HEICO Corp (HEI.A) 2006 Q3 法說會逐字稿

Welcome to the HEICO Corporation fiscal 2006 third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would now like to introduce our host for today's call, Laurans Mendelson.

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

Thank you. Certain statements in today's 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 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 increase 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 risks, interest rates, and economic conditions within and outside of the defense, aviation, space and electronics industries which could negatively impact our costs 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 in both classes.

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 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.

Okay, Victor. Thank you; and now before reviewing our third-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 group recorded higher sales and earnings in the third quarter of '06, combining for an overall 48% improvement in consolidated sales, and a 48% increase in consolidated operating income over the third quarter of last year. Our consolidated third-quarter net sales and operating income represent quarterly results for the sixth consecutive quarter.

The higher sales contributed to a 37% increase in consolidated net income over the prior year's third-quarter. Our listeners should note that in order to better align our business units based on their productlines, during the third quarter of '06 one of the Company's subsidiaries formerly included in the Electronic Technologies Group, was reclassified to the Flight Support Group. And prior period amounts have been retroactively restated to reflect the revised segment classification.

Lastly we believe that our third-quarter results are a further indication of the concentrated efforts for long-term sustainable growth at HEICO. As I have said many times before, we consider HEICO to be a growth company and we believe that this year's performance is definitely proving it.

Drilling down into more of the detail, our consolidated net sales in the third-quarter of '06 increased by $33 million, about up 48% from the third quarter of '05 reflecting revenue growth of 38% within Flight Support and 75% within Electronic Technologies. Net sales of Flight Support increased to $71.1 million in the third quarter of '06, up from $51.4 million in the third quarter of '05. The increase in Flight Support's revenue represents the acquisitions of Seal Dynamics in November '05 and Arger Enterprises in May '06 and as well as organic growth.

In the first nine months of fiscal '06, the Flight Support Group's organic growth approximated 12% when compared to net sales in the first nine months 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 in demand for aftermarket replacement parts, as well as repair and overhaul services within the commercial airline industry.

Net sales of Electronic Technologies increased to $31.1 million in the third quarter of '06, up from $17.7 million in the third quarter of '05. The increase primarily reflects the acquisitions of HVT Group in September '05 and EDT in November '05, as well as organic growth which approximated 15% in the first nine months of fiscal '06 when compared to the first nine months of fiscal '05. Consolidated net sales increased 46% to $282.4 million in the first nine months of '06, up from $193.1 million in the prior year represented approximately by $52 million attributable to acquisitions and $37 million attributable to organic growth.

Our consolidated operating income in the third quarter of '06 increased 48% to $17.4 million, up from $11.7 million in the third quarter of '05. Consolidated operating income in the first nine months of '06 increased 55% to $49.3 million, up from $31.8 million in the first nine months of '05. Operating income of Flight Support in the third quarter increased 17% to $11.5 million, up from $9.8 million in the third quarter of '05. Reflecting higher net sales partially offset by a less favorable product mix.

Operating income of Electronic Technologies in the third quarter of '06 increased 116% to $9.7 million, up from $4.5 million in the third quarter of '05 and this principally reflects the increase in net sales as well as higher operating margins.

Corporate expenses in the third quarter of '06 were $3.8 million versus $2.5 million in the third quarter '05 due primarily to increased costs of compliance with Sarbanes-Oxley and higher accrued performance awards. The majority of such costs incurred in '05 were not incurred until the second half of the year.

Looking at consolidated operating margins, they approximated 17% in both the third quarter of '06 and '05. When combined with operating margins for the first two quarters of '06 the consolidated operating margins for the first nine months of fiscal '06, which were 17.5%, approximates those currently expected for the full fiscal year of 2006.

Operating margins for Flight Support declined slightly to 17% in the first nine months of fiscal '06 from 17.7 in the first nine months of fiscal '05. Operating margins were 16.1% in the third quarter of '06, down from 19% in the third quarter of '05 reflecting 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 31.1% in the third quarter of '06, up very significantly from 25.2% in the third quarter of '05. The increase was principally due to very favorable product mix including a higher margin product mix contributed by some of our recent acquisitions.

Diluted earnings per share improved to $0.31 in the third quarter of '06, up from $0.23 in the third quarter of '05 and that reflects a 37% increase in consolidated net income. The strong growth in consolidated net income was less than the 48% increase in consolidated operating income principally due to the increased minority interest share of certain income in certain consolidated subsidiaries.

Depreciation and amortization expenses increased to $2.3 million in third quarter of '06 from $1.8 in third quarter of '05 primarily due to increased amortization relating to recent acquisitions. Total research and development expense was $4 million in the third quarter of '06 versus $2.9 million in the third quarter of '05. The addition of new FAA PMA approvals continues to be critical to our long-term growth and we now have over 5000 parts approved by the FAA. New parts released by our R&D groups in the third quarter of '06 continued at a very strong level and generally as planned for the period. We are budgeting approximately 350 new PMAs 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 have mentioned many times before, we believe that our focus on continuing new product development is fundamental to our growth strategy and the strategy has proven very effective over the year. We do not plan to change it.

SG&A spending as a percentage of net sales decreased to 19.8% in the third quarter of '06, down from 20.6% in third quarter '05 principally reflecting improved efficiencies in controlling our costs while at the same time increasing revenues. The increase in SG&A expense to $20.2 million for the third quarter of '06, up from $14.3 in the third quarter '05, is due principally to one, higher operating costs principally personnel related including the impact of the mentioned acquisitions; two, increased sales; and three, higher corporate expenses referenced earlier; and four, stock option compensation expense.

Interest expense in the third quarter of '06 versus the third quarter of '05 was up principally due to a higher average balance outstanding under the revolving credit facility and this is attributable of course to new acquisitions and as well as higher interest rates. As you can all see our interest expense is still very low. During the first nine months of '06 we borrowed $46 million under our revolving credit facility principally to fund the three acquisitions we completed in fiscal '06. We made repayments of $20 million including $13 million in the third quarter of '06. Interest and other income in the third quarters of '05 and '06 were not significant.

The Company's effective tax rate of 33% for the third quarter and 34.4% for the first three quarters of '06 are down from 36.3% for the third quarter and the first three quarters of '05. The decreases are principally due to a higher amount of the minority interest share of income excluded from our consolidated income subject to federal income tax. In addition, the third quarter of '06 in the third quarter of '06, the company claimed an income tax credit for qualified research and development activities on the Company's fiscal 2005 tax return and an amended return for a previous tax year. The aggregate tax credit net of expenses increased net income by approximately $200,000 for the third quarter of fiscal '06.

The Company is reviewing other open tax years and may file amendments to claim additional tax credits for qualified research and development activities incurred during those years. The benefits of such tax credits will be recorded when sustainability is considered probable.

The minority interest of $2.8 million in the third quarter of '06 and $1.5 million in the third quarter of '05 represents principally the minority interest held by Lufthansa and Seal Dynamics in our Flight Support Group and Sierra Microwave and HVT in our Electronics Technologies Group. The increase from the third 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 at Sierra Microwave.

Looking at balance sheet and cash flow, our financial position remains extremely strong with cash flow from operating activities being $27 million in the first nine months of fiscal '06 versus $21 million in the comparable period of '05. The increase reflects an increase of course in net income and the minority interest share of income, and an increased tax benefit from stock option exercises partially offset by the increase in net operating assets. For the full fiscal year 2006, we are raising our targeted cash flow from operating activities from approximately $40 million to $42 million.

Our working capital ratio strengthened further to 3.3 as of July 31 versus 2.5 at October 31 of '05. DSOs of Accounts Receivable as of July 31 equal 56 days and is consistent with DSOs of 56 days at October 31, '05. We continue to closely monitor receivable collection efforts to manage our credit exposure carefully in light of the continued financial challenges facing some of our customers, although you will note that the airlines are doing considerably better.

The inventory turnover rate at July 31 equaled 138 days compared with 132 as of October '05, and previously mentioned the inventory levels at our Flight Support Group have increased since October '05 and that is attributable to the higher number of new parts being developed, increased raw material prices, and leadtimes as well as the impact of the acquisition of Arger.

Our top five customers represented about 21% of consolidated net sales in the third quarter of '06 versus approximately 24% for the full year of '05 and we see the broadening of our customer base as very positive. Our long-term debt to capitalization increased to 16.4% as of July 31, '06 versus 11.1% in October '05, and that reflects the net year-to-date borrowings of $26 million under the credit facility. The leverage of course remains extremely low.

CapEx in the first nine months were $7.1 million. Our current net CapEx budget for the full year ranges between $10 million and $12 million. In terms of our outlook, we are pleased to report a strong year-over-year sales increase in both of our business segments and this reflects both organic growth and growth through profitable acquisitions and well-managed businesses. Both of these are fundamental to our long-term growth strategies and they are strategies that we have followed in the past and will continue in the future. Based on current market conditions we are raising our targeted fiscal '06 sales to a range of $378 million to $380 million, representing a growth rate of approximately 40%. We are targeting operating income in a range of $66 million to $67 million, representing a growth rate of approximately 50%. And diluted net income per share targeting in a range of $1.14 to $1.16, which is an increase from our last guidance.

In closing, we continue to adhere to a 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 substantial forward growth. That is the extent of my prepared comments and at this time I would like our conference operator to open the floor for questions.

(OPERATOR INSTRUCTIONS) J.B. Groh, D.A. Davidson.

Are you guys staying dry?

We have dodged the bullet this time and we are very, very thankful for that. It was a nonevent and for that we are very happy.

That's good. A couple questions. On Seal Dynamics can you kind of remind us what your synergy goals there are there? I know as a distribution business it is not going to have the same margins as your manufacturing operations, but can you lay out the goals there in terms of driving margins there a little bit higher towards the average?

Let me just make one comment, and then I'm going to let Eric answer it because he is closer to the ground on that. One of the goals in acquiring Seal Dynamics is that we acquired a wonderful management group and really a very, very talented executive group up there. That was a major goal and I don't have to tell you in any business how important management is, and so that was -- that is the number one goal. And after that the management has done a spectacular job. But I'm going to let Eric field the rest of the details of that question.

Seal is in two primary lines of business. One is the distribution of other OEMs' materials and the second is the distribution of its own PMA parts. Seal is the number one leader in the regional aircraft PMA parts arena. So there's obvious synergies in the second part with HEICO and basically the regional product we are working through Seal because they are already in it; all the regional players established and have been so for 20 or 30 years.

But with regard to the rest of the business there's a lot of customer overlap, a lot of potential synergy there and some other operational synergies in terms of cost reductions, moving people around, so it really fits very well with the other HEICO parts businesses so that is why we bought it and we expect very good growth opportunities out of it as well.

It looks like this little reclassification that something went from Electronic Technologies Flight Support, looks like that brought the margins down a little bit on Flight Support. Is it safe to assume that that particular business is operating this quarter the same as it was last year in your as reported numbers?

This is Tom Irwin. I think the answer is yes, the business represents an item, a business unit that was part of the Electronic Technologies Group when we acquired it. It was primarily a foreign defense oriented. In recent years we have been developing a number of products, it has had a pretty significant development budget, R&D budget. Most of those products are more oriented towards the commercial aviation markets; now as those products begin to come to market we have in fact moved it to the Flight Support Group.

Lastly I look at this Electronic Technologies margin for the quarter and it is pretty spectacular even compared to last quarter. Can you sort of address the sustainability or is there onetime items in there that drove the performance this quarter?

This is Victor. I would say that it appears now the margins in the Electronic Technologies Group are sustainably higher than they have been in the past. I am never willing to go out and say that they're going to remain at the current levels because certainly there are vicissitudes in various markets that could change that, but we are seeing stronger shift in the mix of business.

I know in the past some of these large projects can shift from quarter-to-quarter and that can have a big impact. I'm just wondering if that sort of thing went on this quarter or it is, this is all --

It really did not go on this quarter and as the Electronic Technologies Group grows in revenue, that particular business that has such large shipments, individual shipments, might begin to have a lesser impact if it does not ship in one quarter or the other, so the switch is -- I think that in this quarter we really hit on all fours every business did pretty well. As Victor says, we think that going forward that we have a better shot at having higher margins. We hate to go out on a limb. We used to say 22 to 24% is the operating margin that we would expect from that group. I really don't like to say it is more than that, but it does appear that it is pushing higher. So as Victor says, maybe it is moving up from the upper limit of what we used to think was 24 and it could be higher. But in that group you still can have some of the business units in there have high points and low points, so I would not want to say we're going to be running out at 31% all the time. But it certainly is a very profitable business and it is very well run and the management guys that are operating businesses are spectacular.

Great. Thanks for taking my question. Congratulations.

Arnie Ursaner, CJS Securities.

First question for Tom Irwin. What is your tax rate, your guidance for the balance of the year please?

Basically what we're showing for the nine-month period which is about 34.5 roughly, 34.4, 34.5.

Second question for Tom or Larry. Can you quantify or give us a better feel for the impact of Arger on the quarter in terms of revenue and margin impact?

Basically Arger was not a significant transaction and did not have a material impact plus or minus to the consolidated results.

The balance of my question relates to a better understanding of your margin view for the balance of the year and your revenue guidance for the balance of the year. Particularly in light of Larry's comments regarding Electronic Technologies Group, I kind of felt both that Electronic Technologies and flight safety would return to more the mean or the norm in getting to your 17ish or 17.5% consolidated margin guidance for the balance of the year, but to the extent Electronic Technologies stays something more in a higher range than we've seen, then by inference or implication Flight Support group is going to be materially lower than its been. Again I am a little unclear. You mentioned Seal Dynamics, which you acquired in November of 2005, but you had it in Q1 and we've seen a 400 basis point decline in margin in Flight Support Group over the last two quarters subsequent to that. So I am a little unclear of the margin issue that Seal Dynamics is having in your margin guidance for the balance of the year.

This is Larry and I'm going to let Tom answer, drill down into that question. One of the issues that we have over the year is that in any one particular quarter, that is why we don't give quarterly guidance and we give annual guidance, the margins from quarter-to-quarter depending on shipments and all kinds of other things will vary. I think if you look at the guidance you'll see that we are estimating, Tom, am I correct that the fourth quarter we are estimating a higher margin, operating margin in Flight Support? I mean using our guidance for the year --.

By segment, we don't disclose operating margins by segment. What we have reported is that the nine-month operating margin average is about 17.5% consolidated, is consistent with what we're expecting for the full year approximately.

Right.

Arnie, this is Eric. I'm not sure what you mean because roughly the margins this year, the operating margin in Flight Support is comparable to the operating margin last year. I think that you may be looking at some numbers before the movement of that subsidiary.

And again, that may be the point. Your footnote C, it may be useful if you provide an 8-K or give more detailed numbers regarding the restatement of numbers for the prior periods.

I think, Arnie, they will probably be comparable in both years. The operating margin of Flight Support is reasonably comparable both '05 and '06.

I'm kind of intrigued because I am reading a note I wrote last year after Q3 that the headline was your guidance seems quite illogical and I think the same thing may be true again, so remind me again. You have seasonality in your business. Is there any mechanical reason that Electronic Technologies Group would have declining revenues in Q4?

I think you may recall that in -- two things. In the third quarter of last year, we commented that the Flight Support Group revenue was unusually strong and one of the reasons our guidance for the fully year was lower was that we were not confident and in fact it did not sustain that level. However the Electronic Technologies Group had an extremely strong fourth quarter last year, and so I think in part that may be impacting the comparison. If we do hit, say, the midpoint of our revenue guidance, we still would have fourth quarter to fourth quarter revenue growth of about 27% I think. And operating income growth of 37, 38%. So I think what may be hurting us relative to the comparison of the ETG is that it had such a strong fourth quarter last year, some of which were products that were delayed in the first half and even to some degree the third quarter.

Right, but there are two messages here. You have rarely had declines unless you've had a very unusual item occur in Electronic Technologies and the other point would be, you are correct. Last year you had 25% organic growth in Q3, you showed 10% or 12% organic growth off of a virtually impossible comp. And seasonally you tend to have a much stronger Q4 than Q3. So I'm trying to understand is there some mix change or change in the Flight Support Group that has changed the seasonality that normally impacts Q4? If not, your revenue guidance seems illogically conservative.

I'm sure that you see that seasonality. I'm not sure that that really is the case. What happens we get orders; our customers unfortunately don't place orders as they purchase, as they use the parts. They have human beings in there that plan and typically what happens is they will buy a bunch of inventory, they will use it, and then they will restock periodically. And we know we're going to get the business. We just don't know what month or quarter it is going to come in, so I would be very careful about trying to read any strength or weakness into a particular quarter. We have tried and believe me we have studied back 17 years and we don't see a very strong trend. It tends to be just basically when the orders come out. That is why we give the annual guidance because we just don't know what month or what day we are going to get it. Our customers don't know. I would be careful about this (multiple speakers).

Arnie, I think the last quarter when you raised similar questions, I indicated that we really focus on the year and as Eric pointed out, both in Electronic Technologies or Flight Support, we can get hit with an order and a shipment in one month or another month, if it is an end of a quarter. It can move around. We have pretty high level of confidence for the entire year. That is why we feel relatively comfortable in giving guidance for the year, but in any one quarter I don't think -- my recommendation is that analysts and investors don't focus on one particular quarter but give more consideration to our guidance. Because to the best of our knowledge and belief, that is really where we're going to end up. We don't try to push stuff out the door on July 31st or hold it back or do anything. We ship it the way generally the way it comes in and that can bounce around a little bit. For the whole year we feel pretty comfortable.

Congratulations. You did a great job; I am just trying to make some sense out of parts of your guidance, but again congratulations. Very good quarter.

Tyler Hojo, Sidoti & Co.

Most of my questions were hit on a little bit here, but maybe one of you can give us a little bit more detail on the reclassification and what kind of new products we should expect out of the Flight Support Group.

Tom or Eric, you want to handle?

There will be more details, but just from our press release you can discern by the reclass it was a business unit, it is pretty small. It had revenue I think of about $3 million in the reclass. If you look at the six-month segment information that has been restated and an R&D development operating loss of about $1 million or something like that, so in terms of approximate impact on the quarter.

As far as specific types of products that are moving into the Flight Support Group, can you give any color there?

We generally don't like to telegraph the new products because we find that it is not good for competitive purposes. I don't know. Eric, do you --?

It is consistent with stuff that we have already discussed. It is nothing -- it is in our standard lines of business.

These are good products, new products that we believe will add revenue. I would say generally commercial. As Tom indicated, commercial aviation type products that we can distribute. We don't expect any blockbuster things, but good bread and butter business stuff.

Okay, maybe one more. As far as I believe the last update you gave us earlier in the year on the CASGC contract that you won, at that time you weren't not sure as to what kind of impact that would play into fiscal '06 and even looking into fiscal '07. Maybe now that we are a few months further in you could update kind of your outlook there.

We were very excited about it. We remain excited. We have a lot of stuff going on and as most people know, China is obviously a growing market. But right now there is not that much overhaul which is not done in China, so it is a process of getting everybody onboard, that is going on right now. So I would not change any estimates for '06 and '07 as a result of it, but this just substantiates and maybe adds greater clarity to why we should be able to achieve the numbers that we have already got out there.

Okay, so you are seeing a small impact from that now?

Yes, I would say so.

Is there any variability in the margins between products sold domestically and those sold to China?

No, I would say that they are fairly consistent.

Okay. That's all I have. Thanks a lot.

Jim Foung, Gabelli & Co.

Good quarter. I guess I just wanted to cover on the corporate expense, I guess you covered the margin issue pretty well here. With most companies the following year for you guys would be fiscal '07 we start seeing some relief in Sarbanes-Oxley. And also your ability to reduce some of the outside professional fees, that you probably need to do this year? How should we look at corporate expense in '07? Should we see that trending down from the current quarterly run rate?

This is Tom Irwin. I think the answer is yes, we are experiencing a savings from our first-year compliance, but what we are also experiencing is expanded work required by acquisitions as an example, with three new businesses for roughly '06 and '05, the total budget for 404 compliance is probably going to be about flat. I think we will expect absent more impact of acquisition growth in '07 we are targeting somewhere about a 25% reduction. That is our goal in terms of compliance spending for 07. But again if that is offset by a number of acquisitions which typically have a higher (technical difficulty) then some of that savings could be deferred.

Then the second question would be on the minority interest. Is that -- should I look at that as a function of revenues in the Flight Support Group? Would that be a good way of trying to gauge how that expense would be rising?

Principally yes; or operating income in the Flight Support Group, which we do report as well. The one wrinkle would be the minority interest in Electronic Technologies of our microwave business unit there is a 15% minority interest there, a 15% minority interest in HVT. But the bulk of the dollars in terms of absolute comes from the minority interest of the Flight Support Group principally, the Lufthansa interest in total group as well as the 49% minority interest in Seal Dynamics.

Lastly for you Larry could you just give us your outlook towards acquisition? With your strong balance sheet and your cash flow being very strong going to next couple years, what is your appetite for more acquisitions?

Our appetite is great. Our conservatism is also great, and we are looking at a number of acquisitions that we have in the pipeline. I can never predict whether we will make it or close it because of all the uncertainty involved with acquisitions, but we certainly have a warchest and we certainly have the desire to make these acquisitions. And but we are not going to reach, as I have told you, Jim, and told everybody that we are not going to be overly aggressive. Our appetite is generally the same strategy, singles and doubles, paying fair multiples but not excessive, huge multiples, and it is a conservative strategy and it has served us very, very well. I would say that we are trying to make these acquisitions and we will continue doing it if we see the right candidates.

Terrific. Thank you, Jim, I see you next week.

Yes, we will. Look forward to it.

Chris Donaghey, SunTrust Robinson.

And again an excellent quarter. Larry, again just kind of getting back to the margin issue in Flight Support Group, can you maybe qualify for us what you are seeing in terms of the relative growth rates between the parts business, the distribution business, and the MRO business?

I'm going to ask Tom to -- I don't know how he is going to respond to it, but generally -- well, let's hear what he --.

This is Tom Irwin. Again for competitive reasons we do not disclose our breakdown of organic growth by productline or product groups. We do break it down by business segment of course, but again for competitive reasons we defer -- obviously we track it very closely internally but we do not publish that information.

Incidentally, Chris, that is essentially what I was going to say too.

I understand. What I am trying to get a handle on is if you go back to 2000, 2001, the operating margins in the Flight Support Group were considerably higher. And now you have other business lines mixed into that that are a higher percentage of that business, so from a trend perspective what I am trying to understand is, is this declining trend something that should reverse itself over the course of the next several years? Or are the distribution businesses and the services related businesses always going to keep the margins penalized below those pre September 11th levels?

This is Eric. If you look back at the margins pre-9/11, they were higher. Of course what happened with 9/11 is some very high margin product that did not require any R&D or any SG&A got wiped out. So as a result the margins fell because of that, number one. Number two we started spending a lot of money on R&D and the margins got further eroded as a result of that as we had the double whammy. If you look at from 2002 up to 2006, I think you will see that margins have consistently increased. I think what is confusing people a little bit is the movement of that one subsidiary and also the acquisition of Seal Dynamics. However the margins are up from 2002. And I do think there is additional margin upside, distribution business obviously has a lower margin. It is a very good business for us because of all the synergies. It opens a lot of doors and it has very good return on investment the way we manage it, however it does have a lower margin than our other businesses. So I would suggest that people really look at the operating income growth as opposed to just solely the margin percentage of the Flight Support Group.

Okay, Eric, yes. I understand what you're saying, you actually did answer the question. Really what I was trying to make sure is there is still margin expansion potential here and again I think you addressed that. In terms of the reclassifying the subsidiary from the Electronic Technologies Group to the Flight Support Group, does that move accelerate the path to profitability for that group, or is there going to be any change as a result of that?

We think it does. We think it does.

Okay, great. Thanks a lot, guys.

Chris Quilty, Raymond James.

This is Tassos Recachinas sitting in for Chris this morning. Sorry if I am repeating something that might have already been asked, but did you provide the revenue from Seal this quarter?

No, we did not.

We don't do that.

Okay. Also I know there's been a lot of talk on the FSG margin, but I just wanted to clarify here I believe you said it will pick up in the fourth quarter. Can you quantify that?

I really can't and what we are saying is that the overall margins year-to-year will be consistent in FFG, so but we don't go -- we don't give margin -- is that right, Tom? We don't give margin for predictions by segment for the year, but overall I would say it will be about the same.

Okay, and you stated that the reason for the decline in FSG margin was in part due to the Seal acquisition, but looking at the first quarter when you did have Seal in your results, you guys posted 20% margin in FSG, which is very strong. So just wondering what was there specifically this quarter in Seal that caused that? And is that something that could happen irregularly and there's no way to model it, or do you expect it was a onetime issue that might have been resolved?

Eric will answer you.

I think the 20% number to which you are referring is the number before the movement of that subsidiary. So we have to be careful to make sure we're doing an apples-to-apples comparison. But I would not say that there was anything unique from one quarter to the other quarter. Everything is consistent and moving as it has been.

So the movement of -- the reclassification was done here in your fiscal third quarter, not last quarter?

Actually the answer is it was moved in this quarter but the process is that we restate under business segment reporting rules under generally accepted accounting principles, the procedure is you restate all prior periods. So the footnotes in the press releases and our 10-Qs and in the future our 10-Ks will all restate prior periods for the movement of this business segment out of Electronic Technologies Group into Flight Support Group on a retroactive basis. That impact will lower previously reported Flight Support Group margins retroactively because obviously the margin on this business was with a development budget, R&D budget was actually a negative.

Okay, that helps. Thanks very much.

Chris Donaghey, SunTrust Robinson.

Just a quick follow-up. Tom do you have the historical data for the fourth quarter, first and second quarters that you could send to us so that we do have that apples-to-apples comparison with the subsidiary reclassified?

Yes, we will be doing that, it actually is part of the 10-Q.

Okay, great. Thanks.

We're hoping to get it filed this week or early next week at the latest. (multiple speakers) all that information.

Thanks a lot.

(OPERATOR INSTRUCTIONS) At this time I have no further questions.

Okay, thank you very much and thank you to all the participants for tuning in and for your interest in HEICO. I remind you if you do have questions that we can respond to, you know where to reach us. Please call and we will try to be responsive to your questions. We look forward to speaking to you for the year-end conference call. Have a good holiday weekend and we will speak to you all soon. Thank you.

This concludes today's conference call. Thank you for attending.