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Heico Corp (NYSE:HEI)
Q3 2020 Earnings Call
Aug 26, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the HEICO Corporation Fiscal 2020 Nine Months and Third Quarter Earnings Conference Call. We thank you for joining us today. My name is Vincent and I'll be your conference operator.

As we begin the call, we remind you that certain statements in this conference call will constitute forward-looking statements, which are subject to risks, uncertainties, and contingencies. HEICO's actual results may differ materially from those expressed in or implied by those forward-looking statements as a result of factors, including the severity, magnitude, and duration of the COVID-19 outbreak; HEICO's liquidity and the amount and timing of cash generation; the continued decline in commercial air travel caused by the outbreak, airline fleet changes, or airline purchasing decisions, which could cause lower demand for our goods and services; product specification costs and requirements, which could cause an increase to our costs to complete contracts; governmental and regulatory demands, export policies and restrictions, reductions in defense, space, or homeland security spending by U.S. and/or foreign customers or competition from existing and new competitors, which could reduce our sales and profitability; our ability to introduce new products and services at profitable pricing levels, which could reduce our sales, sales growth, our profitability; 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 or budget cuts, which could reduce our defense-related revenue and profitability.

Parties listening to or reading a transcript of this call are encouraged to review all of HEICO's filings with the Securities and Exchange Commission, including but not limited to filings on Form 10-K, Form 10-Q, and Form 8-K. We undertake no obligation to publicly update or revise any forward-looking statement whether as a result of new information, future events, or otherwise except to the extent required by applicable law.

I now turn the call over to Laurans A. Mendelson, HEICO's Chairman and Chief Executive Officer. Thank you.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Thank you very much and thank you and good morning to everyone on this call. We thank you for joining us and welcome you to the HEICO's third quarter fiscal '20 earnings announcement teleconference. I'm Larry Mendelson, Chairman and CEO of HEICO Corporation, and I'm joined here this morning by Eric Mendelson, HEICO's Co-President and President of HEICO's Flight Support Group; Victor Mendelson, HEICO's Co-President and President of HEICO's Electronic Technologies Group; and Carlos Macau, our Executive VP and CFO.

Before reviewing our operating results in detail, I would like to take a moment to thank all of HEICO's talented team members who have performed admirably during the challenges brought on by the COVID-19 outbreak. Their dedication to HEICO's customers and the safety of their fellow team members has been exemplary. I want each and every member of HEICO's global team to understand that the Board of Directors and I are humbled by your dedication and continued focus on safety and well-being during these challenging times. I am confident that our future is bright and we will exit this COVID-19 period as a stronger and more competitive Company.

At this time, I will take a few minutes to discuss the impact on HEICO's operating results from the outbreak for the three and nine months ended July 31, 2020. The effects of the outbreak and the related actions by governments around the world to mitigate its spread have impacted our employees, customers, suppliers, and manufacturers. In response to the economic impact from the outbreak, we at HEICO have implemented certain cost reduction efforts, including layoffs, temporary reduced work hours, temporary pay reductions within various departments of our business, including within our entire executive management team as well as our Board of Directors.

Our response to the outbreak including -- included implementing varying health and safety measures at our facilities, including supplying and requiring the use of personal protective equipment, staggering work shifts, body temperature taking, increasing work-from-home capabilities, consistent and ongoing cleaning of workspaces and high touch areas, and establishing processes aligned with the Centers for Disease and Control guidelines to work with any individual exposed to COVID-19 on their necessary quarantine period, and the process for the individual to return to work.

With respect to the results of operations, approximately half of our net sales are derived from defense, space, and other industrial markets, including electronics, medical, and telecommunications. Demand for products in that half of our business has not been fundamentally impacted and its operational results remain materially consistent with the financial expectations prior to the outbreak. We have experienced and expect to continue experiencing periodic operational disruptions resulting from supply chain disturbances, staffing challenges, including at some of our customers, temporary facility closures, transportation interruptions, and other conditions, which [Technical Issues] or increased costs.

While these issues have not yet been material overall, we have experienced disruption in some orders and some shipments during the third quarter. The remaining portion of our net sales is derived from commercial aviation products and services. [Technical Issues] has caused significant volatility and a substantial decline in the value across global markets. Most notably, the commercial aerospace industry experienced an ongoing substantial decline in demand resulting from a significant number of aircraft in the global fleet being grounded during our third quarter.

Our businesses that operate within the commercial aerospace industry have been materially impacted by the significant decline in global commercial air travel that began in March of this year. Consolidated net sales for our businesses that operate within the commercial aerospace industry decreased by approximately 54% during the third quarter of fiscal '20. As I previously mentioned, we have taken responsible measures to address these reductions in net sales at our affected businesses. Once commercial air travel resumes, cost savings most likely will be a priority for commercial aviation customers, and we anticipate recovery in demand for our commercial aviation products, which frequently provides aircraft operators with significant cost savings.

One item that I'd like to point out that we have been asked on calls over -- between last night and this morning, a number of people asked for the dollar amount of account receivable reserves that we set up for the bankruptcy of some small airlines, and that number, the absolute number was $7.5 million. Later on in this call, Carlos can give you more details on how it affects the operating margins and so forth, but the absolute number was $7.5 million. Keep in mind that historically we have been able to make up and possibly collect some of that $7.5 million. At this point, we don't know how much that might be, if any. So, we have, as normally do, taken the most conservative approach and reserved the whole amount that could go bad. We believe that our cost savings solutions and robust product development programs will enable us to potentially increase market share and emerge with a stronger presence within the commercial aviation market.

Summarizing the highlights of the third quarter, consolidated net income increased 4% to a record $251.7 million or $1.83 per diluted share in the first nine months of fiscal '20 and that was up from $242.2 million or $1.76 per diluted share in the first nine months of fiscal '19. We continue to forecast positive cash flow from operations for the remainder of fiscal '20. Cash flow provided by operating activities was consistently strong at $299 million and $313.4 million in the first nine months of fiscal '20 and '19 respectively. Cash flow provided by operating activities totaled $93.1 million or 171% of net income in the third quarter of fiscal '20 as compared to $135.1 million in the third quarter of fiscal '19.

Our net debt, which is total debt less cash and equivalents, of $344.8 million compared to shareholders' equity improved to 17.7% as of July 30 [Phonetic], down from 29.8% as of October 31, 2019. Our net debt to EBITDA ratio improved to 0.7 times, less than 1 as of July 31, '20, and that was down from 0.93 times as of October 31, '19. During fiscal '20, we have successfully completed six acquisitions, four of which were completed since the outbreak start. We have no significant debt maturities until fiscal '23, and we plan to utilize our financial flexibility to aggressively pursue high-quality acquisitions to accelerate growth and maximize shareholder returns. I do want to point out that unlike some companies in the aerospace industry, HEICO did not have to go to the market to raise money at, what I consider, exorbitant rates of 8% or more. So, we just went through this financially sound and I think that has really helped us and has proven to be an excellent strategy.

In July '20, we paid the regular semiannual cash dividend of $0.08 per share, and that represented our 84th consecutive semiannual cash dividend. We did not cut that -- we did not have to cut the dividend and we were very proud of that. Some companies did cut dividend significantly because of cash flow pressures; we did not.

In July '20, we reported that our Sierra Microwave, VPT, 3D PLUS subsidiaries supplied mission critical hardware for the Mars 2020/Perseverance mission. The Mars mission is designed to better understand the geology of Mars and seek signs of ancient life by collecting and storing rocks, soil samples for a future return to Earth, while also testing new technology for robotic and human space exploration. We congratulate the many remarkable people who accomplished this first step in this incredible mission, and we are proud of the HEICO companies and team members who contributed to the effort and we are excited for the mission's next stage.

Talking about acquisitions, in June 2020, we acquired 70% of the membership interest of Rocky Mountain Hydrostatics, which overhauls industrial pumps, motors, and other hydraulic units, with a focus on the support of legacy systems for the U.S. Navy. The remaining 30% continues to be owned by certain members of Rocky Mountain's management team. And Rocky Mountain is part of our Flight Support Group, and we expect the acquisition to be accretive to earnings within the first 12 months following closing.

In August 2020, we acquired 75% of the equity interest of Intelligent Devices and Transformational Security. These two companies design and develop and manufacture state-of-the-art technical surveillance countermeasures equipment used to protect critical spaces from exploitation via wireless transmissions, technical surveillance, and listening devices. In summary, I'll say basically spying by unwanted people. These acquisitions are part of Electronic Technologies, and we expect them to be accretive to earnings within the first 12 months following closing. The remaining 25% interest was acquired by the non-controlling interest holders of a subsidiary in HEICO Electronic that is also a designer and manufacturer of the same type of equipment used basically for different applications.

In August '20, we acquired 90% of the equity interest of Connect Tech. Connect Tech designs, manufactures rugged small form factor embedded computing solutions. Its components are designed for very harsh environments and primarily used in rugged commercial and industrial, aerospace and defense, transportation, and smart energy applications. The remaining 10% interest continues to be owned by a member of Connect Tech's management team. This acquisition is part of the Electronic Technologies Group, and we expect it to be accretive to earnings within the first 12 months following closing.

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 this Flight Support Group.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thank you. The Flight Support Group's net sales were $731.2 million in the first nine months of fiscal '20 as compared to $915.5 million in the first nine months of fiscal '19. The Flight Support Group's net sales were $178.2 million in the third quarter of fiscal '20 as compared to $320 million in the third quarter of fiscal '19. The net sales decrease in the first nine months and the third quarter of fiscal '20 is principally organic and reflects lower demand across all of our product lines, resulting from the significant decline in global commercial air travel beginning in March 2020 due to the outbreak. Net sales in fiscal '20 follows a very strong 12% and 13% organic growth reported in the third quarter and full fiscal 2019 year respectively.

The Flight Support Group's operating income was $121.6 million in the first nine months of fiscal '20 as compared to $179.8 million in the first nine months of fiscal '19. The Flight Support Group's operating income was $12 million in the third quarter of fiscal '20 as compared to $64.8 million in the third quarter of fiscal '19. The operating income decrease in the first nine months and third quarter of fiscal '20 principally reflects the previously mentioned decrease in net sales, a lower gross profit margin mainly within our aftermarket replacement parts and repair and overhaul parts and services product lines, and an increase in bad debt expense, principally due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during the third quarter of fiscal '20 as a result of the financial impact of the outbreak. These decreases were partially offset by lower performance-based compensation expense.

The Flight Support Group's operating margin was 16.6% in the first nine months of fiscal '20 as compared to 19.6% in the first nine months of fiscal '19. The Flight Support Group's operating margin was 6.7% in the third quarter of fiscal '20 as compared to 20.2% in the third quarter of fiscal '19. The decrease in the first nine months and third quarter of fiscal '20 principally reflects the previously mentioned lower gross profit margin and an increase in SG&A expenses as a percentage of net sales, mainly reflecting the impact of the outbreak in previously mentioned higher bad debt expense.

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.

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Thank you, Eric. The Electronic Technologies Group's net sales increased 4% to a record $638.3 million in the first nine months of fiscal '20, up from $615 million in the first nine months of fiscal '19. This increase is attributable to the favorable impact from our fiscal '19 and fiscal '20 acquisitions, partially offset by an organic net sales decrease of 1%. The organic net sales decrease is principally due to lower sales of our space, commercial aerospace, and other electronics products, largely attributable to the outbreak, partially offset by increased sales of our defense products.

The Electronic Technologies Group's net sales decreased 2% to $210 million in the third quarter of fiscal '20 from $216.1 million in the third quarter of fiscal '19. This decrease is attributable to an organic net sales decrease of 6%, partially offset by the favorable impact from our fiscal '19 and fiscal '20 acquisitions. The organic net sales decrease is principally due to lower shipments of our defense and commercial aerospace products, mainly attributable to the outbreak, partially offset by increased sales of our space products in the third quarter.

The Electronic Technologies Group's operating income increased 2% to a record $184.9 million in the first nine months of fiscal '20, up from $181.2 million in the first nine months of fiscal '19. The Electronic Technologies Group's operating income was $61.9 million and $62.2 million in the third quarter of fiscal '20 and fiscal '19 respectively. The increase in the first nine months of fiscal '20 principally reflects the previously mentioned net sales growth, lower performance-based compensation expense, and a decrease in acquisition-related expenses, partially offset by a lower gross profit margin. The lower gross profit margin is mainly due to a decrease in net sales of certain space products and the less favorable product mix of certain aerospace products, partially offset by increased net sales of certain defense products.

The Electronic Technologies Group's operating margin was 29% in the first nine months of fiscal '20 as compared to 29.5% in the first nine months of fiscal '19. The decrease principally reflects the previously mentioned lower gross profit margin, partially offset by a decrease in SG&A expenses as a percent of net sales, mainly from lower performance-based compensation expense and lower acquisition-related expenses. The Electronic Technologies Group's operating margin improved to 29.4% in the third quarter of fiscal '20, up from 28.8% in the third quarter of fiscal '19. The increase principally reflects a decrease in SG&A expenses as a percent of net sales, mainly from lower performance-based compensation expense and a decrease in acquisition-related expenses, partially offset by a lower gross profit margin. The lower gross profit margin was mainly due to a decrease in net sales and less favorable product mix of certain commercial aerospace and defense products, partially offset by increased net sales and a more favorable product mix of certain space products in the quarter.

Now, I would like to turn the call back to our Chairman, Larry Mendelson.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Thank you, Victor and Eric. Consolidated net income per diluted share decreased 32% to $0.40 in the third quarter of fiscal '20 and that was down from $0.59 in the third quarter of fiscal '19. The decrease principally reflects the previously mentioned lower operating income of the Flight Support Group, partially offset by lower income tax expense, less net income attributable to non-controlling interest, and lower interest expense. Consolidated net income per diluted share increased 4% to $1.83 in the first nine months of fiscal '20 and that was up from $1.76 in the first nine months of fiscal '19, and that increase principally reflects an incremental discrete tax benefit from stock option exercises, which were recognized in the first quarter of fiscal '20, less net income attributable to non-controlling interest and lower interest expense, partially offset by the previously mentioned lower operating income of Flight Support.

Depreciation and amortization expense totaled $21.9 million in the third quarter of fiscal '20. That was up slightly from $21.1 million in the third quarter of fiscal '19 and totaled $65.2 million in the first nine months of fiscal '20, up from $61.7 million in the first nine months of fiscal '19. The increase in the third quarter and first nine months of fiscal '20 principally reflects the incremental impact from our fiscal '19 and fiscal '20 acquisitions.

R&D expense was $15.1 million in the third quarter of fiscal '20 compared to $16.6 million in the third quarter of fiscal '19 and it increased 1% to $49 million in the first nine months of fiscal '20 and that was up from $48.7 million in the first nine months of fiscal '19. Significant new product development efforts are continuing at both Electronic Technologies and Flight Support, and we continue to invest more than 3% of each sales dollar into new product development.

Consolidated SG&A expense decreased by 20% to $75 million in the third quarter of fiscal '20, down from $93.4 million in the third quarter of fiscal '19. Consolidated SG&A expense decreased by 13% to $232.8 million in the first nine months of fiscal '20 and that was down from $267.9 million in the first nine months of fiscal '19. The decrease in consolidated SG&A expense in the third quarter and first nine months of fiscal '20 principally reflects a concerted effort by both Flight Support and ETG to control their SG&A spend, and these efforts resulted in lower G&A expenses such as a decrease in performance-based compensation expense and a reduction in various selling expense, including outside sales commissions, marketing, and travel. These decreases were partially offset by an increase in bad debt expense at Flight Support, which I previously mentioned was $7.5 million due to potential collection difficulties from certain commercial aviation customers that filed for bankruptcy protection during the third quarter of fiscal '20 as a result of the financial impact of the outbreak as well as the increase from fiscal '19 and '20 acquisitions. Consolidated SG&A expense as a percentage of net sales increased to 19.4% in the third quarter of fiscal '20 and that was up from 17.5% in the third quarter of fiscal '19. The increase in consolidated SG&A expense as a percent of net sales in the third quarter of fiscal '20 principally reflects the aforementioned increase in bad debt expense due to bankruptcy filings made by certain commercial aviation customers and higher other SG&A expenses as a percentage of net sales due to decreased sales volumes. These increases were partially offset by lower performance-based compensation expense. Consolidated SG&A expense as a percent of net sales decreased to 17.1% in the first nine months of fiscal '20, down from 17.7% first nine months of fiscal '19. The decrease in consolidated SG&A expense as a percentage of net sales is mainly due to again lower performance-based compensation expenses, partially offset by an increase in other SG&A expenses as a percentage of net sales and an increase in the bad debt expense, reflecting the previously mentioned bankruptcy filings.

Interest expense decreased to $2.6 million in the third quarter of fiscal '20, down from $5.5 million in the third quarter of fiscal '19 and decreased to $10.6 million in the first nine months of fiscal '20 and that was down from $16.5 million in the first nine months of fiscal '19. The decrease in the third quarter and first nine months of fiscal '20 was principally due to a lower weighted average interest rate on borrowings outstanding under our revolving credit facility.

Our effective tax rate in the third quarter of fiscal '20 was 13.4%, compared to 22% in the third quarter of fiscal '19. The decrease principally reflects a larger deduction related to foreign-derived intangible income, principally resulting from final tax regulations that were issued in the third quarter of fiscal 2020 as part of the Tax Cuts and Jobs Act that was enacted in December 2017 as well as a larger income tax credit for qualified R&D activities. Our effective tax rate in the first nine months of fiscal '20 was 3.5% compared to 17.1% in the first nine months of fiscal '19. As previously mentioned, HEICO recognized a discrete tax benefit from stock option exercises in both the first quarter of fiscal '20 and '19, which accounted for a majority of the decrease in our year-to-date effective rate. The decrease in the effective rate in the first nine months of fiscal '20 also reflects a larger deduction related to the previously mentioned foreign-derived intangible income deduction as well as larger income tax credits for qualified R&D activities.

Net income attributable to non-controlling interest was $3.2 million in the third quarter of fiscal '20 and that compared to $8 million in the third quarter of fiscal '19. Net income attributable to non-controlling interest was $16.6 million in the first nine months of fiscal '20 compared to $25 million in the first nine months of fiscal '19. The decrease in third quarter and first nine months of fiscal '20 principally reflects the impact of a dividend paid by HEICO Aerospace in June '19 -- 2019 that effectively resulted in the transfer of the 20% non-controlling interest held by Lufthansa Technik in eight of our existing subsidiaries back to the Flight Support Group and a decrease in operating results of certain subsidiaries of the Flight Support Group in which non-controlling interests are held.

Moving on to the balance sheet and cash flow, our financial position and forecasted cash flow remain extremely strong. As we mentioned earlier, cash flow provided by operating activities was consistently strong at $299 million and $313.4 million in the first nine months of fiscal 2019 respectively. Cash flow provided by operating activities totaled $93.1 million or 171% of net income in the third quarter of fiscal '20 as compared to $135.1 million in the third quarter of fiscal '19. Our working capital ratio improved to 5 times as of July 31, '20, compared to 2.8 times as of October 31, 2019. Our day sales outstanding, DSOs of receivables improved to 43 days as of July 31, '20 and that compared to 45 days as of July 31, '19. We monitor all receivable collection efforts and try to limit our credit exposure. No one customer accounted for more than 10% of net sales and our Top 5 customers represented 25% and 21% of consolidated net sales in the third quarter of fiscal '20 and '19 respectively. Inventory turnover increased to 154 days for the period ended July 31, '20 and that compared to 125 days for the period ended July 31, '19. The increase in the turnover rate principally reflects certain long term and non-cancelable inventory purchase commitments based on pre-outbreak net sales expectations, and also, the necessity to support the backlog of certain of our businesses.

Now, looking forward, the outlook. We cannot estimate the outbreak's duration and magnitude and we cannot confidently predict when demand for commercial aerospace products will return to pre-outbreak levels. However, we do continue to forecast positive cash flow from operations for the remainder of fiscal '20. We entered the outbreak with a healthy balance sheet that included a strong cash position and nominal debt. We believe HEICO is favorably positioned for long-term success despite the short-term challenges created by the outbreak in the global economy. This COVID pandemic will not last forever. Our time-tested strategy of maintaining low debt and acquiring and operating high cash generating businesses across a diverse base of industries beyond commercial aviation such as defense, space, and other high-end markets, including electronic and medical puts us in a good financial position to weather this uncertain economic period.

I'd like to end my remarks by again thanking our team members for their continued support and commitment to HEICO during these professionally and personally challenging times. Our executive team is focused on your safety and professional success. We will exit this outbreak stronger than before, and that strength will manifest from our culture of ownership, mutual respect for one another, the unwavering pursuit of exceeding customers' expectations, and we thank you all for all that you do to make HEICO an exceptional Company. And I would like to add I also thank our loyal shareholders who stuck by HEICO and sent us many, many positive comments and thanks, and we truly appreciate your interest and support.

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

Questions and Answers:

Operator

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

Robert Spingarn -- Credit Suisse -- Analyst

Good morning.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Good morning, Rob.

Robert Spingarn -- Credit Suisse -- Analyst

Thank you for all of the detail. I just wanted to perhaps dig in a little bit. Eric, maybe we could start with FSG and just talk about the different businesses within FSG and their varying performances, if you will, the parts overhaul distribution. And then if you could talk a little about the trend between the months. In other words, did May mark bottom and how did June and July look? And then I have a couple of other things after that.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Sure, Rob. Let me start with the trend. We were -- back in May, when we said we were hopeful that May would mark the bottom, in fact, May was the bottom, and we were able to bounce nicely off of the May numbers into June and July. And I would say they were sort of consistent in that level. In terms of reviewing the businesses within the parts side, of course, we've got the PMA and we've got the distribution, and I would say that they were down sort of in the similar area. Repair was down a little bit more and that was to be expected as airlines we anticipated would reduce whatever expenditures that they saw. Specialty products, I would say, was down a little less in the beginning of the pandemic, but I think now as people recognize that the build rate is going to be reduced, I think the suppliers to the OEMs, including the HEICO businesses that do that are going to be impacted sort of longer than the aftermarket is going to be impacted.

I reviewed with our sales executives the customer sales and how we're doing by product lines and by customers and it's sort of interesting to note that while the business is down the percentage that we reported, there are certain airlines that are down very significantly, I would say, 96%, 90%, 88%, 87%, and these are major customers. I don't want to mention their names and I don't want to mention their geographies, but I can tell you that these are major airlines that are not going to be able to operate -- I mean, they're operating 30% to 50% of their flights and yet their purchases are down in the 90s. And obviously, that is not a sustainable model. I think that they -- our people believe that they entered the crisis with lean inventories and my sense is that they are -- they've used up or they're using up whatever they've got. And this is not going to last indefinitely.

So, to answer your question, I think that the OEM market will be down longer for the new build and for the reasons that airlines don't need the aircraft, but I do believe that the aftermarket will start to snap back.

Robert Spingarn -- Credit Suisse -- Analyst

And did you see -- did July improve from June?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

July did improve from June, but I would be careful to sort of extrapolate that improvement going forward, because as we've seen with the sort of the late July increase in infection rate, of course, that's now come down, I mean, that would, obviously, sort of, put a damper on the increases going forward. So I think very much it's going to be related to the infection rates into the progress on a therapeutic as well as a vaccine.

But the one thing which I am extraordinarily hopeful of and very, very positive on is, when I met with our salespeople, who are probably on this call, and we reviewed the customers in detail, I gave them every opportunity to tell me why the future would be tough and why I should -- why things may be difficult coming out and sort of, for them to set expectations low? And I can tell you that to a person they were extraordinarily optimistic. They think that -- and they gave me specifics as to why HEICO has increased its credibility with the customers that were a significant aviation company now, if you look at our market cap versus other companies, and they believe that we're going to come out of this significantly stronger than we've come out of any of the other prior crises, and they gave me the specifics, which I don't want to mention for competitive reasons on this call, but I believe that we're going to be in a very strong shape to come out. So, I guess, what you're getting to is, when do we think things will get better? Of course, we don't know, but the one thing we are 100% certain of is they will get better and we will emerge definitely stronger than we've ever been.

Robert Spingarn -- Credit Suisse -- Analyst

And just on that, Eric, while some airlines are under-performing the traffic numbers, as you just mentioned, are others starting to recognize your value proposition? Are you gaining any market share here? And I wanted to call out China, specifically, since it sounds like PMA has not yet really penetrated that one region.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah. I mean, as you know, we're hesitant to talk about specific regions or customers. We pretty much deal with everybody. So it's not so much getting new customers for us as it is selling customers more of our product line. And I'm very optimistic that we are going to be selling. I've seen a lot of specifics on customers interested in and working on improving product that they had not in the past. Our time has come. There is no reason that if somebody is buying X percent of our product line, they shouldn't be buying the entire product line.

And we've got, I believe, the best people in the field. One of the reasons why our results and margins were better than expected but lower than we would have liked is because while there was a lot of shared sacrifice in terms of furloughs, and reduced hours and reduced pay, we've done everything we could and we can to keep our people, whether it's the new product development folks or the sales folks, quality, purchasing, everything to keep our people on our payroll, because we believe that we're going to come out this extremely strong, and we don't want to be caught flat-footed. We've got a number of peers in the industry, who I believe were very aggressive with their reductions, and I think that is going to hamper them coming out, whereas HEICO has continued to maintain that infrastructure.

Robert Spingarn -- Credit Suisse -- Analyst

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

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Yeah. Thanks, Rob. This is Victor. Maybe taking it a little bit in reverse order and thinking about the fourth quarter, which, of course, we're in right now, I'm not sure where things will wind up exactly within the fourth quarter. I could see us being up 5% or 10% just as easily as I could see us being down 5% or 10% in the fourth quarter, and that, sort of, gets into then the first part of your question and the kind of things that we're dealing with. And so, of course, commercial aviation that part of ETG is down, and it's comparable to what we're seeing within the Flight Support Group -- in the commercial aviation businesses within the Flight Support Group, and I expect that to have a trajectory that will be comparable to what we experienced in the Flight Support Group.

And then -- so the other part that has impacted some of the markets, the more general markets that we've talked about, that are serving the broader economy, some of the harsh environment markets have been slower and/or have slower demand, not dramatically, but you'll see 5% to 20% down in some product lines and things like that. So that's kind of the part of the business that's just a little bit slower.

And then you get to the part that isn't slower, right, that has strong orders that remains healthy, which is the bulk of the business and that's in the defense and space side. And what we continue to see are disruptions that we talked about in the early part of the call that comes from -- generally, it's supply chain side of it, but sometimes the customer side where, let's say, on the supply chain, it's deliveries, it's -- will have a supplier, which is experiencing their own outbreak issues in their plant, and they will have a line go down or something in there two weeks or four weeks later, something like that. We have it and they are late delivering to us, and then in turn that slows us down. And so you see things just kind of moving out nothing dramatic, but things can move out for a month or two weeks or something like that, and it shifts it from one quarter to the next.

And then on the customer side, we will see the same kind of effect, where they will be closed or they will be at half staffing or something like that for two weeks or four weeks, and PO doesn't get out and the ordered doesn't get placed, and then we have decisions to make. Well, we know it's coming. Do we go ahead, do we build ahead? And we generally don't take a lot of risk on building ahead and committing capital far in advance ourselves. We grapple with those decisions. We've got actually some government customers. I won't, obviously, name who they are, but we've got government customers who can't work online. They can't have their people working from home for security reasons, and they are at 30% or 50% staffing levels, and so they are delayed simply because they have people on these rotating shifts, and they're like one month on and one month off, it's just stuff like that. So not a fundamental change. The demand is there, and it eventually gets placed. So we're very optimistic about those, and that's why I say it could just as easily be up 5% or 10% as down 5% or 10%. I don't think anything dramatic fortunately, and overall pretty, pretty healthy, but it makes it difficult to forecast, if you will, at the margins.

Keep in mind one other thing when you look at the business, you look at the ETG for example, and you're talking about a business that's couple of hundred million-ish in a quarter, 1% is about $2 million, a little bit more, but that 1% is about $2 million. And you have a few businesses that shift by just a few hundred thousand dollars, and it moves from one quarter to the next, then you have a small number of businesses where that happens. It can have an effect where you have 1% or 2% or 3% of organic growth all of a sudden disappears and moves.

Robert Spingarn -- Credit Suisse -- Analyst

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

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Well, in space -- when I talk about space, I'm really referring to the commercial space part of it. On the supply chain side, no, not so much, because the issues that face people and companies are similar, and so if you have a space supplier who is delayed, and [Indecipherable] defense guy who is delayed. I mean, we all saw this of the F-35, right. They're going to have a delay in testing now simulation right about last week.

So on the supply side, it can be the same. It's just sort of a luck of the draw and commercial space, of course, as we've talked about in the prior calls that the shipments now are picking up to match the orders that we talked about, which had been accelerating and there has been an improvement on our commercial space side as we expected.

Robert Spingarn -- Credit Suisse -- Analyst

Okay, thank you very much.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thank you, Rob. Thank you for the questions.

Operator

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

Peter Arment -- Robert W. Baird -- Analyst

Yes. Good morning, Larry, Victor, Eric, Carlos.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Good morning, Peter.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Good morning.

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Good morning.

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Good morning.

Peter Arment -- Robert W. Baird -- Analyst

Good morning. Hey, Eric, want to just to follow-up on Rob's -- left me the margin question, so I'll ask it. Just how you're thinking about the kind of -- the decrementals were, I guess, in kind of looking at high-30s. How you think about margins kind of trending from here, if clearly this 3Q was kind of the trough from an overall top line perspective?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Okay. Good morning, Peter, and thanks for your question. So, if you add back the bad debt reserve that we had in the third quarter, the Flight Support Group's operating margin was around 11%, so -- the adjusted operating margin. And, of course, we had no way of knowing the impact of what these bad debt charges would be when we originally said at the end of our second quarter call that the Flight Support Group would operate in the breakeven area with sales down 50% to 60%. So I think we did at sales-wise much better than we expected, as well as margins much better than we expected.

And going forward, it really depends on the slope of the recovery. We're very optimistic that we will recover and we're going to come back much stronger than when we went in, but the period of time that it's going to take for that recovery is difficult at this point, but I would say probably somewhat comparable if I were to guess to the third quarter.

Peter Arment -- Robert W. Baird -- Analyst

On an adjusted basis, right?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Correct. And Carlos I think has something to add here.

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Yeah. Peter [Indecipherable], it's Carlos. Good morning. I would say that the bad debt expense, even though it was kind of this one-time period type costs that we'd like to see, it is something that's hard to control when airlines have bankruptcies. We probably had 20 airlines during the quarter declared reorganizations or Chapter 11. So that -- our policies are to just basically write that stuff up, put a reserve up against it when we see that occurring, and if we get paid, great, and we hope to get paid, but nonetheless be conservative about it.

Now, as a result of that and I talked about it at the end of Q2, we have continued to really scrub our receivables and our customer base and make sure that credit that we're granting to our customers aligns with our financial strength and hopes that we -- and continue to not extend ourselves in any one particular customer. So I think we've got -- while I can't predict whether there'll be more bankruptcies, I do believe that we have very conservative and very practical policies around receivables, and hopefully, ex this Chapter 11s, we won't see this type of charge in the future.

Peter Arment -- Robert W. Baird -- Analyst

Okay, that's helpful. And just as a follow-up question on just M&A, you've had six deals this year, I think four since the pandemic. In terms of -- so, clearly your ability to execute deals remains on a good pace. What are you seeing in the M&A environment? Do you see -- are there more deals that you think now that are coming available or how are you approaching it, I guess, particularly if you're looking at anything on the FSG side?

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Peter, this is Larry. We see a lot of books coming across our desk. We see -- we think the motivation is probably twofold. One, some companies feel under pressure. They've seen their markets shrink and so forth and they would like to have a strong financial partner. So that's one thing. The other thing is that the talk of a Biden win and increase of capital gain tax to 43.5% or something like that is really scaring the hell out of a lot of people and -- including me. And I must tell you that we are seeing more books than we can handle, and also, because of the logistics of doing due diligence and you know we do a very thorough due diligence in-house, it takes longer because you can't go out, you can't access the facilities and so forth. But I would say that the M&A, excuse me, pipeline is really very, very strong, and I also think that we're seeing much more reasonable pricing. And I think that we will over the next six, 12 months have some very excellent opportunities.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

And Peter, this is Eric. Also I want to add that due to our capital structure and the culture at HEICO of valuing our team members, because frankly, they are the ones who make the Company, when times are tough like this, we stick by our people, we stick by our programs. We're not highly levered, we don't swing around and cut very deeply. So, as a result, I think when sellers look at HEICO, all businesses go through various cycles, but they want to be connected with somebody who is going to be patient and work with them, and frankly, not kill them and run them out the door the first time there is a downturn. And I think when you look at HEICO, you see that that's the case and that's something that we try to articulate and I think is one of the reasons why we continue to be the acquirer of choice. We're very busy flying around, meeting with management teams with entrepreneurs and very, very much focused on continuing to make acquisitions and use our way under-levered balance sheet.

Peter Arment -- Robert W. Baird -- Analyst

Appreciate all the details. Thanks.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thanks.

Operator

Next question comes from the line of Gautam Khanna. Your line is now open. Please ask your question.

Gautam Khanna -- Cowen -- Analyst

Yes. Thank you. Good morning, guys.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Good morning.

Gautam Khanna -- Cowen -- Analyst

I wanted to follow-up on a couple of questions. First, any commentary on August trends at FSG? Has that sort of continued the linearity of improvement that you talked about during the July quarter?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

This is Eric, Gautam. No, I would say since it's really outside of our -- it's not included in our third quarter, we'd rather not comment on it. However, I think it's reasonable to expect -- if you look at the general -- as I mentioned before, if you look at the general sort of infection rate trend, what's going on in the economy, I think it's logical to assume that things are a little flattish right now. And then -- but we -- I think people are optimistic that it will recover. So the only question is exactly when that recovery occurs.

Gautam Khanna -- Cowen -- Analyst

Got it. And just on that, I mean, have you seen customers that have not been as aggressive in using PMA starting to inquire more about it so that you'll actually -- maybe you'll see greater customer adoption...

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yes, we have.

Gautam Khanna -- Cowen -- Analyst

[Speech Overlap] market influx.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yes. Unequivocally, yes, and there has been a lot more interest and -- definitely. With airlines under the gun, having to show reduced costs for the same if not improve performance, absolutely. And that's what gives me so much confidence for the future.

Gautam Khanna -- Cowen -- Analyst

Okay, that's helpful. The ETG, could you -- maybe you said it, but I just wanted to make it clear for myself. In terms of underlying demand, so there is this timing on shipments, which a customer may or may not be on site to accept delivery and that could swing the organic growth rate around it. But can you -- what do you think the underlying demand growth is right now? Do you think it is kind of low-single digits, and so, we do see a catch-up to 5% to 10%? Maybe it's not in Q4, but at some point, this starts in line [Phonetic] or how do you -- if you put it all together, how would you aggregate underlying demand at this point?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

It's a good question, and I'm not trying to be cute or evasive, it's difficult to assess that now because of some of those disruptions I was talking about, where we have customers who are not there, sort of missing in action, and all of a sudden, they're there and placing big orders and hurrying up or asking us to rush because they were out for two weeks or a week or a month or something like that. So, it's difficult to assess. On the defense demand and space, it feels robust. And when they show up, if they're not, they are all of a sudden had slowed and then it picks up, it seems to make up very nicely. Where it does seem to be lagging, as I said, are in some of those other markets that we serve. But then, again, we'll see something -- it will have a feel of lagging, and then the customer shows up and says, "Okay, look, we really need to hurry up. Can you ship faster? And we have a bunch of orders we know -- is there anything you can do to trim the lead time?" So I -- to be evasive on the -- sort of seem evasive, but I would prefer not to give you any percentage feel at this point until we've got some better clarity, which I'm hoping maybe in three or six months we will and have a better sense.

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Remember one thing, Gautam, and we've said this historically quite often, we are very customer focused, and if our customers are struggling, not there or whatever, we're not going to put something in the mail and send it to them and say tough. We want to make sure that we are easy to do business with, and then our customers respect our flexibility, and our structure is uniquely done in a way that it can handle that ad-hoc. We are not one big monolithic organization. We have multiple subsidiaries all over the place, and they are closer to their customers and they monitor and deal with this. And I think what that will do for us going forward and into the future is it will endure us even more to our customer base, and will allow us to move forward in even a stronger position with all of these customers.

So I agree with Victor, we can't really give a percentage because we're not so focused on that. But what I do know is that our customers appreciate the way we're handling this right now, and I think that's going to pay dividends for us in the future.

Gautam Khanna -- Cowen -- Analyst

I appreciate that. And if I may just on FSG on the repair side of the business are you seeing customers in-source more of that stuff or is there, do you think there has been no change to how the customers are actually looking to us to sell? I'm just wondering how much is like underlying demand versus in-house?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Got it. No, I don't think they've in-sourced. I think that there hasn't been much change, if anything is probably going to be greater outsourcing due to the people cuts that they've been forced to make, so I think our component repair people are very wired in and are very optimistic on a number of really good opportunities.

Gautam Khanna -- Cowen -- Analyst

Okay. And Larry, last one for you on [Technical Issues], are there any larger transactions that you think are may be more likely in this downturn and that could come your way or are these going to be more of the tuck-in variety that's characterized the recent past [Phonetic].

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

We are an opportunistic acquirer. We, in the M&A field, we really manage our cash, and I think that's one of the secrets to our success. We don't put out money unless we get a return on those funds, and they pay for themselves. So it's not size that gives us bottom line, earnings and cash flow. It's -- if we have a good opportunity with a great seller or an operator who will take advantage of it, we also, as you know, use the policy of having sellers retain a percentage to keep them interested and involved, and that's been a very successful formula.

Now as far as the size of the trends, we do look at larger transactions, and we consider them. Would we like to do a larger transaction? Yes, as long as it meets the standards that we set. We're not going to do a big transaction and dilute everything and dilute cash flow and buildup debt and so forth without getting a strong return, which we like to get. So we have been successful income, and remember our goal is compounding our bottom line at 15% to 20%. So we will make acquisitions and internal organic growth to meet that goal. And if a larger acquisition is available, we'll do it, and if we have to go smaller bolt-ons that really generate cash, we'll do it.

Just as an example, the companies that we buy very -- we check based upon their historical performance, cash flow and everything, normally pay for themselves in seven to 10 years. By the time we get to the third or fourth year on a look back, what we have invested -- the initial investment less what we have taken out of the Company or the Company has produced cash for us, we probably have them sitting in our portfolio at anywhere from 2 times to 4 times EBITDA. So I mean they're producing more cash annually then -- I mean it's amazing. That is why you get the results that you get or we get the results that we get. So it's to me and to us and our team, it's all about the cash flow return, and that is more important than the earnings per share. Although, we know if we have cash flow, we will have earnings per share. We can have earnings per share, but no cash flow as you very well know. So that's what we will continue to focus on that strategy.

I hope that answers your -- does that answer your question?

Gautam Khanna -- Cowen -- Analyst

Yeah, it does. Thank you. I appreciate it.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Okay. Thank you.

Gautam Khanna -- Cowen -- Analyst

Okay. Take care.

Operator

Next question comes from the line of Larry Solow. Your line is now open. Please ask your question.

Larry Solow -- CJS Securities -- Analyst

Great, and good morning, guys. Thanks for taking...

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Good morning, Larry.

Larry Solow -- CJS Securities -- Analyst

Good morning. Just Larry, let's stick with the acquisition theme, and just a follow-up on that, and I know HEICO stroke is very high standards. Has COVID changed or broadened your potential net at all [Phonetic]? I mean, I know -- I realize you can't simply look through COVID. So I'm just trying to get a little bit of a gauge of how you sort of fine line how you look at -- you're looking at companies a little bit differently because of COVID?

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

I don't think so, Larry. I think we're looking at them in the same way. We -- as you know, we don't want to pay for a hockey stick and most deals -- and as you well know, the investment banker shows you a hockey stick and it tells you next year, the year is going to be greater, so therefore pay for it upfront. We normally don't buy into that unless we can feel comfortable in due diligence that they really have the orders on the books and so forth and so on.

So the COVID, we are trying to structure deals where we pay for what we get on a current basis, and then offer the seller earn outs or partnerships so the seller can really have his cake and eat it too. They can secure a down payment as a percentage of the total, and then over the next three, four, five, six years they can make up the difference if in fact the company earns it. So this kind of protects us on the downside, and it protects the seller on the upside, and that -- obviously, that structure appeals to a lot of people, and it's a -- we think and they think it's a very fair structure.

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Larry, this is Victor, and keep in mind, we are not buying and we're not trying to be commodity transactors. We are working with people who care about their businesses and care about what they've created and care about their people. So this is not just like they're selling a piece of land or a building or something in their agnostic. It's the what transpires post-closing. They really want a good home for the business, and that is as much a part of this is not just about finding a price and moving on, although obviously price is important. I mean, they're selling to do -- to have some security and to get liquidity and the other thing. So that's all part of the consideration that goes into it for us, and I think that's very much what distinguishes us. And if you look at the transactions the acquisitions we made recently, one of them was a company we've been talking with for four years and getting to know for four years, and they were not for sale, they were not in a process, and at all, they had no investment banker, and it was just our typical type of transaction.

The other two companies, one of them was not for sale either, and as part of the process of buying the first either the two related companies, which was kind of going through a process, which they truncated for us because of the relationships they had with one of our other companies and other people they knew at one of our other companies, and they said, "These are the people we want to sell our business to." And then in the discussions, the business that was related to that, we sort of convinced them that we'd like to put it all together and do something exciting together. That was part of that, and I think we get an advantage out of it.

Larry Solow -- CJS Securities -- Analyst

Yeah. No, absolutely...

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

But one thing we won't do by the way is, we're not going to do a deal just for the sake of doing a deal. We're not going to force a bad deal, because we own forever. And we don't look to sell. It's not like private equity or we're not just stacking in on like some sort of Ponzi scheme, where -- we'll get some growth this year and who cares what happens next year, it's got to work forever.

Larry Solow -- CJS Securities -- Analyst

Right, and that makes total sense. I would appreciate that color. And just shifting gears on maybe a question for Eric, just on everyone is, obviously, trying to figure out when we might see a turnaround, and clearly we're getting a little bit of -- hopefully, we've bottomed. But as we look at TSA, I guess the traffic number is still down like 70% I think, the most recent number. So fair to say with that number, a good indicator, and if that doesn't rapidly improve, which are probably won't in the near term, that revenue performance will be sort of similar to where it's been without a change in that or further improvement in that?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah. Hi. Larry, I would say that is pretty much, correct. With the exception that I mentioned earlier in the call that a number of our customers are operating down in the 90% area, and that is just not sustainable. And these guys are flying aircraft and it is just impossible for them to not purchase the parts. So I do think that we could have a -- some -- we may do better than that, and I think naturally as they run out of inventory. So I guess the short answer to your question is, even if things stay where they are, I would expect a rebound, because they've drawn out the inventory.

Larry Solow -- CJS Securities -- Analyst

Inventories, right?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah, it's going to come back quicker. But, yeah -- but definitely the number of flights is something that we watch very closely, but they can't continue operating at the levels that they are at.

Larry Solow -- CJS Securities -- Analyst

Yeah, understood. And then maybe just a last question just for Carlos. Carlos, you mentioned I think you had close to 20 bankruptcies this quarter, and you've scrubbed your accounts receivables and hard to predict future bankruptcies, but obviously the initial shake out seems like it was -- do you feel like we should slow down and hopefully not see this kind of volume of bankruptcies and impact on your performance going forward?

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Hey, Larry, thanks for the question. So my view on this -- on that topic is as follows. Most of the large domestic, whether it's U.S., Europe, China or wherever, they are getting some sort of government assistance and candidly these airlines are in many cases the pride of many of these countries. And so I feel like the ones that have been shaken out in Q3, candidly were some of the ones I was worried about at the end of Q2, and I brought that up on our conference call and played out. I don't think at the moment that I'm as concerned.

One thing that we have done, as you just mentioned, is we did rationalize some of our credit exposure. We did a pretty deep study on that to make sure that we were appropriately supporting our customers, but that we weren't -- they weren't using us as a bank candidly, and we won't do that going forward. We haven't in the past by the way. So I don't -- as we're sitting here today, yeah, I am obviously concerned about further bankruptcies, but at the moment, I feel like they've been supported either through additional debt, equity offerings or government assistance that I think will get them to the next point when traffic picks up, and we all move forward. So that's my view on it right now. Obviously, that could change, and a dime of things got worse, but we're not thinking that that will be the case right now.

Larry Solow -- CJS Securities -- Analyst

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

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Thanks, Larry.

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Thanks, Larry.

Operator

Next question comes from the line of Josh Sullivan. Your line is now open. Please ask your question.

Josh Sullivan -- The Benchmark Company -- Analyst

Hey, good morning.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Good morning, Josh.

Josh Sullivan -- The Benchmark Company -- Analyst

Yeah, just a follow-up on that deferred maintenance conversation and the unsustainability of inventories. And so, I mean, if TSA traffic does stay at these current levels, when do you think that crossover point is -- will in the current demand levels and that deferred inventory just has to be addressed? I mean, do you see it early 2021? Could it start later this year, just curious on the timing when you might see that?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah. Hi, it's a good question Josh, and it's something which I think about quite a bit. I think that it could start later this year. I just don't see how these airlines can continue operating with the low level of purchases that they've had. So I -- my thought is that it could be quickly, but certainly in 2021.

Josh Sullivan -- The Benchmark Company -- Analyst

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

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

I would say that, in general, everybody went into the downturn with much lower inventories than they had in the prior downturns, whether it was the global financial crisis in 2008-2009 or the U.S. carriers when 9/11 happened, the international carriers with SARS, they went in with much leaner inventories. So I anticipate the snap back to be quicker than perhaps it has in the past.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. Thank you for the time

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thank you.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Thank you.

Operator

Next question comes from the line of Sheila Kahyaoglu. Your line is now open. Please ask your question.

Sheila Kahyaoglu -- Jefferies -- Analyst

Hi. Good morning, guys, and thank you.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Good morning.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Good morning.

Sheila Kahyaoglu -- Jefferies -- Analyst

Eric, I guess just along the last lines of questioning, I actually thought organic growth -- organic decline within FSG was pretty decent, down 44%, just considering what capacity is doing and your short cycle nature of your business. So maybe can you talk about why you think there is a 25 point, 30 point delta between capacity and aftermarket revenues?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Sure. Good morning, Sheila. Yeah, part of that of course is our defense exposure, which has mitigated the impact. The other portion to a lesser extent was really our specialty products, which is primarily OEM related. Now I do anticipate the OEM-related products to be down sort of longer because we expect the new build rates are going to be down.

But I think this points to the importance of the HEICO products out there. We offer great cost savings. We're very aggressive on developing new products. We've got a lot of stuff in the pipeline. And I think that we're going to be a very key part of our customers' recovery plans. HEICO is well capitalized. We kept our sales people out in the field. We didn't do like other companies where they really slammed cost and got rid of engineering. I mean, we've kept all that. So I think that that's really helping us at this time.

Sheila Kahyaoglu -- Jefferies -- Analyst

And then maybe just two more for you, Eric, sorry. You mentioned that folks are liking your products. And I think you said Top 5 customers account for 25% of consolidated sales, so, I know that's partially split with Victor, but how do you think about expanding that Top 5 customers? Are you seeing any swings, incremental pickups from other regional airlines?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

We are. We are out there with all other airlines. We want to give them as much attention as they will tolerate from us. So we're always out there trying to develop additional customers. And as I mentioned in one of the questions earlier, there is no reason if somebody is buying X percent of our product line that they don't increase and buy all of our product line. And frankly, this is the communication effort that we engage in daily. And I think it's taking hold and that's why our people are very optimistic on our recovery here, and why we're going to play a greater role in our customers' fleet plans.

When we came out of the financial crisis, I don't know -- I don't recall what HEICO's market cap was at that time, but it's a fraction of what it is today. And today, when we're out there competing with other suppliers, HEICO has got a much larger market cap than they do, and we have a tremendous amount of credibility, and there is no reason why the airlines shouldn't be increasing their exposure with us, especially since we kept up with them during the down cycle, we kept our people, we kept the new product development, we kept shipping them. There were a lot of suppliers who cut off the financially stressed customers. And while we were careful to manage and only ship them what they needed, we helped keep them in business. So, I think that that's going to help us. And while all this roughly $8 million bad debt hit really stinks, I think that it plants the seeds for very strong customer relationships going forward.

Sheila Kahyaoglu -- Jefferies -- Analyst

Sure. That's helpful. And then last question, Eric. I'm sorry, I'm focusing them all on you today, and going all the way back to Peter's question, I just wanted to clarify the bad debt expense, you add it back, we get 11% margins, I get it. The decline was a little steeper than most of your peers, and I think you mentioned you've kept a lot of staff on R&D and sales, etc. How do we think about the way up? Is it still a 30% incremental on the way up? Can you guide us a little bit there?

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Hey, Sheila, this is Carlos. So, on the decrements, I think for Q3, we were around 37% for this segment. My view continues to be that our decrements resemble a component of fixed costs on our normal margins, which roughly 40%. I do think on the comeback. So, as we continue to follow the industry and hopefully outpace the industry, I do think those decrements will shrink or the -- I'm sorry, the add backs or the additional revenue will produce probably higher incremental margins than the decrements were, because we have leaned out in our Flight Support Group a little bit and we'll be piling back that volume on a lower cost basis. So I think that that will be very favorable.

But in regards to our competitors, I don't know what competitors you're comparing us to, but I -- just candidly, we -- second quarter, we told folks that if we were down 50%, 60% of the segment, we'd break even. I think we did about what we thought we do. In fact, absent that bad debt charge, I was actually happy, not satisfied, but happy that we were able to produce an adjusted 11% margin and think that if we're looking forward, although we're not giving guidance, I don't expect -- Eric, you can correct me on this if you believe, but I don't expect Q4 margins to be too much different.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Correct. I agree with you. I agree with you.

Sheila Kahyaoglu -- Jefferies -- Analyst

Okay, thank you so much.

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Thanks.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thanks.

Operator

Next question comes from the line of Ken Herbert. Your line is now open. Please ask your question.

Ken Herbert -- Canaccord Genuity -- Analyst

Hi, thanks, good morning.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Good morning, Ken.

Ken Herbert -- Canaccord Genuity -- Analyst

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

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah. I think we're going to do better than the industry. I think that our cost saving products are going to very much be needed. People are trusting us more. So, I anticipate that we're going to come out stronger than the industry.

Ken Herbert -- Canaccord Genuity -- Analyst

I mean you've historically outgrown the industry sort of 1.5 times to 2 times. Is that a fair benchmark or should we even expect something better moving forward?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

It's a tough number to look at, because when we compare it to -- there are many things to compare it to, ASMs, number of flights, revenue passenger miles, aftermarket sales performance of our peers. So, I think, no matter what you look at, we're going to outperform it, and sort of the multiple depends on where we are at that moment in time. And remember, one of the things that we typically don't have is the initial provisioning, and that can of course skew the numbers one way or the other. So we don't benefit from that initial provision in general. So, ours is really just straight aftermarket usage of parts.

Ken Herbert -- Canaccord Genuity -- Analyst

Okay. That's great. And just one final question, as you look at the timing here, you've called out your ability to maybe drive more new product introductions. How do we think about either your investment -- either R&D as a percent of sales maybe or another way to look at it on a percentage basis, how much more do you think you could be bringing product to market to take advantage of the opportunity coming out of the crisis?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Well, we've kept up our new product development. I think whereas many of our peers have slashed [Phonetic] new product development, we have not. And that, of course, weighed on our margins. We also did what we could to retain our people, and I think our cuts were significantly less than our peers. So I anticipate that we're going to come out stronger. In terms of number of products, I think it's going to be similar to what we've done in the past. Probably as a percentage of sales, R&D cost is going up because sales have gone down. So -- but we continue to be very bullish.

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

One of the things, Ken, that I would just comment on is that to Eric's point, we're still planning to put out 400 or 500 new parts this year, and that's the cadence that we believe the market can absorb. However, and Eric mentioned this earlier, we strongly believe that not a lot of these airlines are buying everything they can from us and where we're going to get I think the biggest bang, if you would, coming out of this is that these customers will lean into HEICO for these cost savings and look at our existing products that they're currently not buying and really dive into some of those. And I think that's on top of the new products that we introduced to the market, I do think that our existing product base has an opportunity to really expand coming out of this.

Ken Herbert -- Canaccord Genuity -- Analyst

Great. Thank you very much.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thanks, Ken.

Operator

Next question comes from the line of Michael Ciarmoli. Your line is now open. Please ask your question.

Michael Ciarmoli -- SunTrust -- Analyst

Hey, good morning, guys. Thanks for taking the question. Eric or Carlos, if I could just go back to the margin question, I mean, looking at your trailing margins, 18% to 20%, obviously, we're depressed here. I mean, do we need to see a major volume increase for you guys to get back to that level? I mean, if we think about I think some of the market forecasters out there saying the MRO market was $83 billion, it's going to be $35 billion this year, $39 billion next year. I mean, if this market remains depressed and your volumes -- you'll get some pick up here, maybe we get to $200 million revenue quarterly run rate, can you get the margins back into those upper teens or should we be calibrated for sort of this lower double-digit margin environment until we really get volume growth?

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Ken [Phonetic], from our standpoint, we don't think that this is a permanent impairment to the industry. And so, we're viewing this as quite temporary, and as a result, as Eric mentioned earlier, we've made what I'll call humane cuts and cost reductions and things like that with the eye toward the future. So, I would say in the short term, we're rolling to standby our employees, standby our team members, and keep the businesses intact to meet that expanded demand. And so, that's a short-term thing.

If this was to become protractive and permanent, then, of course, we would do other things to our business to drive margins up and have our footprint match the demand. However, we think that demand right now is a dislocation and we're not willing to sacrifice customer service, new products and things like that just to meet a short-term quarterly hurdle on the margins. That's how we're looking at it. I don't think that that's going to change and I don't think the future has [Indecipherable] enough at this point that we would make radical moves just to improve our margins in the short term.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. And what is that definition of the short term? I mean, are you guys thinking this goes on for another three to six months or how are you actually defining the short term?

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

As I think Eric mentioned earlier that he viewed the industry could be through the end of this year, where we see softness with a turn. I don't know -- we're not here to predict when that happens. So, please don't [Indecipherable] optimism is that by the end of this calendar year, we should start seeing some volumes and purchases for the sheer fact that these airlines have not been spending the money and they have been flying even though a lot of their fleets on the ground have been flying these planes, so we do expect just natural demand for those planes that are in air are going to kick up some time in the relatively short period.

Michael Ciarmoli -- SunTrust -- Analyst

Got it.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah, it's so -- Mike, it's so hard to pick what the numbers are. I mean, frankly, we thought the third quarter -- I went back and I looked at our internal forecast in May as to what we thought the third quarter would be, and we significantly outperformed that. So it's very hard to guess. The snap backs come when nobody is expecting them, and boom, they just all of a sudden come and then things flatline for a while and then I think they come again. But I do think that people are just itching to get out, and they're being careful getting more comfortable with social distancing, wearing masks and non-aircraft and that sort of thing. So, but it's just hard to predict exactly when.

Michael Ciarmoli -- SunTrust -- Analyst

Sure.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

But I promise you one thing, we're going to be ready for them.

Michael Ciarmoli -- SunTrust -- Analyst

Yeah. Got it. And what about on the inventory side, I mean your parts that go to distribution, do you have a good view of what kind of inventories in the channel? And if we were looking at those bankrupt airlines, maybe not all bankrupt airlines, but certainly ones that cease operations, like expressed jet, does that inventory hit the marketplace? Are you guys tracking sort of those parts out there, competing parts for the HEICO product line, and any thoughts on that?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

No, I think the companies that have had the airlines that have had to reorganize, I think they had very little inventory. And we work with them to keep them flying to help them out, but I think they had very little inventory. I don't anticipate there being an impact based on that. Okay. Got it. Last one, Carlos, your inventory up again in this quarter. How should we think about your inventory levels, and maybe how some of that converts to cash here? Good question. Surprised it took this long to get it. So look, as you can imagine, when you're dealing with highly sophisticated electronics, highly sophisticated metals for aerospace and commercial aircraft, you have to put in orders for raw materials, well in advance. And so we're not immune. We're like everybody else. We had a lot of POs outstanding -- non-cancelable POs outstanding going into this in March, where we had a lot of long lead time materials that we committed to. And look, we got out of everything we could, but there are certain things that we were committed to we couldn't get out of. So really this quarter was affected by that. We had to take a fair amount of inventory that if we had our druthers, we might not have taken at this time. However, it's all consumable has long shelf life not things that will go bad on us. So from that perspective, I guess, it's an investment in our backlog and when volumes pick up we'll have it available, but that was the inventory jump. I mean that -- when you peel the onion back that's the whole onion right there.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. Should that decline next quarter.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

I believe so. And I think we're going to have a little bit of that, Mike, but not to the levels we had this quarter.

Michael Ciarmoli -- SunTrust -- Analyst

Okay. Got it. Thanks a lot guys.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thank you.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Thanks, Mike.

Operator

Next question comes from the line of Louis Raffetto. Your line is now open. Please ask your question.

Louis Raffetto -- UBS -- Analyst

Good morning, everyone. How are you?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Good. How are you, Louis?

Louis Raffetto -- UBS -- Analyst

Good. So Larry, I appreciate all the detailed information on the M&A and the earn out offsetting sort of the higher pricing. It's a great point. I guess, I just want to get back to the M&A a bit. You guys did two deals so far this year. Can you give any color just so we can get ideas where net debt stands for what you've paid for those deals, also what you think, -- I guess, Victor, can you from an inorganic growth for ETG for the rest of the year, again I know not massive, but just trying to square as much as we can?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Sorry. I'm sorry...

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Well, I was just going to say it was more than two deals this year, that I was just going to correct, and it's four.

Ken Herbert -- Canaccord Genuity -- Analyst

No, I'm sorry, the three deals that you've done subsequent to the quarter -- that you've done in the fourth quarter?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yes, got you. So let me hit the net debt question then Victor can talk a little bit about the acquisitions. Coming out of the quarter, we had close to $400 million on the balance sheet. So the impact on net debt is really zero, right, because I used cash to pay for these things. So the impact on our net debt is not going to be anything. So we're OK in that standpoint.

And Victor, if you want to address?

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Yeah. I wasn't sure I understood. The question was inorganic growth Louis?

Louis Raffetto -- UBS -- Analyst

Yes. Just how much do you expect those -- I mean, you guys don't tend to give a lot of color on individual deals that you've done with these incremental deals. Historically when you've given guidance you've given sort of an organic versus inorganic growth to help us at least get some ideas to what these deals are potentially contributing. Just wanted to know if there is any color you could give as part of these deals?

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Of course, it's late in the year and the Transformational and Intelligent and Connect Tech we just closed, and so they're closed late in the year, and we don't have guidance right for this year, and we're not giving guidance. So unfortunately I can't give anything beyond what we've made public already about the companies other than to say they are sort of typical kinds of transactions that are the entrepreneurial businesses that fit the profile of the kind of companies we buy. They are the typical kind of singles and doubles that we refer to. They're not the swing for the fences kinds of companies that are going to remake HEICO in their entirety. But they're just very nice additive acquisitions, and I think we're just -- we're very happy to have them, but unfortunately I can't give a lot more detail, but I will caution to say I wouldn't go out, for example, and double your earnings [Indecipherable] from these acquisitions. [Speech Overlap] Don't get too aggressive from these.

Louis Raffetto -- UBS -- Analyst

Fair enough.

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

[Speech Overlap] trying to be helpful that way, don't get too aggressive.

Louis Raffetto -- UBS -- Analyst

Fair. So just again sticking with M&A for one more time, the -- I know you kind of talked about what you are not doing in this environment, I guess, are there any deals that you've put on hold or paused given end-market uncertainty that maybe you're looking at prior to this early this year? You sort of waiting because, to the point, we don't -- no one really knows what the next six months to 12 months look like, and I expect that has some impact on the valuation, maybe it is just goes to that earn out aspect, but just curious if there has been any pausing?

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Well, I'll let Eric talk about some that he has seen. There were -- there was an acquisition that we were working on, that was looking promising. But as we dug in in the due diligence, it turned out to be, well, a great company. We felt that it wouldn't hold the long-term promise that we thought. Initially it will be great for a couple of years, maybe two, three years, and then would really start to trend in the wrong direction, and that we couldn't really reverse that. So that was one that, early this year I thought was much more likely to happen.

And by the way, that's not unusual unless -- it's unfortunately part of what happens, and that's why I made that comment earlier when Larry Solow asked the question about acquisitions that we own forever, and we are really very careful because, obviously, every dollar HEICO invests, we look at it as our own money and do it right.

Now, Eric can talk a little about some of the things that he has been working [Speech Overlap].

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah. I -- we have seen some deals pause because the future is very uncertain for certain companies, and also we've seen there were a number of deals we had worked on where frankly private equity offered a significantly higher price unless the companies at the altar. And so, I mean this is a danger with private equity, and I think some of those could come back around for us as well.

Also, I'd like to point out something, I don't know if it came through clearly, but in my remarks I mentioned that we bought 75% of the company call intelligent devices and Transformational Security. We call it TSCM. And that company that we acquired was a direct result of an introduction by another company that we acquired about a year ago, and these two companies are very compatible in what they manufacture. Different markets, slightly different -- and different products but accomplish similar objectives to the customer. Now, many of our acquisitions are as a result of our subsidiary operations getting to know either a supplier, a competitor, or somebody in the industry over a long period of time developing strong relationships, so when we buy a company, we have a pretty good idea of the level of confidence that we will have in the future of owning that company. So we don't shoot in the dark. And again, our strategy, as I mentioned, is bottom line cash flow. And in this particular case, we think we may get some synergies in marketing and may be manufacturing and other things. Those strategies really don't show up in press releases and so forth, but we've made about 78 acquisitions. Carlos, how many?

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

More or less, yeah.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

78 acquisitions. And I think you know we've never had a bust, we've never had a company that said, boom, it's no good. So, some are better than others, some are little less than we expected, but we have never had a disaster where we had to say, "Oh, my God, we just made a terrible mistake." So that is our strategy.

And I think from an acquisition point of view, it's worked for us. And that's how we've been able to compound our bottom line by about 19% over 30 years and we continue to focus on that. We are not interested in being the biggest Company in the world, we want to be a very profitable Company, and by that I mean, cash flow, one, and earnings per share, two.

Louis Raffetto -- UBS -- Analyst

Perfect, thank you. And then, sorry, just one quick follow-up for Eric. Thanks for the color on specialty products. I just wanted to clarify. So, specialty products is majority OEM. Is it commercial aerospace? And you've got 15% exposure to defense and space and FSG. So, just trying to get a sense of the mix within the business of where does that defense fall and the specialty products commercial?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah. So we do defense throughout all of the three sub-reporting groups within FSG. Specialty products is both commercial as well as defense. So, it does both.

Louis Raffetto -- UBS -- Analyst

Okay. And -- but the defense exposure, it's kind of even across those segments or is it predominantly in specialty products or any of the others or kind of even-ish?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

I would say, percentage wise, it would be higher in specialty products, but I need to look at those specific numbers, because -- how it's all reported. But I wouldn't draw a big distinction on that though.

Louis Raffetto -- UBS -- Analyst

Okay, perfect. Thank you.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thank you.

Operator

Next question comes from the line of Colin Ducharme. Your line is open. Please ask your question.

Colin Ducharme -- Sterling Capital Management -- Analyst

Hi, good morning, gents. Thanks for taking my question. Couple, please. Just want to start with Carlos. Can you just please assist our understanding, just offering some color on some of the working capital changes, relines in particular? The AR, I think you touched already on, but AP and contract assets. So, you alluded to the conservative credit posture informing some of that AR reduction, but is the current liability or AP reduction, is that same motion in reverse just led by your suppliers? And then also, if you could just speak to the build-and-contract assets. You touched already on the inventories. What's happening there? Is that signaling potential improving demand trends bouncing off maybe bottom or is this connected at all to any protective builds for any more potential supply disruptions? And then I've got a follow-up. Thanks.

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Sure. So the contracted assets and liabilities are a function of longer-term commitments by customers on HEICO to a project. So it's not like a build-it-and-ship-it arrangement. It's more where we have different revenue recognition [Indecipherable] percent of complete and things like that. So that asset and liability will flex depending on how complete we are in certain projects. So, I don't know that you can draw much conclusions from that other than it's going to move north and south depending on how many deposits we get or how much deferred revenue we recognize versus how much progress we make on the WIP related to those particular projects.

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

In regards to our payables and our liabilities -- accrued liabilities, within accruals, we're having -- it's a kind of a reference point, we do have less accrued performance-based comp now than we did at the end of October '19. So that -- we are looking at it comparatively, that has an impact on the accruals, but I will also say that HEICO as a matter of policy have treated our vendors well during this period. We haven't strung them out, we haven't had a need to. And we believe by having those good business practices and not changing, we'll nerd our benefit on a go-forward basis. So that's why you might see a little bit of a decrease in those areas and payables outside of the timing aspects. Philosophically, that's how we think about it.

Colin Ducharme -- Sterling Capital Management -- Analyst

Okay, thanks. And then just as a follow-up for Eric and Victor, just want to drill down again on executing against the potential market share gain opportunity amid the crisis, maybe attacking it from a different angle here. Just in particular for FSG and ETG, as you continue to sell into stress verticals like commercial aero, are you trying any new go-to-market sales motions to plant seeds for potential share gains? So, for example, bundling service with repair and products perhaps on a contractual basis, improving retention, customer lifetime value, etc.? I think Eric may have already been alluding to this with a previous response, but just kind of bottom line, how can you leverage HEICO's financial strength, obviously rare, given the current state of the industry just to better gain new toehold and capture incremental wallet share gains that can sustain themselves going forward? Thank you.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yeah, Colin. It's a great question, and it is something that we are focused on. And we do have a unique value proposition in that when we do repair, we can offer our proprietary repairs as well as the use of our proprietary parts. So it's up to the customer. If they want the OEM material, we're happy to go ahead and do that, and if they want our material, we're happy to go ahead and sell that as well. But there definitely is close cooperation between our various lines of businesses while they do operate independently for reporting purposes, and so, people can really own their businesses, they do cooperate. And there is a lot of that cross selling, and that's one of the reasons why I'm very optimistic about the future and about the way we're going to come out of this.

Colin Ducharme -- Sterling Capital Management -- Analyst

Okay. So, apart -- just a quick clarification though, just from -- apart from historical cooperation among subsidiaries, is there anything different amid this COVID environment, where there is more of a formal frame to enhance or bring in some of that cooperation that perhaps was less of an effort 12 months, 24 months ago before the pandemic hit?

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Yes, we have increased the cooperation. We are focused on that, absolutely, and that's something that as we continue to broaden the product offerings in each of our businesses, we've got this areas where they can help other businesses and they're very, very much focused on that; absolutely.

Colin Ducharme -- Sterling Capital Management -- Analyst

Thanks.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Great. Thank you, Colin.

Operator

[Operator Instructions] Next question comes from the line of Rene Plessner. Your line is now open. Please ask your question.

Rene Plessner -- Rene Plessner Associates, Inc. -- Analyst

I am Rene Plessner. I am not very good at understanding percentages and market shares, but I am pretty good at respecting and trusting the Mendelson family, who I have known for about 20, 25 years and invested in what I thought was a great business and brilliant businessmen. Things go up, things go down, panics come, panics go. I think you guys have done a sterling job. I have total faith and confidence that a couple of years from today, we'll be doing better than we did ever in our lives. That's my comment.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Thank you, Rene. We greatly appreciate. We thank you for your confidence and loyalty, and we appreciate it very much. You've been a brilliant investor, and I remember when you started investing in HEICO, I think it was 1994, and you've done incredibly well through those ups and downs and those other panics. So thank you very much.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

I think your comments are very wise, because you're right that the economy, the stock market sees these gyrations, and the one thing that is constant is HEICO's performance frankly because of our -- the focus on our people and the great businesses we're in. So thank you very much, and I think that's also particularly reassuring and makes our team members who are on this call feel good as well. So, thank you very much.

Rene Plessner -- Rene Plessner Associates, Inc. -- Analyst

You're very welcome. It's a pleasure to be friends and associates. I wish you good luck.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thanks a lot. [Speech Overlap]

Rene Plessner -- Rene Plessner Associates, Inc. -- Analyst

Okay, my friends. Take care. Bye.

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Thank you.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Bye-Bye.

Operator

There are no further questions, please continue.

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Okay. If there are no more questions, I remind everyone on the call that we remain available to you by telephone or Zoom to answer questions, which you may have. And we look forward to speaking to you in some time now in December when we will have the year-end results announced. I thank you -- we thank you for your participation and your interest in HEICO. And we look forward to speaking to you soon again. That concludes our teleconference for the third quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 117 minutes

Call participants:

Laurans A. Mendelson -- Chairman of the Board; Chief Executive Officer; and Director

Eric A. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Flight Support Group

Victor H. Mendelson -- Co-President and Director; President and Chief Executive Officer of the HEICO Electronic Technologie

Carlos L. Macau, Jr. -- Executive Vice President-Chief Financial Officer and Treasurer

Robert Spingarn -- Credit Suisse -- Analyst

Peter Arment -- Robert W. Baird -- Analyst

Gautam Khanna -- Cowen -- Analyst

Larry Solow -- CJS Securities -- Analyst

Josh Sullivan -- The Benchmark Company -- Analyst

Sheila Kahyaoglu -- Jefferies -- Analyst

Ken Herbert -- Canaccord Genuity -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

Louis Raffetto -- UBS -- Analyst

Colin Ducharme -- Sterling Capital Management -- Analyst

Rene Plessner -- Rene Plessner Associates, Inc. -- Analyst

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