Ladies and gentlemen, thank you for joining us for HEICO's Fiscal Year 2021 First Quarter Earnings Results Call. Please note that some statements made during this call may be forward-looking statements, which carry risks, uncertainties, and contingencies. HEICO's actual results could materially differ from those indicated in these forward-looking statements due to various factors, including the intensity, scale, and duration of the COVID-19 pandemic; HEICO's liquidity and the timing of cash generation; reduced commercial air travel due to COVID-19 and its consequences; changes in airline fleets or purchasing decisions that could lower demand for our products and services; costs and requirements for product specifications that may increase our contract completion costs; governmental and regulatory demands; export policies and restrictions; decreases in defense, space, or homeland security spending by U.S. or international customers; or competition from both existing and new competitors that could hinder our sales. Additionally, our ability to launch new products and services at profitable prices might affect our sales growth; difficulties in development or manufacturing could raise our development costs and delay sales; our capacity to make acquisitions and realize synergies from those acquisitions; customer credit risks, interest rates, foreign currency exchange, and income tax rates; economic conditions in the aviation, defense, space, medical, telecommunications, and electronics sectors could adversely affect our costs and revenues; and changes in defense spending or budget cuts could impact our revenue related to defense. We encourage those attending this call or reading the transcript to review all of HEICO's filings with the Securities and Exchange Commission, including those on Form 10-K, Form 10-Q, and Form 8-K. We are not obligated to publicly update or revise any forward-looking statements unless required by law. I will now hand the call over to Mr. Laurans Mendelson, HEICO's Chairman and CEO. Thank you.

Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to HEICO's First Quarter Fiscal '21 Earnings Announcement Teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. And I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive Vice President and CFO. Before I get into some of the details, I would like to thank all of HEICO's extraordinary team members who have really performed admirably during this pandemic, which is now into about a year. As management looks at the company, we really believe that our success and the ability to keep our heads well above water, not to get into any financial binds, not to struggle to sell debt at 8% or 10% and so forth and to be fiscally sound is all attributed to the unbelievable talent and brilliance of the team members. Senior management hold, and the Board holds these people in the highest regard. So I thank them, and our hats are off to the entire team. Before reviewing our operating results in detail, I'd like to take a few minutes to discuss the impact on HEICO's operating results from the COVID pandemic. Results of operations in the first quarter of fiscal '21 continue to reflect adverse impact from COVID-19. Most notably, demand for commercial aviation products and services continues to be moderated and impacted negatively by ongoing depressed commercial aerospace markets. We continue to focus on health and safety measures at our facilities in accordance with the CDC guidelines in order to protect our global team members and mitigate the spread of COVID-19 while serving our customers' needs. Keep in mind that almost all of our facilities were open continually since the start of the COVID pandemic, and very few members of our teams contracted this disease because of the safety measures and health measures that we employ throughout the company. Consolidated net sales for businesses that operate within the commercial aerospace industry decreased by about 43% in the first quarter of fiscal '21 as compared to the first quarter of fiscal '20. As we move further into fiscal '21, we acknowledge that factors such as the duration, spread and severity of the pandemic, the emergence of new corona strain variants and distribution and effectiveness of the COVID-19 vaccine will largely determine the timing and pace at which commercial aerospace will recover. As we mentioned in prior calls, we anticipate that as the pandemic vaccine becomes more widely available, consumer interest in commercial air travel should begin to reemerge. As such, we cautiously anticipate improved demand for our commercial aerospace products to slowly recover towards the second half of fiscal '21. Summarizing the highlights of our first quarter of fiscal '21 results, I would tell you that despite the continuing difficult operating environment created by the pandemic, HEICO continues to generate excellent cash flow. The cash flow provided by operating activities was very strong, increasing 32% to $107.2 million in the first quarter of fiscal '21, up from $81.1 million in the first quarter of fiscal '20. We are encouraged by the second consecutive quarter of sequential improvement in net sales and operating income at our Flight Support Group. Operating income and net sales at Flight Support increased 20% and 3%, respectively, in the first quarter of fiscal '21 as compared to the fourth quarter of fiscal '20, clearly an improvement. Net sales for Electronic Technologies Group, space and electronics products grew organically by a very strong 19% and 14%, respectively, in the first quarter of fiscal '21, while the ongoing pandemic's impact resulted in softer demand for its commercial aerospace products. In January 21, we paid our regular semiannual cash dividend of $0.08 per share, and this represented our 85th consecutive semiannual cash dividend since 1979. HEICO's strength in the face of ongoing challenging conditions, coupled with our optimism for HEICO's future, gave our Board the confidence to continue paying a cash dividend through the current health pandemic. Total debt to shareholders' equity improved to 32.2% as of January 31, '21, compared to 36.8% as of October 31, '20. Our net debt, which is total debt less cash and cash equivalents, was $270.3 million as of January 31, '21, with a shareholders' equity ratio of 13% as of January 31, '21, down from 16.6% as of October 31, '20. Our net debt-to-EBITDA ratio improved to 0.62x as of January 31, '21, down from 0.71x on October 31, '20. We have no significant debt maturities until fiscal '24, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions of various sizes to accelerate growth and maximize shareholder return. Last week, we publicly expressed our congratulations to both NASA and Jet Propulsion Laboratories on their successful Mars Perseverance Rover Landing. Our Apex Microtechnology, Sierra Microwave, 3D PLUS and VPT subsidiaries supplied mission-critical hardware for the mission. Once again, NASA and JPL demonstrated remarkable talent and capabilities despite a year of great challenges for the world's population and remain a beacon of optimism for all people. We are extremely proud of HEICO companies and team members who contributed to this effort. I think we want to focus on the extreme technical ability and impressive quality that our subsidiaries built into the electronics that they supplied for the Mars Perseverance Rover Landing. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Thank you. The Flight Support Group's net sales were $199.3 million in the first quarter of fiscal '21, compared to $301.1 million in the first quarter of fiscal '20. The net sales decrease is principally organic and reflects lower demand for the majority of our commercial aerospace products and services resulting from the significant decline in global commercial air travel attributable to the pandemic. The Flight Support Group's operating income was $25.8 million in the first quarter of fiscal '21, as compared to $62 million in the first quarter of fiscal '20. The operating income decrease principally reflects the previously mentioned decrease in net sales as well as a lower gross profit margin and the impact from lost fixed cost efficiencies stemming from the pandemic. The lower gross profit margin principally reflects the impact from lower net sales of commercial aerospace products and services across all of its product lines. The Flight Support Group's operating margin was 13.0% in the first quarter of fiscal '21 as compared to 20.6% in the first quarter of fiscal '20. The operating margin decrease principally reflects the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales, mainly from the previously mentioned lost fixed cost efficiencies and the effect of higher intangible asset amortization expense. I would like to point out that the full impact of the pandemic began to affect the Flight Support Group operating segment at the beginning of our third quarter of fiscal '20. Through practical and disciplined cost management, we have delivered sequential quarterly improvements in our Flight Support Group operating margin. The Flight Support Group operating margin was just 6.7% in the third quarter of fiscal '20 and has since steadily increased to 11.1% in the fourth quarter of fiscal '20 and to 13% in the first quarter of fiscal '21. Our team members and assembled workforce is our most valuable asset. Our team members engaged primarily in commercial aviation sacrificed greatly during the pandemic through limited layoffs, moderate furloughs, and wage reductions for nearly all others not impacted by layoffs or furloughs. These team members sacrificed a tremendous amount, and we owe our loyalty to them as we held on to a much higher percentage of our workforce than most others. Thus, we decided to operate with higher overhead, which reduced our gross margins and increased our SG&A. A lot of companies speak about how their team members are important, but HEICO demonstrates it through actions, including by maintaining our 401(k) matching contributions and granting our team members their maximum potential 401(k) profit-sharing contributions, even though we missed our budgets due to the pandemic. We could have sacrificed the future in order to achieve better current period results, but that is not what HEICO is about. That's the luxury of being part of the HEICO family as we don't feel pressured to make short-term decisions that hurt future performance. We also treated our customers, suppliers, partners, and acquisitions extremely well and truly believe this helps us grow faster than the industry as people prefer dealing with us due to our culture. We are confident that our motivated and assembled workforce will propel us to new heights as the pandemic passes. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group, to discuss the results of the Electronic Technologies Group.

Eric, thank you. And I would also like to echo my gratitude to all of HEICO's team members, including those at the Electronic Technologies Group, for their remarkable efforts during this difficult time. About 90% of our people cannot work from home and have to come in. Our businesses have been operating as essential businesses throughout this pandemic very carefully, safely, and taking care of each other. I'm very proud of the job that our people have done throughout this entire difficult period as well as the many years before, and I know that they'll continue to do the excellent work that they've carried out. As for the Electronic Technologies Group's performance, our net sales increased 7% to $223.6 million in the first quarter of fiscal '21, up from $208.4 million in the first quarter of fiscal '20. The increase is principally attributable to the favorable impact from our fiscal '20 acquisitions. The Electronic Technologies Group's operating income increased 5% to $60.1 million in the first quarter of fiscal '21, up from $57.5 million in the first quarter of fiscal '20. This increase reflects the previously mentioned net sales growth. The Electronic Technologies Group's operating margin was 26.9% in the first quarter of fiscal '21 compared to 27.6% in the first quarter of fiscal '20. The lower operating income as a percentage of net sales reflects a lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from certain efficiencies gained from the previously mentioned net sales growth. The lower gross profit margin mainly reflects a decrease in net sales with commercial aerospace products and lower net sales and a less favorable product mix of certain defense products, partially offset by an increase in net sales of certain electronics products. I'll turn the call back over to Larry Mendelson.

Thank you, Victor. Moving on to earnings per share. Consolidated net income per diluted share was $0.51 in the first quarter of fiscal '21, compared to $0.89 in the first quarter of fiscal '20. The decrease principally reflects the previously mentioned lower operating income of the Flight Support Group and higher income tax expense, partially offset by less net income attributable to noncontrolling interest and lower interest expense. Depreciation and amortization expense totaled $23 million in the first quarter of '21, up from $21.6 million in the first quarter of fiscal '20. The increase in the first quarter of fiscal '21 reflects the incremental impact of higher intangible asset amortization expense from our fiscal '20 acquisitions. Significant new product development efforts are continuing at both the Electronic Technologies Group and Flight Support. R&D expense was $16.2 million in the first quarter of fiscal '21 or about 3.9% of sales, compared to $17.1 million in the first quarter of fiscal '20 or 3.4% of sales. Consolidated SG&A expense decreased by 10% to $78.1 million in the first quarter of fiscal '21 compared to $87.1 million in the first quarter of fiscal '20. The decrease in consolidated SG&A expense reflects a decrease in performance-based compensation expense, a reduction in other selling expenses, including outside sales commission, marketing, and travel; and the reduction in other G&A expenses. Consolidated SG&A expense as a percentage of net sales was 18.7% in the first quarter of fiscal '21, and compared to 17.2% in the first quarter of fiscal '20. The increase in the consolidated SG&A expense as a percentage of net sales reflects higher other G&A expenses and the impact from higher intangible asset amortization expense. Interest expense decreased to $2.4 million in the first quarter of fiscal '21, down from $4.3 million in the first quarter of fiscal '20. The decrease was principally due to lower weighted average interest rates, partially offset by a higher weighted average balance of borrowings under our revolving credit facilities. Other income in the first quarters of fiscal '21 and '20 was not significant. HEICO's income tax expense was $2.3 million in the first quarter of fiscal '21, compared to an income tax benefit of $22.9 million in the first quarter of fiscal '20. HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal '21 and '20 of $13.5 million and $47.6 million, respectively. The tax benefit from stock option exercises in both periods was the result of the strong appreciation in HEICO's stock price during the option lease holding period. The $34.1 million larger benefit recognized in the first quarter of fiscal '20 was the result of more stock options being exercised. Net income attributable to noncontrolling interest was $5.7 million in the first quarter of fiscal '21, compared to $7.9 million in the first quarter of fiscal '20. The decrease principally reflects a decrease in the operating results of certain subsidiaries of Flight Support, in which noncontrolling interests are held. For the full FY '21, we now estimate a combined effective tax rate and noncontrolling interest rate of approximately 24% to 26% of pretax income. Moving over to balance sheet and cash flow. The financial position of HEICO and forecasted cash flow remains very strong. As we mentioned earlier, cash flow provided by operating activities was very strong and increased 32% to $107.2 million in the first quarter of fiscal '21, up from $81.1 million in the first quarter of fiscal '20. Our working capital ratio was strong and consistent at 4.9x as of January 31, '21, compared to 4.8 as of October 31, '20. Days sales outstanding of receivables improved to 45 days as of January 31, '21, compared to 46 days as of January 31, '20. We continue to monitor all receivable collection efforts to limit our credit exposure. No one customer accounted for more than 10% of net sales. Our top 5 customers represented about 24% and 22% of consolidated net sales in the first quarter of fiscal '21 and '20, respectively. Our inventory turnover rate increased to 164 days for the period ending January 31, '21, compared to a pre-pandemic 132 days for the period ended January 31, '20. The increase in the turnover rate reflects lower net sales volume, mainly resulting from the pandemic's impact on demand for certain products and services. Despite the increased turnover rate, our subsidiaries have done an excellent job controlling inventory levels in the first quarter of fiscal '21, which we believe are appropriate to support expected future net sales. Considering HEICO's consolidated backlog, which has increased by $62 million since October 31, '20, the backlog was $906 million as of January 31, '21. As we look ahead to the remainder of fiscal '21, the pandemic will likely continue to negatively impact commercial aerospace and HEICO. Given this uncertainty, we cannot provide fiscal '21 net sales and earnings guidance. However, we believe that our ongoing fiscal conservative policies, healthy balance sheet, and increased liquidity will permit us to invest in new research and development and gain market share as the industry recovers. In addition, our time-tested strategy of maintaining low debt and acquiring and operating high cash-generating businesses across a diverse base of industries beyond commercial aviation, such as defense, space, and other high-end markets, including electronics and medical, puts us in a good financial position to weather this uncertain economic period. Furthermore, we are cautiously optimistic that the vaccine progress may generate increased commercial air travel and will result in gradual recovery in demand for our commercial aerospace parts and services businesses. We expect this to commence primarily in the second half of fiscal '21, although we expect gradual increases until we get there. In closing, I again want to thank our incredible team members for their continued support and commitment to HEICO during these professionally and personally challenging times. That strength will manifest from our culture of ownership, our mutual respect for each other, and the unwavering pursuit of exceeding customer expectations. And we thank you for all you do to make HEICO an exceptional company. I would also like to point out that despite the pandemic and decreased sales, HEICO wanted to reward our team members. Again, this year, we continue to make the 5% match to team members' 401(k) investments. Most team members invest 6%, and HEICO matches it at 5% of their salary in HEICO shares; we would never cut that back because we respect and want to reward our outstanding team. Thank you. I'd like to open the floor for any questions.

We have your first question from Robert Spingarn at Credit Suisse.

Good set of numbers today. Larry, could I start with you on M&A? I think you said earlier that the company will continue to pursue a strong M&A policy. What are you seeing trend-wise in the market as the pandemic has evolved? Are sellers more or less willing to sell at this point?

We see a lot of product coming out of some private equity. Sellers are willing to sell. In the Flight Support Group, it's a little tougher because their profits have gone down, and a lot of them are pulling their sales activity hoping for recovery, which I know will be coming. However, in looking at our backlog of potential M&A possibilities, it's probably business as usual. The difficulty here is the logistics of getting out, kicking the tires, checking and doing all these things. This has slowed us down a little bit, particularly when dealing with private equity guys. They have the information and they're more up to speed. However, when dealing with private sellers who have never sold a company before, it becomes much more difficult. The bottom line is we are seeing many opportunities, some at very reasonable prices. We're kicking the tires. Others are at the 14, 16x EBITDA multiples, which price us out of the gate. We are also looking at small companies that we traditionally buy size-wise, and we're looking at larger companies. We are not physically constrained. We've been asked many times if we would use our currency, which is selling at a high multiple, for acquisition. The answer is yes. As a matter of fact, there's one transaction I don't know if it'll ever close but where the seller wants HEICO shares. So we have cash. I said this on the last call, we have cash, stock, and we won't them. We are ready to give the sellers whatever they would like. I guess we'd give them bitcoin, too.

That was my next question. But in terms of the end markets, historically, you've been a little more active, on Victor's side of the business, with the defense and space types of acquisitions. Are we seeing any more opportunity or less opportunity in commercial aero M&A?

We are seeing opportunity in commercial. But as my dad pointed out, the current level of earnings are depressed. So it's a little difficult to narrow down prices there, but we are still seeing plenty of opportunity.

Okay. Just a couple of other ones. Victor, I wanted to just ask you a couple of things about Electronic Technologies Group. You have this very strong 19% and 14% growth in space and other electronics. Could you talk a little bit about what's driving that, and then separately, how defense did? I guess commercial aero was a factor as it's been across the industry.

On space, I think you heard us talk about throughout last year that we felt it would strengthen and will continue to strengthen into this year for us that we saw our backlogs building and orders increasing. That was really the follow-through on that, and I would expect that to continue for some period of time and then flatten out at some point. It's been fairly broad-based for us on the space side, which has been very nice. In terms of the other electronics markets, we started to see those firm up really in the fourth quarter a bit, and that followed through in the first quarter. We did see weakness, as I've talked about before, as the pandemic wore on. There was a destocking effect or inventories weren't built at all. And that's reversed, and I think we're seeing much more order inquiry out of our customers as well. So at the moment, that feels like it's continuing to move in the right direction. Commercial aero is still down but looking better, kind of bit by bit. I think the same general tone as you see with our Flight Support Group should follow that same trajectory. And defense. Defense is flattening out, and we had some things that wound up getting delayed and moved out into the second quarter, not as a result really so much of our actions but supply chain as well as on the customer side with inspection and delivery on their end, things that have been built and were waiting for delivery. So we saw a little bit of that. I would expect, as a rule of thumb, to see defense generally flatten out as we move forward.

Right. And just quickly on your margins. Your margins are always up there in the mid- to high 20s, but they dipped a little bit here in the quarter. I assume that's mix. And does that reflect commercial being down? Is there anything different this quarter about the level or magnitude of commercial? Or maybe it's something else? I just wanted to ask you about that.

Our commercial business is very strong and has high margins. When it decreases, it tends to affect our margins. There was also a mix issue on the defense side. Our margins align with our expectations, and we are comfortable within this range, up or down 10%. We won't penalize our team if they are 100 or 200 basis points lower, providing us with 32% instead of 33% or 34%.

Okay. Eric, just quickly. On order flow and air customer behavior, are you starting to see any signals of restocking of airlines trying to get set up for potential recovery here in the summer?

Yes. I'll answer that by saying I think we correctly called the bottom of the market in May as this was happening. In our fourth quarter, we correctly called that destocking was over. Yes, we are seeing some opportunities as a result of OEMs cutting back inventory. We're careful to maintain sufficient inventory because we're not capital constrained. That doesn't mean they're out of all inventory, but they're out of parts. The parts that they need, they really don't have on the shelf. And there's not a lot of safety stock. I don't think we've seen restocking yet. They're being very careful. If you look, in particular, what's going on in Europe right now, with the passenger miles just cratered and really at the bottom, somewhat similar to what we saw in the spring, those airlines are not in a position right now to restock. I think that benefit is yet to come.

Your next question comes from the line of Peter Arment from Baird.

I just wanted to follow up on what Rob just asked about, Eric. Just I guess, maybe just to ask it a different way, less about the restock but more about just qualitatively maybe some of the conversations you're having about potential pickup in share. I know you've talked about that in the past that coming out of downturns, you've been able to increase share. Maybe any color you could give us there would be helpful.

Yes. We're very optimistic. I've spoken with all of our sales heads to understand where the opportunities are and the color of those discussions. I can tell you that they are extremely optimistic as well as our business heads are very optimistic in terms of the recovery and in terms of our position with respect to those customers. HEICO is no longer a small company. We're diversified. We're in many different areas. I think our customers trust us. They're relying on us to deliver cost savings. We're going to be in a very unique position going forward. If you look at most of our colleagues or competitors in the industry, their cuts were far more aggressive than ours. We held on to a much higher percentage of our workforce. Thus we don't have to rebuild a workforce or remotivate a workforce. Our people are excited about both the new product that is coming out and the comments from our customers. Buying the type of products that HEICO offers is a no-brainer because we generate savings without technical risk. I think people understand that, and that's what specifically gives me the optimism.

Would you characterize that as just that you expect that your existing customers, you would expand kind of the reach there? And then maybe also, you're seeing some new customers show interest in your products?

Yes, you're correct in that the existing, more penetrated customers are wanting to do more with us, as well as customers where we are less penetrated, who are focused on a variety of products that we offer. We will continue to do very well. I want to point out, even though we will take market share, it does not mean OEM businesses will not do well because we take a minority of the market share; the majority will be for the OEMs. The OEMs have been pretty aggressive with price increases, and we're just trying to take our little piece, while their business models are intact.

Sure, sure, sure. So CapEx was up. We had plans in our budgets to have some capital expansion in two of our facilities. Both are in the Electronic Technologies Group, where we are expanding their footprint with some new equipment and more floor space for them to support their growth. That was about half that spend for the quarter, which we didn't see last year in the numbers. So that's why it's accelerated a bit.

And then on the tax rate?

Yes. So the tax rate, we expect for HEICO, a combined effective tax rate and noncontrolling interest rate of approximately 24% to 26% of pretax income.

Your next question comes from the line of Gautam Khanna from Cowen.

First, for Carlos, was there any bad debt expense at Flight Support Group or elsewhere this quarter?

We always have a little bit of pluses and minuses on our normal cadence for HEICO. I think that's what we experienced in Q1. There were no bankruptcies or large buckets of receivable days. On the bad debt side, it's pretty much business as usual under normal times.

Okay. Interestingly, if you exclude the $1.5 million in bad debt from Q4, the incremental margin for the Flight Support Group was about 49% sequentially. Is that correct? I mean, that seems to indicate a fairly high incremental margin.

Yes. The incremental margins are high on the rebound, absolutely. We've seen that two consecutive quarters in a row now.

And maybe, Eric, if you could talk about Flight Support Group if you're seeing any differing trends by the submarkets there?

The commercial aviation market continues to be down the most. That would be in our parts business, which includes PMA, distribution as well as component overhaul and specialty products for commercial applications. The specialty products area has been down significantly in the commercial area, not in the defense, because the build rates have gone down. Aftermarket replacement parts were down slightly less than repair and overhaul and specialty products, while a lot of our military business goes through there. So that's the general overview.

Yes. That's helpful. Is there any discernible difference between what you're seeing demand-wise in the distribution channel that you control versus direct sales?

No. I would say it's all in the similar area.

It's difficult to know, of course, in these early days of the administration, but it feels to me that the primes are guiding low single-digit growth for sales in 2021. Generally, there does not appear to be this movement toward the Budget Control Act that we saw in the Obama administration, and so I think that's a positive.

That's helpful. One for you, Larry. I was intrigued by your remark about one of the targets you're looking at would actually prefer stock. Is there anything you can say about that type of target? I mean, would that be reserved for a large acquisition?

We've been asked many times if we would use our currency, which is selling at a high multiple, for acquisition. The answer is yes, even though our preference has always been cash. We would do it. We want the deal badly enough, we would give them stock. This is an unusual case.

The next question is from the line of Larry Solow from CJS Securities.

You guys have covered most everything. Just one question, kind of a random one. Any thoughts on the price disparity or lack thereof between the common and the A shares? Discounts waned from over 20% 6 months ago to close to 5% today, which we think makes sense, but would love to hear your thoughts.

We agree with you and think it makes a lot of sense. We don't have an answer since we've been asked this question many times. The difference has shrunk significantly.

We believe they should be at par. There should not even be a 5% discount at all.

Our next question is from Ken Herbert from Canaccord.

Victor, over the last couple of years, you've observed a nice increase in margins within the Electronic Technologies Group segment from the first to the second quarter. Should we anticipate a similar increase in 2021? How do you view the margin progression from the first quarter?

At this point, there's still a little too much uncertainty. I think we'll stick with what I said before; we are comfortable within 10% or so of where we are, feels pretty safe.

Okay. Fair enough. What was the amortization headwind in the quarter?

There was about $1.1 million roughly in an additional amortization expense that we absorbed for those acquisitions that was done around in Q1 of '20.

Perfect. If I could, Eric, just one for you. We're starting to hear about some delays on OEM material, and perhaps that risk is getting greater just because of all the restructuring and cost-cutting we've seen in the industry. Are you seeing opportunities emerge potentially yet from the risk of delays from OEM material? Are you seeing any opportunities emerge?

We are seeing some opportunities as a result of OEMs cutting back inventory. We were careful to maintain sufficient inventory; we're not capital constrained. Yes, I think it could help us get specked out on some products; that is a potential area of opportunity for us.

Okay. And just finally, Eric, there's been, unfortunately, some tragedies around the PW4000. Are you seeing any potential incremental risk to the PW4000, if there's any sort of accelerated retirement or discontinuance of some of those engines?

I don't think that, that's going to be a major impact to us. HEICO parts are on the PW4000 engine. We did not have anything on that engine which could have contributed to this kind of fan blade release. Our team did a great job; I think the FAA AD is sufficient and appropriate. I would feel entirely comfortable flying on a PW4000-powered aircraft, and I think they will get this under control quickly.

Your next question comes from the line of Noah Poponak from Goldman Sachs.

Carlos, back to the FSG margin and some of the moving pieces in there. Last quarter, you quantified the bad debt expense, even though it was only $1.5 million. So can I interpret that to assume that, that's now pretty close to 0?

I wouldn't say it's zero. It's a normal run rate, certainly less than the $1.5 million we had in Q1. It wasn't zero, but it certainly wasn't a large number.

Okay. Got it. And then you had also mentioned some inventory obsolescence reserves in the back half of last year. Did you have that again in the fiscal first quarter?

We have a little bit of that right now. The bigger hits were taken last year because of specific reserves taken for fleet retirements and aircraft that were being put down. We had some reserves that are now in line with what would typically occur on a seasonal basis.

Okay. So those items are now getting close to normal or at normal. But your first quarter is usually seasonally the lower margin of the year. And then presumably, there's some volume pickup in the back half of the year. I guess how much of a margin lift through the year at FSG should we be looking at with what we know today?

We've demonstrated the ability to have sequential growth in margin. I don't foresee a scenario where we wouldn't continue that cadence. I don't think it's going to be a cliff up; it's a steady progression back towards normal at some point.

Got it. And then on the ETG margin, it should be in the 28% to 30% range over time. Just want to make sure that still holds.

On an annual basis, in a normal year, I do see that segment in the 28% to 30% range. Could it be a tick lower? Of course, it could. That's the range. And we'll see how '21 plays out.

Hopefully getting there. Okay. And then just lastly, I wanted to dig a little further into free cash flow. Your fiscal '20 free cash flow is only down 5% despite all the challenges. I guess where does that go from here?

As the year plays out, we should run on a conversion rate of about 130%. We've always converted at roughly that rate, which will help our free cash flow numbers.

That's helpful. The capital expenditure piece, I think last quarter, you had discussed approximately $40 million for the year.

This year, to your point, in Q1, it's a little bit more amplified, but if you think of CapEx being around 1.5% of sales, that’s generally where we've trended.

Your next question comes from the line of Michael Ciarmoli from Truist Securities.

Maybe just if you could touch on the backlog. I think you called it out as $906 million. Can you give us any more color there in terms of the breakout by segment?

A lot of the expansion we are seeing in backlog has come in defense and through the Electronic Technologies Group. Commercial aero in Electronic Technologies is down.

Okay. No, that's helpful. And then just maybe a little bit more on Eric on the bookings trends you're seeing from some of the airlines.

I think we're going to do very well on the newer equipment. A lot of customer interest and customer approvals in those areas. We took the position early in the pandemic that a lot of these aircraft would not be retired. I think leasing makes much more sense. The environmental impact of new equipment could affect the overall market.

Got it. Got it. That's helpful. And you guys are watching oil prices as well.

Yes. I think a lot of the recent climb was due to the cold snap. I still think the older equipment will continue to operate, and the number of aircraft retired was even below what we thought it would be during this time.

There are no further questions at this time. Mr. Mendelson, please continue.

Thank you very much. I want to thank everybody on the call for your interest in HEICO. We remain available for any questions. Eric, Victor, Carlos, or I will be happy to speak with you. We look forward to speaking to you at the Q2 conference, which will be in about 3 months. Stay well, stay healthy, and hopefully get vaccines. We'll speak to you real soon. Thank you all.

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