HEICO Corp (HEI.A) 2006 Q2 法說會逐字稿

Welcome to the HEICO Corporation fiscal 2006 second quarter earnings conference call. [OPERATOR INSTRUCTIONS] Please note this call may be recorded. I will now turn the program over to Mr. Laurans Mendelson, Chairman, President, and CEO of HEICO Corporation. Go ahead, sir.

Thank you very much. Good morning to everyone on this call. We welcome you to the HEICO second quarter fiscal '06 earnings announcement teleconference. I am Larry Mendelson, CEO of HEICO Corporation; and I am joined here this morning by Victor Mendelson, President of HEICO's Electronic Technologies Group as well as HEICO's General Counsel; and remotely by Eric Mendelson, President of Flight Support Group; and Tom Irwin, HEICO's Executive Vice President and CFO. Before we begin, Victor Mendelson will read a statement. Thank you, Victor.

Thank you. Certain statements which will be made 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 these forward-looking statements 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, 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 or space spending by U.S. and/or foreign customers, or competition from existing and new competitors which could reduce our sales. HEICO's ability to introduce new products and product pricing level which is 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 aviation, defense, space, and electronics industries which could negatively impact our cost and revenues and HEICO's ability to maintain effective internal controls which could adversely affect our business and the market price of our common stock.

Parties listening to today's call are encouraged to review all of HEICO's filings with the Securities & Exchange Commission including but not limited to filings on Forms 10-K, 10-Q, and 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. Thank you.

Thank you, Victor. To all our listeners, before reviewing our second quarter operating results in detail, I would like to take a few minutes to summarize the highlights of what we consider to be another excellent quarter. Both the flight support and electronic technologies groups reported higher sales and earnings in the second quarter of '06 combining for an overall 38% improvement in consolidated sales and a 45% increase in consolidated operating income over the second quarter of last year. Our consolidated second quarter net sales and operating income represent record quarterly results for the fifth consecutive quarter. Consolidated operating margins increased to 18% in the second quarter of '06, nearly 1 full point above the 17.1% in the second quarter of '05.

The higher sales and operating margins contributed to a 32% increase in consolidated net income over the prior year. HEICO was recently awarded the Good to Great award in the large company category by three Chambers of Commerce in south Florida. The good to great award recognizes businesses that have achieved greatness in their mission by transitioning from solid performance to great performance over a four-year period while demonstrating proven leadership within management ranks as well as a solid workforce. I additionally add that our competition were two outstanding companies south Florida, Carnival Cruise Lines and Related Housing, both very large companies, much larger than HEICO.

Last week we completed our 29th acquisition since 1990 with the addition of Arger Enterprises Incorporated. Arger designs and distributes FAA approved aircraft and engine parts primarily for the commercial aviation market. We do believe that this acquisition will allow us to broaden our aircraft parts portfolio and further strengthen our distribution line of business. We believe that our second quarter results are a further indication of the concentrated efforts for long-term sustainable growth at HEICO, and as I have said many times before, we consider HEICO a growth company. We run it that way, and we believe that this year's performance is again proving it.

Moving onto the details and drilling down a little bit, in net sales our consolidated net sales or revenues in the second quarter of '06 increased by 25.1 million or up 38% from the second quarter of '05 reflecting revenue growth of about 36% within Flight Support and 41% within Electronic Technologies. Net sales of Flight Support increased to 62.5 million in the second quarter of '06, up from 46.1 million in the second quarter of '05. The increase in Flight Support's revenue represents the acquisition of Seal Dynamics and as well as organic growth.

In the first half of fiscal '06 the Flight Support group's organic growth approximated 14% when compared to net sales in the first half of fiscal '05. The organic increase in Flight Support's revenue reflects our success in developing and bringing to market new products and services as well as the continued recovery and demand for after-market replacement parts and repair and overhaul services within the commercial airline industry. As a general comment, I want to mention that we expect that the full year's organic growth should be about the same as the first six months. Net sales of electronic technologies increased to 29.6 million in the second quarter of '06, up from 21 million in the second quarter '05, and the increase primarily reflects the acquisitions of HVT Group in September of '05 and EDT in November '05 as well as the organic growth. Organic growth of Electric Technologies approximated 9% in the first half of fiscal '06 as compared to the first half of fiscal '05. Again, we do expect organic growth in the full year to be the same as the first half -- the percentage increase should be the same as the first half.

Consolidated net sales increased 45% to 180.2 million in the first half of '06, up from 124 million in the prior year represented by approximately $41 million attributed to acquisitions and 15 million attributable to organic growth. Moving onto operating income, our consolidated operating income in the second quarter of '06 increased 45% to 16.6 million, up from 11.4 in the second quarter of '05. Consolidated operating income in the first half of '06 increased 59% to 31.9 million, up from 20.1 million in the first half of '05. Operating income of Flight Support in the second quarter of '06 increased 24% to 11 million, up from 8.9 million in the second quarter of '05 reflecting higher net sales partially offset by a less favorable product mix. Operating income of Electronic Technologies in the second quarter of '06 increased a stunning 105% to 8.7 million, up from 4.2 million in the second quarter of '05. This principally reflects the increase in net sales as well as higher operating margins.

Corporate expenses in the second quarter of '06 were 3.1 million versus 1.7 in the second quarter of '05 primarily due to increased costs of compliance with Sarbanes-Oxley as well as higher accrued performance awards. The majority of such costs incurred in '05 were not incurred until the second half of the year. Operating margins consolidated increased to 18% in the second quarter of '06, again up nearly 1 full point from 17.1 in the second quarter of '05. When combined with operating margins for the first quarter of '06, the consolidated operating margins for the first half of fiscal '06 of 17.7% approximate those currently expected for the full fiscal year of 2006.

Operating margins for the Flight Support Group improved slightly to 18.8% in the first six months of fiscal '06, up from 18.6% in the first six months of fiscal '05. Operating margins were 17.7% in the second quarter '06, down from 19.3 in the second quarter of '05. This reflects a less favorable product mix including the expected impact of lower margins realized on products distributed by Seal Dynamics. Operating margins of Electronic Technologies were 29.2% in the second quarter of '06, up very significantly from 20.1% in the second quarter '05. This increase was principally due to a very favorable product mix including a higher margin product mix contributed by some of our recent acquisitions.

Diluted earnings per share improved to $0.28 in the second quarter '06, up from $0.22 in the second quarter '05 reflecting a 32% increase in consolidated net income. This strong growth in consolidated net income was less than the 45% increase in consolidated operating income principally due to the increased minority interest share of income of certain consolidated subsidiaries. Depreciation and amortization expenses increased to 2.2 million in the second quarter '06, up from 1.8 in the second quarter '05, primarily due to increased amortization relating to recent acquisitions. Research and development expense total was approximately 4.4 million in the second quarter of '06 versus 2.9 million in the second quarter '05. We expect these expenditures of course to benefit the future, and that is part of our basic strategy.

The addition of new FAA PMA approvals continues to be critical to our long-term growth. We now have over 4,000 parts approved by the FAA, and we have approximately 3,150 active SKUs including about 375 which we acquired during the -- as a result of the Arger acquisition. New parts released by our R&D groups in the second quarter of '06 continued at a very strong level and generally as planned for the period. We are budgeting approximately 350 new PMA's in fiscal '06 including new PMA certifications by Seal Dynamics.

We also have a number of new products under development in electronic technologies. As I've mentioned many times before, we believe that our focus on continuing new product development is fundamental to our growth strategy, and this strategy has proven very effective and profitable over the years. SG&A spending as a percentage of net sales decreased to 18.7% for the second quarter of '06 down from 20.4 in the second quarter '05, and the decrease principally reflects the increased sales volume and improved efficiencies through cost controls. The increase in SG&A expense to 16.9 million for the second quarter of '06, up from 13.6 for the second quarter '05 is due principally to higher operating costs, principally personnel related costs including the impact of the previously mentioned acquisitions. Also, increased sales and higher corporate expenses which I spoke about earlier.

Interest expense in the second quarter of '06 versus the second quarter of '05 was up principally due to a higher average balance outstanding under the revolving credit facility, and this was attributable to acquisitions and also higher interest rates caused some increase. As you can see, our interest expense is still of course very low. During the first half of '06 we borrowed $34 million under our revolving credit facility, principally to fund the two acquisitions we completed in November '05. We made repayments during the same period of 7 million including 6 million in the second quarter of '06. Interest and other income in the second quarters of '06 and '05 were really not significant.

The Company's effective tax rate of 36.2% for the second quarter and 35.2 for the first half of '06 are down slightly from the 37.7% for the second quarter and 36.3 for the first six months of '05. These decreases are principally due to a higher amount of the minority interest share of income excluded from our consolidated income which is subject to federal income taxes. Minority interest of 2.7 million in the second quarter of '06 and 1.3 million in the second quarter '05 principally represent the minority interest that are held by Lufthansa and Seal Dynamics in our Flight Support Group and Sierra Microwave and HVT in our Electronic Technologies Group. The increase from the second quarter of '05 is principally attributable to the acquisitions of Seal Dynamics and HVT as well as higher earnings of our Flight Support Group and earnings of Sierra Microwave.

Moving on to the balance sheet and cash flow, I want to remind you that our financial position remains extremely strong. Cash flow from operating activities was 7.4 million in the first six months of fiscal '06 versus 11.5 in the first six months of '05. The decrease reflects the payments of current liabilities including some income taxes as well as higher levels of inventories required by Flight Support. For the full fiscal '06 year we are targeting cash flow from operating activities in the range of approximately $40 million.

Our working capital ratio strengthened even further during the quarter to -- I am sorry, to 3.5 times as of April 30, versus 2.9 as of January 31, and 2.5 as of October 31, of last year. DSOs of accounts receivable as of April 30, equalled 55 days, and is very consistent with DSO's of 53 days as of January 31, and 56 days as of October 31, of '05. We continued to closely monitor receivable collection efforts to manage our credit exposure very carefully in the light of the continued financial challenges facing some of our customers. The inventory turnover rate as of April 30, equalled 131 days compared with 128 as of January 31, and 132 as of October 31. As previously mentioned, inventory levels at our Flight Support Group have increased since October 31, '05 including increases of approximately 4 million in finished products and 2 million in raw material attributable to the higher number of new product offerings being developed as well as increased raw material prices and lead times.

Our top five customers represented approximately 20% of consolidated net sales in the second quarter of '06 versus approximately 24% for the full year of 2005, and we see a broadening of our customer base as a very positive trend. Our long-term debt to capitalization increased to 17.6 million as of April 30, '06 versus 11.1 as of last October 31, '05. This reflects the net year-to-date borrowings of 27 million under our revolving credit facility. Our leverage of course continues to remain extremely low. Capital expenditures in the first half of '06 were 4.6 million. Our current net capital expenditure budget for the full year of '06 has been reduced slightly to the range of 10 to $12 million.

Looking forward, our outlook is that we are pleased to report strong year-over-year sales, operating income, and net income increases in our two business segments reflecting both organic growth and growth through acquiring profitable, well managed businesses. Both of these are fundamental to our long-term growth strategies. Based on current market conditions, and including the operating results of our recently announced acquisition of Arger we are raising our fiscal 2006 sales to a range of 370 to 376 million, and operating income to a range of 65 to 66 million, and diluted net income per share to a range of $1.09 to $1.12.

In closing, we remind you that we continue to adhere to our long-term strategy of developing and marketing new products and services which provide our customers with improved technology and substantial cost savings and permits us to expand our markets. We believe that this strategy has resulted in our strong financial position, and it also positions us with the opportunity for forward substantial growth. That is the extent of my prepared comments, and I would like to ask the operator to please open the floor -- the operator, to open the floor for any questions that we can respond to.

[OPERATOR INSTRUCTIONS] We'll take our first question from Chris Donaghey with SunTrust Robinson.

Good morning, guys. Another strong quarter. First of all, Larry, I am assuming from the forward guidance that there is going to be some margin adjustment in the third and fourth quarter just based on the addition of the distributor business, so this 17.7% operating margin in the second quarter, should we model that as an operating margin for the Flight Support Group through the back half of the year?

I think the answer is yes. Tom, do you agree with that?

Yes, approximately. Again, specifically our comment was that on a consolidated basis the operating margins for the first half of the year are what were expected on a consolidated basis for the full year.

Okay. So then presumably that means the 29% for the Electronic Technologies Group is extraordinarily strong this quarter but not necessarily sustainable.

Chris, we often -- we caution everyone that we don't give quarterly guidance as you know.

Right.

The reason we don't is we can have swings. I do think that Electronic Technologies is unusually high for the quarter. I do think Electronic Technologies based on our guidance for the year is very realistic, and still I think Electronic Technologies operating margins are very, very strong, very high, even without the 29% or a little over, but we don't want anybody -- and you're not doing it. We don't want anybody to annualize the second quarter or any quarter for that matter. We think our overall guidance for the year is more appropriate and realistic. That's just a general comment, but the answer to your question specifically is, yes, we think it will be, Electronic Technologies will be lower for the year.

Great. Thanks. On the Arger acquisition, you said on the call that there were 375 PMAs that were added from that acquisition. Can you just talk about the composition of those PMAs, maybe the percentage of engine parts versus other parts, and any kind of overlap between your existing product portfolio and theirs?

Well, the answer is to drill down into the detail for competitive purposes we don't want to do that, but the 375 is a net number.

Okay.

Which should be additional parts. Some of those will be distribution parts, and some of them will be PMAs owned, but you start to get too detailed, and you can't figure anything out. If you just ballpark at 375, that -- we're expanding our product line. As usual some will have large sales volume. Some will have smaller sales volume. It is just a number to indicate that our share of the market after we digest all this and get the Companies working together, we think that this was a very excellent opportunity.

Okay. Great. For the parts that -- where there was overlap between HEICO and Arger do you just put those in the retired parts inventory and I guess there is no point in selling them off or anything like that?

The answer is I can't answer that, because that's really an internal operating detail decision, and, again, if you just take the 373 parts and say you put it in a whole package, I think we're going to have some very nice results from it, but what we do in one particular part, that, I really am not at liberty to say.

Okay. No problem. Thanks a lot, guys.

Thank you, Chris. Hello. Hello?

I am sorry, sir. Yes, I'm sorry, we'll take our next question from Arnie Ursaner with CJS Securities. Go ahead please.

I am on a cell phone. Hopefully I won't get cut off. Real quick, your organic growth in both segments in Q2, please?

If you do the math, it was approximately 9% in the Flight Support Group and 5% in the Electronic Technologies Group which brings us to the year-to-date numbers of 14 Flight Support and 9% ETG, but, again, we caution that while we're not in seasonal businesses, quarter by quarter fluctuations are sometimes misleading, and on an annual basis as Larry mentioned we're looking for overall organic growth in the second half to approximate the percentage in the first half.

Which was what, Tom?

About overall about 12%.

Okay. Have you incurred or do you expect to incur any unusual expenses with either Seal Dynamics or Arger?

On Seal Dynamics I don't expect any, and Arger, I think that we will have some digesting expenses in there over the second half of the year. I think that that has been factored into our guidance, but, yes, Arger will see some expenses.

Okay, and you mentioned you're budgeting 350 new PMA's internally developed this year. How many have we seen year-to-date?

Eric, do you have that number?

I don't have that number in front of me. It tends to be a little heavier loaded to the second half of the year, but I would guess it is probably somewhere around 40% of the total, ballpark.

As we think about organic growth over the next year or so, if you can develop these 350 internal and add on top of that the 375 from Arger that probably were not fully mined if you will, it would seem to me your organic growth expectations for '07 should be very, very strong. Is that a fair way to think of your business?

Arnie, we would rather say that we -- we give you kind of an overall. We say that we think -- we aim to grow the overall company 15% to -- 15% revenue, 20% net income. As you know and I have said many times, I have as a CEO, I have to push everybody to shoot much higher. I shoot at 35 to 40%, so if I come in higher than the 20% that we say, I want to do that, and so far this year we are doing it, but to make that promise and say, yes, we're going to do it, we're a little too conservative to go out and when it happens, if it happens -- I mean you can be sure that every team member is motivated to do just what you're saying, and they're compensated to do that, and they're pumped to do that, and I certainly and the manager, the executive management team, is compensated as well as the larger shareholder of the Company. We benefit if that happens, but to go out on a limb and promise that, we're a little too conservative, so you can make your own estimates, but we're not going to promise it. You can be sure we're shooting for it.

I think it's pure math, if you have 30 to 50 active SKUs and Canada had 350, mathematically that's 10 to 12 organic growth right there. It is just pure math. Some simple questions. Larry, you've made sales of stock. Do you have plans or intentions for any additional sales this year?

At this time I do not.

Okay. And your guidance just as a reminder for all, does not include any other potential acquisitions, unannounced acquisitions are not in your numbers whatsoever?

That is correct.

Final question from me, I know you've at least signed one deal internationally. Can you -- obviously you've done a great job in the U.S. Can you describe the international opportunity and how that could affect you over the next year or so?

Well, we think that the international opportunities are growing significantly, not only for us but for the overall industry. At a recent AIA meeting which was held in Williamsburg, the standard spring meeting of AIA, the Aerospace Industries Association of which we're members and I am on the Board of Governors, the predictions for visibility and this is their predictions of visibility in the aerospace industry are going out between 2009 to 2011. A lot of that visibility is now coming not from the U.S. and Europe which has been traditional but from the Middle East, Middle Eastern countries, and the Far East which includes China and the Middle Eastern countries, the Emirates and so forth. We think there are very, very good opportunities there.

We sell these airlines -- a lot of the -- the Middle Eastern airlines and the Far Eastern airlines through Lufthansa. Remember, we have a very strong relationship with Lufthansa, and Lufthansa is the MRO source for 200 -- approximately 200 additional carriers, additional to Lufthansa German airlines. When we say Lufthansa is a customer, they are the world's largest independent MRO facility. I think through Lufthansa we will benefit from significant international growth. They have a major commitment internationally, so again we don't have to sell each individual airline in the Middle East and the Far East in order to capture market because we do it through Lufthansa. That's one thing.

Number two, as you know we have been approved by the -- an entity which is owned and controlled by the government of China to distribute parts within China. We cannot quantify what that will be over the next year. But certainly we believe as the years roll on that there will be very significant opportunities as we develop that relationship. Also I mentioned that Lufthansa for many years has had a MRO facility in joint venture with China, roughly a 50/50 joint venture called [AMEKO] it's up in Beijing. That is also a market source for HEICO, so we think the opportunities are very, very strong, but to quantify and say how much it will hit next year, can't do that yet. I hope that is responsive to your question. Hello.

It looks like he dropped off, sir.

Okay.

I think he might have lost the connection.

He had a bad connection. I will go ahead and take our next question from Tyler Hojo with Sidoti Company. Please go ahead.

Good morning, guys.

Good morning.

I was just wondering, I don't know if you mentioned it in your prepared remarks, but did you give an explanation for kind of the reduction in CapEx that's implied in your guidance? No, I did not. It is not a major reduction. Tom, do you want to comment on that reduction, please?

Fundamentally it is projects that we still contemplate that perhaps they won't be approved and executed until perhaps into next year. It wasn't primarily an elimination of stuff but rather the timing. It was only about 2 million roughly if I recall the exact number. I guess moving onto something else, if you could maybe talk about maybe the difference between Arger's distribution network and the one that you got from Seal Dynamics back in November and how they might be complementary to each other?

Tyler, I am going to ask Eric because he is closest to the ground on that. Eric, would you comment, please.

Tyler, Seal Dynamics did two things. One, they developed their own successful PMAs and, two, they distributed parts for other manufacturers. Arger does the same thing. However, Arger's distribution is a it little different if they don't just distribute other people's parts. They actually go out and get them approved at the customer, so therefore Arger is more of a, if you will a hybrid between the HEICO parts group which develops and sells its own parts and Seal which does that and then also just sells parts for other people. That's why when we start analyzing the number of parts that Arger has, it becomes a little bit confusing because they fall into different buckets. Arger's products should be very synergistic with both the parts group, the HEICO parts group as well as the Seal Dynamics straight distribution they do for other people.

Great. And then I guess one more. Maybe if somebody could comment on just the FAA approval process in general? I know over the last three months your expectation has gone from approving 300 parts a year to 350. With Pratt getting into the game here, could that increase further? Just any comment on that would be helpful.

Eric, do you want to take that, too, please?

The 50 additional parts is coming from Seal Dynamics, and Seal Dynamics was basically running at that rate when we purchased the Company. So it is not so much of an increase over on the HEICO parts group side. It is more just the acquisition of Seal. As far as Pratt & Whitney and what they're going to develop, to my knowledge Pratt & Whitney has not obtained any PMAs to date, so I don't know what their -- the exact numbers that they're going to try to obtain or the time period that they're going to try to do it, but we don't anticipate it having a detrimental impact on our PMA plans at all.

Thanks a lot, guys.

Thank you, Tom.

Thank you. We'll take our next question from J.B. Groh with D.A. Davidson. Go ahead, please.

Hey, guys.

Good morning, J.B.

Congratulations on the quarter.

Thank you.

I had a quick question on cruising the Arger website they said something in there like 10,000 parts approved. How do I reconcile that with the 350 that you guys are bringing across? Is that number just -- what is that number on their website mean?

I am not sure I understand the question.

Would you like me to--.

Yes, yes. Go ahead, Eric.

There are -- if we look at Arger, the total number of parts that they distribute, they distribute thousands of PMAs, and some of those parts have very little dollar sales per line item. We are going to be moving -- some of those parts are going to end up getting sold through the HEICO parts group. Some are going to end up getting sold in our distribution group where Arger will fit in actually both groups. It becomes very confusing. I wouldn't get too wrapped up on the specific number of parts. Because they have got a lot of parts that are very, very low revenue per part number.

So that would be maybe fasteners, that sort of thing.

Fasteners, and all sorts of miscellaneous parts. The HEICO parts group sales per part number is significantly higher. When we say we're developing 300 or 350 parts per year, the value of those parts is traditionally much higher than some of these Arger parts, so we're trying to get our arms around that right now.

Tom, maybe you can comment on what sort of tax rate is embedded in your guidance range, should we expect what we've seen in the first half?

Yes, exactly. Basically we update our year-to-date tax estimated effective rate, and based on what we currently expect for the full year, so the year-to-date number is our best estimate at this point of what the full year of expectations are.

Thanks. One more thing, Eric, on Arger, you basically acquired all of Melrose's aftermarket business, is that correct?

No. We acquired Arger and its related companies. Melrose does have other aftermarket businesses that were not part of the acquisition.

Okay. Okay. Thank you. Thanks a lot.

Thank you.

Thank you. We'll take our next question from Chris Quilty with Raymond James & Associates. Go ahead, please.

Good morning, gentlemen, and congratulations on the good results.

Good morning, Chris. Thank you very much.

Can you give us perhaps a little bit more detail, the overall growth rate of the Flight Support Group at 14%. Is there a differential between the parts business and the overhaul business and anything in particular you would want to comment on the overhaul business and how you continue to look at that business?

As for the details, Tom, do we disclose the break down between those two? Tom, maybe you should handle this question.

Sure. No, we do not give a detail breakdown. What we have commented on is on a go-forward foreseeable future basis, that, in fact, the parts group does have a higher organic growth profile than the repair and overhaul business. I think we've consistently said our expectations for our repair and overhaul business is more along the lines of what overall market expectations are which would be in the 5 to 6%, so what you see in the 14% is a blended rate of organic growth somewhat higher as Larry mentioned earlier in the new PMA parts business and of course somewhat lower on the repair and overhaul and to some degree the distribution business, but we do not disclose it by product group.

Okay. In terms of further investments in that area, it has been quite a while since you have made any acquisitions if I remember correctly. Is that still on an attractive area?

You're speaking about the repair business.

Yes, the repair and overhaul.

The answer is it is, but it is only good in niche areas, and again HEICO in general sticks to a niche strategy as you very well know, and if we have the right opportunity, we would do something like -- the repair and overhaul end of the business if you're in the right niche is a very nice complementary business. It is also if you have a big MRO company, they traditionally -- we have a heavy labor content. It is very hard to control cost as you know. We try to stay away from those kind of companies. There are plenty of them out there for acquisition, it is just that we normally are not attracted by that. The answer, we are looking. We have a big M&A menu that we're looking at. Our M&A people are constantly looking at companies that are in this field, but we only want to pick the real long-term profitable type of stuff with relatively high margins.

Okay. And speaking of niches, regional jet has been quite a while since your acquisition in that area. Is that continuing to look attractive to you, and does it make sense at some point given just the volume of engines expected to eventually move into the PMA parts rather than simply overhaul?

Eric, do you want to be responsive to the regional jet engine?

Sure. We got into the regional jet business through our acquisition of future aviation back in 2000 which was primarily when we acquired it doing turboprops but was starting to make the nice transition to regional jets and had one of the best reputations in the industry and future was very success in making the transition into the regional business. Therefore, now in our component repair business we have a very nice market share in the regional jet component repair business. I would say we're one of the largest players there. We were just at the regional aircraft association meeting last week in Dallas. We continue to develop PMAs in the regional jet area, and we expect that to be a continued growth area for us. It is an area where we can package both the parts and the repair services if that's what a customer wants or if the customer just wants repair services and somebody else's parts, we can do that as well.

Okay. And I know with regard to the ETG Group, you did mention that there was a favorable mix in there. Was there any specific product area or was it pretty much across the board?

I would say that it was pretty much across the board. Some of the businesses in that group as you know, Chris, can get lumpy because of large sales, but there was nothing that -- not one single company that just stuck out like a sore thumb that would -- some obviously had higher margins than others, and yet there was some that had lower, so it really was across the board. It is not weighted in any one particular thing.

Okay. Very good. Keep up the good work.

Thank you very much, Chris.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our next question from Jim Foung with Gabelli and Company.

Hi, good morning, guys. Good quarter.

Good morning, Jim. Thank you very much.

Let me just try getting some basics in terms of the segments. In the Flight Support Group, is it still two-thirds parts sales and one third repair and overhaul?

I think it probably is. Tom?

Yes, approximately.

And you said you had 4,000 PMAs approved. Is that pretty much the number you said in the call?

Approximately, yes.

So I can take your parts revenues divided by the PMA approved?

Wait, wait, wait, but you have to be careful. Because some of those parts are really not that active, so the active number of parts I said was about 27, 2,800, 2,750, 2,800 active parts before Arger and 375 for Arger so it is around 3,150 that we would say active SKUs and so forth. The other ones are PMA's which we hold, but in some cases they're combination PMA's and double counting and so forth. But I think if you're working off the active ones, it is at this point roughly 3,150.

And as you do that over time, are you seeing the value of your parts increasing, the value of your per unit parts?

Well, as Eric points out, a lot of the Arger parts will have lower values.

Right.

As a general comment, well, Tom, do we comment on the value of the PMA parts?

No. And I can tell, we really don't look at it on that basis, Jim, because we have some parts where we sell a tremendous quantity, and then we have some where we sell very little. This is why we always tell people be very careful about trying to divide the number of parts into the revenue because there can be great disparity there between parts. We don't really suggest it as a good way. People ask how many PMAs we have, so we provided that information, but it really -- they should be very careful about trying to divide those numbers in there.

Okay. So do you have any suggestions on how we can just kind of -- metrics we can use to measure that kind of growth, that increase in value of your business?

Personally it is a little -- maybe Tom can add some color to it. I think we try to do the best job by giving guidance, and that guidance to the best of our knowledge is realistic. I don't think it is very conservative, but we would rather error on the side of conservative and not promise something that we can't deliver. Tom, do you have any suggestions for Jim?

No. Again, I think what we try to do is deal with that question relative by indicating what our near term fiscal '06 guidance is and what our longer term growth objectives are on a revenue and earnings basis as you said earlier.

Okay. Great. Just a second question, as you fold in these acquisitions, Seal Dynamics and now Arger, how long does it take you to approve the margins of these acquired companies to your segment level margins?

They're different because the operations are different. Seal Dynamics was a -- it really wasn't -- it was a marketing company, and the margins they might improve slightly. The Arger situation, we're really bringing a lot of their product line in-house, so that digestion probably will take six to twelve months to get it fully digested where Seal Dynamics was kind of a stand alone because it was straight distribution. They're different.

So Arger has the potential of performing as good as your other PMA business in flight support where as Seal is more of a marketing?

I would be careful, Jim, on that. I would say that the Arger-owned PMAs would probably perform similarly once everything is fully integrated and we take advantage of all the synergies on both sides of the businesses. However, the straight distribution would be at a lower operating margin.

Right. Because it is just a distributor.

Right.

Just a couple other questions. In terms of on Electronic Technologies, what causes the swing in the operating margins? I know you kind of answered that, Larry, but in this quarter you had a lot of volume. There was a broad based, a pick-up, but I notice over the years that segment tends to swing a bit in terms of the margins. Is there anything in the planning that causes that?

The answer is -- there is a few answers to that. Number one, the type of businesses that are in that group operate generally at pretty high margins, generally. In any quarter because of the size of how orders land and they're lumpy. They're not as consistent as aerospace, so we might have a very large ticket, certain companies in that group, for example, a company called Santa Barbara Infrared, that make large pieces of equipment that ship for 1 million, $1.5 million, if it doesn't ship on the 31st of the month, the last day of the quarter, a lot of margin will shift from one quarter to another. Again, that's why we caution people on quarterly. We don't give quarterly guidance and so forth. That's number one.

Number two, if it is not Santa Barbara Infrared, there are other companies in that group that ship to either government or consolidating contractors like Lockheed or whoever and they may want the shipment this month, or they might want it next month, and if you can't ship it earlier or maybe it is not ready to be shipped, so it is just the nature of that business that the shipments are lumpier. Again, we don't look at it on a quarterly basis as much as we look at it for the year, and we think our revenue numbers for the year are pretty realistic. That's the guidance that we give.

You don't use percentage of completion or percent of any other -- or other kind of program accounting to kind of counter the revenues, then?

I will let Tom answer it. He will give you the detail.

Fundamentally, no. We do have one business that has a component of percent as a completion, but that is not what's driving changes of estimates and things like that have not been significant or material in any quarter for the year, and we do -- but there is a little bit of percentage of completion, but again it is minor.

So it is really -- you book the revenues when the goods go out the door essentially?

Exactly.

Just one last question and let someone else come on. Your corporate expense, should I look at that as the run rate now with the Sarbanes-Oxley costs, now you're looking at 3 million a quarter?

This is Tom Irwin. I think reasonable expectations are that it will remain relatively level, exactly. Last year we really underestimated the scope of the project in the first half of the year like many other companies, and we had to play catch up in the second half of the year. This year we've gotten a much earlier start and seems to be running at a more level rate.

Okay. And you've accounted for stock option expenses in corporate?

Yes.

Okay. Terrific. Good quarter again.

Thank you. Thanks, Jim.

It appears we have no further questions at this time. I will turn the meeting back over to your moderator, Mr. Laurans Mendelson. Go ahead, please.

I just want to say thank you for your interest in HEICO. As you know, we are available if you have further questions give us a call. You have our contact numbers and everybody, the management on this call, remains available to you, and we look forward to speaking to you at the end of our third quarter and during the third quarter conference call. Have a great day, a good weekend, and again, thank you very much for your interest in HEICO.

This concludes today's conference. You may disconnect at any time. Thank you.