HEICO Corp (HEI.A) 2006 Q4 法說會逐字稿

Welcome to the HEICO Corporation fiscal 2006 fourth-quarter and full-year earnings results 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. Mr. Mendelson, you may begin.

Thank you very much and good morning, everyone. We welcome you to the HEICO fourth-quarter and the full fiscal year 2006 earnings announcement teleconference. I'm Larry Mendelson, as most of you know, I'm the CEO of HEICO, and I'm joined here this morning by Eric Mendelson who is 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 Irwin, HEICO's Executive Vice President and CFO. Before we begin Victor Mendelson will read a statement.

Thank you. Certain statements made 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 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 aviation, defense, space and electronics industries which could negatively impact our costs and services; and HEICO's ability to maintain effective internal controls which could adversely affect our business and the market price of our common stock.

Parties receiving this material 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.

Thank you, Victor. Before we begin our brief review with fourth-quarter and full-year operating results in detail, I'd like to take a few minutes and summarize the highlights of what we consider an outstanding fourth quarter and an outstanding full year. First the Full Flight Support and Electronic Technologies reported higher sales and earnings in the fourth quarter of '06, combining for an overall 44% improvement in consolidated sales and a 37% increase in consolidated operating income over the fourth quarter of last year.

Next, our consolidated fourth-quarter net sales and operating income represent record quarterly results for the seventh consecutive quarter. The higher sales contributed to a 41% increase in consolidated net income over the prior year's fourth quarter. Full-year net sales, operating income and net income represent all-time record annual results for the Company. In September we completed our 29th acquisition since 1990 with the addition of Prime Air, which provides high-quality and cost effective niche accessory component exchange services which complements the OEM's spares support and HEICO's overhaul services to commercial airlines, regional operators, asset management companies and MRO providers.

In October HEICO was named as one of the 200 best small companies by Forbes magazine. And yesterday we announced our 57th consecutive semiannual cash dividend. We believe that these operating results and our acquisition successes are a further indication of the concentrated efforts for long-term sustainable growth at HEICO. And as I've said many times before, we do consider HEICO a growth company and we believe that this year's performance is definitely proving it.

Since 1990 and over a 16 year period our net sales and net income have each grown at a compound annual growth rate of 19% and the stock price increase has grown in excess of 23% at a compound annual growth rate. The increases in 2006 over 2005 were done with no sale of equity and only a net increase of $21 million in our long-term debt. I believe that this performance reflects quality of HEICO's earnings. The last time HEICO sold equity, if you recall, was early in 1999.

Moving down to the details, our consolidated net sales in the fourth quarter of '06 increased by $33.3 million or up 44% from the fourth quarter of '05 reflecting revenue growth of 60% within Flight Support and 14% within Electronic Technologies. Net sales of Flight Support increased 60% to $78.7 million for the fourth quarter of '06, up from $49.1 million in the fourth quarter of '05. The increase in Flight Support's revenue represents the acquisitions of Seal Dynamics in November '05; Arger in May '06; Prime Air, September '06 as well as organic growth.

For the full fiscal year '06 the Flight Support Group's organic growth approximated 14% when compared to net sales for full 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 and repair and overhaul services within the commercial airline industry.

Net sales of Electronic Technologies increased 14% to $31.2 million in the fourth quarter of '06, up from $27.4 million in the fourth quarter of '05. The increase primarily reflects acquisitions of HBT in September '05; EDT, November '05 as well as organic growth -- and the organic growth of Electronic Technologies was, as expected, about 8% for the year.

Consolidated net sales increased 45% to $392.2 million for full fiscal '06, up from $269.6 million in the prior year represented by approximately $81 million from acquisition and $42 million attributable to organic growth. Our net sales for '06 by market were composed of approximately 64% from commercial aviation, about the same as '05; 19% from defense and space, down from 23% in '05; and 17% from other markets including industrial, medical, electronics and telecommunications which were about 13% in '05. We have intentionally tried to reduce the defense portion of our business and we have been successful.

Our consolidated operating income in the fourth quarter '06 increased 37% to $17.6 million from $12.8 million in the fourth quarter '05, and consolidated operating income in the full fiscal year increased 50% to $66.9 million up from $44.6 million a year before. Operating income of Flight Support in the fourth quarter '06 increased 75% to $13 million, up from $7.4 million in the prior year quarter, and increased 43% to $46.8 million for the full fiscal '06, up from $32.8 million in the prior year. These increases principally reflect higher net sales.

Operating income of Electronic Technologies in the fourth quarter '06 increased to $9 million, up from $8.9 million in the fourth quarter of '05, and increased 62% to $34 million for the full year, up from $21 million in the prior year. The fourth quarter increase principally reflects the increase in net sales partially offset by a slightly less favorable product mix, and the full-year increase reflects both higher net sales and a favorable product sales mix.

Corporate expenses in the fourth quarter of '06 were $4.4 million versus $3.5 million in the prior quarter of '05 and $14 million for the full '06 versus $9.1 million in the prior year. The increases were primarily due to higher employee compensation costs, professional fees associated with qualified research and development activities, tax credit claims.

Consolidated operating margins improved to 17% for the full '06, up from 16.6% in the prior year, but decreased to 16% in the fourth quarter of '06 from 16.7% in the fourth quarter of '05. The operating margins for Flight Support declined slightly to 16.9% for the full '06, down from 17.1% for '05. This reflects a less favorable product mix including the expected and planned for impact of lower margins realized on products distributed by Seal Dynamics and Arger. Operating margins were 16.5% in the fourth quarter '06, up from 15.2% in the fourth quarter '05.

Operating margins of Electronic Technologies were 29.6% for the full '06, up from 27% in '05. And the increase was principally due to a favorable product mix including a higher margin product mix contributed by some of the more recent acquisitions. Operating margins declined to 28.8% in the fourth quarter of '06, down from 32.5% in the fourth quarter '05, and the decline was principally due, again, to slightly less favorable product sales mix.

Diluted earnings per share increased 40% to $0.35 in the fourth quarter of '06, up from $0.25 in the fourth quarter of '05 and increased $0.33 or 38% to $1.20 for the full fiscal '06, up from $0.87 in the prior year. Net income reflects the benefit of a tax credit net of related expenses for qualified research and development activities claimed for certain prior years which increased net income $767,000 or $0.03 per diluted share in the fourth quarter of '06 and $1 million or $0.04 per diluted share for full fiscal '06.

Depreciation and amortization expenses increased to $3.9 million in the fourth quarter of '06 from $2.1 million in the fourth quarter of '05, and increased to $10.6 million for full year '06, up from $7.4 million in the prior year primarily due to increased amortization of acquired intangible assets relating to recent acquisitions.

Research and development was approximately $3.1 million in the fourth quarter and $15.3 million for the full year '06 versus $3.1 million in the fourth quarter and $11.3 million for the full year in '05. The addition of the new FAA PMA approvals continues to be critical to our long-term growth, that's our standard policy. We now have over 5,000 parts approved by the FAA. New parts released by our R&D groups in the fourth quarter of '06 continued at a very strong level and generally as planned for the period. We are targeting new PMA certification levels in fiscal '07 consistent with levels achieved in each of the last four years and they would be in the range of 300 to 350 new parts per year.

We also have a number of new products under development at Electronic Technologies. And as I mentioned many times before, we do believe that the focus on continuing new product development is fundamental to our growth strategy and this strategy has proven very affective over the years.

Moving on to SG&A, the spending as a percentage of net sales decreased to 19.8% for the fourth quarter of '06, down from 22% in the fourth quarter of '05, and for the full year '06 decreased to 19.3%, down from 20.9% in '05. The decreases principally reflect efficiencies through cost controls as well as increased sales volumes. The increase in SG&A expense in dollars to $75.6 million in fiscal '06 from $56.3 million in '05 is principally due to higher operating costs, mainly personnel related including the impact of previously mentioned acquisitions; increased sales; higher corporate expenses, which I spoke about earlier; and stock option compensation expense. Again, SG&A as a percentage of sales of course decreased in '06.

Interest expense in the fourth quarter of '06 was $896,000 versus $351,000 in the prior year quarter principally due to higher average balance outstanding on the revolving credit facility attributable to acquisitions and higher interest rates. And of course as you can see, interest expense is still very low as is our leverage. During '06 we borrowed $59 million under our revolving credit principally to fund four acquisitions that we completed in '06 and we made repayments of $38 million including $18 million in the fourth quarter of '06. Our net of course was 21 net borrowings -- I mentioned that before.

Interest and other income really were insignificant and nothing much to comment about and the Company's effective tax rate of 27.8% for the fourth quarter and 32.7% for the full fiscal '06 are down from 37.2% in the fourth quarter and 36.6% in the full year of '05. The decreases are principally due to the benefit of an income tax credit for qualified research and development activities which the Company claimed for certain previous tax years. Claims were filed in the third and fourth quarter of '06.

The aggregate tax credit net of expenses increased net income by approximately $800,000 or $0.03 per diluted share in the fourth quarter and about $1 million or $0.04 for the full year '06. In addition, the exclusion from the Company's income subject to federal income taxes of a higher amount of minority interest share in our net income also contributed to the lower effective tax rate for the fourth quarter and the full year.

Minority interest of $2.9 million in the fourth quarter and $1.3 million in the fourth quarter of '05 represent principally the minority interests that are held by Lufthansa, Seal Dynamics, Prime Air in our Flight Support Group and Sierra Microwave and HVT in our Electronic Technologies Group. The increase from the fourth quarter of '05 is principally attributable to acquisitions of Seal Dynamics and Prime Air as well as higher earnings of our Flight Support Group and Sierra Microwave.

Moving on to the balance sheet and cash flow. As you can see, our financial position remains extremely strong. Cash flow from operating activities was a record $46.9 million for '06 versus $35.8 million for '05, and the increase is principally due to increase in net income -- which is where it should be -- and minority interest shares of income and depreciation, amortization along with increased tax benefit from stock option exercises. These increases were partially offset by an increase in net operating assets required to support the larger sales volumes.

Working capital ratios strengthened to 2.7 as of October 31, versus 2.5 October 31, '05. DSO's outstanding Accounts Receivable October 31, '06 were 54 days in improvement from 56 days as of October '05. And we continue to closely monitor receivable collections to manage the credit exposure very carefully in light of continued financial challenges facing some of our customers. Although this threat, as you all know, has abated very significantly. But we still watch very carefully.

The inventory turnover rate at October 31 was 142 days compared with 132 a year ago October and, as previously mentioned, inventory levels at Flight Support have increased since '05 attributable to a higher number of new parts being developed as well as increased raw material prices and increased lead times. No one customer accounted for more than 10% of our sales and our top five customers represented about 21% of consolidated sales this year versus 24% in the prior year.

Our long-term debt to capitalization increased slightly to 15% -- still extremely low -- versus 11% last October, October '05, and that reflects the net year-to-date borrowings of $21 million under the revolving credit facility and of course our leverage remains extremely low -- CapEx in '06 approximately $10 million.

The outlook, as we see it, to fiscal '07 and beyond, we believe that the commitment again to develop new products and services; the increasing product demand from customers; our strong financial position; as well as our ability to identify select acquisition opportunities at reasonable prices provide the foundation for continued growth in sales and earnings. Based on the market conditions that we see, we're targeting fiscal '07 12-month net sales and operating income growth each in the range of 18 to 20% at this time.

We are targeting fiscal '07 diluted net income per share in the range of $1.37 to $1.39. Our fiscal '07 earnings per share target represents a growth rate of approximately 20% at this time over '06 after excluding from '06 the onetime benefit of research and development tax credit which was about $0.04 per diluted share. The targets include our recent acquisitions but exclude the impact of additional acquisitions, if any. Fiscal '07 cash flow from operating activities should approximately be 50 to $54 million and CapEx budget for '07 is approximately $19 million.

In closing, we continue to adhere to our long-term strategy of developing and marketing new products and services which provide our existing customers improved technology, substantial cost savings and allows us to expand our markets and revenue. We believe that this strategy has resulted in our strong financial position as well as our strong growth history and positions us with the opportunity for substantial forward growth. We are confident that our disciplined business model will provide opportunity for continued long-term sustainable growth.

That is the extent of my prepared comments, and I would like to open the floor for any questions which the callers may have.

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

The first question I have is your capital spending plans for '07 look essentially to be close to a double or a pretty big jump versus what you have this year. Can you expand a little bit about where that capital will be allocated?

Yes. Some of it is actual building improvements in the Hollywood facility and in the Florida facility. We've gotten to a place where we're not buying new facilities, but we have to expand the existing internal facility to make room for more people to work in the facility. The same thing in Northwings which is the Miami facility that we're expanding. A lot of it's there.

Some of it -- probably $4 million, if I recall properly, is for IT improvement and that type of thing. Personally, Arnie, I think that although we've allocated $19 million it's kind of a wish list. I'd be surprised if we spend it, but that's what I perceive as the outside number. We ask people what they want, we provide for it, we have the Board approve it. We know we have the capital to spend if we need it. We rarely in the past have spent our capital budget, but that's kind of a wish list and it is higher -- almost double this year.

A couple questions for Tom, if you don't mind. Tom, can you give us your view of what you think D&A will be in '07, please?

I'm sorry, did you say --?

D&A for '07.

It should be amounts just slightly above -- I'd say less than 10% over the current year. The big increase, as Larry mentioned, from last year to this year was about $3 million of amortization of acquired intangibles -- that number is relatively flat going forward. So next year's increase would be likely limited to the depreciation side which has been capital expenditures. And as Larry mentioned, the budget for next year includes a number of long lived assets. So it won't change significantly depreciation next year.

Tax rate, please, for next year?

Tax rate, I think what we see is if you normalize the current year, that is if you add back the tax rate impact with the R&D tax credit impact, to increase net income about $0.04, that equates to roughly a little over $1.4 million of tax credits. That's what you ended up -- normalized tax rate of about 35%.

Final question -- I may jump back in queue -- is when you acquired Arger one of the things that was out there was a possibility would be some cost reduction expenses. Arger had two distribution facilities and you, I think at the time, were hoping or perhaps considering some consolidation. Question one is did you consolidate facilities? And two, what expense may have you incurred in the last year?

The answer is we successfully consolidated the facilities. I don't know that we can answer the second question, but we do think that Arger exceeded our greatest expectation. If you go into something like that -- we never assumed giant savings or when we make acquisitions we don't assume things like to that. And that way we're not negatively surprised. And this year I think it was a very positive result that we got there. But we did eliminate the duplications. So that completely integrated -- part of it's integrated here in Florida, the other part is integrated at Seal Dynamics and the two facilities are shut now, Eric. The other two facilities that existed when we acquired Arger have been shut down.

Your policy normally is to pay 5 to 7 times multiple. With hindsight now that you've done the cost-cutting on an adjustment basis, is this within your expectation now?

The answer is since we merged the two businesses together we didn't keep track of what it was, but intuitively, seat of the pants non-GAAP, I would say that we're not disappointed and I think it's reasonable to say we hit our goals.

I'll jump back in queue. Thank you very much.

Arnie, just as clarification, relative to the cost of integration there were no significant onetime costs in the '06 number. In large measure the integration shutdown costs were accrued as part of the purchase price. So again, those costs that were incurred didn't hit the P&L in '06.

Where I was heading is I'm trying to understand some of the margin issues in the quarter. But again, I'll let someone else have a go at it, but that's where I was trying to get a better understanding of what may have impacted margins in Q4. Thank you.

J.B. Groh, D.A. Davidson.

Good morning, guys. A couple questions. You mentioned your new PMA certificate is running roughly what it has been in the past. And you mentioned 5,000 total that you have. Can you give us a feel for kind of what's active and inactive? I know that there are some there that are probably long in the tooth and not active anymore. What's the active number?

I'm going to ask Eric to respond to that, J.B.

We've got about 5,000 total PMA's and roughly 4,000 of them are active.

Okay. And is the value of the new PMA's that you're getting kind of consistent with the average? I think I've asked this question every quarter, but it seems to me when you PMA an aircraft there's kind of low hanging fruit, and then as you go through the process subsequent parts maybe don't have the same amount of value. Can you give us a feel for how that kind of rolls out?

I would say that the sales potential from the PMA's that we did this year is consistent with what we've had in the past. There's natural fluctuations. In general you're right, we pick the best parts first. However, we also develop new technologies later and new processes which permit us to go back and pick parts that we haven't done in the past. So when you put the whole thing together I would say it's pretty consistent.

And so what engine programs are you -- what engine programs are you looking at now that you weren't looking at say a year ago?

I would say everything we're doing now we were pretty much doing a year ago as well.

Okay. And then Larry, maybe you could comment on the acquisition pipeline potential and pricing that you're seeing?

We have a number of transactions in the pipeline that we're looking at. The pricing is getting a little bit tougher in the industry. We're still looking at transactions that are reasonably priced that would be accretive which is our policy. The big transactions are going for telephone numbers, which you know. We rarely look at them -- I mean, we look at them because there may be an opportunity, but at those big prices it's very hard for us to swallow anything like that. But I would assume that the pipeline is reasonably equal to what it's been in the past, not any major changes, but there have been slight upward pressures in pricing.

Now that you've got a large OEM in the PMA business, have you noticed any change in attitude towards acceptance of PMA? Has there been any significant change since that announcement sometime ago?

I'll ask Eric to answer that.

Yes, I would say that since one of the large OEMs has entered the PMA business it really added a dose of credibility to the PMA industry. I think what we've been saying for years now is validated and just the whole reputation and credibility of large company PMA's I'd say has been greatly enhanced and (indiscernible).

And it seems that the organic growth is a lot better than any sort of capacity increases would imply, which I guess leaves me to believe that either penetration is better, pricing is better and the catalog is growing -- is it a mix of those three or is there any one of those three that is trumping the others?

No, I would say offhand it's probably all three. It's really all three.

And then lastly, the big buzz in the airline industry right now is consolidation. Maybe could you conceptually, Larry, talk about what sort of threat and/or opportunity a combination of any big airlines might mean for HEICO?

We talk about it internally, but to speculate on it too much -- will it happen, won't it happen and so forth -- we really don't think that that consolidation is going to have a very major impact. People are going to use alternative parts we believe more and more. So no matter who you are, if you want to save money -- one of the easiest ways to control cost and save money -- it's a no-brainer. You don't have to speculate in the fuel markets, you don't have to worry about union contracts, you don't have to worry about -- this is solid saving from the get go.

And more of the people who were opposed to PMA and alternative parts are accepting that, realizing it. Airlines -- I don't want to mention names -- but clearly airlines that had no alternative part policies are changing and they are accepting alternative parts. So we just see this -- and not only do we, but I've read, and I'm sure you have too, articles where analysts in the industry continue to predict an increase in the amount of alternative parts that are used.

We also try to differentiate ourselves and I'm trying to avoid the use of the word PMA because we really believe that HEICO's alternative parts in general or maybe always is really of a much higher quality. Now that may sound like sales pumping, but if you come down and see the process that we go through -- I would even speculate if you ask the big OEM, big engine manufacturers, big accessories, they would privately tell you that that is true. So to use a generic word, PMA, we really think the HEICO alternative part is truly superior for a whole bunch of reasons.

J.B., this is Eric. Also just to touch on what you said, it is not the goal of HEICO, nor any of the -- really the PMA suppliers out there to put the OEMs out of business. It's not in either of our situations. We exist to supplement their businesses. And actually by providing an alternative source it provides greater flexibility to the customer. It can also be beneficial to the OEM. So touching on what you said with regard to United Technologies Pratt & Whitney getting into the PMA business, I think it just shows that there's room for additional players and we can all coexist in that space.

Thanks for your time and congratulations on the quarter and the year.

Thank you very much.

Christine Min, Calyon Securities.

Regarding the PMA market, the competition, with the other OEM in the market now are you running into them at all on a competitive basis?

No, not really. No. As a matter of fact, I'm not quite sure that they're in the market yet. We have not heard. But even so, their product offering is announced and our product offering is really different. So we would think -- we've always felt it would be helpful once they do get in.

Right. Based on their announced offering or what we've gathered in the industry, their product offering is complementary to our product offering. Actually it would provide the customer with a greater basket of products to supplement their already OEM parts purchases.

Okay. And with regards to the acquisition pipeline, can you provide some detail on what areas of interest there are to you in terms of possible candidates?

We can, but basically they're in the same line of business; they're in aerospace-related businesses and electronic technologies. We'd like some of the medical or we're looking, as I mentioned. We're trying to, not in a major way, but sort of deemphasize the defense side, reemphasize the medical side. We think that's a very good industry, it's a growing industry and other electronic technologies.

But I would say we're an opportunistic buyer and we will buy on either side as long as it generates cash flow. Generally our policy is to be accretive and within the first year, we pay a fair price, we get good management, so all those things enter into the mix. But there is a pipeline and, as I say, prices are slightly higher. But I don't think there's anything that's -- of the type of transaction that we look at I don't see anything that's really going to knock us out of the market at this stage.

Okay, great. Thanks for the color.

Chris Quilty, Raymond James.

Congratulations on the results. I wanted to follow-up. Tom, can you give us the organic growth rates there in the fourth quarter, a breakdown of the acquired revenues? And likewise for the revenue EBIT guidance for FY '07, is that about evenly divided, that 18 to 20%, amongst Flight Support and ETG or is there a different mix to them that we should expect?

Okay. First on an historic basis, as we mentioned in the press release, the organic growth of the Flight Support Group for the year is around 14 and ETG around 8%. That was up in the fourth quarter compared to the nine-month numbers and FSG and down. Now to put a little color on that, you may recall that in the fourth quarter of '05 our Flight Support Group, particularly the South Florida operations were shut down with hurricane advance preparation and power, etc., etc. So some of the organic growth favorable comparison in our fourth quarter results from a little push out from the fourth quarter last year.

And contrary to that, you may recall last year in '05 we had some delays in the Electronic Technologies Group which caught up in the fourth quarter of last year. So the negative comparison of organic growth in the fourth quarter of '06 versus the fourth quarter of '05 largely reflects the catch-up of last year. Overall organic growth in the fourth quarter ran about 10%, consolidated again with FSG higher and ETG organic flat for the reasons that I just made reference to.

Relative to our outlook going forward, I think we've consistently indicated that organic growth in the Flight Support Group for the foreseeable future should be maintained in double-digits, 10, 11, 12%, something in that range. And in the Electronic Technologies Group I think we've consistently indicated expectations of mid single-digit on a go forward basis for ETG. Although again, this year it was higher than that, about 8%. So I think overall that works out to be a 10 to 12% organic growth on a go forward in our target analysis.

Great. And just to confirm the numbers I ran, you gave the full-year organic growth for Flight Support and ETG, but not the quarterly, and you gave the color. But I'm coming up with a flight support somewhere in the high teens and ETG being slightly negative, sort of a negative mid single-digit. Is that ballpark correct?

Yes, that would be right, exactly. Because again, for the nine months Flight Support was 12, for the full year it was 14. So obviously it was above 14. And then similarly, the ETG came down and, as I explained, in large measure that had to do with the large push outs that were ultimately caught up in the fourth quarter of last year which affected revenues as well as margins since they were very profitable projects.

Okay. With regard to the ETG group, you've had this step up in the operating margins that followed your fourth-quarter acquisition last year of -- help me here, I'm drawing a blank.

We acquired two companies in the fourth quarter of last year. We acquired Engineering Design Team and HVT Group.

That's right. But the margin stepped up from what had been a low 20% to a high 20% and it seems to have been sustained here for the last several quarters. Again, would you expect operating margins to remain at the current level on a go forward basis?

I think in summary, yes. I think also that's indicated -- if you look at our targets of revenue 18 to 20% and operating margins -- operating income, excuse me, of 18 to 20%, that would indicate that our key profit drivers for '07 are going to be revenue driven as opposed to either margin appreciation or depreciation. So I think at this point we're comfortable in rough margins on a consolidated basis in the 17% range.

So by business segment we're not that comfortable with real exact numbers, but certainly the ETG operating margin should be above the mid 20's now on a go forward basis as opposed to below the mid 20's. And we're always seeking to improve margin, but to commit to it is a little dangerous.

Chris, I think if you go back to '04 you'll see that ETG margins were similar to '06 and in '05 they dropped down a little bit. But I agree with Tom and to predict 30% margins straightaway is pretty hard to keep that. So we prefer to assume probably 25, 24, 26 -- something like that. And if we do better that's a positive surprise.

That's probably a good idea. A question, Larry. In your comment before you had mentioned -- I think you said deemphasizing the defense part of the business. And if I got it correctly, as a company overall, defense was down from 23% to 19%

I think what we're doing is on the acquisition side, if we see a good opportunity we're definitely going to make it. As we look we probably would prefer the medical and so forth, but I'm going to ask Victor to comment a little more on ETG.

The way we've gotten more active in the medical industry is from companies that we acquired that were generally heavily defensed that also had a medical component to it. And as time has passed, the more recent acquisitions we've seen a heavier medical component in it, a much larger medical component, and we have been acquiring less defense revenue.

And we're very attractive to the medical markets, it's not that we're not attracted to the defense markets. We are being cautious because of budgetary uncertainty and so forth. But the overall interest in the medical market stems from the fact that we have businesses that serve both markets with the same products. That's the strategy you've heard me talk about to have products serving multiple industries and multiple platforms in those industries.

Okay. And this is not intended as a joke, but you guys aren't looking at MediTech again, are you?

No, we're not looking at -- at this point at least -- services businesses. They're design and manufacture types of --.

No, no.

What goes around comes around. And I'll ask one final question and jump out into 3Q. The China import/export deal which was -- I guess it's coming on a year now from when you announced that -- can you give us a little bit of a progress report on where you stand there?

Eric will respond to that.

Chris, we had our Asian customer conference in [Chengdu], China this past October and there's been a lot of interest in what we're doing also. I'd have to say that United Technologies' publicity in the area has helped us significantly in that region. Also UGC just announced that they're doing something with an engine shop in Shanghai which I think is very exciting for the region and will complement what the OEM's are already doing in that area. So we anticipate very good growth in use of our products as that continues to take effect.

Great, thank you. And again, congratulations on a good quarter and wish you Happy Holidays.

Thanks, Chris. And the same to you.

Chris Donaghey, SunTrust Robinson.

Let me add my congratulations on a very nice quarter. Going to the guidance for '07, obviously very strong top-line guidance, better than what I had expected. But just looking at what that implies from an operating margin perspective for '07, is the implication in here that the distribution businesses and the services business are going to be growing at least as fast as the parts business and maybe that's why you're not seeing a lot of the margin expansion in the Flight Support Group?

Yes.

So we shouldn't expect to see a huge amount of margin expansion really in either group for 2007 at this point?

I would think that that's right.

Okay. Second of all, if you look at the other operating expense line -- and I'm not exactly sure how you guys look at this -- but this is the third consecutive year where the other operating expense line item has grown as a percent of revenue. Is there an explanation or can you explain to me why it keeps growing faster than other line items?

Chris, this is Tom Irwin. I think as we mentioned earlier, basically what we call the other corporate expenses has gone up. We targeted for a number of years around 3% of sales, it's inched up to 3.5 the last couple years with S-Ox, with compensation costs. And then in this year we incurred about roughly $700,000 professional fees, an outside consultant study in connection with the research and development activities credit. That's on that line item now. Of course that generated $1 million of income net of those expenses, so it was a positive project but it was somewhat expenses.

I think on a go forward basis we do feel, number one, with recent S-Ox efficiencies that we've undertaken -- and speaking of the 404 audit costs -- as well as I think a general belief in recent announcements by the FCC that those costs are under control and perhaps should come back down relative to the size of our company. So I think we continue on a go forward basis to target that to come back down closer to the 3%. And it's not a trend that we continue to believe will continue upward going forward.

Okay, great. Thanks, and again, nice quarter.

Tyler Hojo, Sidoti & Co.

Just a couple quick questions for you. Tom, what was your expectation for stock option expense in fiscal '07?

I was going to say it's probably -- this year it was down to about 1 million I would say, it's not going to be significant to '07 at that. Quantifiably it's not a significant amount going forward.

So if I was to keep it roughly flat with '06 that would be a good go forward?

It's actually coming down because, if you look back, we haven't issued many options in the last two to three years. So the amortization amount on Black Scholes is going down. So absent -- of course that would change if our Board issued options going forward, but at this point it's a decreasing number absent additional option grants.

Okay, very good. And you guys hit on the CapEx being up about $10 million next year. Just curious, is there a capacity issue at the Hollywood and the Miami facility or maybe your comments there would be helpful?

One clarification. Relative to next year's forecast, some of that is actually carryover stuff. There were some projects that we had contemplated and I think previously we had indicated the budget for '06 was probably about 3 to $4 million higher than our ultimate spending.

Right, I remember that.

That has been project expansion, capacity expansions including Miami where we are adding space to our repair and overhaul facility. That's simply been deferred into next year as opposed to -- we just didn't finish the project and get it underway until late in the year and most of it will hit next year. So those are some examples and relative to a real capacity announcement, I'll let Eric describe that.

We've added a number of people and we are refurbishing and adding to the facilities, but we do have plenty of space available to take on additional work and grow. This will not impact the growth rate or our ability to put out new product next year. It's just that we evolutionarily have to do and, as Tom mentioned, there's a lot of spending that's basically deferred from '06 into '07 -- not intentionally, but that's just where it fell out. So as a result it's picking up next year.

Could you possibly give me a ballpark percentage as far as what Hollywood is running as far as capacity utilization rate goes?

I don't have that figure with me. It's somewhat of a complex question because we don't run, for example, in the manufacturing area a full second shift. So we'd have to analyze what that is. But there's still plenty of additional potential that can come out of that facility.

Okay. So it's just not a concern? Very good, thank you very much.

Arnie Ursaner, CJS Securities.

To get to your guidance, there's got to be some implied number for minority interest. I assume it's roughly the 3% of sales or is that number increasing?

I'm sorry, Arnie, I couldn't hear the details of your question, but I can -- obviously relative to our guidance, it does include minority interest. In large measure the majority interest and the tax rate are impacted by a couple of ownership interests that are held in LLC's. If you analyze '06 and, again, do two things -- number one, normalize for the R&D tax credit the combination of taxes and minority interest run about 50% of free tax.

So I think our guidance is somewhere in that range going forward on a combined basis for both taxes and minority interest. Because it's possible -- and this is pretty technical and perhaps confusing -- but some of the minority interest is in there on a pre-tax basis and as it goes up then your tax provision effective rate is going to go down. But overall it's running about 50 to 52% of pre tax -- taxes and minority interest.

Got it. And I know you've been asked this perhaps in a slightly different way, and I know you guys tend to be very conservative early in the year. But if your revenue guidance turns out to be correct, your operating income growth -- I guess the question I'm trying to grapple with is unless your gross margins are coming down in some material way you're not getting any leverage in corporate or other expenses. Could you comment a little more on that, please?

I think our guidance is on revenue and operating income, not necessarily on gross profit or SG&A.

Again, mathematically if they're both growing the same you're getting no operating leverage (multiple speakers).

That would be true. And then that might be the situation, as an example, if distribution business grew faster than the PMA parts business, then your gross profit margin might decrease; although because, again, the distribution business has a lower gross profit percentage and a lower operating income margin as well. So it is possible that there would be overall a decrease in gross profit percentage and an increase in or a lowering of SG&A percentage and still maintain a relatively approximate operating margin.

So perhaps to answer the question in a slightly different way, if I looked at Flight Support Group in '06 and I were to look at it in '07 and try to value it distribution versus actual parts manufacturing, what's the breakdown between the two in '06 and in '07?

We don't break that down.

Can you give us a rough percentage or an approximation?

What we do breakdown is parts versus overhaul services as a percentage of sales. And if I recall, parts sales will probably run in '06 about 70% of Flight Support Group, and Repair Services would be roughly 30%. Those are approximate numbers at this point.

Right. But those do not represent the piece of parts sales that would be distribution versus manufacturing.

That is correct. We don't break that down for competitive reasons.

Okay, thank you.

Herb [Withrom], BrainPower Inc.

Good morning, gentlemen. First of all, I'd like to thank you, Larry, and your team for a spectacular year and a wonderful growth pattern since you've taken over HEICO over the last 16 plus years.

Thank you very much.

I'm excited to hear that you're looking at the medical part of the business which, as you know, accounts for about 19 to 20% of our GDP in the United States. Can you elaborate a little further as to what products you have now and what products you anticipate looking at in the future?

I'm going to ask Victor to respond to that, Herb.

The answer is the products that we currently have now serving medical markets are high voltage connectors, high voltage cable assemblies, power supplies generally on the high voltage side used mostly in connection with laser systems as well as quadrant trackers, basically laser range finder receiver quadrant trackers that are used in laser eye surgery. And right now that's the stable, if you will, for the most part of products we have that serve the market.

And going forward, I think we're looking at probably some more of the same or hopefully some more of the same. But really, the strategy is to make subcomponents, niche subcomponents that are found in these products. And we're not so selective really as to which products they go into so much as that it meets our criteria which you know to be margin and niche market and kind of protected operating areas.

Do you expect in time to break this out as a separate operating division like components and so forth to begin to develop -- I guess medical OEM parts that go into instrumentation, is that kind of what we're talking about?

That's one of them and I think a major part of it, yes.

Thank you, that was my --

By the way, also for diagnostic equipment. A lot of what we sell winds up in diagnostic equipment.

Thank you.

You're welcome.

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We thank you all for your participation and interest in HEICO and we'll be speaking to you at the first-quarter conference call some time in the early 2007. Have a great day and a wonderful holiday. Bye-bye.

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