Heico Corporation

Ladies and gentlemen, thank you for standing by and welcome to the HICO's fiscal year 2021 first quarter earnings results call. Certain statements in today's call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. HICO'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 pandemic, high cost liquidity and amount and timing of cash generation, lower commercial air travel cost by COVID-19 pandemic and its aftermath, 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 or costs 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 and manufacturing costs 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, telecommunications, and electronics industries, which could negatively impact our costs and revenues, and defense spending our budget cuts, which could reduce our defense-related revenue. Parties receiving listening to this call or reading a transcript of this call are encouraged to review all of HICO'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 statements. 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 you, Mr. Lawrence A. Mendelson, High Coast Chairman and CEO. Thank you, sir.

Thank you very much, and good morning to everyone on the call. We thank you for joining us, and we welcome you to HICO's first quarter fiscal 21 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HICO Corporation, and I'm joined here this morning by Eric Mendelson, HICO's Co-President and President of HICO's Flight Support Group, Victor Mendelson, HICO's Co-President and President of HICO's Electronic Technologies Group, and Carlos Macal, our Executive Vice President and CFO. Before I get into some of the detail, I would like to thank all of Heiko's extraordinary team members who have really performed in the most admirable way 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 head well above water not to get into any financial binds, not to struggle to sell debt at 8% and 10% and so forth, and to be fiscally sound, is all attributed to the unbelievable talent and brilliance of the team members. And I can tell you, senior management 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 HICO'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 the 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, very few members of our teams came down with this miserable disease. And that was because of the safety measures and health measures that we employed 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 COVID-19 vaccines 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 continuing difficult operating environment created by the pandemic, HICO continues to generate excellent cash flow, and the cash flow provided by operating activities was very strong, increasing 32 percent to $107.2 million in the first quarter of fiscal 21, and that was 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 percent and 3 percent, respectively, in the first quarter of fiscal 21 as compared to the fourth quarter of fiscal 20. Clearly, an improvement that's obvious. Net sales for ETG and electronics products grew organically by a very strong 19 and 14 percent, 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 eight cents per share, and this represented our 85th consecutive semiannual cash dividend since 1979. HICO's strength in the face of ongoing challenging conditions, coupled with our optimism for HICO'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 percent as of January 31, 21, and that compared to 36.8 percent as of October 31, 20. Our net debt, which is total debt less cash and cash equivalents of 270.3 million as of January 31, 21, to shareholders' equity ratio improved to 13% as of January 31, 21, and that was down from 16.6% as of October 31, 20. Our net debt to EBITDA ratio improved to 0.62 times as of January 31, 21, and that was down from 0.71% on October 31, 2020. 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 the growth and maximize shareholder return. Last week, we publicly and proudly extended our congratulations to both NASA and Jet Propulsion Laboratories, or known as JPL, on their successful Mars Perseverance rover landing. Our APEX Micro Technologies, Sierra Microwave 3D Plus, and DPT 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 they remain a beacon of optimism for all people. And we are extremely proud of Heiko companies and team members who contributed to this effort. I think we want to focus on the extreme technical ability and unbelievable quality that our subsidiaries built into the electronics that they supplied for that Mars Perseverance rover landing. At this time, I would like to introduce Eric Mendelson, co-president of HICO and president of HICO'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, as 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 deficiencies 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 in 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 FSG 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 FSG operating margin. The FSG 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 2020 and to 13% in the first quarter of fiscal 21. Our team members and assembled workforce is our most valuable asset. Our team members engage 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 Heiko demonstrates it through actions, including by maintaining our 401 matching contributions in granting our team members their maximum potential 401 profit-sharing contributions, even though we missed our budgets due to the pandemic. We could have sacrificed the future in order to have better current period results, but that is not what HICO is about. That's the luxury of being part of the HICO family, as we don't feel pressured to make short-term decisions that hurt future performance. We also treated our customers, suppliers, principals, 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 And our businesses have been operating as essential businesses throughout this pandemic very carefully and very safely and taking care of each other. And 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 principally reflects the previously mentioned net sales growth. The Electronic Technologies Group's operating margin was 26.9 percent in the first quarter of fiscal 21 as compared to 27.6 percent in the first quarter of fiscal 20. The lower operating income as a percent of net sales principally 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 of 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. Turn the call back over to Larry Mendelson.

Thank you, Victor. Moving on to earnings per share, consolidated net income per diluted share was 51 cents in the first quarter of fiscal 21, and that compared to 89 cents 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 non-controlling interests, as well as lower interest expense. Depreciation and amortization expense totaled $23 million in the first quarter of 21. That was up from 21.6 in the first quarter of fiscal 20. The increase in the first quarter of fiscal 21 principally reflects the incremental impact of higher intangible asset amortization expense from our fiscal 20 acquisitions. Significant new product development efforts are continuing at both ETG and flight support. R&D expense was $16.2 million in the first quarter of fiscal 21, or about 3.9% of sales, and that compared to $17.1 million in the first quarter of fiscal Consolidated SG&A expense decreased by 10 percent to $78.1 million in the first quarter of fiscal 21 as 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 a 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 that 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 principally reflects higher other G&A expenses as a percentage of net sales and the impact from higher intangible asset amortization expense. Interest expense decreased to $2.4 million in the first quarter of fiscal 21, and that was 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 quarter of fiscal 21 and 20 was really not significant. ICO's income tax expense was $2.3 million in the first quarter of fiscal 21, and that compared to an income tax benefit of $22.9 million in the first quarter of fiscal 20. HICO recognized a discrete tax benefit from stock option exercises in both the first quarter 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 HICO stock price during the optionese holding period and the $34.1 million larger benefit recognized in the first quarter of fiscal 20 was the result of more stock options which were exercised. Net income attributable to non-controlling interest was $5.7 million in the first quarter of fiscal 21, and that compared to $7.9 million in the first quarter of fiscal 20. The decrease principally reflects a decrease in operating results of certain subsidiaries of flight support in which non-controlling interests are held. For the full fiscal year 21, we now estimate a combined effective tax rate and non-controlling interest rate of approximately 24 to 26 percent of pre-tax income. Moving over to the balance sheet and cash flow, the financial position of HICO 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 4.9 times as of January 31, 21, and that compared to 4.8 as of October 31, 20. Day sales outstanding of receivables, DSOs, improved to 45 days as of January 31, 21, and that compared to 46 days as of January 31, 20. Of course, we continue to closely monitor all receivable collection efforts in order to limit our credit exposures. No one customer accounted for more than 10 percent of net sales. Our top five customer represented about 24 and 22 percent 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. That compared to a pre-pandemic 132 days for the period ended January 31, 20. The increase in the turnover rate principally reflects lower net sales volume, mainly resulting from the pandemic impact on demand for certain of our products and services. And despite the increased turnover rate, our subsidiaries really 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. And in consideration of HICO's consolidated backlog, which has increased by 62 million since October 31, 2020. The backlog was $906 million as of January 31, 2021. As we look ahead to the remainder of fiscal 21, the pandemic will likely continue to negatively impact commercial aerospace and HICO. Given this uncertainty, we cannot provide fiscal 21 net sales and earnings guidance at this time. However, we believe that our ongoing fiscal conservative policies, healthy balance sheets, 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 and demand for our commercial aerospace parts and services businesses. And we expect that to commence primarily in the second half of fiscal 21, although we do expect it to increase gradually until we get there. In closing, I again want to thank our incredible team members. for their continued support and commitment to Heiko 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 customers' expectations. And we thank you for all you do to make Heiko an exceptional company. I also would like to point out that in spite of the pandemic, And in spite of decreased sales, Heiko wanted to look and reward our team members. And again, this year, we continued to make the 5% match to team members' 401k investments. As you know, most team members invest 6%. Heiko matches it with 5%. of their salary in HICO shares. We would never cut that back because we respect and we want to reward our outstanding team. Thank you. And now I'd like to open the floor for any questions. Thank you.

Thank you, sir. At this time, we would like to take any questions you might have for us today. As a reminder, if you would like to ask a question over the phone, simply press star, then the number one on your telephone keypad. Again, that would be star, then the number one on your telephone keypad. We have your first question from the line of Robert Spingarn from Credit Suisse. Please go ahead.

Hi, good morning. Good morning, Robert. Hi. A 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?

Well, we see a lot of product coming out. Some are coming out of private equity, so 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. And probably the difficulty here, Rob, is the logistics of getting out, kicking the tires, checking and doing all these things. And that really has slowed us down a little bit. Particularly when you're dealing with private equity guys, they have the information and they're more up to speed. But when you're dealing with private sellers, who have never sold a company before, it becomes much more difficult. But the bottom line is we are seeing many opportunities, some at very reasonable prices, and we're kicking the tires. Others are at the 14, 16 times EBITDA multiples, which price us out of the game. And we are also looking at small companies that we traditionally buy, And we're looking at larger companies. And, of course, as you know, we are not fiscally constrained. We've been asked many times, would you use your currency, which is selling in a high multiple, for acquisition? And the answer is yes. As a matter of fact, there's one transaction, I don't know if it will ever close, but where the seller wants HICO shares. So, you know, our currency, we have cash. I said this on the last call. We have cash. We have stock, and we have wampum. So, you know, we're ready to give you whatever, give the sellers whatever they would like. I guess we can give them Bitcoin, too. Yes.

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

Yeah. yes uh rob this is eric what we are seeing opportunity in in commercial but uh as um my dad pointed out the uh the the current level of earnings are depressed so it's a little difficult to uh you know nail down prices there but we are still seeing plenty of opportunity okay okay just a couple other ones victor

I wanted to just ask you a couple of things about ETG. 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 and clearly, I guess, commercial era was a factor as it's been across the industry?

Yes. Thank you, Rob. Those are good questions. On space, I think you heard us talk about throughout last year, that we felt it would strengthen and would continue to strengthen into this year for us that we saw our backlogs building and orders increasing. And so 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. But that really has been fairly broad base for us on the space side. which has been very nice. And 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 weaknesses, as I talked about before, as the pandemic wore on. And I think perhaps inventories, there was a, call it 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 arrow still down, but looking better, kind of bit by bit. I think the same general tone as you see with our flight support group, I would say it should follow that same trajectory. And defense, you know, defense at this point, we had some things that wound up getting delayed and moving out into the second quarter, not as a result really so much of our actions, but supply chain as well as actually on the customer side with inspection and delivery. On their end, things that had been built and were waiting for delivery. So we saw a little bit of that. And I would say I would expect, as a rule of thumb, as we've talked about, to see defense generally flatten out as we move forward. I don't think that's any surprise to anybody. And I would expect us to see medical markets firm up. As we move out, I think we all know they tended to be softer last year because of the cessation of elective procedures and doctor visits and things like that. And I think that's beginning to reverse as people feel more comfortable returning to doctor's offices and so on.

Right. And just quickly on your margins, you know, your margins are always up there in the call mid to high 20s, but they dipped a little bit here in the quarter. I assume that's mixed. 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.

Yeah, our commercial business is a very strong kind of business, so therefore it's a high margin business. So when that trails off, it tends to hit our margins. It was also mixed on the defense side, definitely mixed on the defense side. And, you know, I'll point out that the margins, and we've talked about this before, we don't really go too hard after people if we're running, let's say, 32% what I call cash margin, right, the real margin. We have amortization in there, which is obviously the number and the operating margin that we report, but there's about four to five points of amortization, and there's probably this period in additional beyond that half a point or so beyond what we saw last year, which was a further headwind. So if you take that out, it was actually much more comparable to where we were last year. But even so, I mean, if I look at it and I say, you know, I look at how we're doing, and you've heard us say this before on many calls and at conferences and so on, I don't really, I don't wrap people on the knuckles if they're 100 basis points or 200 basis points lower, and they're giving us 32% as opposed to 33 or 34. And, you know, people ask, where you think your margins are going to be, generally say, look, I think we're comfortable within this range, up or down 10%, although I think the up part is always hard. So, you know, that's consistent with what, to be honest, what we're expecting.

Okay. Okay. Eric, just quickly, on order flow and Eric 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?

Yeah, I, you know, I'll answer that by saying, I think we correctly called the bottom of the market in May, you know, as this was happening. And we also in our fourth quarter, correctly called, that destocking was over. And then other companies have since come out and said the same thing, but I think we were the first to talk about it. With regard to restocking, I wouldn't say that we've seen restocking so much as we've seen really depletion of inventory. And when customers order items, they need it right away. So now that doesn't mean they're out of all inventory, but they're out of all parts. But the parts that they need, they really don't have on the shelf and there's not a lot of safety stock. So no, I don't think that we've seen restocking yet. I think 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. And also, we're seeing it in a whole bunch of other markets as well. So no, I think that benefit is yet to come. And I would anticipate, it's very hard to predict, obviously with the variants and what's going to happen with the virus. But I don't think you're going to see a restocking until the airlines really start seeing that surge in travel, which we all know is going to come. But I think they're going to really hold off on spending the cash until the last possible moment.

Okay, excellent. Thank you all. Thank you.

Thank you. Your next question comes from the line of Peter Arment from Baird. Your line's open.

Yeah, thank you. Good morning, Larry, Victor, Eric, Carlos. Eric, good morning. I just wanted to follow up on just what Rob just asked about, Eric. Just, I guess, maybe just to ask it a different way, you know, less about the restock, but more about just qualitatively maybe some of the conversations you're having about potential pickup and 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 call you could give us there would be helpful.

Yeah, 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. And 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. ICO 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, and I think that 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, I think that their cuts were far more aggressive. I know that their cuts were far more aggressive than ours. You know, I alluded to in my comments that we held on to a much higher percentage of our workforce and protected a much higher percentage of our workforce than both our smaller and larger competitors. So I think we are in position, we don't have to rebuild a workforce, we don't have to re-motivate a workforce, and I think we're going to be very strong in, you know, mining those opportunities. I can tell you that at the moment things are difficult. There are some airlines that are working partial days, you know, where they've decided to also try to hang on to their workforce and they're rotating them where people work a couple days every other week. So it's more complicated, you know, getting in touch with people. But I think where, you know, we've got those relationships and our people are very excited about both the new product that is coming out as well as, you know, the comments that we're getting from our customers. I think, you know, after going through a pandemic like this, you know, buying products, uh you know the type of products that hyco offers is a no-brainer because we generate savings you know without technical risk so i think people understand that and and that's what specifically gives me the optimism yeah would you characterize that as just that you expect that your maybe your existing customers you you would expand kind of the the reach there and then maybe also you're seeing some new customers show interest in your products Yes, I would say that is correct. I mean, there's not a lot of new customer opportunity because we pretty much deal with everybody. However, you're correct in that the existing, I would say, you know, more penetrated customers are wanting to do more with us as well as customers where we are less penetrated. They're very focused on a whole variety of products that we offer that we haven't sold them in the past. And I think that we will continue to do very well. And also, I want to point out that even though we will take market share, you know, in no means should this be interpreted that OEM businesses will not do well because we take a minority of the market share. We leave a majority for the OEM. The OEMs have been pretty aggressive with price increases. And, you know, we're just trying to take our little piece. And I think their business models are very much intact.

Right, right. And then just two quick ones, Carlos. Just CapEx was up quite a bit year over year and just wondering what the kind of the trend is there or anything to call out. And then also just a clarification on what you expect the tax rate to be for the balance of the year. Thanks.

Sure, sure, sure. Good morning, Peter. So CapEx was up. We had planned in our budgets to have some capital expansion in two of our facilities. Actually, they're both in the ETG group where we are expanding their footprint with the with some new equipment and some more floor space for them to support their growth. And so that was about half that spend, if you would, was that type of growth expansion 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?

Yeah, so the tax rate, I think what we're going to wind up seeing this year for HICO is, you know, Larry mentioned earlier that We expect a 24% to 26% rate. I think that breaks down somewhere, you know, 18% to 19% on the tax rate for the year, the effective tax rate. And then NCI could be 6% to 7%. Both those percentages are of pre-tax income. So that's kind of where my head is on those rates.

Appreciate it. Nice results, guys. Thanks. Thank you. Thanks.

Thank you. Your next question comes from the line of Gautam Khanna from Cowen. Please go ahead.

Yeah, thank you. Good morning, guys. Good morning. Hey, just first for Carlos, was there any bad debt expense at FSG or elsewhere this quarter?

I mean, we always have, you know, a little bit of pluses and minuses on our normal cadence for HICO. I think that's what we experienced in Q1. There were no there weren't any large buckets of receivables aged or anything like that. So it was, on the bad debt side, it was pretty much business as usual under normal times in that regard. So no one-timers there or any amplified charges.

Okay. Because, you know, it was interesting, if you were to strip out the $1.5 million of bad debt in Q4, the incremental margin sequentially was like 49%. And FSG, and I just wanted to, Is that right? I mean, that's what it is, right? I mean, it's 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. If you look at it sequentially, that's correct.

And maybe, Eric, if you could talk about FSG, if you're seeing any differing trends by the submarkets there. you know, the PMA products versus the repair and obviously specialized products, but just if you could disaggregate what you're seeing in the various sub-markets.

Sure, Gautam. Obviously, the commercial aviation market continues to be down the most, and that would be in our parts business, which includes PMA and distribution, as well as component overhaul, as well as the specialty products. that go to commercial applications and primarily new bills. The specialty products area has been down significantly in the commercial area, not in the defense, but in the commercial area because, as you see, the bill rates have gone down. So you'll see our aftermarket replacement parts was down actually a little less than repair and overhaul and specialty products. However, a lot of our military business also goes through there. So that's one of the reasons why. But, you know, I would say in general, commercial is what was hit. Defense is still relatively strong, in particular on the products that we provide. So, if that gives you an indication.

Yeah, that's helpful. And is there any discernible difference between what you're seeing demand-wise in the distribution channel that you guys control versus the direct sales?

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

Okay. And then one for Victor, if you wouldn't mind. Your comment, you know, defense eventually flattens out. I'm just curious, what do you think the timeframe is for that when, you know, we see the primes guiding kind of low single-digit growth for sales in 2021? I mean, do you think that's sort of where we end up tracking on the defense side of ETG? And, you know, when it declines from there, or how should we frame it?

It's difficult to know, of course, in these early days of the administration, but it sort of feels like that to me. And I think they probably have as good a handle on it as anybody. And, of course, budgets for the budget or budgets for 21 are really pretty set. And the direction is fairly well known, although there can be variations for sure. in the current government fiscal year. So I think they've got, like I said, a reasonable handle on the situation, as reasonable as anyone has. And I think we're all just waiting to see where it shakes out. And we're all watching, certainly, like, for example, the daily comments now coming out of D.C. and the struggles in between... various Democrats, for example, I'll call them the hawks and the doves. And so we'll just kind of wait and see where it pans out. But I think in the very least, one thing it does seem is that 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. And one for you, Larry, I was intrigued by your remark about, you know, one of the targets you were looking at, you know, would actually prefer stock. Is that anything you can say about that type of target? Would that be, you know, reserved for a large acquisition? Or, in other words, you're not inclined to use stock on some of these $100 million deals, but it would have to be kind of one that moves the needle where you'd actually contemplate stock. That's the currency for M&A.

As you know, our preference has always been to pay cash. Occasionally, we will get, and it's very rare, we'll get somebody who prefers stock probably for tax reasons, number one. And number two, because these people, certain ones are really long-term believers in Heiko. So... it doesn't really matter to us if we want that acquisition and the only way we can make it is by giving stock we would do it and uh you know it as you know we would still want to have it accretive as to earnings and cash and it will have the same impact i mean the alternative is uh you know We could sell stock and give them cash, but they don't want cash in this case. So, again, if we want the deal badly enough, we would give them stock. But this is really an unusual case.

Got it. And I should not infer that it's a big deal because they want stock.

No, no, you can't make any inference from that at all. No, no. Okay.

Terrific. Thank you very much, guys. I appreciate all the candor.

Thank you. The next question is from the line of Larry Solo from CJS Securities. Please go ahead.

Hi, good morning. It's Pete Lucas for Larry. 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 weighing from over 20% six months ago to close to 5% today, which we think makes sense, but we'd love to hear your thoughts.

We agree with you. We think it makes a lot of sense. We have no idea. Over the years, we've been asked this question many times, and we never really have the answer. I think we think now, and I think I'm speaking for everybody in the corporate office, we think it makes a whole hell of a lot of sense. that the difference has shrunk so much. But as to what the reason is, I guess a lot of investors realize that they're better off buying the A shares at a discount than the HEI shares. But that's all I can venture. It's just a guess.

And maybe I'll add to that. We believe they should be a parity. I mean, there should not even be a 5% discount at all when there had been times originally when the shares were issued, in fact, that they traded at par.

Well, actually, they traded originally at a premium to HEI. So, it was a time.

Oh, very helpful. Thanks. I'll jump back in the queue. Thanks.

Thank you. Your next question is from the line of Ken Herbert from Canaccord. Your lines are open.

Hi, good morning. Thank you. Good morning, Tim. Hey, first, Victor, you know, over the last couple of years, you've seen a really nice sequential step up in margins within the ETG segment from the first to the second quarter. Can you, sorry if I missed it earlier, but should we expect a similar step up here in 21? Or how are you thinking about the margin progression off the first quarter?

You know, I think we've got to be careful at this point There's still a little too much uncertainty. And I think I'll stick with what I said before, which is pretty much within 10% or so of where we are feels pretty safe to me. One way up or down in our margins, and we'll see where it comes out. I'm not trying to be evasive, but I just just don't really know yet. We're still too early into the quarter.

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

Can I take it? Sure. Kenneth, Carlos, there was about, related to the acquisitions we did in the prior year, there was about $1.1 million roughly in additional amortization expense that we absorbed for those acquisitions that was on route in Q1 of 2020. So that would be the incremental uptake in amortization expense that went through the ETG's OI margin.

Perfect. Thanks, Carlos. And if I could, Eric, just one for you. You know, we're starting to hear about some delays on OEM material and perhaps that risk getting a little greater just because of all the restructuring and cost cutting we've seen in the industry. As you look at your portfolio, I think clearly that benefits the PMA product line, and that's always been a an opportunity for you. Could perhaps be a risk on the distribution side if you're seeing delays from some suppliers. Are you seeing any opportunities emerge potentially yet from the risk of delays from OEM material, and how do you think about that as it emerges, potentially presenting opportunities or risks to your segment?

Yeah, that's a good question, Ken. We are seeing some opportunities. as a result of OEMs cutting back inventory. You know, we were pretty careful to maintain both, you know, in all of our businesses sufficient inventory because we're not capital constrained. And, you know, we need happy customers because, you know, we have an expansionary view of the market and our position in the market. So we want people to be very happy. And, you know, we don't deal from a view, a perspective of scarcity. And we are seeing opportunities that you allude to. I think that there are going to be pockets of opportunities. Having said that, I think our OEM competitors are well-run, and they will be able to flex up and build the inventory that is required in order to satisfy the demand. So, yeah, I think it could help us get, if you will, spec'd out on some products. So that is a potential area of opportunity for us.

Okay. And just finally, Eric, there's been, obviously, unfortunately, some tragedies around the PW4000. I know you typically don't talk about types of engines, but I can imagine that's been a significant market for you over time. 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. I will come out because of the unique extenuating circumstances of this and mention, of course, we do have hyco parts on the PW4000 engine. We, of course, did not have anything on that engine which could have contributed to this kind of family release. We're very knowledgeable about the incident, and it's for that reason that HICO does not produce parts that are susceptible to this kind of issue. I think the FAA AD that they've come out with to mandate the thermal imaging of the hollow composite fan blade is sufficient and is appropriate. I would feel entirely comfortable flying on a PW4000-powered 777. I think that they're going to get this under control quickly. If you look, none of the incidents caused a crash, and so I think it shows that Pratt & Whitney did a great job and really designed a very high-quality product to be able to withstand such an event. So I do think that there will be opportunity for us to sell our parts as those engines do come in for service. As you know, roughly half of them have been grounded due to the pandemic. But I think that those are perfectly good aircraft, and Pratt is more than capable of resolving this issue.

Great. Well, thanks for all the color.

Thank you.

Thank you. Your next question comes from the line of Noah Poponek from Goldman Sachs. Please go ahead.

Hello, everyone. Morning. Morning. Carlos, back to that discussion of the FSG margin and some of the moving pieces in there. I mean, last quarter you had quantified the bad debt expense, even though it was only $1.5 million. So the lack of quantification this quarter, can I interpret that to assume that is now pretty close to zero?

No. Well, I wouldn't say it's zero. It's just, you know, more than the normal run rate. It's certainly less than the $1.5 million we had in Q1. It's not something, Noah, that sticks out or that was a flux in any of the numbers this quarter. Okay. It wasn't a zero. It certainly wasn't a million dollars.

Okay. Got it. And then you had also, over the last few quarters, spoke to the inventory obsolescence reserves in addition to that bad debt expense, and it was a somewhat sizable number in the back half of last year. Did you have that again in the fiscal first quarter?

You know, we have, I guess, I guess the answer to that question is we have a little bit of that right now. The bigger hits were taken last year because if you recall, you know, last year we had some specific reserves that we took for fleet retirements and aircraft that were being put down. So we took 100% reserve on some of that stuff that we had in stock. And then with the lower sales volumes that we're experiencing in the FSG, You do get into this situation when you project demand over the near term, you do wind up with a little bit of a kick to your slow-moving reserve. And so we have a little bit of that, but nothing that NOAA is noteworthy to call out as being any different than it maybe would have been, let's say, in Q1 of 20. It was about the same pace.

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

Well, I would say this. We've demonstrated – the ability or the market has allowed us to participate in having sequential growth in the margin. And I don't foresee, even though we're not giving guidance and we're real careful, I don't see a scenario right now where we wouldn't continue that cadence. I don't think it's going to be a cliff up, if you would. I think it's going to be a steady progression back towards normal at some point. We're not going to get there in 21, in my judgment. But I do think we'll see marginal improvements as we play out the year and as our volumes pick up. And it's logical if you think about the cost structure of the FSG, it is highly variable. We have very low fixed cost components. So as the volumes kick up, we do get lift in our margins. So you'll see that throughout 21.

Got it. And then on the ETG margin, Carlos or Victor, You guys have spoken in the past to the lumpiness quarter to quarter from mix or other items, but you have specified that that segment's margin should be in the 28% to 30% range over time. I just want to make sure that still holds and nothing has changed there.

I mean, this is Carlos. I think on an annual basis, because as we've talked about in the past, and I know you're aware of the the quarter by quarter margins are real tough, you know, because you have pushes and pulls and it's a lumpy business. But I think on a normal year, and I'm not so sure I would call 21 a normal year yet, you know what I mean? But a normal year, I do see that segment of the 28 to 30% range. Could it be a tick lower or even a tick higher? Of course it could. But I think expectation wise, you know, if you're thinking about a normal year, that's the range and We'll see how 21 plays out. I wouldn't necessarily call 21 a normal year yet. You know what I mean?

Sure. Hopefully getting there. Okay. And then on the ETG organic revenue growth rate, you know, that's been chopping around a bit in recent quarters with, you know, some of the non-defense pieces in there going against you. If looking at the model, you know, starting next quarter in your fiscal second quarter, you will be annualizing the start of the decline. Can that give us reason to expect the organic growth rate of the segment to start to, you know, consistently get back to a definitively positive territory?

The answer to that question is I think our second quarter, it straddles this pandemic, right? So we kind of have, you know, half the quarter is good, half the quarter is, you know, shell-shocked. That was the initial bow wave that came in from this whole pandemic. So we've got still kind of a lumpy Q2 to deal with. But, yes, to answer your question, as we get into the back half of the year, you know, the costs get easier. And as the business and, you know, the vaccine kicks in and people start traveling, we expect that the ETG commercial aerospace business will pick up. And that will be helpful to the margin because that was the one area that drug us down this quarter, you know, comparative to Q1 of 20.

Okay. And then I just lastly wanted to dig a little further into free cash flow. Carlos, you know, your fiscal 20 free cash flow was only down 5% despite all of the challenges. Your 1Q... free cash is up again year over year, despite, you know, comparing to a normal period of time. I guess, you know, where does that go from here? Is there anything, anything that was abnormally helping fiscal 20 that reverses on you? Or should we be thinking that that, you know, just grows 21 versus 20? I know you have the higher CapEx, but you still have it up in 1Q versus last year. Just any further thoughts on where you go from here with free cash flow of the business?

No, look, I think our free cash flow, if I think in terms of operating cash flow, I do think that as the year plays out, we should run on a conversion rate of, let's say, around 130% of net income.

Okay.

So, you know, that's traditionally about where we're at. I believe we'll convert at that rate. which will help our free cash flow numbers that you're talking about. The problem is, and I want to be very careful because it is an uncertain time for us, predicting that net income number right now is hard to do. And so until we get to a point where I know when the numbers flush out, we'll probably see it converted 130-plus percent. I just want to be careful not to give you some kind of guidance here that we have certainty on net income because right now it's still in flux. You know, as we get more confident... Yeah, sorry, go ahead. I was just going to say, as our subsidiaries get more confident in their end markets, you know, we'll start talking a little bit more about guidance and things like that, but right now that's not on the table.

That's helpful. And the capital expenditure piece, I think last quarter you had discussed approximately $40 million for the year, which... That would put the expansion effort pretty loaded into the number you just had for 1Q. Is that the case?

That's correct. Yeah, that's exactly the case. This is no surprise. We had planned on this and it was part of the $40 million.

So that was back kind of sub $10 million a quarter. And then 22 or beyond 21, this is sort of a one-time thing, beyond 21 goes back down.

Yeah, I mean, look, every year we have the potential for one of our facilities, you know, graduating and having needs for bigger facilities or expansion. We always have growth capital that's planned. This year, to your point, in Q1, it's a little bit more amplified. But I think that if you're thinking about modeling or, you know, you're thinking about 22 and things like that, I think if you think along terms of our CapEx being somewhere between – you know, somewhere around one and a half percent of sales that that's generally where we've trended. And that's, you know, kind of a conservative way to think about it and put your model together.

Excellent. Okay. Thanks so much.

You're more than welcome.

Thank you. The next question comes from the line of Michael here, Molly from Truman's security. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions here. Nice results as always. Maybe, I don't know who wants to field this one, if it's Victor or Carlos, but maybe just if you could touch on the backlog. I think you called it out as $906 million, so a nice little sequential uptick. Can you give us any more color there in terms of the breakout by segment? Were you seeing disproportionately more strengths in ETG or FSG and maybe some color on product lines there?

I'll take a stab, and I'm sure the guys may want to follow up. As you know, Michael, the FSG, for the most part, not everything, because we do have defense in there that has backlog, but for the most part, the FSG, you kind of eat what you kill in the month you get the order. It's a business that doesn't have a ton of backlog by its nature. So a lot of the expansion that we're seeing in backlog is coming in through FSG defense and through the ETG. And to parse that out within the ETG, we're seeing, as Victor mentioned, we're seeing strength in some of our space backlog in this first half of the year and general electronics and things like that. I think, you know, defense and It's pretty stable. It's lumpy, but the backlog is there right now. And, you know, commercial aero and ATG is down. So we're not seeing expansion in that backlog at the moment. So that's kind of the breakout.

Okay. No, that's helpful. And then just maybe a little bit more on, you know, Eric, on some of the, you know, call it bookings trends you're seeing from some of the airlines. I mean, obviously there's, still pretty significant reduced utilization of older planes. You know, can you help us or quantify, are you seeing a significant amount of pickup on the parts side in support of, you know, the newer, younger fleet? I know you've been pretty guarded in the past on, you know, what kind of content you've got on the H-7 and the 350, but, you know, are you guys positioned, you know, do you think to support, you know, a younger fleet as this kind of you know, we emerged through this pandemic and presumably the fleet age tilts lower given the older retirements?

Yes, that's a great question, Mike. Yes, I think, you know, the short answer is we are well positioned on the newer equipment. I think that we're going to do very well on that. A lot of customer interest and, you know, customer approvals in those areas. In addition, also to point out, we took the position early in the pandemic that a lot of these aircraft would not be retired as some thought for the simple reason that they already exist and the lessors and the banks that would end up having to replace them, find a new home for them, would have two options. One is to cut it up for parts or two is to go and lease it out. And we think leasing it out makes a lot more sense when you've got life on the aircraft. So we thought that the price of the rental rates was going to fall to the point where the new build was not going to make as much sense and where that was going to have a greater impact. Now, of course, the wild card is the environmental impact of new equipment. And to the extent that governments, both in the United States and Europe, help subsidize, if you will, some of the newer equipment, that could have an impact. We haven't really seen much of that. And if you look, a lot of the build rates sort of have underestimated the amount of the decline. And they're taking that down. So I would say that we're a little sanguine on the new build rates. Coming back to the 2019 levels, I think that a lot of the older, still economic equipment will continue to operate. And so I think we're going to be well positioned in both the new equipment as well as the older equipment.

Got it. Got it. That's helpful. And I mean, you're close enough to the customers, presumably. I think everybody in this industry is watching oil prices, which which keep climbing that that could kind of, you know, throw a wrench into keeping some of that older equipment for sure with these cash strapped airlines. So I'm sure you guys are watching that that indicator as well.

We are, and I think a lot of the recent climb was due to the cold snap that we've had here in the United States, and that should pass. So I still think that the order equipment with its lower acquisition cost makes a lot of sense for the airline. Got it. So I don't see them. At this point, who wants to commit to newer equipment where you increase your cost base in the face of what we've just gone through? So I think the order equipment is going to hang in there and do well. And actually, the number of aircraft retired was even below what we thought it was going to be. And we were on the low side of the spectrum and the estimates on the retirement. I mean, a lot of people spoke of big retirements, and we didn't share that view. But we're positioned well, I think, in both sides. Got it.

Last one I had, just Carlos, I think you guys called out this quarter, all of commercial aerospace across the entity was down 43%. Did you have that number in the fourth quarter? Just trying to get a sense of the the rate of decline there. I think you called it out for 2020 or fiscal 20 in total, but did you have, uh, what, what all of arrow did in a fiscal fourth quarter?

I, I, I don't, I don't recall what it was in the fourth quarter off of that. You're right. We did disclose it for the year. It was like in the mid thirties or something like that for the year. I don't recall that what the fourth quarter was.

Okay. Okay. No worries. Um, all right. Good stuff. Thanks guys. Thanks. Thanks.

Thank you. Your next question comes from the line of Colleen Dukarm from Sterling Capital. Please go ahead.

Hi, good morning. Thanks for taking the question. Most of my questions were answered, but just a quick one for Carlos, perhaps just trying to take a look at the incremental margin progression from a different angle. You know, you guys have kept human resources in capacity given the culture through the pandemic. Totally understandable, but clearly it seems to me like the business is built and can sustain, with the current expense structure, a higher revenue level. And that's my question for Carlos. I mean, if you had to back into how much incremental revenue, perhaps on a percentage basis, your current expense base from a human resource and capacity could sustain, what your best guess might be?

Well, I think that our... Our businesses right now are positioned to handle quite a bit of sales growth in the FSG, which I think is what you're focusing on. Naturally, as that business picks up, we will have some hires to get back up to levels we saw in 19, but that's going to be a slow tick upward. And I think what you'll see happen is that as the sales grow, you will see us catching some more leverage in our fixed costs as that expands. But we will have some expenditures. I don't have a percentage for you because the problem, Greg, is that we don't have total clarity on what those sales are going to be. We have a sense that they're going to rise, but we don't know the magnitude of the steepness of that rise. So we're very nimble and we will flex as necessary. But as we're sitting here today, The current business can handle a pretty sizable jump in sales before we got to go out and make meaningful hires.

Okay, thanks. And then just as a quick follow-up, maybe one for Carlos and one for Eric. Carlos, you talked a little bit about OEMs continuing to push price, somewhat surprising given the health of the customer base through the pandemic. Heiko's franchise poised to take share. can you talk about the price disparity, i.e. the umbrella? Is that widening over time and therefore better positioning you, not just with the recovery, which would normally be a time for you to take share, but is that price umbrella making that opportunity even more, positioning Heiko to be an even more attractive option as the economy recovers here? And then just quickly for Victor, Congrats again on the Perseverance landing. Very exciting for the company and for the country. You guys are putting a variety of parts, sensors, memory, et cetera, on electronic vehicles on Mars. Wondering if there's any crossover opportunity to participate in what is still an early but large and growing market for electronic vehicles here on Earth where share positions are still fluid. if that's even on your radar. Thanks.

So this is Eric. I'll go ahead and start first. With respect to the pricing umbrella, we treat our committed customers extremely well. And so we moderate price increases for them if they commit to us for a long period of time. So yes, you're absolutely right. The pricing umbrella does widen over time. And we can get to a point where if somebody's been buying a part from us for 15 or 20 years, our price could end up being 70, 80% below the OEM price. And where we're still able to earn a fair margin on it, and we're able to give a very good value, and then we add more products as a result of that. There's no question that we've got the opportunity if we wanted to push pricing that we could, but we've decided that the future is much greater to us and we would rather continue on our growth path and sort of limit, voluntarily limit those opportunities in order to capture more market share. The OEMs, I would say this year in general, Their price increase, I mean, they've been across the board. Some have decided to raise price substantially in order to make up all of the lost margin that they've surrendered due to the pandemic. Others have been slightly more uh moderate in their price increases but i would say it's pretty much across the board of business as usual so the the the heiko value has even been enhanced uh during the pandemic so and then for victor uh so it's a it's a very good question and and uh i appreciate you you're asking it actually it's insightful to

And thank you, by the way, for the compliment to our people and to our company on perseverance. The answer is yes. Some of our businesses are working on autonomous vehicles, cars, automobiles. And it's not, I wouldn't call it a big part of our business. I think it has some potential for us. We'll see how it develops. Part of the question is we tend to be a high-end, higher-margin producer, as you know, and we tend not to be in the extreme high-volume, low-margin end, which is often where automotive lies. We'll have to see how it develops for us. Is it something that turns into an opportunity longer term? or are we really more on the development end? So right now, what we're doing there tends to be more on the development end. Unfortunately, I can't... tell specifically or disclose specifically the companies we're working with, the programs we're on, because we're subject to some confidentiality agreements on those, and they want it kept secret. By the way, I can say it's not just the automotive companies, but it's the tech companies as well who are involved with automotive applications. And Carlos, do you have?

I couldn't have said it better, Victor.

I couldn't have said it better. Was there one that you were going to answer? No.

I think Eric took care of it, so I think we're good.

Thank you.

All right.

Thanks, Colin.

Thank you, Colin. Thank you. Your next question is from the line of Greg Conrad from Jefferies. Please go ahead.

Good morning. Good morning. Just two quick follow-ups. One on ETG. I think last year, defense in space was about two-thirds of the segment. Any granularity around the breakout? And then you mentioned space was broad-based in terms of opportunities. Any color around drivers? I mean, you mentioned Mars Rover, but how much is government versus maybe some of these new commercial space opportunities we hear about?

Yeah, so just in terms of giving you a sense of the breakdown, you know, sales, it's comparable to where it's been. I mean, it's a little better than half. It's defense and commercial space is around the 10% range, and then other markets, you know, other electronics and government markets, kind of about, you know, a quarter and You know, our medical bounces around 5% to 10%, and commercial aviation is sub-10% now, between 5% and 10%, running between 5% and 10%. And, you know, I would expect commercial aviation to get back up more toward 10% as the year wears on or as we get into next year, certainly based on what we know today and how things are doing. And on the space side, you're right, of course, Perseverance, there was no revenue in the quarter from that as that launched, of course, in July of last year. But it's broad-based. It tends to be more satellites. You know, it's most heavily satellites and most heavily communications satellites. The space exploration part of the business is nice. and it is a profitable business for us, but it is not the bread and butter part, if you will. It tends to be the bragging rights, if you will, for us, and it tends to be the more noteworthy, but obviously there are not a lot of rovers built each year and launched each year. But when you get into Earth observation, There are a number of Earth observation satellites that we're on, that we're getting on, that our companies are supplying components on, as well as some launch vehicles. So that's broadly where we lie.

Thank you. And then just a quick question on FSG. I mean, you mentioned Europe earlier in the call. When we think about the eventual improvement of the aftermarket, should that kind of follow the capacity trends that we're seeing in the regions with, you know, surgeons recovering, you know, ahead of others? And is that kind of what we should be looking at in terms of, you know, regional trends?

Yes, absolutely. I think you nailed it. You know, there may be a little bit of a recovery slightly before that as airlines get prepared. If they start to see bookings, I think that could drive it. you know, drive an early recovery, they've got to make sure that they've got the aircraft ready for, I believe, what's going to be a surge down the road.

Thank you.

Thanks, Rick. Thank you.

Again, as a reminder, if you would like to ask a question over the phone, simply press star, then the number one on your telephone keypad. We have another question from Luis Rafeto from UBS. Please go ahead.

Hey, guys. Thanks for getting me on. I'll just take one from Michi. Carlos, the SG&A trended up a bit in the quarter. Is that some of the performance comp coming back in? Is that also maybe what weighed a little bit on the FSG margins? Because I think if you add back the bad debt expense and the inventory reserves, you know, sort of the clean margins did tick down, but is that just maybe some of that SG&A coming back?

The performance-based comp in the first quarter of 2000 and 2021 were fairly comparable. So, because remember last year, you know, we had very low bonuses, so this year we're, you know, we're wanting to take care of our folks as we do see some green shoots in the process going forward. So, I think what we're seeing, to be candid with you, Lou, is that as the sales have started to tick up a little bit, we're still not catching the leverage on our SG&A that we had experienced in Q1 of 20. We had a great quarter in 20, and comparatively speaking, it's some of the SIS cost inefficiencies is the only way I can think to put it that we're experiencing when compared to Q1 20. I don't think it has anything to do with performance-based comp.

Okay. Um, and then Eric, the talk of the, the share, uh, share taking, I guess, is that, do you see that more on the part side of the MRO side? I just, obviously the parts to your point, you have 70, 80% lower price. In some cases that's extremely competitive. Are you as competitive on the MRO side? It's just trying to get a sense of where you think that share taking could take place.

Yeah, I think it's really across the board in all of our businesses. Um, Yes, you're right. First of all, the 70% to 80% price benefit would be for, as I mentioned, for a customer who is committed to us and has been buying something for, say, 15 to 20 years. And that would be the maximum. I mean, that's not where we come out of the box. So if you look at repair, you know, typically parts as a percentage of repair is, you know, just say roughly 40% of the cost. So you're right that the, you know, the extreme cost benefit would be more on the, you know, in particular on the PMA side. But I think we're very competitive across the board in everything that we do.

Okay, great. Thank you. And then, Victor, just for you, to your earlier point, aviation is now 5% to 10% of ETG. And correct me if I'm wrong, but I think it's primarily OEM. So where is the uncertainty, you know, in ETG? I mean, defense, all defense primes have guidance. Just what else is it that you guys are particularly so uncertain about in that business?

So, Lou, this is Victor. The business is roughly split between OEM and aftermarket in ETG for commercial aviation. So, you know, that pretty much explains what we're looking at, right? I mean, you've got the uncertainty in aftermarket, which is improving. and the uncertainty in new production, which I think is also probably moving in the right direction. I mean, there was a lot of disruption in new aircraft production rates and shifting, which seems to be moving again in the right direction. I mean, we've got the MAX, which is now resuming production, but then it stopped. And so that's why I'm generally optimistic about the direction that we're moving in commercial aviation. I just don't know the exact timing.

Sure. Okay. And I think that earlier number someone asked about, I think it was minus 49 and a half percent for the fourth quarter. So just so it was there. Thank you guys.

Thank you. 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 HICO. As you know, we remain available. If you have questions, give us a call. Eric, Victor, Carlos, or I will be happy to speak with you. And if not, we look forward to speaking to you at the Q2 conference, which will be in about three months. So stay well, stay healthy, hopefully get vaccines, and 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.