Q3 2020 HEICO Corp Earnings Call

We thank you for joining us today.

My name is Vincent and I'll be your conference operator.

That's would begin to call we remind you that certain statements in today's conference call will constitute forward looking statements, which are subject to risks.

Certain piece and contingencies.

Hi coach actual results may differ materially from those expressed.

Or implied by those forward looking statements as a result.

Oh factors, including the severity magnitude and duration of the cobot 19 outbreak.

Hi coast liquidity and be amount and timing of cash generation.

The continued decline in commercial air travel costs by the outbreak.

Our lines to be changes or airline purchasing decisions.

Which could cost lower demand for our goods and services.

Product specifications cost and requirements, which could cause an increase to our cost to complete contracts.

Governmental and regulatory demands experts policies and jurisdictions.

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 and profitability.

Our ability to introduce you products and services, that's profitable pricing levels, which could reduce our sales so school or profitability.

Bought up development or manufacturing difficulties, which could increase our product development and manufacturing costs and the lease deals.

Our ability to make acquisitions and achieve operating synergies from acquired businesses.

Consumer credit risk.

Interest foreign currency exchange and income tax rates.

Economic conditions within and outside of the aviation.

Defense space.

Medical telecommunications and electronics industries.

Which could negatively impact our costs in revenues.

And defense spending or budget cuts, which could reduce our defense related revenue and profitability.

Mark this listening to our reading a transcript off.

This call are encouraged to review all of Heico's pardon me.

<unk> Securities and Exchange commission, including but not limited to filings on form 10-K.

Form 10-Q.

And for him to 80.

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 now turn the call over to Lawrence A., Mendelson, Heico's, Chairman and Chief Executive Officer. Thank you.

Thank you very much and thank you and good morning to everyone. On this cool we thank you for joining us and welcome you to the HEICO third quarter fiscal Wendy earnings announcement Telecom front, 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 Bill.

Before reviewing all we're operating results in detail I would like to take a moment to think all of heico's talented team members, who have performed admirably. During the challenge is brought on by the Cobot 19 outbreak their dedication to heico's customers.

And the safety of their fellow team members has been exemplary.

On each and every member of Heico's global team to understand that the board of directors and away or humbled by your dedication and continued focus on safety and will be during these challenging times I am confident that our future is right and we will exit the scope.

Good 19 period, as a stronger and more competitive company.

At this time I'll take a few minutes to discuss the impact on heico's operating results from the outbreak for the three and nine months ended July 31 Twentytwenty.

The effects of the outbreak and the related actions by governments around the world to mitigate it spread.

Impacted our employees customers suppliers and manufacturers.

In response to the economic impact from the outbreak we at HEICO has implemented certain cost reduction efforts, including lay offs temporary reduced work hours temporary pay reductions within various departments of our business, including within our.

Entire executive management team as well as our board of directors.

Oh, no response to the outbreak, including included implementing varying health and safety measures at our facilities, including supplying and requiring the use of personal protective equipment.

Staggering work ships body temperature taking.

Increasing work from home capabilities, consistent and ongoing cleaning of work spaces, and I tried to areas and establishing processes aligned with the centers for disease and control guidelines to work with any individual exposure.

It is to go been 19 on their necessary quarantine period.

And the process for the individual to return to work.

With respect to the results of operations approximately half of our net sales are derived from defense.

Space and other industrial markets, including electronics medical and telecommunications demand for products in that half of our business.

Has not been fundamentally impacted and its operational results remain but to really consistent with the financial expectations prior to the outbreak.

[noise], we have experienced and expect to continue experiencing periodic operational disruptions, resulting from supply chain disturbances staffing challenges, including at some of our customers temporary fussy.

Realty closures transportation interruptions and other conditions, which.

Others or increased cost.

Well these issues have not yet and material overall, we have experienced disruption in some orders and some shipments during the third quarter.

The remaining portion of our net sales is derived from commercial aviation products and services.

The outbreak has caused significant volatility and the substantial decline in the value across global markets, most notably the commercial aerospace industry experienced an ongoing substantial decline in demand, resulting from a signal.

Nipigon number the aircraft in the global fleet being grounded during our third quarter.

Oh businesses that operate within the commercial aerospace industry had been materially impacted by the significant decline in global commercial air travel that began in March of this year.

Consolidated net sales for our businesses that operate within the commercial aerospace industry decreased by approximately 54% during the third quarter fiscal 20.

As I previously mentioned, we have taken responsible measures to address these reductions in net sales at all affected businesses.

Once commercial air travel resumed cost savings most likely will be a priority for commercial aviation customers and we anticipate recovery in demand.

For our commercial aviation products.

Frequently provides aircraft operators with significant cost savings.

[noise], one item that I'd like to point out that we have been asked a on calls a over the between last night in this morning.

A number of people as for.

The dollar amount of account receivable reserves that we set up for the bankruptcy of some small airlines.

And that number [noise], the absolute number was $7.5 million.

Later on in this call Carlos can give you more details and Howard.

Next the operating margins and so forth, but the absolute number was seven and they have million keep in mind that historically.

We have been able to make up and possibly collect some of that seven and a half million.

At this point, we don't know how much that might be if any.

So we have as normally do [noise] taken the most conservative approach [noise].

And reserve the whole now that could go bad [noise].

[laughter], we believed 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 the commercial aviation market.

Summarizing the highlights of the third quarter consolidated net income increased 4% to a record $251.7 million or $1.83 per diluted share in the first nine months to fiscal 20.

And that was up from 242.2 million 176 per diluted share in the first nine months of fiscal 19.

We continue to forecast positive cash flow from operations for the remainder of fiscal 20.

Cash flow provided by operating activities was consistently strong at $299 million and 313.4 million in the first nine months of fiscal 20 and 19, respectively.

Cash flow provided by operating activities totaled $93.1 million or a 171% of net income in the third quarter fiscal 20, as compared to 135.1 million in the third quarter fiscal 19.

Our net debt, which is total debt less cash and equivalents.

Of 344.8 million.

Compared to shareholders equity improved to 17.7%.

As of July 30 down from 29.8 as of October 31, 2019.

Our net debt to EBITDA ratio improved 2.7 times less than one.

As of July 31, 20, and that was down from <unk> 0.93 times as of October 31 19.

During fiscal 20, we have successfully completed six acquisitions.

All of which were completed since the outbreak star.

We have no significant debt maturities until fiscal 23 and.

And we plan to utilize our financial flexibility to aggressively pursue high quality acquisitions to accelerate growth and maximize shareholder returns I do want to point out that unlike some.

Companies in the aerospace industry HEICO did not have to go to the market to raise money Ed what I consider exorbitant rates of 8% or more or so we just went through this financially sound and I think that has.

Really helped us and has proven to be an excellent strategy.

In July 20, we paid the regular semiannual cash dividend of eight cents per share and that represented over 84th consecutive semi annual cash dividend. We did not cut that we did not have to cut the dividend.

And we were very proud of that some companies did cut dividends significantly because of cash flow pressures, we did not.

In July 20, we reported that hours Sierra microwave.

The P.T. and Threed plus subsidiaries supplied mission critical hardware.

For the Mars Twentytwenty perseverance mesh mission. The Mars mission is designed to better understand the geology of Mars and seek signs of ancient life by collecting and storing rocks soils samples for a future returned to Earth.

We're also testing new technology for robotic and human space exploration.

We congratulate the many remarkable people who accomplished this first step in this incredible mission and we're proud of the HEICO companies and team members, who contributor to the effort and we are excited for the missions next stage.

Talking about acquisitions in June Twentytwenty, we acquired 70% of the membership interest a rocky mountain hydrostatics.

Which holds industrial pumps motors and other hydraulic units with a focus on the support of legacy systems.

For the U.S. Navy.

The remaining 30% continues to be owned by certain members of Rocky Mountains management team.

And Rocky Mountain is part of our flight support group and we expect the acquisition to be accretive to earnings within the first 12 months following closing.

In August Twentytwenty, we acquired 75% of the equity interest of intelligent devices and transformational security.

These two companies design and develop and manufacture state of the art technical surveillance countermeasures equipment.

To protect critical spaces from exploitation via wireless transmission technical surveillance and listening devices in summary, I'll say basically spying by unwanted people.

These acquisitions, a part of electronic technologies, and we expect them to be accretive to earnings within the first 12 months following closing.

The remaining 25% interest was acquired by the non controlling interest holders of a subsidiary in HEICO electronic.

That is also a designer and manufacturer of the same type of equipment.

It was basically put different applications.

In August 20, we acquired 90% of the equity interest of connected.

Connectx designs manufactures rugged small form factor embedded computing solar solutions.

It's components, our design for a very harsh environments and primarily used in rugged commercial and industrial aerospace and defense transportation and smart energy applications.

The remaining 10% interest continues to be owned by a member of Connectx management team.

This acquisition is part of the electronic technologies group and we expected to be accretive to earnings within the first 12 months following closing.

At this time I'd like to introduce Eric Mendelson co President apply go and President of Heico's flight support group and he will discuss the results of this flight support group. Thank you.

The flight support groups net sales were 731.2 million in the first nine months at fiscal 20 as compared to 915.5 million in the first nine months of fiscal 19.

The flight support groups net sales were 178.2 million in the third quarter fiscal 20, as compared to 320 million in the third quarter fiscal 19.

The net sales decrease in the first nine month in the third quarter fiscal 20 is principally organic and reflects the 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.

Net sales in fiscal 20 follows a very strong, 12% and 13% organic growth reported in the third quarter and full fiscal 2019 year respect respectively.

The flight support groups operating income was 121 point.

6 million in the first nine months of fiscal 20 as compared to 179.8 million in the first nine months of fiscal 19.

The flight support groups operating income was 12 million in the third quarter fiscal 20, as compared to 64.8 million in a third quarter fiscal 19.

The operating income decrease in the first nine month and third quarter fiscal 20, principally reflects the previously mentioned decrease in net sales a lower gross profit margin, mainly within our aftermarket replacement parts and repair and overhaul parts and services product.

Lines and an increase in bad debt expense, principally due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during the third quarter of fiscal 20 as a result, the financial impact of the outbreak.

These decreases were partially offset by lower performance based compensation expense.

The flight support groups operating margin was 16.6% in the first nine months of fiscal 20 as compared to 19.6% in the first nine months of fiscal 19.

The flight support groups operating margin was 6.7% in the third quarter fiscal 20 as compared to 20.2% in the third quarter fiscal 19.

The decrease in the first nine months and third quarter fiscal 20, principally reflects the previously mentioned lower gross profit margin and an increase in SGT expenses as a percentage of net sales, mainly reflecting the impact to be outbreak and previously mentioned higher bad debt expense.

Yes.

Now I'd like to introduce Victor Mendelson co president of HEICO, and President of Heico's Electronic technologies group to discuss the results the electronic technologies group.

Thank you Eric.

The electronic technologies group's net sales increased 4% to a record $638.3 million in the first nine months of fiscal 20 up from $615 million in the first nine months of fiscal 19.

This increase is attributable to the favorable impact from our fiscal 19 and fiscal 20 acquisitions, partially offset by an organic net sales decrease of 1% the organic net sales decreases principally due to lower sales of our space commercial aerospace and other electronics products largely.

The attributable to the outbreak partially offset by increased sales of our defense products.

The electronic technologies group's net sales decreased 2% the $210 million in the third quarter fiscal 20 from $216.1 million in the third quarter fiscal 19.

This decrease is attributable to an organic net sales decrease of 6%, partially offset by the favorable impact from our fiscal 19 and fiscal 20 acquisitions. Your organic net sales decrease is principally due to lower shipments of our defense and commercial aerospace products mainly.

Attributable to the outbreak partially offset by increased sales of our space products in the third quarter.

The electronic technologies groups operating income increased 2% to a record $184.9 million in the first nine months of fiscal 20.

From a $181.2 million in the first nine months of fiscal 19, the electronic technologies group's operating income was $61.9 million and $62.2 million in the third quarter fiscal 20.

And fiscal 19, respectively. The increase in the first nine months of fiscal 20, principally reflects the previously mentioned net sales growth lower performance based compensation expense and the decrease in acquisition related expenses, partially offset by a lower gross profit margin.

The lower gross profit margin is mainly due to a decrease in net sales of certain space products and the less favorable product mix of certain aerospace products, partially offset by increased net sales of certain defense products.

The electronic technologies group's operating margin was 29% in the first nine months of fiscal 20 as compared to 29.5% in the first nine months of fiscal 19. The decrease principally reflects the previously mentioned lower gross profit margin, partially offset by a decrease in its DNA expenses.

As a percent of net sales mainly from lower performance based compensation expense and lower acquisition related expenses electronic technologies group's operating margin improved to 29.4% in the third quarter fiscal 20 up from 28.8% in the third quarter fiscal 19.

The increase principally reflects a decrease in SGN a expenses as a percent of net sales mainly from lower performance based compensation expense and a decrease in acquisition related expenses, partially offset by a lower gross profit margin.

The lower gross profit margin is mainly due to a decrease in net sales and less favorable product mix of certain commercial aerospace and defense products, partially offset by increased net sales and a more favorable product mix absurd.

Based products in the quarter now I would like to turn the call back toward chairman Larry numbers.

Thank you Victor and Eric.

Consolidated net income per diluted share decreased 32% to 40 cents in the third quarter fiscal 20 and that was down from 59 cents in the third quarter fiscal 19.

The decrease principally reflects the previously mentioned lower operating income of the flight support group, partially offset by lower income tax expense.

Net income attributable to non controlling interest and lower interest expense.

Consolidated net income per diluted share.

Increased 4% to $1.83 in the first nine months of fiscal 20 and that was up from $1.76 in the first nine months of fiscal 19.

And that increase principally reflects an incremental discrete tax benefit from stock option exercises, which we recognize in the first quarter fiscal 20, less net income attributable to non controlling interest and lower interest expense partially offset.

By the previously mentioned lower operating income of flight support.

Depreciation and amortization expense totaled 21.9 million in the third quarter fiscal 20 that was up slightly from 21.1 million in the third quarter fiscal 19 and totaled 65.2 million in the first nine months of physical 20 up from six.

The 1.7 in the first nine months of fiscal 19.

The increase in the third quarter and first nine months of fiscal 20, principally reflects the incremental impact from our fiscal 19 and 20 acquisitions.

R&D expense was 15.1 million in the third quarter fiscal 20, compared to 16.6 million in the third quarter fiscal 19, and it increased 1% to 49 million in the first nine months of fiscal 20 and that was up from 48.

7 million in the first nine months of fiscal 19.

Significant new product development efforts are continuing at both electronic technologies and flight support and we continue to invest more than 3% of each sales dollar into new product development.

Consolidated as DNA expense decreased by 20% to 75 million in the third quarter fiscal 20 down from 93.4 million in the third quarter fiscal 19.

Consolidated SGN a expense decreased by 13%.

232.8 million in the first nine months of fiscal 20 and that was down from 267.9 million in the first nine months of fiscal 19.

The decrease in consolidated SGN a expense in the third quarter and first nine months of fiscal 20, principally reflects a concerted effort by both flight support and EPG to control their SGN a spend.

In these efforts resulted in lower Gionee expenses, such as a decrease a decrease in performance based compensation expense and the reduction in various selling expense, including outside sales commissions marketing and travel.

These decreases were partially offset by an increase in bad debt expense at flight support, which I previously mentioned was $7.5 million.

Due to potential collection difficulties from certain commercial aviation customers that file for bankruptcy protection during the third quarter fiscal 20.

As a result of the financial impact of the outbreak as well as the increase from fiscal 19 and 20 acquisitions.

Consolidated SGN, a expensive percentage of net sales increased to 19.4% in the third quarter fiscal 20, and that was up from 17.5% in the third quarter fiscal 19.

The increase in consolidated SGN, a expense as a percentage net sales in the third quarter fiscal 20.

Principally reflects the F. for mentioned increase in bad debt expense due to bankruptcy filings made by certain commercial aviation customers.

And higher other gene as DNA expenses as a percentage of net sales due to decrease sales volumes.

These increases were partially offset by lower performance based compensation expense.

Consolidated as DNA expense as a percent of net sales decreased to 17.1% in the first nine months of fiscal 20.

Down from 17.7% first nine months of fiscal 19.

The decrease in consolidated as DNA expense as a percentage of net sales is mainly due to again lower performance based compensation expenses, partially offset by an increase in other G. As DNA expenses as a percentage of net sales and an increase in the bed.

Good expense.

Reflecting the previously mentioned bankruptcy filings.

Interest expense decreased to 2.6 million in the third quarter fiscal 20 down from five and a half million in the third quarter fiscal 19 and decreased to 10.6 million in the first nine months of fiscal 20 and that was down from 16.5 million in the first.

Nine months of fiscal 19.

The decrease in the third quarter and first nine months of fiscal 20 was principally due to a lower weighted average interest rate on borrowings outstanding.

Under our revolving credit.

Facility.

Our effective tax rate in the third quarter fiscal 20 was 13.4% compared to 22% to the third quarter fiscal 19.

The decrease principally reflects a larger deduction related to foreign derived intangible income.

Principally resulting from final tax regulations that were issued in the third quarter fiscal 2020 as part of the tax cuts and jobs Act that was enacted in December 2017.

As well as a larger income tax credit who are qualified R&D activities.

Our effective tax rate in the first nine months of fiscal 20 was 3.5% compared to 17.1% in the first nine months.

Team.

As previously mentioned.

HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter fiscal 20, M. 19, which accounted for a majority of the decrease in our year to date effective rate.

The decrease in the effective rate in the first nine months of fiscal 20 also reflects a larger deduction related to the previously mentioned far in derived intangible income.

Deduction as well as larger income tax credits for qualified R&D activities.

Net income attributable to non controlling interest was 3.2 million in the third quarter fiscal 20 and that compared to 8 million in third quarter fiscal 19 net income attributable to non controlling interest was 16.6 million.

The first nine months of fiscal 20 compared to 25 million in the first nine months of fiscal 19.

The decrease in third quarter and first nine months of fiscal 20.

Principally reflects the impact of the dividend paid by HEICO Aerospace in June 19, 2019 that effectively resulted in the transfer of the 20% non controlling interest held by Lufthansa technique in eight of our existing subsidiaries.

Back to the flight support group and a decrease in operating results of certain subsidiaries.

The flight support group.

Non controlling interest are held.

Moving onto the balance sheet and cash flow, our financial position and forecasted cash flow remain extremely strong.

As we mentioned earlier cash flow provided by operating activities was consistently strong at 299 million.

And.

213.4 million in the first nine months of fiscal 2018.

Respectively.

Cash flow provided by operating activities totaled 93.1 million or 171% of net income in the third quarter fiscal 20, as compared to 135.1 million in the third quarter fiscal 19.

Our working capital ratio improved to five times.

As of July 31, 20, compared to 2.8 as of October 31 2019.

Our day sales outstanding Dsos of receivables improved to 43 days as of July 31 20.

And that compared to 45 days as of July 31, 19.

We monitor all receivable collection efforts and try to limit our credit exposure.

No one customer accounted for more than 10% of net sales and our top five customers represented 25 and 21% of consolidated net sales in the third quarter fiscal 20 and 19, respectively.

Inventory turnover increased 254 days for the period ended July 31, 20, and that compared to 125 days for the period ended July 31 19.

The increase in the turnover rate principally reflects certain long term and non cancellable inventory purchase commitments based on pre out.

Outbreak net sales expectations.

And also and this is the necessity to support the backlog of certain of our businesses.

Now looking forward the outlook.

We cannot estimate the outbreaks duration and magnitude and we cannot confidently predict when demand for commercial aerospace products will return to pre outbreak levels.

However, we do continue to forecast positive cash flow from operations for the remainder of physical 20.

We entered the outbreak with a healthy balance sheet that included a strong cash position and nominal debt.

We believe HEICO is favorably position for long term success. Despite the short term challenges created by the outbreak in the global economy.

This call good pandemic will not last forever.

Our time tested strategy of maintaining low debt.

And acquiring and operating high cash generating businesses across a diverse base of industries beyond commercially.

Aviation, such as defense base, and other high end markets, including electronic and medical.

Puts us in a good financial position to weather this uncertain economic period.

I'd like to end my remarks by again 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 professional success.

We will exit this outbreak stronger than before and that strength will manifest from our culture of ownership mutual respect for one another the unwavering pursuit of exceeding customers expectations.

And we thank you all for all that you do to make HEICO and exceptional company and I would like to Ed I also think our loyal shareholders, who have stuck by HEICO and sent US many many positive comments and thanks.

And we truly appreciate your interest and support.

And now I would like to open the floor for questions. Thank you.

Participants to ask a question you will need to press star one on your telephone keypad to withdraw your question. Please press the pound or hatch.

Oh.

First question comes from the line of Robert Spingarn. Your line is now open. Please ask your question.

Good morning.

Good morning, Rob.

Thank you for all of the detail I, just wanted to perhaps dig in a little bit Eric.

Maybe we could start with Fs Ci and just talk about the different businesses with NFS GE and there are varying performance is if you will have a parts overhaul distribution and then if you could talk a little about the trend between the months in other words did may mark bottom.

And how to June and July look and then I've a couple other things after that.

Sure Rob.

Let me start with that trend we were.

Back in May when we said we were hopeful that.

May would mark the bottom in fact may was the bottom.

And we were able to bounce.

Nicely off of the main numbers.

Into June and July.

And I would say you know they were sort of consistent in that level.

In terms of reviewing the businesses within the parts side of course, we've got the Pmeight and we've got the distribution and I would say that they were down you know sort of in the similar area.

Repair was down a little bit more and that was to be expected as airlines.

We anticipated would reduce whatever expenditures that they saw.

Specialty products I would say was down a little less in the beginning of the pandemic, but I think now as people recognize that the build rate is going to be reduced I think the suppliers to the Oems, including HEICO businesses that do that are going to be.

Impacted sort of longer than the aftermarket is going to be impacted.

I reviewed with our sales executives the.

Customer sales and how we're doing by product lines and by customers and it sort of interesting to note that while that the businesses down the percentage that we reported there are certain airlines that are down very significantly I would say, 96% nine.

80%, 88%, 87% and these are major customers I I don't want to mention.

Their names and I don't want to mention there geographies, but I can tell you that these are major airlines that are not going to be able to operate I mean, they're operating.

30% to 50% of there.

Right and yet their purchases are down in the Ninetys and obviously that is not a sustainable model I think that they are.

Our people believe that they entered the crisis with lean inventories and my sense is that they are.

They've used up or they are using up whatever they've got and.

This is not going to last.

Indefinitely. So to answer your question I think that the OEM market will be down longer for the new boat and you know for the reasons that airlines don't need the aircraft, but I do believe that the aftermarket will.

We'll start to snap back and did you see did July improved from June.

So I did improve from June.

But I would be careful to sort of extrapolate that improvement going forward because as we've seen with the.

Sort of the late July.

Increase in infection rate of course, that's now come down I mean that would obviously.

It is sort of put a damper on the increases going forward. So I think very much it's going to be related to the infection rates into the progress on a therapeutic as well as a vaccine.

But the one thing, which I am extraordinarily hopeful of and very very positive on is when I met with our salespeople who are probably on this call.

And we reviewed that the customers in detail I gave them every opportunity to tell me why the future would be tough and why I should.

Why things may be difficult coming out and sorted for them to set expectations low and I can tell you that to a person they were extraordinarily optimistic they think that and they gave me specifics as to why HEICO has increased its credibility with the customers that were a significant.

The Asian.

A company now if you look at our market cap versus other companies and they believe that we're going to come out of this significantly stronger than we've come out of any of the other prior crises and they gave me the specifics, which I don't want to mention for competitive reasons on this call, but I believe that we're going to be in a very strong.

Shape to come out so I.

I guess, what you're getting too is when do we think things will get better of course, we don't know, but the one thing we are 100% certain of is they will get better and we will emerge us definitely stronger than we've ever been.

And just on that Eric while some airlines are underperforming.

The the traffic numbers as you just mentioned our others.

Starting to recognize your value proposition are you gaining any market share here and I wanted to call out China, specifically since it sounds like Camay has not yet really penetrated that one region. Yeah. I mean is as you know where were hesitant to talk about specific regions or a customer as we pretty much deal with every.

Body. So it's not so much getting new customers for us is as it is selling customers more of our product line and I'm very optimistic that we're going to be selling I I've seen a lot of specifics on customers.

Interested in working on improving product that they had not in the past.

Our time has come there is no reason that if somebody is buying X percent of our product line they shouldn't be buying the entire product line.

And we've got I believe the best people in the field one of the reasons why our results in margins were better than expected, but lower than.

We would have liked is because while there with a lot of shared sacrifice in terms of furloughs and reduced hours and reduce pay we've done everything we could and we can to keep our people whether it's the new product development folks are the sales folks.

Quality purchasing everything to keep our people on our payroll because we believe that we're going to come at it is extremely strong and we don't want to be caught flat footed. We've got a number of peers in the industry, who I believe were.

Very aggressive with their reductions and I think that that is.

It's going to hamper them coming out where its HEICO has continued to maintain that infrastructure.

Okay I'll leave margins for the next person, but Victor just quickly on your side I just was going to ask if you talk a little bit more about the decline in sales on a quarter and Nick and the impact of co bid and how you think that sets up here for the fourth quarter terms of organic growth.

Thanks, Rob. This is this is victor.

Maybe taking it a little bit in reverse order of and thinking about the fourth quarter, which of course, we're in right now.

I'm not sure.

Where things will wind up exactly within the for fourth quarter.

I could see us being up five or 10% just as easily as I could see as being down five or 10% in the fourth quarter and that sort of gets into then the first part of your question.

And the kind of things that we're dealing with and so of course commercial aviation that part of STG is down and it's comparable to what we're seeing within the flight support group.

Commercial aviation businesses within the flight support group Tonight, I expect that they have a trajectory thatll be comparable to two what we experienced in the flight support group and then so the other part that's impacted some of the markets. The more general markets that we've talked about.

That had are serving the broader economy some in the harsh environment markets.

Have been slower and our have slower demand.

Not dramatically, but you know you've seen.

5% to 20% down in some product lines and things like that so.

That's that's kind of the part of the business. That's just a little bit slower and then you get to the part that isn't slower right that that has strong orders that remains healthy which is the bulk of the business and that's in the defense and space side.

And what we continue to see our disruptions that we talked about in the early part of the call that comes from generally its supply chain side of it but sometimes the customer side, where lets say on the supply chain.

It's a it's deliveries it's a little have a supplier.

Which is experiencing their own.

Outbreak issues in their plant and they'll have a line go down or something in there two weeks or four weeks later something like that we have it and then there there late delivering to US and then in turn that slows us down and so you see things just kind of moving yeah, nothing dramatic but things can.

Now for for a month or or two weeks or something like that and it shifts from one quarter to the next and.

Then on the customer side, we'll see the same kind of effect, where there will be closed or though there will be at half staffing or something like that for two weeks or four weeks and the Pos and get out in the order doesn't get placed and then we have decisions to make well we know what's coming do we go ahead do we build ahead and we.

Generally don't take a lot of risk on building ahead and committing capital far in advance.

Ourselves. So we we grapple with those decisions, we've got actually some government customers I wont, obviously name who they are but you've got government customers who.

Can't work online they can't have their people working from home for security reasons.

And they are at 30, or 50% staffing levels and so they're delayed simply because they have people on these rotating shifts in there like one month on one month often.

Or stuff like that so no fundamental change the demand is there and it eventually gets placed so we're very optimistic about those.

And that's why I say it could just as easily be up five or 10% is down five or 10% I don't think anything dramatic Fortunately and overall.

Pretty pretty healthy, but it makes it difficult to forecast if you will at the margins keep in mind one other thing when you look at the business. You know you look at the EPG for example, and you know you're talking about a business that.

Couple of hundred million ish in a quarter.

1%.

Is about $2 million.

You know a little bit more but you know about 1% is about $2 million and you have a few businesses that shift by just a few hundred thousand dollars.

And it moves from one quarter to the next than you have a small number of businesses where that happens. It can have an effect, where you have one or two or 3% of organic growth all of a sudden disappears and moves.

Just a final detailed point would you call any difference or major difference out between space and defense in terms of either supply issues or demand issues.

Well in space, you know when I talk about space I'm really referring to the commercial space part of it on the supply chain side.

No not not so much because you know the issues that face.

People.

Companies are similar and.

So if you have a space supplier, who is delayed any can just seasonally the defense Guy who's delayed I mean, we all saw this of the F 35, right that they're going to have a delay in testing now.

And you know simulation right that last week.

So no on the supply side it can be the same.

You know, it's just sort of the look of the draw.

And commercial space of course, as we've talked about in the prior calls.

That the shipments now are picking up to match the orders that we talked about which had been.

Accelerating and there has been an improvement on our commercial space side as we expected.

Okay. Thank you very much. Thank you Ron Thank you for the questions.

Next question comes from the line of Peter Arment. Your line is open. Please ask your question.

Yes, good morning, Larry Victor and good morning Theater good morning, good morning.

Eric why I'm, just a follow up on robs you know a left me the margin question. So I'll ask it just how you're thinking about the.

Kind of the Decrementals were I guess and that kind of looking at high Thirtys.

How you how you think about margins kind of trending from here. It's clearly this threeq you what's kind of the trough from an overall top line perspective.

Good morning, Peter and thanks for your question.

So the if you add back the.

Bad debt reserve that we had in the third quarter or the flight support groups operating margin was around 11%. So the adjusted operating margin.

And of course, we had no way of knowing.

Yeah, the the impact of what this these bad debt charges would be when we.

Originally said at the end of our second quarter call that the flight support group.

Would operate in the breakeven area with sales down 50% to 60%. So I think we did a sales wise much better than we expected as well as margins much better than we expected.

And going forward it it really depends on the the slope of the recovery, we're very optimistic that we will recover and we're going to come back much stronger than when we went in.

But the period of time that it's going to take for that recovery is is difficult at this point, but I would say you know probably somewhat comparable if I were to guests to the third quarter.

On an unadjusted basis right.

Correct and Carlos I think is something to add here yeah I.

Well as Carlos good morning.

Yes, I would say that.

Bad debt expense, even though it was kind of this one time period type cost that.

I'd like to see it is something thats hard to control and airlines.

Hi, bankruptcies, we probably had 20 airlines during the quarter.

Declare reorganizations or chapter 11, so that our policies are to just basically right that stuff off put a reserve up against that when we see that occurring and.

You know if we get paid great we hope to get paid but nonetheless be conservative about it now as a result of that and I talked about at the end of Q2, we have continued to really scrub, our receivables and our customer base and make sure that credit that were granting to our customers alike.

And with their financial strength and hopes that we and continue to do not extend ourselves in any one particular customer so.

I think we've got while I can't predict whether there will be more bankruptcies I do believe that we have very conservative and very practical policies around receivables and hopefully.

Next this this chapter elevens, we won't see this type of charge in the future.

That's helpful and I've just as a follow up question on on just M&A Youve at six deals this year I think for since the pandemic.

In terms of so clearly your ability to execute deals remains on on a on a on a good pace. What are you seeing in the M&A environment you'd see that are there more deals that you think now that are coming available or how are you approaching it I guess, particularly if you're looking at any of them yet.

This is Larry.

We see a lot of books coming across our desk.

We see we think the motivation or probably twofold, one some companies feel under pressure they've seen their markets shrink and so forth than they would like to have a strong financial partner. So thats. One thing. The other thing is that the talk of a biden win and increase.

Use of capital gains tax is 43, and 5% or something like that is really scaring the hell out of a lot of people and including me and Hi, I must tell you that.

We are seeing more books than we can handle and also.

Because of the logistics of doing due diligence and you know we do a very thorough due diligence in house it takes longer.

Because you can't go out you can access the facilities and so forth, but I would say that the M&A excuse me pipeline is really very very strong and I also think.

It was seeing much more reasonable pricing and I think that we will over the next 612 months have some very excellent opportunities and Peter. This is Eric also I want to add that due to our capital structure and the culture at HEICO valuing our team members because frankly, they're the ones who make the company.

When times are tough like this we stick by our people we stick by our programs you know, we're not highly levered, we don't swing around.

Hi.

Cut very deeply.

So as a result, I think when sellers look at HEICO all businesses go through various cycles, but they want to be connected with somebody who is going to be patient and work with them in frankly, not kill them and run them out the door. The first time, there's a downturn and I think when you look at.

So you see that that's the case and that's something that we tried to articulate and I think is one of the reasons why we continue to be the acquire choice. We're very busy flying around meeting with management teams with entrepreneurs in very very much focused on continuing to make acquisitions and.

Use our way under Levered balance sheet.

I appreciate all the detail thanks. Thanks.

Next question comes from the line of Cotton cannot lifestyle. Then please ask your question.

Yes. Thank you good morning, guys.

Morning.

One of the follow up on a couple of questions first.

You know any commentary on August trends that SSG has that sort of continued the linear areas improvements.

He talked about during the July quarter.

No. This is Eric.

No I would say since its really outside of our.

It's not included in our third quarter, we'd rather not comment on it. However, I I think it's reasonable to expect to be if you look at the general you know as I mentioned before you look in the general sort of infection rate trend, what's going on in the economy I think it it's logical too.

Assume that.

You know things are a little flattish right now.

And then.

But we and I think people are optimistic that it it will recover so the only question is exactly when that recovery occurs.

Got it.

Just I want to that point.

Have you seen customers that has not been.

As aggressive in using pmeight, starting to inquire more about it so that will actually maybe you'll see greater customer adoption.

Yes, if we had the overall mark the correct, yes, unequivocal say, yes.

There is been a lot more interest.

And.

Definitely you know with airlines under the gun.

Having to show a reduced costs for the same if not improve performance.

Absolutely and that's what gives me so much confidence for the future.

Okay. That's helpful.

The at EPG that you could you maybe you said it but I just wanted to make it.

Also myself [laughter] in terms of underlying demand. So theres this timing on shipments, which customer may or may not be an on site to accept delivery and that can swing the organic growth.

Growth rate around but.

Can you give what do you think the underlying demand grows.

Is right now do you think it is kind of low single digits and so.

We do see a catch up to 5% to 10%, maybe it's not in Q4, but.

At some point.

The stars nine or how do you if you put it altogether I would you aggregate underlying.

At this point.

It's a good question and I'm not trying to be cuter evasive it's difficult.

To assess that now because of some of those disruptions I was talking about where.

We have customers who are.

Not they're sort of missing in action and all of decided there there.

And placing big orders and hurrying up.

Are asking us to rush.

Because they were out for two weeks or a week or month or something like that.

It's so it's difficult to assess oh on the defense demand up and space.

It feels robust and when they show up you know if they're not they're all of a sudden and slow and then it picks up it seems to make up very nicely, where it it does seem to be lagging as I said or in some of those other markets that we serve.

But then again, what we'll see something C and it'll have a feel of lagging and then the customer shows up in says Okay look we really need to hurry up can you ship faster and we have a bunch of orders. We know it's anything you can do to trim the lead time so.

I I really hate.

To be evasive on on this sort of seem evasive, but I I would prefer not to give you.

Any percentage feel at this point until we've got some better clarity.

Which which I'm, hoping maybe in three or six months, we will.

And you have a better sense.

Number one thing got summit.

You know and we've said this historically quite often.

We are very customer focused and if our customers are struggling not there whatever we're not going to put something in the mail incented tome and say tough we want to make sure that we are easy to do business with.

And that our customers respect our flexibility in and our structure is uniquely are done in a way that it can handle that ad hoc.

We are not one big monolithic organization, we have multiple subsidiaries all over the place and they're closer to their customers and they monitor and deal with this and I think what that will do for us going forward and into the future as it will NDRC, even more to our customer base and will allow us to to move forward, even a stronger position with all of this customer so.

Hi, good Victor we can't really give a percentage because we're not so focused on that but what I do know is that our customers. Appreciate the way. We're handling this right now and I think thats going to pay dividends for us in the future.

I appreciate that and if I may it's just on SSG on the repair side of the business are you seeing customers.

In source more of that stuff or is there do.

Do you think there's been no change to how.

You know the customers are actually looking to us to so I'm just wondering how much us like underlying demand versus in house got it no I don't think they didn't source.

I think that there hasn't been much change if anything is probably going to be greater outsourcing due to the.

The people cuts that they've been forced to make.

So I think our component repair.

People are very wired in and are very optimistic on a number of really good opportunities.

Okay.

Larry lesson for you on M&A, you talked about the pipeline, but are there any larger transactions that you think or.

Maybe more likely in this downturn that could come your way or are these going to be more of the tuck in variety. That's characterized the recent.

You know, we're an opportunistic acquirer.

We in the M&A field, we really manage our cash and I think that's one of the secrets to our success, we don't put out money unless we get a return on those funds and they pay for themselves. So.

It's not size that gives us bottom line earnings and cash flow. It's if we have a good opportunity with a great.

Seller or an operator, we'll take advantage of it. We also as you know use the policy of having sellers retain a percentage to keep them interested in involved and that's been a very successful formula now as far as the size of the trend that we do look at larger track.

As actions and we consider them would we like to do a larger transaction, yes as long as it meets the standards that we set we're not going to do a big transaction and dilute everything in dilute cash flow in and build up debt and so forth without getting a.

Strong return, which we like to get so we had been successful income Pat remember our goal is compounding our bottom line at 15% to 20%. So we will make acquisitions and internal organic growth.

To meet that goal.

Good for large acquisition is available we'll do it.

And if we have to go smaller bolt ons that really generate cash we'll do it just as an example.

The company's that we buy.

There you what we check based upon their historical performance cash flow and everything normally pay for themselves and seven to 10 years by the time, we get to the third or fourth year on the look back what we have invested the initial investment less what we have taken out of the company.

Or the company has produced cash for us, we probably have them sitting in our portfolio and anywheres from two to four times.

EBIT day, so I mean, there [laughter], they're producing more cash annually then I mean, it's amazing that is why you get the results that you get or we get the results that we get so it's to me and to us and our team. It's all about the cash flow return.

And that that is more important than a than the earnings per share. Although we know if we have cash flow. We will have earnings per share. We can have earnings per share, but cash flow as you very well now so that's that's what we will continue.

Too.

Focus on that strategy I hope that's answered your they have does that answer your question.

Yes. It does thank you I appreciate it.

Thank you.

Okay tickets.

Okay.

Next question comes from the line of Larry Solow Your lifestyle often please ask your question.

Great and a good morning to us.

Good morning up.

All right, let's stick with the acquisition theme in just a follow up on that and I know HEICO stroke is very high standards.

As covert changed or brought into your potential not at all I mean, I know you really can't simply look through covert so just trying to.

I guess what are the gauge how you sort of a fine line. How you look at you're looking at comp is a little bit differently and I mean, you know because of Cowen.

I don't think so Larry I think we're looking at them in the same way.

We.

As you know, we don't want to pay for a hockey stick and most deals and as you will know the investment banker shows you a hockey stick in its tells you you know next year in the year is going to be greater so therefore pay for it upfront we normally don't buy into that unless we can feed.

I feel comfortable in due diligence that they really have the orders on the books and so forth zone. So the cove it.

We are trying to structured deals where we paid for what we get on a current bases.

And then offer the seller earn outs or partnerships. So the seller. It can really have is cake and eat it too they can secure a down payment as a percentage of of the total and then over the next 3456 years they can make.

The difference if in fact, the company earns us. So this kind of protects us on the downside and it protects the seller on the upside and that obviously that.

Structure appeals to a lot of people and it's a we think and they think it's a very fair structure and Larry This is Victor and keep in mind, where we're not buying and we're not trying to be.

Commodity transactors rents are working with people, who care about their businesses and care about what they created and care about their people. So this is not just like they are selling a piece of land or a building or something in the right now.

It gets the what transpires post closing they really want a good home for the business and that is as much a part of this is not just about finding a price and moving on although obviously prices important I mean, they're selling to to do the to have some security and a great liquidity in the.

Other thing so.

That's all part part of the consideration.

That goes into it for us and I think that's very much what distinguishes us and if you look at the transactions. The acquisitions. We made recently one of them was a company we've been talking with for four years in getting to know for four years and they were not.

For so they were not in a process and I don't they had no investment banker and it was just our typical type of transaction.

The other two companies one of them.

Was not for sale, either and as part of the process of buying the first into the two related companies, which was kind of going through a process, which they truncated for us because of the relationships. They had with one of our other companies are the people they knew it at one of them.

Our other companies and they said you know these are the people we want to sell our business too and then in the discussions that business that was related to that.

Sorta convince them that we'd like to put it all together and do something exciting together those part of that and.

I think we get an advantage out of it.

Absolutely not.

But one thing we won't do by the way you know is.

We're not going to do a deal just for the taken doing a deal we're not going to force a bad deal because we own forever and we don't sell its not like private equity or were not just stacking. It online some sort of Ponzi scheme, where all right and I will get some growth this year in who cares what happens next year, it's got to work forever right.

Right now that makes total sense I don't appreciate that color I'm just shifting gears.

On maybe a question of Eric just on and everyone's obviously, you know trying to figure out when we might see above a turnaround or and clearly we're getting a little bit hopefully we bottomed but.

But as we look out T.S.A. I guess, the traffic numbers still down like 70% I think most recent number.

You know fair to say what that number.

Good indicator and if that doesn't rapidly improve which are probably more in the near term that revenue performance will be sort of similar to where it's been without a change or not or further improvement or not.

Yes, Hi, Larry I I would say that is pretty much correct with the exception that I mentioned earlier in the call that a number of our customers are operating down in the 90 percentage area.

And if that is just not sustainable and these guys are flying aircraft and it is just impossible for them to not purchase the parts. So I do think that we could have a.

Somewhat we may do better than that.

And I think naturally is they run out of inventory. So I guess the short answer to your question is even if things stay where they are I would expect a rebound because they have drawn out the inventory inventory right. Yeah, it's it's going to come back quicker.

But.

Okay.

You know definitely the number of ice is something that we watch very closely but but they can't continue operating at the levels that direct.

Understood understood and then maybe just last question just for Carlos him because he mentioned that to get close to 20 bankruptcies this quarter and you've you've scrubbed your accounts receivables and hard to predict future bankruptcies, but obviously the missile shakeout seems like it was.

Do you feel like we should slow down now and.

Hopefully not see this kind of volume of bankruptcy has an impact on air performance going forward.

<unk>.

Thanks to the question. So my view on this on that topic is as follows most of the large domestic whether it's us Europe, China wherever.

They are getting some sort of government assistance and candidly these airlines or in many cases, the pride of many of these countries since so I feel like the ones that have been shut shaken out in Q3.

Canada, where some of the ones that was worried about at the end of Q2 and I brought that up on our conference call and.

Played out I don't think at the moment that him as concerned one thing that we have done as you just mentioned as we did rationalize some of our credit exposure, we did a pretty deep study on that to make sure that we were appropriately supporting our customers, but that we weren't.

Yeah, they weren't using us as a bank candidly and we won't do that going forward, we haven't in the past by the way so.

I don't we're sitting here today.

Obviously, I'm concerned about further bankruptcies, but.

At the moment I feel like they've been supported either through additional debt equity offerings or.

Got them in assistance that I think we'll get them too.

The next point, where traffic picks up and well look forward. So that's my view on it right now obviously that could change in a dime if things got worse, but we're not I think right that'll be the case right now.

Got it okay, great. Thanks, again, guys I appreciate it.

Thanks, Larry.

Next question comes from the line of Josh Sullivan. Your line is now think please ask your question.

Hi, good morning.

Uh huh.

Just a follow up on that to hurt maintenance conversation and young sustainability of inventories. So I mean, if you say traffic does stay at these current levels. When do you think that crossover point as well in the current demand levels that deferred inventory just has to be addressed we do see it early 21 could it.

Later this year just curious on on the timing when you might see that.

Yeah I, it's a good question, Josh and it's something which I think about quite a bit.

I think that it could start later this year.

I just don't see how these airlines can continue operating with the low level of purchases that they've had.

So I I you know my thought is that it's it could be a quickly but certainly in 2021.

Got it.

And then can you just give us some color on any differences and how the mainline legacy airline carriers and the low cost carriers are handling the current environment maybe versus previous downturns.

I would say that in general everybody went into the downturn with.

Much lower inventories than they had in the prior downturns, whether it was the global financial crisis in 2008, nine or are the U.S. carriers to win 911 happen the international carriers with Sars.

They went in with much leaner inventories, so I anticipate the snap back to be quicker than.

Then perhaps it has in the past.

Got it thank you for the time.

Thank you. Thank you.

Next question comes from the line of Sheila Key algorithm lifestyles. Then please ask your question.

Hi, Good morning, guys and thank you.

Just a long last lines of questioning I actually thought organic growth organic decline within FSC was you know pretty decent down 44% just considering what capacity is around and your short cycle nature of your business. So maybe can you talk about why you think theres, a 25 30 point Delta.

Between capacity and aftermarket Robin yes.

Sure.

Good morning show you a part of that of course is our defense exposure.

Which has mitigated the impact.

The other portion.

To a lesser extent was really our specialty products, which is primarily OEM related now I do anticipate the OEM related products to be down sort of longer.

Because you know we expect the new build rates are going to be down.

But I think this points to the importance of the HEICO products out there.

We offer a great cost savings were very aggressive on developing new products.

We've got a lot of stuff in the pipeline and I think that we're going to be a very key part of our customers recovery plans HEICO is well capitalized we kept our salespeople out in the field, we didn't do like other companies, where they really slammed costing got rid of engineering I mean, we've kept all that.

So I think that.

Ah that's really helping us at this time.

And then maybe just two more for you I am sorry.

Mentioned that folks are liking your products and I think you said top five customers account for 25% of consolidated sales. So I know, that's partially split with vector, but how do you think about expanding that top five customers or are you seeing any swings.

Incremental pickups from.

No other regional airlines.

Oh, we are I, you know were out there with all of the airlines, we want to give them is much attention is they will tolerate from us.

So were always out there trying to develop additional customers and.

As I mentioned in one of their questions earlier, there's no reason if somebody is buying.

X percent of our product line that they don't increase in by all of our product line and frankly. This is the communication effort that we engage in daily and I think it's it's taking hold and that's why our people are very optimistic on our recovery here and why we're going.

To play a greater role in our customers fleet plans you know when we came out of their financial crisis I don't know I don't recall, what heico's market cap was at the time, but it's a fraction of what it is today and today when we're out there competing with other suppliers I goes got up much.

Larger market cap than they do and we have a tremendous amount of credibility and there's no reason why the airlines shouldn't be increasing their exposure with especially since we kept up with them during the down cycle. We kept our people we kept the new product development, we kept shipping.

There were a lot of a lot of suppliers, who cut off the financially stressed.

Customers and while we were careful to manage in only ship and what they needed we help keep them in business. So I think that that's going to help us in while this roughly 8 million dollar bad debt hit really stations I think that it plant the seeds for very strong customer relationships.

Going forward.

Sure. That's helpful. And then last question, Eric I'm, sorry, I'm, focusing them, all and <unk> and going all the way back to Peter's question I. Just wanted to clarify you know the bad debt expense you added back when we get 11% margins I get it.

You know the decline was a little steeper than most your peers and I think you mentioned, you're you've talked a lot of staff on R&D and sales et cetera, how do we think about the way up is it still a 30% incremental on the way up.

You know Camille.

Okay got us a little bit there.

Hey, So this is carlo so.

On the detriment I think for the for Q3 were around 37% for this segment. My view continues to be that you know our decrements resemble a component of fixed cost center on our normal margins, which roughly 40% I do think on the comeback so as we can.

Can you to follow the industry and hopefully outpaced the industry I do think those detriments will shrink or the I'm sorry, the add backs or the additional revenue will produce probably higher incremental margins than the documents were because we have leaned out in our flight support group a little bit and.

We'll be pulling back that volume on a lower cost basis. So I think that that will be very favorable but.

In regards to our competitors I you know I don't I don't know what competitors are you're comparing a stupid I'll just candidly you know we second quarter. We told folks that have were down 50, 60% in the segment would breakeven I think we did about.

What we thought we did in fact absent that bad debt charge I was actually happy.

Satisfied, but happy that we were able to produce an adjusted 11% margin and think that.

If we're looking forward, although we're not giving guidance I don't expect Eric and correct me on this if you believe but I don't expect Q4.

Margins to be too much different CRE I agree with you I agree with you.

Thank you so much thanks. Thanks.

Next question comes from the line of Ken Herbert lifestyle Open. Please ask your question.

Thanks, Good morning, I'm not running Ken.

Hi, Eric I, just wanted to first start with you everything you've talked about points to your confidence and you highlighted this is it really sort of sort of your ability to take share how do we think about coming out of this what your growth rate should be within SSG relative to the industry in terms of the commercial aftermarket in particular.

I I think we're going to do better than the industry I think that our cost saving.

Products are going to very much be needed a people are trusting us more so I anticipate that we're going to we're going to come out stronger than out than the industry.

No I mean, you've historically outgrowing the industry sort of wanting to have to two times is that a fair benchmark or should we even expect something better moving forward.

Hey, you know, it's a tough number to look at because you know when we compare it to you too there are many things to compare it to way as and number of provides revenue passenger miles.

Aftermarket sales performance of our peers.

So I think no matter, what you look at where we're going to outperform it.

And.

Sort of the multiple is even it depends on where we are at that moment in time.

And remember one of the things that we typically don't have is the.

Initial provisioning and that can of course skew the numbers one way or the other so we we don't benefit from that initial provisioning in general.

So.

You know ours is really just straight aftermarket.

Usage of parts.

Okay, that's great and just one final question as you look at the.

You know the the timing here you've called out your ability to to maybe drive more new product introductions, how do we think about either your investment in either R&D as a percent of sales maybe or another way to look at it on a percentage basis, how much more do you think you could be bringing product to market to take advantage of the.

The opportunity.

Coming out of the crisis.

Well, where we've kept up our new product development, I think whereas many of our peers.

Had slash new product development, we have not and you know that that of course weighed on our margins. We also.

Did what we could retain our people and I I think our cuts were significantly less than our peers.

So I anticipate that we're going to come out stronger I in terms of number of products I think it's going to be similar to what we've done in the past you know probably as a percentage of sales R&D cost is going up because sales have gone down.

So, but where we continue to be very bullish.

One of the things can that I would just comment on is that Terex point, we're still playing to put out four or 500, new parts. This year and that's the cadence that we believe the market can absorb however, and Eric mentioned. This earlier, we strongly believe that now a lot of these airlines are buying everything they can from us and where we're going.

To get I think the biggest bang if you would coming out of this is that these customers will lean into HEICO for these cost savings and look at our existing products that they are currently not mine and really dive into some of those and I think thats on top of the new product.

That we introduced to the market I do think that our existing product base as an opportunity really expand coming out of this.

Great. Thank you very much.

Thanks, Ken.

Next question comes from the line as Michael.

Yeah I'm always your line is now open please ask your question.

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

Yes, Eric or Carlos if I could just go back to the margin question. I mean, you know looking at your trailing margins, 18% to 20% obviously were depressed here I mean.

Do we need to see a major volume increase for you guys to get back to that level. I mean, if we if we think about you know I think some of the the market forecasters out there, saying the MRO market was 83 billing and it's going to be 35 billion. This year 39 billion next year I mean, if this market.

Mains depressed and your volumes here, you'll get some pick up here, maybe we get to a 200 million revenue quarterly run rate can can you get the margins back into those those upper teens are we or should we be calibrated for sort of this lower double digit margin environment until we really get volume growth.

Ken.

From our standpoint, we don't think that this is a permanent impairment to the industry and so we're viewing this as quite temporary and as a result, as Eric mentioned earlier you know, we've we've made what I'll call humane.

Cuts and cost reductions and things like at with the eye towards future. So let's say in a short term we're willing to stand by our employees stand by our team members and keep the business is intact to meet that expanded demand.

And so that's a short term thing if this was to become protracted in permanent that of course, we would do other things to our business too to drive margins up and have our footprint matched the demand. However, we think that demand right now as a dislocation and we're not willing to sacrifice a customer service new products and things like that just to me to show.

Short term.

Quarterly hurdle auto margins Thats, how were looking at it I don't.

I don't think that that's going to change and I don't think the futures done enough at this point that would make radical moves just to improve our margins in the short term.

Got it what is that definition or the short term I mean are you guys banking. Yeah. This is goes on for another three to six months or how are you actually declined in the short term.

Yeah. Thank Eric mentioned earlier that that you have had the industry could be through the end of this year, where where we see.

Softness but at Turner.

I know, we're not we're not here to predict when that happens so okay.

Quarterly ended at our view are often some is that by the end of this calendar year, we should start seeing some some volumes and purchases for the share fact that these airlines have not been spending the money and they have been fly and even though a lot of their fleets on the ground have been find these plans. So we do expect just natural.

Demand for those planes that are in there are going to kick up sometime in the relatively short period, yeah. It into it just yeah. It's so Mike it's so hard to pick what the numbers are I mean, frankly, we thought that third quarter. You know I went back and I look at our internal forecasts in may as to what we thought the third.

Quarter would be and we significantly outperformed.

So it's very hard to get you know these that backs come when nobody is expecting them and boom. They just all the sudden Tom and then things flatline for Awhile and then I think they come again.

But I do think that people are just itching to get out or you know in there there they're being careful getting more comfortable with with a social distancing wearing masks and non aircraft and that sort of thing so but it but it's just hard to predict exactly when.

Sure sure what I promise you one thing we're going to be ready for him.

Yeah got it what about on the inventory side I mean, your your parts that go to distribution do you up a good view of what kind of inventories in the channel on and if we were looking at those bankrupt Airlines you know maybe not all bankrupt airlines, but certainly one that ceased operations like express the jet but does that.

Inventory hit the marketplace are you guys tracking sort of those parts out there competing parts you know for the HEICO product line and any thoughts on that no. You know I think the companies that have had the airlines that have had to reorganize I think Dan very little inventory and <unk>.

We we worked with them to keep them flying to help them out.

But I think they had very little inventory I I don't anticipate there being any impact based on that.

Okay got it last one Carlos your inventory up again in this quarter, how should we think about your inventory levels and maybe how some of that converts the cashier.

Good question surprise it took this long to get it.

So look.

As you can imagine goal when you're dealing with.

I just can't electronics highly sophisticated metals for aircraft aerospace and commercial aircraft you have to put in orders for our materials, while in advance and so we're not we're not immune were like everybody else. We had a lot appeal is outstanding Noncancelable Peos outstanding.

Going into this in March where we had a lot of lot long lead time materials that we committed to and we got out of everything we could.

But there are certain things that we were committed to we couldn't get out of so really this quarter with infected by that we had to take fairmount inventory that we had our druthers we might not have taken at this time. However, it's all consumable has long shelf life not things that will go bad on us so from that perspective, I guess, it's an investment in our backlog at.

And when volumes pick up we'll have an available but that that was the inventory jump I mean at that when you Peel the onion back thats the whole that's the whole that's the whole onion right there.

Got it should that decline next quarter I believe so I think we're going to have a little bit of that Mike, but not to the levels. We had this quarter.

Okay got it thanks, a lot guys. Thank you Mike.

[noise] next question comes from the line of the lease breast fed only lifestyle from please ask your question.

Hi, Good morning, everyone. How are you on good how are you the.

Good so.

Larry I appreciate all the.

Hey, John information on the M&A in the Earnout offsetting sort of the the higher pricing Coutts, It's a great point I guess I just want to get back to.

The M&A a bit you guys did two deals so far this year can you give any color just so we can get ideas, where net debt stands for what you've paid for those deals also what you think.

I guess dichter to you for that from an inorganic growth for IGI for the rest of the the here again I know not massive but just trying to square as much as we can.

Although slowly on sorry, I was just because it was more than two deals. This year right right that is going to correct that is.

For yes, or no sorry, three at the three deals. This question you've done subsequent to the quarter you know they've done in the fourth quarter Scotches. So let me hit the net debt question, then Victor can talk little about the acquisitions.

You know coming out of the quarter, we had close to $400 million on the balance sheets. So the impact on net debt is really a zero right because I used cash to pay for these things. So the the impact our net debt is not going to be a is going to be anything. So we're okay that standpoint is that if you want to address.

Yes, I wasn't sure I understood. We the question was inorganic growth Louis.

Yes, I just how much do you expect those do you I know you guys don't tend to give a lot of.

Color on individual deals that you've done these incremental deals you historically, when you've given guidance, you've given sort of organic versus inorganic growth to help us.

At least get some idea as to what these deals are potentially contributing just wondering if there's any color you could give you know the sales of course, it's it's late in the year ER and the transformational and intelligent and Connectx, we just closed and so they are closed late in the year.

And where we don't have guidance right for for this year.

We're not giving guidance so unfortunately I can't.

Give anything.

Beyond what what we've made public to already about the companies other than to say there. They are sort of typical kinds of transactions that are that entrepreneurial businesses.

That fit the profile of the kind of companies we buy they are the typical kind of singles and doubles that that we.

Referred to there they're not the swing for the fences kinds of companies that are going to remake heiko.

In their entirety, but they're just very nice additive acquisitions.

And I think.

We're just we're very happy to have them, but I. Unfortunately I.

Can't give a lot more detail, but I I will caution to say I wouldn't go out for example, and double your earnings estimate of high go from these acquisitions.

That I wouldn't okay. So don't get too aggressive from the [laughter] fair enough that budget. It doesn't just ACA is try to be helpful that why don't I don't get too aggressive [laughter]. So just again sticking with emanate from one time the.

I know you kind of talked about what you aren't aren't doing in this environment are there any deals that you put on hold or Paul given market uncertainty that maybe you were looking at prior to this early this year.

Sort of waiting because that's the point, we don't no one really knows what the next 612 months look like and I'd have to that has some impact on the valuation maybe it is just goes to that earn out aspect, but just curious if theres been any yes pausing.

Well I'll, let Eric talked about some that he's seen you know there were a there was an acquisition that we were working on.

That was looking promising but as we dug in and the due diligence.

It turned out to be while a great company, we felt that it wouldn't hold the long term promise.

That we thought initially it will be great for a couple of years, maybe two three years, and then would really start to trend in the wrong direction and that we couldn't really reverse that so there was one that you know that early this year I thought was much more likely to happen by the way that that's not unusual.

Uh huh.

Unfortunately, part of what happens and that's why I made that comment earlier and Larry Solow asked the question about acquisitions that we own forever and we're really very careful because honestly every dollar.

Hi, Good we'll invest we look at it as our own money and sure do it right now Eric can talk a little that some of the things that he has been work yet he changed I see it we have seen some deals pause because the future is very uncertain.

You know for certain companies.

Also we see there were a number of.

Deals we had worked on where frankly private equity offered a significantly higher price and that the companies at the offer.

And so I mean, this is the danger with private equity.

And I see.

Some of those could come back around for us as well.

Well, so I'd like to I'd like to point out something I don't know if it came through clearly but.

My remarks, I mentioned that we bought 75% of a company called intelligent devices and transformational security quality as C M and.

That company that we acquired was a direct result of an introduction.

By another company that we acquired about a year ago and these two companies a very compatible in what.

They manufacture different markets slightly different more and different products, but accomplish similar objectives.

To the customer now many of our acquisitions are as a result of our subsidiary operations getting to know either a supplier a competitor.

Or somebody in the industry over a long period of time developing strong relationships. So when we buy a company we have a pretty good idea of the level of confidence that we will have in the future of owning that company. So we.

We don't shooting the dark and.

Again, our strategy as I mentioned is bottom line cash flow and in this particular case, we think we may get some synergies in marketing and may be manufacturing and other things those.

Strategy is really don't show up in press releases and so forth, but we've made about 78 acquisitions Carlos remedy some analysts now 78 acquisitions.

And I think you know we've never had a bust we've never had a company that said boom. It's no. Good. So some are better than others. Some are little.

Less than we expected, but we've never had a disaster, where we added Oh My God. We we just made a terrible mistakes. So that is our strategy and I think is from an acquisition point of view.

It's a it's worked for us and that's how we've been able to come pound our bottom line by about a 19% over 30 years and we continue to focus on that we're not interested in being the biggest company in the world, we want to be a very profitable company and by that I.

<unk> cash flow, one and earnings per share too.

Perfect. Thank you and then sorry, just one quick follow for Eric Thanks for the color on specialty products I just wanted to clarify so, especially politics is majority OEM is it commercial aerospace and we've got 15% exposure to defense and space and NFS G.. So just trying to get a sense of the the mix within the business of where does that the fence.

Fall and yet, especially products partial yeah. So we do defense throughout the you know all three.

Sub reporting groups within SSG specialty product is both commercial as well as defense. So it does both.

Okay and that puts a defense exposure, it's kind of even across those segments or is it predominantly in specialty products or any others are kinda, even ish I would say percentage wise it would be higher in specialty products, but I need to look at those specific numbers bigger.

How it's all reported but I wouldn't I wouldn't draw a big distinction on that though.

Okay perfect. Thank you. Thank you.

Next question comes from the line of Colleen Calming your line sell them. Please ask your question.

Hi, Good morning, Gents, Thanks for taking my question.

Couple of please just wanted to start with call. Carlos can you just please assist our understanding just offering some color on some of the working capital changes re lines in particular, they are I think you touched already on but.

In contract assets.

You alluded to the conservative credit posture, informing some of that a our reduction but does the current liability or a p. reduction is that that same motion in reverse just led by your suppliers.

And then also if you could just speak to the build and contract assets you touched already on the inventories what's happening there is that signaling potential improving demand trends bouncing off the bottom or is this.

Connected at all to any protective builds.

For any but more potential supply disruptions and then I've got a follow up thanks sure. So.

You know the contract assets and liabilities are a function of you no longer term.

Commitments by customers in HEICO to a project so it's not like a build it and ship. It arrangement, it's more where we have deferred revenue recognition mesh as percent of complete and things like that so that asset liability will flux, depending on how complete we are in certain projects. So I don't know.

You can draw much conclusions from that other than its going to move north and south depending on how many deposits, we get or how much deferred revenue, we recognize versus how much progress you make on the with related to those particular.

Projects.

I was working capital goes I was very pleased with the collections for the quarter a our was down despite the fact that some of that was due to increasing the allowance. The majority of it was due to extraordinary efforts by our team members to collect on cash and then of course, you have lower revenues, which is going to can contribute to lower our balance.

Also.

In regards to our payables in our liabilities accrued liabilities with an accrual as you know, we're having kind of a reference point, we do have less crude performance based comp now than we did.

At the end of October 19, so that we are looking at a comparatively that has an impact on the accruals, but I'll also say that HEICO as a matter of policy.

It has traded our vendors wealth. During this period, we havent strong them out we haven't had a need to and we believe by having those good business practices and not changing won't hurt our benefit on a go forward basis. So thats why you might see little bit of a decrease in those areas in payables outside of the timing aspects.

Philosophically, that's how we think about it.

Okay. Thanks, and just as a follow up for Eric and Victor just wanted to drill down again on executing against the potential market share gain opportunity amid the crisis, maybe attacking it from a different angle here just in particular for SSG any TG as you can see continue to sell into stress verticals like commercial Aero are you trying any new go to market.

Sales motions to plant seeds for potential share gains. So for example.

Bundling service with a repair and products, perhaps on a contractual basis, you know improving retention customer lifetime value et cetera, I think Eric may have already been alluding to this with a previous response, but just kind of bottom line. How can you leverage heico's financial strength, obviously rare given the current state of the industry just to better gauge.

A new toehold and capture incremental wallet share gains that can sustain themselves going forward. Thank you yeah, calling it. It's a great question. It is something that we are focused on and we do have unique value proposition in that when we do repair we can offer our proprietary repairs as well as the U.S.

Most of our proprietary parts. So it's up to the customer you know if they want the OEM material, we're happy to go and do that.

And if they want our material we're happy to to go ahead and sell that as well, but there definitely is close cooperation between our various lines of businesses, while they do operate independently for reporting purposes, and so people can really own their businesses.

They do cooperate and there is a lot of that cross selling and and that's one of the reasons why im very optimistic about the future and about the way we're going to come out of this.

Okay. So a part just just a quick clarification, though just from a apart from historical cooperation among subsidiaries is there anything different amid this cobot environment, where there is a more of a formal frame to enhance or bring in some of that cooperation that perhaps.

Was less of an effort 12 24 months ago before the pandemic hit.

Yes, we have increased the cooperation we are focused on that.

Absolutely and that you know that's something that as we continue to broaden the product offerings in each of our businesses. We've got this.

Or areas, where they can help other businesses and they're very very much is a focus on that absolutely.

Thanks.

Great. Thank you comps.

Again caused a question you will need to press star one on your telephone keypad.

Next question comes from the line of renewing plus during your line is open. Please ask your question.

I am Rene plus snare I am not very good at understanding percentages and market shares, but I am pretty good.

Respecting and trusting the mendelson family.

I have known for about 2025 years and invested in what I thought was a great business and brilliant businessman.

Things go up things go down panics Com panics go I think you guys have done the sterling job.

Total faith and confidence that a couple of years from today, we'll be doing better than we did ever in our lives.

That's my comments.

But its bank. Thank you Rene we greatly appreciate it. Thank you for your confidence in loyalty and we appreciate it very much you've been a brilliant investor appetite I remember when you started investing in high go I think it was 1994 and.

You've done incredibly well through those ups and downs and those other panic. So thank you again like I think your your comments are very wise, because you're right that.

The economy the stock market fees. These gyrations.

And you know the one thing that is constant tyco's performance frankly, because of our you know the focus on our people and grape is where it. So thank you very much and I think thats also a particularly a reassuring and makes our team members who are on this call feel good as well. Thank you very much.

Thank you very welcome it's a it's a pleasure to be friends and associates I wish you continue on the same way Okay. My friends they take care bye.

[noise] [noise] there no further questions. Please continue.

Okay.

If there are no more questions I remind everyone on the call that we remain available to you.

By telephone or resume.

To answer questions would you may have and we look forward to speaking to you and sometime now in December when we'll have the yearend results announced.

Thank you we thank you for your participation and your interest in Heiko.

And we look forward to speaking to you soon again.

That concludes our teleconference for the third quarter. Thank you.

This concludes todays conference call. Thank him for participating in May now disconnect.

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