Laurans A. Mendelson - Chairman, Chief Executive Officer and Chairman of Executive Committee Eric A. Mendelson - Co-President, Director, Member of Environmental, Safety & Health Committee,Chief Executive Officer of Heico Flight Support Group and President of Heico Flight Support Group Victor H.

Mendelson - Co-President, Director, Member of Environmental, Safety & Health Committee, Chief Executive Officer of Heico Electronic Technologies Group and President of Heico Electronic Technologies Group Thomas S. Irwin - Senior Executive Vice President and Member of the Office of the Chief Executive Officer.

J. B. Groh - D.A. Davidson & Co., Research Division Tyler Hojo - Sidoti & Company, LLC Arnold Ursaner - CJS Securities, Inc. Sheila Kahyaoglu - Jefferies LLC, Research Division Kenneth Herbert - Canaccord Genuity, Research Division Michael F. Ciarmoli - KeyBanc Capital Markets Inc., Research Division Stephen E.

Levenson - Stifel, Nicolaus & Company, Incorporated, Research Division.

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the HEICO Corporation Fiscal 2014 First Quarter Earnings Results Conference Call. [Operator Instructions] Your host for today is Laurans A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation.

Before the conference call begins, I will read the following statement. Certain statements made in this call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies.

HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors including, but not limited to, lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could also cause lower demand for our goods and services; product development or product specification costs and requirements, which could cause an increase to our cost to complete contracts; governmental and regulatory demands; export policies and restrictions; reductions in defense, space or homeland security spending by U.S.

and foreign customers or competition from existing and new competitors, which could reduce our sales; our ability to introduce new products and product pricing levels, which could reduce our sales and sales growth; product development difficulties, which could increase our product development costs and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk, interest and income tax rates; economic conditions within and outside the aviation, defense, space, medical and telecommunications and electronic industries, which could negatively impact our costs and revenues; and defense budget cuts, which could reduce our defense-related revenue.

Those listening to this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to, the filings on Form 10-K, 10-Q and Form 10 -- 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 in the extent required acceptable by law. Please go ahead with your conference call, sir..

Thank you very much, and good morning to everyone on the call, and we thank you for joining us. We welcome you to the HEICO first quarter fiscal '14 earnings announcement telecon. I'm Larry Mendelson.

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

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

This new facility has provisions for additional credit expansion up to an aggregate of $1 billion. Not only were we able to increase the overall size of our revolving credit facility but did so in a very cost-effective manner, and we retained our low cost of borrowing, which, at the present time, is about 1.4%.

We believe that HEICO's current credit facility will continue to provide us with the financial flexibility to grow our business organically and through strategic acquisition. In January 2014, we paid a cash dividend of $0.06 per share plus a special and extraordinary dividend of $0.35 per share.

The regular semiannual cash dividend represents a 7% increase over the prior semiannual per share amount of $0.056, which, of course, is adjusted for our 5-for-4 stock split in October 2013. And this was our 71st consecutive semiannual dividend since 1979.

In January 2014, we were pleased to report that Forbes Magazine had included HEICO as 1 of the 100 Best Small Companies in Forbes' 2013 annual list of such businesses. And this marked the seventh year that HEICO has been included in the list of Forbes 200 Best Small Companies and the third year of HEICO's inclusion in the top 100 list.

Consolidated first quarter fiscal net income and operating income are up 38% and 44%, respectively, on a 23% increase in net sales over the first quarter of fiscal '13. Our Flight Support Group's net sales and operating income improved 31% and 33%, respectively, over the first quarter of '13.

Those increases principally reflect strong organic growth of approximately 19%, as well as additional net sales of $15.6 million contributed by an acquisition which we made in fiscal 2013. Consolidated net income per diluted share increased 37% to $0.41 in the first quarter of fiscal '14, and that was up from $0.30 in the first quarter of fiscal '13.

Cash flow provided by operating activities increased to $33.5 million in the first quarter of fiscal '14, and that represented 122% of net income. That was compared to $13.3 million in cash flow in the first quarter of '13.

As of January 31, 2014, the company's net debt-to-shareholders' equity ratio was 50%, with net debt, which is total debt less cash, of $364 million. Now I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, to discuss the results of the Flight Support Group..

Thank you. The Flight Support Group's net sales increased 31% to $181.6 million in the first quarter of fiscal '14, up from $139 million in the first quarter of fiscal '13. The fiscal '14 first quarter increase reflects organic growth of approximately 19%, as well as additional net sales of $15.6 million from a fiscal 2013 acquisition.

The fiscal 2014 first quarter organic growth principally reflects new product offerings and continued improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines and within our specialty product line.

The Flight Support Group's operating income in the first quarter of fiscal 2014 increased 33% to $32.2 million, up from $24.2 million in the first quarter of fiscal '13. The increase in the first quarter of fiscal '14 is primarily attributed to the previously mentioned net sales growth.

The Flight Support Group's operating margin in the first quarter of fiscal '14 increased to 17.7%, up from 17.4% in the first quarter of fiscal '13. The increase in the first quarter of fiscal '14 principally reflects the previously mentioned higher net sales volumes.

Consistent with our past practice of increasing our ownership in certain non-wholly owned subsidiaries, on February 18, 2014, HEICO Corporation acquired the 20% noncontrolling interest held by our partner, Lufthansa Technik, in 4 of our existing subsidiaries principally operating in the specialty products and distribution businesses within our HEICO Aerospace Holdings Corp.

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

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

HEICO Aerospace has grown significantly and generated substantial cash flow since Lufthansa partnered with us over 16 years ago. This transaction rewards Lufthansa with $67 million in cash and, at the same time, permits HEICO to increase its ownership in 4 very successful businesses.

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

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

Thank you, Eric. The Electronic Technologies Group's net sales increased 11% to $87.5 million in the first quarter of fiscal 2014, up from $78.8 million in the first quarter of fiscal 2013.

The increase in the first quarter of fiscal 2014 principally reflects additional net sales of $8.1 million from a fiscal 2013 acquisition and organic growth of approximately 1%.

The Electronic Technologies Group's operating income in the first quarter of fiscal 2014 increased by 47% to $22.9 million, up from $15.5 million in the first quarter of fiscal 2013.

The increase in the first quarter of fiscal 2014 reflects a $4 million increase in operating income as a result of the decrease in accrued contingent consideration related to a fiscal 2013 acquisition, partially offset by lower-than-expected operating income at the acquired business principally due to unanticipated costs associated with certain contracts in the backlog at acquisition.

The acquired business is one of those ETG businesses that can be lumpy, and while we have lowered our near-term outlook, we remain confident in the business and its management team going forward. The balance of the increase in operating income primarily results from the increase in net sales.

The Electronic Technologies Group's operating margin in the first quarter of fiscal 2014 increased to 26.2%, up from 19.7% in the first quarter of fiscal 2013. The increase in the first quarter of fiscal 2014 principally reflects the aforementioned increase in operating income from the fiscal 2013 acquired business.

I'll turn the call back over to Larry Mendelson..

Thank you, Victor. The diluted earnings per share -- consolidated net income per diluted share increased 37% to $0.41 a share in the first quarter of fiscal '14, and that was up from $0.30 in the first quarter of fiscal '13.

That increase was principally reflecting the previously mentioned year-over-year growth within both of our operating segments, as well as the $0.04 benefit from the previously mentioned reduction in the value of a liability for contingent consideration related to a prior year acquisition.

And that, too, was offset by lower-than-expected operating income at that acquired business. Depreciation and amortization expense increased by $3.9 million in the first quarter of fiscal '14.

That was up from $8.1 million in the first quarter of '13, and that increase in the first quarter of '14 principally reflects higher amortization expenses of intangible assets recognized in connection with our fiscal 2013 acquisitions.

R&D expense increased 24% to $9.1 million in the first quarter of '14, and that was up from $7.3 million the first quarter of '13. We have significant ongoing new product development efforts at both Flight Support and ETG, and we continue to invest between 3% and 4% of each sales dollar into new product development.

SG&A expense was $41.7 million and $42.7 million in the first quarter of fiscal '14 and '13, respectively.

The decrease in SG&A reflects previously mentioned $7 million reduction in the value of contingent consideration, partially offset by a $4.7 million increase in SG&A expenses attributable to fiscal '13 acquired businesses and a $1.3 million increase in SG&A expenses pertaining to existing business, which the majority of that was incurred in selling expense necessary to support our organic sales growth.

SG&A expenses as a percentage of net sales decreased from $19.7 million in the first quarter of fiscal '13 to $15.6 million in the first quarter of '14 and principally reflecting the impact of reduced contingent consideration, which we talked about before, as well as the impact of higher sales volumes on the fixed portion of SG&A expenses.

Interest expense in the first quarter of '14 increased to $1.3 million from $0.6 million, $600,000, in the first quarter of fiscal '13. That increase was principally due to a higher weighted average balance outstanding under our revolving credit facility during the first quarter of fiscal '14.

And that was associated with the fiscal '13 acquisitions, as well as the funding of our special dividends, which were in 2014 and '13. Other income in both years was not significant. I won't comment on it. The effective tax rate in the first quarter of '14 increased to 33.9% from 27.8% in the first quarter of fiscal '13.

That increase principally due to an income tax credit for qualified R&D activities for the last 10 months of fiscal '12 that was recognized in the first quarter of fiscal '13.

And that resulted from the retroactive extension of Section 41 of the Internal Revenue Code called Credit for Increasing Research Activities, as well as the expiration of Section 41 on December 31, 2013 that limited the tax credit, which could be recognized in the first quarter of fiscal '14.

In addition, the increase is the result of a larger income tax deduction recognized in the first quarter of fiscal '13 under Section 404(k) of the Internal Revenue Code for the special and extraordinary cash dividend paid in December 2012 to participants of the HEICO savings and investment plan.

For full fiscal '14, we estimate an effective tax rate of about 34.5%, and we continue to anticipate a combined effective rate for income taxes and noncontrolling interest as a percentage of pretax income to approximately 43%, which is comparable to fiscal 2013.

Net income attributable to noncontrolling interest was $5.1 million in the first quarter of '14 compared to $5 million in the first quarter of '13.

And that principally reflects higher earnings of subsidiaries which have noncontrolling interest, partially offset by the impact of redemptions of noncontrolling interest, which result in no earnings allocations to the redeemed ownership. Moving on now to our balance sheet and cash flow.

As I mentioned earlier, our financial position and forecasted cash flow remain strong. Cash flow provided by operating activities increased to $33.5 million in the first quarter of fiscal '14, and that was up from $13.3 million in the first quarter of fiscal '13.

The increase in cash flow from operating activities principally reflects our increased earnings for the quarter, as well as the timing of certain tax payments. We do expect cash flow provided by operating activities to approximate $160 million in fiscal '14.

Our working capital ratio is a strong 3x as of January 31, '14, and that's up slightly from 2.7x as of October 31, 2013. DSOs of receivables was 52 days as of January 31, '14, and that was comparable to the 50 days on October 31, '13. And of course, we closely monitor all receivable collection efforts to try to limit our credit exposure.

No one customer accounted for more than 10% of sales. Our top 5 customers represented approximately 16% of consolidated net sales in the first quarter of fiscal '14, and that compared to 15% in the first quarter of fiscal '13. Inventory turnover rate was 118 days as of January 31, '14 compared to 111 as of October 31, '13.

And that principally reflects an increase in inventory levels to support anticipated customers' demand and projected sales growth during the remainder of fiscal '14.

Net debt-to-shareholders' equity was 50% as of January 31, '14, with net debt of $364 million that was principally incurred to fund our fiscal '13 acquisitions, as well as the payment of cash dividends -- special cash dividends in fiscal '14 and '13.

We have no significant debt maturities until fiscal '19, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisition opportunities. As for the outlook, when we look ahead at the remainder of fiscal '14, we continue to anticipate organic growth within our product lines that serve the commercial aviation markets.

We expect overall organic growth within ETG pretty consistent with the prior year, reflecting higher demand for the majority of our products, moderated by lower demand for certain defense-related products.

During the remainder of fiscal '14, we plan to continue our focus on new product development, further market penetration, executing our acquisition strategies and maintaining our financial strength.

Based upon our current economic visibility, we are increasing our fiscal '14 year-over-year net income growth estimate to between 10% and 12%, up from a prior 8% to 10% growth estimate.

We continue to estimate fiscal '14 year-over-year growth in net sales of 12% to 14%; our full year fiscal '14 consolidated operating margin should approximate 18%; CapEx should approximate $25 million; depreciation and amortization, approximate $49 million; and cash flow from operations, as I said earlier, to approximate $160 million.

Consistent with our long-term growth goals, management continues to target net income growth averaging 20% over the next 1 to 3 years, including the effects of additional acquired businesses, which we would expect but we can't guarantee.

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

[Operator Instructions] Your first question is from J.B. Groh with D.A. Davidson..

Eric, I'm not sure how granular you want to get with this 19% organic growth, but you mentioned new product offerings were a big driver. And I looked -- Q1 margin was a little bit lower than some of the margin numbers you put forth last year.

Does the new product growth go hand in hand with maybe a little bit lower margins that we saw in some of the quarters last year, or is that just a typical Q1 thing?.

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

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

But the non-engine stuff probably has a little bit lower margin than the engine products..

Not materially, not materially. I would say in general, it's in the same ballpark area. A lot of customers are asking us to develop additional non-engine parts. I would say that our breadth of product in that space continues to grow substantially.

And we've got significant more number of areas and ATA chapters that we plan on penetrating very heavily over the next, I'd say, 1, 2, 3 years. But I would say that the margins will be consistent with what we've seen in the past and nothing materially different..

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

Well, we've done a lot of the engine parts. We will -- we continue to do more engine parts. And interestingly enough, whereas a couple of years ago, people were getting a little bit concerned over the aggressiveness and the aggressive behavior of some of the engine OEMs.

There's been a bit of a backlash in that area recently, in particular, with the value of assets at the end of the lease. What's happened is the lessors have now started to realize that when there is not sufficient competition for the overhaul of an engine, there is not sufficient demand for the parting out of those engines at the end of life.

So what's happening is the lessors are starting to realize that the OEM -- the high OEM market shares on certain engine products is not very good for the value that they're able to obtain when they part out the engines at the end of life. So just for example, taking something that we don't participate in, Rolls-Royce Trent engines.

We don't -- that's not an area of focus for us. But on Rolls-Royce Trent engines, when a lessor wants to break down an engine, typically, there's only one buyer of engine material, and that would be Rolls-Royce because they control a large percentage of the overhauls of those products.

So what happens is former -- with former engines or other engines, the owner of the engine would break down the engine into pieces and then sell them -- sell those pieces at, let's just say, roughly 50% to 60% of the new price.

Well, if Rolls-Royce is selling a part, say, for $100 and it costs them $10 to make it, where they have 90% gross margins, why would they spend $50 or $60 on a surplus part? They'd rather just make a brand-new part, which is superior anyway and sell that to their customer, even if they had to do it at the reduced price.

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

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

Okay.

And can you comment maybe on what you sort of think customer inventory levels are?.

I would say they are consistent with what we've seen in the past. I did sales reviews with our regional heads last week, and we don't see a restocking. I mean, we see that the airlines are running lean. There is no intention for them to hold more inventory.

So I don't anticipate -- I mean, to answer your question, we don't think that we've seen restocking, and we don't see -- we don't think that it's going to be coming.

I think that our sales improvement has been a result of being very aggressive in all of our businesses, picking up more distribution lines in our distribution businesses, as well as doing very well in our specialty products and, of course, our PMA and repair business.

So it's really, I think, due to execution across the board as opposed to restocking..

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

That's a good question, J.B. I would say in the quarter, actually, defense business quarter-over-quarter was pretty good. First quarter to first quarter, this year versus last year was actually pretty healthy, although I think our mix deteriorated in that business, and it contributed less of a margin than it has historically.

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

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

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

Yes. I was just curious on the top line guidance to start. Obviously, maintaining that, and I get that you guys are historically pretty conservative. But when I look at kind of the aggregate 12% organic growth that you put up and obviously, the 19% in FSG, you're guiding to, I think, 6% to 7% organic for the year.

How does that square? Because it certainly seems like Q1 probably came in above your expectations..

Tyler, this is Tom. I think it's always been our policy, particularly early in the year, to not overpromise, as Larry says. As specifically by segment, we do have 4 challenging comps in the second half of the year in FSG. And as Victor mentioned, we see some potential concern in ETG on defense in the second half of the year.

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

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

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

But we don't want to go out there and tell the world that, oh, yes, we're going to do this, that and the other thing and then come short. And we don't want to influence the bottoms-up reporting and estimating that our people that run these businesses do. So just adding to what -- that's a little color to what Tom is saying.

I mean, we would hope and estimate that those numbers do go up, but at this point, particularly early in the year, in the first quarter, we just stated in what we think is a conservative manner and, I believe, reflects the way our people put their numbers together and roll them up to us.

I don't know if that gives you a little more color into how we get to it..

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

This is Tom Irwin again. I would say overall, we don't contemplate in our internal updated outlook substantial changes from the mix in terms of segment mix from what we saw going into the year. So we look at combining growth with both acquisitions and organic growth. That's pretty comparable.

And I think our organic growth estimates haven't really changed substantially from going into the year on a segment basis..

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

Or is there more of a shift back to engine introductions?.

No. I would say for the last number of years, we've been focused on the non-engine area. Again, roughly 10 years ago, we had 0 sales in the non-engine area. Today, it now makes up over half of our PMA sales. So there continues to be a lot of focus in that area. I think that focus is accelerating. We continue to do engine as well.

I would say the -- probably, the change with regard to the engine market is that lessors and owners of assets, including airlines, realize that there's not going to be much residual value if there isn't competition in the aftermarket. So they're starting to wake up, and I think we see some good potential in that area.

But that doesn't change our focus in the non-engine area. And to answer your question, we're developing numbers of parts consistent with what we've done in the past, and I don't see any major change. Maybe we'll increase it somewhat as we continue to go into additional non-engine products, but I think it'll be somewhat consistent..

Your next question is from Arnie Ursaner with CJS Securities..

Relates to your guidance for the upcoming year.

Is that on reported or adjusted numbers, please?.

I'm going to ask Tom to respond..

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

Okay. And again, I know you guys attempt to be conservative, but mathematically, it would imply to have an 18% operating margin for the year. We, as analysts, would have to cut Q2, 3 and 4, and I seriously doubt that that's your intention, but just making sure you're aware of the math.

My second question relates to the transaction you mentioned with Lufthansa.

Who initiated the transaction? Why now? And what's the rationale behind it?.

Well, the summary -- we probably talked about this for the past couple of years, but I'll -- and it just happened when it happened after negotiation. We have very strong relationship with them, as you know.

Wolfgang Mayrhuber is on our board, and this is just something that developed over the years as a result of good business relationships, but I'll let Eric add the color to that..

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

There's a lot of cash built up in the company, and this was a way to distribute the cash. We've received comments from, frankly, from a lot of shareholders at investor conferences, including yours, where shareholders have said to us, "Hey, you guys have built up a lot of cash. You're looking at acquisitions.

Why don't you consider taking out LHT Lufthansa in some of their position?" And I think we responded to that. We have no desire to sell any of our businesses, and we don't need the cash from it. So we decided to take our dividend in kind. LHT took theirs in cash. Why did we do it? Because it makes financial sense for both parties.

And the business case is still intact. We continue -- they remain an owner of 20% of HEICO Aerospace, and it doesn't change any of our PMA or repair offerings. So that's why we did it..

Your next question is from Sheila Kahyaoglu with Jefferies..

I guess, Eric, this one's for you a little bit. The 19% growth was clearly spectacular.

A few of our companies and distributors have commented about weather having an impact and given the quarter -- closing period for HEICO, do you think there's a bit of a push forward in demand into Q2 for this, or weather was really not an impact with all the flight cancellations?.

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

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

Really just across the board with execution in all of our businesses..

Okay.

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

I would think it's pretty consistent. There's not a significant difference between the 2 areas, so I don't anticipate a significant difference there. I mean, we are being very aggressive in the non-engine area.

So maybe in going out to secure additional business, we would be more aggressive and we could see slightly lower margins in that area, but that's really to be seen. To date, it's been very similar between the 2..

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

Yes. This is Victor, Sheila. Also a good question, I think. Lucix, I think where we see the opportunity in Lucix is in a few places. They have a great heritage and success rate, particularly on large satellites, as we'd say. The GEO satellites have been strong for them. They're continuing to pick up opportunities.

Their backlog is actually very strong there and has increased. We have an excellent team there. We have a very talented team, so we think it's also a good complement to the other business that we're doing in space. I think there's opportunity generally in the market. That's one of the things that attract it to us.

We feel that it is a growing market and that there is just growth from the market itself in addition to the market share and the new products that Lucix is developing.

And of course, as I mentioned, that very talented team there, which has great respect and admiration from its customers, which we learned when we did some pretty intensive due diligence, talking with these customers and having some pretty detailed conversations.

I think where it's been disappointing, if I could maybe, I mean, go that far, has been on something that, I think, we've seen before in businesses and will see again, and that is they've had some technical issues on a couple of programs that slowed them down, which meant that they had to spend more getting through those issues.

And it also meant that they couldn't work on other very profitable or successful revenue for the business. And that's short-term in nature. As I said, I've seen it before, and I expect that we'll see it again at various businesses, including Lucix.

But given kind of the history there, their backlog, what we know about them, their management team and the fact that we've experienced this kind of thing before many times, we still feel very good about the business. And we expect that the back half of this year will be good for them..

The next question is from Ken Herbert with Canaccord..

First, I just wanted to ask, relative to when you gave the initial guidance last December, has anything changed with what you've seen in the business over the last 2 to 3 months? I mean, it looks like the increase in net income in the guidance probably reflects the accounting adjustment in the quarter, but I'm just wondering, fundamentally, either of the segments, FSG or ETG, if anything's fundamentally changed in your outlook on the business..

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

Okay, okay. And then, Larry, I just wanted to follow up. I mean, you've clearly, with the credit line, you've got very good capacity now.

How would you characterize the acquisition pipeline? And is there anything you would talk about today as maybe an opportunity from a technological or a preference standpoint that, perhaps, you're looking at?.

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

But I can tell you in general, that the acquisition area is what I would say normal, sort of. Pricing is, as you've read in the newspapers, is getting more difficult. Probably, the average price that people are asking is at least 1 turn more than we've been used to paying.

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

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

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

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

Okay, okay. No, that's helpful. And then finally, Victor, just a quick question.

How should we think about organic growth within the ETG segment as we progress through '14? I mean, obviously, I know the issues you've mentioned with the recent acquisition, but how should we think about that moving forward? I mean, do we see much strengthening here as we get firming up on the defense budget, at least here in the United States, or the cadence for that business as we move through the year?.

Yes, this is Victor. It's a good question. I would say that we're looking to maybe the low single digits if we do get growth this year. And really, I think we're expecting that principally as a result of what we think would happen on the defense side. But you never know. We could get positive surprises there, too. It's sort of unsettled there.

So I would feel more comfortable saying the low single digits. We would be kind of very happy to be doing low single digits..

The next question is from Michael Ciarmoli with KeyBanc..

Maybe, Eric, just to stay on this theme. You mentioned sort of airlines being concerned about a lack of availability for parts or the lessors when looking at these engines. That begs the question -- you mentioned Rolls-Royce and the Trent.

Are you guys looking to, potentially, PMA parts, where there is sort of that monopolistic share right now by the OEMs? I mean, do you see that as an opportunity for you guys to sort of accelerate some of your PMA adoption?.

Well, as you know, Michael, we don't like to talk specifically about customers or competitors for obvious reasons. So I can't comment specifically on the Trent. But we continue to look in areas where there isn't competition. And also, of course, the airlines realize that they -- it's very important to have a competitive balance in there.

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

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

You typically get approached by airlines, by carriers for requests.

I mean, are you seeing any kind of interest from the lessors who are saying that basically, my residual engine value is getting hurt? Would you guys consider entering the space? I mean, are those dialogues starting to happen?.

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

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

So I think that is why there's greater interest in those areas..

Okay, that's fair. And then maybe just staying on FSG, specifically on the margins.

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

No, I would say that the typical balance that we've had, which is about 2/3 part, 1/3 services, remains. And I would not say that there's any particular focus or strength in one of the areas.

I think the strength that we're seeing is really not necessarily the tide going up, but I really do believe it's execution on our people's behalf and our teams going out and finding these opportunities and harvesting them..

Okay. And then maybe just another quick one on FSG. I know Sheila asked a little bit about weather and kind of the impact there. We heard a lot of companies talk about the December -- the month of December having an impact with holidays, with other customers just trying to shore up their balance sheet. Did that -- and I know you guys are January end.

But did that create a little bit of additional softness in the quarter on sales, or is a lot of that made up in the month of January?.

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

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

Okay, okay. And then just real quickly, Victor, on ETG.

The current mix in that business, is it still about 1/3 industrial, 20% space, call it, 35% aerospace and maybe 10% commercial aerospace? Is that sort of the right way to think about the revenue mix there?.

Close. I mean, it moves around. It's a little bit shy -- it's around 1/3 defense. I would say general electronics is more in the 1/4 range, about 1/4 or so. And our space business, the commercial space, is getting up to being close to around 1/4 as well. So if you look at the mix that way, 20% to 25%.

And again, it's going to bounce around, for sure, and some of that's going to be sensitive to acquisitions. But based on our current mix of businesses, that would be the case..

And your final question is from Steve Levenson with Stifel..

Just a question. I don't know if you calculate this. If you do, great. If you don't, maybe you could take a guess.

On the ratio between newer planes coming into their service interval and aircraft retirements, my guess is it might have been less than 1 a year ago, and I'd just be interested to see what you think it was a year ago, where it is today and where you think it will be a year from now..

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

For us, it's a very complex number because you've got, obviously, if you've got 700 aircraft coming out, those can be lower-margin because they were developed a long time ago and maybe we're set-in on some prices. But you've got this fleet of 15,000 aircraft that are aging 1 year, and so that's offsetting it.

So it's a complex equation, but we're guessing that roughly half of the new aircraft that are delivered are for growth, half are for retirement. I don't know if that specifically answers your question. If not, I'd be happy to....

That gets into the -- I guess I was just looking to see if you see the aircraft being retired going down as a percentage of the aircraft that are going to require service in the next year or 2..

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

Okay. Last one is on your expansion of non-engine parts.

Are there any new materials or new technologies that you'll be using that are going to require capital investment that goes a little bit above what you've been doing historically? Or do you think you'll still stay in that range?.

No, I think we'd still stay in that range. On the non-engine part area, we've got, of course, this large component repair business, so we know where the parts go and we know how they operate.

So we're not going to have to make additional capital expenditures because, for example, if we come out with some various non-engine parts, we can test them in our own facilities, where we perform the overhaul of the unit. So I wouldn't think that there's going to be substantial capital expenditures, anything more than what we've done in the past.

I think we've got sufficient facilities to be able to handle that..

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

Yes. Thank you all for joining in. You know where to reach us if you have additional questions. I do want to say one thing, and that is to thank all of our team members who do, I think, an extraordinary job. We have the business unit leaders who give outstanding leadership. I don't want to mention each person's name. Those out there know who you are.

But I think without doubt, you are an incredible group of people, talented, hard-working, focused. And I can tell you on behalf of HEICO's Board of Directors, our executive management, we thank you and we give you tremendous respect and regard. So I have no other further comments.

We look forward to speaking to you on the Q2 call in about 3 months from now, and again, contact us if you have any questions or comments. Thank you, and that ends this session..

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