Ladies and gentlemen, thank you for standing by, and welcome to the Fiscal 2014 Second Quarter Earnings Results and First 6 Months of Fiscal 2014 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Your host today is Laurence A. Mendelson, Chairman and Chief Executive Officer of HEICO Corporation.
Before the conference call begins, I will read the following statement. Certain statements made in this call will constitute forward looking statements, which are subject to risks, uncertainties and contingencies. HEICO's actual results may differ materially from those expressed in or implied by and outside of the aviation, defense, space, medical, telecommunications and electronic industries, which could negatively impact our costs and revenues and defense budget cuts, which could reduce our defense related revenue. Those listening to this call are encouraged to review all of the HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10 ks, Form 10Q and Form 8 ks. We undertake no obligation to publicly update or revise any forward looking statement, which whether as a result of new information, future events or otherwise, except to the extent required by applicable law.
Thank you. I will now turn the conference over to Mr. Mendelson. Please go ahead.
Thank you very much and thank you and good morning to everyone on the call. We again thank you for joining us and we welcome you to HEICO's 2nd quarter fiscal 2014 earnings announcement telecom. 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 Tom Irwin, HEICO's Senior Executive Vice President and Carlos Macau, our Executive Vice President and CFO. Before reviewing Q2 operating results in detail, I'd like to take a few moments to summarize the highlights. Our consolidated net sales, operating income and net income in the 1st 6 months of fiscal 2014 represent record results for HEICO, driven principally by record net sales and operating income within Flight Support and Electronic Technologies.
Consolidated 2nd quarter fiscal 2014 net income and operating income are up 20% 10%, respectively, on a 19% increase in net sales over the Q2 of fiscal 2013. Consolidated net income and operating income in the 1st 6 months of fiscal 2014 are up 28% 25% respectively on a 21% increase in net sales over the 1st 6 months of fiscal 2013. Consolidated net income per diluted share increased 20% to $0.42 in the Q2 of fiscal 2014, up from $0.35 in the Q2 of fiscal 2013. Our Flight Support Group set an all time quarterly net sales and operating income record in the Q2 of fiscal 2014 by improving 26% 22% respectively over the Q2 of fiscal 2013. The increases principally reflect organic growth of about 15% and additional net sales contributed by a fiscal 2013 acquisition.
Cash flow provided by operating activities increased to $55,000,000 in the 1st 6 months of fiscal 2014. That was up from $44,500,000 in the 1st 6 months of fiscal 2013. As of April 30, 2014, the company's net debt to shareholders' equity ratio was 57.9% with net debt of $415,200,000 As discussed in our last conference call in February, we acquired the 20% non controlling interest held by Lufthansa Technique in 4 of the company's existing subsidiaries, those principally operating in specialty products and distribution within our HEICO Aerospace subsidiary. LHT still maintains a 20% ownership in HEICO Aerospace, a leading producer of PMA parts and component repair and overhaul services. At this time, I'd like to introduce Eric Mendelson, Co President of HEICO and President of HEICO's Flight Support Group and he will discuss the results of Flight Support.
Thank you. The Flight Support Group's net sales increased 26% to a record
190 $4,900,000 and increased 28 percent to a record $376,500,000 in the Q2 and 1st 6 months of fiscal 2014, respectively, up from $155,200,000 and $294,200,000 in the 2nd quarter and 1st 6 months of fiscal 2013, respectively. The increase in the Q2 of fiscal 2014 reflects organic growth of approximately 15% as well as additional net sales of $15,700,000 from a fiscal 2013 acquisition. The organic growth principally reflects new product offerings and improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines. The increase in the 1st 6 months of fiscal 2014 reflects organic growth of approximately 17% as well as additional net sales of $31,300,000 from a fiscal 2013 acquisition. The organic growth principally reflects new product offerings and improving market conditions within our aftermarket replacement parts and repair and overhaul services product lines and within our specialty products lines.
As previously announced, HEICO is especially proud of the accomplishments of 1 of its Flight Support Group's subsidiaries, Sunshine Avionics, who has become HEICO's 2nd subsidiary to attain ANAC or ANAC certification. ANAC is the agency responsible for the regulation and the safety oversight of civil aviation in the country of Brazil. This achievement will permit Sunshine Avionics to offer their advanced avionics repair services to the numerous airline and MRO customers in Brazil. The Flight Support Group's operating income in the Q2 of fiscal 2014 increased 22% to a record $36,900,000 up from $30,300,000 in the Q2 of fiscal 2013 and increased 27 percent to a record $69,100,000 in the 1st 6 months of fiscal 20 14, up from $54,500,000 in the 1st 6 months of fiscal 2013. The increase in the 2nd quarter and 1st 6 months of fiscal 2014 principally reflects the previously mentioned net sales growth.
The Flight Support Group's operating margin was 18.9% and 18.4% in the 2nd quarter and 1st 6 months of fiscal 2014 respectively as compared to 19.5% and 18.5% in the Q2 and 1st 6 months of fiscal 2013. The decrease in the Q2 of fiscal 2014 principally reflects the impact of additional amortization expense from our successful fiscal 2013 acquisition. 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. Thank you, Eric.
Eric. The Electronic Technologies Group's net sales increased 7% to $89,700,000 in the Q2 of fiscal 2014, up from $83,900,000 in the Q2 of fiscal 2013 and increased 9% to a record $177,200,000 in the 1st 6 months of fiscal 2014, up from $162,800,000 in the 1st 6 months of fiscal 2013. The increase in the Q2 and 1st 6 months of fiscal 2014 resulted from additional net sales of $4,100,000 $12,200,000 from a fiscal 2013 acquisition as well as organic growth of approximately 2% and 1%, respectively. Organic growth in the Q2 of fiscal 2014 was principally driven by our Space and Aerospace businesses, tempered by softer sales in our defense related businesses. Organic growth for the 1st 6 months of fiscal 2014 was principally driven by our Aerospace business, offset by softer sales in our defense related businesses.
The Electronic Technologies Group's operating income decreased 10% to $18,100,000 in the Q2 of fiscal 2014, down from $20,200,000 in the Q2 of fiscal 2013. The decrease in the Q2 of fiscal 2014 principally reflects a less favorable product mix for certain of our space and defense products, partially offset by a $2,300,000 reduction in the fair value of the contingent consideration related to the fiscal 2013 Lusiks acquisition, principally due to less favorable projected market conditions during the future earn out period. The Electronic Technologies Group's operating income increased 15% to a record $41,000,000 in the 1st 6 months of fiscal 2014, up from $35,800,000 in the 1st 6 months of fiscal 2013. The increase in the 1st 6 months of fiscal 2014 is principally attributed to the overall impact of the acquired business. The Electronic Technologies Group's operating margin was 20.2% and 24.1% in the Q2 of fiscal 2014 fiscal 2013 respectively.
The decrease in the Q2 of fiscal 2014 principally reflects the previously mentioned less favorable product mix, principally at Lusiks and in certain defense products. Excluding Lusiks' results, ETG operating margins were approximately 20 2% in the Q2 of fiscal 2014. The Electronic Technologies Group's operating margin increased to 23.2% in the 1st 6 months of fiscal 2014, up from 22% in the 1st 6 months of fiscal 2013. The increase in the 1st 6 months of fiscal 2014 principally reflects the overall impact of the acquired business, partially offset by a less favorable product mix for certain of our Space and Defense products. I now turn the call back over to Larry Mendelson.
Okay. Moving on to diluted earnings per share. The consolidated net income per diluted share increased 20% 28%
to $0.42
$0.83 in the 2nd quarter and 1st 6 months of fiscal 2014. And that was up from $0.35 $0.65 in the 2nd quarter and 1st 6 months of fiscal 2013 respectively. The increase in the 2nd quarter and the 1st 6 months of fiscal 2014 principally reflect the previously mentioned growth within both of our operating segments. Consolidated net income per diluted share includes a $0.05 benefit in the 1st 6 months of fiscal 2014 and that was from a reduction in the fair value of the contingent consideration related to a prior year acquisition and that was net of lower than expected operating income at the acquired business. If you want more color on that when I'm finished with my prepared remarks, we will be able to give it to you.
Depreciation and amortization expense increased by $3,800,000 $7,700,000 in the second quarter and 1st 6 months of 20 14. That was up from $8,300,000 $16,400,000 in the 2nd quarter and the 1st 6 months of 2013. The increase in both periods principally reflects higher amortization expense of intangible assets recognized in connection with our fiscal 2013 acquisition. Research and development expense increased 21% 23% to $9,300,000 $18,400,000 in the 2nd quarter and 1st 6 months of 2014, respectively, and that was up from $7,700,000 $15,000,000 in the 2nd quarter and 1st 6 months of 2013, respectively. Significant ongoing new product development efforts are continuing at both Flight Support and Electronic Technologies and we continue to invest over 3% of each sales dollar into new product development.
You will all recall that this is a strategic model that we follow and have followed for the past 20 2 years and we believe it to be the lifeblood of our business. SG and A expenses increased 13% to $50,800,000 and 6 percent to $92,500,000 in the 2nd quarter and 1st 6 months of fiscal 2014 respectively, up from $44,800,000 $87,400,000 in the Q2 and 1st 6 months of fiscal 2013. The increase in the 2nd quarter and 1st 6 months of fiscal 2014 principally reflect the incremental impact from acquired businesses and additional costs incurred at our existing businesses to support consolidated organic sales growth. And that was partially offset by the previously mentioned reduction in fair value of contingent consideration associated with the fiscal 2013 acquisition of Bluestix. SG and A expense as a percentage of net sales decreased from 18.8% in the Q2 of fiscal 20 13 to 18% in the Q2 of fiscal 2014 and that principally reflects the impact of the fair value adjustment again of the contingent consideration earn out liability.
SG and A expenses as a percentage of net sales decreased from 19.2% in the 1st 6 months of 20 13 to 16.8% in the 1st 6 months of fiscal
on the fixed
portion of SG and A expense. Interest expense in the 2nd quarter and 1st 6 months of fiscal quarter outstanding under our revolving credit facility, and that was associated with borrowings that we used to fund acquisitions. Interest rates on our revolving credit facility remained low at approximately 1.3% per annum as of April 30. Other income in the 2nd quarter and 1st 6 months of fiscal 2014 was not significant. Income taxes, our effective tax rate in the Q2 of fiscal 2014 decreased to 31.8 percent from 34.1% in the Q2 of fiscal 2013.
The decrease is principally attributed to the impact of the previously mentioned reduction in the fair value of contingent consideration associated with the fiscal 2013 acquisition of Lusik's acquired by means of a non taxable stock transaction. The effective tax rate in the 1st 6 months of fiscal 2014 increased to 32.9%,
up from
31.3% in the 1st 6 months of fiscal 20 2013. The increase is principally attributed to the benefit we recognized in the Q1 of fiscal 2013 from the retroactive extension of the R and D tax credit as well as the subsequent expiration of the credit in December 2013, which limited the R and D tax credit recognized in the 1st 6 months of fiscal 2014. Additionally, the increase is the result of a larger income tax deduction we recognized in the first quarter of fiscal 2013 for the special and extraordinary cash dividend, which we paid in December 2012 to participants of the HEICO Savings and Investment Plan. Furthermore, the aforementioned increases were partially offset by the impact again of the previously mentioned reduction in the fair value of contingent consideration. Our full year combined tax rate and non controlling interest rate expressed as a percentage of pre tax income is now anticipated to be 42%, down from our prior expectation of 43%.
Net income attributable to non controlling interests were $4,400,000 $9,500,000 in the 2nd quarter and 1st 6 months of 2014, respectively, and that compared to $5,300,000 $10,400,000 in the 2nd quarter and 1st 6 months of 2013. The decrease in net income attributable to non controlling interest in the Q2 of fiscal 2014 reflects the purchase of certain non controlling interest during the Q2 of fiscal 2014, resulting in lower allocations of net income to the non controlling interest. The decrease in net income attributable to non controlling interest in the 1st 6 months of fiscal 2014 reflects purchases of non controlling interest during fiscal 2013 as well as the Q2 of fiscal 2014 And of course, that results in lower allocations of net income to the non controlling interest. Moving on now to the balance sheet and cash flow. Our financial position and cash flow remain extremely strong.
Cash flow provided by operating activities increased to $55,000,000 in the 1st 6 months of 20 14. That was up from $44,500,000 in the 1st 6 months of fiscal 20 13. And that reflected principally increased earnings, higher depreciation and amortization expense and an increase in non cash value adjustments relating to contingent consideration. We continue to expect cash flow provided by operating activities to approximate $160,000,000 in fiscal 2014. Our working capital ratio is a strong 3.4 as of April 30, 2014 and that's up nicely from 2.7 as of October 31, 2013.
DSOs of accounts receivable was 52 days as of April 30, 14 and that was comparable to the 50 days as of October 31, 2013. And of course, we continue to closely monitor all receivable collection efforts in order to limit credit exposure. Those of you who have been with us for a long time know that HEICO does not have any significant losses in accounts receivable. No one customer accounted for more than 10% of net sales and our top 5 customers represented approximately 17% of consolidated net sales, both in the Q2 of fiscal Inventory turnover rate was 110 days as of April 30, 2014 and that was comparable to the 111 as of October 31, 'thirteen. Net debt to shareholders' equity ratio was 57.9 percent as of April 30, 14, with net debt, which we define as debt less cash and cash equivalents of $415,000,000 $415,200,000 actually principally incurred to fund the acquisitions as well as the payment of special cash dividends in fiscal 2014 2013.
We have no significant debt maturities until fiscal 2019 and we plan to utilize our financial flexibility to aggressively pursue high quality acquisition opportunities. As you know, HEICO is not a financially constricted company. We have more than enough available cash and credit facilities to do all the things that we want to do, whether it's CapEx, acquisition, dividends and so forth. So financially, we're considered a very strong credit. As we look ahead to the remainder of fiscal 2014, we continue to anticipate organic growth within our product lines that serve commercial aviation.
We expect organic growth within ETG consistent with prior years, reflecting higher demand for the majority of our products moderated by lower demand for certain of our defense related products. During the remainder of fiscal 2014, we plan to remain focused on new product development, market penetration, executing our acquisition strategies and maintaining our financial strength. Based upon the current economic visibility, we are increasing our estimate of fiscal 14 year over year growth in net income to 12% to 14% over the prior year and that is up from our prior growth estimate, which we gave you about 3 months ago. At that time, it was 10% to 12%. We continue to estimate fiscal 2014 year over year growth in net sales of 12% to 14%.
Our full year fiscal should approximate 18%. CapEx will approximate $25,000,000 depreciation and amortization expense to approximate $49,000,000 and cash flow from operations, again should approximate lines for questions.
Thank you. Our first question comes from Tyler Hojo with Sidoti and Company.
Yes. Hi, good morning, everyone. Good morning. Just firstly, I was hoping to talk a little bit more about kind of some of the impressive growth within the Flight Support business, 15% organic. I guess, I'm most curious about what the impact of weather was, if any, regards to that growth rate?
And if you could maybe just comment a little bit on what you're seeing real time in terms of perhaps some restocking in the industry?
Yes. I guess I'm going to turn it to Eric, but my 30,000 foot comment is we really didn't see much on weather. And when it comes to restocking, we don't see that much So we don't do that much on rotables where you would have restocking issues. So but I can let Eric give you more color.
Yes, Tyler. I don't know what more I can really add to that other than we while some other companies spoke about weather being a sort of an excuse for some shortfalls, we really haven't seen that and I haven't heard that excuse from our business units. So I don't think that that's an issue for us. We also somewhat have a culture where if there would be weather delays, our business units would figure out how to make it up elsewhere. So that may not even bubble up to my desk.
And then as far as restocking, as we've said now for the last couple of years, airlines are running inventories very, very lean. Even the most successful airlines are trying not to hold inventory. So we for our products really haven't seen a restocking. We see it operating pretty much hand to mouth as it has been for the last couple of years, albeit volumes are up. So that's I think what's driving some of our performance.
But I would not say that it's due to our restocking.
Okay. That's helpful. And I don't know if you've seen the numbers yet, but as we sit here thus far 21 days through May, have you seen anything noticeable in terms of the trends within kind of your core aftermarket levered products?
Yes. We need to be careful about commenting outside of the reporting periods. But I would say it's just business as usual.
Okay. Got it. And just lastly for me, could you remind us what your guidance bakes in just in regards to capacity or air traffic growth this fiscal year?
I'm going to ask Tom is going to respond to that.
Yes, yes, Tyler. Actually
early in
the year, we commented on our sales growth by segment actually, but our overall sales growth of 12% to 14% and about 60% of that we thought would be organic in the commercial aviation side or FSG. If you equate that to I think ASM growth forecast, they seem to continue to run about mid single digits. So again, on a macro basis, we like to target organic growth in the commercial aviation aftermarket at 1.5 to 2x times the ASM growth or MRO spend, which isn't reported as frequently or statistically. But I think it's still in that range. And of course, we have some tough comps in the second half of this year for the Flight Support Group, given the growth in the second half, organic growth last year of like 14% and 17%, I think.
So but that being said, I think overall we're still looking at that range of organic growth in Flight Support Group on a full year basis.
Got it. Thanks so much.
Appreciate
it. Thank you.
Thank you. Your next question comes from Julie Yates with Credit Suisse.
Good morning. Nice quarter guys.
Good morning, Julie. Thank you.
Question for Victor on ETG margins. Do you expect these the mix lies in the second half and to see a rebound back into the mid-20s? Or how should we be thinking about the margin profile the rest of the year?
Yes. I would say that we're looking probably to the lower 20s, somewhere in that range for the balance of the year and I would look for it later in the year at this point. I'm not I don't think that it's a 3rd quarter event. Okay.
Okay. And then I think last quarter you mentioned some concern over defense softening in the second half of the year. Do you have any better visibility here? I think you're now saying organic growth can be consistent with last year in the kind of the historical low single digit range? Any update?
Yes. I would I mean, I
think it's pretty much what I said on our last call and that is we've started to see it really leak into the longer cycle businesses that we have and not just shorter cycle businesses. And I would some of the aerospace and defense.
Okay. Okay, understood. And then just on the acquisition pipeline, what are you guys seeing? I think prices have been pushing up for a while. What's the appetite in FSG versus ETG based on availability and pricing?
I think the appetite is really equal. We don't have a particular plan for one business over the other and we're sensitive to pricing. Sometimes a particular market can command higher pricing than another because it's getting more interest and sometimes it's better for us to wait that out as we've done in the past. And I think that's always worked to our benefit. And we're very careful on the defense side.
We see a lot of opportunities there, but we are careful and we like the bacon additional haircuts when we look at those on top line and margins and bottom line and so forth on those opportunities, so that we are conservative in our forecasting.
And Julie, just to add over on the Flight Support side, obviously pricing is significantly up. It seems like the aftermarket has been discovered by the world as the great secret of great business model. And we understand it very well. We're very cautious and we want to make sure that we do well in both the good times as well as the tougher times, but we've got a number of opportunities that we're looking at right now. Of course, we tend to be a preferred acquirer.
We really need to find those circumstances where our the qualities of the company in terms of the touch and feel that we use in our operating style is valued by the seller in order to find a transaction that works for us. So we are working on a number of transactions right now.
Okay, great. Thank you very much.
Thanks, Julie.
Thank you. Your next question comes from JB Groff with D. A. Davidson.
Hey guys, can you hear me okay?
We can. Good morning.
Hey, good morning. Hey, I had a quick one for Eric. I mean, sort of teeing off some of the other questions on organic growth. Has your development pace changed materially over the last few years? I mean, I know you used to give a number of PMAs that you thought you would get in a year.
And I understand you don't want to get too detailed on that. But is that is your capability of putting more PMAs through the system increased and has that helped with the growth?
Yes. Again, we tend not to give out details because frankly our competitors are on this call and listen and respond accordingly and that's certainly not helpful to HEICO. But I can tell you in a very broad sense that our development pipeline remains consistent with prior year periods and we continue to develop into adjacent markets. We continue to develop new products and new technologies that are really very exciting and very much appreciated by our customers and doing things that frankly nobody else in the industry does and very often that our competitors believe is not doable. So we continue to have a major focus in that area.
And there's no change at all.
Okay. And is the margin potential consistent with what you've been getting in terms of some of these new product lines and sort of areas that you haven't played in the past?
Yes, absolutely. I'd say they're consistent, if not better than what we've done in the past. Okay, great. Thanks. One of the important things to note is that the basically the newer technologies that have come out, the newer products that serve the same purpose as prior generation products, typically at price points that are much higher than the prior generation.
So the margin potential is off hand. And remember, we're not only extension, but we also do components and we're all around the aircraft.
Right. Thank you.
Thank you.
Thank you. Your next question comes from Ernie Ursaner with CJS Securities.
Hi. This is actually Lee Jagoda from CJS Securities for Ernie.
Okay, Lee. Good morning.
Good morning. So, Larry, can you talk a little bit about the status and the issues you've had that have affected Lustix in the first half? And then as we move through Q3 and Q4, how does that kind of develop? And then as a follow-up, just the amount that's remaining on the earn out for 20 15?
Okay. Again, at 30,000 feet, Lusiks had a sizable backlog when we acquired it. A few of the contracts had cost overruns, which I think you're seeing in the results. And I think that's what's impacting the initial the Q1 and the Q2. Those cost overruns will of course are painful to take them, but at the same time the cost overruns have the effect of reducing cash that we will require as a payout to the former Lusik shareholders.
So whereas we had a total potential liability earn out of $50,000,000 which we had estimated would actually be somewhat less. At this time, the $50,000,000 is going to be considerably less and every dollar we save on that is really cash in our pockets. So that's the positive and the negative side of the whole thing. We believe that once these cost overruns are out of the way and there are cost overruns that we had to complete for very customers. We think that the credibility that Lusiks will derive from doing the job right and sticking with it will be made up in the future.
If you recall, about a year or 2 ago, we bought a company 3 d in France. And the 1st 6 months, it hit the bottom line and we had the contract flow drop and we said that that was affecting ETG and that we expected it to turn around. And I think the Lusik situation at this point we look at in the very same way. We do believe that it will turn around. We do believe that additional contracts will fill in and we expect that the situation will straighten itself out.
So I can't guarantee it because these contracts are complex and they're as you know they're on satellites and the electronics to the satellite are very complex issues to deal with. But I think that that's the overall picture. And as we see the likelihood of the earn out being reduced, we have been required under the accounting rules to reduce our liability for the earn out and the accounting treatment of that is to take some of it into income, which lessens the impact of the loss. So it's kind of an accounting truthfully to me, it's an accounting nightmare. But suffice it to say a lot of the loss is made up by the reduction in the ultimate earn out, which is cash in our pocket.
So I'm going to let Victor comment if he has anything more to say about that. I think you've covered it
pretty well. This is Tom Irvin. The last part of your question regarding the remaining amount that we have recorded as a liability at this point is around $12,000,000
That's $12,000,000 out of the initial $30,000,000 Originally, it was $50,000,000 and then $20,000,000 dropped, it's $12,000,000 is the remaining liability.
Okay. And then one more bookkeeping question just to be clear. Your guidance for net income growth of 12% to 14 percent, is that on a reported basis or after adjusting for the earn out reversals and taking that out of the numbers?
That would be GAAP reported. So it's all inclusive of positives and negative adjustments.
Okay, great. Thanks very much.
Thank you. Your next question comes from Kevin Sabatoni with KeyBanc Capital.
Good morning, guys. Thanks for taking my questions.
Good morning.
One quick follow-up on LUSIC. You talked about the cost overruns. Has anything changed there from the demand side from when you closed the business last the acquisition of the business last year through now? Or has it been purely those cost overruns on the contracts?
Kevin, this is Victor. I'll answer that for you. The satellite business and we knew this when we bought Lucics based and other businesses that we have tends to be volatile in terms of orders. So you'll go a series of months with no orders whatsoever and then all of a sudden it's like feast or famine, you have a huge order month. And in fact, we had a huge order month somewhat recently.
It's been a little quieter lately, and that could work its way into our production later in the year or we could have orders come in and move forward. So at this point, I would say it's a fairly typical sort of cycle that we're seeing. And I would expect that over the course of our ownership of the business, we have to look at this a little longer cycle 1 to 2 years, if you will, and we kind of judge the performance of the business on that basis because of the volatility and the size of the orders. They tend to be very large individual orders as opposed to, let's say, production line orders of the sort that kind of come in regularly and on a sort of pro rata basis.
Okay. Thanks. That's helpful.
I just want
to add one other bit of color. When we purchased Lucics, we expected, a, it to be lumpy because of what Victor just described. And number 2, that Lusik's in the future would have a very, very great future in the Space business. So we didn't really expect it to be an immediate impact. We didn't expect it to have this immediate loss either, but we thought that the future for the products that it makes and the customers' service would be a longer term type of an investment.
So that's the color. We're not ready to write it off or we're not terribly upset with what's happened. We don't like it, but we think the future still is pretty bright.
Okay, thanks. And then just shifting to Commercial Aerospace, curious as to what kind of opportunities you're seeing or expect to see on the A380, starting to see the first of those aircraft due for heavy maintenance visits and Lufthansa with the ownership stake, they've got a pretty substantial fleet already. Just kind of wondering what you guys are expecting to see from that platform?
Yes. We obviously, the A380 is doing quite nicely. There are a number of them out there. We need to be very careful though unfortunately, Kevin, on what we comment on specific platforms because as I said, our customers I'm sorry, our competitors are listening to what we say very intently. But we do view it as an excellent platform for us and we do already have plenty of content on it.
Again, it has the same dynamics that all of the other aircraft have where typically one manufacturer charges a lot of very high prices for the spare parts and the
repair services. So I think that there's a
lot of very good opportunity. And also as you rightly point out, Lufthansa is a major operator of the A380 and of course they own 20% of HEICO Aerospace. So there's tremendous opportunities there. I think we're in a unique position to be able to work with our partner to solve their needs. And of course, Lufthansa is partnered with Air France and the components business there.
So I think that there's very good opportunity for us there as well as all around the different fleets.
Perfect. And then last one for me, another one for you, Eric, I guess. Just looking at what appears to be a pretty strong interior retrofit cycle, are you guys kind of seeing any uptick there just given your mix shift away from the engine and more towards components interior components? Just kind of curious as to what you guys are seeing there in terms of order flow, I guess?
Yes. We're active as you mentioned in that space. We do very well in it. And yes, the airlines want to continue to retrofit their cabins and I think that that provides great opportunity for HEICO, huge opportunity for us in many of the different areas in which we operate in that space.
All right. Thanks. That's all I have.
Thank you.
Thank you. Your next question comes from Sheila Kahyaoglu with Jefferies.
Hi, good morning. Thank you for taking my question.
Good morning, Sheila.
Good morning. This one's for Victor. In terms of ETG, do you mind elaborating on the magnitude of the decline in defense and maybe what you saw on a sequential basis? And also in terms of the profitability level, if you exclude the one time items, you're sort of in the high teens margin level, whereas you've been operating at a 20% plus margin rate. So how should we think about that going forward?
Sheila, I think if you take out just for Lusiks, as I said, we're around 22%. So I think that's consistent there. And in terms of what we're seeing in defense, for the most
part, we are, I think, seeing
a softness that's coming from what our people tell me appears to be kind of budgetary issues out of their customers. And so they tend to see things that they tell me are slipping out to the right, if you will, that the demand remains there. As far as we're concerned, we sort of take that out of our planning and we take that out of our assumptions to be conservative. Could that add back in later? I suppose so, but we kind of take what we're given and discount it a little bit further.
So that's essentially what we're seeing.
Okay. And then just back on the margins then. So we should expect it to kind of remain around a 22% level or does it tick back up to the mid-20s?
I would say, I would look in the lower 20s. It's possible to the mid-20s. But right now, if I look at the mix of where we are, some of the things that as I said to you on our defense side that they're telling me they expect to see stronger, but we kind
of want to be
a little more conservative. I would expect to see the lower 20s for the time being. And we'll see where we are as we get into next year.
Okay. Got it. And then just one for Eric. In terms of new products, they've been driving growth for the last few quarters. Are you also reaching out to new customers?
Do you mind elaborating on that a bit?
Yes. We absolutely have a tremendous focus on reaching out to new customers. We bring new customers on board. And again, there's obviously there's new customers, people haven't purchased products from us and there's not a lot of those out there. But what we also define somewhat of a new customer would be a customer for a type of product that they haven't purchased from us in the past.
And there's a tremendous amount of opportunity in that area for us and we continue to win over customers where they haven't purchased certain product lines and there's a lot of opportunity, a lot of stuff that they can buy from HEICO, significant cost savings, turn time advantages and component repair as well as distribution and we see a lot of expansion there There are a lot of expansion opportunities.
Got it. Thank you.
Thank
you. Thank you, Sheila.
Thank you. Your next question comes from Ken Herbert with Canaccord.
Hi, good morning.
Good morning, Ken.
Victor, I first just wanted to ask, can you just remind us again or Tom maybe of the sort of 3% to 4% implied organic top line growth for ETG, how does that parse out by the legacy defense or military business versus space and maybe versus the industrial business?
Ken, this is Tom Irwin.
Again, yes, in terms of our overall segment organic growth, we're still in the consolidated full fiscal year, 14 numbers in ETG around 2% to 4%. That was a buildup based on growth in space and aerospace and some industrial. And then if you will, going into the year, our estimates on defense would be potentially a drag of 5% to 10%. That was all that was the build up to the roughly 2% to 4%. And at this point, our outlook for the full year hasn't materially changed by market segment.
Okay. Great. That's helpful.
And then Eric, if I could, within it's been a while, but you've kind of rambled now for a few quarters. Are you seeing any change in the business when you acquired it either on the missile defense opportunity or perhaps on the interior side? And how would you comment on the track of that business relative to your expectations
now? Yes. I would say we're it's performing consistent with our expectations. We have an excellent management leadership team there and a great team member base, and they are performing very well in all segments of their business. Obviously, there's different opportunities in different areas and business cycles a little bit.
And as you mentioned, missile defense tends to be a little bit lumpy. But overall, I would say the company has performed extremely well and we're very happy with it.
Great. Well, thank you very much and nice quarter.
Thank you. Thank you.
Thank And we're just pausing for a moment. Okay. I'm not showing any further questions.
Okay. Well, I thank you all for your interest in HEICO. If you have any questions, you know that we are all available to respond. Give us a call or if you're down in South Florida, set up an appointment to come on in and chat with us. And we look forward to speaking to you on about 3 months from now on the Q3 earnings call.
So have a good summer and we will speak to you in the near future. Thank you all.
Ladies and gentlemen, thank you for joining today's conference. Thank you for your participation. That does conclude the conference. You may now disconnect.