production that will need to get delivered.

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Operator [88]

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I am showing no further questions at this time. I would now like to turn the conference back to the presenters.

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Laurans A. Mendelson, HEICO Corporation - Chairman of the Board & CEO [89]

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Well, the management team in HEICO wants to thank everybody on this call for their interest in HEICO. We are available at any time. If you have other questions, you're welcome to call me, Carlos, Eric, Victor, and if we can clarify anything, and we're happy to discuss it. And otherwise, we look forward to speaking to you after the third quarter announcement. And that call will be sometime, I guess, in the middle of August, the end of August. So thank you all, and please stay safe and healthy during this COVID epidemic.

This concludes the call.

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Operator [90]

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Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.