HEICO Corp (HEI.A) 2003 Q4 法說會逐字稿

Good morning and welcome to the HEICO corporation fourth quarter fiscal 2003 earnings and full year results conference call. I will now turn the call over to your host, Mr. Laurans Mendelson, Chairman, President, and CEO.

Debbie, thank you very much. Good morning to everybody on this call, and we welcome you, as Debbie said, to the HEICO fourth quarter and full year fiscal 2003 earnings announcement teleconference. I'm Larry Mendelson, CEO of HEICO Corporation. I'm joined here by Eric Mendelson, President of HEICO's Flight Support Group, Victor Mendelson, President of Electronic Technologies Group and HEICO's general counsel, and Tom Irwin, HEICO's EVP and CFO. Before we begin, Victor will read a statement.

Thank you. Certain statements that is will be made during this conference call will be constitute forward-looking statements which may involve risks and uncertainties. HEICO's actual experience may differ materially from those discussed as a result of factors including, but not limited to, lower demand for commercial air travel or airline fleet changes which could cause lower demand for our goods and services, production specification costs and requirements, which could cause our costs to complete contracts to increase, governmental and regulatory demands, export policies and restrictions, military program funding by U.S. And nonU.S. Government agencies, or competition on military programs which could reduce our sales, HEICO's ability to introduce new products and product pricing levels which could reduce our sales or sales growth, HEICO's ability to make acquisitions and achieve operating synergies from acquired businesses, customer credit risk interest rates and economic conditions within and outside of the aerospace defense and electronics industries which could negatively impact our costs and revenues.

Parties listening to this conference 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-Q, 10-Q and 8-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Thank you.

Okay. Thank you, Victor. Before we begin reviewing the fourth quarter and full year operating results in detail, I'd like to take a few minutes to summarize the fiscal 2003 highlights. One, during the second half of '03, we showed some strengthening in commercial aerospace resulting from the end of the impact of the military conflict in Iraq and SARS, and some signs of strengthening in the domestic economy. Our Flight Support Group reported higher sales and operating margins in the fourth quarter of '03 based upon sales of new products and services, and the strengthening within the commercial aviation industry, both domestically and internationally. This contributed to a 17% increase in our operating income in the fourth quarter of '03 versus the fourth quarter of '02.

Next, we continue to generate very strong cash flow, positive cash flow from operating activities has, of course, allowed us to reduce the amount outstanding on our revolving credit facility about $24m in fiscal '03, including $12 million in the fourth quarter alone.

During the second quarter of '03 we entered into five-year part supply and agreements with Delta airlines and Air Canada. These relationships are the fourth and fifth such unique relationships between HEICO aerospace and major international airlines. We paid our 49th and 50th consecutive semiannual cash dividend since 1979. Just to insert, I presume that you have all seen our press release that went out yesterday at the board meeting. We declared another 10% stock dividend, and we also declared our semiannual cash dividend, which is payable on the 10% stock dividend. So the result of that is an effective increase, 10% increase in the cash dividend.

During the year, Forbes magazine ranked HEICO as one of its hot-shot 200 in this year's listing. That was in the October issue. At HEICO, we believe that the successes are the direct result of our consistent strategy of remaining focused on medium to long-term growth opportunities. Also, earlier this month, we completed the acquisition of 80% of the business of Sierra microwave technology which we believe to be the leading designer and manufacturer of certain niche microwave components used in satellite and military products. With that, I'm going to move on to the specific items in our press release, financial information.

Consolidated revenues in the fourth quarter of '03 increased by $2.2 million or 5% from the fourth quarter of '02, reflecting revenue growth of 5% each, both within the Flight Support Group and the Electronic Technologies Group. Consolidated revenues for the full year, fiscal year 2003, were up 3% over fiscal '02, reflecting growth of 7% within flight support, partially offset by a 7% decline in revenues within Electronic Technologies.

Now, revenues of flight support increased 5% to $33.3 million in the fourth quarter of '03, up from $31.8 million in the fourth quarter of '02, and increased 7% to $128.3 million for the full fiscal year 2003, up from 120 million for the full fiscal year '02. These increases in flight support revenues reflect stronger repair and overhaul sales, sales of new products and services, and some improved demand within the commercial aerospace industry in the latter half of fiscal '03. Revenues of Electronic Technologies in the fourth quarter of '03 increased to $14.5 million from $13.8 in the fourth quarter of '02. We're also up $1.7 million over the third quarter of fiscal '03. These increases were due to strong product demand during the second half of the fiscal year, as well as the shipment of some products whose deliveries were delayed in the first half of the year. The decrease in revenues for the full fiscal 2003 was due, principally, to a decline in demand from certain foreign military customers. Moving on to operating income, as I previously noted, consolidated operating income in the fourth quarter of '03 increased 17% to $6.6 million, up from $5.7 million in the fourth quarter of '02. The increase in operating income in the fourth quarter of '03 primarily reflects higher earnings in the Flight Support Group.

For the full fiscal '03, consolidated operating income is up 4% versus fiscal '02. Operating income of flight support increased 17% to $4.9 million in the fourth quarter of '03 versus 4.2 million in the fourth quarter of '02, primarily reflecting the impact of higher sales from new products and services and lower SG&A expenses which I will explain a little later. For the full fiscal year, operating income of flight support increased 21%, $19.2 million in fiscal '03, versus $15.8 million in fiscal '02, based on the higher sales levels from new products and as we begin to see some strengthening in commercial aviation during the latter half of the year.

Operating income of Electronic Technologies remained approximately level at $3.1 million in both the fourth quarter of '03 and the fourth quarter of '02, but increased 16% over operating income in the third quarter of fiscal '03. For the full year, operating income of Electronic Technologies decreased $3.4 million due primarily to lower foreign military sales.

Moving on to operating margins, the consolidated margins totaled 14% in the fourth quarter of '03 up nicely from 12% in the fourth quarter of '02, due to higher Flight Support Group margins. The improved operating margins within flight support, which were 15% in the fourth quarter of '03 versus 13% in the fourth quarter of '02, are principally due to higher sales volumes and lower SG&A expenses. Operating margins of Electronic Technologies were a very strong 22% in the fourth quarter of '03 and in the fourth quarter of '02 and they improved from 21% in the third quarter of fiscal '03 due to higher sales volumes, which I discussed a few moments ago.

Earnings per share diluted was 16 cents in the fourth quarter of '03, or 9 cents lower than the 25 cents reported in the fourth quarter of '02. Diluted earnings per share in the fourth quarter of '02 includes 9 cents from a recovery of a portion of taxes paid in prior years resulting from an income tax audit completed in fiscal '02. And this was net of related expenses. So actually on a comparable basis, without the tax recovery in '02, the earnings were the same. Diluted earnings per share were the same in both years. Diluted earnings per share was 55 cents in fiscal '03 for the full year versus 68 cents in fiscal '02. Again, diluted earnings in fiscal '02 included recovery of taxes, which I just spoke about, as well as an increase in the gain on sale of a product line sold in fiscal '02, and those two items increased diluted earnings per share in '02 by 13 cents. Again, if you ignore that 13 cents, the earnings in both years were, essentially, identical.

Adjusted on a pro forma basis for the 10% stock dividend announced by the company yesterday, diluted earnings per share for fiscal October 31 '03 and '02 would be 50 cents and 62 cents respectively, and diluted earnings per share for the fourth quarters of '03 and '02 would be 14 cents and 23 cents respectively. On a pro forma basis, again adjusted for the stock dividend, the recovered income taxes and additional gain on sale of product line improved diluted earnings per share by 12 cents in fiscal '02, and the recovered income taxes increased diluted earnings per share by 9 cents in the fourth quarter of fiscal '02.

Depreciation and amortization expenses were $1.3 million, up slightly from $1.2 million in the fourth quarter of '02. For the full fiscal years, depreciation and amortization expenses were $5.1 million in fiscal '03 versus $4.5 million in fiscal '02, and this reflects some expansion of our production facilities and capabilities. Research and development. Total R&D expense was $2.7 million in the fourth quarter of '03, compared to $1.6 million in the fourth quarter of '02. The fourth quarter year-over-year increase in R&D expense of $1.1 million was due to the timing of approximately one half million of Electronic Technologies Group R&D expense in fiscal '03, and the balance was due to a reclassification in the fourth quarter '02 of certain new product development costs previously included in flight support's R&D, and that was reclassified to costs of sales.

Total R&D for fiscal '03 totaled $9.2 million versus $9.7 million for fiscal '02. The small decrease did not negatively affect our new product development results as our development groups have become more efficient and have been able to reduce costs consistent with our expectations. The addition of new FAA PMA approvals particularly for non JTAT aircraft continues to be a fundamental part of our long-term strategy in light of the accelerated retirements in. JTAT standard fleet after 9/11. We currently have approximately 700 parts in development, 97% of which are for non JTAT powered aircraft. We have over 3,000 parts approved by the FAA, over 70% of those are non JTAT powered aircraft. New parts released by our R&D groups in fiscal '03 continued at a very strong level and pretty much on budget for the period. And as a result further expanded our PMA product offerings by approximately 300 parts.

SG&A expenses in the fourth quarter of '03 decreased by approximately $2 million from the fourth quarter of '02 and decreased by approximately $4.2 million in the full fiscal year 2003 compared to 2002. The decrease in SG&A for the fourth quarter of '03 and the full year of 2003 are mainly due to lower commission expenses within the Electronic Technologies Group based primarily on the sales mix consisting of fewer commissionable products, professional fee expenses recorded in the fourth quarter of '02 in association with income tax audit -- the income tax audit previously discussed, and some reduced bad debt expenses within flight support in fiscal '02.

SG&A expenses as a percentage of sales decreased to 18% in the fourth quarter '03, down from 23% in the fourth quarter '02, and decreased to 20% for the full fiscal year '03, down from 23% in fiscal '02. These decreases are primarily due to higher sales volumes and lower bad debt expenses within flight support. The reduction in professional fee expenses, and by lower sales of high commissioned products within Electronic Technologies. Interest expense in the fourth quarter of '03 decreased by about $261,000 compared to '02. The decrease was principally due to a lower weighted average balance outstanding under the company's credit facility in the fourth quarter of '03. Our strong cash flow from operating activities has allowed us to pay down the outstanding balance on our credit facilities by $24 million in fiscal '03, and of course, $12 million in the fourth quarter as I mentioned earlier.

Interest income in the fourth quarter of '03 and '02 and the full year were pretty minimal, and approximated the same numbers in '02. Income taxes, the recovery in the fourth quarter '02 of the portion of taxes paid in prior years, which I discussed earlier was the principal driver behind the increase in the company's effective tax rate from a net recovery in the fourth quarter of '02 to 35%, 35.5, in the fourth quarter of '03, and from an effective tax rate of 23% for the full year '02 to 35.6% for the full year of '03. The company's effective tax rate in the fourth quarter of '02 and the full year '02, excluding the tax recovery, was approximately 35%, and that's pretty comparable to the effective tax rate of the respective periods in '03.

Minority interest of $572,000 in the fourth quarter and $2 million in the full year '03 represent, principally, the minority interest of Lufthansa and American Airlines in our Flight Support Group and increased with higher earnings within flight support. Those are my comments on the P&L.

Moving on to the balance sheet and cash flow, our financial position, as you all know, is extremely strong. Cash flow from operating activities remains strong and totaled $9.8 million in the fourth quarter of '03 versus $8.7 million in the fourth quarter of '02. This was a 13% increase in cash flow. It totaled $27.9 million in fiscal '03 versus $23.3 in '02. That was a 20% increase. The year-to-date cash flow of $27.9 million approximated 225% of our net income in 2003, and we believe that cash flow is a great indicator of the quality of earnings, and we continue to believe that we have excellent quality of earnings at HEICO. The working capital ratio increased to 4.2 to one as of October 31, '03 versus 3.4 as of October '02. The days sale outstanding, DSOs as of October 31, '03, improved by one day, to 56 days compared to 57 days on October 31, '02. The improvement reflects our continuing efforts to closely manage receivable collection and maximize cash flow from operations in the current business environment. We work diligently to manage that credit exposure in light of the financial challenges facing some of our customers, and I can say that I personally am very pleased by the work of our work, our financial staff, and our entire credit management because our accounts receivable losses in a terrible year for the airline industry, our losses have been truly minimal.

No customer represented greater than 10% of consolidated sales in the fourth quarter of '03, and the top five customers, about 27%. Inventories decreased 6% since October 31, '02, and the inventory turnover rate of 146 days as of our October 31 '03 improved by 26 days compared to 172 days as of October 31, '02. Our focus on optimizing inventory levels has resulted in a reduction in inventory and has enhanced our cash flow even as we continue to add numerous new products, and I told you that we added approximately 300 new products in fiscal '03.

Our already low total debt to capital decreased further during the year by 8% to 13% as of October 31, '03 versus 21% as of October 31, '02 as we used our positive cash flow to reduce the balance on our revolving credit facilities by $24 million during fiscal '03. We also reduced that credit facility by $12 million in the fourth quarter of '03. I mentioned this earlier in the call. I do want to point out that we, subsequent to year end, we did borrow on our credit facility for the acquisition of Sierra microwave. Still, our total debt outstanding remains relatively low, very conservative run capital budget. Capital expenditures in '03 were $3.8 million, or somewhat lower than our 5 to $6 million budget. It includes the expansion of production facilities and capability.

As far as the outlook goes, we're very pleased to report continued improvements in year-over-year results for flight support, and this reflects our on going new product development efforts and some recovery within the commercial aerospace industry. We're further encouraged by recent production by various entities of a continuing strengthening in the commercial aviation industry in 2004 -- I'm sorry. I said production. I meant to say prediction by various entities in the commercial aviation industry in 2004 and beyond. We're also encouraged by the increase in demand during the second half of the fiscal year within our Electronic Technologies Group, which is a highly profitable segment of HEICO corporation. Our recent acquisition of Sierra microwave within the satellite microwave component industry furthers our product and customer diversification strategy, and revenues from the defense industry and other markets, including industrial, medical, electronics, and telecommunications, represented approximately one-third of our total revenues in fiscal '03.

Based on our expectation of continuing improvement in sales and earnings, which, in turn, is based on anticipated strengthening of the economy, and our continued success in introducing new products and services, together with the recent acquisition of Sierra microwave, we are now targeting fiscal 2004 sales and earnings growth of at least 15% and 30% respectively over fiscal 2003 results. Please note that in accordance with the trend that seems to be developing in the financial markets, we will not be giving quarterly guidance on sales and earnings during fiscal '04.

In closing, I want you to know that we remain committed to our very well-known strategy of focusing on medium to long-term growth opportunities, such as developing and marketing new products and repair services, practicing financial prudence, and developing new revenue sources through internal growth and selected acquisitions. We believe this approach best positions us for long-term sustainable growth and to create substantial and increasing shareholder values. That is the end of my formal comments, and I would like Debbie, our operator, to open the floor to any questions. Debbie.

If anyone has a question, you can hit star one on your telephone keypad. We have a question from Jim Larkin. You can go ahead and ask your question.

Good morning. I would like more information on Sierra microwave. Could you give us guidance on how large that acquisition was, how much you paid for it.

Good morning, Jim. This is Larry Mendelson. I'm going to ask Tom if we can do that.

Jim, that transaction was a privately owned company. There's no public financial information available. It is also an insignificant acquisition relative to the reporting requirements. So in accordance with that, there were not -- there will not be any detailed financial terms disclosed on the acquisition.

Jim, let me add a little. We did say in the press release of Sierra a few things that can give you a little color on it. We do think it will be accretive. We think the management at Sierra is exceptional. We studied these people out there. They're, I think, really -- their technological excellence is truly admirable. We think Sierra will be a very nice contributor to HEICO. As Tom indicated, we have not intentionally, for a lot of competitive reasons and so forth we really don't want to disclose that.

So I guess with your guidance for revenue growth next year, that's, essentially, internal growth, is what you're guiding for the 15%?

I would say that the revenue growth probably is -- well, most of it is -- most of the revenue side, yes, is -- yes. It's internal, yeah.

Okay. Great. And I know you haven't done a lot of acquisitions this year. Can you tell me in the quarter how much of your revenue came from acquisitions in the past 12 months?

Virtually zero.

Virtually none. Our only acquisition on the year was a very, very small repair facility in California.

Okay. Great. And then can you disclose what percent of Flight Support Group is owned by minority interests?

Flight Support Group is owned by minority interest.

Are you speaking of -- well, of course, you have to look at 20% ownership of the parent company. You have a 16% minority ownership of American airlines, of an entity within that, and a small other minority interest of another small entity. In terms of dollars, it is represented by the dollar amount minority interest in our financial statement.

Okay. All right. Good enough. I think that's about it. Thanks, guys.

Thank you. Jim, I just want to point out one thing that doesn't come clear. I'm sure you guys will crunch the numbers and figure this out for yourself. One of the things that I do want to point out to you, in the fourth quarter, from an operating income, if you look at the operating income line before minority interests and income taxes and interest, I was personally very pleased to see the growth in fourth quarter '03 over '02. To me, as a manager, I kind of look at the operating income line because you can get a lot of confusion in the deductions from goodwill and everything else. But to see how the entity, HEICO Corporation, is performing, that's, to me, a key number. I was pleased with that.

One comment. When I look at the growth and minority interests year-over-year, that, I guess, implies to me the strength of the core PMA business. Is that fair to say?

I would say that's probably right. That is where the growth of that business really comes from. It's the new products. The constant emphasis on new products.

Okay. Great.

And, also, of course -- part of it is, also, the repair and overhaul, too.

Okay. Thank you.

Thank you, Jim.

We have a question from Chris Quigley.

Good morning, gentleman.

Good morning, Chris.

As a follow-up to Jim's earlier question, in terms of positioning this year, microwave because it has the same minority infrastructure, will it act the same on the P&L as the Lufthansa or because it can be purchased out as a different accounting treatment of it?

Tom Irwin. The accounting investment in Sierra will be similar to Lufthansa. We will consolidate 100% of the revenue and line item expenses, and then 20% minority interest is at the bottom of the income statement.

Okay. But, obviously, over the course of time, if you execute the purchase agreements, it would be reported as a normal operating entity?

Yes. If we were to reduce that minority interest through various issues, it would go away yes.

This is folded into the Flight Support Group?

No. It's in the Electronic Technologies Group.

Okay. Is there any discernible crossover in product line, R&D efforts or expertise with any of the other ETG companies?

I'm going to turn that over to Victor.

Good morning, Chris. This is Victor. There is on the electrical engineering side for technical capability, there is no marketing crossover at this point, no end market crossover at this point, but we're starting to look into that because the management at Sierra thinks there might be an opportunity to couple some products that is we make, power supply products, with their products. They would be in a different form and for a different application. It is a different market with the higher liability requirement.

Okay. And was there -- you know, their motivation for selling, is it lack of scale or access to capital on their side or the downturn in the commercial market finally just forced them to look for outside investors?

No. I don't think it was that they were in trouble. What they felt was they reached a certain size in growth and some of the major companies they dealt with felt they were too small, too great of a risk to get some of the larger programs. They needed to link up with a larger company in order to get on larger programs and get more business. So they felt in order to grow, they needed to do this, be part of a bigger organization. When I say bigger, financially bigger. The feedback we've gotten initially from the customers has been very positive.

Okay. Do you see an ongoing opportunity to do a little more consolidation in this area?

Possibly. We're going to be very cautious and selective, but we're currently looking at some possibilities. I don't see any in the near term.

Similar profitability levels to the core ETG group or is the business operating below peak levels? Where do you think it can get to?

We believe it should be consistent with the ETG operations overall.

Okay. Very good. Shifting over, a question on the foreign military program which has continually been pushed off. Any increased visibility on when that might happen?

Well, we saw some of the revenue hit us in the fourth quarter, smaller than we expected, and I just -- I've become reticent by predicting it because we don't have good visibility on it. Unfortunately, the longer it takes to get it, the less likely we are to get it just by the nature of how things work, although we're still hearing from the customer that it's coming. It's mixed signals, as far as I'm concerned.

Switching over to Flight Support Group, can you give us an idea of what percent of the revenues of the business were generated out of the platform? You gave us 97% or non JTAT. As an overall piece of the parts count. In terms of revenue contribution?

Yes. Chris, this is Eric. We've disclosed in the past the percentage of JT 8 V standard, which is a percentage of the total. And the parts which are applicable to the JT 8 V standard in fiscal 03 represented about 4% of our PMA sales.

Okay.

And those are parts that are only eligible on the JTAT standard on the 727, 737, 100, 200 and DC-9s. Separately, JTAT in total, including the 200 series, which is 34%.

Chris, this is Larry. Just to put a little color on that, there has been a significant shift from JTAT to non JTAT product. I think our program of development has been responsible for that. It's really happening. We are no longer dependent on JTAT.

Chris, I should clarify one thing. 34% of our PMA sales were JTAD and 4% were only applicable to the baby 8, which is already include in that 34% number.

Okay. That's how I understood it.

You should not add them together.

Got it. If you guys take a look at the overall Flight Support Group in terms of its profitability level which is below where we were a year or two ago, what do you see as the primary factor? Is it simply volume and parts? Is it improvement on the overhaul business? Where do you see the most leverage in terms of improvement?

This is Tom Irwin. A couple things and then Larry can add a few things. Looking at it over the last three or four years, as Larry mentioned, there was a significant decline in JTAT, which was a very profitable product line post 9/11. In part, to counterbalance that, we increased R&D. Again, while the total spending has increased by a couple million, in the earlier years we had substantial reimbursements under our R&D reimbursement contracts or cooperative agreements which reduced significantly the P&L impact of the R&D. So those two things and our expansion of marketing capabilities as we've expanded our product line to some 3,000 plus PMA parts has had a negative impact on the operating margins. Now I think we feel it offers opportunity for the growth prospects.

Chris, we've got commitment from our five partners on a part number basis. So as we develop parts and offer them for sale, we have it under contract that they will purchase those parts. We've got a high degree of confidence that as long as they remain viable flying the aircraft, which they are currently projected to fly, that the new product development activities will quickly find revenue demands, as well as there should be some manufacturing synergies to get greater utilization in the manufacturing operation, and we're able to allocate this over a larger product base as well as in the SG&A area as well.

And is the R&D fairly leverageable in this 9 to $10 million range?

Yes. That's what it was consolidated last year, and that's about what the forseeable future will run.

It may be able to come down a little bit as we get more efficient in some of the flight support areas, but maybe we'll spend more in some other areas.

Okay.

Chris, in the R&D, as our policy, we do spend in Electronic Technologies, too, and we do have some programs going on over there that we're using.

Speaking of which, my always final question for Victor, any developments on the backup power supply for the cockpit voice recorder?

No. The FAA has told us they still plan to issue that rule when they get to it. They're trying to come up with a more cost effective way to do it. In my opinion, we haven't had it in our projections. We're not putting them in. I'm no longer counting on it happening because one of those things that my theory is when it takes so long, you can't count on it.

Until another disaster happens.

Until another disaster happens. Exactly.

Very good. Thank you, gentlemen.

Chris, thank you. One other comment. The R&D is running about 5% of sales. That's a rule of thumb. We're keeping it there.

We have one more question from Tom Lewis. Tom, you can ask your question.

Okay, great. Most of my questions were answered, but first of all, in getting at the difference in gross margin this year from last year, would I be correct in assuming those high commissioned sales that weren't happening this year carried larger gross margins and were a factor -- so their absence was a factor in that decline?

Tom, this is Tom Irwin. Yes, the higher commission sales which would increase the SG&A percent but carry a higher gross margin. That's correct.

With respect to sales of JT 8 parts, a little more light. Would you say they continued to decline in the fourth quarter, or was it more mixed or -- I'm trying to get at whether or not an absolute as opposed to percent basis there's any signs of a bottom there, or maybe even recovery in certain lines within that mix.

This is Eric speaking. They were, I would say, pretty flat in the fourth quarter compared to the prior quarters. We have not yet seen a big recovery in that area, and our customers are projecting that one day there will be, but we just don't know when that will occur.

For the moment, flat would be the operative word, then?

Right.

Thanks a lot.

Thank you.

We have a question from Jim Larkin. You can ask your question.

I just wanted to see if I can get some guidance on the tax rate in the coming year.

In our targets it presumes a slight increase in the effective tax rate, somewhere around 36%.

Okay. And then could you give us some color on what the acquisition pipeline looks like this coming year?

Jim, the acquisition pipe there is line, we have a number of transactions we're continuing to do due diligence on. I can't predict when or if we're going to make any of these acquisitions, and, you know, until we do it, we don't know. But we're very active in looking at them. The question is which ones kind of meet our standards, which ones fit in, which ones are priced right. We're pretty conservative on the way we spend money.

Is it fair to say that the pipeline is pretty normal as far as the opportunities you see come across your desk, has it slowed down or picked up it?

I would say it's normal. I think it's normal. One of the problems that we've had in acquisitions, and I guess the whole M and A industry has been the same, that many sellers have seen decreases in their earnings over the past 2 years, but they have not reduced their prices. They want the same prices. Well, you know, you just can't put ten pounds in a five-pound bag. It won't work. These deals have been backed off. There's one transaction we've been looking at for probably over two years, and, you know, we continue to watch these companies and, in some way, we get higher levels of confidence doing it. We won't pull the trigger until we feel that the return is a good one for the company.

Okay. Switching gears a little bit, Chris was asking you a little bit about the difference between margins and the previous peak margins versus where we are today. I wonder if you might be able to frame our expectations for what the long run opportunities are in margins. If I look at the Flight Support Group, margins are up in the high 20s, even higher at one point. The electronic -- when you have the ground support in there as well, that was -- you know, you got up into the 22, 24% operating margins on a segment basis. Overall, operating margins hit close to 20% plus at one point. Can you frame up what those opportunities still are in the long run, three to five years out?

I can -- this is Eric. For the flight support group. The margins, of course, are recovering as the volume increases. After 9/11 our sales volume dropped significantly, yet we continued to increase our selling expenses as well as new product development expenses, which had a negative impact on the margin. As our sales increased, the percentage of selling and new product development as a percentage of total will, of course, fall. We're seeing an increase in those margins. So I would say that as the recovery takes effect, if there is a return or in some of the demand, some additional strengthening, there's going to be continued improvement. I'm reluctant to give out a percentage because with the new regulations we're not supposed to do that. But I think it's logical to assume some strengthening over the next number of years. I think the margins you mentioned before were peak margins in the cycle, and so they'll get stronger as the cycle improves.

Can I pin you down to say 20% are still possible?

I know the answer to it. I'm just not sure what we're supposed to speak about here. I would say in terms of consolidated operating margins, if you do the math on the sales and so on and so forth, there's going to be some modest improvement in the consolidated operating margins. We will need to do some modest improvement and meet our earnings target based on the 15% sales growth target. Within, as you mentioned, the electronics group is already in excess of 20%, and so I think it's reasonable to presume that whatever improvement we would make on a consolidated basis would come primarily from the Flight Support Group. I think, clearly, on a consolidated basis before R&D we should be able to do the 20%.

Jim, a lot of it, of course, depends on R&D and the amount of R&D dollars that we're spending. That goes into the margin. If we let up on the R&D, the percentage, of course, is going to jump. For the long term, we don't think that's a healthy thing to do. If we spend more on R&D, it's going to impact it. So that's why we're a little reluctant to signal what we're going to do. Also, it has a competitive impact. The competition likes to know what we're doing in R&D, and they try to find out what we're working on, what parts we're planning on introducing, certain parts cost more to produce and do PMA on. We're very very careful about this. We got into trouble one time, trouble meaning competitive trouble, where they found out a product that we were making and they raced to the market, and we didn't get as much sales coverage out of it. We had to wait. So we're very, very cautious with this.

That's helpful. Thanks, guys.

Thank you, Jim.

We have a question from Terry Ledbetter. You may ask your question.

Good morning. My question is often times in the Flight Support Group we have seen a seasonality with that sales kick, so to speak, in the fourth quarter. There wasn't much of that this year. I wanted to ask why that was.

Well, I think last year's fourth quarter showed an increase -- I don't know that we continually have seen any seasonality particularly in the business. Maybe there's been times when a particular quarter was stronger in a year, but, in general, I would say there's not a lot of seasonality to our business, except to say that November and December, of course, have fewer working days. Of course, those two fall into our first quarter. So maybe that's some of the things you've seen. In the fourth quarter with October, September, August have more working days. That may be some of what you're seeing. I wouldn't say there is a particular seasonality.

All right. Then I was wondering if you could review what you said -- I didn't catch it. On the shifting or reclassifying of R&D and FSG. I believe you mentioned it at the beginning of the call.

This is Tom Irwin. In the fourth quarter of last year, to conform with ongoing classification determinations, we took some dollars that were classified as R&D into cost of sales. It was a reclass of $600,000. It wasn't a change in spending, but we determined that it didn't fit a narrowly defined new product development definition. So we moved it within the classification internally.

I see. Okay. Thank you.

There are no more questions.

Okay. In that case, this concludes the conference call. I thank you for your attendance and interest in HEICO. If you do have questions, you can call any one of us, Tom, Eric, Victor or myself, and we will try to be responsive for your questions. For everybody, have a very good holiday season. We'll talk to you, I guess, unless you call before, at the first quarter conference call beginning of the year. Bye now.