Earnings Call Transcript - HEI Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the HEICO Corporation Fiscal Year 2020 Second Quarter Earnings Results Conference Call. Certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors, including the severity, magnitude and duration of the COVID-19 outbreak; HEICO's liquidity and the amount and timing of cash generation; the continued decline in commercial air travel caused by the COVID-19 outbreak; lower demand for commercial air travel or airline fleet changes or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our cost to complete contracts, governmental and regulatory demands; export policies and restrictions; reductions in defense, space or Homeland Security spending by US and/or foreign customers or competition from existing and new competitors, which could reduce our sales, our ability to introduce new products and services at profitable pricing levels, which could reduce our sales or sales growth; product development or manufacturing difficulties, which could increase our product development cost and delay sales; our ability to make acquisitions and achieve operating synergies from acquired businesses; customer credit risk; interest, foreign currency exchange and income tax rates; economic conditions within and outside of the aviation, defense space; medical for the communications and electronic industries, which could negatively impact our cost and revenues; and defense spending or budget cuts, which could reduce our defense-related revenue. Parties listening to or reading a transcript of this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including, but not limited to filings on Form 10-K, Form 10-Q and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by applicable law. I would now like to hand the conference over to your speaker today, Mr. Laurans Mendelson, HEICO Chairman and Executive Officer. Please go ahead, sir.

Laurans Mendelson, Chairman and CEO

Thank you, and good morning to everyone on the call, and we thank you for joining us. Welcome to the HEICO second quarter fiscal '20 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation. And I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive VP and CFO. Before reviewing our second quarter operating results in detail, I'd like to take a moment to thank all of HEICO's talented team members. You have responded with distinction to the unprecedented challenge of serving our customers and your local communities during the onset of the COVID-19 global pandemic. I am humbled by your collective actions and unwavering commitment to HEICO's success. I strongly believe your contributions to HEICO's entrepreneurial values and ownership culture will continue to produce a winning formula in the marketplace despite the near-term challenges that we face as a result of the COVID-19 outbreak. I'll now take a few moments to discuss our second quarter operating results. The results of operations for the six and three months ended April 30, 2020 have been affected by COVID-19. The effects of the outbreak and related actions by governments around the world to mitigate its spread have impacted our team members, customers, suppliers and manufacturers. In response to the economic impact from the outbreak, we, at HEICO, have implemented certain cost reductions including layoffs, temporary reduced work hours, and temporary pay reductions within various departments of our businesses, including our entire executive management team and our Board of Directors. Our response to the outbreak, including implementing varying health and safety measures at our facilities, including supplying and requiring the use of personal protective equipment, staggering work shifts, body temperature taking, increasing work from home capabilities, consistent and ongoing cleaning of workspaces in high-touch areas and establishing processes aligned with the Centers for Disease Control guidelines to work with any individual exposed to COVID-19 on the necessary quarantine period and the process for the individual to return to work. With respect to our results of operations, approximately half of our net sales are derived from defense, space, and other industrial markets including electronics, medical, and communications. Demand for products in that half of our business has not been fundamentally impacted, and its operational results remained materially consistent with the financial expectations prior to the outbreak. However, we have experienced, and expect to continue experiencing, periodic operational disruptions resulting from supply chain disturbances, staffing challenges, including some of our customers, temporary facility closures, transportation interruptions and other conditions, which slow production or may increase cost. While these issues have not yet been material, it is impossible to predict their future impact, and our current experience indicates that the likely effect will be to delay orders and shipments measured in weeks and months and to temporarily increase some costs as opposed to profoundly changing our business overall. Fortunately, many of our defense and medical component design, manufacturing and supply operations are believed to be crucial suppliers to markets with continuing strong needs, while it has not had a material impact on consolidated net sales, demand for our components used in medical equipment, such as ventilators, x-ray systems, sterilization equipment, and personal protective equipment all increased as a result of the outbreak. The remaining portion of our net sales is derived from commercial aviation products and services. The outbreak has caused significant volatility and substantial decline in value across global economic markets. Most notably, the commercial aerospace industry has experienced an ongoing substantial decline in demand. As such, our businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March 2020. Once commercial air travel resumes, cost savings will most likely be a priority for our commercial aviation customers. And we do anticipate recovery in demand for our commercial aviation products, which frequently provide aircraft operators with significant cost savings. Furthermore, we believe that our cost-saving solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within this market. Consolidated net income increased 22% to a record $197.3 million, or $1.44 per diluted share in the first six months of fiscal 2020, and that was up from $161.1 million, or $1.18 per diluted share in the first six months of fiscal 2019. Consolidated operating income increased 1% to $219.2 million in the first six months of fiscal 2020, and that was up from $217.1 million in the first six months of fiscal 2019. Our consolidated operating margin improved to 22.5% in the first six months of fiscal 2020, and that was up from 22.1% in the first six months of fiscal 2019. Cash flow provided by operating activities was strong, increasing 15% to $205.9 million in the first six months of fiscal 2020, and that was up from $178.3 million in the first six months of fiscal 2019. We continue to forecast positive cash flow from operations for the remainder of fiscal 2020. Our net debt, which is total debt less cash and cash equivalents of $393.4 million as of April 30, compared to shareholders' equity ratio decreased to 20.8% as of April 30, 2020, and that was down from 29.8% as of October 31, 2019. Net debt to EBITDA ratio decreased to 0.72 times as of April 30, 2020, and that was down from 0.93 times as of October 31, 2019. During fiscal 2020, we successfully completed two acquisitions and we have completed five acquisitions over the past year. We have no significant debt maturities until fiscal 2023, and we plan to utilize our financial strength and flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns. At this time, I would like to introduce Eric Mendelson, Co-President of HEICO and President of HEICO's Flight Support Group, and he will discuss the results of the Flight Support Group.

Eric Mendelson, Co-President and President of Flight Support Group

Thank you very much. The Flight Support Group's net sales declined by 18% to $252 million in the second quarter of fiscal 2020, down from $308.3 million in the same quarter of fiscal 2019. For the first six months of fiscal 2020, net sales fell by 7% to $553.0 million, compared to $595.5 million in the first half of fiscal 2019. The decrease in net sales for both periods is largely organic and is attributed to a decrease in demand across all product lines due to the significant drop in global commercial air travel that began in March 2020 as a result of the outbreak. Operating income for the Flight Support Group dropped by 24% to $47.5 million in the second quarter of fiscal 2020, compared to $62.2 million in the second quarter of fiscal 2019, while for the first six months of fiscal 2020, it decreased by 5% to $109.6 million, from $115 million in the first half of fiscal 2019. This decline in operating income for both periods primarily reflects the previously mentioned fall in net sales and a lower gross profit margin, especially within our aftermarket replacement parts and repair and overhaul service product lines, somewhat mitigated by reduced performance-based compensation expenses. The operating margin for the Flight Support Group was 18.9% in the second quarter of fiscal 2020, compared to 20.2% in the same quarter of fiscal 2019. This decline is mainly due to the lower gross profit margin, though it was partially offset by a decrease in SG&A expenses as a percentage of net sales, primarily from reduced performance-based compensation expenses. However, the operating margin rose to 19.8% in the first six months of fiscal 2020, up from 19.3% in the first half of fiscal 2019, reflecting lower SG&A expenses as a percentage of net sales, mainly due to decreases in performance-based compensation expenses, partially offset by the previously mentioned lower gross profit margin. Now I would like to introduce Victor Mendelson, Co-President of HEICO and President of HEICO's Electronic Technologies Group to discuss the Electronic Technologies Group results.

Victor Mendelson, Co-President and President of Electronic Technologies Group

Thank you Eric. The Electronic Technologies Group's net sales increased 2% to $219 million in the second quarter of fiscal 2020, up from $214.5 million in the second quarter of fiscal 2019. The increase is attributable to the favorable impact from our fiscal 2019 and 2020 acquisitions, partially offset by an organic net sales decrease of 2%. The organic net sales decrease is mainly attributable to lower space product shipments, partially offset by increased demand for our space products. The Electronic Technologies Group's net sales increased 7% to a record $427.4 million in the first six months of fiscal 2020, up from $398.9 million in the first six months of fiscal 2019. The increase is attributable to the favorable impact from our fiscal 2019 and 2020 acquisitions, as well as 2% organic growth mainly due to increased demand for our defense products, partially offset by lower space product shipments. The Electronic Technologies Group's operating income decreased 3% to $65.5 million in the second quarter of fiscal 2020 as compared to $67.4 million in the second quarter of fiscal 2019. This decrease principally reflects a lower gross profit margin mainly due to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales of our defense products as well as the previously mentioned net sales growth and lower performance-based compensation expense. The Electronic Technologies Group's operating income increased 3% to a record $123 million in the first six months of fiscal 2020, up from $119 million in the first six months of fiscal 2019. The increase principally reflects the previously mentioned net sales growth and lower performance-based compensation expense, partially offset by a lower gross profit margin mainly due to a decrease in net sales of our space and commercial aerospace products, partially offset by increased net sales in our defense products. The Electronic Technologies Group's operating margin was 29.9% in the second quarter of fiscal 2020 as compared to 31.4% in the second quarter of fiscal 2019. The Electronic Technologies Group's operating margin was 28.8% in the first six months of fiscal 2020 as compared to 29.8% in the first six months of fiscal 2019. The decrease in the second quarter and first six months of fiscal 2020 is mainly due to the previously mentioned lower gross profit margin, partially offset by a decrease in SG&A expenses as a percentage of net sales, mainly from lower performance-based compensation expense. Let me turn the call back over to Larry Mendelson.

Laurans Mendelson, Chairman and CEO

Thank you, Victor. Moving on to diluted earnings per share. Consolidated net income per diluted share decreased 8% to $0.55 in the second quarter of fiscal 2020, down from $0.60 in the same period last year. This drop is mainly due to the lower operating income from the Flight Support Group. However, consolidated net income per diluted share increased 22% to $1.44 in the first six months of fiscal 2020, compared to $1.18 during the same period in fiscal 2019. This rise is attributed mainly to a discrete tax benefit from stock option exercises recognized in the first quarter of fiscal 2020. Depreciation and amortization expense reached $21.7 million in the second quarter of fiscal 2020, an increase from $20.5 million in the same quarter of fiscal 2019, with a total of $43.3 million in the first six months of fiscal 2020, up slightly from $40.5 million in the prior year. The increase is primarily due to the impact of our acquisitions in fiscal 2019 and 2020. Research and development expenses remained the same at $16.8 million in both the second quarters of fiscal 2020 and 2019, but rose 6% to $33.9 million in the first half of fiscal 2020 from $32 million in the same months last year, reflecting our significant investment in ongoing new product development efforts at both Flight Support and Electronic Technologies. Our consolidated SG&A expenses decreased by 22% to $70 million in the second quarter of fiscal 2020 compared to $90.2 million in the same quarter of fiscal 2019. For the first six months of fiscal 2020, consolidated SG&A expenses fell by 10% to $157.8 million compared to $174.5 million in the corresponding period of fiscal 2019. This decrease is largely due to lower performance-based compensation and cuts to expenses related to outside sales, commissions, marketing, and travel, partially offset by impacts from our recent acquisitions. The percentage of consolidated SG&A expense as a part of net sales dropped to 15.1% in the second quarter of fiscal 2020, down from 17.5% in the same period last year, mainly driven by reduced performance-based compensation, despite some inefficiencies due to the outbreak. Similarly, SG&A as a percentage of net sales was 16.2% in the first six months of fiscal 2020, down from 17.8% in the same portion of fiscal 2019, again primarily due to lower performance-based compensation expenses. Interest expense fell to $3.8 million in the second quarter of fiscal 2020 from $5.5 million in fiscal 2019's second quarter. It also decreased to $8 million in the first half of fiscal 2020, down from $11 million a year earlier, largely due to lower interest rates on our borrowings. Other income was not significant in both the second quarter and first six months of fiscal 2020 and 2019. Our effective tax rate for the second quarter of fiscal 2020 was 22.6%, compared to 22.5% last year. In the first six months of fiscal 2020, the effective tax rate was 0.3%, down from 14.5% during the same period in fiscal 2019, primarily due to the aforementioned discrete tax benefit from stock option exercises recognized in both years, which significantly impacted the year-to-date effective rate decrease. The larger tax benefit in the first quarter of fiscal 2020 arose from an increase in stock options exercised alongside a strong rise in HEICO's stock price during the options holders' period. Net income attributable to non-controlling interests was $5.5 million in the second quarter of fiscal 2020 compared to $8.3 million in the same quarter of fiscal 2019, and totaled $13.4 million in the first six months of fiscal 2020, down from $17 million in the prior year. This decrease is mainly due to a dividend paid by HEICO Aerospace in June 2019, which facilitated the transfer of the 20% non-controlling interest held by Lufthansa Technik back to HEICO's Flight Support Group. Our financial condition and projected cash flow remain strong. Cash provided by operating activities increased 15% to $205.9 million in the first half of fiscal 2020, rising from $178.3 million in the same period of fiscal 2019. We continue to expect positive operational cash flow for the rest of fiscal 2020. Our working capital ratio improved to 4.4 times as of April 30, compared to 2.8 times on October 31, 2019. Our day sales outstanding of receivables improved slightly to 44 days as of April 30, 2020, compared to 45 days on the same date the previous year. We are closely monitoring receivable collections to manage our credit risk. No single customer accounted for more than 10% of net sales, and our top five customers comprised about 24% and 21% of consolidated net sales in the second quarters of fiscal 2020 and 2019, respectively. Our inventory turnover rate rose to 139 days for the period ending April 30, 2020, compared to 126 days for the same period in 2019. This rise in turnover indicates certain inventory purchase commitments based on pre-outbreak net sales expectations as well as to support business backlogs. Regarding our outlook, the results for the second quarter and first six months of fiscal 2020 have been impacted by the outbreak. In our quarterly report for the period ending January 31, 2020, we provided financial guidance for fiscal 2020, excluding potential impacts from the coronavirus outbreak due to its early-stage nature. Following recent developments related to the outbreak, we've withdrawn our fiscal 2020 guidance, as noted in our Form 8-K filed on April 15, 2020. HEICO entered the outbreak with a solid balance sheet characterized by available cash and negligible debt. While we cannot predict the duration and impact of the outbreak, we believe HEICO is well-positioned for long-term success despite the short-term challenges presented by the current global economic climate. Our established strategy of maintaining low debt while acquiring and operating high cash-generating businesses in diverse industries beyond commercial aerospace, such as defense, space, electronics, and medical markets, places us in a strong financial position during this uncertain economic period. Therefore, we still anticipate positive cash flow from operations for the remainder of fiscal 2020. I want to express my gratitude to our team members for their ongoing support and commitment to HEICO during these challenging times. Our leadership team is dedicated to ensuring your safety and professional success. We will emerge from this outbreak stronger than ever, thanks to our culture of ownership, mutual respect, and relentless pursuit of exceeding our customers' expectations. I also want to acknowledge that HEICO's executive team has navigated similar challenges before, including the events of 9/11, SARS, and the 2008 financial crisis, each time emerging stronger and more profitable. I am fully confident that we will repeat this success again. Thank you all. Now we can open the floor for questions.

Operator, Operator

Thank you, sir. For the first question we have Robert Spingarn from Credit Suisse. Your line is open.

Robert Spingarn, Analyst

Good morning.

Laurans Mendelson, Chairman and CEO

Good morning.

Robert Spingarn, Analyst

Larry, I have a couple of questions about FSG, so I'll direct these to Eric. Eric, this is an incredibly dynamic situation and we all understand the challenges posed by the virus. Can you characterize the cadence from February to April in Q2? How should we view it in terms of components as this situation evolved? Additionally, how can we frame that regarding when we might see a bottom? Just to clarify, you wouldn't have reached that point in the quarter.

Eric Mendelson, Co-President and President of Flight Support Group

Thank you, Rob. That's a very good question and we've spent a lot of time internally thinking about that and looking at what happened. Basically February was an outstanding month. It was a short month, but had it been the length of the other months it probably would have been a record month for us. And we entered March very strong. I would say that March overall was quite decent. It did start coming off in the second half of the month, but still we were able to hold our own in March. April was the point where we really started to get impacted. And of course, we still had some backlog that was preordered before the month began so April started coming down. And you can see the results where they are now. I think we are hopeful that May is probably the bottom of the crisis. It's very hard to say that with all certainty. May has not concluded yet. We're starting to get June orders. Remember, we get most of our orders in the month of shipment. So, it's very hard to have visibility. But as we can see as enthusiasm in the country starts improving as therapeutics or vaccines look like they're coming along and people are getting more comfortable with the idea of traveling we think that it should be up from here. That would really be our internal guess. If you want to get into the numbers, we've stress tested our sales and earnings to make sure that we can withstand whatever may come our way. And we believe that within the Flight Support Group based on the current expense levels that we can sustain a drop of sales in Flight Support in the 50% to 60% area and still breakeven. Now, that 50% to 60% drop in Flight Support sales would imply probably a 70% to 80% drop in the aftermarket. But with all of the business units we've run those numbers, we understand what that is. And when I say breakeven at 50% to 60% down that is after writing off all of the inefficiencies and the under-absorbed overheads that would end up getting incurred in a reduced volume environment.

Robert Spingarn, Analyst

Okay, I appreciate all that. That's very helpful. I have one more question that I wanted to compare with what we've heard from some of your peers regarding used serviceable material in the parked fleet. Some of your peers have mentioned that it only becomes an issue when price points exceed about $5,000. Do you agree with that? What is FSG's exposure at those higher levels, if any?

Eric Mendelson, Co-President and President of Flight Support Group

I would agree with that. I've been on calls where people have suggested those numbers. We believe that the $5,000 mark is likely a reasonable figure. I can share that less than 10% of our PMA sales volume comes from parts that cost over $5,000, which we haven't disclosed in the past due to competitive reasons. Given where we stand in the cycle and the current crisis, we think it's appropriate to discuss this now. Therefore, we believe our focus on the types of products we handle is likely to reduce the risk of cannibalization from used serviceable material.

Robert Spingarn, Analyst

Got it. Got it. Thank you very much. I'll jump back in. Thank you.

Eric Mendelson, Co-President and President of Flight Support Group

Thank you.

Operator, Operator

Next question for you is from Peter Arment from Baird. Line is open.

Peter Arment, Analyst

Thank you. Good morning Larry, Victor, Eric, Carlos.

Eric Mendelson, Co-President and President of Flight Support Group

Good morning.

Laurans Mendelson, Chairman and CEO

Good morning.

Peter Arment, Analyst

Eric, I suppose you're going to be quite in demand today, so I'll keep discussing FSG. Could you elaborate on your thoughts regarding the stress test you mentioned about FSG? How do you view that in relation to the retirements we're hearing about and the age of the fleet? What are your considerations around that?

Eric Mendelson, Co-President and President of Flight Support Group

Yes, Peter, that's a great question. Right now, the initial impact is that if airlines aren’t flying the aircraft, they don’t need the parts. They need to deplete their inventories, and we've seen how destocking operates. For example, if an airline was using 100 units of a particular widget before the crisis and wanted to maintain three months of inventory, they would have 300 units. If consumption demand hypothetically drops by 50%, they would be using only 50 units. If they still want the full three months of inventory but may hold less due to their financial situation, they would only require 150 pieces. So, with 300 on hand, they need to use up 150 pieces before placing new orders. This is the initial effect seen across the industry. Additionally, there’s a differentiation between components and engines in the economy. We anticipate that sales for component overhaul and parts will align closely with the number of flights or available seat miles because airlines typically won’t remove a functioning component from a working aircraft only to end up with a non-functional one. Thus, we expect that sales for component overhaul and parts will rebound first. Conversely, engine sales will be more adversely affected as airlines will find ways to delay engine maintenance or avoid swapping engines from aircraft that are performing well. Heavy maintenance will be the last segment to recover. Around two-thirds of our PMA sales are from the component area, which we expect to recover sooner than engine and heavy maintenance sales. Regarding retirements, airlines are in a tough position: should they keep flying their current equipment or take on new deliveries? While we could discuss this extensively, we believe that airlines facing significant deposit losses will take the deliveries. However, generally, they will postpone maintenance for the planes needing substantial investment to remain operational but will aim to make the existing equipment serviceable before accepting new aircraft. Deliveries of new aircraft will continue, but we think those will be affected more significantly. That summarizes our perspective on the market.

Peter Arment, Analyst

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

Laurans Mendelson, Chairman and CEO

We are in a very strong capital position with low debt and low leverage. We have good availability and are actively exploring various projects. The ongoing travel restrictions due to COVID have made the due diligence process more extended, as we are not able to visit locations as frequently or thoroughly as we would prefer. Nonetheless, we are prepared to make acquisitions if they align with our principles. We seek acquisitions that are accretive and generate cash flow. When we invest, we expect that acquisition to contribute positively within the first year. Some companies in the aerospace sector are struggling, and their asking prices may not fit our model, so we will avoid getting into a cash crunch. I've always said that HEICO is not merely an aerospace or electronics company; rather, it is a vehicle for generating strong cash flow. Our decisions will be based on cash flow profitability. I anticipate the possibility of announcing an acquisition, although I cannot confirm it until a deal is finalized. However, I can assure you that we have the appetite and financial capability to pursue opportunities as actively as we can.

Peter Arment, Analyst

Thank you very much, Larry.

Operator, Operator

Next question is from Larry Solow from SJ Securities. Line is open.

Larry Solow, Analyst

Great. Thanks. Good morning guys. Good to hear your voices and hope all your families are doing well.

Laurans Mendelson, Chairman and CEO

Thank you, Larry.

Larry Solow, Analyst

Absolutely. I have a few follow-up questions regarding aircraft retirements. There has been a lot of discussion about the upcoming retirement of planes. Can you comment on how that might compare to the significant growth in new aircraft over the past decade, many of which have been under warranty, meaning you haven't fully benefited from them? Will there be some compensation for that as you assess the situation? While we can't predict exactly how many planes will be retired, I assume some of the newer aircraft will come off warranty, which could provide some offset. Is that a reasonable assumption?

Eric Mendelson, Co-President and President of Flight Support Group

Yes, this is Eric. As you mentioned, once the aircraft come out of warranty, they really become our focus. There is ongoing discussion about which aircraft will be permanently retired and which will be temporarily retired. I believe there is a fair amount of optimism that many pieces of equipment will return to service. There has been a delay in the production of new equipment, and production rates have decreased. However, we remain optimistic because even with an aggressive retirement schedule, the rest of the aging equipment will continue to increase each year. The fleet consists of approximately 25,000 aircraft. Even if a certain number of aircraft are retired, we don't anticipate being significantly impacted by cannibalization. While there will be a short-term effect, we believe that the aging aircraft still in service will offer ample sales opportunities for us, whether through parts or repairs.

Larry Solow, Analyst

It’s difficult to predict the future, but historically, during downturns, the interest and demand for PMA parts have increased significantly. This may happen again. Regarding your question about the outlook, we have consistently introduced a certain number of new parts each year. Without going into details, is there a possibility of increasing the number of PMA parts introduced annually if demand goes up?

Eric Mendelson, Co-President and President of Flight Support Group

Yes, we are capable of expanding our offerings. We have conducted a comprehensive review of our new product development pipeline to ensure that our investments align with actual needs. Currently, we have not increased our new product development efforts; we are maintaining a steady approach similar to previous years because it is important for us to support airlines as they recover from this crisis. I believe we will be well-positioned to assist the airlines. While I have my perspective based on my involvement with HEICO, it's crucial to distinguish between the growth of PMA and HEICO. Airlines recognize HEICO as a significant player in the industry, with a market cap of $10 billion, and we are well-known among major companies. The PMA industry is challenging, and we strive hard for every piece of business we secure. Therefore, I would caution against assuming that the PMA market will thrive as we emerge from this crisis. I am confident, however, in HEICO's potential to succeed due to our product offerings and financial stability. Other companies may face significant challenges based on their long-term performance in the PMA space. Our strategy of continually developing new parts and ensuring customer satisfaction through fair pricing has earned us many supporters, which makes me optimistic about our future.

Larry Solow, Analyst

It seems like an opportunity for you to potentially gain some market share.

Eric Mendelson, Co-President and President of Flight Support Group

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

Larry Solow, Analyst

Great. Okay. I'm going to switch gears and ask a question for Victor to keep him on his toes.

Victor Mendelson, Co-President and President of Electronic Technologies Group

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

Larry Solow, Analyst

Never, never. Just quickly for you. Obviously, some of your businesses are somewhat more insulated, particularly the defense and medical sectors. You also mentioned expecting a rebound in space in the latter half of the year. What about the general industrial segment of your business, which I understand is about 15% to 20% of that area? Is that segment potentially more vulnerable to a downturn?

Victor Mendelson, Co-President and President of Electronic Technologies Group

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

Larry Solow, Analyst

Fair enough. Okay, just to follow up on the accounts receivable. Is there any way to analyze the aging of your receivables? Has that changed significantly over the last quarter? And one last question, I noticed you drew down a bit on your revolver. What are your thoughts on that? Thanks.

Laurans Mendelson, Chairman and CEO

Thanks for the question, Larry. So the receivables are actually very high quality right now. We did a good job on collections during the quarter. And as you can see from the press release, receivables are down as a source of cash for us. So that was very good. The aging has not deteriorated. I mean, candidly, I am worried about airline bankruptcies and that impact on our receivables. We don't tend to have high concentrations within any one airline or any what I'll call significant exposures. But for the health of the industry, I do worry about that and we'll see how that plays out over the next three to six months. As far as the draw, you're correct, we took a draw in March and I did that preemptively to make sure that if the banks, for whatever reason, seized up, as we saw back in the financial crisis that HEICO wasn't at the mercy of the banks in the case, where we needed to draw on the line for an acquisition or for whatever capital needs we had. And so, I took the draw in a proactive state. You could see we didn't use it. We have about close to $350 million sitting on the balance sheet right now. And my carrying cost for that is so low, that I'm going to let it sit there for a while. And if we use it for acquisitions, great. If not, we'll just repay the line with it.

Larry Solow, Analyst

Great. All right. Awesome guys. Thanks so much. Appreciate it.

Operator, Operator

Next question is from Gautam Khanna from Cowen. Your line is open.

Gautam Khanna, Analyst

Hey. Thanks. Good morning, guys.

Laurans Mendelson, Chairman and CEO

Good morning.

Eric Mendelson, Co-President and President of Flight Support Group

Good morning.

Gautam Khanna, Analyst

I have a couple of follow-up questions. First, Eric, can you provide some insight into the current orders and demand on the PMA side? Should we assume it's declining in line with available seat miles, or is there a noticeable difference at this time? We assume you'll gain market share compared to general aftermarket part suppliers, but I'm curious about the current situation. Is everything down at the same rate as ASMs, or potentially worse? Can you share any information about trends in May?

Eric Mendelson, Co-President and President of Flight Support Group

Yes, that's a great question. In the past, in order to sort of keep things simple, we used to say that the greatest proxy for the aftermarket was really available seat miles. Ultimately, passenger seat miles would impact available seat miles, but available seat miles were really the driver. And as we got into this crisis, we realized, yes, I mean, obviously, that's important. But just the number of flights is also very important. Most of our sales have always been on the narrow-body product. So wide-body is what's obviously most impacted right now or even more impacted than narrow-body. And most of our sales are over on the narrow-body. So, I would say number of flights is probably the highest correlated to the aftermarket right now and the thing that we're really looking at. But remember, the other issue that you've got as I mentioned earlier was the destocking phenomenon. And that is extremely sharp and extremely painful in the beginning because, everybody's got to burn off their inventory. And until that happens, it's very hard to see a rebound. But I would say that's probably the big driver for us the number of flights.

Gautam Khanna, Analyst

Can you provide some guidance on the mix of PMA? What percentage is narrow-body compared to wide-body so we can track the right data points, like 75-25?

Eric Mendelson, Co-President and President of Flight Support Group

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

Gautam Khanna, Analyst

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

Victor Mendelson, Co-President and President of Electronic Technologies Group

Bookings in the ETG tend to be grouped, especially in the defense and space sectors, resulting in large volumes. Recently, we have received several substantial orders, leading to strong order flow in defense and space. This is why we mentioned in the release that our shipments in space were softer; we did not indicate weaker demand. Demand in space for us remains robust.

Gautam Khanna, Analyst

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

Victor Mendelson, Co-President and President of Electronic Technologies Group

Yes. That will begin to happen in the second half of the year as well as in fiscal 2021 for us.

Larry Mendelson, Chairman and CEO

We are currently exploring acquisition opportunities and conducting thorough due diligence on several companies. I previously mentioned that logistics challenges have made this process more difficult, particularly due to travel restrictions related to COVID. Despite these hurdles, our commitment to a comprehensive evaluation remains unchanged. We assess not only the financial aspects but also examine manufacturing processes and market conditions. Our appetite for acquisitions is strong and has not diminished; in fact, we are cautiously optimistic about finding opportunities, especially since some sellers may be receptive to prices aligned with our strategy, which does not involve paying high multiples like 14 or 12 times EBITDA. The competitive landscape might also shift, as private equity firms may struggle to raise funds in the current environment. We are not limited by capital; we maintain a low debt level and are actively seeking acquisitions. However, we recognize that many companies, particularly in aerospace, have experienced revenue declines. We remain disciplined in our approach, focusing on acquiring firms that can sustain their operational performance and generate the required cash flow and margins that meet our standards at HEICO. Our goal is not to grow merely for the sake of size but to enhance our cash flow position. I believe that over the next six months to a year, we will see an increase in opportunities, and we are ready to pursue beneficial transactions as they arise.

Gautam Khanna, Analyst

Would you say that there are larger acquisition opportunities that have appeared in the pipeline recently?

Laurans Mendelson, Chairman and CEO

No, I think it's pretty much the same. The mix is pretty much the same. We look at large ones and smaller ones. Again, the key for us is not size. Investment bankers come to us with deals that have 7% or 11% operating margins, which are large. However, we are not interested in size; we want cash flow. We prefer 20% to 30% operating margins from strong entrepreneurial management. HEICO is not a company that seeks growth merely for the sake of being big. We aim to grow for cash flow reasons. The size of the company is not as crucial as its profitability and cash flow.

Colin Ducharme, Analyst

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

Carlos Macau, Executive VP and CFO

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

Gautam Khanna, Analyst

If I could just add to Carlos' point, the biggest part here being that we have a very decentralized structure, so you can imagine if we were heavy handed or we were top-down, it might not offer as much flexibility as it does.

Carlos Macau, Executive VP and CFO

That's correct.

Laurans Mendelson, Chairman and CEO

I want to thank you. Our management team is very focused on cash flow management, and we consider ourselves among all companies to ensure profitability and maintain strong balance sheets. I encourage all companies to treat their employees well during these challenging times. I believe that will foster goodwill and assist with our future operations. I truly appreciate your support and interest in HEICO. Let's keep everything in perspective.